**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington
      D.C. 20549





**FORM
      10-QSB**





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





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





o
            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  o




Indicate
      by check mark whether the registrant is a shell company (as defined in rule
      12b-2 of the Exchange Act).




YES  o NO
x





As
      of
      August 14, **** 2007,
      17,618,987 shares of Issuer’s common stock, with $0.0001 par value per share,
      were outstanding.





Transitional
      Small Business Disclosure Format:  YES  o NO  x







**HANDHELD
      ENTERTAINMENT, INC.**





**Table
      of Contents**


**PART
                  I - FINANCIAL INFORMATION**
              
              
              **3**ITEM
                  1- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              
              
              3CONDENSED
                  CONSOLIDATED BALANCE SHEET (UNAUDITED)
              
              
              3CONDENSED
                  CONSOLIDATED STATEMENTS OF OPERATIONS  (UNAUDITED)
              
              
              4CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS  (UNAUDITED)
              
              
              5NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (UNAUDITED)
              
              
              6ITEM
                  2- MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
                  OPERATION
              
              
              25ITEM
                  3- CONTROLS AND PROCEDURES
              
              
              44**PART
                  II - OTHER INFORMATION**
              
              
              **44**ITEM
                  4- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
              
              
              44ITEM
                  6- EXHIBITS
              
              
              45**SIGNATURES**
              
              
              **46****INDEX
                  TO EXHIBITS:**
              
              
              **47**


2




**PART
      I - FINANCIAL INFORMATION**




**Item
      1- Condensed Financial Statements**




**HANDHELD
      ENTERTAINMENT, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEET**




**June
                30, 2007****Unaudited****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            1,410,233Restricted
                cash
            
            
            50,000Accounts
                Receivables, net
            
            
            489,357Inventories,
                net
            
            
            641,368Prepaid
                expenses and other current assets
            
            
            183,134**Total
                current assets**
            
            
            **2,774,092**Fixed
                assets, net
            
            
            249,002Intangible
                Asset, Websites, net
            
            
            10,413,037Debt
                Issue Costs, Net
            
            
            54,833Deferred
                equity offering costs
            
            
            480,526Deposit
                and other non-current assets
            
            
            19,174**Total
                assets**
            
            **$**
            **13,990,664****LIABILITIES
                AND SHAREHOLDERS' EQUITY**Current
                liabilities:Trade
                accounts payable
            
            $
            1,134,922Accrued
                and other liabilities
            
            
            1,619,155Short
                Term Notes Payable
            
            
            1,425,000Trade
                accounts and other obligations payable to officers, affiliates and
                related
                parties
            
            
            85,120**Total
                current liabilities**
            
            
            **4,264,197**Long
                term convertible notes
            
            
            800,000**Total
                liabilities**
            
            
            **5,064,197****Commitments
                and Contingencies (See Note 10)****Shareholders'
                Equity**Common
                stock, $0.0001 par value; 50,000,000 authorized; 17,236,950 issued
                and
                outstanding
            
            
            1,724Additional
                paid in capital - Warrants and stock options
            
            
            2,738,330Additional
                paid in capital
            
            
            35,246,241Accumulated
                deficit
            
            
            (29,059,828
            )**Total
                shareholders' equity**
            
            
            **8,926,467****Total
                liabilities and shareholders' equity**
            
            **$**
            **13,990,664**





See
      Notes
      to Unaudited Condensed Consolidated Financial Statements




3


**HANDHELD
      ENTERTAINMENT, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(Unaudited)**





**Three
                months ended June 30,**
            
            **Six
                months ended June 30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Sales
            
            $
            319,043
            
            $
            591,787
            
            $
            708,776
            
            $
            1,176,021Cost
                of goods sold
            
            
            371,895
            
            
            464,991
            
            
            708,649
            
            
            1,065,695**Gross
                margin**
            
            
            **(52,852**
            **)**
            
            **126,796**
            
            
            **127**
            
            
            **110,326****Costs
                and expenses**Sales
                and marketing
            
            
            803,047
            
            
            793,568
            
            
            1,453,043
            
            
            1,495,508General
                and administrative (including stock based compensation expense  
                of $187,091 and $188,424 for the three months ended June 30, 2007
                and 2006
                and $582,743 and $953,685 for the six months ended June 30, 2007
                and 2006)
            
            
            2,088,524
            
            
            1,398,245
            
            
            4,256,205
            
            
            3,096,357Research
                and development
            
            
            167,629
            
            
            606,328
            
            
            340,074
            
            
            960,753**Total
                operating expenses**
            
            
            **3,059,200**
            
            
            **2,798,141**
            
            
            **6,049,322**
            
            
            **5,552,618****Loss
                from operations**
            
            
            **(3,112,052**
            **)**
            
            **(2,671,345**
            **)**
            
            **(6,049,195**
            **)**
            
            **(5,442,292**
            **)****Other
                income and (expense)**Interest
                income
            
            
            19,876
            
            
            28,763
            
            
            60,257
            
            
            52,849Interest
                expense
            
            
            (18,369
            )
            
            4,747
            
            
            (41,716
            )
            
