`UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington D.C. 20549


                                  FORM 10-QSB/A



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

                  For the quarterly period ended MARCH 31, 2006
                                                 --------------


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

               For the transition period from: _______ to _______

                        Commission File Number 333-124421



                          HANDHELD ENTERTAINMENT, INC.
                          ----------------------------
              (Exact name of Small business issuer in its charter)



-----------------------------------------------------------------------------------------------------------------------------------

                                    DELAWARE                                                         98-0430675
         (State or other jurisdiction of incorporation or organization)                 (I.R.S. Employer Identification No.)

             539 BRYANT STREET SUITE 403, SAN FRANCISCO, CALIFORNIA                                    94107
                    (Address of principal executive offices)                                         (Zip code)

                                (415) 495 - 6470
                           Issuer's telephone number
-----------------------------------------------------------------------------------------------------------------------------------



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

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

As of June 30, 2006, 14,900,204 shares of Issuer's common stock, with $0.0001
par value, were outstanding.

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






                                EXPLANATORY NOTE

The purpose of this Form 10-QSB/A is to retroactively reflect in the comparative
December 31, 2005 balance sheet in the accompanying financial statements, the
conversion of the preferred shares of Handheld Entertainment, Inc. (privately
held California entity) into common stock just prior to the completion of the
reverse merger on February 10, 2006. This amends the quarterly report on Form
10-QSB of Handheld Entertainment, Inc. for the three months ended March 31,
2006, as filed with the Securities and Exchange Commission on May 15, 2006. All
share and per share data has been retroactively adjusted in the accompanying
financial statements to reflect the effect of the recapitalization. Except as
set forth in this Form 10-QSB/A, this Form 10-QSB/A does not reflect any events
that occurred after the filing of the Form 10-QSB or modify, amend or update any
disclosures contained in the Form 10-QSB to reflect any subsequent events.
Except as set forth in this Form 10-QSB/A, the Company is not making any changes
to, or updating any disclosures contained in, the Form 10-QSB.



                          HANDHELD ENTERTAINMENT, INC.

                                TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION                                                 3
--------------------------------------------------------------------------------


   ITEM 1-  CONDENSED FINANCIAL STATEMENTS (UNAUDITED)                         3
            CONDENSED BALANCE SHEETS (UNAUDITED)                               3
            CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)                     4
            CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)                     5
            NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)                6
   ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION          15
   ITEM 3- CONTROLS AND PROCEDURES                                            28


PART II - OTHER INFORMATION                                                   29
--------------------------------------------------------------------------------


   ITEM 6- EXHIBITS                                                           29


SIGNATURES                                                                    30
--------------------------------------------------------------------------------


INDEX TO EXHIBITS:                                                            31
--------------------------------------------------------------------------------

                                       2






                         PART I - FINANCIAL INFORMATION
                         ------------------------------

ITEM 1- CONDENSED FINANCIAL STATEMENTS
                          HANDHELD ENTERTAINMENT, INC.
                            CONDENSED BALANCE SHEETS



                                                                             MARCH 31,           DECEMBER 31,
                                                                               2005                 2005
                                                                          ----------------    -----------------
                                                                             UNAUDITED             RESTATED
                                                                                                (SEE NOTE 13)

ASSETS
   Current assets:
     Cash and cash equivalents, net                                            $5,016,399             $277,734
     Accounts Receivables, net                                                    596,691              902,492
     Inventories, net                                                              61,175              165,732
     Prepaid expenses and other current assets                                    104,062              118,354
                                                                            --------------        -------------
   TOTAL CURRENT ASSETS                                                         5,778,327            1,464,312

   Fixed assets, net                                                               38,661               27,813
   Capitalized software, net                                                        8,997               10,034
   Deposit and other non-current assets                                           280,100               12,394
                                                                            --------------        -------------
TOTAL ASSETS                                                                    6,106,085            1,514,553
                                                                            ==============        =============

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
     Current liabilities:
        Trade accounts payable                                                    831,948            1,184,086
        Accrued and other liabilities                                             686,581              705,675
        Trade accounts and other obligations payable to officers,
          affiliates and related parties                                          646,299            1,348,241
        Short term convertible and non-convertible notes and loans                 79,500              109,500
        Short term notes and loans, related party                                 500,000            3,741,049
                                                                            --------------        -------------
     TOTAL CURRENT LIABILITIES                                                  2,744,328            7,088,551

                                                                            --------------        -------------
   TOTAL LIABILITIES                                                            2,744,328            7,088,551
                                                                            --------------        -------------

SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, $0.0001 par value; 50,000,000 authorized;
14,267,787 issued and outstanding at March 31, 2006 and
5,283,954 issued and outstanding at December 31, 2005.                              1,429                  529
Additional paid in capital - Warrants and stock options                         2,656,888            2,482,073
Additional paid in capital - Deferred Compensation                               (177,950)                  --
Additional paid in capital                                                     15,641,682            2,792,669
Accumulated deficit                                                           (14,760,292)         (10,849,269)
                                                                            --------------        -------------
   TOTAL SHAREHOLDERS' EQUITY (DEFICIT)                                         3,361,757           (5,573,998)

                                                                            --------------        -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)                           $6,106,085           $1,514,553
                                                                            ==============        =============


                   See Notes to Condensed Financial Statements
                                       3




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



                                                                                 THREE MONTHS ENDED MARCH 31,
                                                                            ------------------------------------
                                                                                    2006                2005
                                                                            ----------------    ----------------
                                                                                                    RESTATED
                                                                                                  (SEE NOTE 13)

 Sales                                                                             $584,234             $46,223

 Cost of goods sold                                                                 600,704              43,383
                                                                               -------------         -----------
 GROSS MARGIN
                                                                                    (16,470)              2,840

 COSTS AND EXPENSES

    Sales and marketing                                                             701,940              74,041
    General and administrative (including stock based compensation
    expense of $773,925 and $109,103)                                             1,698,112             419,832

    Research and development                                                        354,425             170,710
                                                                               -------------        ------------
 TOTAL OPERATING EXPENSES
                                                                                  2,754,477             664,583

                                                                               -------------        ------------
 LOSS FROM OPERATIONS
                                                                                 (2,770,947)           (661,743)

 OTHER INCOME AND (EXPENSE)

    Interest income                                                                  24,086                   -

    Interest expense                                                                (70,479)            (16,328)

    Loss on conversion of debt                                                   (1,093,684)                  -
                                                                               -------------       -------------

 TOTAL OTHER INCOME (EXPENSE)                                                    (1,140,077)            (16,328)

                                                                               -------------       -------------
 NET LOSS
                                                                                 (3,911,024)           (678,071)
                                                                               =============       =============


                                                                               -------------       -------------
 NET LOSS PER SHARE - BASIC AND DILUTED                                              ($0.41)             ($0.14)
                                                                               =============       =============

    Weighted Average shares used in computing basic and diluted net loss
    per share                                                                     9,446,644           4,684,167


                   See Notes to Condensed Financial Statements
                                       4




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



                                                                THREE MONTHS ENDED MARCH 31,
                                                             ------------------------------------
                                                                   2006                2005
                                                             ---------------     ----------------

CASH FLOWS FROM OPERATING ACTIVITIES:
   NET CASH USED IN OPERATING ACTIVITIES                        ($2,626,189)           ($446,606)

CASH FLOWS FROM INVESTING ACTIVITIES:

   Purchase of equipment                                            (15,193)                   -
   Purchase of Software Licenses                                   (156,000)                   -
                                                               -------------        -------------
   NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES               ($171,193)                  $0

CASH FLOWS FROM FINANCING ACTIVITIES:

   Bank overdraft                                                         -               10,468
   Short-term borrowings, related parties                           500,000                    -
   Repayments of short-term borrowings, related parties                   -               (8,370)
   Long-term borrowings, related parties                                  -              419,500
   Repayments of long-term borrowings                               (30,000)                   -
   Issuance of common stock                                       7,605,000                    -
   Offering costs                                                  (538,953)              (3,975)
                                                               -------------        -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                        $7,536,047             $417,623

