**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington
      D.C. 20549




**FORM
      10-QSB**






xQUARTERLY
      REPORT UNDER
      SECTION 13 OR 15( d )
      OF THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      quarterly period ended **September
      30, 2007**








oTRANSITION
      REPORT UNDER
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For
      the
      transition period from: _______ to _______





Commission
      File Number  001-32985






**ZVUE
      CORPORATION**


(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
o





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




As
      of
      November 14, **** 2007,
      22,215,134 shares of Issuer’s common stock, with $0.0001 par value per share,
      were outstanding.





Transitional
      Small Business Disclosure Format:   YES
o   NO
x







**ZVUE
      CORPORATION**


**(formerly
      known as Handheld Entertainment, Inc.)**


**Table
      of Contents**




**PART
                  I - FINANCIAL INFORMATION**
              
              
              **3**ITEM
                  1- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              
              
              3CONDENSED
                  CONSOLIDATED BALANCE SHEET (UNAUDITED)
              
              
              3CONDENSED
                  CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
              
              
              4CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
              
              
              5NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
              
              
              6ITEM
                  2- MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
                  OPERATION
              
              
              30ITEM
                  3- CONTROLS AND PROCEDURES
              
              
              45**PART
                  II - OTHER INFORMATION**
              
              
              **46**ITEM
                  4- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
              
              
              46ITEM
                  6- EXHIBITS
              
              
              47**SIGNATURES**
              
              
              **47****INDEX
                  TO EXHIBITS:**
              
              
              **48**




2




**PART
      I - FINANCIAL INFORMATION**




**Item
      1- Condensed Consolidated Financial Statements**





**ZVUE
      CORPORATION and Subsidiaries**


**(formerly
      known as Handheld Entertainment, Inc.)**


**CONDENSED
      CONSOLIDATED BALANCE SHEET**


**AT
      SEPTEMBER 30, 2007**


**(Unaudited)**




**ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            166,328Restricted
                cash
            
            
            50,000Accounts
                receivables, net
            
            
            815,555Inventories,
                net
            
            
            259,860Prepaid
                expenses and other current assets
            
            
            330,796**Total
                current assets**
            
            
            **1,622,539**Fixed
                assets, net
            
            
            234,170Intangible
                assets, websites, net
            
            
            9,426,969Debt
                issue costs, net
            
            
            994,315Deferred
                acquisition costs
            
            
            980,283Deposit
                and other non-current assets
            
            
            155,088**Total
                assets**
            
            **$**
            **13,413,364****LIABILITIES
                AND SHAREHOLDERS' EQUITY**Current
                liabilities:Trade
                accounts payable
            
            $
            1,553,635Accrued
                and other liabilities
            
            
            1,506,452Line
                of credit, Related Party
            
            
            1,326,823Short
                term notes
            
            
            1,425,000**Total
                current liabilities**
            
            
            **5,811,910**Long
                term convertible notes
            
            
            800,000**Total
                liabilities**
            
            
            **6,611,910****Shareholders'
                Equity**Preferred
                Stock, $0.0001 par value; 1,000,000 authorized; none issued and
                outstanding
            
            
            --Common
                stock, $0.0001 par value; 75,000,000 authorized; 17,678,345 issued
                and
                outstanding
            
            
            1,768Additional
                paid in capital - Warrants and stock options
            
            
            4,139,688Additional
                paid in capital
            
            
            35,908,292Accumulated
                deficit
            
            
            (33,248,294
            )**Total
                shareholders' equity**
            
            
            **6,801,454****Total
                liabilities and shareholders' equity**
            
            **$**
            **13,413,364**





See
      Notes
      to Unaudited Condensed Consolidated Financial Statements




3




**ZVUE
      CORPORATION and Subsidiaries**


**(formerly
      known as Handheld Entertainment, Inc.)**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**** **(Unaudited)**





Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,2007
            
            2006
            
            2007
            
            2006Product
                sales, net
            
            $
            510,587
            
            $
            123,104
            
            $
            1,079,383
            
            $
            1,299,125Service
                revenue
            
            
            106,348
            
            
            -
            
            
            246,328
            
            
            -Net
                revenue
            
            
            616,935
            
            
            123,104
            
            
            1,325,711
            
            
            1,299,125Cost
                of product sales
            
            
            831,597
            
            
            396,800
            
            
            1,540,246
            
            
            1,462,495Cost
                of service revenue
            
            
            18,811
            
            
            -
            
            
            18,811
            
            
            -Cost
                of revenues
            
            
            850,408
            
            
            396,800
            
            
            1,559,057
            
            
            1,462,495**Gross
                margin**
            
            
            **(233,473**
            **)**
            
            **(273,696**
            **)**
            
            **(233,346**
            **)**
            
            **(163,370**
            **)****Costs
                and expenses**Sales
                and marketing
            
            
            788,718
            
            
            937,116
            
            
            2,241,761
            
            
            2,432,624General
                and administrative (including stock based compensation expense of
                $885,054
                and $677,237 for the three months ended September 30, 2007 and 2006
                and
                $1,467,789 and $1,639,586 for the nine months ended September 30,
                2007 and
                2006)
            
            
            2,733,600
            
            
            1,581,570
            
            
            6,989,805
            
            
            4,677,927Research
                and development
            
            
            205,512
            
            
            596,322
            
            
            545,586
            
            
            1,557,075**Total
                operating expenses**
            
            
            **3,727,830**
            
            
            **3,115,008**
            
            
            **9,777,152**
            
            
            **8,667,626****Loss
                from operations**
            
            
            **(3,961,303**
            **)**
            
            **(3,388,704**
            **)**
            
            **(10,010,498**
            **)**
            
            **(8,830,996**
            **)****Other
                income (expense)**Interest
                income
            
            
            4,774
            
            
            6,725
            
            
            65,031
            
            
            59,574Interest
                expense
            
            
            (231,937
            )
            
            (1,334
            )
            
            (273,653
            )
            
            (67,066
            )Loss
                on conversion of debt
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,038,743
            )**Total
                other income (expense)**
            
            
            (227,163
            )
            
            5,391
            
            
            (208,622
            )
            
            (1,046,235
            )******Net
                Loss**
            
            **$**
            **(4,188,466**
            **)**
            **$**
            **(3,383,313**
            **)**
            **$**
            **(10,219,120**
            **)**
            **$**
            **(9,877,231**
            **)****Net
                loss per share - basic and diluted**
            
            
            ($0.24
            )
            
            ($0.31
            )
            
            ($0.62
            )
            
            ($1.08
            )Weighted
                Average shares used in computing basic and diluted net loss per share
            
            
            17,584,600
            
            
            10,886,870
            
            
            16,481,502
            
            
            9,178,833





See
      Notes
      to Unaudited Condensed Consolidated Financial Statements




4




**ZVUE
      CORPORATION and Subsidiaries**


**(formerly
      known as Handheld Entertainment, Inc.)**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


(Unaudited)




**Nine
                months ended September 30,****2007**
            
            **2006****Cash
                flows from operating activities:****Net
                cash used in operating activities**
            
            **$**
            (8,024,441
            )
            **$**
            (8,147,364
            )**Cash
                flows from investing activities:**Acquisition
                of subsidiary
            
            
            (857,598
            )
            
            --Acquisition
                of websites
            
            
            (369,807
            )
            
            --Purchase
                of equipment
            
            
            (152,668
            )
            
            (235,149
            )Deferred
                acquisition costs
            
            
            (868,536
            )
            
            --Software
                License Fees
            
            
            -
            
            
            (208,000
            )**Net
                cash used in investing activities**
            
            
            (2,248,609
            )
            
            (443,149
            )**Cash
                flows from financing activities:**Issuance
                of common stock
            
            
            4,079,999
            
            
            13,424,189Short
                term loans
            
            
            1,425,000
            
            
            --Short-term
                borrowings, related parties
            
            
            1,326,863
            
            
            500,000Repayments
                of long-term borrowings
            
            
            --
            
            
            (79,500
            )Proceeds
                from exercise of stock options
            
            
            250,148
            
            
            --Debt
                issuance cost
            
            
            (170,867
            )
            
            --Offering
                costs-secondary offering
            
            
            --
            
            
            (1,096,267
            )Offering
                costs-issuance of common stock
            
            
            (124,909
            )
            
            (546,412
            )**Net
                cash provided by financing activities**
            
            
            **6,786,234**
            
            
            **12,202,010**Net
                increase (decrease) in cash and cash equivalents
            
            
            (3,486,816
            )
            
            3,611,497Cash
                and cash equivalents at beginning of period
            
            
            3,653,144
            
            
            277,734**Cash
                and cash equivalents at end of the period**
            
            **$**
            **166,328**
            
            **$**
            **3,889,231****Supplemental
                Disclosure of Cash Flow Information**Cash
                Paid During the PeriodInterest
            
            $
            20,257
            
            $
            16,399Taxes
            
            
            14,010
            
            
            --**Supplemental
                Disclosure of Non-Cash Investing and Financing
                Activities**Conversion
                of notes to common stock
            
            $
            1,600,000
            
            $
            --Common
                stock issued in business combinations
            
            
            7,805,698
            
            
            --Installment
                payments due from business combinations
            
            
            536,458
            
            
            --Conversion
                of notes, related party to common stock
            
            
            --
            
            
            4,452,759





See
      Notes
      to Unaudited Condensed Consolidated Financial Statements




5




**ZVUE
      CORPORATION and Subsidiaries**


**(formerly
      known as Handheld Entertainment, Inc.)**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2007**


**(UNAUDITED)**





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





**Interim
      Consolidated Financial Statements**





The
      interim condensed consolidated financial statements have been prepared from
      the
      records of ZVUE Corporation (formerly known as Handheld Entertainment, Inc.),
      a
      Delaware corporation (“we", “us”, “our” or the “Company”) without audit. In the
      opinion of management, all adjustments, which consist of only normal recurring
      adjustments, to present fairly the consolidated financial position at September
      30, 2007, and the consolidated results of operations and cash flows for the
      three and nine months ended September 30, 2007 and 2006, have been made. The
      interim condensed consolidated financial statements should be read in
      conjunction with the financial statements and notes thereto contained in the
      annual report on Form 10-KSB filed on April 2, 2007 with the U.S. Securities
      and
      Exchange Commission (“SEC”) for the year ended December 31, 2006. The results of
      operations for the three and nine months ended September 30, 2007, are not
      necessarily indicative of the results to be expected for any other interim
      period or for the full year.





**Going
      Concern**





As
      reflected in the consolidated financial statements included in the annual report
      on Form 10-KSB filed on April 2, 2007 with the SEC for the year ended December
      31, 2006, the Company had a net loss of approximately $12.2 million, negative
      gross margin of $559,955 **** and
      net
      cash used in operations of approximately $7.1 million for the year ended
      December 31, 2006 and an accumulated deficit of approximately $23.0 million
      at
      December 31, 2006. In addition, for the nine months ended September 30, 2007,
      the Company has a net loss and cash used in operations of $10,219,120 and
      $8,024,441, respectively, and an accumulated deficit of $33,248,294 at September
      30, 2007. These matters raise substantial doubt about the Company’s 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-manufacturer. We may seek additional equity and/or debt financing
      to
      sustain our growth strategy. We were able to obtain sufficient funds subsequent
      to December 31, 2006 (see notes 6, 10 and 12) to continue in operation and
      we
      believe that based on our current cash position, our borrowing capacity, and
      our
      assessment of how potential equity investors will view us, we will be able
      to
      continue operations at least through the end of 2007. The forecast that our
      financial resources will last through that period is a forward-looking statement
      that involves significant risks and uncertainties. It is reasonably possible
      that we will not be able to obtain sufficient financing to continue operations.
      Furthermore, any additional equity or convertible debt financing will be
      dilutive to existing stockholders and may involve preferential rights over
      common shareholders. Debt financing, with or without equity conversion features,
      may involve restrictive covenants.





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




6




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




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





**Use
      of Estimates** ****





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





**Princip** **les
      of Consolidation**




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







**Foreign
      Currency**





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





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





**Fair
      Value of Financial Instruments**





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




7




***Revenue
      Recognition***





***Product
      Sales***





Revenue
      from product sales is recognized when persuasive evidence of an arrangement
      exists (generally a purchase order), product has been shipped, the sale price
      is
      fixed and determinable, and collection of the resulting account is reasonably
      assured. We record the associated revenue at the time of the sale net of
      estimated returns. We also sell our products directly to end-users via the
      Internet and we record revenue when the product is shipped, net of estimated
      returns.





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





***Service
      Revenues***





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





**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, 2007, two customers accounted for approximately 44% and 37% of
      gross accounts receivable before the allowance for doubtful
      accounts.





*Concentration
      of Revenues*





In
      the
      three months ended September 30, 2007, we had two customers’ that represented
      more than 10% of our net revenues. One customer accounted for approximately
      65%
      of our net revenues while the second, Wal-Mart, represented 10% of our net
      revenues and we therefore were materially dependent upon these two customers.
      Due to the nature of our business and the relative size of the contracts, which
      are entered into in the ordinary course of business, the loss of any single
      significant customer, including the above customers, would have a material
      adverse effect on our results.




8




*Concentration
      of Supplier*





The
      Company’s products are manufactured on a purchase order basis pursuant to a
      Manufacturing Agreement with a contract manufacturer headquartered in
      Taiwan. The Manufacturing Agreement is valid through December 2008. Our
      ZVUE
      product is produced in China by our manufacturing partner.




