**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington
      D.C. 20549





**FORM
      10-QSB**





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





For
      the
      quarterly period ended **March
      31, 2007**








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





For
      the
      transition period from: _______ to _______





Commission
      File Number  001-32985





**HANDHELD
      ENTERTAINMENT, INC** **.**


(Exact
      name of Small business issuer in its charter)








**DELAWARE**
            **98-0430675**(State
                or other jurisdiction of incorporation or organization)
            (I.R.S.
                Employer Identification No.)**539
                BRYANT STREET SUITE 403, SAN FRANCISCO,
                CALIFORNIA**
            **94107**(Address
                of principal executive offices)
            (Zip
                code)**(415)
                495 - 6470**Issuer's
                telephone number








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





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





As
      of **** May
      15,
      2007, 17,001,333 shares of Issuer’s common stock, with $0.0001 par value, were
      outstanding.





Transitional
      Small Business Disclosure Format:  YES  [
      ]   NO  [X]










**HANDHELD
      ENTERTAINMENT, INC.**





**Table
      of Contents**


**PART
                I - FINANCIAL INFORMATION**
              
              3ITEM
                  1- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              
              3CONDENSED
                  CONSOLIDATED BALANCE SHEETS
              
              3CONDENSED
                  CONSOLIDATED STATEMENTS OF OPERATIONS
              
              4CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS
              
              5NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              
              6ITEM
                  2- MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
                  OPERATION
              
              20ITEM
                  3- CONTROLS AND PROCEDURES
              
              33PART
                II - OTHER INFORMATION
              
              34ITEM
                  6- EXHIBITS
              
              34SIGNATURES
              
              35INDEX
                TO EXHIBITS
              
              36





2


**PART
      I - FINANCIAL INFORMATION**




**Item
      1- Condensed Financial Statements**


**HANDHELD
      ENTERTAINMENT, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**March
                31,
                2007**
            
            
            **December
                31, 2006****Unaudited****ASSETS**Current
                assets:Cash
                and cash equivalents, net
            
            $
            2,597,545
            
            $
            3,653,144Restricted
                cash
            
            
            50,000
            
            
            50,000Receivable
                from escrow account
            
            
            -
            
            
            90,086Accounts
                Receivables, net
            
            
            233,879
            
            
            676,582Inventories,
                net
            
            
            651,508
            
            
            627,832Prepaid
                expenses and other current assets
            
            
            175,016
            
            
            248,084**Total
                current assets**
            
            
            **3,707,948**
            
            
            **5,345,728**Fixed
                assets, net
            
            
            262,019
            
            
            117,043Capitalized
                software, net
            
            
            4,845
            
            
            5,883Intangible
                Asset, Websites, net
            
            
            10,497,112
            
            
            3,607,259Deferred
                equity offering costs
            
            
            --
            
            
            35,528Deposit
                and other non-current assets
            
            
            15,322
            
            
            15,322**Total
                assets**
            
            **$**
            **14,487,246**
            
            **$**
            **9,126,763****LIABILITIES
                AND SHAREHOLDERS' EQUITY**Current
                liabilities:Trade
                accounts payable
            
            $
            1,070,549
            
            $
            3,969,726Accrued
                and other liabilities
            
            
            1,629,494
            
            
            962,406Trade
                accounts and other obligations payable to officers, affiliates and
                related
                parties
            
            
            62,644
            
            
            51,995**Total
                current liabilities**
            
            
            **2,762,687**
            
            
            **4,984,127**Long
                term convertible notes
            
            
            800,000
            
            
            2,400,000**Total
                liabilities**
            
            
            **3,562,687**
            
            
            **7,384,127****Commitments
                and Contingencies (See Note 7)**
            
            
            -
            
            
            -**Shareholders'
                Equity**Common
                stock, $0.0001 par value; 50,000,000 authorized; 16,281,986 issued
                and
                outstanding at March 31, 2007 and 11,613,874 issued and outstanding
                at
                December 31, 2006.
            
            
            1,629
            
            
            1,161Additional
                paid in capital - Warrants and stock options
            
            
            3,194,256
            
            
            3,089,011Additional
                paid in capital
            
            
            33,677,867
            
            
            21,681,638Accumulated
                deficit
            
            
            (25,949,193
            )
            
            (23,029,174
            )**Total
                shareholders' equity**
            
            
            **10,924,559**
            
            
            **1,742,636****Total
                liabilities and shareholders' equity**
            
            **$**
            **14,487,246**
            
            **$**
            **9,126,763**





See
      Notes
      to Condensed Consolidated Financial Statements


3


**HANDHELD
      ENTERTAINMENT, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(Unaudited)**


**Three
                months ended March 31,****2007**
            
            
            **2006**Sales
            
            $
            389,733
            
            $
            584,234Cost
                of goods sold
            
            
            336,754
            
            
            600,704**Gross
                margin**
            
            
            **52,979**
            
            
            **(16,470**
            **)****Costs
                and expenses**Sales
                and marketing
            
            
            649,996
            
            
            701,940General
                and administrative (including stock based compensationexpense
                of $395,647 and $773,925)
            
            
            2,167,681
            
            
            1,698,112Research
                and development
            
            
            172,445
            
            
            354,425**Total
                operating expenses**
            
            
            **2,990,122**
            
            
            **2,754,477****Loss
                from operations**
            
            
            **(2,937,143**
            **)**
            
            **(2,770,947**
            **)****Other
                income and (expense)**Interest
                income
            
            
            40,471
            
            
            24,086Interest
                expense
            
            
            (23,347
            )
            
            (70,479
            )Loss
                on conversion of debt
            
            
            --
            
            
            (1,093,684
            )**Total
                other income (expense)**
            
            
            17,124
            
            
            (1,140,077
            )**Net
                Loss**
            
            **$**
            **(2,920,019**
            **)**
            **$**
            **(3,911,024**
            **)****Net
                loss per share - basic and diluted**
            
            $
            (0.20
            )
            $
            (0.41
            )Weighted
                Average shares used in computing basic and diluted netloss
                per share
            
            
            14,453,245
            
            
            9,446,644


See
      Notes
      to Condensed Consolidated Financial Statements


4


**HANDHELD
      ENTERTAINMENT, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


(Unaudited)




**Three
                months ended March 31,****2007**
            
            
            **2006****Cash
                flows from operating activities:****Net
                cash used in operating activities**
            
            **$**
            **(4,245,590**
            **)**
            **$**
            **(2,626,189**
            **)****Cash
                flows from investing activities:**Cash
                paid for acquisition of subsidiary, net of cash acquired
            
            
            (563,420
            )
            
            --Cash
                paid for acquisition of website
            
            
            (2,088
            )
            
            --Purchase
                of equipment
            
            
            (118,253
            )
            
            (15,193
            )Purchase
                of Software Licenses
            
            
            --
            
            
            (156,000
            )**Net
                cash used in investing activities**
            
            **$**
            **(683,761**
            **)**
            **$**
            **(171,193**
            **)****Cash
                flows from financing activities:**Proceeds
                from sale of common stock
            
            
            3,830,000
            
            
            7,605,000Offering
                costs
            
            
            (89,283
            )
            
            (538,953
            )Proceeds
                from exercise of stock options
            
            
            133,134
            
            
            --Short-term
                borrowings, related parties
            
            
            --
            
            
            500,000Repayments
                of long-term borrowings
            
            
            --
            
            
            (30,000
            )**Net
                cash provided by financing activities**
            
            **$**
            **3,873,752**
            
            **$**
            **7,536,047**Net
                increase (decrease) in cash and cash equivalents
            
            
            (1,055,599
            )
            
            4,738,665Cash
                and cash equivalents at beginning of period
            
            
            3,653,144
            
            
            277,734**Cash
                and cash equivalents at end of the period**
            
            **$**
            **2,597,545**
            
            **$**
            **5,016,399**




**Three
                months ended March 31,****2007**
            
            **2006****SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION****SUPPLEMENTAL
                DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES**Conversion
                of notes to common stock
            
            $
            1,400,000
            
            $
            --Common
                stock issued in business combinations
            
            
            6,250,000
            
            
            --Installment
                payments due from business combinations
            
            
            830,000Conversion
                of notes, related party to common stock
            
            
            --
            
            
            3,913,112





See
      Notes
      to Condensed Consolidated Financial Statements


5





**HANDHELD
      ENTERTAINMENT, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2007**


**(UNAUDITED)**





**1.** **Basis
      of Presentation**





**Interim
      Consolidated Financial Statements**





The
      interim condensed consolidated financial statements have been prepared from
      the
      records of Handheld Entertainment, Inc., a Delaware corporation (“we", “us”,
“our” or the “Company”) without audit. In the opinion of management, all
      adjustments, which consist of only normal recurring adjustments, to present
      fairly the consolidated financial position at March 31, 2007 and the
      consolidated results of operations and cash flows for the three months ended
      March 31 ,
      2007
      and 2006, have been made. The interim condensed consolidated financial
      statements should be read in conjunction with the financial statements and
      notes
      thereto contained in the annual report on Form 10-KSB filed on April 2, 2007
      with the U.S. Securities and Exchange Commission (“SEC”) for the year ended
      December 31, 2006. The results of operations for the three months ended March 31 ,
      2007
      are not necessarily indicative of the results to be expected for any other
      interim period or for the full year.





**Going
      Concern**





As
      reflected in the consolidated financial statements included in the annual report
      on Form 10-KSB filed on April 2, 2007 with the SEC for the year ended December
      31, 2006, the Company had a net loss of approximately $12.2 million, negative
      gross margin of $559,955 **** and
      net
      cash used in operations of approximately $7.1 million for the year ended
      December 31, 2006 and an accumulated deficit of approximately $23.0 million
      at
      December 31, 2006. In addition, for the three months ended March 31, 2007 the
      Company has a net loss and cash used in operations of $2,920,019 and $4,245,590
      and an accumulated deficit of $25,949,193 at March 31, 2007. These matters
      raise
      substantial doubt about its ability to continue as a going concern. Our
      financial statements do not include any adjustments to reflect the possible
      effects on recoverability and classification of assets or the amounts and
      classification of liabilities that may result from our inability to continue
      as
      a going concern.





Historically,
      we have financed our working capital and capital expenditure requirements
      primarily from short and long-term notes, sales of common and preferred stock
      and the product financing arrangement we established with our
      contract-manufacturing partner. We may seek additional equity and/or debt
      financing to sustain our growth strategy. We were able to obtain sufficient
      funds subsequent to December 31, 2006 (see note 10) to continue in operation
      and
      we believe that based on our current cash position, our borrowing capacity,
      and
      our assessment of how potential equity investors will view us, we will be able
      to continue operations at least through the end of 2007. The forecast that
      our
      financial resources will last through that period is a forward-looking statement
      that involves significant risks and uncertainties. It is reasonably possible
      that we will not be able to obtain sufficient financing to continue operations.
      Furthermore, any additional equity or convertible debt financing will be
      dilutive to existing stockholders and may involve preferential rights over
      common shareholders. Debt financing, with or without equity conversion features,
      may involve restrictive covenants.





We
      plan
      on generating future revenues from the monetization of the traffic to our
      network of websites and through the sale of our existing and future products
      through retail establishments. The time required for us to become profitable
      from operations is highly uncertain, and we cannot assure you that we will
      achieve or sustain operating profitability or generate sufficient cash flow
      to
      meet our planned capital expenditures, working capital and debt service
      requirements.





We
      believe that actions being taken by management as discussed above provide the
      opportunity to allow us to continue as a going concern.


6




**2.** **Significant
      Accounting Policies**





**Use
      of Estimates**





Our
      condensed consolidated financial statements are prepared in accordance with
      accounting principles generally accepted in the United States (“GAAP”). These
      accounting principles require us to make certain estimates, judgments and
      assumptions. We believe that the estimates, judgments and assumptions upon
      which
      we rely are reasonable based upon information available to us at the time that
      these estimates, judgments and assumptions are made. These estimates, judgments
      and assumptions can affect the reported amounts of assets and liabilities as
      of
      the date of our condensed consolidated financial statements as well as the
      reported amounts of revenues and expenses during the periods presented. Our
      condensed consolidated financial statements would be affected to the extent
      there are material differences between these estimates and actual results.
      In
      many cases, the accounting treatment of a particular transaction is specifically
      dictated by GAAP and does not require management’s judgment in its application.
      There are also areas in which management’s judgment in selecting any available
      alternative would not produce a materially different result. Significant
      estimates in 2007 include the valuation
      of accounts receivable and inventories, valuation and amortization periods
      of
      intangible assets, valuation of capital stock, options and warrants granted
      for
      services, or other non-cash purposes including business combinations, estimates
      of allowances for sales returns and the estimate of the valuation allowance
      on
      deferred tax assets.





