`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 SEPTEMBER 30, 2006

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

               For the transition period from: _______ to _______

                        Commission File Number 333-124421

                          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 November 14, 2006, 11,424,247 shares of Issuer's common stock, with
$0.0001 par value per share, were outstanding.

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



                          HANDHELD ENTERTAINMENT, INC.

                                TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION                                                 3

   ITEM 1- CONDENSED FINANCIAL STATEMENTS                                      3
           CONDENSED BALANCE SHEETS (UNAUDITED)                                3
           CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)                      4
           CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)                      5
           NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)                 6
   ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION          18
   ITEM 3- CONTROLS AND PROCEDURES                                            34

PART II - OTHER INFORMATION                                                   35

   ITEM 6- EXHIBITS                                                           35

SIGNATURES                                                                    35

INDEX TO EXHIBITS:                                                            36


                                        2



                         PART I - FINANCIAL INFORMATION

ITEM 1- CONDENSED FINANCIAL STATEMENTS

                          HANDHELD ENTERTAINMENT, INC.
                            CONDENSED BALANCE SHEETS



                                                                                   SEPTEMBER 30,    DECEMBER 31,
                                                                                        2006            2005
                                                                                   -------------   -------------
                                                                                      UNAUDITED    RESTATED; SEE
                                                                                                       NOTE 14

   Current assets:
      Cash and cash equivalents, net                                                $  3,889,231    $    277,734
      Restricted cash                                                                     50,000              --
      Accounts Receivables, net                                                          233,829         902,492
      Inventories, net                                                                   503,886         165,732
      Other current assets - Related Party                                               333,000              --
      Prepaid expenses and other current assets                                          229,029         118,354
                                                                                    ------------    ------------
   TOTAL CURRENT ASSETS                                                                5,238,975       1,464,312

   Fixed assets, net                                                                     245,060          27,813
   Capitalized software, net                                                               6,921          10,034
   Deposits and other non-current assets                                                 236,016          12,394
                                                                                    ------------    ------------
TOTAL ASSETS                                                                        $  5,726,972    $  1,514,553
                                                                                    ============    ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
      Current liabilities:
         Trade accounts payable                                                     $    799,092    $  1,184,086
         Accrued and other liabilities                                                   588,944         705,675
         Trade accounts and other obligations payable to officers, affiliates
            and related parties                                                          918,179       1,348,241
         Short term convertible and non-convertible notes and loans                           --         109,500
         Short term notes and loans, related party                                            --       3,741,049
                                                                                    ------------    ------------
      TOTAL CURRENT LIABILITIES                                                        2,306,215       7,088,551
                                                                                    ------------    ------------
   TOTAL LIABILITIES                                                                   2,306,215       7,088,551
                                                                                    ------------    ------------
   SHAREHOLDERS' EQUITY (DEFICIT)
      Common stock, $0.0001 par value; 50,000,000 authorized; 11,424,247
      issued  and outstanding at September 30, 2006 and 3,644,106 issued
      and outstanding at December 31, 2005.                                                1,143             365
      Additional paid in capital - Warrants and stock options                          3,178,991       2,482,073
      Additional paid in capital                                                      20,967,123       2,792,833
      Accumulated deficit                                                            (20,726,500)    (10,849,269)
                                                                                    ------------    ------------
   TOTAL SHAREHOLDERS' EQUITY (DEFICIT)                                                3,420,757      (5,573,998)
                                                                                    ============    ============
   TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)                             $  5,726,972    $  1,514,553
                                                                                    ============    ============


              See Notes to Unaudited Condensed Financial Statements


                                        3



                          HANDHELD ENTERTAINMENT, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)



                                                                 Three Months Ended September 30,  Nine Months Ended September 30,
                                                                 --------------------------------  -------------------------------
                                                                     2006               2005             2006              2005
                                                                 ------------      ------------      ------------    ------------

Sales                                                            $    123,104      $    519,102      $  1,299,125    $    936,790
Cost of goods sold                                                    396,800           525,945         1,462,495         973,588
                                                                 ------------      ------------      ------------    ------------
GROSS MARGIN                                                         (273,696)           (6,843)         (163,370)        (36,798)

COSTS AND EXPENSES
   Sales and marketing                                                937,116           162,660         2,432,624         367,513
   General and administrative (including stock based
   compensation expense of $677,237 and $154,112 for the three
   months ended September 30, 2006 and 2005 and $1,639,586
   and $327,318 for the nine months ended September 30, 2006
   and 2005)                                                        1,581,570           571,505         4,677,927       1,427,099
   Research and development                                           596,322           250,315         1,557,075         612,270
                                                                 ------------      ------------      ------------    ------------
TOTAL OPERATING EXPENSES                                            3,115,008           984,480         8,667,626       2,406,882
                                                                 ------------      ------------      ------------    ------------
LOSS FROM OPERATIONS                                               (3,388,704)         (991,323)       (8,830,996)     (2,443,680)

OTHER INCOME AND (EXPENSE)
   Interest income                                                      6,725                --            59,574              --
   Interest expense                                                    (1,334)          (40,472)          (67,066)        (83,747)
   Loss on conversion of debt                                              --                --        (1,038,743)             --
                                                                 ------------      ------------      ------------    ------------
TOTAL OTHER INCOME (EXPENSE)                                            5,391           (40,472)       (1,046,235)        (83,747)
                                                                 ------------      ------------      ------------    ------------
NET LOSS                                                          ($3,383,313)      ($1,031,795)      ($9,877,231)    ($2,527,427)
                                                                 ============      ============      ============    ============

                                                                 ------------      ------------      ------------    ------------
NET LOSS PER SHARE - BASIC AND DILUTED                                 ($0.31)           ($0.29)           ($1.08)         ($0.75)
                                                                 ============      ============      ============    ============
Weighted Average shares used in computing basic and diluted
net loss per share                                                 10,886,870         3,620,047         9,178,833       3,382,046


              See Notes to Unaudited Condensed Financial Statements


                                        4



                          HANDHELD ENTERTAINMENT, INC.
                       CONDENSED STATEMENTS OF CASH FLOWS
                                   (Unaudited)



                                                                         NINE MONTHS ENDED SEPTEMBER 30,
                                                                         -------------------------------
                                                                              2006             2005
                                                                          ------------    ------------

CASH FLOWS FROM OPERATING ACTIVITIES:

   NET CASH USED IN OPERATING ACTIVITIES                                   ($8,147,364)    ($1,656,954)

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of equipment                                                      (235,149)         (6,529)
   Purchase of software licenses                                              (208,000)             --
                                                                          ------------    ------------
   NET CASH USED IN INVESTING ACTIVITIES                                      (443,149)         (6,529)

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from sale of common stock                                       13,424,189              --
   Short-term borrowings, related parties                                      500,000              --
   Repayments of short-term borrowings, related parties                             --          (8,370)
   Long-term borrowings, related parties                                            --       1,701,500
   Repayments of long-term borrowings                                          (79,500)             --
   Offering costs-secondary offering                                        (1,096,267)
   Offering costs-sale of common stock                                        (546,412)
   Offering costs-preferred stock                                                   --         (19,883)
                                                                          ------------    ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                   12,202,010       1,673,247
Net increase in cash and cash equivalents                                    3,611,497           9,764
Cash and cash equivalents at beginning of period                               277,734          28,984
                                                                          ------------    ------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD                            $  3,889,231    $     38,748
                                                                          ============    ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