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





Our
      purchases during the three and nine months ended September 30, 2007 from our
      manufacturer were approximately $539,000 and $1.2 million, respectively. This
      compares to approximately $300,000 and $2.3 million, respectively, for the
      three
      and nine months ended September 30, 2006. Amounts payable due to this vendor
      at
      September 30, 2007 were approximately $42,000 and are included in accounts
      payable. The balance due is fully collateralized by substantially all assets
      of
      the Company.





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





A
      closing
      condition of the convertible debenture financing used to complete the
      eBaum’s World, Inc acquisition, described in Note 12, is for the Financing and
      Escrow agreement and Security Agreement described above to be cancelled and
      the
      lien on the Company’s assets to be removed. At September 30, 2007, that process
      had not been completed but we expect it to be completed at or shortly after
      the
      close of the acquisition transaction.





Product
      Concentration





During
      the first nine months of 2007, product sales were derived primarily from the
      sale of one product model, the ZVUE Model 250 as compared to the comparable
      period in 2006 where revenues consisted primarily of sales of the ZVUE Model
      200.




9




**Recent
      Accounting Pronouncements**




The
      following pronouncements have been issued by the Financial Accounting Standards
      Board (‘‘FASB’’):




On
      February 15, 2007, FASB issued SFAS No. 159, entitled ‘‘The Fair Value
      Option for Financial Assets and Financial Liabilities.’’ The guidance in SFAS
      No. 159 ‘‘allows’’ reporting entities to ‘‘choose’’ to measure many financial
      instruments and certain other items at fair value. The objective underlying
      the
      development of this literature is to improve financial reporting by providing
      reporting entities with the opportunity to reduce volatility in reported
      earnings that results from measuring related assets and liabilities differently
      without having to apply complex hedge accounting provisions, using the guidance
      in SFAS No. 133, as amended, entitled ‘‘Accounting for Derivative Instruments
      and Hedging Activities.’’ The provisions of SFAS No. 159 are applicable to all
      reporting entities and is effective as of the beginning of the first fiscal
      year
      that begins subsequent to November 15, 2007. We are evaluating the
      impact of this new standard, but currently believe that adoption will not have
      a
      material impact on our financial position or results of operations.





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





Accounts
      Receivable at September 30, 2007 were as follows:





Accounts
                receivable
            
            $
            901,177Less:
                Allowance for doubtful accounts
            
            
            (85,622
            )**Total
                Accounts Receivable, net**
            
            $
            815,555





The
      Company recorded bad debt expense of $13,455 and $22,480 for the three and
      nine
      months ended September 30, 2007, respectively, and none in the same periods
      of
      2006.





**4.** **Inventories**





At
      September 30, 2007, Inventories consist of the following:





Finished
                Goods
            
            $
            266,110Less:
                Valuation Allowance
            
            
            (6,250
            )**Total
                Inventories**
            
            $
            259,860





For
      the
      three and nine months ended September 30, 2007, the Company did not change
      the
      inventory valuation reserve. During the three and nine months ended September
      30, 2007, the Company wrote off inventory of approximately $198,000 and $223,000
      as compared to approximately $141,000 and $154,000 in the three and nine months
      ended September 30, 2006.




10




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





At
      September 30, 2007 Intangible Assets, net consist of the following:





**Dorks
                LLC**
            
            **Fun**
              **Mansion.com**
            
            **YourDaily**
              **Media.com**
            
            **Putfile.com**
            
            **UnOriginal.co.uk**
            
            **HolyLemon.com**
            
            **TOTAL**Transaction
                Close Date
            
            
            Nov
                13, 2006
            
            
            Dec
                1,
              2006
            
            
            Dec
                15, 2006
            
            
            Feb
                5, 2007
            
            
            March
                26,
              2007
            
            
            April
                20,
              2007Amortization
                Period
            
            
            3
                Years
            
            
            3
                Years
            
            
            3
                Years
            
            
            3
                Years
            
            
            3
                Years
            
            
            3
                YearsAt
                Cost
            
            $
            1,533,651
            
            $
            1,114,758
            
            $
            1,075,256
            
            $
            7,071,275
            
            $
            521,834
            
            $
            916,890
            
            $
            12,233,664Less:
                Amortization
            
            
            (450,155
            )
            
            (309,655
            )
            
            (284,512
            )
            
            (1,543,236
            )
            
            (91,540
            )
            
            (127,597
            )
            
            (2,806,695
            )Net
                Book Value
            
            $
            1,083,496
            
            $
            805,103
            
            $
            790,744
            
            $
            5,528,039
            
            $
            430,294
            
            $
            789,293
            
            $
            9,426,969




Amortization
      expense is computed using the straight-line method over the estimated useful
      life of 3 years. We incurred amortization expenses of approximately $1 million
      and $2.7 million for the three and nine months ended September 30, 2007,
      respectively.





The
      following table summarizes the estimated fair values of the assets acquired
      and
      liabilities assumed at the date of acquisition as of September 30,
      2007.





**Dorks
                LLC**
            
            **Fun**
              **Mansion.com**
            
            **YourDaily**
              **Media.com**
            
            **Putfile.com**
            
            **UnOriginal.co.uk**
            
            **HolyLemon.com**
            
            **TOTAL**Transaction
                Close Date
            
            
            Nov
                13, 2006
            
            
            Dec
                1,
              2006
            
            
            Dec
                15, 2006
            
            
            February
                5, 2007
            
            
            March
                26,
              2007
            
            
            April
                20,
              2007Tangible
                Assets
            
            
            --
            
            
            --
            
            
            --
            
            $
            84,421
            
            
            --
            
            
            --
            
            $
            84,421Intangible
                assets
            
            $
            1,533,651
            
            $
            1,114,758
            
            $
            1,075,256
            
            $
            7,071,275
            
            $
            521,834
            
            $
            916,890
            
            $
            12,233,664Total
                Assets
            
            $
            1,533,651
            
            $
            1,114,758
            
            $
            1,075,256
            
            $
            7,155,696
            
            $
            521,834
            
            $
            916,890
            
            $
            12,318,085Total
                Liabilities
            
            
            --
            
            
            --
            
            
            --
            
            $
            88,531
            
            
            --
            
            
            --
            
            $
            88,531Net
                assets acquired
            
            $
            1,533,651
            
            $
            1,114,758
            
            $
            1,075,256
            
            $
            7,067,165
            
            $
            521,834
            
            $
            916,890
            
            $
            12,229,554




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




11




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





***Acquisition
      of Dorks, LLC***





On
      November 13, 2006, we acquired 100% of the membership interests of Dorks,
      LLC, which operates Dorks.com, a website that aggregates user-generated
      content, from Zeus Promotions, LLC (“Zeus”). The purchase price of $1.5
      million for the membership interests of Dorks, LLC was comprised of a
      combination of $500,000 in cash and a five-year $1 million secured
      convertible promissory note in favor of Zeus bearing 4.7% interest and due
      December 31, 2011. In addition we had $33,651 of acquisition costs. At the
      completion of the acquisition, the note was convertible into 750,751 shares
      of our common stock at a fixed conversion price of $1.33 per share.





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





As
      part
      of the purchase agreement, the Company and Zeus entered into an escrow agreement
      whereby $25,000 of the cash paid under the purchase agreement would be deposited
      into an escrow account and held for six months to fund any post closing
      indemnity claims. At conclusion of the six month period, no claims were
      identified and the $25,000 was released to Mr. John Kowal who is the owner
      of
      Zeus.





The
      Company and Mr. Kowal, the previous owner of Dorks, LLC, entered into an 18
      month employment agreement whereby the Company agreed to pay Mr. Kowal $1,667
      per month for services to be rendered by him to assist the Company in
      transitioning the acquired entity to the Company. Additionally, under the
      employment agreement, Mr. Kowal is entitled to certain bonuses if the Company
      acquires other companies which further the business interests of Dorks LLC
      and
      he is materially involved in those transactions. The bonuses are based on the
      acquisition price of the target and range from 3 - 5% of the total price,
      depending on several factors. Under the terms of this agreement, Mr. Kowal
      was
      issued 23,342 and 143,854 restricted common shares in calendar year 2006 and
      through the nine months ended September 30, 2007, respectively, in consideration
      for his involvement in various of our acquisition transactions. In the three
      months ending December 31, 2007, Mr. Kowal will be issued an additional 303,398
      common shares related to the completion of the eBaum’s World, Inc. acquisition
      referred to in Note 12.





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





***Acquisition
      of FunMansion.com***





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




12




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





As
      part
      of the purchase agreement, the Company and Aperio entered into an escrow
      agreement whereby $25,000 of the cash paid under the purchase agreement would
      be
      deposited into an escrow account and held for six months to fund any post
      closing indemnity claims. At the end of the six month period, no claims were
      identified and the $25,000 was released to Ms. Mary Dunne, the owner of Aperio.





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





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





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





***Acquisition
      of YourDailyMedia.com***





On
      December 15, 2006, we acquired certain assets from Mr. Scott John Paul
      Worsnop, including all of the assets and business of YourDailyMedia.com, an
      internet website that aggregates user-generated content. The purchase price
      of $1.06 million for the assets and business of YourDailyMedia.com was
      comprised of a combination of $260,000 in cash ($200,000 due January 2, 2007
      and
      $60,000 over the following twelve months) and a five-year $800,000
      convertible promissory note in favor of John Paul Worsnop. In addition, we
      had
      $15,256 of acquisition costs. The note is convertible into 186,306 shares
      of our common stock at a fixed conversion price of $4.29 per share. The
      note bears interest at a rate of 4.9% per annum and is due December 2011.
      The Company can force the conversion of the note into our common stock under
      certain conditions including if our common stock trades more than 50,000 shares
      per day and the trading price of the stock for 5 days is twice the conversion
      price of the shares or $8.58. To date, we have not met the conditions to force
      conversion.





As
      part
      of the purchase agreement, the Company and Mr. Worsnop entered into an escrow
      agreement whereby $25,000 of the cash paid under the purchase agreement would
      be
      deposited into an escrow account and held for six months to fund any post
      closing indemnity claims. At the end of the six month period, no claims were
      identified and the $25,000 was released to Mr. Worsnop.




13




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





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





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




***Acquisition
      of Putfile Limited***





On
      February 5, 2007, we acquired 100% of the outstanding shares of
      Putfile Limited. Puftile Limited (“Putfile”) operates a leading free
      digital media website, Putfile.com, featuring user-generated content. The
      purchase price of approximately $7.1 million for Putfile Limited
      was comprised of a combination of approximately $1,035,000 of cash
      ($500,000 at closing and approximately $570,000 over the following twelve
      months) and $6,000,000 of our restricted common stock (2,092,050 shares).
      In addition, we had $36,275 of acquisition costs. For accounting purposes,
      the
      common shares were valued at $2.87 per share or $6,000,000 based on the 5-day
      average closing price prior to the closing date since the quantity of shares
      we
      were required to issue to the seller was not determinable until the closing
      date.





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





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





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





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




14




Tangible
                Assets
            
            $
            84,421Intangible
                assets
            
            $
            7,071,275Total
                Assets
            
            $
            7,155,696Total
                Liabilities
            
            $
            88,531Net
                assets acquired
            
            $
            7,067,165





This
      transaction was deemed to be a material business combination, and therefore,
      the
      summarized unaudited consolidated pro forma results, for the three months ended
      March 31, 2007 and 2006, required under the Statement of Financial
      Accounting Standards No. 141 are below. The pro forma data does not purport
      to
      be indicative of the results that would have been obtained had these events
      actually occurred at January 1, 2006 and is not intended to be a projection
      of
      future results.





**UNAUDITED**
            
            **Three
                Months Ended March 31, 2007**
            
            **Three
                Months Ended March 31, 2006**Net
                Revenues
            
            $
            408,144
            
            $
            722,273Net
                Loss
            
            
            ($2,935,060
            )
            
            ($3,896,258
            )Net
                Loss per Share - Basic & Diluted
            
            
            ($0.18
            )
            
            ($0.34
            )





***Acquisition
      of Unoriginal.co.uk***





On
      March
      26, 2007, our wholly-owned subsidiary, Dorks LLC, acquired certain assets
      from Gareth Coote, including all of the assets and business of
      Unoriginal.co.uk, an internet website that aggregates
      user-generated content and is based in the United Kingdom. The purchase
      price for the assets and business of Unoriginal.co.uk was comprised of a
      combination of $250,000 in cash payable over 15 months beginning April 1, 2007
      and $250,000 of our restricted common stock based on the five day average of
      the
      closing price preceding the close of the transaction or 92,456 shares. In
      addition, we had approximately $22,000 of acquisition costs recorded as of
      September 30, 2007. For accounting purposes, the common shares were valued
      at
      $2.70 per share or $250,000 based on the 5-day average closing price prior
      to
      the closing date since the quantity of shares we were required to issue to
      the
      seller was not determinable until the closing date.





Additionally,
      the Company and Mr. Coote entered into an 18 month consulting agreement whereby
      the Company agreed to pay Mr. Coote $2,000 per month for services to be rendered
      by him to assist the Company in transitioning the acquired business into the
      Company.