**Principals
      of Consolidation**




The
      consolidated financial statements include the accounts of Handheld
      Entertainment, Inc. and its wholly owned subsidiaries. All significant
      inter-company balances and transactions have been eliminated in
      consolidation.




**Foreign
      Currency**





The
      accompanying financial statements are presented under accounting principles
      generally accepted in the United States of America and in United States
      dollars.





The
      functional currency of the Company’s subsidiary, Putfile, is the U.S. Dollar,
      since the acquisition date. Gains and losses resulting from foreign currency
      transactions are recognized in operations of the period incurred.





**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.





**Concentrations**





Concentration
      of Credit Risk





Financial
      instruments that potentially subject us to concentrations of credit risk consist
      of cash and cash equivalents and accounts receivable.





At
      March
      31, 2007, one retailer accounted for approximately 54% of gross accounts
      receivable before the allowance for doubtful accounts.





Concentration
      of Revenues





In
      the
      three months ended March 31, 2007, Wal-Mart represented 44% of our revenues
      and
      we therefore were materially dependent upon them. Due to the nature of our
      business and the relative size of the contracts, which are entered into in
      the
      ordinary course of business, the loss of any single significant customer,
      including the above customer, would have a material adverse effect on our
      results.


7


Concentration
      of Supplier





Under
      a
      two-year agreement dated June 2003 (“Vendor Agreement”), the Company purchases
      its primary products from a contract manufacturer located in Taiwan who is
      designated under the Vendor Agreement as the sole and exclusive manufacturing
      partner. This Vendor Agreement expired in June 2005, however the Manufacturing
      Agreement is in place and valid thru December 2008. Although the Vendor
      Agreement has expired date, the vendor has continued to manufacture the
      Company’s products, under the Manufacturing Agreement, based on purchase
      orders.





Manufacturing
      of our ZVUE product is performed in China by our manufacturing partner. Any
      disruption of the manufacturing process as a result of political, economic,
      foreign exchange or other reasons could be disruptive to our operations. We
      have
      no reason to expect such a disruption but we believe that, if necessary,
      production could be reestablished in other territories in a reasonable period
      of
      time at reasonable terms. This is, however, a forward-looking statement that
      involves significant risks and uncertainties. It is possible that relocation
      of
      production, if it were to become necessary, would take longer and be more
      expensive than anticipated.





Purchases
      during the three months ended March 31, 2007 and 2006 from our manufacturing
      partner were approximately $328,000 and $488,000, respectively. Amounts payable
      due to this vendor at March 31, 2007 were approximately $332,000 and are
      included in accounts payable. The balance due is fully collateralized by
      substantially all assets of the Company.





In
      April
      2004, the Company executed a Financing and Escrow agreement and a Security
      Agreement with the vendor whereby accounts payable to that vendor would be
      deferred and payable from a percentage of receipts of accounts receivable from
      the Company’s customers. The customer payments are made payable to the Company
      by the customers but are deposited into a third party escrow account and such
      escrow agent then disburses the stipulated percentage amounts to both the
      Company and the vendor. Under the arrangement, 70% of each receipt was paid
      to
      the vendor against the accounts payable, while 30% was remitted to the Company.
      In July 2005, the Security Agreement was modified to include a lien on
      substantially all of the assets of the Company. In March 2007, the agreement
      was
      further amended to include all products manufactured by the vendor under the
      Manufacturing Agreement. This arrangement is accounted for as a lending
      transaction under FASB Statement 140 “Accounting for Transfers and Servicing of
      Financial Assets and Extinguishment of Liabilities”. During 2005 the Company
      began receiving payments directly from its primary customer rather than through
      the escrow agent. Certain unknown consequences could result from this deviation
      from the Financing and Escrow Agreement.





Product
      Concentration





During
      the first quarter of 2007, revenues were derived primarily from the sale of
      one
      product model the ZVUE model 250.





**3.** **Accounts
      Receivable**





Accounts
      Receivable at March 31, 2007 were as follows:





Accounts
                receivable
            
            $
                299,321Less:
                Allowance for doubtful accounts
            
            (65,442)**Accounts
                Receivable, net**
            
            $
                233,879





Bad
      debt
      expense for the three months ended March 31, 2007 and 2006 was $2,300 and $0,
      respectively.


8


**4.** **Inventories**





At
      March
      31, 2007, Inventories consists of the following:





Finished
                Goods
            
            $
                657,758Less:
                Valuation Allowance
            
            (6,250)Total
                Inventories
            
            $
                651,508





For
      the
      three months ended March 31, 2007 and 2006, the Company increased the inventory
      valuation reserve by $0 and $11,460, respectively, primarily related to sales
      returns that were charged to cost of goods sold.





**5.** **Acquisitions
      and Intangible Assets, websites, net**





At
      March
      31, 2007 Intangible Assets, net consists of the following:





**Dorks
                L.L.C.**
            **FunMansion.com**
            **YourdailyMedia.com**
            **Putfile.com**
            **UnOriginal.co.uk**
            **TOTAL**Transaction
                Close Date
            November
                13, 2006
            December
                1, 2006
            December
                15, 2006
            February
                5, 2007
            March
                26, 2007Amortization
                Period
            3
                Years
            3
                Years
            3
                Years
            3
                Years
            3
                YearsAt
                Cost
            $1,533,651
            $1,114,758
            $1,075,256
            $7,067,165
            $500,135
            $11,290,965Less:
                Amortization
            (195,018)
            (124,413)
            (105,279)
            (364,576)
            (4,567)
            (793,853)Net
                Book Value
            $1,338,633
            $990,345
            $969,977
            $6,702,589
            $495,568
            $10,497,112





Amortization
      expense is computed using the straight-line method over the estimated useful
      life of 3 years. We incurred amortization expenses of $679,400 for the three
      months ended March 31, 2007. The following table summarizes the estimated fair
      values of the assets acquired and liabilities assumed at the date of acquisition
      as of March 31, 2007.





**Dorks
                L.L.C.**
            **FunMansion.com**
            **YourdailyMedia.com**
            **Putfile.com**
            **UnOriginal.co.uk**
            **TOTAL**Transaction
                Close Date
            November
                13, 2006
            December
                1, 2006
            December
                15, 2006
            February
                5, 2007
            March
                26, 2007Net
                Current Assets
            --
            --
            --
            $86,688
            --
            $86,688Intangible
                assets
            $1,533,651
            $1,114,758
            $1,075,256
            $7,067,165
            $500,135
            $11,290,965Total
                Assets
            $1,533,651
            $1,114,758
            $1,075,256
            $7,153,853
            $500,135
            $11,377,653Current
                Liabilities
            --
            --
            --
            $86,688
            --
            $86,688Net
                assets acquired
            $1,533,651
            $1,114,758
            $1,075,256
            $7,067,165
            $500,135
            $11,290,965







9


No
      Goodwill was recorded as a result of any of the five transactions noted above.
      The intangible assets relate to values assigned to the website assets acquired
      consisting of the basic domain name, internet presence as demonstrated through
      the websites, URL's and search engine optimization abilities that drive unique
      visitors to view the user generated videos maintained on the various suites.
      The
      amortization period for the intangible assets is three years or 36 months from
      the acquisition date.





The
      results of five acquisition’s operations are included in the consolidated
      financial statements beginning as of the date of acquisition.





***Acquisition
      of Dorks LLC***





On
      November 13, 2006, we acquired 100% of the membership interests of Dorks,
      LLC, which operates Dorks.com, a website that aggregates user-generated
      content, from Zeus Promotions, LLC (“Zeus”). The purchase price of $1.5
      million for the membership interests of Dorks, LLC was comprised of a
      combination of $500,000 in cash and a five-year $1 million secured
      convertible promissory note in favor of Zeus bearing 4.7% interest and due
      December 2011. In addition we had $33,651 of acquisition costs. At the
      completion of the acquisition, the note was convertible into 750,751 shares
      of our common stock at a fixed conversion price of $1.33 per share.





On
      January 22, 2007, Zeus converted the entire principal amount of the note and
      the
      accrued interest of $9,008 into 757,514 shares of our common stock. As was
      required under the terms of the registration rights agreement between Zeus
      and
      the Company, the Company included these shares in the registration statement
      on
      Form S-3, filed January 30, 2007, which was declared effective on April 13,
      2007.





As
      part
      of the purchase agreement, the Company and Zeus entered into an escrow agreement
      whereby $25,000 of the cash paid under the purchase agreement would be deposited
      into an escrow account and held for six months to fund any post closing
      indemnity claims. To date, no claims have been identified.





Additionally,
      the Company and John Kowal entered into an 18 month employment agreement whereby
      the Company agreed to pay Mr. Kowal $1,667 per month for services to be rendered
      by him to assist the Company in transitioning the acquired entity to the
      Company. Additionally, under the employment agreement, Mr. Kowal is entitled
      to
      certain bonuses if the Company acquires other companies and he is materially
      involved in those transactions. The bonuses are based on the acquisition price
      of the target and range from 3 - 5% of the total price, depending on several
      factors. Under the terms of this agreement, Mr. Kowal was issued 23,342
      restricted common shares in 2006 in consideration for his involvement in the
      FunMansion.com and YourDailyMedia.com transactions.





This
      transaction was not deemed to be a material business combination, as it was
      determined, based on the facts and circumstances, that it was not an operating
      business at the date of acquisition under Statement of Financial Accounting
      Standards No. 141 (“FAS # 141”) and as result, no pro forma results are
      required. At the date of the acquisition, the website had no, nor had since
      its
      inception, specific operating expenses or revenue. We did not record any
      goodwill as a result of this acquisition.





***Acquisition
      of FunMansion.com***





On
      December 1, 2006, we acquired certain assets from Aperio Technologies, Inc.
      (“Aperio”), including all of the assets and business related to
      FunMansion.com, an internet website that aggregates user-generated content.
      The purchase price of $1.1 million for the assets and business of
      FunMansion.com was comprised of a combination of $500,000 in cash ($350,000
      at closing and $150,000 over the following twelve months) and a five-year
      $600,000 convertible promissory note in favor of Aperio Technologies, Inc.
      bearing 4.9% interest and due December 2011. In addition we had $14,758 of
      acquisition costs. At the completion of the acquisition, the note was
      convertible into 96,899 shares of our common stock at a fixed conversion price
      of $6.19 per share. The Company could have forced the conversion of the
      note into its common stock under certain conditions including if the Company
      trades more than 50,000 shares per day and the trading price of the stock for
      5
      days is twice the conversion price of the shares or $12.38.


10





On
      March
      22, 2007, Aperio notified the Company that it intended to convert the note
      and
      the accrued interest of $9,065 into common stock on that date. As a result
      the
      Company has issued Aperio 98,363 restricted shares of its common stock. The
      Company intends to include these shares in the registration statement on Form
      S-3, filed January 30, 2007, which was declared effective on April 13,
      2007





As
      part
      of the purchase agreement, the Company and Aperio entered into an escrow
      agreement whereby $25,000 of the cash paid under the purchase agreement would
      be
      deposited into an escrow account and held for six months to fund any post
      closing indemnity claims. To date, no claims have been identified.





Additionally,
      the Company and Mary Dunne entered into a 1 year employment agreement whereby
      the Company agreed to pay Ms. Dunne $2,000 per month for services to be rendered
      by her to assist the Company in transitioning the acquired entity to the
      Company.





This
      transaction was deemed to be a material business combination, and therefore,
      the
      summarized unaudited consolidated pro forma results required under the Statement
      of Financial Accounting Standards No. 141 are below. We did not record any
      goodwill as a result of this acquisition. Pro forma data does not purport to
      be
      indicative of the results that would have been obtained had these events
      actually occurred at January 1, 2005 and is not intended to be a projection
      of
      future results.