CASH PAID DURING THE PERIOD
Interest                                                                        16,399              --
Taxes                                                                               --              --

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Conversion of notes due to a related party to common stock                   4,452,759              --
Completion of reverse merger                                                        --              --
Conversion of preferred stock into common stock                                     --              --


              See Notes to Unaudited Condensed Financial Statements


                                        5



                          HANDHELD ENTERTAINMENT, INC.
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2006
                                   (UNAUDITED)

1.   BASIS OF PRESENTATION

     INTERIM FINANCIAL STATEMENTS

The interim condensed 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, have been made to present
fairly the financial position at September 30, 2006 and the results of
operations and cash flows for the three and nine months ended September 30, 2006
and 2005. The interim condensed financial statements should be read in
conjunction with the financial statements and notes thereto contained in our
Prospectus on Form 424B4 (Registration No. 333-133550) filed on August 16, 2006
with the U.S. Securities and Exchange Commission ("SEC") for the year ended
December 31, 2005. The results of operations for the three and nine months ended
September 30, 2006 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 accompanying financial statements, the Company has net
losses of $3,383,313 and $9,877,231 for the three and nine months ended
September 30, 2006, respectively, negative gross margin of $273,696 and $163,370
for the three and nine months ended September 30, 2006, respectively and an
accumulated deficit of $20,726,500 at September 30, 2006. 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 are seeking additional equity and/or debt
financing to sustain our growth strategy. 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 June 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 shareholders 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 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 be sure that we
will achieve or sustain operating profitability or generate sufficient cash flow
to meet our planned capital expenditures and working capital 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



     REVERSE STOCK SPLIT

The Company's Board of Directors on August 14, 2006 effectuated a 1.45-for-1
reverse stock split. All share and per share amounts in the accompanying
financial statements for all periods presented have been retroactively adjusted
to account for the reverse split.

2.   SIGNIFICANT ACCOUNTING POLICIES

     USE OF ESTIMATES

Our condensed 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 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. Significant estimates in 2006 include the
valuation of accounts receivable and inventories, valuation of capital stock,
options and warrants granted for services, estimates of allowances for sales
returns and the estimate of the valuation allowance on deferred tax assets.

     STOCK BASED COMPENSATION

On January 1, 2006, the Company implemented Statement of Financial Accounting
Standard 123 (revised 2004) ("SFAS 123(R)"), "Share-Based Payment" which
replaced SFAS 123 "Accounting for Stock-Based Compensation" and superseded APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123(R) requires
the fair value of all stock-based employee compensation awarded to employees to
be recorded as an expense over the related vesting period. The statement also
requires the recognition of compensation expense for the fair value of any
unvested stock option awards outstanding at the date of adoption. During 2006,
all employee stock compensation is recorded at fair value using the Black
Scholes Pricing Model. In adopting SFAS 123(R), the Company used the modified
prospective application ("MPA"). MPA requires the Company to account for all new
stock compensation to employees using fair value. For any portion of awards
prior to January 1, 2006 for which the requisite service has not been rendered
and the options remain outstanding as of January 1, 2006, the Company shall
recognize the compensation cost for that portion of the award for which the
requisite service was rendered on or after January 1, 2006. The fair value for
these awards is determined based on the grant date. There was no cumulative
effect of applying SFAS 123R at January 1, 2006.

     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.


                                        7



     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 September 30, 2006, Wal-Mart accounted for approximately 76% of gross
accounts receivable before the allowance for doubtful accounts.

Concentration of Revenues

In the three and nine months ended September 30, 2006, Wal-Mart represented 82%
and 97%, respectively of our net revenues and, therefore, we 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.

Concentration of Supplier

Manufacturing of our ZVUE product is performed in China by our manufacturing
partner who is a related party (see Note 9). 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. At
September 30, 2006, $6,787 of component inventory was held at the Chinese
location and we had a balance of $333,000 in "Other Current Assets - Related
Party" related to an advance we made to our manufacturing partner for components
(see Note 5).

Purchases during the three and nine months ended September 30, 2006 were
approximately $0.3 million and $2.3 million, respectively. This compares to
approximately $0.4 million and $0.8 million, respectively, for the three and
nine months ended September 30, 2005. Amounts payable due to this vendor at
September 30, 2006 was approximately $817,000 and is included in trade accounts
and other obligations payable to officers, affiliates and related parties. The
balance due is fully collateralized by substantially all assets of the Company.

Product Concentration

During the three and nine months ended September 30, 2006, revenues were derived
primarily from the sale of one product model (ZVUE Model 200).


                                        8



3.   ACCOUNTS RECEIVABLE

Accounts Receivable at September 30, 2006 were as follows:

Accounts receivable                               $296,971
Less: Allowance for doubtful accounts              (63,142)
                                                  --------
TOTAL ACCOUNTS RECEIVABLE, NET                    $233,829
                                                  ========

The Company has not incurred any bad debt expense for the three and nine months
ended September 30, 2006 and 2005.

4.   INVENTORIES

At September 30, 2006, Inventories consists of the following:

Finished Goods                                    $565,469
Components                                           6,787
Less:  Valuation Allowance                         (68,370)
                                                  --------
TOTAL INVENTORIES                                 $503,886
                                                  ========

For the nine months ended September 30, 2006, the Company recognized $154,175 of
expense primarily related to the write-down of returned media players and
components to their net realizable value.

5.   OTHER CURRENT ASSETS - RELATED PARTY

At September 30, 2006, Other current assets - Related Party of $333,000 consists
of an advance made to our manufacturing partner Eastech Electronics, Inc. for
the purchase of liquid crystal display ("LCD") screens used in the manufacture
of our media player. The advance will continue to be recouped as our partner
ships product to us for sale to end users.

6.   PREPAID EXPENSES AND OTHER CURRENT ASSETS

At September 30, 2006, prepaid expenses and other current assets consists of the
following:

Prepaid content                                   $118,509
Prepaid insurance premiums                          27,774
Trade Shows                                         24,672
Prepaid rent                                        19,404
Other                                               38,670
                                                  --------
TOTAL PREPAID EXPENSES AND OTHER CURRENT ASSETS   $229,029
                                                  ========


                                        9



7.   REVERSE MERGER

On February 10, 2006, the Company (formerly known as VIKA Corp.) entered into an
Agreement of Merger and Plan of Reorganization (the "Merger Agreement") by and
among the Company, Handheld Entertainment, Inc. a privately held California
corporation ("HHE"), and HHE Acquisition, Inc., a newly formed wholly-owned
California subsidiary of the Company ("Acquisition Sub"). Upon closing of the
merger transaction contemplated under the Merger Agreement (the "Merger") on
February 10, 2006, Acquisition Sub was merged with and into HHE, and HHE became
a wholly-owned subsidiary of the Company. Pursuant to the terms of the Merger
Agreement, following the Merger, the Company changed its name to Handheld
Entertainment, Inc.