We
      did
      not record any goodwill as a result of the transaction. The intangible assets
      of
      approximately $522,000 relate to values assigned to the website assets acquired
      consisting of the basic domain name, internet presence as demonstrated through
      the websites, URL's and search engine optimization abilities that drive unique
      visitors to view the user generated videos maintained on the various suites.
      The
      amortization period for the intangible assets is three years or 36 months from
      the acquisition date. We did not acquire any material liabilities.




15




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





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





***Acquisition
      of HolyLemon.com***





On
      April
      20, 2007, Dorks LLC, our wholly-owned subsidiary, acquired all
      of
      the business and assets of HolyLemon.com from Mr. Kieran O’Neill pursuant
      to an asset purchase agreement dated April 20, 2007, for an aggregate
      purchase price of $900,000 consisting (i) $25,000
      in cash payable immediately, (ii) $225,000 in cash, payable in twenty-four
      equal
      monthly installments commencing on May 1, 2007, and (iii) $650,000 in the
      Company ’s common
      stock based on the average closing price for the five days preceding the closing
      or 268,595 common
      shares .
      For
      accounting purposes, the common shares were valued at $2.42 per share or
      $650,000 based on the 5-day average closing price prior to the closing
      date. In addition we had approximately $17,000 of acquisition costs
      recorded as of September 30, 2007. The purchase price for HolyLemon.com may
      be
      increased pursuant to an earn-out provision contained in the Asset Purchase
      agreement if Holylemon.com generates in excess of 1.7 million unique visitors
      derived from organic sources per month for three consecutive months during
      the
      twelve month period commencing on May 1, 2007. At September 30, 2007, the
      conditions to make these earn-out payments have not been met.





The
      Company granted Mr. O’Neill customary “piggy-back” registration rights with
      respect to the shares. Pursuant to the terms of the agreement, Mr. O’Neill may
      not, directly or indirectly, sell more than one-twelfth (1/12), or 22,383 of
      the
      shares issued to him in the acquisition in any thirty-day period for twelve
      months after the closing of the acquisition, notwithstanding any registration
      of
      such shares. At September 30, 2007, we have not registered these common
      shares.





Mr.
      O’Neill entered into a 24-month consulting agreement with the Company to assist
      in the transition and continuing operations of the acquired business. Under
      the
      terms of the consulting agreement, Mr. O’Neill will receive $2,000 per month for
      consulting services.





We
      did
      not record any Goodwill as a result of the transaction. The intangible assets
      of
      approximately $917,000 relate to values assigned to the website assets acquired
      consisting of the basic domain name, internet presence as demonstrated through
      the websites, URL's and search engine optimization abilities that drive unique
      visitors to view the user generated videos maintained on the various suites.
      The
      amortization period for the intangible assets is three years or 36 months from
      the acquisition date. We did not acquire any material liabilities.





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





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





16





**6.** **Debt**





The
      following tables detail our short and long-term convertible notes payable as
      of
      September 30, 2007:





*Short
      Term Notes*





8.0%
                Short Term Notes Payable
            
            $
            1,425,000$
            1,425,000




*Long
      Term Notes*





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




On
      June
      27, 2007, we sold an aggregate of $1,425,000 principal amount of 8% Notes due
      July 31, 2007 (“2007 Notes”), pursuant to several subscription agreements
      between us and each purchaser of 2007 Notes. We received aggregate gross
      proceeds of $1,425,000 from the sale of 2007 Notes. The 2007 Notes were offered
      solely to “accredited investors” in reliance on the exemption from registration
      afforded by Rule 506 of Regulation D promulgated under Section 4(2) of the
      Securities Act of 1933, as amended.




On
      July
      31, 2007, we exercised our right under the Notes to require the holders of
      2007
      Notes to exchange the 2007 Notes for 8% Notes due June 27, 2008 (“2008 Notes”)
      in principal amount equal to the principal and accrued interest then outstanding
      on the 2007 Notes for which they were exchanged. Since we exercised our
      right, we issued to each holder of the Notes warrants to purchase a number
      of
      shares of the Company’s common stock equal to thirty-five percent (35%) of the
      principal amount of the 2007 Notes held by such holder that we redeemed. The
      warrants are exercisable, in the aggregate, to purchase 498,750 shares of our
      common stock, expire on June 27, 2012, have an exercise price of $1.90 per
      share
      and are subject to adjustment as described below. In addition to certain
      anti-dilution provisions, and subject to certain exceptions, if at any time
      from
      June 27, 2007 to December 27, 2007, the Company issues shares of its common
      stock or securities exercisable for, or convertible into, shares of its common
      stock at a price per share that is less than the then effective exercise price
      of the warrants, then the exercise price of the warrants shall be reduced to
      such lesser price; provided, however, that the number of shares of the Company’s
      common stock issuable upon exercise of the warrants shall not be proportionally
      adjusted but shall remain the same.




As
      we
      entered into the $28.1 million financing as described in Note 12, each holder
      of
      2008 Notes was entitled, subject to the terms of the 2008 Notes, to participate
      in that offering on the same terms and conditions as the other investors
      therein, except that, in lieu of paying a cash purchase price in the subsequent
      offering, such holders had the right to exchange their 2008 Notes for the
      securities being sold in the subsequent offering. Furthermore, each such note
      holder that did not elect to participate in the subsequent offering could elect
      to have the entire principal and accrued interest on such holder’s 2008 Notes
      prepaid. At the various holders’ respective elections, an aggregate of $775,000
      of principal and approximately $34,000 of interest converted into the
      convertible debenture instrument described in Note 12. The remaining aggregate
      principal amount of $650,000 and accrued interest of approximately $25,000
      from
      these notes will be payable to the investors upon maturity or earlier if they
      so
      elect.




17




Chicago
      Investment Group (“CIG”) acted
      as
      placement agent with respect to the offering of 2007 Notes and received a cash
      fee equal to $82,250 (7% of the gross proceeds received from investors
      introduced to the Company by CIG) and with respect to the 2008 Notes, warrants
      to purchase an aggregate of 182,250 shares of the Company’s common stock
      (100,000 shares plus 7% of the gross proceeds received from investors introduced
      to us by CIG).




Pursuant
      to the several subscription agreements, **** we
      granted the purchasers of 2007 Notes certain “piggy-back” registration rights
      with respect to the shares of common stock issuable upon exercise of any
      warrants that were issued pursuant to the terms of the 2008 Notes.




The
      498,750 and 182,250 warrants granted to the investors and placement agent as
      a
      result of the exchange of the 2008 Notes for the 2007 Notes were valued using
      the Black-Scholes valuation model with the following assumptions: volatility
      of
      182.7 % based on historical volatility analysis, expected term equal to the
      expiration terms of the warrants, zero expected dividends, and risk free
      interest rate of 4.55%. We determined that the warrants had a fair value of
      $1.59 or a total of approximately $1.1 million which was recorded as a debt
      issue cost and is being amortized as interest expense.





On
      December 15, 2006, we acquired all of the assets and business of
      YourDailyMedia.com, for a purchase price of $1.06 million consisting of $260,000
      in cash and a five-year $800,000 convertible promissory note in favor of
      Mr. Worsnop. The note bears interest at 4.9% and is due on December 31, 2011.
      The note is convertible into 186,306 shares of our common stock at a
      fixed conversion price of $4.29 per share. We can force the conversion of
      the note into our common stock under certain conditions including if our common
      stock trades more than 50,000 shares per day and the trading price of the stock
      for 5 days is twice the conversion price of the shares or $8.58. To date the
      Company has not met the conditions to force conversion. As of September 30,
      2007, we had accrued approximately $32,000 of interest related to the notes.




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





On
      November 13, 2006, we acquired 100% of the membership interests of Dorks,
      LLC. The purchase price of $1.5 million was comprised of a combination of
      $500,000 in cash and a five-year $1 million secured convertible promissory
      note in favor of Zeus bearing interest at 4.7% and due on December 31, 2011.
      The
      note was convertible at a fixed conversion price of $1.33 per share. On
      January 22, 2007, Zeus converted the entire principal amount of $1
      million of its note and the accrued interest of approximately $9,000 into
      757,514 shares of our common stock.





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





On
      December 1, 2006, we acquired the assets and business related to FunMansion.com.
      The purchase price of $1.1 million was comprised of a combination of
      $500,000 in cash and a five-year $600,000 convertible promissory note in
      favor of Aperio bearing interest at 4.9% and due on December 31, 2011. The
      note
      was convertible at a fixed conversion price of $6.19 per share.





On
      March
      22, 2007, Aperio converted its $600,000 note and the accrued interest of
      approximately $9,000 into 98,363 shares of our common stock.





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




18




The
      following table details the repayments of the debt detailed above over the
      next
      five years ending December 31, 2011 and thereafter:




**Fiscal
                Year ending December 31,****2007**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **2011**
            
            **2012
                and beyond**Short-Term
                Debt
            
            $
            1,425,000
            
            $
            1,362,863
            
            $
            --
            
            $
            --
            
            $
            --
            
            $
            --Long-Term
                Debt
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            800,000
            
            
            --**Total
                Repayments**
            
            **$**
            1,425,000
            
            **$**
            1,362,863
            
            **$**
            **--**
            
            **$**
            **--**
            
            **$**
            **800,000**
            
            **$**
            **--**





The
      total
      interest expense was approximately $224,000 and $264,000 for the three and
      nine
      months ended September 30, 2007, respectively.




**7.** **Related
      Party Transactions**





On
      August
      13, 2007, the Company entered into an agreement with Carl Page, our chief
      technology officer and a member of our board of directors, whereby he agreed
      to
      purchase from the Company, from time to time, up to $5 million aggregate
      principal amount of promissory notes. The notes issued under such agreement
      bear
      an interest at a rate of 6% and are due on the earlier of a closing of a
      financing of at least $20 million or January 31, 2008. As part of this
      agreement, Mr. Page agreed to exchange a minimum of $500,000 of such notes
      for
      up to $500,000 of equity securities or securities convertible into equity
      securities of the Company offered in a subsequent financing of at least $20
      million. As of September 30, 2007, the Company has drawn approximately $1.4
      million under the line of credit leaving approximately $3.6 million of
      funds available to draw on at September 30, 2007 and recorded approximately
      $7,000 of interest expense. As described in Note 12 and subsequent to September
      30, 2007, Mr. Page exchanged $900,000 of these notes for $900,000 principal
      amount of the convertible debentures described in Note 12. As a result of the
      exchange of the notes for convertible debentures, Mr. Page was issued on October
      31, 2007, 118,421 warrants with an exercise price of $1.90 and 107,656 warrants
      with an exercise price of $2.09.




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





Basic
      earnings per share are computed using the weighted average number of common
      shares outstanding during the period. Diluted earnings per share are computed
      using the weighted average number of common and potentially dilutive securities
      outstanding during the period. Potentially dilutive securities consist of the
      incremental common shares issuable upon exercise of stock options and warrants
      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 each
      of
      September 30, 2007 and 2006, 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:




19




**Three
                months ended September 30,**
            
            **Nine
                months ended September 30,****2007**
            
            **2006**
            
            **2007**
            
            **2006****Basic
                Weighted Average Shares Outstanding**
            
            
            **17,584,600**
            
            
            **10,886,870**
            
            
            **16,481,502**
            
            
            **9,178,833**Total
                Unvested Stock
            
            
            469,965
            
            
            --
            
            
            469,965
            
            
            --Less:
                Anti-Dilutive Unvested stock
            
            
            (469,965
            )
            
            --
            
            
            (469,965
            )
            
            --Total
                Convertible Debt into Common Stock
            
            
            186,306
            
            
            --
            
            
            186,306
            
            
            --Less:
                Convertible Debt into Common Stock
            
            
            (186,306
            )
            
            --
            
            
            (186,306
            )
            
            --Total
                Stock Options Outstanding
            
            
            1,639,811
            
            
            1,704,421
            
            
            1,639,811
            
            
            1,704,421Less:
                Anti-Dilutive Stock Options due to loss
            
            
            (1,639,811
            )
            
            (1,704,421
            )
            
            (1,639,811
            )
            
            (1,704,421
            )Total
                Warrants Outstanding
            
            
            4,197,139
            
            
            2,147,624
            
            
            4,197,139
            
            
            2,147,624Less:
                Anti-Dilutive Warrants due to loss
            
            
            (4,197,139
            )
            
            (2,147,624
            )
            
            (4,197,139
            )
            
            (2,147,624
            )**Diluted
                Weighted Average Shares Outstanding**
            
            
            **17,584,600**
            
            
            **10,886,870**
            
            
            **16,481,502**
            
            
            **9,178,833**





In
      total,
      at September 30, 2007 and 2006, there were financial instruments convertible
      into 6,493,221 and 3,852,045 common shares which may potentially dilute future
      earnings per share.




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





The
      Company has adopted SFAS No. 131, “Disclosures about Segments of an Enterprise
      and Related Information.” SFAS No. 131 requires a business enterprise, based
      upon a management approach, to disclose financial and descriptive information
      about its operating segments. Operating segments are components of an enterprise
      about which separate financial information is available and regularly evaluated
      by the chief operating decision maker(s) of an enterprise. Under this
      definition, the Company operated as a single segment for all periods presented.
      The single segment is comprised of our Consumer Electronics segment.
      Approximately, 99% of our sales for the three and nine months ended September
      30, 2007 , respectively, were to customers in the United States of America;
      the
      remaining percentage were principally to customers in Europe. This
      compares to approximately 100% and 98% of sales in the three and nine months
      ended September 30, 2006, respectively, were to customers in the United States
      of America, the remaining percentage were primarily to customers in Australia.