Net increase (decrease) in cash and cash equivalents              4,738,665              (28,983)
Cash and cash equivalents at beginning of period                    277,734               28,983
                                                               -------------        -------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD                   $5,016,399                    -
                                                               =============        =============




-------------------------------------------------------------------------------------------------
                                                                THREE MONTHS ENDED MARCH 31,
                                                            --------------------------------------
                                                                 2006                  2005
                                                            ---------------      -----------------

 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
 Conversion of notes, related party to common stock              3,913,112                    -

 Completion of reverse merger                                            -                    -
 Conversion of preferred stock into common stock                         -                    -
--------------------------------------------------------------------------------------------------


                   See Notes to Condensed Financial Statements
                                       5





                          HANDHELD ENTERTAINMENT, INC.
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                                 MARCH 31, 2006
                                   (UNAUDITED)

1.       BASIS OF PRESENTATION
         ---------------------

     INTERIM FINANCIAL STATEMENTS

The interim condensed financial statements have been prepared from the records
of Handheld Entertainment, Inc., a Delaware corporation ("we", "us", "our" or
the "Company") without audit. In the opinion of management, all adjustments,
which consist of only normal recurring adjustments, to present fairly the
financial position at March 31, 2006 and the results of operations and cash
flows for the three months ended March 31, 2006 and 2005, have been made. The
interim condensed financial statements should be read in conjunction with the
financial statements and notes thereto contained in the current report on Form
8-K/A filed on April 11, 2006 with the U.S. Securities and Exchange Commission
("SEC") for the year ended December 31, 2005. The results of operations for the
three months ended March 31, 2006 are not necessarily indicative of the results
to be expected for any other interim period or for the full year.

Refer to Note 5 for a discussion of the Companys recapitalization as of
February 10, 2006.


     GOING CONCERN

As reflected in the accompanying financial statements, the Company has a net
loss of $3,911,024 and net cash used in operations of $2,626,189 for the three
months ended March 31, 2006 and an accumulated deficit of $14,760,292 at March
31, 2006. These matters raise substantial doubt about its ability to continue as
a going concern. Our financial statements do not include any adjustments to
reflect the possible effects on recoverability and classification of assets or
the amounts and classification of liabilities that may result from our inability
to continue as a going concern.

Historically, we have financed our working capital and capital expenditure
requirements primarily from short and long-term notes, sales of common and
preferred stock and the product financing arrangement we established with our
contract-manufacturing partner. We are seeking additional equity and/or debt
financing to sustain our growth strategy. We were able to obtain sufficient
funds subsequent from our 2006 private placement to continue in operation at
least through the completion of these financial statements. 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 2006. The forecast that our financial
resources will last through that period is a forward-looking statement that
involves significant risks and uncertainties. It is reasonably possible that we
will not be able to obtain sufficient financing to continue operations.
Furthermore, any additional equity or convertible debt financing will be
dilutive to existing shareholders and may involve preferential rights over
common shareholders. Debt financing, with or without equity conversion features,
may involve restrictive covenants.

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

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


2.       SIGNIFICANT ACCOUNTING POLICIES
         -------------------------------

     USE OF ESTIMATES

Our condensed financial statements are prepared in accordance with accounting
principles generally accepted in the

                                       6



United States ("GAAP"). These accounting principles require us to make certain
estimates, judgments and assumptions. We believe that the estimates, judgments
and assumptions upon which we rely are reasonable based upon information
available to us at the time that these estimates, judgments and assumptions are
made. These estimates, judgments and assumptions can affect the reported amounts
of assets and liabilities as of the date of our condensed financial statements
as well as the reported amounts of revenues and expenses during the periods
presented. Our condensed financial statements would be affected to the extent
there are material differences between these estimates and actual results. In
many cases, the accounting treatment of a particular transaction is specifically
dictated by GAAP and does not require management's judgment in its application.
There are also areas in which management's judgment in selecting any available
alternative would not produce a materially different result. Significant
estimates in 2006 include the valuation of accounts receivable and inventories,
valuation of capital stock, options and warrants granted for services, estimates
of allowances for sales returns and the estimate of the valuation allowance on
deferred tax assets.


     STOCK BASED COMPENSATION

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


     FAIR VALUE OF FINANCIAL INSTRUMENTS

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


     CONCENTRATIONS

Concentration of Credit Risk
----------------------------

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

At March 31, 2006, one retailer accounted for approximately 96% of gross
accounts receivable before the allowance for doubtful accounts.


Concentration of Revenues
-------------------------

In the three months ended March 31, 2006, Wal-Mart represented 97% of our
revenues and we therefore were materially dependent upon them. Due to the nature
of our business and the relative size of the contracts, which are entered into
in the ordinary course of business, the loss of any single significant customer,
including the above customer, would have a material adverse effect on our
results.


Concentration of Supplier
-------------------------

Manufacturing of our ZVUE product is performed in China by our manufacturing
partner who is a related party (see Note 8). Any disruption of the manufacturing
process as a result of political, economic, foreign exchange or other

                                       7



reasons could be disruptive to our operations. We have no reason to expect
such a disruption but we believe that, if necessary, production could be
reestablished in other territories in a reasonable period of time at reasonable
terms. This is, however, a forward-looking statement that involves significant
risks and uncertainties. It is possible that relocation of production, if it
were to become necessary, would take longer and be more expensive than
anticipated. At March 31, 2006, $4,562 of component inventory was held at the
Chinese location.

Purchases during the three months ended March 31, 2006 and 2005 from our
manufacturing partner were approximately $488,000 and $186,000, respectively.
Amounts payable due to this vendor at March 31, 2006 was approximately $306,000
and are included in accounts payable and other obligations payable to officers,
affiliates and related parties. The balance due is fully collateralized by
substantially all assets of the Company.


Product Concentration
---------------------

During the first quarter of 2006, revenues were derived primarily from the sale
of one product model.


3.       ACCOUNTS RECEIVABLE
         -------------------

Accounts Receivable at March 31, 2006 were as follows:



         Accounts receivable                                $659,833
         Less:  Allowance for doubtful accounts              (63,142)
                                                          -----------
         ACCOUNTS RECEIVABLE, NET                           $596,691
                                                          ===========

Bad debt expense for the three months ended March 31, 2006 and 2005 was $0 and
$0, respectively.

4.       INVENTORIES
         -----------

At March 31, 2006, Inventories consists of the following:



         Finished Goods                                     $125,118
         Components                                            4,562
         Less:  Valuation Allowance                          (68,505)
                                                           ----------
         TOTAL INVENTORIES                                   $61,175
                                                           ==========

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

No valuation allowance was recorded for the three months ended March 31, 2005.

5.       REVERSE MERGER (Restated, See Note 13)
         --------------

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

Each share of HHE common and preferred stock issued and outstanding immediately
prior to the closing of the Merger was converted into the right to receive one


                                       8



share of the Company's common stock. The total common shares of 3,396,771 and
preferred shares of 1,887,183 of HHE were converted. The original remaining
outstanding common shares of the Company totaled 2,350,000. Accordingly, the
shareholders of HHE obtained 5,283,954 common shares of a total 7,633,954 of the
Company's common shares outstanding immediately following the closing of the
merger resulting in an approximate 69% controlling voting interest in the
consolidated entity. Immediately after the closing, another 2,491,673 common
shares were issued to an officer/director of the Company (who had been an
officer and director of HHE) upon conversion of his convertible notes,
increasing the controlling interest in the Company of the HHE shareholders and
noteholders to approximately 77% prior to the private placement described below.
In addition, the Board of Directors and officers of the Company were changed to
the existing directors and officers of HHE. Upon the closing of the Merger, each
outstanding option or warrant to acquire HHE's capital stock was assumed by the
Company and will thereafter may be exercisable for shares of the Company's
common stock.