**UNAUDITED**
            
            **Year
                Ended**
              **December
                31, 2006**
            
            **Year
                Ended**
              **December
                31, 2005**Net
                Revenues
            
            $
            3,874,055
            
            $
            1,968,078Net
                Loss
            
            
            (12,491,876
            )
            
            (5,791,799
            )Net
                Loss per Share - Basic & Diluted
            
            
            ($1.26
            )
            
            ($1.70
            )





***Acquisition
      of YourDailyMedia.com***





On
      December 15, 2006, we acquired certain assets from John Paul Worsnop,
      including all of the assets and business of YourDailyMedia.com, an internet
      website that aggregates user-generated content. The purchase price of $7
      million for the assets and business of YourDailyMedia.com was comprised of
      a combination of $1 million in cash ($200,000 due January 2, 2007 and
      $60,000 over the following twelve months) and a five-year $800,000
      convertible promissory note in favor of John Paul Worsnop. In addition we had
      $15,256 of acquisition costs. The note is convertible into 186,306 shares
      of our common stock at a fixed conversion price of $4.29 per share. The
      note bears interest at a rate of 4.9% per annum and is due December 2011.
      The Company can force the conversion of the note into its common stock under
      certain conditions including if our common stock trades more than 50,000 shares
      per day and the trading price of the stock for 5 days is twice the conversion
      price of the shares or $8.58. To date, the Company has not met the conditions
      to
      force conversion.





As
      part
      of the purchase agreement, the Company and Mr. Worsnop entered into an escrow
      agreement whereby $25,000 of the cash paid under the purchase agreement would
      be
      deposited into an escrow account and held for six months to fund any post
      closing indemnity claims. To date, no claims have been identified.





Additionally,
      the Company and Scott Worsnop entered into a 1 year consulting agreement whereby
      the Company agreed to pay Mr. Worsnop $2,000 per month for services to be
      rendered by him to assist the Company in transitioning the acquired entity
      to
      the Company.





This
      transaction was deemed to be a material business combination, and therefore,
      the
      summarized unaudited consolidated pro forma results required under the Statement
      of Financial Accounting Standards No. 141 are below. We did not record any
      goodwill as a result of this acquisition. Pro forma data does not purport to
      be
      indicative of the results that would have been obtained had these events
      actually occurred at January 1, 2005 and is not intended to be a projection
      of
      future results.


11





**UNAUDITED**
            
            **Year
                Ended**
              **December
                31, 2006**
            
            **Year
                Ended**
              **December
                31, 2005**Net
                Revenues
            
            $
            3,888,979
            
            $
            1,975,509Net
                Loss
            
            
            (12,465,961
            )
            
            (5,618,473
            )Net
                Loss per Share - Basic & Diluted
            
            
            ($1.25
            )
            
            ($1.60
            )





***Acquisition
      of Putfile Limited.***





On
      February 5, 2007, we acquired 100% of the outstanding shares of
      Putfile Limited. Puftile Limited operates a leading free digital media
      website, Putfile.com, featuring user-generated content. The purchase price
      of $7.08 million for Putfile Limited was comprised of a combination of
      approximately $1,060,000 of cash ($500,000 at closing and $500,000 over the
      following twelve months) and $6,000,000 of our restricted common stock
      (2,092,050 shares). In addition we had $67,165 of acquisition costs. For
      accounting purposes, the common shares were valued at $2.87 per share or
      $6,000,000 based on the 5-day average closing price prior to the closing date
      since the quantity of shares we were required to issue to the seller was not
      determinable until the closing date. The site, which in January 2007 attracted
      approximately 9.5 million unique monthly visitors, is currently generating
      ad
      based revenues.





As
      part
      of the purchase agreement, the Company and the Seller entered into an escrow
      agreement whereby $100,000 of the cash paid under the purchase agreement would
      be deposited into an escrow account and held for one year for any post closing
      indemnity claims. To date, no claims have been identified.





Additionally,
      the Company and Gordon Page, the prior owner of Putfile, entered into a 2 year
      consulting agreement whereby the Company agreed to pay Mr. Page $2,000 per
      month
      for services to be rendered by him to assist the Company in transitioning the
      acquired entity to the Company.





We
      did
      not record any Goodwill as a result of this transaction and allocated the entire
      purchase price which is excess of the net assets to intangible assets which
      we
      will amortize over three years. The intangible assets relate to values assigned
      to the website assets acquired consisting of the basic domain name, internet
      presence as demonstrated through the websites, URL's and search engine
      optimization abilities that drive unique visitors to view the user generated
      videos maintained on the various suites. The amortization period for the
      intangible assets is three years or 36 months from the acquisition date.





The
      results of the acquisitions operations will be included in the Company’s
      consolidated financial statements beginning as of the date of acquisition.
      The
      following table summarizes the estimated fair values of the assets acquired
      and
      liabilities assumed at the date of acquisition. Purchase price adjustments
      following the closing are customary.





Transaction
                Close Date
            
            February
                5, 2007Net
                Current Assets
            
            $
            86,688Intangible
                assets
            
            $
            7,067,165Total
                Assets
            
            $
            7,153,853Current
                Liabilities
            
            $
            86,688Net
                assets acquired
            
            $
            7,067,165





12





This
      transaction was deemed to be a material business combination, and therefore,
      the
      summarized unaudited consolidated pro forma results required under the Statement
      of Financial Accounting Standards No. 141 are below. The preliminary pro forma
      data does not purport to be indicative of the results that would have been
      obtained had these events actually occurred at January 1, 2006 and is not
      intended to be a projection of future results.





**UNAUDITED**
            
            **Three
                Months Ended March 31, 2007**
            
            **Three
                Months Ended March 31, 2006**Net
                Revenues
            
            $
            408,144
            
            $
            722,273Net
                Loss
            
            $
            (2,935,060
            )
            $
            (3,836,258
            )Net
                Loss per Share - Basic & Diluted
            
            $
            (0.18
            )
            $
            (0.34
            )





***Acquisition
      of UnOriginal.co.uk***





On
      March
      26, 2007, our wholly-owned subsidiary, Dorks L.L.C., acquired certain
      assets from Gareth Coote, including all of the assets and business of
      Unoriginal.co.uk, an internet website that aggregates
      user-generated content and is based in the United Kingdom. The purchase
      price for the assets and business of Unoriginal.co.uk was comprised of a
      combination of $250,000 in cash payable over 15 months beginning April 1, 2007
      and $250,000 of our restricted common stock based on the five day average of
      the
      closing price preceding the close of the transaction or 92,456 shares. In
      addition we had $135 of acquisition costs recorded as of March 31, 2007 and
      expect an additional approximate $20,000 of additional closing costs to be
      recorded in the next quarter as they are determined. For accounting purposes,
      the common shares were valued at $2.70 per share or $250,000 based on the 5-day
      average closing price prior to the closing date since the quantity of shares
      we
      were required to issue to the seller was not determinable until the closing
      date. The site, which in February 2007 attracted approximately 900,000 unique
      monthly visitors, is currently generating ad-based revenues. Additionally,
      the
      Company and Mr. Coote entered into an 18 month consulting agreement whereby
      the
      Company agreed to pay Mr. Coote $2,000 per month for services to be rendered
      by
      him to assist the Company in transitioning the acquired entity to the Company.





We
      did
      not record any Goodwill as a result of the transaction. The intangible assets
      of
      $500,135 relate to values assigned to the website assets acquired consisting
      of
      the basic domain name, internet presence as demonstrated through the websites,
      URL's and search engine optimization abilities that drive unique visitors to
      view the user generated videos maintained on the various suites. The
      amortization period for the intangible assets is three years or 36 months from
      the acquisition date. We did not acquire any material liabilities.





The
      results of the acquisitions operations will be included in the Company’s
      consolidated financial statements beginning as of the date of
      acquisition.





This
      transaction was not deemed to be a material business combination based on the
      facts and circumstances of the transaction under Statement of FAS # 141 and
      as
      result, no pro forma results are required.





**6.** **Debt**





The
      following table details our long-term convertible notes as of March 31,
      2007:





Convertible
                4.9% Note Payable - YourDailyMedia.com Acquisition
            
            $
            800,000$
            800,000




13


On
      December 15, 2006, we acquired certain assets from John Paul Worsnop,
      including all of the assets and business of YourDailyMedia.com, an internet
      website that aggregates user-generated content. The purchase price of $1.06
      million for the assets and business of YourDailyMedia.com was comprised of
      a combination of $260,000 in cash and a five-year $800,000 convertible
      promissory note in favor of John Paul Worsnop and bearing interest at 4.9%
      and
      due on December 31, 2011. The note is convertible into 186,306 shares of
      our common stock at a fixed conversion price of $4.29 per share. The
      Company can force the conversion of the note into its common stock under certain
      conditions including if the Company trades more than 50,000 shares per day
      and
      the trading price of the stock for 5 days is twice the conversion price of
      the
      shares or $8.58. To date the Company has not met the conditions to force
      conversion. As of March 31, 2007 we had accrued approximately $15,027 of
      interest related to the notes.




***Conversion
      of Convertible Notes - Dorks LLC***





On
      November 13, 2006, we acquired 100% of the membership interests of Dorks,
      LLC, which operates Dorks.com, an internet website that aggregates
      user-generated content, from Zeus Promotions, LLC (“Zeus”). The purchase
      price of $1.0 million for the membership interests of Dorks, LLC was
      comprised of a combination of $500,000 in cash and a five-year $1 million
      secured convertible promissory note in favor of Zeus bearing interest at 4.7%
      and due on December 31, 2011. The note was convertible into 750,751 shares
      of our common stock at a fixed conversion price of $1.33 per share.





On
      January 22, 2007, Zeus converted the entire principal amount of $1,000,000
      of
      its note and the accrued interest of approximately $9,000 into 757,514 shares
      of our common stock. As was required under the terms of the registration
      rights agreement between Zeus and the Company, the Company included these shares
      in the registration statement on Form S-3, filed January 30, 2007 which was
      declared effective April 13. 2007.





***Conversion
      of Convertible Notes - FunMansion.com***





On
      December 1, 2006, we acquired certain assets from Aperio Technologies, Inc.
      (“Aperio”), including all of the assets and business related to
      FunMansion.com, an internet website that aggregates user-generated content.
      The purchase price of $1.1 million for the assets and business of
      FunMansion.com was comprised of a combination of $500,000 in cash and a
      five-year $600,000 convertible promissory note in favor of Aperio
      Technologies, Inc. bearing interest at 4.9% and due on December 31, 2011. The
      note was convertible into 96,899 shares of our common stock at a fixed
      conversion price of $6.19 per share.





On
      March
      22, 2007, Aperio notified the Company that it intended to convert its $600,000
      note and the accrued interest of approximately $9,000 into common stock on
      that
      date. As a result, the Company issued Aperio 98,363 restricted shares of its
      common stock. The Company included these shares in the registration statement
      on
      Form S-3, filed January 30, 2007 which was declared effective April 13. 2007.





All
      convertible notes were reviewed by management to determine if the embedded
      conversion rights qualified as derivatives under FASB Statement 133 “Accounting
      for Derivative Instruments and Hedging Activities” and related interpretations.
      Management determined the embedded conversion features were not derivatives
      since the debt qualifies as conventional convertible debt and accordingly each
      convertible instrument is reflected as one combined instrument in the
      accompanying consolidated financial statements. Management then reviewed whether
      a beneficial conversion feature and value existed. For convertible notes with
      fixed conversion terms, there was no beneficial conversion value as the
      conversion price equaled the fair market value of the underlying capital shares
      at the debt issuance date.


14





The
      following table details the repayments of the debt detailed above over the
      next
      five years ending December 31, 2010 and thereafter:




**Fiscal
                Year ending December 31,****2007**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **2011**
            
            **2012
                and beyond****$-**Short
                Term Debt
            
            $
            --
            
            $
            --
            
            $
            --
            
            $
            --
            
            $
            --
            
            $
            --Long
                Term Debt
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            800,000
            
            
            --**Total
                Repayments**
            
            **$**
            **--**
            
            **$**
            **--**
            
            **$**
            **--**
            
            **$**
            **--**
            
            **$**
            **800,000**
            
            **$**
            **--**





The
      total
      interest expense was $ 23,386 and $70,479 for
      the
      three months ended March 31, 2007 and 2006, respectively. Of the $23,386
      interest expense recorded in the three months ended March 31, 2007,
      approximately $22,000 related to the promissory notes issued as part of the
      acquisitions.





**7.** **Commitments
      and Contingencies**




***Legal
      Matters:***





From
      time
      to time, we may be involved in litigation relating to claims arising out of
      our
      operations in the normal course of business. As of March 31, 2007 there were
      no
      pending or threatened lawsuits that could have a material effect on the results
      of operations.





There
      are
      no proceedings in which any of our directors, officers or affiliates, or any
      registered or beneficial shareholder, is an adverse party or has a material
      interest adverse to our interest.