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




**Preferred
      Stock**





The
      Company has 1,000,000 shares of preferred shares authorized of which none is
      outstanding at September 30, 2007.




20




**Common
      Stock**




**Common
      Stock Issued for Cash** ****





***January
      2007 Private Placement***





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




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





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





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





***May*** **2007
      sale of common stock to a Related Party** ****





On
      May
      25, 2007, we sold 149,700 shares of our common stock for a purchase price of
      $1.67 per share to Carl Page, our Chief Technology Officer and a member of
      the
      Board, with total proceeds of approximately $250,000. The purchase price per
      share was equal to the consolidated closing bid price of the Company’s common
      stock on The NASDAQ Capital Market on the date of the transaction. The sale
      of
      the shares was made pursuant to the exemption from registration afforded by
      Rule
      506 of Regulation D promulgated under the Securities Act of 1933, as amended.
      The shares have piggyback registration rights.




21




**Common
      Stock Issued for Services**





*Employees*





In
      January 2007, the Company granted 3,000 shares of restricted common stock to
      employees for services. 33% of the shares vest on the one year anniversary
      of
      the grant date and then remaining amount vest pro-rata semi-annually for an
      additional three years. They were valued at $9,720 based on the quoted trade
      price of $3.24 of the Company’s common stock on the grant date. The Company
      recognized approximately $4,300 of expense in the nine months ended September
      30, 2007.





In
      July
      2007, we issued 513,192 shares of restricted common stock to employees for
      services. The shares have varying vesting provisions but primarily 33% of the
      shares vest on the one year anniversary of the grant date and then remaining
      amount vest pro-rata semi-annually for an additional three years. The shares
      were valued at approximately $1.0 million based on the quoted trade price of
      $2.02 of the Company’s common stock on the grant date. The Company recognized
      approximately $373,000 of expense in the nine months ended September 30, 2007
      related to these grants.





In
      September 2007, we issued 65,000 shares of restricted common stock to employees
      for services. 33% of the shares vest on the one year anniversary of the grant
      date and then remaining amount vest pro-rata semi-annually for an additional
      three years. The shares were valued at approximately $102,000 based on the
      quoted trade price of $1.57 of the Company’s common stock on the grant date. The
      Company recognized approximately $3,000 of expense in the nine months ended
      September 30, 2007 related to these grants.





The
      Company also recognized approximately $198,000 of expense during the nine months
      ended September 30, 2007 relating to common stock grants of prior periods which
      have not yet vested.





Approximately
      $1.1 million will be recognized in future period relating to unvested common
      stock grants.





The
      following summarizes the quantity of employee shares granted, vested, unvested
      and cancelled as of September 30, 2007:





TotalVested
            
            
            406,736Unvested
            
            
            471,069Cancelled
            
            
            57,205Total
                Granted
            
            
            935,010





*Non-Employees*





In
      July
      2007, we issued 140,438 shares of restricted common stock to non-employees
      for
      services. The shares vest at varying rates through December 2007 from the grant
      date and were valued at approximately $278,000 based on the quoted trade price
      of the Company’s common stock ranging from $1.67 to $2.02 per share on the grant
      dates. The Company recognized approximately $123,000 of expense in the nine
      months ended September 30, 2007.





During
      January and February 2007, the Company granted 89,760 shares of restricted
      common stock to non-employees for services rendered. The shares vested at
      various rates through June 2007 and were valued at $262,699 based on the quoted
      trade price of the Company’s common stock ranging from $2.89 to $3.83 per share
      on the grant dates. The Company recognized approximately $263,000 of expense
      in
      the nine months ended September 30, 2007.




22




In
      the
      nine months ended September 30, 2007, the Company also recognized approximately
      $14,000 of expense relating to restricted common stock grants made in 2006
      which
      were not immediately vested. These grants were fully expensed as of September
      30, 2007.





The
      following summarizes the quantity of non-employee shares granted, vested,
      unvested and cancelled as of September 30, 2007:





TotalUnvested
            
            
            76,863Vested
            
            
            346,218Cancelled
            
            
            10,345Total
                Granted
            
            
            433,426





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





In
      May
      2007, the Company issued 403,424 shares of common stock upon the cashless
      exercise of warrants to purchase an aggregate of 403,448 shares of common stock
      for $0.0001 per share. Bill Keating, the chairman of our Board of Directors
      and
      Tim Keating, our former COO, each cashlessly exercised a warrant for 201,724
      shares and received 201,712 shares upon exercise. The Company also issued 8,279
      common shares upon the exercise of warrants to purchase an aggregate of 10,345
      shares of common stock for $0.73 per share in the first quarter.





During
      the nine months ended September 30, 2007, the Company issued 540,956 shares
      of
      common stock upon the exercise of options for approximately $250,000 of cash
      proceeds.







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





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





**Common
      Stock Issued in Business Combinations**





During
      the nine months ended September 30, 2007, the Company issued 2,453,101 shares
      of
      common stock in three business combinations, which shares were valued at a
      total
      of approximately $6.9 million (see Note 5).





Also
      refer to Note 12 for a description of approximately 3.6 million shares of common
      stock which the Company issued subsequent to September 30, 2007 as part of
      the
      acquisition of eBaum’s World, Inc.





**Common
      Stock Options**





In
      January 2007, the Company granted stock options to purchase an aggregate of
      65,500 common shares exercisable at $3.24 per share expiring in 10 years and
      vesting 25% at 6 months, 50% at 9 months and 25% at 12 months. The options
      were
      valued at $204,587 or $3.12 per option using a Black-Scholes option pricing
      method with the following assumptions: stock price $3.24, expected life of
      5
      years (using the simplified method under SAB 107), volatility of 183% (using
      historical volatility since the company’s options do not trade to provide an
      implied volatility) and a discount rate of 5.26%. In the nine months ended
      September 30, 2007, based on vesting provisions, the Company expensed
      approximately $119,000 relating to these option grants.




23




In
      January 2007, the Company also granted stock options to purchase an aggregate
      of
      17,241 common shares exercisable at $2.98 per share expiring in 10 years and
      vested immediately. These options were valued at $49,530 or $2.87 per option
      using a Black-Scholes option pricing method with the following assumptions:
      stock price $2.98, expected life of 5 years (using the simplified method under
      SAB 107), volatility of 183% (using historical volatility since the company’s
      options do not trade to provide an implied volatility) and a discount rate
      of
      5.26%.





In
      April
      2007, the Company granted stock options to purchase an aggregate of 9,000 common
      shares exercisable at $2.37 per share expiring in 10 years and vesting 25%
      at 6
      months, 50% at 9 months and 25% at 12 months. The options were valued at $20,561
      or $2.28 per option using a Black-Scholes option pricing method with the
      following assumptions: stock price $2.37, expected life of 5 years (using the
      simplified method under SAB 107), volatility of 183% (using historical
      volatility since the company’s options do not trade to provide an implied
      volatility) and a discount rate of 5.19%. Year to date, the Company expensed
      approximately $9,000 relating to these option grants.


In
        September 2007, the Company granted stock options to purchase an aggregate
        of
        100,000 common shares exercisable at $1.66 per share expiring in 10 years
        and
        vesting 25% at 6 months, 50% at 9 months and 25% at 12 months. The options
        were
        valued at approximately $161,000 or $1.61 per option using a Black-Scholes
        option pricing method with the following assumptions: stock price $1.66 expected
        life of 5 years (using the simplified method under SAB 107), volatility of
        183%
        (using historical volatility since the company’s options do not trade to provide
        an implied volatility) and a discount rate of 3.88%. Year to date, the Company
        expensed approximately $11,000 relating to these option grants.





Also
      in
      September 2007, the Company granted stock options to purchase an aggregate
      of
      150,000 common shares exercisable at $1.66 per share expiring in 10 years which
      were fully vested at issuance. The options were valued at approximately $241,000
      or $1.61 per option using a Black-Scholes option pricing method with the
      following assumptions: stock price $1.66 expected life of 5 years (using the
      simplified method under SAB 107), volatility of 183% (using historical
      volatility since the company’s options do not trade to provide an implied
      volatility) and a discount rate of 3.88%.




In
      the
      nine months ended September 30, 2007, the Company also expensed approximately
      $61,000 relating to option grants that occurred in November 2006.




**11.** **Commitments
      and Contingencies**





***Legal
      Matters:***





From
      time
      to time, we may be involved in litigation relating to claims arising out of
      our
      operations in the normal course of business. As of September 30, 2007, there
      were no pending or threatened lawsuits that could reasonably be expected to
      have
      a material effect on the results of our operations.





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




24




***Other
      Contingencies:***




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




**12.** **Subsequent
      Events**





***Acquisition
      of eBaum’s World. and Sale*** **of $28.1 Million of Convertible Notes**





On
      October 31, 2007, we completed our previously announced acquisition of all
      the
      business and assets of eBaum’s World, Inc., a New York corporation
      (“ eBaum’s ”),
      pursuant to an Asset Purchase Agreement entered into as of August 1, 2007 (the
      “Asset Purchase Agreement”). In connection with the completion of the
      acquisition and in consideration for the assets acquired, the Company paid
      eBaum’s $15,000,000 in cash and common stock which included $14,250,000 in cash
      at closing. We previously paid, as part of the extension agreement $350,000
      in
      cash and issued 261,438 common shares valued by the parties at $400,000.
      Additionally, we issued 2,885,056 shares of its common stock to eBaum’s. Such
      shares were placed in escrow with LaSalle Bank N.A. acting as escrow agent.
      Such
      shares were issued pursuant to the exemption from registration afforded under
      Section 4(2) of the Securities Act of 1933, as amended (the “Act”).




Of
      the
      2,885,056 shares placed in escrow, 1,635,056 shares are subject to forfeiture
      if
      Eric Bauman, the founder of eBaum’s, is not continually employed by EBW
      Acquisition, Inc. (“EBW”), the Company’s wholly-owned subsidiary for 36 months
      following the closing date of the acquisition. The remaining shares of the
      Company’s common stock will be released from escrow to eBaum’s in 23 monthly
      installments commencing on December 31, 2007. Such 1,250,000 shares of common
      stock are subject to the following adjustment 10 business days following
      the closing date of the acquisition:




·
            if
                the quotient of (a) $5,000,000 divided by (b) the average closing
                price of
                our common stock for the 10 trading days following the closing is
                less
                than 1,250,000, then the Company will be required to issue to the
                escrow
                agent a number of additional shares of its common stock equal to
                the
                excess of such quotient over 1,250,000;
                and




·
            if
                the result of such calculation equals more than 1,250,000, then LaSalle
                Bank will release to the Company that number of shares that is equal
                to
                the difference between (i) 1,250,000 shares and (ii) the number of
                shares
                determined as a result of the calculation set forth
                above.




The
      Company may also be required to pay eBaum’s “earn out” payments of up to $30
      million, in a combination of cash and shares of its common stock, subject to
      the
      achievement of certain performance milestones. Pursuant to a Subordination
      Agreement, dated October 31, 2007, by and among the Company, eBaum’s and YA
      Global Investments, L.P. (“YA Global”), at any time when the outstanding
      principal amount of the Company’s 7.5% Senior Secured Convertible Debentures due
      October 31, 2010 (the “YA Convertible Debentures”) exceeds $8,000,000, the
      Company shall not make any cash “earn out” payments unless the Company has met
      certain cash flow tests and redeems an amount of the YA Convertible Debentures
      equal to the cash “earn out” payment.




25




At
      the
      closing of the acquisition, the Company entered into a registration rights
      agreement (the “eBaum’s Registration Rights Agreement”) with eBaum’s whereby the
      Company agreed to file one or more registration statements covering all shares
      of its common stock issued to eBaum’s pursuant to the acquisition, except for
      the 1,635,056 shares of common stock subject to forfeiture. The Company is
      required to file a registration statement within (i) 60 days following the
      date
      that any shares of its common stock are payable pursuant to any “earn out”
payment, (ii) 60 days following each date upon which the Company is required
      to
      deliver the first eleven installments of the shares of common stock issued
      as
      part of the purchase price and (iii) prior to each date upon which the Company
      is required to issue the final twelve installments of the shares of common
      stock
      issued as part of the purchase price. The Company is required to use its best
      efforts to cause any registration statement filed pursuant to the eBaum’s
      Registration Rights Agreement to be declared effective as soon as possible.
      Should the Company be unable to obtain an effective registration statement
      for
      these shares within 365 days, eBaum’s has the ability to require the Company to
      repurchase the shares at the greater of the price at which they were issued
      or a
      twenty day moving average market price calculated as of the time of the default
      notice from eBaums.




*The
      YA Convertible Debentures*




On
      October 31, 2007, the Company sold $23 million principle amount of YA
      Convertible Debentures to YA Global pursuant to a Securities Purchase Agreement,
      dated August 2, 2007, by and between the Company and YA Global. The YA
      Debentures, which are due on October 31, 2010, carry a 7.5% interest coupon.
      The
      Company is required to repay principal and interest under the YA Convertible
      Debentures monthly, commencing on March 3, 2008, in cash or in shares of the
      Company’s common stock, at the Company’s option. On each monthly payment date,
      the Company will pay an aggregate of $638,889 of principal, plus accrued
      interest, by converting such amount into shares of the Company’s common stock at
      the lesser of (i) $1.90 per share or (ii) the price that shall equal 90% of
      the
      lowest volume weighted average price of the Company’s common stock during the 10
      consecutive trading days immediately preceding the payment date.