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

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

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


6.       DEBT
        -----

The following table details our short term convertible and non-convertible notes
and loans outstanding as of March 31, 2006:

Convertible 10% Notes Payable - Preferred Series D            $    34,500
Convertible Notes Payable - Preferred Series C                     30,000
8% Promissory Note Payable with Warrants Attached                  15,000
                                                              -------------
                                                              $    79,500
                                                              =============

The following table details our short term convertible notes and loans, related
party:

8% Promissory Note Payable to Related Parties -
      (See Note 8)                                            $   500,000

                                                              -------------
                                                              $   500,000
                                                              =============

CONVERTIBLE 10% NOTES PAYABLE - PREFERRED SERIES D

In February 2004, HHE sold $64,500 of notes that were convertible into its
Series D preferred stock at a price equal to $3.75. The preferred series D stock
was convertible to the common stock of the Company on a one for one ratio. The
notes carry a 10% interest rate and were due and payable on demand but not
earlier than one year after issuance. As of March 31, 2006, $34,500 of the notes
and related interest earned were outstanding. These notes and all related
accrued interest were repaid in full in May 2006.

For the quarter ended March 2006, $30,000 of the notes were repaid with
interest.

As of March 31, 2006, we had accrued approximately $1,500 of interest related to
the notes.

                                       9




CONVERTIBLE NOTES PAYABLE - PREFERRED SERIES C

In February 2004, HHE sold $30,000 of notes that were convertible into its
Series C preferred stock at a price equal to $2.50. The preferred series C stock
was convertible to the common stock of the Company on a one-for-one ratio. The
notes carry no interest and were due and payable on demand.

On April 27, 2006, all of the notes were converted to 12,000 shares of the
Company's unregistered common stock. As a result of the conversion we will
record a loss on conversion of approximately $30,000 in April 2006.

8% PROMISSORY NOTES PAYABLE TO RELATED PARTIES WITH WARRANTS ATTACHED

On December 15, 2003, HHE entered into a promissory note with a member of the
Board of Directors for $15,000. The note carried an 8% interest rate and was
originally due on January 14, 2004 which was subsequently amended to July 1,
2006. Additionally, the holder received a warrant to purchase 3 shares of the
common stock of the Company for each dollar of principal. These warrants have a
strike price of $0.375 and will expire three years from issuance. The warrants
were valued at $32,805 utilizing the Black-Scholes valuation model and were
recognized as equity and interest expense over the original term of the loan.

At March 31, 2006, we considered the $15,000 note holder to no longer be a
related party and accordingly this note is presented on the balance sheet in the
$79,500 balance to non-related parties. The note and accrued interest of
approximately $3,000 were paid in full to the note holder in May 2006.

All convertible notes were reviewed by management to determine if the embedded
conversion rights qualified as derivatives under FASB Statement 133 "Accounting
for Derivative Instruments and Hedging Activities" and related interpretations.
Management determined the embedded conversion features were not derivatives and
accordingly each convertible instrument is reflected as one combined instrument
in the accompanying financial statements. Management then reviewed whether a
beneficial conversion feature and value existed. For convertible notes with
fixed conversion terms, there was no beneficial conversion value as the
conversion price equaled the fair market value of the underlying capital shares
at the debt issuance date. For convertible instruments with a variable
conversion price which were issued prior to 2006, due to the contingency of the
conversion being linked to a future offering not under control of the creditor,
any beneficial conversion amount was deferred to be measured and recorded when
the contingency was resolved. In February 2006 the contingency was resolved and
all were converted at the time of the recapitalization and therefore there were
no variable conversion price notes outstanding at March 31, 2006. The Company
recognized a loss on conversion of these variable price convertible notes of
$1,093,684


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

As of March 31, 2006, trade accounts and other obligations payable to officers,
affiliates and related parties consisted of the following:




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

Eastech Electronics (Taiwan), Inc.     Manufacturing Partner and former Director              $ 305,553
Nekei Consulting LLC                   Controlled by Bill & Tim Keating, Chairman and COO       100,000
Gregory Sutyak                         Company Officer  (EVP)                                    33,598
William Bush                           Company Officer (CFO)                                     25,579
The Ardtully  Group                    Related Party Consultant                                  24,552
James Newborough                       Company Employee                                          20,000
Garrett Cecchini                       Company Officer (EVP)                                     14,373
Carl Page                              Director & CTO                                             7,369
Other                                                                                           115,275
                                                                                              ----------
                                                                                              $ 646,299
                                                                                              ==========


                                       10



8.       RELATED PARTY TRANSACTIONS
         --------------------------

CONVERSION OF CONVERTIBLE NOTES BY RELATED PARTY

Starting in December 2003, a member of our board of directors and our Chief
Technology Officer (the "Lender") from time to time made cash advances to HHE
which were subsequently converted into notes totaling $3,741,049 to finance
HHE's operations. This amount was documented in four separate promissory notes.
The principal and interest on three of those notes was convertible into shares
of common stock at different conversion rates. The other note entitled the
Lender to receive a warrant to purchase 60,000 shares of common stock with a
strike price of $0.37 per share.

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

Pursuant to the terms of the Lender's convertible notes, in connection with the
Merger, an aggregate of $3,913,112 of principal and accrued interest on the
convertible notes was converted into a total of 2,491,673 shares of the
Company's common stock. The Company recognized a loss on conversion of
$1,093,684.

CONVERTIBLE 8.0% PROMISSORY NOTES - COMMON STOCK

In January and February 2006, the Company received $500,000 in a series of cash
advances from the Lender. The advances were, effective April 30, 2006, converted
into convertible notes which carry an 8.0% interest rate. Simultaneous with the
conversion of the advances into notes, the Lender agreed to convert the notes
and all accrued interest at a rate of $4.92 per share which resulted in the
issuance of 103,587 shares of the Company's unregistered common stock. In April
2006, the Company will recognize a gain on conversion of $84,941. (see Note 6).


9.       NET LOSS PER SHARE (Restated, See Note 13)
         ------------------

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 and preferred stock to shares of common stock
outstanding at March 31, 2006 and 2005, respectively, has not been included in
the calculation of the net loss per share as such effect would have been
anti-dilutive. As a result of these items, the basic and diluted loss per share
for all periods presented are identical. The following table summarizes the
weighted average shares outstanding:

                                       11



 -------------------------------------------------------------------------------------------------------------------------------
                                                                                        THREE MONTHS ENDED MARCH 31
                                                                             ---------------------------------------------------
                                                                                       2006                      2005

 -------------------------------------------------------------------------------------------------------------------------------
    BASIC WEIGHTED AVERAGE SHARES OUTSTANDING                                         9,446,644                4,684,167
 -------------------------------------------------------------------------------------------------------------------------------
    Total Convertible Debt into Common Stock                                             95,972                    792,936
    Less: Anti Dilutive Common Stock due to loss                                        (95,972)                  (792,936)

    Total Stock Options Outstanding                                                   2,471,411                  1,477,683
    Less: Anti Dilutive Stock Options due to loss                                    (2,471,411)                (1,477,683)

    Total Warrants Outstanding                                                        1,666,055                  1,350,555
    Less: Anti Dilutive Warrants due to loss                                         (1,666,055)                (1,350,555)
 -------------------------------------------------------------------------------------------------------------------------------
                                 DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING          9,446,644                  4,684,167
 -------------------------------------------------------------------------------------------------------------------------------


In total, at March 31, 2006 and 2005 there were financial instruments
convertible into 4,233,438 and 3,621,174 common shares, respectively, which may
potentially dilute future earnings per share.


10.      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, 97% and 98% of our sales for the three
months ended March 31, 2006 and 2005, respectively were to customers in the
United States of America; the remaining percentage were principally to customers
in Europe.