Each share of HHE common and preferred stock issued and outstanding immediately
prior to the closing of the Merger was converted into the right to receive one
share of the Company's common stock. The total common shares of 2,342,601 and
preferred shares of 1,301,506 of HHE were converted. The original remaining
outstanding common shares of the Company totaled 1,620,690. Accordingly, the
shareholders of HHE obtained 3,644,106 common shares of a total 5,264,796 of the
Company's common shares outstanding immediately following the closing of the
merger resulting in an approximate 69% controlling voting interest in the
consolidated entity. Immediately after the closing, another 1,718,395 common
shares were issued to an officer/director of the Company (who had been an
officer and director of HHE) upon conversion of his convertible notes,
increasing the controlling interest in the Company of the HHE shareholders and
note holders to approximately 77% prior to the private placement described
below. In addition, the Board of Directors and officers of the Company were
changed to the existing directors and officers of HHE. Upon the closing of the
Merger, each outstanding option or warrant to acquire HHE's capital stock was
assumed by the Company and will thereafter be exercisable for shares of the
Company's common stock.

Due to the change in control of the Company, the transaction was accounted for
as an acquisition of the Company by HHE and a recapitalization of HHE.

Accordingly, the condensed financial statements of the Company just subsequent
to the recapitalization consists of the balance sheets of both companies at
historical cost, the historical operations of HHE, and the operations of both
companies from the recapitalization date of February 10, 2006. At the time of
the merger, VIKA had no liabilities and therefore none were assumed by the
Company.

As a result of the recapitalization which occurred in February 2006, the
preferred stock outstanding in Handheld Entertainment, Inc. (privately held
California entity) at December 31, 2005 has been retroactively restated to
reflect the common stock issued to preferred shareholders just prior to the
reverse merger. All share and per share data has been retroactively adjusted in
the accompanying financial statements to reflect the effect of the
recapitalization. In connection with the merger, on April 12, 2006, HHE merged
with and into the company.

8.   TRADE ACCOUNTS AND OTHER OBLIGATIONS PAYABLE TO OFFICERS, AFFILIATES AND
     RELATED PARTIES

As of September 30, 2006, trade accounts and other obligations payable to
officers, affiliates and related parties consisted of the following:


                                       10



NAME                                 RELATIONSHIP
----------------------------------   -----------------------------------------

Eastech Electronics (Taiwan), Inc.   Manufacturing Partner and former Director   $817,456
The Ardtully Group                   Related Party Consultant                      24,552
Gregory Sutyak                       Company Officer (EVP)                         23,496
Larry Gitlin                         Company Officer (VP)                           4,534
Gene O'Donnell                       Company Officer (VP)                           2,042
Jeff Oscodar                         Company Officer (CEO)                            900
William Bush                         Company Officer (CFO)                            610
Other                                                                              44,589
                                                                                 --------
                                                                                 $918,179
                                                                                 ========


9.   RELATED PARTY TRANSACTIONS

CONVERSION OF CONVERTIBLE NOTES BY RELATED PARTY

Starting in December 2003, a member of our board of directors and our Chief
Technology Officer (the "Lender") from time to time made cash advances to HHE
which were subsequently converted into notes totaling $3,741,049 to finance
HHE's operations. This amount was documented in four separate promissory notes.
The principal and interest on three of those notes was convertible into shares
of common stock at different conversion rates. The other note entitled the
Lender to receive a warrant to purchase 41,379 shares of common stock with a
strike price of $0.54 per share.

Three of the four notes provided for an interest rate of 8% from the date the
advances thereunder were made to HHE and one note provided for an interest rate
of 9.5% from the date the advances thereunder were made to HHE. As of December
31, 2005, the aggregate principal amount owing on these notes was $3,741,049 and
the total accrued interest was $138,399, for a total of $3,879,448 owed to the
Lender pursuant to these notes.

Pursuant to the terms of the Lender's convertible notes, in connection with the
Merger, an aggregate of $3,889,662 of principal and accrued interest on the
convertible notes was converted into a total of 1,718,395 shares of the
Company's common stock. The Company recognized a loss on conversion of
$1,093,684.

CONVERTIBLE 8.0% PROMISSORY NOTES - COMMON STOCK

In January and February 2006, the Company received $500,000 in a series of cash
advances from the Lender. The advances were, effective April 30, 2006, converted
into convertible notes which carry an 8.0% interest rate. Simultaneous with the
conversion of the advances into notes, the Lender agreed to convert the notes
and all accrued interest at a rate of $7.13 per share which resulted in the
issuance of 71,439 shares of the Company's unregistered common stock. In April
2006, the Company recognized a gain on conversion of $84,941.

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 and
accordingly each convertible instrument is reflected as one combined instrument
in the accompanying 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. For convertible instruments with a variable
conversion price which were issued prior to 2006, due to the contingency of the
conversion being linked to a future offering not under control of the


                                       11



creditor, any beneficial conversion amount was deferred to be measured and
recorded when the contingency was resolved. In February 2006, the contingency
was resolved and all were converted at the time of the recapitalization and
therefore there were no variable conversion price notes outstanding at September
30, 2006. For the nine months ended September 30, 2006, the Company recognized a
gain on conversion of these variable price convertible notes of $54,491 and a
loss for the nine months ended September 30, 2006 on conversion of these
variable price convertible notes of $1,038,743.

10.  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 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 to shares of common stock outstanding at
September 30, 2006 and 2005, 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:



                                                    THREE MONTHS ENDED        NINE MONTHS ENDED
                                                      SEPTEMBER 30,             SEPTEMBER 30,
                                                 -----------------------   -----------------------
                                                    2006        2005          2006         2005
                                                 ----------   ----------   ----------   ----------

BASIC WEIGHTED AVERAGE SHARES OUTSTANDING        10,886,870    3,620,047    9,178,833    3,382,046
                                                 ----------    ---------    ---------    ---------
Total Convertible Debt into Common Stock                 --      911,253           --      911,253
Less: Convertible Debt into Common Stock                 --     (911,253)          --     (911,253)

Total Stock Options Outstanding                   1,704,421    1,067,368    1,704,421    1,067,368
Less: Anti Dilutive Stock Options due to loss    (1,704,421)  (1,067,368)  (1,704,421)  (1,067,368)

Total Warrants Outstanding                        2,147,624      972,107    2,147,624      972,107
Less: Anti Dilutive Warrants due to loss         (2,147,624)    (972,107)  (2,147,624)    (972,107)
                                                 ----------    ---------    ---------    ---------
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING      10,886,870    3,620,047    9,178,833    3,382,046
                                                 ----------    ---------    ---------    ---------


In total, at September 30, 2006 there were financial instruments convertible
into 3,852,045 common shares which may potentially dilute future earnings per
share.

11.  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


                                       12



single segment for all periods presented. The single segment is comprised of our
Consumer Electronics segment. Approximately, 100% and 98% of our sales for the
three and nine months ended September 30, 2006, respectively, were to customers
in the United States of America; the remaining sales were principally to
customers in Australia. This compares to approximately, 98% and 97% for the
comparable periods ended September 30, 2005, respectively.

12.  SHAREHOLDERS' EQUITY

PREFERRED STOCK

As a result of the reverse merger (See Note 7) 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 December 31, 2005 and the statement of
operations for the three and nine months ended September 30, 2005.