At
      its
      option, subject to certain conditions, the Company may make any monthly payment
      of principal or interest in shares of its common stock, cash or a combination
      of
      cash and shares of its common stock. If the Company elects to pay any part
      of
      the monthly payment of principal in cash, then it will be required to pay a
      redemption premium equal to 10% of the principal amount being paid in
      cash.




The
      Company will have the right to redeem, upon at least thirty days prior written
      notice to YA Global, all or any portion of the outstanding principal amount
      of
      the YA Convertible Debentures prior to the maturity date. If the Company elects
      to redeem principal, the Company will be required to pay in cash an amount
      equal
      to the principal being redeemed plus a redemption premium equal to 10% of the
      principal amount being redeemed. Until the Company has paid the redemption
      price
      in full, YA Global may, at its option, convert the principal amount to be
      redeemed into shares of the Company’s common stock at a conversion price of
      $1.90 per share.




YA
      Global
      may convert any portion of the outstanding principal amount of the YA
      Convertible Debentures and accrued, but unpaid interest into shares of the
      Company’s common stock at a conversion price of $1.90 per share. However, the
      Company will not effect and the holder will have no right to convert any portion
      of the YA Convertible Debentures, if as a result of such conversion YA Global
      would beneficially own in excess of 9.99% of the Company’s common stock. This
      provision may be waived by YA Global upon 65 days written notice to the Company.




26




In
      the
      event that the Company issues shares of its common stock, except for certain
      excluded issuances, at a lower price than the conversion price of $1.90 per
      share (or such conversion price then in effect), the conversion price will
      be
      reduced to such lower price, and therefore, the number of shares issuable upon
      conversion of the YA Convertible Debentures will increase proportionately.




Events
      of
      default under the convertible debentures include, but are not limited to, the
      following:




·
            failure
                to pay principal, interest or other amounts, if any, when due;




·
            any
                form of bankruptcy or insolvency proceeding instituted by or against
                us or
                any of the Company’s subsidiaries that is not dismissed in 61 days;




·
            the
                Company is unable to pay its debts as they come due;




·
            a
                default occurring under any other debenture, mortgage, credit agreement,
                indenture or other instrument representing or securing indebtedness
                in an
                amount exceeding $250,000, other than certain excluded indebtedness,
                to
                which the Company or any of the Company’s subsidiaries are bound;




·
            the
                Company’s common stock is delisted from the Nasdaq Capital Market and the
                Company is not listed or quoted an another stock exchange or trading
                market within five days of such
                delisting;




·
            the
                Company fails to file or maintain the effectiveness of a registration
                statement covering the resale of the shares of common stock underlying
                the
                convertible debentures and the related warrants;
                and




·
            the
                Company or any of its current senior executive officers or directors
                shall
                be indicted, convicted or have a judgment entered against it (including
                in
                a settled action) for any intentional or willful violation of federal
                securities laws, including without limitation, in any administrative
                proceeding or Federal District Court action brought by the Commission
                or
                applicable criminal authorities.




If
      an
      event of default were to occur, payment of the entire principal amount of the
      YA
      Convertible Debenture could be accelerated and become immediately due and
      payable. In addition, if an event of default were to occur, YA Global may elect
      to convert the entire principal amount into shares of the Company’s common stock
      at a default conversion price equal to the lesser of (i) the conversion price
      of
      $1.90 per share or (ii) the price that shall equal 75% of the lowest volume
      weighted average price of the Company’s common stock during the 10 consecutive
      trading days immediately preceding the conversion date. Furthermore, under
      certain circumstances, if an event of default were to occur, then eBaum’s will
      have the option to purchase the YA Convertible Debentures from YA Global at
      the
      face value of the YA Convertible Debentures.




In
      connection with the sale of the YA Convertible Debentures to YA Global, the
      Company entered into a security agreement with YA Global whereby the Company
      granted YA Global a continuing, first priority security interest in all of
      the
      Company’s assets and the assets of its subsidiaries, including without
      limitation the assets of EBW. The Company has also pledged the shares of each
      of
      its subsidiaries, including EBW, as part of this transaction.





The
      YA
      Convertible Debentures were issued pursuant to the exemption from registration
      afforded under Section 4(2) of the Act.




27





*The
      Junior Convertible Debentures*





In
      addition, on October 31, 2007, the Company sold $5,124,170 aggregate principal
      amount of junior secured convertible debentures (the “Junior Convertible
      Debentures”) to certain accredited investors (the “Junior Purchasers”),
      including Carl Page, our chief technology officer and a member of our board
      of
      directors, and Eric Bauman, the founder of eBaum’s. The Junior Convertible
      Debentures have substantially similar terms as the YA Convertible Debentures,
      except that the Junior Convertible Debentures are subordinated in right of
      payment to both the YA Convertible Debentures and eBaum’s rights to receive any
“earn-out” payments under the Asset Purchase Agreement, and the security
      interest of the Junior Purchasers is subordinated the security interest of
      YA
      Global in all of the Company’s assets and the security interest of eBaum’s in
      EBW, all pursuant to a secondary subordination agreement, dated October 31,
      2007, by and among the Company, YA Global, the Junior Purchasers and eBaum’s
      (the “Secondary Subordination Agreement”). The Junior Convertible Debentures
      also differ from the YA Convertible Debentures in that the initial monthly
      principal and interest installment payment on the Junior Convertible Debentures
      is due on March 13, 2008, and the maturity date of the Junior Convertible
      Debentures is November 10, 2010.




The
      Junior Convertible Debentures were issued pursuant to the exemption from
      registration afforded under Section 4(2) of the Act.




*Common
      Stock and Common Stock Warrants Issued to YA Global and the Junior Convertible
      Debenture Holders*




In
      connection with the sale of the YA Convertible Debentures, the Company issued
      to
      YA Global (i) 680,000 shares of its common stock, (ii) warrants
      to purchase 3,026,316 shares of the Company’s common stock at an exercise price
      of $1.90 per share and (iii) warrants to purchase 2,751,196 shares of its common
      stock at an exercise price of $2.09 per share .
      Key
      provisions of the warrants include the following:




·
            the
                warrants expire on October 31,
                2012;




·
            if
                at the time that a warrant is exercised (i) the shares of common
                stock
                issuable upon exercise of the warrant are not covered by an effective
                registration or (ii) an event of default has occurred under the YA
                Convertible Debentures, then YA Global may exercise such warrant on a
                cashless basis in lieu of paying
                cash;




·
            in
                the event that the Company issues shares of its common stock, except
                for
                certain excluded issuances, at a lower price than the exercise price
                of
                the warrants, the exercise price of the warrants will be reduced
                to such
                lower price and the number of shares issuable upon exercise of the
                warrants will increase
                proportionately.




In
      connection with the Sale of the Junior Convertible Debentures, the Company
      issued to the Junior Purchasers (i) warrants to purchase an aggregate of 671,053
      shares of the Company’s common stock at an exercise price of $1.90 per share and
      (ii) warrants to purchase an aggregate of 610,048 shares of its common stock
      at
      an exercise price of $2.09 per share. The terms and provisions of the warrants
      issued to the Purchasers are substantially similar to the terms of the warrants
      issued to YA Global.




On
      October 31, 2007, the Company entered into separate registration rights
      agreements with each of YA Global and the Junior Purchasers. The Company has
      agreed to file resale registration statements with the Securities Exchange
      Commission covering all shares of its common stock issuable upon conversion
      of
      the YA Convertible Debentures and the Junior Convertible Debentures and all
      shares issuable upon exercise of the warrants. The Company must file the initial
      registration statement on or before November 30, 2007. Should the Company
      be unable to meet the deadlines described above or effectiveness and maintenance
      requirements as defined in the agreement, it could be required to pay liquidated
      damages to each of YA Global and the Junior Purchasers in the amount of 1%
      of
      the purchase price of YA Convertible Debentures and Junior Convertible
      Debentures per month, up to a maximum of 6%, payable in either stock
      or cash at the Company’s option.




28




The
      Company has also agreed to use its best efforts to have such registration
      statement declared effective by February 28, 2008.





Chicago
      Investment Group (“CIG”) acted as placement agent with respect to the offering
      and received a cash fee equal to $73,500 (7% of the gross proceeds received
      from
      investors introduced to the Company by CIG) with respect to the Junior
      Convertible Debentures and warrants to purchase an aggregate of approximately
      37,000 shares of our common stock (7% of the gross proceeds received from
      investors introduced to us by CIG).




The
      shares of common stock and warrants that were issued to YA Global and the Junior
      Purchasers were issued pursuant to the exemption from registration afforded
      under Section 4(2) of the Act.




The
      Company received aggregate gross proceeds of $28,144,290 from the sale of the
      YA
      Convertible Debentures, the Junior Convertible Debentures and the various
      warrants issued in connection therewith.




***Name
      Change to ZVUE Corporation from Handheld Entertainment,
      Inc.***





On
      October 31, 2007, the Company amended its certificate of incorporation to change
      its name to “ZVUE Corporation” from “Handheld Entertainment, Inc.”




***Increase
      in Authorized Capital Shares*** ******





Pursuant
      to a contractual obligation contained in the Securities Purchase Agreement
      between the Company and YA Global, on October 30, 2007, the Company amended
      its
      certificate of incorporation to increase the number of authorized shares of
      its
      common stock to 75 million shares.




***Increase
      in number of shares reserved under the 2007 Incentive Stock Plan***





On
      October 31, 2007, our stockholders approved the increase in the number of shares
      reserved under the 2007 Incentive Stock Plan to 3.5 million from 2.0 million.




***Issuance
      of Common Stock***





Subsequent
      to September 30, 2007, we granted 693,398 common shares for services to various
      employees including Jeff Oscodar, our CEO, and William Bush our CFO. Mr. Oscodar
      was granted 175,000 fully vested shares and Mr. Bush was granted 125,000 fully
      vested shares. The grants will be valued at the price per share on the day
      of
      the grant per share or an aggregate of approximately $1.8 million. We expect
      to
      record approximately $1.6 million of that expense in 2007 while the remaining
      amount will be recognized over the respective service periods.





***Advances
      on the $5M Line of Credit, Related Party***





Subsequent
      to September 30, 2007, we drew approximately $1 million of additional funds
      against the line of credit which we entered into with Carl Page. The line,
      which
      bears a 6% interest rate, is due and payable January 31, 2008.




29




***Issuance
      of Common Stock Options***





Subsequent
      to September 30, 2007, we granted 50,000 options to purchase our common stock
      for services to various employees. The grants will be valued at the price per
      share on the day of the grant per share or an aggregate of approximately
      $140,000. The expense will be recognized over the respective service
      periods.





***Warrants
      Activity***





As
      noted
      above, subsequent to September 30, 2007 and concurrent with the issuance of
      the
      convertible notes described above, we issued approximately 7.1 million, 5-year
      warrants expiring October 31, 2012 approximately half of which have an exercise
      price of $1.90 and approximately half with an exercise price of $2.09. We will
      recognize interest expense of approximately $19.9 million through the October
      31, and November 10, 2010 maturities of the related convertible notes.
      After accounting for that issuance, our outstanding warrants are as
      follows:




**Number
                of Warrants**
            
            
            **Average
                Exercise Price****Outstanding,
                September 30, 2007**
            
            
            4,197,139
            
            **$**
            **3.93**Granted
            
            
            7,101,610
            
            $
            2.00Exercised
            
            
            --
            
            
            --Expired
            
            
            **--**
            
            
            **--****Outstanding,
                November 14, 2007**
            
            
            **11,298,749**
            
            **$**
            **2.71**




**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:




•
      Overview, Trends and Business Development;


•
Forward
      Looking Statements;


•
Results
      of Operations;


•
      Liquidity and Capital Resources;


•
      Critical Accounting Policies; and


•
Factors
      That May Impact Future Operating Results.




**Overview,
      Trends and Business Development**





ZVUE
      Corporation (“we”, “us”, “our”, or “the Company”) is a Delaware corporation.





**Corporate
      History**





We
      were
      organized in the state of Nevada on February 3, 2003 as Vika Corp. On February
      8, 2006, we merged with and into a wholly-owned Delaware subsidiary, for the
      sole purpose of reincorporating in the state of Delaware from Nevada. On
      February 10, 2006, HHE Acquisition, Inc., our newly formed wholly-owned
      California subsidiary, merged (“the Merger”) with and into Handheld
      Entertainment, Inc. (“HHE”), a private California corporation. Upon closing of
      the Merger, Handheld Entertainment, Inc. became our wholly-owned subsidiary
      and
      we succeeded to Handheld Entertainment’ Inc.’s line of business as our sole line
      of business. In connection with the Merger, Handheld Entertainment, Inc changed
      its name to HHE Corp. and we changed our name to Handheld Entertainment, Inc.
      On
      October 31, 2007, we changed our name to ZVUE Corporation from Handheld
      Entertainment, Inc.