***Other
      Contingencies:***




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




**8.** **Net
      Loss per Share**





Basic
      earnings per share are computed using the weighted average number of common
      shares outstanding during the period. Diluted earnings per share are computed
      using the weighted average number of common and potentially dilutive securities
      outstanding during the period. Potentially dilutive securities consist of the
      incremental common shares issuable upon exercise of stock options and warrants,
      vesting of unvested stock and conversion of convertible debt (using the treasury
      stock method). Potentially dilutive securities are excluded from the computation
      if their effect is anti-dilutive. The treasury stock effect of options, warrants
      and conversion of convertible debt and preferred stock to shares of common
      stock
      outstanding at March 31, 2007 and 2006, respectively, has not been included
      in
      the calculation of the net loss per share as such effect would have been
      anti-dilutive. As a result of these items, the basic and diluted loss per share
      for all periods presented are identical. The following table summarizes the
      weighted average shares outstanding:


15




**Three
                Months ended March 31****2007**
            
            **2006****Basic
                Weighted Average Shares Outstanding**
            
            
            **14,453,245**
            
            
            **9,446,644**Total
                Convertible Debt into Common Stock
            
            
            186,306
            
            
            95,972Less:
                Anti Dilutive Common Stock due to loss
            
            
            (186,306
            )
            
            (95,972
            )Total
                Stock Options Outstanding
            
            
            1,785,708
            
            
            2,471,411Less:
                Anti Dilutive Stock Options due to loss
            
            
            (1,785,708
            )
            
            (2,471,411
            )Total
                Warrants Outstanding
            
            
            3,919,137
            
            
            1,666,055Less:
                Anti Dilutive Warrants due to loss
            
            
            (3,919,137
            )
            
            (1,666,055
            )Total
                Unvested Stock
            
            
            415,207
            
            
            --Less:
                Anti Dilutive Unvested stock
            
            
            (415,207
            )
            
            --**Diluted
                Weighted Average Shares Outstanding**
            
            
            **14,453,245**
            
            
            **9,446,644**





In
      total,
      at March 31, 2007 and 2006 there were financial instruments convertible into
      6,306,358 and 4,233,438 common shares, respectively, which may potentially
      dilute future earnings per share.





**9.** **Segment
      Information**





The
      Company has adopted SFAS No. 131, “Disclosures about Segments of an Enterprise
      and Related Information.” SFAS No. 131 requires a business enterprise, based
      upon a management approach, to disclose financial and descriptive information
      about its operating segments. Operating segments are components of an enterprise
      about which separate financial information is available and regularly evaluated
      by the chief operating decision maker(s) of an enterprise. Under this
      definition, the Company operated as a single segment for all periods presented.
      The single segment is comprised of our Consumer Electronics segment.
      Approximately, 100% and 97% of our sales for the three months ended March 31,
      2007 and 2006, respectively were to customers in the United States of America;
      the remaining percentage were principally to customers in Europe.





**10.** **Shareholders’
      Equity**




**Preferred
      Stock**





As
      a
      result of the reverse merger (See Note 6) completed on February 10, 2006, which
      was accounted for as a recapitalization, the outstanding preferred stock of
      Handheld Entertainment, Inc. (privately held California entity) have been
      retroactively converted to common stock for financial accounting purposes and
      reflected as such on the balance sheet at March 31, 2007.




Since
      the
      reverse merger completed on February 10, 2006, the Company has 1,000,000 shares
      of preferred shares authorized of which none is outstanding at March 31,
      2007.




**Common
      Stock**




**Common
      Stock Issue** **d
      for Cash**





***January
      2007 Private Placement***





On
      January 17, 2007, we sold in a private placement 1,276,666 shares of common
      stock, warrants to purchase 957,500 shares of our common stock at an
      exercise price of $3.50 per share and warrants to purchase 957,500 shares
      of our common stock at an exercise price of $4.00 per share, for aggregate
      gross
      proceeds of $3.83 million or $3.00 per unit.. The private placement was
      offered to accredited investors pursuant to the exemption from registration
      afforded by Rule 506 of Regulation D promulgated under Section 4(2) of the
      Securities Act. Offering costs of $124,909 were charged to additional paid-in
      capital.


16




NASDAQ
      Marketplace Rule 4350(i)(1)(D)(ii), requires a company to obtain
      shareholder approval prior to the issuance of 20% or more of its shares of
      common stock outstanding before the issuance, if such issuance is for less
      than the market value of the stock. It was determined that the
      original liquidated damages provision contained in the warrants, which
      provides for a decrease in the exercise price (see below) issued in the private
      placement could have resulted in the issuance of a number of shares equal
      to more than 20% of our outstanding shares of common stock, at a price less
      than the market value of the stock. On January 29, 2007, we
      were advised by the staff of the NASDAQ Stock Market that we regained
      compliance with this rule, upon amending the liquidated damages provision
      contained in the warrants issued in the private placement.





Under
      the
      terms of the subscription agreement with investors, we were required, to file
      a
      registration statement by January 31, 2007, which we did, and obtain its
      effectiveness by March 15, 2007. As we were unable to obtain its effectiveness
      by March 15, 2007, the exercise price of the $3.50 warrant was reduced by 20%
      to
      $2.80 on March 15, 2007. The registration statement was declared effective
      on
      April 13, 2007 completing these conditions.





The
      Company reevaluated whether the warrants previously granted by the Company
      may
      have to be classified as liabilities pursuant to EITF 00-19 “Accounting for
      Derivative Financial Instruments Indexed to, and Potentially Settled in, a
      Company's Own Stock” due to the terms of the warrants as discussed above. There
      were no other criteria of EITF 00-19 that would require the warrants to be
      classified as liabilities. Therefore the warrants will remain as equity
      instruments.




**Common
      Stock Issued for Services**





In
      January 2007 the Company granted 3,000 common shares to employees for services.
      The shares cliff vest in one year from the grant date and were valued at $9,720
      based on the quoted trade price of $3.24 of the Company’s stock on the grant
      date. The Company recognized $1,620 of expense in the three months ended March
      31, 2007. The Company also recognized $65,541 of expense relating to common
      stock grants of prior periods which have not yet vested. A total of $637,946
      will be recognized in future period relating to unvested common stock
      grants.





The
      following summarizes the quantity of employee shares granted, vested, unvested
      and cancelled as of March 31, 2007





TotalVested
            
            
            164,936Unvested
            
            
            164,897Cancelled
            
            
            26,895Total
                Issued
            
            
            356,818





During
      January and February 2007, the Company granted 89,761 common shares to
      non-employees for services rendered. The shares vest at various rates through
      June 2007 and were valued at $262,699 based on the quoted trade price of the
      Company’s common stock ranging from $2.89 to $3.83 per share on the grant dates.
      The Company recognized $216,052 of expense in the three months ended March
      31,
      2007. The Company also recognized $7,188 of expense relating to common stock
      grants of prior periods which have not yet vested. A total of $53,835 will
      be
      recognized in future period relating to unvested common stock
      grants.


17


The
      following summarizes the quantity of non- employee shares granted, vested,
      unvested and cancelled as of March 31, 2007





TotalUnvested
            
            
            32,183Vested
            
            
            250,310Cancelled
            
            
            10,345Total
                Issued
            
            
            292,838





**Common
      Stock Issued upon Exercise of Stock Options or Warrants**





During
      the three months ended March 31, 2007, the Company issued 8,270 common shares
      upon a cashless exercise of 10,345 warrants.





During
      the three months ended March 31, 2007 the Company issued 269,165 common shares
      upon the exercise of 269,165 options for $133,134 of cash proceeds.





**Common
      Stock Issued upon Conversion of Convertible Notes**





In
      January and March 2007, notes holders converted $1,600,000 of principal and
      $18,065 accrued interest into 855,877 common shares.





**Common
      Stock Issued in Business Combinations**





During
      the three months ended March 31, 2007, the Company issued 2,184,506 common
      shares in two business combinations valued at a total of $6,250,000 (see Note
      5).





**Common
      Stock Options**





During
      the three months ended March 31, 2007the Company granted employee stock options
      for 65,500 common shares exercisable at $3.24 per share expiring in 10 years
      and
      vesting 25% at 6 months, 50% at 9 months and 25% at 12 months. The options
      were
      valued at $204,587 or $3.12 per option using a Black-Scholes option pricing
      method with the following assumptions: stock price $3.24, expected life of
      5
      years (using the simplified method under SAB 107), volatility of 183% (using
      historical volatility since the company’s options do not trade to provide an
      implied volatility) and a discount rate of 5.26%. Based on vesting provisions
      the Company expensed $34,098 relating to these new option grants. In January
      2007 the Company also granted employee stock options for 17,241 common shares
      exercisable at $2.98 per share expiring in 10 years and vested immediately.
      These options were valued at $49,530 or $2.87 per option using a Black-Scholes
      option pricing method with the following assumptions: stock price $2.87,
      expected life of 5 years (using the simplified method under SAB 107), volatility
      of 183% (using historical volatility since the company’s options do not trade to
      provide an implied volatility) and a discount rate of 5.26%. In the first
      quarter of 2007 the Company also expensed $21,618 relating to option grants
      that
      occurred in November 2006.


18


**11.** **Subsequent
      Events**





***Acquisition
      of HolyLemon.com***





On
      April
      20, 2007, Dorks L.L.C. (“Dorks”), our wholly-owned subsidiary, acquired all
      of
      the business and assets of HolyLemon.com (the “Acquired Assets”) from Kieran
      O’Neill (“O’Neill”) pursuant to an Asset Purchase Agreement (“Agreement”) dated
      April 20, 2007, for an aggregate purchase price of $900,000 consisting (i) $25,000
      in cash payable immediately, (ii) $225,000 in cash, which is payable in
      twenty-four equal monthly installments commencing on May 1, 2007, and (iii)
      $650,000 in the
      Company ’s common
      stock based on the average closing price for the five days preceding the closing
      or 268,595 common
      shares (the “Shares”) .
      For
      accounting purposes, the common shares were valued at $2.42 per share or
      $650,000 based on the 5-day average closing price prior to the closing date
      since the quantity of shares we were required to issue to the seller was not
      determinable until the closing date. The purchase price for the Acquired Assets
      may be increased pursuant to an earn-out provision contained in the Agreement
      if
      Holylemon.com generates in excess of 1.7 million unique visitors derived from
      organic sources per month for three consecutive months during the twelve month
      period commencing on May 1, 2007. The Company granted O’Neill customary
“piggy-back” registration rights with respect to the Shares. Pursuant to the
      terms of the Agreement, O’Neill may not, directly or indirectly, sell more than
      one-twelfth (1/12), or 22,383 shares, of the Shares in any thirty-day period
      for
      twelve months after the closing of the acquisition notwithstanding any
      registration of the Shares. In addition, O’Neill entered into a 24-month
      consulting agreement with the Company to assist in the transition and continuing
      operations of the Acquired Assets. Under the terms of the consulting agreement,
      O’Neill will receive $2,000 per month for consulting services. We did not record
      any Goodwill as a result of the transaction. The intangible assets of $900,000
      plus acquisition costs of approximately $15,000 relate to values assigned to
      the
      website assets acquired consisting of the basic domain name, internet presence
      as demonstrated through the websites, URL's and search engine optimization
      abilities that drive unique visitors to view the user generated videos
      maintained on the various suites. The amortization period for the intangible
      assets is three years or 36 months from the acquisition date. We did not acquire
      any material liabilities.





***Warrants
      Activity***




Subsequent
      to March 31, 2007 two related party holders of common stock warrants exercised
      an existing warrant to purchase 403,448 shares of our stock. The exercise was
      concluded on a cashless exercise basis resulting in no cash to the company.
      As a
      result of the exercise, the Company, in April 2007, issued 403,424 common shares
      to the holders. After accounting for that conversion, outstanding warrants
      are
      as follows:




**Number
                of Warrants**
            
            **AverageExercise
                Price****Outstanding,
                March 31, 2006**
            
            
            3,919,137
            
            **$**
            **3.88**Granted
            
            
            --
            
            
            --Exercised
            
            
            (403,448
            )
            $
            0.0001Expired
            
            
            **--**
            
            
            **--****Outstanding,
                May 15, 2006**
            
            
            **3,515,689**
            
            **$**
            **3.88**




19


**Item
      2- Management's Discussion and Analysis or Plan of
      Operations**





Handheld
      Entertainment, Inc. (“we”, “us”, “our”, or “the Company”) is a Delaware
      corporation. We design, develop and market portable media players (PMP) and
      deliver digital content through our website, www.zvue.com .