Since the reverse merger (See Note 7) completed on February 10, 2006, the
Company has 1,000,000 shares of preferred shares authorized of which none is
outstanding at September 30, 2006.

PRIVATE PLACEMENT

In connection with the Merger, through February 22, 2006, we accepted
subscriptions for a total of 152.1 units in a private placement, each unit
consisting of 17,241 shares of our common stock, at a purchase price of $50,000
per unit (the "Private Placement"). We received gross proceeds from the Private
Placement in the amount of $7,605,000 and issued 2,622,414 common shares.

The Private Placement was made solely to "accredited investors," as defined in
Regulation D under the Securities Act. The units and the common stock were not
registered under the Securities Act, or the securities laws of any state, and
were offered and sold in reliance on the exemption from registration afforded by
Section 4(2) and Regulation D (Rule 506) under the Securities Act and
corresponding provisions of state securities laws.

The common shares issued under the private placement are subject to registration
rights pursuant to a registration rights agreement ("the Agreement"). The
agreement states that the registration statement shall be (i) filed within 60
days of February 10, 2006, (ii) declared effective within 120 days of the
initial filing date and (iii) kept effective until the earlier of (a) 18 months
after February 10, 2006 or (b) the date when all registerable securities have
been sold. The registration statement was filed on April 11, 2006 and declared
effective on August 14, 2006. The Company has exercised a market standoff
provision included in the registration rights agreement whereby the shares,
subject to the registration statement, will be subject to a 180 day lockup
period following the effectiveness of a second registration statement filed by
the Company on April 26, 2006 and declared effective on August 14, 2006, which
was an underwritten offering.

The Company reevaluated whether the warrants and options previously or currently
granted by HHE or 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 HHE becoming a publicly
traded company and due to the registration rights agreement. Management noted
all convertible debt which had been convertible at a variable rate was converted
in February 2006 and that the warrants and options are not subject to the
registration rights and have fixed exercise prices. In addition, there were no
other criteria of EITF 00-19 that would require the warrants and options to be
classified as


                                       13



liabilities. Therefore the warrants and option will remain as equity
instruments.

The Company did determine however that the registration rights agreement itself
is a derivative instrument subject to classification as liability at fair value.
We noted that the maximum potential liquidated damages amount would be $456,300
and we will value the derivative liability at fair value subject to that maximum
amount. At September 30, 2006 we determined that since we timely met all our
requirements under the registration rights agreement and therefore liquidated
damages were no longer applicable, that the fair value of the registration
rights agreements using a probability based discounted cash flow model is zero.

Newbridge Securities Corporation served as placement agent in connection with
the Private Placement and was credited with placing 13 units. The placement
agent received (1) a cash fee of $39,000 (representing 6% of the gross proceeds
of the units sold by it in the Private Placement), (2) three-year warrants to
purchase 11,207 shares of common stock (representing 5% of the shares sold by it
in the Private Placement) at an exercise price of $2.90 per share and (3)
additional three-year warrants to purchase 11,207 shares of common stock
(representing 5% of the shares sold by it in the Private Placement) at an
exercise price of $5.80 per share. Those warrants were cancelled in August 2006
by mutual agreement between the Company and Newbridge Securities Corporation at
the time of the effectiveness of the secondary stock offering. As part of that
cancellation, the Company paid Newbridge Securities Corporation $40,625 which
was approximately the intrinsic value of the outstanding warrants and was
recognized as compensation expense.

OFFERING OF COMMON STOCK - SECONDARY FINANCING

On August 14, 2006, the Company sold 1.2 million units (consisting of one common
share and one five-year warrant to purchase an additional common share) to
investors. The units were sold for $4.85 and as a result the Company received
net proceeds of approximately $5.1 million after cash offering costs of
approximately $800,000. The warrants are exercisable at an exercise price of
$6.06 or 125% of the unit offering price and are redeemable by the Company if
the underlying common stock trades above $8.49 or 175% of the unit offering
price for 20 consecutive days. Contemporaneously with the offering the Company
listed its shares and units on the NASDAQ Capital Market and Boston Stock
Exchange under the ZVUE, ZVUEU and HDE, HDEU symbols, respectively.

The underwriters were also granted a 45-day option to purchase an additional
225,000 units to cover over-allotments which they did not exercise. As part of
the compensation to the underwriters, the Company sold 120,000 units for $100 to
the underwriter which was treated as offering costs and offset against
additional paid in capital in the accompanying financial statements. Each unit
is identical to the units offered to the public except that the warrant included
in the unit has an exercise price of $7.06 or 145% of the unit price in the
offering.

On November 5, 2006 the units separated and began trading as common stock and
warrants (ZVUEW and HDEW) and trading in the units ceased.

OTHER STOCK GRANTS AND ISSUANCES

During the nine months ended September 30, 2006, 1,620,690 common shares were
deemed issued to the original shareholders of Vika pursuant to a reverse merger
and recapitalization of the Company (see Note 7).

During the nine months ended September 30, 2006, the Company issued 1,789,834
common shares upon conversion of convertible notes and accrued interest of a
related party aggregating $4,422,760. The Company recognized a net loss on
conversion of $1,008,743 (see Note 9).


                                       14




During the nine months ended September 30, 2006 the Company granted 237,795
common shares to employees for services of which 187,409 are subject to future
service requirements and 50,386 are for past services rendered. The 55,903
shares granted prior to March 2006 are valued at the contemporaneous private
placement price of $2.90 per share for a total of $162,120. All shares granted
after March 6, 2006 are valued at the quoted trading price of the common stock
on the respective grant dates for a total value of $1,128,000. Of the total
value of $1,290,120, $357,305 has been expensed for the nine months ended
September 30, 2006 and $932,815 will be recognized over the future vesting
periods.

During the nine months ended September 30, 2006 the Company granted 192,227
common shares to non-employees for services rendered. The 159,378 shares granted
prior to March 2006 are valued at the contemporaneous private placement price of
$2.90 per share for a total of $462,200. The 32,849 shares granted after March
6, 2006 are valued at the quoted trading price of the common stock on the
respective grant dates for a total value of $217,361. Of the total shares value
of $679,561, $597,373 has been expensed for the nine months ended September 30,
2006 and $82,188 will be recognized over the future vesting periods.

STOCK BASED AWARDS

During the nine months ended September 30, 2006 we granted 68,966 vested
warrants exercisable at $2.90 per share to a service provider. The warrants were
valued at $1.62 (using an expected volatility of 82.7% (based on our analysis of
comparable companies), an expected term of three years, a risk-free interest
rate of 4.66% and a dividend yield of 0%) per a Black-Scholes option pricing
method for a total $111,634 charged to operations.

We also issued 11,207 warrants at an exercise price of $2.90 per share and
11,207 warrants at an exercise price of $5.80 per share to an investment banking
firm for services rendered. These warrants were valued at $1.62 and $1.15 (using
an expected volatility of 82.7% (based on our analysis of comparable companies),
an expected term of three years, a risk-free interest rate of 4.66% and a
dividend yield of 0%) respectively, for a total value of $30,981 charged to
operations. On August 14, 2006 those warrants were cancelled in exchange for
$40,625 which represented the intrinsic value of the warrants at the time of
cancellation. The amount was recorded as an expense in the three months ended
September 30, 2006.