30




**Overview**





Our
      mission is to provide 18-35 year olds with video entertainment content on the
      screens that matter to them. Our library of video content comes to us from
      both
      our network of user-generated video sites, which house more than 850,000 videos
      that are created by users, and our commercial content providers who have
      contracted with us to provide us with 12,000 commercially produced videos.





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





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





In
      addition to our digital media business, we produce our own portable media
      devices which are sold in mass market distribution under our ZVUE brand. We
      manufacture products that are value priced and focus on price points at or
      below
      $99. Our ZVUE devices have been designed to be compatible with virtually all
      formats of content ranging from “digital rights management” protected commercial
      content to user-generated content all from our network of sites.




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





The
      ZVUE
      260 player is currently available at WalMart.com and we are in talks with
      retailers to expand its distribution. Our ZVUE Model 250 media player is sold
      in
      more than 2,200 Wal-Mart stores in the United States, InMotion stores, as well
      as retail store websites, including Amazon.com and WalMart.com.




**Recent
      Developments**





***Acquisition
      of eBaum’s World and the Sale of $28.1 Million of Convertible
      Notes***





On
      October 31, 2007, our wholly owned subsidiary, EBW Acquisition, Inc., acquired
      all of the business and assets of eBaum’s World, Inc., including without
      limitation, all of eBaum’s World’s right, title and interest in ebaumsworld.com.
      On October 15, 2007, our earnest money deposit consisting of 261,438 shares
      of
      our common stock and $350,000 was released to eBaum’s World. At the closing, we
      paid eBaum’s World $14,250,000 in cash and placed 2,885,056 shares of our common
      stock in escrow. On November 14, 2007, we will place an additional number of
      shares of our common stock into escrow, which will equal the difference between
      (x) the quotient of $5,000,000 divided by the average closing price of our
      common stock for the 10 trading days following the closing date and (y)
      1,250,000. Of such shares held in escrow, 1,635,056 shares are subject to
      forfeiture if Eric Bauman, the founder of eBaum’s World, is not continually
      employed by EBW Acquisition for 36 months following the closing date. The
      remaining shares of common stock will be released from escrow in 23 equal
      monthly installments commencing on December 31, 2007. We may also be required
      to
      pay eBaum’s World “earn out” payments of up to $30 million in a combination of
      cash and shares of our common stock, subject to achievement of certain
      performance milestones.




31




We
      entered into a registration rights agreement with eBaum’s World whereby we
      agreed to register all shares of common stock issued in connection with the
      acquisition, except for the 1,635,056 shares subject to forfeiture.




In
      order
      to finance the cash portion of the purchase price of the assets and to provide
      working capital, on October 31, 2007, we sold $23 million principal amount
      of
      Senior Secured Convertible Debentures to YA Global Investments, L.P. pursuant
      to
      a Securities Purchase Agreement, dated August 2, 2007, by and between YA Global
      Investments and us. In connection with the sale of the Senior Secured
      Convertible Debenture, we issued YA Global Investments (i) 680,000 shares of
      our
      common stock, (ii) warrants to purchase 3,026,316 shares of our common stock
      at
      an exercise price of $1.90 per share and (iii) warrants to purchase 2,751,196
      shares of our common stock at an exercise price of $2.09 per share.




In
      addition, On October 31, 2007, we sold an aggregate of $5,124,170 principal
      amount of Junior Secured Convertible Debentures to certain accredited investors,
      including Eric Bauman, the founder of ebaumsworld.com, and Carl Page, our chief
      technology officer and a member of our board of directors. In connection with
      the sale of the Junior Secured Convertible Debentures, we issued the purchasers
      (i) warrants to purchase an aggregate of 671,053 shares of our common stock
      at
      an exercise price of $1.90 per share and (ii) warrants to purchase an aggregate
      of 610,048 shares of our common stock at an exercise price of $2.09 per
      share.




We
      received aggregate gross proceeds of $28,124,170 in connection with the sale
      of
      the Senior Secured Convertible Debentures and the Junior Secured Convertible
      Debentures. All shares of our common stock and other securities issued in
      connection with the acquisition and the related financing transactions were
      issued pursuant to the exemption from registration afforded by Section 4(2)
      of
      the Securities Act of 1933, as amended.




We
      entered into separate registration rights agreements with YA Global Investments,
      on the one hand, and the investors in the Junior Secured Convertible Debentures,
      on the other hand, to register the shares of common stock underlying the Senior
      Secured Convertible Debentures, the Junior Secured Convertible Debentures and
      the various warrants issued in connection therewith.




The
      foregoing does not purport to be complete summary of the terms of the
      acquisition or the related financing transactions and reference is made to
      our
      Current Report on form 8-K, filed with the Securities and Exchange Commission
      on
      November 5, 2007, and our definitive Notice of Consent Solicitation and
      Consent Solicitation Statement filed with the Securities and Exchange Commission
      on October 18, 2007.




32


**Forward
      Looking Statements**







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




Generally
      accepted accounting principles require us to make certain estimates, judgments
      and assumptions. We believe that the estimates, judgments and assumptions upon
      which we rely are reasonable based upon information available to us at the
      time
      that these estimates, judgments and assumptions are made. These estimates,
      judgments and assumptions can affect the reported amounts of assets and
      liabilities as of the date of our condensed consolidated financial statements
      as
      well as the reported amounts of revenues and expenses during the periods
      presented. Our condensed 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, 2007 and 2006 in absolute dollars and as a percentage
      of sales. It also details the changes from the prior fiscal year in absolute
      dollars and in percentages.





33




Three
                  Months Ended September 30,
              
              
              
              
              
              
              
              
              Nine
                  Months Ended September 30,2007
              
              
              
              
              
              2006
              
              
              
              
              
              **Change
                  from**
                **previous
                  year**
              
              
              2007
              
              
              
              
              
              2006
              
              
              
              
              
              **Change
                  from previous year****$**
              
              
              **As
                  % of sales**
              
              
              **$**
              
              
              **As
                  % of sales**
              
              
              **$
                  Increase / (Decrease)**
              
              
              **%**
              
              
              **$**
              
              
              **As
                  % of sales**
              
              
              **$**
              
              
              **As
                  % of sales**
              
              
              **$
                  Increase / (Decrease)**
              
              
              **%**Product
                  sales, net
              
              $
              510,587
              
              
              83
              %
              $
              123,104
              
              
              100
              %
              $
              387,483
              
              
              315
              %
              $
              1,079,383
              
              
              81
              %
              $
              1,299,125
              
              
              100
              %
              $
              (219,742
              )
              
              -17
              %Service
                  revenue
              
              
              106,348
              
              
              17
              %
              
              -
              
              
              0
              %
              
              106,348
              
              
              n/a
              
              
              246,328
              
              
              19
              %
              
              -
              
              
              0
              %
              
              246,328
              
              
              n/aNet
                  Revenue
              
              
              616,935
              
              
              100
              %
              
              123,104
              
              
              100
              %
              
              493,831
              
              
              401
              %
              
              1,325,711
              
              
              100
              %
              
              1,299,125
              
              
              100
              %
              
              26,586
              
              
              2
              %Cost
                  of product sales
              
              
              831,597
              
              
              135
              %
              
              396,800
              
              
              322
              %
              
              434,797
              
              
              110
              %
              
              1,540,246
              
              
              116
              %
              
              1,462,495
              
              
              113
              %
              
              77,751
              
              
              5
              %Cost
                  of service revenues
              
              
              18,811
              
              
              3
              %
              
              -
              
              
              0
              %
              
              18,811
              
              
              n/a
              
              
              18,811
              
              
              1
              %
              
              -
              
              
              0
              %
              
              18,811
              
              
              n/aCost
                  of revenues
              
              
              850,408
              
              
              138
              %
              
              396,800
              
              
              322
              %
              
              453,608
              
              
              114
              %
              
              1,559,057
              
              
              118
              %
              
              1,462,495
              
              
              113
              %
              
              96,562
              
              
              7
              %**Gross
                  margin**
              
              
              **(233,473**
              **)**
              
              **-38**
              **%**
              
              **(273,696**
              **)**
              
              **-222**
              **%**
              
              40,223
              
              
              -15
              %
              
              **(233,346**
              **)**
              
              **-18**
              **%**
              
              **(163,370**
              **)**
              
              **-13**
              **%**
              
              (69,976
              )
              
              43
              %**Costs
                  and expenses**Sales
                  and marketing
              
              
              788,718
              
              
              128
              %
              
              937,116
              
              
              761
              %
              
              (148,398
              )
              
              -16
              %
              
              2,241,761
              
              
              169
              %
              
              2,432,624
              
              
              187
              %
              
              (190,863
              )
              
              -8
              %General
                  and administrative
              
              
              2,733,600
              
              
              443
              %
              
              1,581,570
              
              
              1285
              %
              
              1,152,030
              
              
              73
              %
              
              6,989,805
              
              
              527
              %
              
              4,677,927
              
              
              360
              %
              
              2,311,878
              
              
              49
              %Research
                  and development
              
              
              205,512
              
              
              33
              %
              
              596,322
              
              
              484
              %
              
              (390,810
              )
              
              -66
              %
              
              545,586
              
              
              41
              %
              
              1,557,075
              
              
              120
              %
              
              (1,011,489
              )
              
              -65
              %**Total
                  operating expenses**
              
              
              **3,727,830**
              
              
              **604**
              **%**
              
              **3,115,008**
              
              
              **2530**
              **%**
              
              **612,822**
              
              
              **20**
              **%**
              
              **9,777,152**
              
              
              **738**
              **%**
              
              **8,667,626**
              
              
              **667**
              **%**
              
              **1,109,526**
              
              
              **13**
              **%****Loss
                  from operations**
              
              
              **(3,961,303**
              **)**
              
              **-642**
              **%**
              
              **(3,388,704**
              **)**
              
              **-2753**
              **%**
              
              **(572,599**
              **)**
              
              **17**
              **%**
              
              **(10,010,498**
              **)**
              
              **-755**
              **%**
              
              **(8,830,996**
              **)**
              
              **-680**
              **%**
              
              **(1,179,502**
              **)**
              
              **13**
              **%****Other
                  income and (expense)**Interest
                  income
              
              
              4,774
              
              
              1
              %
              
              6,725
              
              
              5
              %
              
              (1,951
              )
              
              -29
              %
              
              65,031
              
              
              5
              %
              
              59,574
              
              
              5
              %
              
              5,457
              
              
              9
              %Interest
                  expense
              
              
              (231,937
              )
              
              -38
              %
              
              (1,334
              )
              
              -1
              %
              
              (230,603
              )
              
              17287
              %
              
              (273,653
              )
              
              -21
              %
              
              (67,066
              )
              
              -5
              %
              
              (206,587
              )
              
              308
              %Loss
                  on conversion of debt
              
              
              -
              
              
              0
              %
              
              -
              
              
              0
              %
              
              -
              
              
              n/a
              
              
              -
              
              
              0
              %
              
              (1,038,743
              )
              
              -80
              %
              
              1,038,743
              
              
              -100
              %**Total
                  other income (expense)**
              
              
              (227,163
              )
              
              -37
              %
              
              5,391
              
              
              4
              %
              
              (232,554
              )
              
              -4314
              %
              
              (208,622
              )
              
              -16
              %
              
              (1,046,235
              )
              
              -81
              %
              
              837,613
              
              
              -80
              %**Net
                  Loss**
              
              **$**
              **(4,188,466**
              **)**
              
              **-679**
              **%**
              **$**
              **(3,383,313**
              **)**
              
              **-2748**
              **%**
              **$**
              **(805,153**
              **)**
              
              **24**
              **%**
              **$**
              **(10,219,120**
              **)**
              
              **-771**
              **%**
              **$**
              **(9,877,231**
              **)**
              
              **-760**
              **%**
              **$**
              **(341,889**
              **)**
              
              **3**
              **%**




34


***Sales***





Sales
      were approximately $617,000 and $1.3 million during the three and nine months
      ended September 30, 2007 as compared to approximately $123,000 and $1.3 million
      during the comparable periods from 2006. Overall revenue for the three months
      ended September 30, 2007 increased 401% which was due to increases in hardware
      sales and the development of the content business. The 315% increase in revenue
      from product sales for third quarter ended September 30, 2007 is due to the
      new
      sales relationship with a major credit card issuer which is using the ZVUE
      250
      as part of its rewards program. The slight increase in total revenue of 2%
      for
      the nine months ended September 30, 2007 is primarily due to the development
      our
      on-line advertising sales business model which consists of revenues from the
      sale of banner and skyscraper ads through our network of humor based web sites.
      Those new revenues were offset by lower sales in Wal-Mart stores of the Model
      250 as compared to the ZVUE Model 200. The decline in sales to Wal-Mart was
      partially offset by a distribution arrangement with a new customer whereby
      the
      ZVUE Model 250 is being used as part of a rewards program for a major credit
      card issuer.





At
      September 30, 2007, Wal-Mart accounted for approximately 37% of the gross
      accounts receivable and represented approximately 10% and 33% of our revenues
      for the three and nine months ended September 30, 2007, respectively. 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. A new customer, which
      purchased the ZVUE Model 250 for its rewards program, accounted for accounted
      for approximately 44% of the gross accounts receivable and represented
      approximately 65% and 30% of our revenues for the three and nine months ended
      September 30, 2007, respectively. As a result, for the periods being reported,
      we were materially dependent upon Wal-Mart and this new 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 or our new customer,
      would have a material adverse effect on our results.