The
      following Management’s Discussion and Analysis or Plan of Operations
      (“MD&A”) is intended to provide readers with an understanding of the
      Company. The following are included in our MD&A:




•
      Overview, Trends and Business Development;


•
Forward
      Looking Statements;


•
Results
      of Operations;


•
      Liquidity and Capital Resources;


•
      Critical Accounting Policies; and


•
Factors
      That May Impact Future Operating Results.




**Overview,
      Trends and Business Development**





**Corporate
      History**





We
      were
      organized in the state of Nevada on February 3, 2003 as Vika Corp. On February
      8, 2006, we merged with and into a wholly-owned Delaware subsidiary, for the
      sole purpose of reincorporating in the state of Delaware from Nevada. On
      February 10, 2006, HHE Acquisition, Inc., our newly formed wholly-owned
      California subsidiary, merged with and into Handheld Entertainment, Inc., a
      private California corporation. Upon closing of the merger Handheld
      Entertainment, Inc. became our wholly-owned subsidiary and we succeeded to
      Handheld Entertainment’ Inc.’s line of business as our sole line of business. In
      connection with the merger, Handheld Entertainment, Inc. changed its name to
      HHE
      Corp. and we changed our name to Handheld Entertainment, Inc. On April 12,
      2006,
      HHE Corp. merged with and into us. On August 14, 2006, we affected a 1.45-for-1
      reverse stock split.





**Overview**





Our
      mission is to provide 18-35 year olds with video entertainment content on all
      screens that matters to them. Our library of video content comes to us from
      both
      our network of user generated video sites, which have over 525,000 videos that
      are generated by users and our commercial content partners who have contracted
      with us to provide us with 12,000 commercially produced videos. We currently
      provide this video content to approximately 13.7 million unique visitors per
      month (in January 2007) through a network of websites most of which we have
      acquired through acquisitions.





We
      have
      acquired Dorks.com, FunMansion.com, YourDailyMedia.com, Putfile.com,
      UnOriginal.co.uk and HolyLemon.com; we have built zvue.com, our commercial
      web
      site, and FreeStuff! our own user generated site. Our commercial content is
      supplied by many commercial content providers, including Sony BMG Music
      Entertainment, Showtime, International Marketing Group, Canadian Broadcasting
      Corporation and others. We also have over two million songs available for
      download through our strategic partnerships with content providers, eMusic
      and
      Rhapsody.





Our
      goal
      is to provide this content, both commercial and user generated, to our audience
      on PCs and mobile devices, which we believe are the screens that matter to
      them
      the most. Our business model is to aggregate both commercial and user-generated
      content with a focus on humor, extreme sports and music videos and monetize
      the
      resulting traffic to these websites by selling handheld players and pre &
post roll, skyscraper and banner ads.





In
      addition to our digital media business, we produce our own portable media
      devices which are sold in mass market distribution under our ZVUE brand. We
      manufacture products that are value priced and focus on price points below
      $149.


20





We
      also
      believe that we can capitalize on the synergy between our portable digital
      entertainment products and our related digital content. We offer consumers
      access to a large and growing library of audio and video digital content, which
      integrates with our easy to use mobile devices and is offered at a compelling
      value. Our ZVUE devices have been designed to be compatible with virtually
      all
      formats of content ranging from DRM protected commercial content downloaded
      from
      our commercial site, ZVUE.com, to user generated content from the “Free STUFF!”
section of ZVUE.com, as well as from Dorks.com, Putfile.com, HolyLemon.com,
      FunMansion.com, YourDailyMedia.com and UnOriginal.co.uk.




We
      presently sell the ZVUE 250 model of our media player with a suggested retail
      price of $99, as well as a MP3 player, which comes pre-loaded with music content
      provided by Sony BMG. In January 2007, we announced a new media player, the
      ZVUE
      260, which is the smallest and lightest ZVUE yet. At 4.16- X 2.4- X 0.5-inches
      and 3.93 ounces, the ZVUE 260 PMP is comparable to the video iPod in thickness
      (6/100ths of an inch longer and 7/100ths of an inch thicker), yet weighs close
      to an ounce less (3.98 ounces versus 4.8 ounces, respectively). The ZVUE 260
      features a 2.5-inch active matrix Thin Film Transistor (TFT) backlit screen
      and
      supports videos running at up to 30 frames per second (fps) at resolutions
      of up
      to 320X240 pixels as well as being the first ZVUE to feature a built-in audio
      speaker. Entry-level configurations of the Model 260 have a $99 suggested retail
      price and are
      expected to be available in mid-2007.





Our
      media
      players are sold in more than 2,200 Wal-Mart stores in the United States,
      InMotion stores, as well as retail store websites, including Amazon.com and
      WalMart.com. We also have over two million songs available for download through
      our strategic partnerships with content providers, eMusic and Rhapsody.





**Recent
      Developments**





All
      traffic estimates in this document are internal estimates based on Google
      Analytics unless stated otherwise.





***Acquisition
      of HolyLemon.com***




On
      April
      20, 2007, Dorks L.L.C. (“Dorks”), our wholly-owned subsidiary, acquired all of
      the business and assets of HolyLemon.com (the “Acquired Assets”) from Kieran
      O’Neill (“O’Neill”) pursuant to an Asset Purchase Agreement (“Agreement”) dated
      April 20, 2007, for an aggregate purchase price of $900,000 consisting (i) $25,000
      in cash payable immediately, (ii) $225,000 in cash, which is payable in
      twenty-four equal monthly installments commencing on May 1, 2007, and (iii)
      $650,000 in the
      Company ’s common
      stock based on the average closing price for the five days preceding the closing
      or 268,595 common
      shares (the “Shares”) .
      The
      purchase price for the Acquired Assets may be increased pursuant to an earn-out
      provision contained in the Agreement if Holylemon.com generates in excess of
      1.7
      million unique visitors derived from organic sources per month for three
      consecutive months during the twelve month period commencing on May 1, 2007.
      The
      Company granted O’Neill customary “piggy-back” registration rights with respect
      to the Shares. Pursuant to the terms of the Agreement, O’Neill may not, directly
      or indirectly, sell more than one-twelfth (1/12), or 22,383 shares, of the
      Shares in any thirty-day period for twelve months after the closing of the
      acquisition notwithstanding any registration of the Shares. In addition, O’Neill
      entered into a 24-month consulting agreement with the Company to assist in
      the
      transition and continuing operations of the Acquired Assets. Under the terms
      of
      the consulting agreement, O’Neill will receive $2,000 per month for consulting
      services.


21




**Forward
      Looking Statements**




The
      following information should be read in conjunction with our financial
      statements and the notes thereto and in conjunction with “Management’s
      Discussion and Analysis or Plan of Operations” in our Current Report on Form
      10-KSB filed on April 2, 2007. This quarterly report on Form 10-QSB, and in
      particular this “Management’s Discussion and Analysis or Plan of Operations,”
may contain forward-looking statements regarding future events or our future
      performance. These future events and future performance involve certain risks
      and uncertainties including those discussed in the “Factors That May Impact
      Future Operating Results” section of this Form 10-QSB, as well as contained in
      the Form 10-KSB. Actual events or our actual future results may differ
      materially from any forward-looking statements due to such risks and
      uncertainties. We assume no obligation to update these forward-looking
      statements to reflect actual results or changes in factors or assumptions
      affecting such forward-looking statements. This analysis is not intended to
      serve as a basis for projection of future events.




These
      accounting principles require us to make certain estimates, judgments and
      assumptions. We believe that the estimates, judgments and assumptions upon
      which
      we rely are reasonable based upon information available to us at the time that
      these estimates, judgments and assumptions are made. These estimates, judgments
      and assumptions can affect the reported amounts of assets and liabilities as
      of
      the date of our condensed financial statements as well as the reported amounts
      of revenues and expenses during the periods presented. Our condensed financial
      statements would be affected to the extent there are material differences
      between these estimates and actual results. In many cases, the accounting
      treatment of a particular transaction is specifically dictated by GAAP and
      does
      not require management’s judgment in its application. There are also areas in
      which management’s judgment in selecting any available alternative would not
      produce a materially different result.




**Results
      of Operations**





The
      following table sets forth our results of operations for the three months ended
      March 31, 2007 and 2006 in absolute dollars and as a percentage of sales. It
      also details the changes from the prior fiscal year in absolute dollars and
      in
      percentages.





Three
                Months Ended March 31,
            
            **Change
                from previous year**2007
            
            2006$
            
            As
                % of sales
            
            $
            
            As
                % of sales
            
            $
                Increase / (Decrease)
            
            %Sales
            
            $
            389,733
            
            
            100
            %
            $
            584,234
            
            
            100
            %
            
            ($194,501
            )
            
            -33
            %Cost
                of goods sold
            
            
            336,754
            
            
            86
            %
            
            600,704
            
            
            103
            %
            
            (263,950
            )
            
            -44
            %**Gross
                margin**
            
            
            **52,979**
            
            
            **14**
            **%**
            
            **(16,470**
            **)**
            
            **-3**
            **%**
            
            **69,449**
            
            
            **-422**
            **%****Costs
                and expenses**Sales
                and marketing
            
            
            649,996
            
            
            167
            %
            
            701,940
            
            
            120
            %
            
            (51,944
            )
            
            -7
            %General
                and administrative
            
            
            2,167,681
            
            
            556
            %
            
            1,698,112
            
            
            291
            %
            
            469,569
            
            
            28
            %Research
                and development
            
            
            172,445
            
            
            44
            %
            
            354,425
            
            
            61
            %
            
            (181,980
            )
            
            -51
            %**Total
                operating expenses**
            
            
            **2,990,122**
            
            
            **767**
            **%**
            
            **2,754,477**
            
            
            **471**
            **%**
            
            **235,645**
            
            
            **9**
            **%****Loss
                from operations**
            
            
            **(2,937,143**
            **)**
            
            **-754**
            **%**
            
            **(2,770,947**
            **)**
            
            **-474**
            **%**
            
            **(166,196**
            **)**
            
            **6**
            **%****Other
                income and (expense)**Litigation
                settlement proceeds, net
            
            
            -
            
            
            0
            %
            
            -
            
            
            0
            %
            
            -
            
            
            n/aInterest
                income
            
            
            40,471
            
            
            10
            %
            
            24,086
            
            
            4
            %
            
            16,385
            
            
            68
            %Interest
                expense
            
            
            (23,347
            )
            
            -6
            %
            
            (70,479
            )
            
            -12
            %
            
            47,132
            
            
            -67
            %Loss
                on conversion of debt
            
            
            -
            
            
            0
            %
            
            (1,093,684
            )
            
            -187
            %
            
            1,093,684
            
            
            -100
            %**Total
                other income (expense)**
            
            
            17,124
            
            
            **4**
            **%**
            
            (1,140,077
            )
            
            **-195**
            **%**
            
            1,157,201
            
            
            -102
            %**Net
                Loss**
            
            
            **($2,920,019**
            **)**
            
            **-749**
            **%**
            
            **($3,911,024**
            **)**
            
            **-669**
            **%**
            **$**
            **991,005**
            
            
            **-25**
            **%**




***Sales***





Sales
      were approximately $390,000 during the three months ended March 31, 2007 as
      compared to approximately $584,000 during the three months ended March 31,
      2006,
      a decrease of approximately $195,000 or 33%. The decrease is primarily due
      to
      the decline of sales of the ZVUE Model 250 media player as we prepare for the
      introduction of the ZVUE Model 260 offset by approximately $77,000 of
      advertising revenue from our network of websites.





At
      March
      31, 2007, Wal-Mart accounted for approximately 54% of the gross accounts
      receivable and represented approximately 44% of our revenues for the three
      months ended March 31, 2007. At March 31, 2006, Wal-Mart accounted for
      approximately 96% of the gross accounts receivable and represented approximately
      97% of our revenues for the three months ended March 31, 2006. As a result,
      for
      the periods being reported, we were materially dependent upon this customer
      for
      our revenues. Due to the nature of our business and the relative size of the
      contracts, which are entered into in the ordinary course of business, the loss
      of any single significant customer, especially Wal-Mart, would have a material
      adverse effect on our results.





All
      of
      our sales to Wal-Mart during 2007 and 2006 were of our ZVUE 200, 250 and MP3
      models. There can be no assurance that Wal-Mart will accept our additional
      models if, and when, our shipments of future models commence, or that if
      ordered, such products will be accepted by Wal-Mart as successfully as our
      ZVUE
      200 or 250. The failure of these events to occur would significantly impact
      our
      future sales.





Approximately
      100% and 97% of our sales for the three months ended March 31, 2007 and 2006,
      respectively, were to customers in the United States of America; the remaining
      percentage were principally to customers in Europe.