In addition, $63,727 of expense and additional paid-in capital was recorded
relating to vesting of portions of warrants granted to non-employees in 2006.

During 2006 we accounted for 10,345 vested options granted to an employee and
charged the fair value of $7,950 to operations.

Prior to January 1, 2006, we accounted for stock-based compensation plans in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", under which no compensation cost is recognized
in the financial statements for employee stock arrangements when grants are made
at fair market value. We had adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock Based Compensation" as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure".

Had compensation cost for the stock-based compensation plans been determined
based upon the fair value at grant dates for awards under those plans consistent
with the method prescribed by SFAS 123, net loss would have been changed to the
pro forma amounts indicated below. The pro forma financial information should be
read in conjunction with the related historical information and is not
necessarily indicative of actual results.


                                       15



                                                           THREE MONTHS ENDED    NINE MONTHS ENDED
                                                           SEPTEMBER 30, 2005   SEPTEMBER 30, 2005
                                                           ------------------   ------------------

Net loss, as reported                                         ($1,031,797)         ($2,527,427)
Intrinsic compensation charge recorded under APB 25               109,102              327,307
Pro Forma compensation charge under SFAS 123, net of tax         (140,766)            (422,298)
Pro Forma net loss                                            ($1,063,461)         ($2,622,418)
Net Loss Per Share:
   Basic and Diluted --as reported                                 ($0.25)              ($0.75)
   Basic and Diluted --pro forma                                   ($0.29)              ($0.78)


The fair value of each option granted was estimated on the date of the grant
using the Black-Scholes option-pricing model using the following weighted
average assumptions:



                                                           THREE MONTHS ENDED    NINE MONTHS ENDED
                                                           SEPTEMBER 30, 2005   SEPTEMBER 30, 2005
                                                           ------------------   ------------------

Risk-free interest rates                                        3.1 - 4.5%           3.1 - 4.5%
Expected dividend yields                                              0.0%                 0.0%
Expected volatility                                                  82.7%                82.7%
Expected option life (in years)                                         5                    5


The weighted average fair values as of the grant date for grants made in the
three and nine months ended September 30, 2005 were $1.12 and $1.12.

CONVERSION OF CONVERTIBLE NOTES BY RELATED PARTY

As discussed in Note 9, on April 30, 2006, a member of our board of directors
and our Chief Technology Officer converted a series of cash advances, and the
related interest, to common stock at a fixed price resulting in the issuance of
71,439 unregistered common shares.

WARRANTS ACTIVITY

As noted above, during the nine months ended September 30, 2006, we issued, for
services rendered, 68,966 warrants, exercisable at $2.90 per share, to purchase
common stock to a service provider and 22,414 warrants, 11,207 of which are
exercisable at $2.90 per share and 11,207 of which are exercisable at $5.80 per
share, to purchase common stock to a placement agent as part of a private
placement. The value of $142,616 which was expensed was computed using a
Black-Scholes model with the following assumptions (using an expected volatility
of 82.7%, an expected term of three years, a risk-free interest rate of 4.66%
and a dividend yield of 0%)

Also, during the nine months ended September 30, 2006, we sold 1.2 million units
(consisting of one common share and one five-year warrant to purchase an
additional common share) to investors. The warrants are exercisable at an
exercise price of $6.06 or 125% of the unit offering price and are redeemable by
the Company if the underlying common stock trades above $8.49 or 175% of the
unit offering price for 20 consecutive days.

Additionally, as part of the compensation to the underwriters for the secondary
offering, the Company sold 120,000 units for $100 to the underwriter. Each unit
is identical to the units offered to the public except that the warrant included
in the unit will have an exercise price of $7.03 or 145% of the unit price in
the offering.


                                       16



During the nine months ended September 30, 2006, a holder of a common stock
warrant exercised an existing warrant to purchase 321,379 shares of our stock.
The exercise was concluded on a "cashless exercise" resulting in no cash to the
Company. As a result of the exercise, the Company, on April 27, 2006, issued
305,572 unrestricted common shares to the holder.

Outstanding warrants are as follows:

                                  NUMBER OF WARRANTS   AVERAGE EXERCISE PRICE
                                  ------------------   ----------------------
OUTSTANDING, DECEMBER 31, 2005         1,057,624                $0.54
Granted                                1,411,379                 5.96
Exercised                               (321,379)                0.36
Expired/Cancelled                        (60,728)                2.43
OUTSTANDING, SEPTEMBER 30, 2006        2,086,896                $4.18

13.  SUBSEQUENT EVENTS

RESIGNATION OF BOARD MEMBER

On October 31, 2006, Mr. Harvey Kesner resigned from the Company's Board of
Directors. The resignation was the result of Mr. Kesner moving to a new law firm
which doesn't allow its partners to serve on the board of directors of public
companies. The resignation did not result from a disagreement with the Company
on any matter relating to the Company's operations, policies or practices.

SETTLEMENT AGREEMENT AND MUTUAL RELEASE

On November 6, 2006, Handheld Entertainment, Inc. ("the Company") agreed to
settle its lawsuit against Microsoft Corporation. The lawsuit, filed by the
Company on October 12, 2006, alleged infringement of the Company's "zvue"
trademark. In the settlement, the parties agreed to a payment to the Company of
$1,850,000, and to the dismissal of the lawsuit and mutual releases of claims.

14.  RESTATEMENT

As a result of conversion of the preferred stock of Handheld Entertainment, Inc.
(privately held California entity) in February 2006 just prior to the reverse
merger and the requirement to treat the reverse merger transaction as a
recapitalization, we restated the financial statements of Handheld
Entertainment, Inc. (Delaware public company) to retroactively reflect the
preferred shares of the private company as common shares at December 31, 2005
and modify the disclosure as follows:



                                                    AS OF DECEMBER 31, 2005
                                       ------------------------------------------------
                                              PAR VALUE          ISSUED AND OUTSTANDING
                                       ----------------------   -----------------------
                                       AS REPORTED   RESTATED   AS REPORTED    RESTATED
                                       -----------   --------   -----------   ---------

Convertible Series A Preferred Stock       $ 56        $ --        388,538           --
Convertible Series B Preferred Stock       $ 90        $ --        619,157           --
Convertible Series C Preferred Stock       $ 14        $ --         95,655           --
Convertible Series D Preferred Stock       $ 29        $ --        198,155           --
Common Stock                               $341        $365      2,342,601    3,644,106



                                       17



ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

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:

     o    Overview, Trends and Business Development;

     o    Forward Looking Statements;

     o    Results of Operations;

     o    Liquidity and Capital Resources;

     o    Critical Accounting Policies and Estimates; and

     o    Factors That May Impact Future Operating Results.

OVERVIEW, TRENDS AND BUSINESS DEVELOPMENT

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.

We offer consumers easy to use mobile devices at a compelling value, as well as
access to a large and growing library of digital audio and video content. Our
players have been designed to be compatible with virtually every content format.
Our portable media players are sold in more than 1,800 Wal-Mart stores in the
United States and through retail websites, including Amazon.com. Our strategy is
to capitalize on the synergy between portable digital entertainment products and
related digital content.