All
      of
      our sales to Wal-Mart and our new customer during 2007 are of our ZVUE Model
      250
      model while 2006 sales consisted primarily of the ZVUE Model 200. While we
      are
      currently selling the ZVUE Model 260 to walmart.com, there can be no assurance
      that the Wal-Mart retail stores will accept the Model 260 or 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
      Model 200 or 250. The failure of these events to occur would significantly
      impact our future sales.





Approximately
      99% of our sales for the three and nine months ended September 30, 2007 were
      to
      customers in the United States of America; the remaining percentage was
      principally to customers in Europe. This compares to approximately 100% and
      98%
      to customers in the United States of America for the three and nine months
      ended
      September 30, 2006.





***Cost
      of*** ***Revenues***





At
      September 30, 2007, cost of revenues for products sales was approximately
      $831,000 and $1.5 million for the three and nine month periods ended September
      30, 2007, respectively, as compared to approximately $400,000 and $1.5 million
      for the comparable periods from 2006. The increase in cost of revenues during
      the three months ended September 30, 2007 as compared to the prior year is
      primarily the result of the increase in unit sales of the ZVUE 250 product.
      The
      5% increase in cost of product sales for the nine months ended September 30,
      2007 are the result of increased distribution costs and the write down of ZVUE
      200 and 250 model inventory to its net realizable value. The ZVUE Model 250
      is
      near the end of its lifecycle, and as expected, sales have begun to diminish.
      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, 2007
      from Eastech were approximately $0.5 million and $1.2 million which compares
      to
      purchases of approximately $0.3 million and $2.3 million, respectively for
      the
      three and nine months ended September 30, 2006.




35




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




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




***Gross
      Margin*** ****





At
      September 30, 2007, gross margin was approximately ($233,000) and approximately
      ($233,000) for the three and nine month periods ended September 30, 2007,
      respectively. Gross margin was negative for the three and nine months ended
      September 30, 2007 primarily as a result of write offs related to new and
      returned inventory from the ZVUE Model 250. We have historically experienced
      a
      negative gross margin as a result of expenses related to the introduction and
      support 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*** ******





At
      September 30, 2007, sales and marketing expenses were approximately $789,000
      and
      $2.2 million for the three and nine month periods ended September 30, 2007,
      respectively, as compared to approximately $937,000 and $2.4 million for the
      comparable periods from 2006. Sales and marketing expenses consist primarily
      of
      salaries and benefits for sales and marketing personnel, commissions,
      advertising, printing and customer acquisition-related costs. These costs have
      declined in the three and nine months ended September 30, 2007 as compared
      to
      the same period from the previous year. This is directly related to cost
      reductions for the hardware component of our business partially offset by
      marketing investments in the content business. We have made marketing
      investments in personnel and promotional expenses related to the content
      business to accelerate the growth of this high margin component of our business
      strategy. We may increase marketing and development efforts in the future as
      our
      content business grow, or as new versions of the ZVUE PMP are
      introduced.




36




***General
      and Administrative Expenses***





At
      September 30, 2007, general and administrative expenses were approximately
      $2.7
      million and approximately $7.0 million for the three and nine month periods
      ended September 30, 2007, respectively, as compared to approximately $1.6
      million and approximately $4.7 million for the comparable periods from 2006.
      Our
      general and administrative expenses consist primarily of salaries and benefits
      for employees, amortization and depreciation expenses, fees to our professional
      advisors, 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 $885,000 and $1.5 million in the three and nine months ended
      September 30, 2007 as compared to approximately $677,000 and $1.6 million in
      the
      three and nine months ended September 30, 2006, respectively. We also include
      amortization expense related to the acquisition of our network of websites
      in
      general and administrative expense. In the three and nine months ended September
      30, 2007 those expenses were approximately $1.0 million and $2.7 million,
      respectively, as compared to $0 for both periods from the prior year. Excluding
      these non-cash charges general and administrative costs declined approximately
      6% and 7% for the three and nine months ended September 30, 2007 to
      approximately $849,000 and $2.8 million reflecting our implementation of costs
      controls and a reduction of personnel.





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





***Research
      and Development Expenses*** ******





Research
      and development expenses were approximately $206,000 and $546,000 during the
      three and nine months ended September 30, 2007 as compared to approximately
      $596,000 and $1.6 million during the three and nine months ended September
      30,
      2006, a decrease of approximately 66% and 65%, respectively. Our research and
      development expenses consist primarily of salaries and benefits for research
      and
      development employees and payments to independent contractors. The decrease
      in
      research and development expenses is primarily as a result of the elimination
      of
      development work on two proposed versions of the ZVUE product and our movement
      to a hardware model which utilizes low cost components which we do not need
      to
      do significant development work to integrate into our products.





We
      continue to closely monitor development expenses to ensure that we have maximum
      leverage while maintaining our ability to continually develop new products.
      While we expect to continue to make an investment in research and development
      we
      do not expect it to be a significant component of our cost structure. This
      change reflects our de-emphasis of basic development in the design and
      manufacture of our products.





***Interest
      income***





Interest
      income of approximately $5,000 and $65,000 for the three and nine months ended
      September 30, 2007 relate to deposits in our depository accounts as a result
      of
      funds generated by the private placement concluded in January 2007 and debt
      offering in June 2007. Interest income from three and nine months ended
      September 30, 2006 relates to cash balances resulting from the private placement
      concluded in February 2006.




37




***Interest
      expense***





Interest
      expense of approximately $232,000 and $274,000 for the three and nine months
      ended September 30, 2007 were directly related to amortization of the warrants
      issued as part of the June 2007 financing as well the interest payable on notes
      and other borrowings which we have entered into to fund our operations and
      acquisitions. The amortization of the warrants resulted in our recognition
      of
      approximately $181,000 in the three months ended September 30, 2007. These
      amounts compare to approximately $1,000 and $67,000 for the three and nine
      months ended September 30, 2006 which result from interest on borrowing which
      were subsequently converted to common stock.




***Gain/(Loss)
      on conversion of debt***





Starting
      in December 2003, Carl Page, a member of our board of directors and our Chief
      Technology Officer 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 Mr. Page pursuant to these notes. Pursuant to the terms
      of the Mr. Page’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 our common stock. We recognized
      a
      loss on conversion of $1,093,684.




In
      January and February 2006, we received $500,000 in a series of cash advances
      from Mr. Page. 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 Mr. Page 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 our common stock. In April 2006, we recognized
      a
      gain on conversion of $84,941.




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




**Liquidity
      and Capital Resources**





At
      September 30, 2007, we had a cash and cash equivalent balance of approximately
      $166,000 and negative working capital of approximately $4.2 million. Net cash
      used in operations was approximately $8.0 million for the nine months ended
      September 30, 2007 as compared to net cash used in operations of approximately
      $8.1 million for the nine month period ended September 30, 2006. For the nine
      months ended September 30, 2007, we used cash to fund our loss of approximately
      $10.2 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 $1.5 million and amortization expenses related to
      acquisitions of $2.7 million.





Net
      cash
      used in investing activities in the nine months ended September 30, 2007 was
      approximately $2.2 million as compared to net cash used in investing activities
      of approximately $443,000 for the nine month period ended September 30, 2006.
      For the nine months ended September 30, 2007, the primary use of the cash was
      to
      purchase our newly acquired subsidiary, Putfile, Ltd and the UnOriginal.co.uk
      website and acquisition costs associated with our proposed acquisition of
      eBaum’s World which included a $350,000 cash deposit (see Note 12) as well as
      some fixed assets, primarily computer equipment, to expand our content
      business.




38




Net
      cash
      provided by financing activities in the nine months ended September 30, 2007
      was
      approximately $6.8 million as compared to approximately $12.2 million for the
      nine month period ended September 30, 2006. The completion of the private
      placement in January 2007 resulted in gross proceeds to us of approximately
      $3.8
      million offset by approximately $89,000 in offering costs. The sale of common
      stock to Carl Page, our CTO, in May 2007, resulted in cash proceeds to us of
      approximately $250,000 while the sale of unsecured notes in June 2007 resulted
      in cash proceeds of approximately $1.4 million offset by approximately $82,000
      in offering costs. We additionally entered into an agreement with Mr. Page
      whereby he purchased notes from us under a line of credit bearing 6% interest.
      We received approximately $1.3 from the sale of these notes. For the nine months
      ended September 30, 2006, the completion of the private placement in February
      2006 resulted in gross proceeds to the company of approximately $7.6 million
      and
      a payment of approximately $297,000 in offering costs. The company also incurred
      cash expenses of approximately $546,000 as of September 30, 2006, related to
      the
      secondary offering which was completed in August 2006.





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. In addition
      to the financing concluded in conjunction with the eBaum’s World acquisition, we
      may seek additional equity and/or debt financing to sustain our growth strategy.
      We believe that based on our current cash position, the eBaums World financing,
      the recent Bridge Note financing, our borrowing capacity, and our assessment
      of
      how potential equity investors will view us, we will be able to continue
      operations at least through the end of 2007. However, 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.




**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.




39




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 record 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*** ******





*Product
      Sales*





Revenue
      from product sales is recognized when persuasive evidence of an arrangement
      exists (generally a purchase order), product has been shipped, the sale price
      is
      fixed and determinable, and collection of the resulting account is reasonably
      assured. 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.
      In 2006, we also sold our products directly to end-users via the Internet and
      we
      recorded revenue when the product was shipped, net of estimated
      returns.





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





*Service
      Revenues*





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




40




***Reserve
      for Sales Returns***





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







**Factors
      That May Impact Future Operating Results**





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




***Since
      Wal-Mart*** **and
      a new customer represented approximately 35% and 30% of our revenues foe the
      nine months ended September 30, 2007, respectively,, if they were no longer
      our
      customers, demanded different terms, or did not accept our future planned
      models, that would have a negative impact on our revenues.**




Wal-Mart
      and our new customer currently are, and for the foreseeable future are expected
      to remain, our largest customers. Wal-Mart represented approximately 35% of
      our
      revenues during 2007 and our new customer represented approximately 30% of
      our
      revenues during 2007. While we plan to aggressively expand our ad-based model
      to
      diminish hardware sales as a percentage of our total and market the ZVUE to
      other major retailers, we may not be successful in developing our content model
      and 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 and this new customer, which may not happen. We
      do
      not have any long term or supply agreement for the sale of our products to
      Wal-Mart and this new customer and our business plans are based upon estimates
      for orders from Wal-Mart and this new customer that could be inaccurate. In
      addition, having virtually all of our hardware business concentrated in two
      customers also entails the risk that such customers may demand price concessions
      and other terms that could prevent us from operating profitably, and could
      subject us to the risks affecting that customers business.





The
      majority of our sales to Wal-Mart, our largest customer during 2006, were of
      our
      ZVUE Model 200 and our MP3 player. We expect the majority of our orders shipped
      to Wal-Mart during 2007 to be of our ZVUE Model 250 as well as our MP3 player
      and while we are currently shipping our ZVUE Model 260 to WalMart.com there
      is
      no guarantee that the product will be accepted by the retail stores and 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 Model 200
      or
      250.





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.





***If
      the costs that advertisers are willing pay for internet advertising declines,
      revenues from our network of content websites, including ebaumsworld.com, will
      be negatively effected.***




We
      generate revenues from our network of content websites from the sale of
      advertising space. If the costs that advertisers are willing to pay for Internet
      advertising generally, or for content sharing websites in particular, declines
      the revenues and financial condition of our content business will be negatively
      effected.




41




***If
      our websites do not continue to attract unique visitors, then our ability to
      continue generating advertising revenue may be
      impaired.***




Our
      ability to generate advertising and other revenues is predicated on our ability
      to attract traffic to our network of websites. Historically, we have been able
      to increase traffic to our websites by offering user-generated content that
      attracts unique visitors. Due to increased offerings of, and competition among,
      content-sharing websites, it may be more difficult for us to continue to attract
      and increase the number of unique viewers to our websites. It is also possible
      that users may not continue to submit the same quality and quantity of content
      as historically provided. If traffic to our network of websites declines, then
      our ability to generate revenues will be impaired.





***If
      consumers do not continue to visit our websites, our revenues may decline and
      we
      may be forced to revise our business plan.***




The
      success of our business is largely dependent on the continued demand for, and
      growth of, user-generated web content, flash games, jokes and other related
      content and acceptance and use of our current and intended product and service
      offerings by consumers. To a certain extent, these factors are out of our
      control. In the event that the popularity of viewing user-generated web content
      decreases or the growth of this industry slows, our revenues may decline and
      we
      may be forced to significantly revise our business operations.





***Changes
      in laws governing the Internet could prohibit or impair our ability to conduct
      our user-generated content business or subject us to burdensome
      regulation.***




Our
      online user-generated content business is not currently subject to direct
      regulation by any governmental agency, other than such laws as are applicable
      to
      similar businesses in general. In the future, federal, state, local and/or
      foreign governments may enact legislation or approve regulations that prohibit
      or impair our ability to continue to obtain content in our current manner and/or
      offer our services and products in their current format or at all. Any future
      governmental regulation may have a detrimental effect on our user-generated
      content business, overall operations and financial results and us to
      unanticipated costs.