11.      SHAREHOLDERS' EQUITY (Restated, See Note 13)
         --------------------

     PREFERRED STOCK

As a result of the reverse merger (See Note 5) completed on February 10, 2006,
which was accounted for as a recapitalization, the outstanding preferred stock
of Handheld Entertainment, Inc. (privately held California entity) have been
converted to common stock and reflected retroactively as such on the balance
sheet at March 31, 2006 and the statement of operations for the three months
ended March 31, 2006 and retroactively for periods in 2005.

Since the reverse merger (See Note 5) completed on February 10, 2006, the
Company has 1,000,000 shares of preferred stock authorized of which none is
outstanding at March 31, 2006.

                                       12




     PRIVATE PLACEMENT

In connection with the Merger, through February 22, 2006, we accepted
subscriptions for a total of 152.1 units in a private placement, each unit
consisting of 25,000 shares of our common stock, at a purchase price of $50,000
per unit (the "Private Placement"). We received gross proceeds from the Private
Placement in the amount of $7,605,000 and issued 3,802,500 common shares.

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

The common shares issued under the private placement are subject to registration
rights pursuant to a registration rights agreement ("the agreement"). The
agreement states that the registration statement shall be (i) filed within 60
days of February 10, 2006, (ii) declared effective within 120 days of the
initial filing date and (iii) kept effective until the earlier of (a) 18 months
after February 10, 2006 or (b) the date when all registerable securities have
been sold. The registration rights agreement contains a liquidated damages
provision whereby liquidated damages may accrue and are payable in cash or
common stock at fair market value, at the Company's discretion, at the rate of
1% of the aggregate amount invested by the investors per 30 day period or
pro-rated for partial periods if (i) a registration statement is not filed
within 60 days of February 10, 2006, (ii) the Company does not respond to
initial comments of the SEC within 21 days after the Company's receipt of such
comments or (iii) if the Company fails to use its reasonable best efforts to
cause the registration statement to be declared effective. The liquidated
damages are limited under the registration rights agreement to a 6% maximum
amount. The registration statement was filed on April 11, 2006 as per the
registration rights agreement. Additionally, the Company has exercised a market
standoff provision included in the registration rights agreement whereby the
shares, subject to the registration statement, will be subject to a 180 day
lockup period following the effectiveness of a second registration statement
filed by the Company on April 26, 2006 which is an underwritten offering.

The Company reevaluated whether the warrants and options previously (see Note 6)
or currently granted by HHE or the Company may have to be classified as
liabilities pursuant to EITF 00-19 "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock" due
to HHE becoming a publicly traded company and due to the registration rights
agreement. Management noted all convertible debt which had been convertible at a
variable rate was converted in February 2006 and that the warrants and options
are not subject to the registration rights and have fixed exercise prices. In
addition, there were no other criteria of EITF 00-19 that would require the
warrants and options to be classified as liabilities. Therefore the warrants and
option will remain as equity instruments.

The Company did determine however that the registration rights agreement itself
is a derivative instrument subject to classification as liability at fair value.
We noted that the maximum liquidated damages amount computed at 6% would be
$456,300. At March 31, 2006 we determined that since the registration statement
had been filed timely and the Securities and Exchange Commission has notified us
that the registration statement would not be reviewed by them, that the fair
value of the registration rights agreements using a probability based discounted
cash flow model is zero. This fair value will be reevaluated at each reporting
date.

Newbridge Securities Corporation served as placement agent in connection with
the Private Placement and was credited with placing 13 units. The placement
agent received (1) a cash fee of $39,000 (representing 6% of the gross proceeds
of the units sold by it in the Private Placement), (2) three-year warrants to
purchase 16,250 shares of common stock (representing 5% of the shares sold by it
in the Private Placement) at an exercise price of $2.00 per share and (3)
additional three-year warrants to purchase 16,250 shares of common stock
(representing 5% of the shares sold by it in the Private Placement) at an
exercise price of $4.00 per share.

     OTHER STOCK GRANTS AND ISSUANCES

During the three months ended March 31, 2006, 2,350,000 common shares were
deemed issued to the original shareholders of Vika pursuant to a reverse merger
and recapitalization of the Company ( see Note 5).

During the three months ended March 31, 2006, the Company issued 2,491,673
common shares upon conversion of convertible notes and accrued interest of a
related party aggregating $3,913,112. (see Note 5).

                                       13



During the three months ended March 31, 2006 the Company granted 108,560 common
shares to employees for services of which 35,900 are subject to future service
requirements and 72,660 are for past services rendered. The 81,060 shares
granted prior to March 2006 are valued at the contemporaneous private placement
price of $2.00 per share for a total of $162,120 and the shares granted in March
2006 are valued at the quoted trading price of the common stock on the
respective grant dates of $4.85 for 15,000 shares and $6.40 for 12,500 shares
for a total value of $152,750 for the March 2006 shares. Of the total shares
value of $314,870, $136,920 has been expensed and $177,950 has been deferred as
of March 31, 2006.

During the three months ended March 31, 2006 the Company granted 231,100 common
shares to non-employees for past services rendered. The shares were valued at
the contemporaneous private placement price of $2.00 per share resulting in an
expense of $462,200.

     STOCK BASED AWARDS

During the three months ended March 31, 2006 we granted 100,000 vested warrants
exercisable at $2.00 per share to a service provider. The warrants were valued
at $1.12 (using an expected volatility of 82.7%, a risk-free interest rate of
4.66% and a dividend yield of 0%) per a Black-Scholes option pricing method for
a total $111,634 charged to operations. We also issued 16,250 warrants at an
exercise price of $2.00 per shares and 16,250 warrants at an exercise price of
$4.00 per share to an investment banking firm for services rendered. These
warrants were valued at $1.12 and $0.79 (using an expected volatility of 82.7%,
a risk-free interest rate of 4.66% and a dividend yield of 0%) respectively for
a total value of $30,981 charged to operations. In addition, $24,240 of expense
and additional paid-in capital was recorded relating to vesting of portions of
warrants granted to non-employees in 2006.

During 2006 we accounted for 15,000 vested options granted to an employee and
charged the fair value of $7,950 to operations.

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

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




-----------------------------------------------------------------------------------------------
                                                               THREE MONTHS ENDED MARCH 31,
                                                                           2005
                                                              ---------------------------------

Net loss, as reported                                                                ($678,071)
Intrinsic compensation charge recorded under APB 25                                    109,102
Pro Forma compensation charge under SFAS 123, net of tax                              (140,766)
Pro Forma net loss                                                                   ($709,735)
Net Loss Per Share:
          Basic and Diluted --as reported                                               ($0.14)
          Basic and Diluted --pro forma                                                 ($0.15)
-----------------------------------------------------------------------------------------------



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

                                       14



---------------------------------------------------------------------------------------------
                                                                  THREE MONTHS ENDED
                                                                    MARCH 31, 2005
                                                             --------------------------------

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


The weighted average fair values as of the grant date for grants made in the
three months ended March 31, 2005 was $0.77.


12.      SUBSEQUENT EVENTS
         -----------------

CONVERSION OF CONVERTIBLE NOTES BY RELATED PARTY

As documented in Note 8, on April 30, 2006, a member of our board of directors
and our Chief Technology Officer converted a series of cash advances, and the
related interest, to common stock at a fixed price resulting in the issuance of
103,487 unregistered common shares.