We are focused on two large and growing synergistic multi-billion dollar
markets--portable digital media devices and distributed digital content. We
believe there is an increasing demand for 'on the go' entertainment as evidenced
by trends such as increased broadband penetration into the home and the
proliferation of wi-fi "hot spots". These factors have increased consumer's
expectations for access to digital content across many different platforms.
Digital video recorders, such as TIVO, have freed consumers to view media "when
they want". We believe that location shifting technologies used for transferring
digital content between devices have enabled consumers to view media "where they
want". Content distribution is also undergoing dynamic changes as both new and
classic music videos, television shows and films are made available for
downloading to devices. We believe that devices need to provide content, that
content providers require devices, and consumers want a complete solution. We
believe we offer that complete solution.

We believe we are well positioned to take advantage of the projected growth in
both PMP and digital content markets. Our strategy consists of the following
elements:

          o    a family of products, mass marketed at a compelling value

          o    easy to use - out of the box experience

          o    diverse and continually relevant online content service

          o    device and content flexibility

By providing consumers a solution that includes devices as well as content, our
goal is to create a powerful platform that will encourage consumers to adopt our
devices and access our content distinguishing us from the competition.


                                       18



On August 14, 2006, the Company sold 1.2 million units (consisting of one common
share and one five-year warrant to purchase an additional common share) to
investors. The units were sold for $4.85 and as a result the Company received
net proceeds of approximately $5.1 million after offering costs of approximately
$800,000. The warrants are exercisable at an exercise price of $6.06 or 125% of
the unit offering price and are redeemable by the Company if the underlying
common stock trades above $8.49 or 175% of the unit offering price for 20
consecutive days. Contemporaneously with the offering the Company listed its
shares and units on the NASDAQ Capital Market and Boston Stock Exchange under
the ZVUE, ZVUEU and HDE, HDEU symbols, respectively.

On February 10, 2006, we merged with a privately owned company whose
stockholders acquired shares of our common stock that, after giving effect to
the sales in the private placements, represented in excess of 46% of our
ownership. The information in this quarterly filing on Form 10-QSB is presented
as if the private company existing since 2003 had been the registrant for all
periods presented. This section, "Management's Discussion and Analysis or Plan
of Operation," and the financial statements presented in this quarterly filing
on Form 10-QSB, are exclusive of any assets or results of operations or business
attributable to our operations, other then those of the private company in
accordance with accounting requirements applicable to reverse-merger
transactions.

Also on February 10, 2006, we sold an aggregate of 70 units, each consisting of
17,241 shares of our common stock, to accredited investors in a private
placement and received gross proceeds of $3,500,000 before payment of expenses.
On February 22, 2006, we sold an additional 82.1 units to accredited investors
and received gross proceeds of $4,105,000 before payment of expenses and
commissions, and closed the private placement having realized total gross
proceeds of $7,605,000. In connection with the second closing, we issued to a
placement agent (1) three-year warrants to purchase 11,207 shares of our common
stock (representing 5% of the shares sold by it in the private placement) at an
exercise price of $2.90 per share and (2) additional three-year warrants to
purchase 11,207 shares of our common stock (representing 5% of the shares sold
by it in the private placement) at an exercise price of $5.80 per share. In
August 2006, the warrants issued to the placement agent were cancelled in
exchange for a payment of $40,625 which represented the intrinsic value of the
warrants at the time of cancellation.

Concurrent with the reverse merger and financing transaction described above the
Lender converted a series of cash advances, which had been transferred into
notes, totaling $3,741,049 in principal, into our common stock. This amount was
documented in four separate promissory notes. Three of the four notes provided
for an interest rate of 8% from the date the advances thereunder were made and
one note provided for an interest rate of 9.5% from the date the advances
thereunder were made. As of December 31, 2005, the aggregate principal amount
owing on these notes was $3,741,049 and the total accrued interest was $138,399,
for a total of $3,879,448 owed to the Lender pursuant to these notes. Pursuant
to the terms of the Lender's convertible notes, in connection with the reverse
merger, an aggregate of $3,913,112 of principal and accrued interest on the
convertible notes through the conversion date was converted into a total of
1,718,395 shares of our common stock. The Company recognized a loss on
conversion of $1,093,684.

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 the Prospectus on Form 424B4
(Registration No. 333-133550) filed on August 16, 2006. 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


                                       19



That May Impact Future Operating Results" section of this Form 10-QSB, as well
as contained in Prospectus on Form 424B4 (Registration No. 333-133550) filed on
August 16, 2006. 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 and
nine months ended September 30, 2006 and 2005 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.


                                       20



                                                                                CHANGE FROM PREVIOUS
                                            Three Months Ended September 30,            YEAR
                                        --------------------------------------  --------------------
                                            2006                2005
                                        -----------         -----------
                                                      AS %                AS %
                                                      OF                   OF    $ INCREASE /
                                             $       SALES       $       SALES    (DECREASE)     %
                                        -----------  -----  -----------  -----   ------------  ----

Sales                                   $   123,104    100% $   519,102    100%     ($395,998)  -76%
Cost of goods sold                          396,800    322%     525,945    101%      (129,145)  -25%
                                        -----------  -----  -----------   ----    -----------  ----
GROSS MARGIN                               (273,696)  -222%      (6,843)    -1%      (266,853) 3900%

COSTS AND EXPENSES
   Sales and marketing                      937,116    761%     162,660     31%       774,456   476%
   General and administrative
   (including stock based compensation
   expense of $773,991 and $109,103)      1,581,570   1285%     571,505    110%     1,010,065   177%
   Research and development                 596,322    484%     250,315     48%       346,007   138%
                                        -----------  -----  -----------   ----    -----------  ----
TOTAL OPERATING EXPENSES                  3,115,008   2530%     984,480    190%     2,130,528   216%
                                        -----------  -----  -----------   ----    -----------  ----
LOSS FROM OPERATIONS                     (3,388,704) -2753%    (991,323)  -191%    (2,397,381)  242%

OTHER INCOME AND (EXPENSE)
   Interest income                            6,725      5%          --      0%         6,725   100%
   Interest expense                          (1,334)    -1%     (40,472)    -8%        39,138   -97%
   Loss on conversion of debt                    --      0%          --      0%            --   100%
                                        -----------  -----  -----------   ----    -----------  ----
TOTAL OTHER INCOME (EXPENSE)                  5,391      4%     (40,472)    -8%        45,863  -113%
                                        -----------  -----  -----------   ----    -----------  ----
NET LOSS                                 (3,383,313) -2748%  (1,031,795)  -199%   (2,443,244)   228%
                                        ===========  =====  ===========   ====    ===========  ====


                                                                                    CHANGE FROM
                                           Nine Months Ended September 30,         PREVIOUS YEAR
                                        --------------------------------------  ------------------
                                            2006                2005
                                        -----------         -----------
                                                      AS %                AS %
                                                      OF                  OF    $ INCREASE /
                                             $       SALES       $       SALES   (DECREASE)    %
                                        -----------  -----  -----------  -----  ------------  ----

Sales                                   $ 1,299,125   -328% $   936,790     72% $    362,335    39%
Cost of goods sold                        1,462,495  -1132%     973,588     67%      488,907    50%
                                        -----------  -----  -----------    ---  ------------  ----
GROSS MARGIN                               (163,370)    61%     (36,798)    23%     (126,572)  344%