***We
      may be subject to intellectual property rights claims, which are costly to
      defend and could require payment of damages.***




We
      may
      have copyright claims filed against us by third parties alleging that certain
      content available on our websites infringe their rights. Adverse results in
      these lawsuits may include awards of substantial monetary damages, costly
      royalty or licensing agreements or orders preventing us from offering certain
      functionalities, and may also result in a change in our business practices,
      which could result in a loss of revenue or otherwise harm our business. In
      addition, any time one of our websites links to or hosts material in which
      others allegedly own copyrights, we face the risk of being sued for copyright
      infringement or related claims. Because our online user-generated content
      business comprises a significant part of our overall operations, the risk of
      harm from such lawsuits could be substantial.





***Our
      online user-generated content business faces intense competition from other
      user
      generated content sharing websites.***




While
      we
      are currently aware of other websites that offer products and/or services
      similar to those offered by us (i.e., YouTube.com), there may also exist, or
      may
      in the future be developed, any number of additional content sharing websites
      that offer content, products and/or services similar to those offered by us.
      It
      is possible that other businesses in the industry will have greater capital,
      marketing and other resources than we do. There can be no assurances that the
      websites already offering content, products and/or services similar to those
      offered by us, or other businesses developing such products and/or services,
      will not offer such products and/or services in a more favorable format or
      with
      greater success than us.





42




**Risks
      Related to our Common Stock**





***We
      incurred $28,124,170 of indebtedness to finance the acquisition of
      ebaumsworld.com and for working capital purposes, which increased our
      liabilities and exposes us to greater risks.***




We
      incurred $28,124,170 of indebtedness to finance the acquisition of
      ebaumsworld.com by selling $23 million principal amount of Senior Secured
      Convertible Debentures and warrants to YA Global Investments and $5,124,170
      principal amount of Junior Secured Convertible Debentures and warrants to other
      purchasers, including Eric Bauman, the founder of ebaumsworld.com, and Carl
      Page, our chief technology officer and a member of our board of directors.
      The
      terms of the Senior Secured Convertible Debentures and the Junior Secured
      Convertible Debentures will contain certain restrictions including but not
      limited to the following:




·
            we
                may not consummate any merger, reorganization or sale of all or
                substantially all of our assets;




·
            we
                and our subsidiaries may not enter into, create, incur or assume
                any
                indebtedness of any kind that is senior in any respect to our obligations
                under the convertible debentures;
                and




·
            repay,
                repurchase or otherwise acquire shares of our common stock or other
                equity
                securities.




In
      addition, the Senior Secured Convertible Debentures, the Junior Secured
      Convertible Debentures and the related warrants contain certain anti-dilution
      protections that may discourage us from issuing shares of our common stock
      at a
      price per share below the conversion price of the convertible debentures or
      the
      exercise price of the warrants. In the event that we issue shares of our common
      stock, except for certain excluded issuances, at a lower price than the
      conversion price of the convertible debentures, the conversion price will be
      reduced to such lower price, and therefore, the number of shares issuable upon
      conversion of the convertible debentures will increase proportionately.
      Similarly, in the event that we issue shares of our common stock, except for
      certain excluded issuances, at a lower price than the exercise price of the
      warrants, the exercise price of the warrants will be reduced to such lower
      price
      and the number of shares issuable upon exercise of the warrants will increase
      proportionately. Any of the foregoing could result in substantial dilution
      to
      our stockholders, may limit our ability to raise additional capital through
      the
      issuance of debt or equity securities or enter into other transactions that
      would be advantageous to us, and could cause the price of our common stock
      to
      decline.





***We
      may have insufficient cash to repay our obligations under the Senior Secured
      Convertible Debentures and/or the Junior Secured Convertible Debentures, which
      could have a material adverse effect on our ability to operate our
      business.***




Under
      the
      terms of the Senior Secured Convertible Debentures issued to YA Global
      Investments, we will be required to pay interest at a rate of 7.5% per annum
      and
      to pay $638,889 of principal on the first day of each calendar month commencing
      on March 3, 2008, by converting such amount of principal and interest into
      shares of our common stock or by paying the monthly installment of principal
      plus a premium equal to 10% of the principal amount to be paid at our option.
      Principal and interest on the Junior Secured Convertible Debentures will be
      payable on the same terms except that the initial monthly payment of principal
      and interest on the Junior Secured Convertible Debentures will commence on
      March
      13, 2008. If we fail to satisfy certain equity conditions on an ongoing basis,
      then we may be forced to pay these monthly installments in cash. These equity
      conditions include, but are not limited to, the following:




43




·
            there
                is an effective registration statement covering the resale of the
                shares
                of common stock underlying the convertible
                debentures;




·
            trading
                of our common stock on the Nasdaq Capital Market has not been suspended
                nor shall delisting or suspension by the Nasdaq Capital Market be
                pending
                or threatened; and




·
            timely
                delivery of shares of our common stock upon conversion of the convertible
                debentures.




If
      we do
      not meet these conditions, we will be required to pay the monthly installment
      of
      principal plus 10% premium in cash, which would most likely come out of our
      working capital. Since we rely on our working capital for our day-to-day
      operations, failure to satisfy the equity conditions would have a material
      adverse effect on our ability to continue operating our business and we may
      be
      forced to scale back our operations.





***The
      number of shares of our common stock that we are required issue under the Senior
      Secured Convertible Debentures and the Junior Secured Convertible Debentures
      will depend in part on market prices for shares of our common stock, which
      could
      result in the issuance of a large number of shares of our common
      stock.***




Under
      the
      terms of the Senior Secured Convertible Debentures and the Junior Secured
      Convertible Debentures, we may make monthly payments of principal and interest
      in shares of our common stock at a conversion price equal to the lesser of
      (i)
      $1.90 per share or (ii) the price that shall equal 90% of the lowest volume
      weighted average price of our common stock during the 10 consecutive trading
      days immediately preceding the payment date. Therefore, the number of shares
      of
      common stock that we will be required to issue will depend on the market prices
      of our common stock for the 10 trading days prior to the payment date. To the
      extent that the lowest volume weighted average price of our common stock during
      the 10 consecutive trading days immediately preceding the payment date is less
      than $1.90 per share, the number of shares that we will be required to issue
      will be inversely proportional to such volume weighted average price. If the
      market price of our common stock declines during the 10 trading-day period,
      then
      we will be required to issue more shares of our common stock, which could lead
      to greater dilution of existing stockholders’ percentage of ownership and voting
      power and lead to declines in the price of our common stock.





***If
      an event of default occurs under the Senior Secured Convertible Debentures
      and/or the Junior Secured Convertible Debentures it could result in a material
      adverse effect on our business, operating results and financial condition,
      or
      the loss of our assets as YA Global Investments will hold a first priority
      security interest, and the holders of the Junior Secured Convertible Debentures
      will have a subordinate security interest, in all of our assets and the
      assets of our subsidiaries.***




Events
      of
      default under the Senior Secured Convertible Debentures and the Junior Secured
      Convertible Debentures include, but are not limited to, the
      following:




·
            failure
                to pay principal, interest or other amounts, if any, when
                due;




·
            any
                form of bankruptcy or insolvency proceeding instituted by or against
                us or
                any of our subsidiaries that is not dismissed in 61
                days;




·
            we
                are unable to our pay debts as they come
                due;




·
            a
                default occurring under any other debenture, mortgage, credit agreement,
                indenture or other instrument representing or securing indebtedness
                in an
                amount exceeding $250,000, other than certain excluded indebtedness,
                to
                which we or any of our subsidiaries are
                bound;




44




·
            our
                common stock is delisted from the Nasdaq Capital Market and we are
                not
                listed or quoted an another stock exchange or trading market within
                five
                days of such delisting;




·
            we
                or any of our subsidiaries is party to a change of
                control;




·
            we
                fail to file or maintain the effectiveness of a registration statement
                covering the resale of the shares of common stock underlying the
                convertible debentures and the related
                warrants;




·
            if
                we are unable to cure any failure to deliver shares of our common
                stock
                upon receipt of a conversion notice within 7 days of such conversion
                failure;




·
            failure
                to pay in cash certain liquidated damages resulting from a conversion
                failure; and




·
            failure
                to observe or perform any other covenant or agreement with the purchasers
                of the convertible debentures that is not cured within the time permitted
                by such covenant or agreement.




If
      an
      event of default were to occur, payment of the entire principal amount could
      be
      accelerated and become immediately due and payable. The cash that we may be
      required to pay would most likely come out of our working capital, which may
      be
      insufficient to repay the obligation. In such event, we may lose some or all
      of
      our assets as YA Global Investments will have a first priority security
      interest, and the purchasers of the Junior Secured Convertible Debentures will
      have a subordinate security interest, in all of our assets and the assets
      of subsidiaries, including without limitation the assets associated with
      ebaumsworld.com. We may also be required to file for bankruptcy, sell assets,
      or
      cease operations, any of which would put our company, our investors and the
      value of our common stock, at significant risk.




In
      addition, if an event default were to occur, the holders of both the Senior
      Secured Convertible Debentures and the Junior Secured Convertible Debentures
      may
      elect to convert the entire principal amount into shares of our common stock
      at
      a default conversion price, which may be at a significant discount to the market
      price of our common stock at the time of conversion. This could result in
      substantial dilution to our existing stockholders and may negatively impact
      the
      market price of our common stock.




**Item
      3- Controls and Procedures**





We
      carried out an evaluation, under the supervision and with the participation
      of
      our management, including our chief executive officer and chief financial
      officer, of the effectiveness of the design and operation of our disclosure
      controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
      the
      Securities Exchange Act of 1934, as amended (“the Exchange Act”). Disclosure
      controls and procedures include, without limitation, controls and procedures
      designed to ensure that information required to be disclosed by an issuer in
      the
      reports that it files or submits under the Exchange Act is accumulated and
      communicated to the issuers management, including its principal executive and
      principal financial officers, or persons performing similar functions, as
      appropriate to allow timely decisions regarding required disclosure. Based
      upon
      our evaluation, our chief executive officer and chief financial officer
      concluded that our disclosure controls and procedures are effective, as of
      the
      end of the period covered by this report (September 30, 2007), in ensuring
      that
      material information that we are required to disclose in reports that we file
      or
      submit under the Exchange Act is recorded, processed, summarized and reported
      within the time periods specified in the SEC rules and forms. There were no
      changes in our internal control over financial reporting during the nine month
      period ended September 30, 2007 that have materially affected, or are reasonably
      likely to materially affect, our internal control over financial
      reporting.





45




**PART
      II - OTHER INFORMATION**







**Item
      4 - Submission of Matters to a Vote of Security Holders**





On
      May
      14, 2007, we filed a Definitive Proxy Statement on Schedule 14A with the
      Securities and Exchange Commission in connection with the solicitation of
      proxies by our board of directors for use at the annual meeting of our
      stockholders.





The
      annual meeting of our stockholders of ZVUE was held on June 12, 2007 and the
      following proposals were approved by the shareholders:





Proposal
      1: The election of seven directors for a term of one year:





**Name**
            
            **Position**
            
            **Director
                Since**
            
            **Votes
                For**
            
            **Votes
                Against**
            
            **Abstentions**
            
            **%
                in Favor**William
                Keating
            
            
            Chairman
                of the Board of Directors
            
            
            2006
            
            
            6,090,946
            
            
            2,093,417
            
            
            --
            
            
            69.7
            %Jeffrey
                Oscodar
            
            
            Director,
                President and Chief Executive Officer
            
            
            2006
            
            
            8,410,774
            
            
            333,589
            
            
            --
            
            
            96.2
            %Geoffrey
                Mulligan
            
            
            Director
            
            
            2006
            
            
            8,626,554
            
            
            117,809
            
            
            --
            
            
            98.7
            %Carl
                Page
            
            
            Director
                and Chief Technical Officer
            
            
            2006
            
            
            8,412,751
            
            
            331,612
            
            
            --
            
            
            96.2
            %David
                Hadley
            
            
            Director
            
            
            2006
            
            
            8,626,554
            
            
            117,809
            
            
            --
            
            
            98.7
            %Carl
                Goldfischer, M.D.
            
            
            Director
            
            
            2006
            
            
            8,624,577
            
            
            119,786
            
            
            --
            
            
            98.6
            %Robert
                Austrian
            
            
            Director
            
            
            2007
            
            
            8,624,577
            
            
            119,786
            
            
            -
            
            
            98.6
            %





Proposal
      2: To
      ratify
      the appointment of Salberg & Company, P.A. as the Company’s independent
      registered public accounting firm for the year ending December 31, 2007. This
      proposal was approved according to the votes as cast below:





§
            For:8,661,394
                (a total of 99.1% in favor)


§
            Against:64,761


§
            Abstain:18,
                208





Proposal
      3: The
      approval of the 2007 Incentive Stock Plan. This proposal was approved according
      to the votes as cast below:





§
            For:8,424,488
                (a total of 96.3% in favor)


§
            Against:269,879


§
            Abstain:49,996




46




**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.




**ZVUE
                CORPORATION****By:
                /s/ Jeff Oscodar**
              Jeff
                Oscodar
              Director,
                Chief Executive Officer & President (Principal Executive
                Officer)**By:
                /s/ William J. Bush**
              William
                J. Bush
              Chief
                Financial Officer (Principal Financial and Accounting
                Officer)**Date: November 14,
              2007**




47




**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




48