WARRANTS ACTIVITY

Subsequent to March 31, 2006, a holder of a common stock warrant exercised an
existing warrant to purchase 466,000 shares of our stock. The exercise was
concluded on a "net" basis resulting in no cash to the company. As a result of
the exercise, the Company, on April 27, 2006, issued 443,080 common shares to
the holder. After accounting for that conversion, outstanding warrants are as
follows:



----------------------------------------------------------------------------------------------------
                                                        NUMBER OF WARRANTS   AVERAGE EXERCISE PRICE
----------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------
OUTSTANDING, MARCH 31, 2006                                      1,666,055                    $0.50
----------------------------------------------------------------------------------------------------
Granted                                                                 --                       --
Exercised                                                         (466,000)                    0.25
Expired                                                                 --                       --
----------------------------------------------------------------------------------------------------
OUTSTANDING, MAY 15, 2006                                        1,200,055                    $0.60
----------------------------------------------------------------------------------------------------


13.      RESTATEMENT

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



----------------------------------------------------------------------------------------------------
                                                             March 31, 2005
----------------------------------------------------------------------------------------------------
                                             As reported                     Restated
----------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------
Net loss per share - basic and diluted       ($0.24)                         ($0.14)
----------------------------------------------------------------------------------------------------
Weighted Average shares used in computing    2,835,861                       4,684,167
basic and diluted net loss per share
----------------------------------------------------------------------------------------------------


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

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

  o   Overview, Trends and Business Development;
  o   Forward Looking Statements;
  o   Results of Operations;
  o   Liquidity and Capital Resources;
  o   Critical Accounting Policies; and
  o   Factors That May Impact Future Operating Results.


OVERVIEW, TRENDS AND BUSINESS DEVELOPMENT

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

We offer consumers robust, feature rich, easy to use mobile devices at a
compelling value, as well as access to a large and growing library of audio and
video digital content assets. Our devices have been designed to be compatible
with virtually all formats of content. Our portable media players are sold in
over 1,800 stores in the United States. Our strategy is to capitalize on the
synergy between portable digital entertainment products and related digital
content.

                                       15



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

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

o        family of products, mass marketed at a compelling value
o        easy to use - out of the box experience
o        diverse and continually relevant online content service
o        device and content flexibility

BY PROVIDING CONSUMERS A SOLUTION THAT INCLUDES DEVICES AS WELL AS CONTENT, OUR
GOAL IS TO CREATE A POWERFUL PLATFORM THAT WILL ENCOURAGE CONSUMERS TO ADOPT OUR
DEVICES, ACCESS OUR CONTENT AND THUS DISTINGUISH US FROM THE COMPETITION.

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

Also on February 10, 2006, we sold an aggregate of 70 units, each consisting of
25,000 shares of our common stock, to accredited investors in a private
placement and received gross proceeds of $3,500,000 before payment of expenses.
On February 22, 2006, we sold an additional 82.1 units to accredited investors
and received gross proceeds of $4,105,000 before payment of expenses and
commissions, and terminated the private placement having realized total gross
proceeds of $7,605,000. In connection with the second closing, we issued to a
placement agent (1) three-year warrants to purchase 16,250 shares of our common
stock (representing 5% of the shares sold by it in the private placement) at an
exercise price of $2.00 per share and (2) additional three-year warrants to
purchase 16,250 shares of our common stock (representing 5% of the shares sold
by it in the private placement) at an exercise price of $4.00 per share.

Concurrent with the reverse merger and financing transaction described above a
member of our board of directors and our Chief Technology Officer (the "Lender")
converted a series of cash advances, which had been transferred into notes,
totaling $3,741,049 in principal, into our common stock. This amount was
documented in four separate promissory notes. Three of the four notes provided
for an interest rate of 8% from the date the advances thereunder were made and
one note provided for an interest rate of 9.5% from the date the advances
thereunder were made. As of December 31, 2005, the aggregate principal amount
owing on these notes was $3,741,049 and the total accrued interest was $138,399,
for a total of $3,879,448 owed to the Lender pursuant to these notes. Pursuant
to the terms of the Lender's convertible notes, in connection with the reverse
merger, an aggregate of $3,913,112 of principal and accrued interest on the
convertible notes through the conversion date was converted into a total of
2,491,673 shares of our common stock. The Company recognized a loss on
conversion of $1,093,684.


FORWARD LOOKING STATEMENTS

The following information should be read in conjunction with our financial
statements and the notes thereto and in conjunction with "Management's
Discussion and Analysis or Plan of Operations" in our Current Report on Form 8-

                                       16



K/A filed on April 11, 2006. This quarterly report on Form 10-QSB, and in
particular this "Management's Discussion and Analysis or Plan of Operations,"
may contain forward-looking statements regarding future events or our future
performance. These future events and future performance involve certain risks
and uncertainties including those discussed in the "Factors That May Impact
Future Operating Results" section of this Form 10-QSB, as well as contained in
the Form 8-K/A. Actual events or our actual future results may differ materially
from any forward-looking statements due to such risks and uncertainties. We
assume no obligation to update these forward-looking statements to reflect
actual results or changes in factors or assumptions affecting such
forward-looking statements. This analysis is not intended to serve as a basis
for projection of future events.

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


RESULTS OF OPERATIONS

The following table sets forth our results of operations for the three months
ended March 31, 2006 and 2005 in absolute dollars and as a percentage of sales.
It also details the changes from the prior fiscal year in absolute dollars and
in percentages.



                                                                          THREE MONTHS ENDED MARCH 31,
                                                 --------------------------------------------------------------------------------
                                                          2006                       2005                CHANGE FROM PREVIOUS
                                                                                                                 YEAR
                                                 -----------------------    -----------------------    --------------------------
                                                                 AS %                       AS %
                                                                 OF                         OF           $ INCREASE /
                                                       $         SALES            $         SALES        (DECREASE)         %
                                                 -------------- --------    -------------- --------    --------------- ----------

      Sales                                           $584,234     100%           $46,223     100%           $538,011      1164%

      Cost of goods sold                               600,704     103%            43,383      94%            557,321      1285%
                                                   ------------   ------      ------------  -------      -------------   --------
 GROSS MARGIN                                          (16,470)     -3%             2,840       6%            (19,310)     -680%

      Operating expenses

      Sales & marketing                                701,940     120%            74,041     160%            627,899       848%

      General & administrative                       1,698,112     291%           419,832     908%          1,278,280       304%

      Research & development                           354,425      61%           170,710     369%            183,715       108%
                                                   ------------   ------      ------------  -------      -------------   --------
      TOTAL OPERATING EXPENSES                       2,754,477     471%           664,583    1438%          2,089,894       315%
                                                   ------------   ------      ------------  -------      -------------   --------

 LOSS FROM OPERATIONS                               (2,770,947)   -474%          (661,743)  -1432%         (2,109,204)      319%

      Other income / (expenses)

      Interest income                                   24,086       4%                 -       0%             24,086       100%

      Interest expense                                 (70,479)    -12%           (16,328)    -35%            (54,151)      332%

      Loss on conversion of debt                    (1,093,684)   -187%                 -       0%         (1,093,684)      100%
                                                   ------------   ------      ------------  -------      -------------   --------
 TOTAL OTHER INCOME / (LOSS)                        (1,140,077)   -195%           (16,328)    -35%         (1,123,749)     6682%
                                                   ------------   ------      ------------  -------      -------------   --------
 NET LOSS                                          ($3,911,024)   -669%         ($678,071)  -1467%        ($3,232,953)      477%
                                                   ============   ======      ============  =======      =============   ========


                                       17



              SALES

         Sales were approximately $584,000 during the three months ended March
31, 2006 as compared to approximately $46,000 during the three months ended
March 31, 2005, an increase of approximately $538,000 or 1,164%. The increase is
primarily due to the expansion of our distribution of our ZVUE product to nearly
1,800 Wal-Mart stores. Prior to that distribution contract, our product had
primarily been purchased by customers over the Internet and through smaller
retail outlets.

         At March 31, 2006, Wal-Mart accounted for approximately 96% of the
gross accounts receivable and represented approximately 97% of our revenues for
the three months ended March 31, 2006. At March 31, 2005, Wal-Mart accounted for
approximately 6% of the gross accounts receivable and represented approximately
20% of our revenues for the three months ended March 31, 2005. As a result, for
the periods being reported, we were materially dependent upon this customer for
our revenues. Due to the nature of our business and the relative size of the
contracts, which are entered into in the ordinary course of business, the loss
of any single significant customer, especially Wal-Mart, would have a material
adverse effect on our results.