***Cost
      of Goods Sold and Gross Margin***





Cost
      of
      goods sold were approximately $337,000 during the three months ended March
      31,
      2007 as compared to approximately $601,000 during the three months ended March
      31, 2006, a decrease of approximately $264,000 or 44%. The decrease in cost
      of
      goods sold during the three months ended March 31, 2007 as compared to the
      prior
      year is primarily the result of the decline in sales of the ZVUE product. We
      purchase our products from Eastech Electronics (Taiwan) Inc., a contract
      manufacturer located in Taiwan that is the sole manufacturer of our ZVUE
      product. Purchases during the three months ended March 31, 2007 and 2006 from
      Eastech were approximately $328,000 and $488,000, respectively.


22





We
      are
      dependent on a continuing relationship with Eastech, the sole manufacturer
      of
      our PMPs which is subject to a manufacturing agreement which expired in January
      2007 and was extended in January 2007 through December 31, 2008. Eastech
      manufactures our PMPs based on purchase orders that we submit. Eastech has
      been
      providing us payment terms that permit us to pay for products once our customers
      have paid us. This arrangement greatly reduces our cash needs. However, these
      terms are expected to change and that may require us to begin to make advance
      payments for our purchases of inventory and components. Our present relationship
      gives us both the production capacity and buying power of a much larger company.
      We do not have alternative financing available and do not maintain a revolving
      line of credit for purchases.




Our
      relationship with Eastech may not continue into the future, and unforeseen
      events may result in our relationship ending or changing. An adverse change
      to
      this relationship would have a material adverse impact on our business and
      results of operations by, among other things, increasing our costs. The
      inability or unwillingness of Eastech to manufacture our products on a purchase
      order basis would expose us to additional costs.




While
      Gross margin is positive in the three months ended March 31, 2007, we expect
      that the basic ZVUE product will continue to have low gross margins in the
      future although we expect to offset those margins with the introduction of
      new
      products and services which will be sold to customers of the media player,
      as
      well as other revenue streams which will utilize the ZVUE product as a platform
      to distribute content under subscription or single use contracts. However,
      we
      expect to continue to experience relatively high gross margins from our sales
      of
      advertising on our network of websites.





***Sales
      and Marketing Expenses***





Sales
      and
      marketing expenses were approximately $650,000 during the three months ended
      March 31, 2007 as compared to approximately $702,000 during the three months
      ended March 31, 2006, a decrease of approximately $52,000 or 7%. Sales and
      marketing expenses consist primarily of salaries and benefits of sales and
      marketing personnel, commissions, advertising, printing and customer acquisition
      related costs. The decrease in these expenses is directly related to reduction
      of sustaining marketing for the currently shipping version of the ZVUE product
      (Model 250). We expect to continue to increase marketing and development efforts
      in the future, including as new versions of the ZVUE are introduced, and as
      a
      result expect this class of expenses to increase.





***General
      and Administrative Expenses***





General
      and administrative expenses were approximately $2,200,000 during the three
      months ended March 31, 2007 as compared to approximately $1,698,000 during
      the
      three months ended March 31, 2006, an increase of approximately $470,000 or
      28%.
      Our general and administrative expenses consist primarily of salaries and
      benefits for employees, amortization and depreciation expenses, fees to our
      professional advisors, non-cash stock based expenses, rent and other general
      operating costs. Our general and administrative expenses also include
      amortization expense related to the issuance of stock options to employees
      and
      contractors, which was approximately $396,000 and $774,000 in the three months
      ended March 31, 2007 and 2006, respectively. We also include amortization
      expense related to the acquisition of our network of websites in general and
      administrative expense. In the three months ended March 31, 2007 and 2006,
      those
      expenses were approximately $679,000 and $0, respectively





Based
      on
      our eventual implementation of Sarbanes-Oxley Section 404, as well as expected
      increases in our number of employees and consultants and related costs due
      to
      the increase in our business, our general and administrative costs are likely
      to
      increase significantly in future reporting periods.





***Research
      and Development Expenses***





Research
      and development expenses were approximately $172,000 during the three months
      ended March 31, 2007 as compared to approximately $354,000 during the three
      months ended March 31, 2006, a decrease of approximately $182,000 or 51%. Our
      research and development expenses consist primarily of salaries and benefits
      for
      research and development employees and payments to independent contractors.
      The
      decrease in research and development expenses is primarily as a result of the
      elimination of development work on two proposed versions of the ZVUE product.


23





We
      continue to closely monitor development expenses to ensure that we have maximum
      leverage while maintaining our ability to continually develop new cutting edge
      products. We expect to continue to have a steady investment in research and
      development. This is a reflection on our commitment to improving our existing
      core products and developing new products, features and functionalities. Our
      management believes that product innovation and new technology integration
      is
      essential to proactively respond to the ever-evolving customer demands and
      to
      remain competitive in our segment of the industry.





***Interest
      income***





Interest
      income of approximately $40,000 and $24,000 at March 31, 2007 and 2006 relates
      to deposits in our depository accounts as a result of funds generated by the
      sale of common stock.





***Interest
      expense***





Interest
      expense of approximately $23,000 and $70,000 for the three months ended March
      31, 2007 and 2006, respectively, was directly related to the interest payable
      on
      notes and other borrowings which we have entered into to fund our operations.




**Liquidity
      and Capital Resources**





At
      March
      31, 2007, the Company had a cash and cash equivalent balance of
      approximately  $2,598,000
      and working capital of approximately  $945,000.
      Net cash used in operations was $4,245,590 for the three months ended March
      31,
      2007 as compared to net cash used in operations of $2,626,189 for the prior
      three month period ended March 31, 2006. For the three months ended March 31,
      2007, the Company used cash to fund the Company loss of $2,920,019 offset by
      non-cash items such as expenses related to common stock issued for services
      of
      approximately $395,000 and charges related to the amortization of acquired
      assets of $679,000 and charges under APB 25 related to stock options and
      warrants issued with intrinsic value to employees of $7,950. There were also
      changes in assets and liabilities of $2,416,431.





Net
      cash
      used in investing activities in the three months ended March 31, 2007 was
      $683,761 as compared to net cash used in investing activities of $171,193 for
      the three month period ended March 31, 2006. For the three months ended March
      31, 2006, the primary use of the cash was to purchase our newly acquired
      subsidiary, Putfile, Ltd.





Net
      cash
      provided by financing activities in the three months ended March 31, 2007 was
      $3,873,752 as compared to $7,536,047 for the three month period ended March
      31,
      2006. The completion of the private placement in January 2007 resulted in gross
      proceeds to the company of $3,830,000 and a payment of approximately $89,000
      in
      offering costs. The completion of the private placement February 2006 resulted
      in gross proceeds to the Company of $7,605,000 and a payment of approximately
      $539,000 in offering costs. For the three months ended March 31, 2006, the
      Company received $500,000 in proceeds from notes from related parties as
      compared to $419,500 in the three month period ended March 31, 2005.





Historically,
      we have financed our working capital and capital expenditure requirements
      primarily from short and long-term notes, sales of common and preferred stock
      and the product financing arrangement we established with Eastech. We are
      seeking additional equity and/or debt financing to sustain our growth strategy.
      With the completion of the private placement in January 2007 we were able to
      obtain funds to continue our operations at least through December 2007. We
      believe that based on our current cash position, our borrowing capacity, and
      our
      assessment of how potential equity investors will view us, we will be able
      to
      continue operations at least through the end of 2007. It is reasonably possible
      that we will not be able to obtain sufficient financing to continue operations.
      Furthermore, any additional equity or convertible debt financing will 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.


24




**Critical
      Accounting Policies and Estimates**





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





***Inventories***





Inventories,
      consisting primarily of finished goods and components, are valued at the lower
      of cost or market and are accounted for on the first-in, first-out basis.
      Management performs periodic assessments to determine the existence of obsolete,
      slow moving and non-salable inventories, and records necessary provisions to
      reduce such inventories to net realizable value. We recognize all inventory
      reserves as a component of product costs of goods sold.




***Software
      Development Costs***





Costs
      incurred in the initial design phase of software development are expensed as
      incurred in research and development. Once the point of technological
      feasibility is reached, direct production costs are capitalized in compliance
      with Statement of Financial Accounting Standards SFAS No. 86, *Accounting
      for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed”* for
      software that is embedded in our products. ** We
      cease
      capitalizing computer software costs when the product is available for general
      release to customers. Costs associated with acquired completed software are
      capitalized.





We
      amortize capitalized software development costs on a product-by-product basis.
      The amortization for each product is the greater of the amount computed using
      (a) the ratio of current gross revenues to the total of current and anticipated
      future gross revenues for the product or (b) 18, 36, or 60 months, depending
      on
      the product. We evaluate the net realizable value of each software product
      at
      each balance sheet date and records write-downs to net realizable value for
      any
      products for which the carrying value is in excess of the estimated net
      realizable value.





***Impairment
      of Long-Lived Assets***





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





***Revenue
      Recognition***





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 PMPs to retailers. We record the
      associated revenue at the time of the sale net of estimated returns. We also
      sell our products directly to end-users via the Internet and we record revenue
      when the product is shipped, net of estimated returns.





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


25





***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.




**Factors
      That May Impact Future Operating Results**





Set
      forth
      below and elsewhere in this report are some of the risks and uncertainties
      that
      could cause actual results to differ materially from the results contemplated
      by
      the forward-looking statements contained in this report. For a more complete
      list of risks and uncertainties, see our Current Report on Form 10-KSB filed
      on
      April 2, 2007.





**RISKS
      RELATING TO OUR BUSINESS**




**Since
      Wal-Mart currently represents approximately 44% of our revenues for the three
      month period ended March 31, 2007 and if they were no longer our customer,
      demanded different terms, or did not accept our future planned modes, a negative
      impact on our revenues would result.**





Wal-Mart
      currently is, and for the foreseeable future is expected to remain, our largest
      customer. Wal-Mart represented approximately 44% of our revenues during the
      three month period ended March 31, 2007, and 97% of our revenues during the
      twelve months ended December 31, 2006. While we plan to aggressively market
      the
“ZVUE” product line to other major retailers, other major retailers may not take
      on the “ZVUE” product line. Consequently, our short-term business plan depends,
      to a significant extent, on continuing our relationship with Wal-Mart, which
      may
      not happen. We do not have any long term or supply agreement for the sale of
      our
      products to Wal-Mart and our business plans are based upon estimates for orders
      from Wal-Mart that could be inaccurate.





All
      of
      our sales to Wal-Mart, our largest customer during 2005, were of our ZVUE 200
      model, which had been our sole product sold. The majority of our orders shipped
      to Wal-Mart during 2006 were our ZVUE 200 and ZVUE 250 models, as well as our
      new MP3 product. We expect the majority of our orders shipped to Wal-Mart during
      2007 to be of our ZVUE 250 and 260 models as well as our MP3
      player.





Having
      virtually all of our retail business concentrated in one retailer also entails
      the risk that the retailer may demand price concessions and other terms that
      prevent us from operating profitably, and which could subject us to the risks
      affecting that retailer's business. In addition, Wal-Mart maintains its own
      pay
      music download service that could compete with our download business and impact
      sales of our PMP devices.





**Eastech
      is the sole manufacturer of our products and, if we are unable to continue
      our
      relationship on acceptable terms, our ability to manufacture products would
      be
      significantly impaired and our revenues would be negatively
      impacted.**





We
      are
      dependent on a continuing relationship with Eastech, the sole manufacturer
      of
      our PMP and MP3 devices. Eastech presently manufactures our PMP and MP3 devices
      based on purchase orders that we submit. Eastech has been providing us payment
      terms that permit us to pay for products once our customers have paid us.
      However, our agreement with Eastech expires on December 31, 2008, and these
      terms are expected to change, which may require us to begin to make advance
      payments for our purchases of inventory and components. We currently do not
      have
      alternative financing available and do not maintain a revolving line of credit
      for purchases.





Our
      relationship with Eastech may not continue into the future, and unforeseen
      events may result in our relationship ending or changing. An adverse change
      to
      this relationship would have a material adverse impact on our business and
      results of operations by, among other things, increasing our costs. The
      inability or unwillingness of Eastech to continue manufacturing our products
      on
      a purchase order basis exposes us to additional risks.