COSTS AND EXPENSES
   Sales and marketing                    2,432,624    314%     367,513     15%    2,065,111   562%
   General and administrative
   (including stock based compensation
   expense of $773,991 and $109,103)      4,677,927    463%   1,427,099     31%    3,250,828   228%
   Research and development               1,557,075    450%     612,270     39%      944,805   154%
                                        -----------  -----  -----------    ---  ------------  ----
TOTAL OPERATING EXPENSES                  8,667,626    407%   2,406,882     28%    6,260,744   260%
                                        -----------  -----  -----------    ---  ------------  ----
LOSS FROM OPERATIONS                     (8,830,996)   368%  (2,443,680)    28%   (6,387,316)  261%

OTHER INCOME AND (EXPENSE)
   Interest income                           59,574    100%          --    100%       59,574   100%
   Interest expense                         (67,066)  -171%     (83,747)   125%       16,681   -20%
   Loss on conversion of debt            (1,038,743)   100%          --    100%   (1,038,743)  100%
                                        -----------  -----  -----------    ---  ------------  ----
TOTAL OTHER INCOME (EXPENSE)             (1,046,235) -2281%     (83,747)     8%     (962,488) 1149%
                                        -----------  -----  -----------    ---  ------------  ----
NET LOSS                                 (9,877,231)   420%  (2,527,427)    26%  ($7,349,804)  291%
                                        ===========  =====  ===========    ===  ============  ====



                                       21



          SALES

     Sales were approximately $123,000 and $1,299,000 during the three and nine
months ended September 30, 2006 as compared to approximately $519,000 and
$937,000 during the comparable periods from 2005. The decrease in sales in the
three month period is primarily lower demand for our products due to ordering
difficulties with Wal-Mart and seasonality issues. In the three months ended
September 30, 2006, we experienced an order drop off with Wal-Mart which was the
result of several factors including issues with moving our product's placement
in the MP3 case, its movement to the new MP4 case and a lack of co-ordination
between Wal-Mart purchasing and the local stores. These three issues resulted in
a lack of system generated orders of our product and required significant manual
intervention by Wal-Mart. That situation was resolved late in the third quarter
and we do not expect it to be an issue going forward.

     At September 30, 2006, Wal-Mart accounted for approximately 76% of the
gross accounts receivable and represented approximately 82% and 97% of our
revenues for the three and nine months ended September 30, 2006, respectively.
At September 30, 2005, Wal-Mart accounted for approximately 77% of the gross
accounts receivable and represented approximately 93% and 87% of our revenues
for the three and nine months ended September 30, 2005. 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 2006 and 2005 were of our ZVUE 200
model, which was the sole product sold. We are in the process of replacing the
Model 200 with the Model 250 as well as introducing the ZVUE MP3, however, 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. The failure of
these events to occur would significantly impact our future sales.

     Approximately 100% and 98% of our sales for the three and nine months ended
September 30, 2006 were to customers in the United States of America; the
remaining percentage were principally to customers in Australia. This compares
to approximately 98% and 97% for the three and nine months ended September 30,
2005.

          COST OF GOODS SOLD AND GROSS MARGIN

     The decrease in cost of goods sold during the three months ended September
30, 2006 as compared to the prior year is primarily the result of lower sales in
the quarter as compared to the prior year partially offset by royalties for
licensed content and valuation allowance for inventory. The increase in cost of
goods sold during the nine months ended September 30, 2006 as compared to the
prior year is primarily the result of increased sales of the product, royalties
for licensed content and valuation allowance for inventory.

     We expect to stop shipping the ZVUE model 200 in the middle of the fourth
quarter and replace it with the Model 250. That product exchange has resulted in
obsolescence reserves and the write off of returned inventory related to the old
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 and nine months ended September 30, 2006
from Eastech were approximately $0.3 million and $2.3 million, respectively.
These compare to purchases of approximately $0.4 million and $0.8 million,
respectively for the three and nine months ended September 30, 2005.


                                       22



     We are dependent on a continuing relationship with Eastech, the sole
manufacturer of our PMP's which is subject to a manufacturing agreement which
expires in January 2007. 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. We began that process in the second quarter with an advance payment
of $408,000 to our manufacturing partner for the purchase of screens for our
media player. The advance payment is recouped through the purchase of completed
units. On September 30, 2006, we had a remaining balance of $333,000 related to
this advance. 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.

     Gross margin was negative for the three and nine months ended September 30,
2006 as a result of product returns and obsolescence partially offset by our
control of the expense related to production of our handheld media player. We
cannot guarantee that we will have positive gross margins in the future. We have
historically experienced a negative gross margin as a result of expenses related
to the introduction of the product into retail distribution, the subsequent
expansion of the product's distribution and the effect of higher component costs
associated with low-volume production. We expect that the basic 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.

          SALES AND MARKETING EXPENSES

     Sales and marketing expenses consist primarily of salaries and benefits of
sales and marketing personnel, commissions, advertising, printing and customer
acquisition-related costs. The increase in these expenses in the three and nine
months ended September 30, 2006 as compared to the same period from the previous
year is directly related to sustaining marketing for the currently shipping
version of the ZVUE product (Model 200) and market introduction costs for the
upcoming versions of the ZVUE product Models 250 and MP3. We expect to continue
to increase marketing and development efforts in the future as new versions of
the ZVUE are introduced, and as a result expect this class of expenses to
continue to increase.

          GENERAL AND ADMINISTRATIVE EXPENSES

     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 restricted common stock and
common stock options to employees and contractors, which was approximately
$677,000 and $1,640,000 in the three and nine months ended September 30, 2006 as
compared to approximately $154,000 and $372,000 in the three and nine months
ended September 30, 2005, respectively. In February 2006, our Board of Directors
accelerated the vesting of all outstanding options as of December 31, 2005. As a
result of the decision by the Board,


                                       23



approximately 828,000 options became vested as of December 31, 2005 and the
Company recognized all of the remaining intrinsic value in the underlying
options. The expense in 2006 is primarily related to the issuance of common
stock to employees and other service providers.

     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

     Our research and development expenses consist primarily of salaries and
benefits for research and development employees and payments to independent
contractors. The increase in research and development expenses is primarily the
result of the development work on the newest versions of the ZVUE product. Also,
as a result of our product focus, we engaged additional third party consultants
and made other investments to enhance our product offerings. These actions also
accounted for the increase in research and development expenses for the three
and nine months ended September 30, 2006 as compared to the previous period.

     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 $7,000 and $60,000 for the three and nine
months ended September 30, 2006 relate to deposits in our depository accounts as
a result of funds generated by the private placement concluded in February 2006
and the secondary stock offering in August 2006. We did not record any interest
income during 2005.

          INTEREST EXPENSE

     Interest expense of approximately $1,000 and $67,000 for the three and nine
months ended September 30, 2006 were directly related to the interest payable on
notes and other borrowings which we have entered into to fund our operations.
These amounts compare to approximately $40,000 and $84,000 for the three and
nine months ended September 30, 2005.