         All of our sales to Wal-Mart during 2006 and 2005 were of our ZVUE 200
model, which was our sole product sold. There can be no assurance that Wal-Mart
will accept our additional models if, and when, our shipments of future models
commence, or that if ordered, such products will be accepted by Wal-Mart as
successfully as our ZVUE 200. The failure of these events to occur would
significantly impact our future sales.

         Approximately 97% and 98% of our sales for the three months ended March
31, 2006 and 2005, respectively, were to customers in the United States of
America; the remaining percentage were principally to customers in Europe.

              COST OF GOODS SOLD AND GROSS MARGIN

         Cost of goods sold were approximately $601,000 during the three months
ended March 31, 2006 as compared to approximately $43,000 during the three
months ended March 31, 2005, an increase of approximately $558,000 or 1,285%.
The increase in cost of goods sold during the three months ended March 31, 2006
as compared to the prior year is primarily the result of the expansion of our
distribution for the ZVUE product. We purchase our products from Eastech
Electronics (Taiwan) Inc., a contract manufacturer located in Taiwan that is the
sole manufacturer of our ZVUE product. Purchases during the three months ended
March 31, 2006 and 2005 from Eastech were approximately $488,000 and $186,000,
respectively.

         We are dependent on a continuing relationship with Eastech, the sole
manufacturer of our PMP's which is subject to a manufacturing agreement which
expires in January 2007. Eastech manufactures our PMPs based on purchase orders
that we submit. Eastech has been providing us payment terms that permit us to
pay for products once our customers have paid us. This arrangement greatly
reduces our cash needs. However, these terms are expected to change and that may
require us to begin to make advance payments for our purchases of inventory and
components. 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.

                                       18



         Gross margin is negative in the three months ended March 31, 2006 as a
result of expenses related to the introduction of the product into retail
distribution, the subsequent expansion of the product's distribution and the
effect of higher component costs associated with low volume production. We
expect that the basic product will continue to have low gross margins in the
future although we expect to offset those margins with the introduction of new
products and services which will be sold to customers of the media player, as
well as other revenue streams which will utilize the ZVUE product as a platform
to distribute content under subscription or single use contracts.


              SALES AND MARKETING EXPENSES

         Sales and marketing expenses were approximately $702,000 during the
three months ended March 31, 2006 as compared to approximately $74,000 during
the three months ended March 31, 2005, an increase of approximately $628,000 or
848%. Sales and marketing expenses consist primarily of salaries and benefits of
sales and marketing personnel, commissions, advertising, printing and customer
acquisition related costs. The increase in these expenses is directly related to
sustaining marketing for the currently shipping version of the ZVUE product
(Model 200) and market introduction costs for the upcoming versions of the ZVUE
product (Models 400 and 500). We expect to continue to increase marketing and
development efforts in the future, including as new versions of the ZVUE are
introduced, and as a result expect this class of expenses to continue to
increase.


              GENERAL AND ADMINISTRATIVE EXPENSES

         General and administrative expenses were approximately $1,698,000
during the three months ended March 31, 2006 as compared to approximately
$420,000 during the three months ended March 31, 2005, an increase of
approximately $1,278,000 or 304%. Our general and administrative expenses
consist primarily of salaries and benefits for employees, amortization and
depreciation expenses, fees to our professional advisors, non-cash stock based
expenses, rent and other general operating costs. Our general and administrative
expenses also include amortization expense related to the issuance of stock
options to employees and contractors, which was approximately $774,000 and
$109,000 in the three months ended March 31, 2006 and 2005, respectively. In
February 2006, our Board of Directors accelerated the vesting of all outstanding
options as of December 31, 2005. As a result of the decision by the Board,
approximately 1.2 million options became vested as of December 31, 2005 and the
Company recognized all of the remaining intrinsic value in the underlying
options. The expense in 2006 is primarily related to the issuance of common
stock to employees and other service providers.

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


              RESEARCH AND DEVELOPMENT EXPENSES

         Research and development expenses were approximately $354,000 during
the three months ended March 31, 2006 as compared to approximately $171,000
during the three months ended March 31, 2005, an increase of approximately
$184,000 or 108%. Our research and development expenses consist primarily of
salaries and benefits for research and development employees and payments to
independent contractors. The increase in research and development expenses is
primarily as a result of the development work on the newest versions of the ZVUE
product. Also, as a result of our product focus, we engaged additional third
party consultants and made other investments to enhance our product offerings.
These actions also accounted for the increase in research and development
expenses for the three months ended March 31, 2006 as compared to the previous
period.

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

                                       19



              INTEREST INCOME

         Interest income of approximately $24,000 relates to deposits in our
depository accounts as a result of funds generated by the private placement
concluded in February 2006. We did not record any interest income during 2005.

              INTEREST EXPENSE

         Interest expense of approximately $70,000 and $16,000 for the three
months ended March 31, 2006 and 2005, respectively, was directly related to the
interest payable on notes and other borrowings which we have entered into to
fund our operations.


LIQUIDITY AND CAPITAL RESOURCES

         At March 31, 2006, the Company had a cash and cash equivalent balance
of approximately $5,016,000 and a working capital of approximately $3,004,000.
Net cash used in operations was $2,626,189 for the three months ended March 31,
2006 as compared to net cash used in operations of $446,606 for the prior three
month period ended March 31, 2005. For the three months ended March 31, 2006,
the Company used cash to fund the Company loss of $3,911,024 offset by non-cash
items such as expenses related to common stock issued for services of
approximately $599,000, charges related to warrants issued to non-employees for
services of $166,855, and charges under APB 25 related to stock options and
warrants issued with intrinsic value to employees of $7,950. There were also
changes in assets and liabilities of $595,389.

         Net cash used in investing activities in the three months ended March
31, 2006 was $171,193 as compared to net cash used in investing activities of $0
for the three month period ended March 31, 2005. For the three months ended
March 31, 2006, the primary use of the cash was to purchase software licenses.

         Net cash provided by financing activities in the three months ended
March 31, 2006 was $7,536,047 as compared to $417,623 for the three month period
ended March 31, 2005. The completion of the private placement in February 2006
resulted in gross proceeds to the company of $7,605,000 and a payment of
$539,000 in offering costs. For the three months ended March 31, 2006, the
Company received $500,000 in proceeds from notes from related parties as
compared to $419,500 in the three month period ended March 31, 2005.

         Historically, we have financed our working capital and capital
expenditure requirements primarily from short and long-term notes, sales of
common and preferred stock and the product financing arrangement we established
with Eastech. We are seeking additional equity and/or debt financing to sustain
our growth strategy. With the completion of the private placement in February
2006 we were able to obtain funds to continue our operations at least through
November 2006. 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 2006. 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.

                                       20



         INVENTORIES

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

         SOFTWARE DEVELOPMENT COSTS

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

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

         IMPAIRMENT OF LONG-LIVED ASSETS

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

         REVENUE RECOGNITION

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

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

         RESERVE FOR SALES RETURNS

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

FACTORS THAT MAY IMPACT FUTURE OPERATING RESULTS

Set forth below and elsewhere in this report are some of the risks and
uncertainties that could cause actual results to differ materially from the
results contemplated by the forward-looking statements contained in this report.
For a more complete list of risks and uncertainties, see our Current Report on
Form 8-K/A filed on April 11, 2006.

                                       21


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

         Wal-Mart currently is, and for the foreseeable future is expected to
remain, our largest customer. Wal-Mart represented approximately 94% of our
revenues during 2005 and is expected to have similar importance in 2006. While
we plan to aggressively market the ZVUE to other major retailers, other major
retailers may not take on the ZVUE product line. Consequently, our short-term
business plan depends to a significant extent on continuing our relationship
with Wal-Mart, which may not happen. We do not have any long term or supply
agreement for the sale of our products to Wal-Mart and our business plans are
based upon estimates for orders from Wal-Mart that could be inaccurate.