Eastech
      is one of our investors. In 2004, Eastech purchased 383,142 shares of our series
      B convertible preferred stock (which was converted into our common stock in
      the
      reverse merger) for an aggregate purchase price of $500,000. In addition,
      Eastech's founder, chairman and CEO who was a member of our board of directors
      at the time (he resigned in November 2005), purchased 18,390 shares of our
      series D convertible preferred stock (which was converted into our common stock
      in the reverse merger) for an aggregate purchase price of $100,000. The terms
      of
      Eastech's relationship with us may be significantly influenced by Eastech's
      ownership interest. We may not be able to locate replacement manufacturing
      or
      assembly facilities from independent parties that would provide payment, supply
      and other terms equivalent to those provided us by Eastech, particularly in
      light of the incentive provided by the ownership relationship which would not
      exist with any successor manufacturer to Eastech.


26





**Our
      existing agreements with Eastech could harm our cash flows, and a default on
      our
      payment obligations would allow Eastech to foreclose and liquidate some or
      all
      of our assets.**





Under
      these agreements, Eastech has a security interest in all of our assets (other
      than our patents, trademarks and copyrights). In addition, payments by our
      customers of our accounts receivable from the sale of our PMP and MP3 products
      are required to be made to an escrow account, with the proceeds from that escrow
      account first being distributed to Eastech so that it receives its contract
      manufacturing price, with the remainder to us. A default by us on our payment
      obligations to Eastech, including our failure to pay Eastech its contract
      manufacturing price, would permit Eastech to foreclose and liquidate some or
      all
      of our assets in order to pay amounts owed, which would negatively impact our
      ability to conduct business.





**Although
      we expect to achieve cash flow positive results in the fourth quarter of 2007,
      we have experienced losses to date, and, as of our last audit at the end of
      2006, our independent registered public accounting firm expressed doubt about
      our ability to continue as a going concern.**





Although
      we expect to achieve cash flow positive results in the fourth quarter of 2007,
      there can be no assurance that we will be able to achieve or sustain
      profitability or positive cash flow by such period, or at all. Based on our
      history of losses, our independent registered public accounting firm has stated
      in their report accompanying their audit of our 2006 year-end financial
      statements that there is substantial doubt about our ability to continue as
      a
      going concern. If consumers are slower to embrace our products than we expect,
      we may not be able to continue operating our business.





**Our
      business plan relies on our ability to generate significant advertising revenues
      from visitors to our network of websites and if we are unable to accomplish
      this
      goal a negative impact on our revenues would result.**





Our
      revenue model for 2007 includes revenue from advertising generated by pre and
      post roll videos advertisements as well as banner and skyscraper ads. If we
      are
      unable to fully implement this revenue model or if the pricing for such ads
      is
      materially different than our estimates, our revenues will be negatively
      affected.





**We
      face intense competition from both PMP manufacturers and content distributors
      and if customers do not choose our products or our content delivery methods,
      pricing or offerings over those of our competitors, then our revenues would
      be
      negatively impacted.**





The
      handheld entertainment market in which we operate, which includes portable
      video
      players, portable stereos, game players, MP3 and CD players and, to a limited
      degree, personal digital assistants (PDAs) and wireless phones, is very
      competitive. The content delivery business in which we operate also is very
      competitive. Consumers have many devices to choose from and many content
      providers to choose from, such as Apple, Microsoft, Napster, Yahoo, RealAudio,
      and Wal-Mart, and we must compete with these devices and services in order
      to
      sell our ZVUE PMP devices and generate revenues from content, including video
      content.





Several
      companies, including Apple, Microsoft, Nintendo, Nokia, Sony, Samsung, Toshiba
      and Creative Labs, have released, or announced that they are developing,
      handheld devices featuring digital video playback similar to that offered by
      us
      and planned in the future. We cannot guarantee that consumers will choose to
      purchase our PMP devices, or purchase content through our service, instead
      of
      other handheld devices or from other content companies. We also face competition
      from traditional media outlets such as television (including cable and
      satellite), radio (terrestrial and satellite), CDs, DVDs, videocassettes and
      others, and may in the future face competition from new or as yet unknown
      sources, such as broadband telephone providers. Emerging Internet media sources
      and established companies entering into the Internet media content market
      include Time Warner's AOL subsidiary, Microsoft, Apple, Google, Yahoo! and
      broadband Internet service providers who can be expected to be significant
      competitors. We expect this competition to become more intense as the market
      and
      business models for Internet video content to mature and more competitors enter
      these new markets. Competing services may be able to obtain better or more
      favorable access to compelling video content than we can and may develop better
      offerings than us and may be able to leverage other assets to promote their
      offerings successfully.





Most
      of
      our competitors or potential competitors in both devices, and content, have
      significantly greater financial, technical and marketing resources than we
      do.
      They may be able to respond more rapidly than we can to new or emerging
      technologies or changes in customer requirements. They may also devote greater
      resources to developing, promoting and selling their products and services
      than we
      can.


27




**If**  **our
      suppliers are unable to meet our manufacturer’s requirements, then we will need
      to reduce the number of ZVUES available to our distribution partners, which
      would decrease our revenues.**





Our
      products contain components, including liquid crystal displays, memory chips
      and
      microprocessors, from a variety of suppliers. In order for us to have the ZVUE
      devices manufactured, these components must be available at the right level
      of
      quality and at the right price. Some components, such as microprocessors, come
      from single-source suppliers, and alternative sources would not be available
      for
      those components unless we were to redesign the device. Other components, such
      as our screens, could be obtained from alternative suppliers without redesign,
      but only at higher prices than we currently pay or for delivery later than
      required by our production schedule. If suppliers are not able to provide these
      critical components on the dates and at the prices scheduled, our sole-source
      manufacturer, Eastech Electronics (Taiwan) Inc. Eastech may not be able to
      promptly and cost-effectively manufacture the ZVUE devices in sufficient
      quantities to meet our demand, which would decrease our revenues.





**If
      consumers do not embrace our products our revenues will
      decline.**





During
      2005 and 2006, nearly all of our revenues were derived from sales of just a
      single product, the “ZVUE 200.” Since then, we have begun selling additional
      products, the “ZVUE 250” and our MP3 player and are planning to introduce the
      Model 260 in stores in mid 2007. Consumers may not accept our new products,
      on
      which future revenues will rely, or adopt our content services. Our financial
      success will depend largely on our ability to quickly and successfully
      establish, maintain and increase sales of our new products, including through
      untested new retail channels of distribution. We have assumed that there is
      substantial and growing consumer demand for PMP devices priced under $149,
      on
      which assumption our business model is substantially reliant. Because our
      distribution to date has also been largely concentrated in Wal-Mart, a single
      large well-established retail chain, representing approximately 44% of our
      revenues for the first quarter of 2007 and 97% of the 2006 fiscal year revenues,
      our products and content may not achieve the mass market appeal and success
      on
      which we have based our plans. Our success is significantly dependent upon
      the
      accuracy of our price and positioning assumptions and various other assumptions
      including design, functionality, and consumer acceptance.





The
      market for products that enable the downloading of media and personal
      music/video management is still evolving. We may be unable to develop sufficient
      demand to take advantage of this market opportunity. We cannot predict whether
      consumers will adopt or maintain our products as their primary application
      to
      play, record, download and manage their digital content. Our inability to
      achieve or maintain widespread acceptance or distribution of our products would
      negatively impact our revenue.





**Failure
      to develop consumer recognition of our products could limit the demand for
      the
      ZVUE, resulting in less than expected sales.**





We
      believe that continuing to strengthen our brand will be critical to increasing
      demand for, and achieving widespread acceptance of, our ZVUE devices. We also
      believe that a strong brand, such as those offered by many competitors, offers
      an advantage to those competitors with better name recognition than ours.
      Various well-recognized brands have introduced players, and our PMP products
      may
      be viewed as late to the portable media player market, a significant competitive
      disadvantage. Promoting our brand will depend largely on our marketing efforts
      and whether we are able to secure rights to desirable content. There is no
      guarantee that our marketing efforts will result in increased demand for our
      products or greater customer loyalty, and even if they do, that we will generate
      increased revenues or profitability due to requirements for enhanced marketing
      efforts and costs to attract and retain consumers.





**If
      we were to lose the services of members of our senior management team, we may
      not be able to execute our business strategy.**





Our
      success depends in large part upon the continued service of key members of
      our
      senior management team, which includes Jeff Oscodar, our Chief Executive Officer
      and President, Tim Keating, our Chief Operating Officer, Garrett Cecchini,
      our
      Executive Vice President, Secretary and founder, Carl Page, our Chief Technology
      Officer, Bill Bush, our Chief Financial Officer, Greg Sutyak, our Executive
      Vice
      President, Finance and Operations, and Larry Gitlin, our Vice President of
      Business Development. The loss of any of our senior management or key personnel
      could seriously harm our business and prospects.





**If
      we are not able to manage our product return rate at acceptable levels, then
      gross margin will decline.**





Our
      strategy of appealing to a mass market with low prices requires that our
      products be easy to use. We have experienced return rates that are higher than
      acceptable to us, and may exceed return rates experienced by competing brands,
      but which we believe are in line with acceptable levels of returns for our
      product category. We cannot guarantee that we will be successful in reducing
      our
      return rates, resulting in lower gross margins.


28





**Major
      retailers purchasing electronic equipment require buy-back protections, which
      could materially impair our cash flow.**





Major
      retailers such as Wal-Mart, Best Buy, Target, and Toys "R" Us may require
      manufacturers and distributors to provide them various inventory and price
      protections and incentives. Major retailers may require a variety of
      protections, including holdbacks on payment, reducing the price paid if the
      retailer cannot sell the product or the product requires discounting, or
      requiring the manufacturer to buy back unsold goods. If our products do not
      sell
      as well as we or retail distributors anticipate, such protections could lead
      to
      excess inventory and costs, and our becoming subject to significant holdback
      and
      repayment obligations, which may be arbitrary and difficult or impossible to
      contest without jeopardizing our relationship with a retailer. We may be unable
      to recover from our manufacturers any amounts that we will be required to pay
      or
      allow to our retailers. Accordingly, these obligations could significantly
      impair our cash flow, revenues and financial condition.




**Since
      our products are manufactured overseas, changes in political or economic
      conditions in those countries could affect our ability to manufacture products
      in compliance with our distribution partners’ schedules.**





Because
      our manufacturer's headquarters are in Taiwan and its factory is in China,
      our
      business is subject to risks associated with doing business internationally.
      Accordingly, our ability to distribute the product could be harmed by a variety
      of factors, including changes in foreign currency exchange rates, changes in
      the
      political or economic conditions in Taiwan, China or elsewhere, trade-protection
      measures, import or export licensing requirements, delays in shipping, potential
      labor activism, inclement weather, difficulty in managing foreign manufacturing
      operations and less effective protection of intellectual property.





**We
      have a limited operating history and therefore it is difficult to accurately
      make projections and forecasts.**





We
      are an
      early stage company. We are devoting substantial efforts to establishing a
      new
      business that has not yet generated significant revenues in a new industry.
      As a
      result, we have no reliable operating history upon which to base our projections
      and forecasts.





We
      may
      not be able to adequately protect our proprietary rights, which would have
      an
      adverse effect on our ability to competitively manufacture and distribute our
      products on a world-wide basis.





Our
      ability to compete depends upon internally developed technology and technology
      from third parties. To protect our proprietary rights, we rely on a combination
      of patent, trademark, copyright and trade secret laws, confidentiality
      agreements, and protective contractual provisions. Despite these efforts, our
      applications for patents and trademarks relating to our business may not be
      granted and, if granted, may not provide us with any competitive advantages.
      Additionally, another party may obtain a blocking patent and we would need
      to
      either obtain a license or design around the patent in order to continue to
      offer the contested feature or service in our products. Further, effective
      protection of intellectual property rights may be unavailable or limited in
      some
      foreign countries. Our inability to adequately protect our proprietary rights
      would have an adverse impact on our ability to competitively manufacture and
      distribute our products on a world-wide basis.





**We
      may be subject to claims that we have infringed the proprietary rights of
      others, which could require us to obtain a license, increasing our royalty
      expenses, or to change our products, resulting in higher development
      expenses.**





Although
      we do not believe that any of our activities infringe the proprietary rights
      of
      others, we may be subject to claims that our intellectual property is invalid,
      or claims for indemnification resulting from infringement of intellectual
      property owned by others. Regardless of the merit of such claims or if such
      claims are valid or can be successfully asserted, or defended, such claims
      could
      cause us to incur significant costs and could divert resources away from our
      other activities. In addition, assertion of infringement claims could result
      in
      injunctions that prevent us from distributing our products. If any claims or
      actions are asserted against us, we may seek to obtain a license to the
      intellectual property rights that are in dispute. Such a license may be
      unavailable on reasonable terms, or at all, which could force us to pay higher
      royalties or change our products or activities, which could result in
      higher


development
      expenses.