          GAIN/(LOSS) ON CONVERSION OF DEBT

     Starting in December 2003, a member of our board of directors and our Chief
Technology Officer (the "Lender") from time to time made cash advances to HHE
which were subsequently converted into notes totaling $3,741,049 to finance
HHE's operations. Three of the four notes provided for an interest rate of 8%
from the date the advances thereunder were made to HHE and one note provided for
an interest rate of 9.5% from the date the advances thereunder were made to HHE.
As of December 31, 2005, the aggregate principal amount owing on these notes was
$3,741,049 and the total accrued interest was $138,399, for a total of
$3,879,448 owed to the Lender pursuant to these notes. Pursuant to the terms of
the Lender's convertible notes, in connection with the Merger, an aggregate of
$3,889,662 of principal and accrued interest on the convertible notes was
converted into a total of 1,718,395 shares of the Company's common


                                       24



stock. The Company recognized a loss on conversion of $1,093,684.

     In January and February 2006, the Company received $500,000 in a series of
cash advances from the Lender. The advances were, effective April 30, 2006,
converted into convertible notes which carry an 8.0% interest rate. Simultaneous
with the conversion of the advances into notes, the Lender agreed to convert the
notes and all accrued interest at a rate of $7.13 per share which resulted in
the issuance of 71,439 shares of the Company's unregistered common stock. In
April 2006, the Company recognized a gain on conversion of $84,941.

     In April 2006, the Company converted an existing debt of $30,000 into 8,276
shares. As a result of the transaction, the Company recorded a loss on
conversion of $30,000.

LIQUIDITY AND CAPITAL RESOURCES

     At September 30, 2006, the Company had a cash and cash equivalent balance
of approximately $3.9 million and a working capital of approximately $2.9
million. Net cash used in operations was approximately $8.1 million for the nine
months ended September 30, 2006 as compared to net cash used in operations of
approximately $1.7 million for the nine month period ended September 30, 2005.
For the nine months ended September 30, 2006, the Company used cash to fund the
Company loss of approximately $9.9 million offset by non-cash items such as
expenses related to the issuance of common stock, common stock options and
warrants to employees and service providers of approximately $1.6 million as
well as a non cash loss on conversion of debt of approximately $1.0 million.
There were also changes in assets and liabilities of approximately $979,000.

     Net cash used in investing activities in the nine months ended September
30, 2006 was approximately $443,000 as compared to net cash used in investing
activities of approximately $7,000 for the nine month period ended September 30,
2005. For the nine months ended September 30, 2006, the primary use of the cash
for investing was to purchase tooling used in the manufacture of our media
players and the acquisition of software licenses.

     Net cash provided by financing activities in the nine months ended
September 30, 2006 was approximately $12.2 million as compared to approximately
$1.7 million for the nine month period ended September 30, 2005. The completion
of the private placement in February 2006 resulted in gross proceeds to the
company of $7,605,000 and a payment of $546,000 in offering costs. The company
also concluded a secondary offering of units (one common share and one five-year
warrant to purchase a common share) to investors in August 2006 which resulted
in gross proceeds to the company of approximately $5.8 million which were offset
by total offering costs of approximately $1.1 million. For the nine month period
ended September 30, 2005, the primary source of cash was loans from related
parties.

     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. We believe that based on our current cash position, the just
completed secondary offering, our borrowing capacity, and our assessment of how
potential equity investors will view us, we will be able to continue operations
at least through June 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.


                                       25



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 PMP's 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


                                       26



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.

     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 Prospectus on Form
424B4 (Registration No. 333-133550) filed on August 16, 2006.

     SINCE WAL-MART REPRESENTS APPROXIMATELY 97% OF OUR REVENUES, AND WAL-MART
HAS ONLY PURCHASED A SINGLE MODEL, IF THEY WERE NO LONGER OUR CUSTOMER, DEMANDED
DIFFERENT TERMS, OR DID NOT ACCEPT OUR FUTURE PLANNED MODELS, THAT WOULD HAVE A
NEGATIVE IMPACT ON OUR REVENUES.

Wal-Mart currently is, and for the foreseeable future is expected to remain, our
largest customer. Wal-Mart represented approximately 97% of our revenues during
the nine months ended September 30, 2006. While we plan to aggressively market
the ZVUE 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 and 2006, were of
our ZVUE 200 model which had been our sole product sold. We expect the majority
of our orders shipped to Wal-Mart during 2006 to be of our ZVUE 200 model. While
we are in the process of introducing the ZVUE MP3 and replacing the Model 200
with the Model 250, there can be no assurance that Wal-Mart will accept our
additional models if, and when, our shipments of future models commences, or
that if ordered, such products will be accepted by Wal-Mart as successfully as
our ZVUE 200.

Having virtually all of our retail business concentrated in one retailer and in
one product 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 PMPs. Eastech presently 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. However, 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


                                       27



not have alternative financing available and do not maintain a revolving line of
credit for purchases. There can be no assurance that we can successfully
renegotiate our agreement with Eastech upon expiration of the agreement in
January 2007.

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 significant 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.

     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 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.

     WE ANTICIPATE LOSSES FOR THE IMMEDIATE FUTURE AND MAY NOT ACHIEVE
PROFITABILITY, AND OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM HAS
EXPRESSED DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.

We anticipate incurring losses in the immediate future and there can be no
assurance that we will be able to achieve or sustain profitability or positive
cash flow in the near term, 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 2005 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 and we are unable to obtain
additional financing in the near future, we may not be able to continue
operating our business.

     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, Musicmatch,
RealAudio, and Wal-Mart, and we must compete with these devices and services in
order to sell our ZVUE PMPs and generate revenues from content, including video
content.


                                       28



Several companies, including Apple Computer, 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, 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.

     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 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 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, ZVUE Model 200. As such, consumers may not accept our new
products which we plan to introduce and on which future revenues 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 PMPs
priced between $99 and $299, 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 94% of our 2005 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,


                                       29



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 players.
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. We intend to
utilize a portion of the proceeds of this offering to secure key-man life
insurance on certain of our executives.

     IF WE DO NOT RECEIVE ADDITIONAL FUNDING, WE WILL BE UNABLE TO CONTINUE
DEVELOPING OUR TECHNOLOGY AND MARKETING OUR PRODUCTS.

We will need additional funding to achieve the goals stated in our business
plan. In particular, we will need working capital to support the marketing and
distribution of our planned new products into retail channels. If we are unable
to borrow money to cover these costs, certain proceeds of the offering may be
required to be utilized reducing our ability to invest in other aspects of our
business potentially accelerating our need to raise additional funds. If we
experience delays in producing our new devices, acquiring content or entering
into distribution agreements to get our products into additional retail outlets,
we may need more funding than we currently anticipate which could accelerate our
need to raise additional funds.

     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.

     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


                                       30



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.


                                       31



     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.

     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


                                       32



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.

     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.


                                       33



     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.

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
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 (September 30,
2006), 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 September 30, 2006 that have materially
affected, or are reasonably likely to materially affect,


                                       34




our internal control over financial reporting.

                           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

                                   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 Oscodar
                                        Director, Chief Executive Officer &
                                        President


                                        BY: /s/ WILLIAM J. BUSH
                                            ------------------------------------
                                        William J. Bush
                                        Chief Financial Officer (Principal
                                        Accounting Officer)

                                        DATE: NOVEMBER 14, 2006


                                       35



                               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


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