         All of our sales to Wal-Mart, our largest customer during 2005, were of
our ZVUE 200 model which was our sole product sold in 2005. We expect the
majority of our orders shipped to Wal-Mart during 2006 to be of our ZVUE 200
model. None of our other products are presently being ordered by Wal-Mart, 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 200.

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

         EASTECH IS THE SOLE MANUFACTURER OF OUR PRODUCTS AND, IF WE ARE UNABLE
TO CONTINUE OUR RELATIONSHIP ON ACCEPTABLE TERMS, OUR ABILITY TO MANUFACTURE
PRODUCTS WOULD BE SIGNIFICANTLY IMPAIRED AND OUR REVENUES WOULD BE NEGATIVELY
IMPACTED.

         We are dependent on a continuing relationship with Eastech, the sole
manufacturer of our PMPs. Eastech presently manufactures our PMPs based on
purchase orders that we submit. Eastech has been providing us payment terms that
permit us to pay for products once our customers have paid us. However, these
terms are expected to change, which may require us to begin to make advance
payments for our purchases of inventory and components. We currently do not have
alternative financing available and do not maintain a revolving line of credit
for purchases. There can be no assurance that we can successfully renegotiate
our agreement with Eastech upon expiration of the agreement in January 2007.

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

         Eastech is one of our significant investors. In 2004, Eastech purchased
555,556 shares of our series B convertible preferred stock (which was converted
into our common stock in the reverse merger) for an aggregate purchase price of
$500,000. In addition, Eastech's founder, chairman and CEO who was a member of
our board of directors at the time (he resigned in November 2005), purchased
26,666 shares of our series D convertible preferred stock (which was converted
into our common stock in the reverse merger) for an aggregate purchase price of
$100,000. The terms of Eastech's relationship with us may be significantly
influenced by Eastech's ownership interest. We may not be able to locate
replacement manufacturing or assembly facilities from independent parties that
would provide payment, supply and other terms equivalent to those provided us by
Eastech, particularly in light of the incentive provided by the ownership
relationship which would not exist with any successor manufacturer to Eastech.


                                       22


         OUR EXISTING AGREEMENTS WITH EASTECH COULD HARM OUR CASH FLOWS, AND A
DEFAULT ON OUR PAYMENT OBLIGATIONS WOULD ALLOW EASTECH TO FORECLOSE AND
LIQUIDATE SOME OR ALL OF OUR ASSETS.

         Although our manufacturing agreement with Eastech expired in June 2005,
we have other agreements with Eastech that remain in effect. Under these
agreements, Eastech has a security interest in all of our assets (other than our
patents, trademarks and copyrights). In addition, payments by our customers of
our accounts receivable from the sale of our PMP products are required to be
made to an escrow account, with the proceeds from that escrow account first
being distributed to Eastech so that it receives its contract manufacturing
price, with the remainder to us. During 2005, we began receiving payments
directly from Wal-Mart rather than through this escrow arrangement. If Eastech
were to require that these payments be made to the escrow account, it could
impact our cash flows. Furthermore, a default by us on our payment obligations
to Eastech, including our failure to pay Eastech its contract manufacturing
price, would permit Eastech to foreclose and liquidate some or all of our assets
in order to pay amounts owed, which would negatively impact our ability to
conduct business.

         WE FACE INTENSE COMPETITION FROM BOTH PMP MANUFACTURERS AND CONTENT
DISTRIBUTORS AND IF CUSTOMERS DO NOT CHOOSE OUR PRODUCTS OR OUR CONTENT DELIVERY
METHODS, PRICING, OR OFFERINGS OVER THOSE OF OUR COMPETITORS, THEN OUR REVENUES
WOULD BE NEGATIVELY IMPACTED.

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

         Several companies, including Apple Computer, Nintendo, Nokia, Sony,
Samsung, Toshiba and Creative Labs, have released, or announced that they are
developing, handheld devices featuring digital video playback similar to that
offered by us and planned in the future. We cannot guarantee that consumers will
choose to purchase our PMP, or purchase content through our service, instead of
other handheld devices or from other content companies.

         We also face competition from traditional media outlets such as
television (including cable and satellite), radio (terrestrial and satellite),
CDs, DVDs, videocassettes and others, and may in the future face competition
from new or as yet unknown sources, such as broadband telephone providers.
Emerging Internet media sources and established companies entering into the
Internet media content market include Time Warner's AOL subsidiary, Microsoft,
Apple, Google, Yahoo! and broadband Internet service providers who can be
expected to be significant competitors. We expect this competition to become
more intense as the market and business models for Internet video content to
mature and more competitors enter these new markets. Competing services may be
able to obtain better or more favorable access to compelling video content than
we can and may develop better offerings than us and may be able to leverage
other assets to promote their offerings successfully.

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

         IF OUR SUPPLIERS ARE UNABLE TO MEET OUR MANUFACTURER'S REQUIREMENTS,
THEN WE WILL NEED TO REDUCE THE NUMBER OF ZVUES AVAILABLE TO OUR DISTRIBUTION
PARTNERS, WHICH WOULD DECREASE OUR REVENUES.

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

                                       23


         IF CONSUMERS DO NOT EMBRACE OUR PRODUCTS OUR REVENUES WILL DECLINE.

         During 2005, nearly all of our revenues were derived from sales of just
a single product, ZVUE Model 200. As such, consumers may not accept our new
products which we plan to introduce and on which future revenues rely, or adopt
our content services. Our financial success will depend largely on our ability
to quickly and successfully establish, maintain and increase sales of our new
products, including through untested new retail channels of distribution. We
have assumed that there is substantial and growing consumer demand for PMPs
priced between $99 and $299, on which assumption our business model is
substantially reliant. Because our distribution to date has also been largely
concentrated in Wal-Mart, a single large well-established retail chain,
representing approximately 94% of our 2005 revenues, our products and content
may not achieve the mass market appeal and success on which we have based our
plans. Our success is significantly dependent upon the accuracy of our price and
positioning assumptions and various other assumptions including design,
functionality, and consumer acceptance.

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

         FAILURE TO DEVELOP CONSUMER RECOGNITION OF OUR PRODUCTS COULD LIMIT THE
DEMAND FOR THE ZVUE, RESULTING IN LESS THAN EXPECTED SALES.

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

         IF WE WERE TO LOSE THE SERVICES OF MEMBERS OF OUR SENIOR MANAGEMENT
TEAM, WE MAY NOT BE ABLE TO EXECUTE OUR BUSINESS STRATEGY.

         Our success depends in large part upon the continued service of key
members of our senior management team, which includes Jeff Oscodar, our Chief
Executive Officer and President, Tim Keating, our Chief Operating Officer,
Garrett Cecchini, our Executive Vice President, Secretary and founder, Carl
Page, our Chief Technology Officer, Bill Bush, our Chief Financial Officer, Greg
Sutyak, our Executive Vice President, Finance and Operations, and Larry Gitlin,
our Vice President of Business Development. Other than Jeff Oscodar, all of our
executive officers and key employees are at-will employees. The loss of any of
our senior management or key personnel could seriously harm our business and
prospects. We intend to utilize a portion of the proceeds of this offering to
secure key-man life insurance on certain of our executives.

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

         We will need additional funding to achieve the goals stated in our
business plan. In particular, we will need working capital to support the
marketing and distribution of our planned new products into retail channels. If
we are unable to borrow money to cover these costs, certain proceeds of the
offering may be required to be utilized reducing our ability to invest in other
aspects of our business potentially accelerating our need to raise additional
funds.

         If we experience delays in producing our new devices, acquiring content
or entering into distribution agreements to get our products into additional
retail outlets, we may need more funding than we currently anticipate which
could accelerate our need to raise additional funds.