**Our
      anticipated growth could strain our resources.**





We
      expect
      to grow at a rate that will place a significant strain on our managerial,
      operational and financial resources. To manage this growth, we will have to
      develop and install operational and financial systems, as well as hire, train
      and manage new employees, in addition to independent consultants. We may not
      be
      able to locate and hire the individuals we will need as our business
      grows.


29





**Our
      mobile product plans may not be realized and we may not be successful if
      consumers do not use mobile devices to access video digital media in addition
      to
      audio.**





In
      order
      for our investment in the development of mobile video products to be successful,
      consumers need to adopt and use mobile devices for consumption of digital video
      media. Available video devices are not widely known or available at reasonable
      prices so consumers have not yet widely adopted products for video as they
      have
      for audio. If adoption does not significantly increase, our revenues would
      not
      increase to the levels we desire.





**We
      rely on third-party content providers, who may not provide their content to
      us
      on advantageous terms or at all, which would affect the quality of our content
      offering.**





We
      contract with third parties to obtain content for distribution to our customers.
      We pay royalties/fees to obtain the necessary rights to lawfully offer these
      materials to our customers. Royalty rates associated with content are not
      standardized or predictable. Our licensing arrangements are generally
      non-exclusive and short-term and do not guarantee renewals. Some parties in
      the
      content industry have consolidated and formed alliances, which could limit
      the
      availability of, and increase the costs associated with acquiring rights to
      content. Further, some content providers currently, or in the future may, offer
      music and video products and services that would compete with our music and
      video products and services, and could take action to make it more difficult
      or
      impossible for us to license or distribute content, such as imposing harsh
      usage
      rules restricting copying or other uses by our customers. If we are unable
      to
      offer a wide variety of content at reasonable rates, our revenues would be
      diminished.





**If
      we are unable to continually license compelling digital content on commercially
      reasonable terms, then our gross margins would be negatively
      impacted.**





We
      must
      continue to obtain fresh compelling digital media content for our video and
      music services in order to develop and increase revenue and overall customer
      satisfaction for our products and services. In some cases, we have paid and
      will
      continue to pay substantial fees in order to obtain premium content. We have
      limited experience determining what content will be successful with current
      and
      prospective customers. In addition, some of our content licensing agreements
      may
      have high fixed costs, and in the event that we do not renew these agreements
      these fixed costs may be lost. If we cannot obtain premium content on
      commercially reasonable terms, or at all, our gross margins would be negatively
      impacted.





**Development
      delays or cost overruns may negatively affect the profitability of our
      products.**





We
      have
      experienced development delays and cost overruns in our development efforts
      in
      the past and we may encounter such problems in the future. Delays and cost
      overruns could affect our ability to respond to technological changes, evolving
      industry standards, competitive developments or customer requirements. Also,
      our
      products may contain undetected errors, including security errors, that could
      cause increased development costs, loss of revenue, adverse publicity, reduced
      market acceptance, and lead to disputes or litigation.





**If
      our products are not able to support popular digital media formats, our sales
      will be substantially impaired.**





The
      success of our products and services depends upon our interoperability and
      support for a variety of media formats and, to a lesser extent relating to
      our
      future plans, wireless formats. Technical formats and consumer preferences
      may
      change over time, and we may be unable to adequately address these changes
      or
      have proficiency with new and evolving formats. We may not be able to license
      technologies, like “codecs” -- compression/decompression -- or DRM - digital
      rights management -- technology, that are introduced, which would harm consumer
      and developer acceptance of our products and services.





**Changes
      in network infrastructure, transmission methods and protocols, and broadband
      technologies could negatively impact our revenues.**





Our
      products and services depend upon the means by which users access content over
      the Internet and will, to an increasing degree in the future, rely on wireless
      networks. If popular technologies, transmission methods and protocols change
      use
      of our technologies and products could decrease, and our operating results
      could
      be negatively impacted.





Development
      of new technologies, products and services for transmission infrastructure
      could
      increase our vulnerability to competitors by enabling the emergence of new
      competitors, such as traditional broadcast and cable television companies,
      which
      have significant control over access to content, substantial resources, and
      established relationships with media providers. Our current competitors may
      also
      develop relationships with, or ownership interests in, companies that have
      significant access to or control over the broadband transmission infrastructure
      or content that could provide them with a significant competitive
      advantage.


30





**Standards
      for non-PC wireless devices have not been established and could diminish our
      sales if our products and technologies are not compatible with the new
      standards.**





We
      do not
      believe that complete standards have emerged with respect to non-PC wireless
      and
      cable-based systems. If we do not successfully make our products and
      technologies compatible with emerging standards, we may miss market
      opportunities and our financial performance will suffer. If other companies'
      products and services, including industry-standard technologies or other new
      standards, emerge or become dominant in any of these areas, or differing
      standards emerge in global markets, demand for our technology and products
      could
      be reduced or they could become obsolete.





**Our
      operating results will suffer if our systems or networks fail, become
      unavailable or perform poorly so that current or potential users do not have
      adequate access to our products, services and websites.**





Our
      ability to provide our products and services to our customers and operate our
      business depends, in part, on the continued operation of our systems and
      networks and those of third parties. A significant or repeated reduction in
      the
      performance, reliability or availability of these information systems and
      network infrastructure could harm our ability to conduct our business, our
      reputation and our ability to attract and retain users and content providers.
      Problems with these systems and networks could result from our failure to
      adequately maintain and enhance these systems and networks, natural disasters,
      power failures, intentional actions to disrupt our systems, and networks and
      many other man-made and natural causes. The vulnerability of our computer and
      communications infrastructure is enhanced because it is located in San
      Francisco, California, an area that is at heightened risk of earthquakes and
      fires. We do not currently have fully redundant systems or a formal disaster
      recovery plan, and we may not have adequate business interruption insurance
      to
      compensate us for losses that may occur from a system outage. We intend to
      utilize a portion of the proceeds of this offering to promote fully-redundant
      systems and enhance our business interruption insurance from the present
      levels.





**Our
      network is subject to security risks that could harm our reputation and expose
      us to litigation or liability.**





Online
      commerce and communications depend on the ability to transmit confidential
      information and licensed intellectual property securely over private and public
      networks. Any events that compromise our ability to transmit and store
      information and data securely, and any costs associated with preventing or
      eliminating such problems, could hurt our ability to distribute products and
      content and collect revenue, threaten the proprietary or confidential nature
      of
      our technology, harm our reputation, and expose us to litigation or liability.
      We also may be required to expend significant capital or other resources to
      protect against the threat of security breaches or hacker attacks or to
      alleviate problems caused by such breaches or attacks. A successful attack
      or
      breach of security against us (or against a well-known third party) could hurt
      consumer demand and expose us to consumer class action lawsuits.





**We
      may be forced to litigate to defend our intellectual property rights or to
      defend against claims by third parties against us relating to intellectual
      property, which could be very costly and distracting to
      management.**





Disputes
      regarding the ownership of technologies and rights associated with media,
      digital distribution and online businesses are common and likely to increase
      in
      the future. We may be forced to litigate to enforce or defend our intellectual
      property rights or manner of doing business, to protect our trade secrets or
      to
      determine the validity and scope of other parties' proprietary rights. Any
      such
      litigation could be very costly and distracting to management, even if such
      claims are not meritorious. The existence and/or outcome of any such litigation
      is unpredictable and could significantly increase our expenses.





**We
      may be subject to legal liability for the provision of third-party products,
      services or content, resulting in damages or penalties.**





Our
      arrangements to offer third-party products, services, content or advertising
      could subject us to claims by virtue of our involvement in providing access
      to
      that information. Our agreements may not adequately protect us from potential
      liabilities. It is also possible that if information provided directly by us
      contains errors or is illegal, or is otherwise negligently provided to users,
      we
      could be subject to claims (or prosecution). Investigating and defending these
      claims would be expensive, even if the claims are unfounded. If any of these
      claims results in liability, we could be required to pay damages or other
      penalties.




**We
      may be liable for content displayed on our network of websites which could
      subject us to liabilities and increase our expenses.**





We
      may
      liable to third parties for content available or posted on our websites,
      ZVUE.com, Dorks.com, FunMansion.com, YourDailyMedia.com, Putfile.com,
      UnOriginal.co.uk and HolyLemon.com, if the music, artwork, text, video or other
      content involved violates the copyright, trademark or other intellectual
      property rights of such third parties or if the content is defamatory. Any
      claims by third parties resulting from content available or posted on our
      websites could be time consuming, result in costly litigation and divert
      management’s attention.


31








**RISKS
      RELATING TO OUR INDUSTRY**





**We
      may be subject to risk and legal liability in connection with data collection
      capabilities of our products and services, resulting in damages or
      penalties.**





Products
      that are interactive require communication between a client and server. To
      provide better consumer experiences and operate effectively, such products
      send
      information, including private data, to servers and also require that a user
      provide information. Companies impacted by interactive data collection and
      transmission over the Internet, such as us, establish and maintain a privacy
      policy concerning collection, use and disclosure of user data. Online privacy
      is
      an area of developing law and regulation. Failure to comply with posted privacy
      policy and existing or new legislation or rules concerning privacy could impact
      the market for our products and services, hurt our reputation with consumers,
      subject us to litigation, and may also lead to strict regulation of such
      activities.





**RISKS
      RELATING TO OUR COMMON STOCK**




**Future
      sales of our common stock may cause the price of our common stock to
      decline.**





Sales
      of
      a substantial number of shares of our common stock or the availability of a
      substantial number of such shares for sale could result in a decline of
      prevailing market price of our common stock and impair our ability to raise
      capital through the sale of additional equity securities in the future at a
      time
      and price that we deem necessary or appropriate.





**The
      price of our common stock is highly volatile.**




The
      price
      of our common stock has fluctuated widely since it began trading on March 6,
      2006 ranging from $9.50 to $1.00. Purchases and sales of a substantial number
      of
      shares by investors of our common stock, the shorting of our stock or the sale
      of additional shares by us could result in either significant daily and
      inter-day increases or decreases in the price of our common stock which could
      result in significant losses to investors.





**If
      we cannot comply with NASDAQ Marketplace Rules, the market for our common stock
      may decline.**




We
      have
      been out of compliance with NASDAQ marketplace rules three times since our
      stock
      was listed on the NASDAQ Capital Market in August 2006. We have been able to
      cure all of these instances, which related to (i) our not having sufficient
      independent directors (ii) issuing a number of shares of common stock in excess
      of 20% of our outstanding shares below the current market price of our stock
      and
      iii) the issuance of a number shares in excess of 10% of our outstanding common
      stock in connection with the acquisition of Putfile Ltd and the issuance of
      common stock outside of a shareholder approved plan. If we are unable to comply
      with NASDAQ rules in the future our common stock may be delisted from the NASDAQ
      stock exchange, the market for our stock may decline and investors may suffer
      capital losses.




**Item
      3- Controls and Procedures**





We
      carried out an evaluation, under the supervision and with the participation
      of
      our management, including our chief executive officer and chief financial
      officer, of the effectiveness of the design and operation of our disclosure
      controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
      the
      Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure
      controls and procedures include, without limitation, controls and procedures
      designed to ensure that information required to be disclosed by an issuer in
      the
      reports that it files or submits under the Exchange Act is accumulated and
      communicated to the issuers management, including its principal executive and
      principal financial officers, or persons performing similar functions, as
      appropriate to allow timely decisions regarding required disclosure. Based
      upon
      our evaluation, our chief executive officer and chief financial officer
      concluded that our disclosure controls and procedures are effective, as of
      the
      end of the period covered by this report (March 31, 2007), 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 SEC rules and forms. There were no
      changes in our internal control over financial reporting during the three month
      period ended March 31, 2007 that have materially affected, or are reasonably
      likely to materially affect, our internal control over financial
      reporting.


32







**PART
      II - OTHER INFORMATION**







**Item
      6- Exhibits**






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




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





33




**SIGNATURES**





In
      accordance with 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.





**HANDHELD ENTERTAINMENT,
              INC.****By: /s/ Jeff
              Oscodar**Jeff OscodarDirector, Chief Executive Officer &
              President**By: /s/ William J.
              Bush**William J. BushActing Chief Financial Officer (Principal
              Financial & Accounting Officer)**Date: May 15,
              2007**


34




**INDEX
      TO EXHIBITS:**







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





35