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

         We anticipate incurring losses in the immediate future and there can be
no assurance that we will be able to achieve or sustain profitability or
positive cash flow in the near term, or at all. Based on our history of losses,
our independent registered public accounting firm has stated in their report
accompanying their audit of our 2005 year-end financial statements that there is
substantial doubt about our ability to continue as a going concern. If consumers
are slower to embrace our products than we expect and we are unable to obtain
additional financing in the near future, we may not be able to continue
operating our business.

                                       24


         IF WE ARE NOT ABLE TO MANAGE OUR PRODUCT RETURN RATE AT ACCEPTABLE
LEVELS, THEN GROSS MARGIN WILL DECLINE.

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

         MAJOR RETAILERS PURCHASING ELECTRONIC EQUIPMENT REQUIRE BUY-BACK
PROTECTIONS, WHICH COULD MATERIALLY IMPAIR OUR CASH FLOW.

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

         SINCE OUR PRODUCTS ARE MANUFACTURED OVERSEAS, CHANGES IN POLITICAL OR
ECONOMIC CONDITIONS IN THOSE COUNTRIES COULD AFFECT OUR ABILITY TO MANUFACTURE
PRODUCTS IN COMPLIANCE WITH OUR DISTRIBUTION PARTNERS' SCHEDULES.

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

         WE HAVE A LIMITED OPERATING HISTORY AND THEREFORE IT IS DIFFICULT TO
ACCURATELY MAKE PROJECTIONS AND FORECASTS.

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

         WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS, WHICH
WOULD HAVE AN ADVERSE EFFECT ON OUR ABILITY TO COMPETITIVELY MANUFACTURE AND
DISTRIBUTE OUR PRODUCTS ON A WORLD-WIDE BASIS.

         Our ability to compete depends upon internally developed technology and
technology from third parties. To protect our proprietary rights, we rely on a
combination of patent, trademark, copyright and trade secret laws,
confidentiality agreements, and protective contractual provisions. Despite these
efforts, our applications for patents and trademarks relating to our business
may not be granted and, if granted, may not provide us with any competitive
advantages. Additionally, another party may obtain a blocking patent and we
would need to either obtain a license or design around the patent in order to
continue to offer the contested feature or service in our products.

         Further, effective protection of intellectual property rights may be
unavailable or limited in some foreign countries. Our inability to adequately
protect our proprietary rights would have an adverse impact on our ability to
competitively manufacture and distribute our products on a world-wide basis.

         WE MAY BE SUBJECT TO CLAIMS THAT WE HAVE INFRINGED THE PROPRIETARY
RIGHTS OF OTHERS, WHICH COULD REQUIRE US TO OBTAIN A LICENSE, INCREASING OUR
ROYALTY EXPENSES, OR TO CHANGE OUR PRODUCTS, RESULTING IN HIGHER DEVELOPMENT
EXPENSES.

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

         OUR ANTICIPATED GROWTH COULD STRAIN OUR RESOURCES.

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


                                       25


         OUR MOBILE PRODUCT PLANS MAY NOT BE REALIZED AND WE MAY NOT BE
SUCCESSFUL IF CONSUMERS DO NOT USE MOBILE DEVICES TO ACCESS VIDEO DIGITAL MEDIA
IN ADDITION TO AUDIO.

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

         WE RELY ON THIRD-PARTY CONTENT PROVIDERS, WHO MAY NOT PROVIDE THEIR
CONTENT TO US ON ADVANTAGEOUS TERMS OR AT ALL, WHICH WOULD AFFECT THE QUALITY OF
OUR CONTENT OFFERING.

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

         IF WE ARE UNABLE TO CONTINUALLY LICENSE COMPELLING DIGITAL CONTENT ON
COMMERCIALLY REASONABLE TERMS, THEN OUR GROSS MARGINS WOULD BE NEGATIVELY
IMPACTED.

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

         DEVELOPMENT DELAYS OR COST OVERRUNS MAY NEGATIVELY AFFECT THE
PROFITABILITY OF OUR PRODUCTS.

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

         IF OUR PRODUCTS ARE NOT ABLE TO SUPPORT POPULAR DIGITAL MEDIA FORMATS,
OUR SALES WILL BE SUBSTANTIALLY IMPAIRED.

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

         CHANGES IN NETWORK INFRASTRUCTURE, TRANSMISSION METHODS AND PROTOCOLS,
AND BROADBAND TECHNOLOGIES COULD NEGATIVELY IMPACT OUR REVENUES.

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

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


                                       26


         STANDARDS FOR NON-PC WIRELESS DEVICES HAVE NOT BEEN ESTABLISHED AND
COULD DIMINISH OUR SALES IF OUR PRODUCTS AND TECHNOLOGIES ARE NOT COMPATIBLE
WITH THE NEW STANDARDS.

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

         OUR OPERATING RESULTS WILL SUFFER IF OUR SYSTEMS OR NETWORKS FAIL,
BECOME UNAVAILABLE OR PERFORM POORLY SO THAT CURRENT OR POTENTIAL USERS DO NOT
HAVE ADEQUATE ACCESS TO OUR PRODUCTS, SERVICES AND WEBSITES.

         Our ability to provide our products and services to our customers and
operate our business depends, in part, on the continued operation of our systems
and networks and those of third parties. A significant or repeated reduction in
the performance, reliability or availability of these information systems and
network infrastructure could harm our ability to conduct our business, our
reputation and our ability to attract and retain users and content providers.

         Problems with these systems and networks could result from our failure
to adequately maintain and enhance these systems and networks, natural
disasters, power failures, intentional actions to disrupt our systems, and
networks and many other man-made and natural causes. The vulnerability of our
computer and communications infrastructure is enhanced because it is located in
San Francisco, California, an area that is at heightened risk of earthquakes and
fires. We do not currently have fully redundant systems or a formal disaster
recovery plan, and we may not have adequate business interruption insurance to
compensate us for losses that may occur from a system outage. We intend to
utilize a portion of the proceeds of this offering to promote fully-redundant
systems and enhance our business interruption insurance from the present levels.

         OUR NETWORK IS SUBJECT TO SECURITY RISKS THAT COULD HARM OUR REPUTATION
AND EXPOSE US TO LITIGATION OR LIABILITY.

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

         WE MAY BE FORCED TO LITIGATE TO DEFEND OUR INTELLECTUAL PROPERTY RIGHTS
OR TO DEFEND AGAINST CLAIMS BY THIRD PARTIES AGAINST US RELATING TO INTELLECTUAL
PROPERTY, WHICH COULD BE VERY COSTLY AND DISTRACTING TO MANAGEMENT.

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

         WE MAY BE SUBJECT TO LEGAL LIABILITY FOR THE PROVISION OF THIRD-PARTY
PRODUCTS, SERVICES OR CONTENT, RESULTING IN DAMAGES OR PENALTIES.

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


ITEM 3-CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision and with the participation
of our management, including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act. Based upon that evaluation, our chief executive officer and chief
financial officer concluded that our disclosure controls and procedures are
effective, as of the end of the period covered by this report (March 31, 2006),
in ensuring that material information that we are required to disclose in
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC rules and
forms. There were no changes in our internal control over financial reporting
during the quarter ended March 31, 2006 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.

                                       28



                           PART II - OTHER INFORMATION
                           ---------------------------

ITEM 6-EXHIBITS

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



  NUMBER                              EXHIBIT TITLE
-------------------------------------------------------------------------------

   31.1      Certification of Chief Executive Officer Pursuant to Section 302
             of the Sarbanes-Oxley Act of 2002

   31.2      Certification of Chief Financial Officer Pursuant to Section 302
             of the Sarbanes-Oxley Act of 2002

   32.1      Certification of Chief Executive Officer & Chief Financial Officer
             Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


                                       29



                                   SIGNATURES
                                   ----------

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

                         HANDHELD ENTERTAINMENT, INC.
                         ----------------------------

                         BY: /S/ JEFF OSCODAR
                         Jeff Oscodar
                         Director, Chief Executive Officer & President


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

                         DATE: JULY 3, 2006





                                       30



                               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


                                       31`