            (65,732
            )Gain/(loss)
                on conversion of debt
            
            
            —
            
            
            54,941
            
            
            —
            
            
            (1,038,743
            )**Total
                other income (expense)**
            
            
            1,417
            
            
            88,451
            
            
            18,541
            
            
            (1,051,626
            )**Net
                Loss**
            
            
            **($3,110,635**
            **)**
            
            **($2,582,894**
            **)**
            
            **($6,030,654**
            **)**
            
            **($6,493,918**
            **)****Net
                loss per share - basic and diluted**
            
            
            ($0.18
            )
            
            ($0.26
            )
            
            ($0.38
            )
            
            ($0.78
            )Weighted
                Average shares used in computing basic and diluted net loss per
                share
            
            
            16,869,770
            
            
            10,113,819
            
            
            15,809,275
            
            
            8,322,182





See
      Notes
      to Unaudited Condensed Consolidated Financial Statements


4


**HANDHELD
      ENTERTAINMENT, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


(Unaudited)




**Six
                months Ended June 30,****2007**
            
            **2006****Cash
                flows from operating activities:****Net
                cash used in operating activities**
            
            
            **($6,191,378**
            **)**
            
            **($5,644,548**
            **)****Cash
                flows from investing activities:**Acquisition
                of subsidiary, net of $1,479 cash acquired
            
            
            (732,353
            )
            
            —Acquisition
                of websites
            
            
            (200,840
            )
            
            —Deferred
                acquisition costs
            
            
            (480,526
            )
            
            —Purchase
                of equipment
            
            
            (129,769
            )
            
            (36,335
            )Purchase
                of software Licenses
            
            
            —
            
            
            (208,000
            )**Net
                cash used in investing activities**
            
            
            **(1,543,488**
            **)**
            
            **(244,335**
            **)****Cash
                flows from financing activities:**Proceeds
                from the issuance of common stock
            
            
            4,079,999
            
            
            7,605,000Short-term
                borrowings
            
            
            1,425,000
            
            
            —Short-term
                borrowings, related parties
            
            
            —
            
            
            500,000Proceeds
                from exercise of stock options
            
            
            158,587
            
            
            —Repayments
                of long-term borrowings
            
            
            —
            
            
            (79,500
            )Short
                term debt issuance costs
            
            
            (82,250
            )
            
            —Offering
                Costs - secondary common stock offering
            
            
            —
            
            
            (297,373
            )Offering
                Costs - issuance of common stock
            
            
            (89,381
            )
            
            (546,412
            )**Net
                cash provided by financing activities**
            
            
            **5,491,955**
            
            
            **7,181,715**Net
                increase (decrease) in cash and cash equivalents
            
            
            (2,242,911
            )
            
            1,292,832Cash
                and cash equivalents at beginning of period
            
            
            3,653,144
            
            
            277,734**Cash
                and cash equivalents at end of the period**
            
            **$**
            **1,410,233**
            
            **$**
            **1,570,566****SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION****CASH
                PAID DURING THE PERIOD**Interest
            
            $
            20,257
            
            $
            —Taxes
            
            
            12,935
            
            
            —**SUPPLEMENTAL
                DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES**Common
                Stock issued from the acquisition of subsidiaries and
                websites
            
            $
            6,900,000
            
            $
            —Conversion
                of notes issued from the acquisition of subsidiaries and websites
                to
                common stock
            
            
            1,618,065
            
            
            —Installment
                payments due from the acquisition of subsidiaries and
                websites
            
            
            975,000
            
            
            —Conversion
                of notes due to a related party to common stock
            
            
            
            
            
            4,452,759





See
      Notes
      to Unaudited Condensed Consolidated Financial Statements


5





**HANDHELD
      ENTERTAINMENT, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2007**


**(UNAUDITED)**





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





**Interim
      Consolidated Financial Statements**





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





**Going
      Concern**





As
      reflected in the consolidated financial statements included in the annual report
      on Form 10-KSB filed on April 2, 2007 with the SEC for the year ended December
      31, 2006, the Company had a net loss of approximately $12.2 million, negative
      gross margin of $559,955 **** and
      net
      cash used in operations of approximately $7.1 million for the year ended
      December 31, 2006 and an accumulated deficit of approximately $23.0 million
      at
      December 31, 2006. In addition, for the six months ended June 30, 2007, the
      Company has a net loss and cash used in operations of $6,030,654 and $6,191,378,
      respectively, and an accumulated deficit of $29,059,828 at June 30, 2007. These
      matters raise substantial doubt about the Company's ability to
      continue as a going concern. Our financial statements do not include any
      adjustments to reflect the possible effects on recoverability and classification
      of assets or the amounts and classification of liabilities that may result
      from
      our inability to continue as a going concern.





Historically,
      we have financed our working capital and capital expenditure requirements
      primarily from short and long-term notes, sales of common and preferred stock
      and the product financing arrangement we established with our
      contract-manufacturing partner. We may seek additional equity and/or debt
      financing to sustain our growth strategy. We were able to obtain sufficient
      funds subsequent to December 31, 2006 (see notes 6, 9 and 10) to continue in
      operation and we believe that based on our current cash position, our borrowing
      capacity, and our assessment of how potential equity investors will view us,
      we
      will be able to continue operations at least through the end of 2007. The
      forecast that our financial resources will last through that period is a
      forward-looking statement that involves significant risks and uncertainties.
      It
      is reasonably possible that we will not be able to obtain sufficient financing
      to continue operations. Furthermore, any additional equity or convertible debt
      financing will be dilutive to existing stockholders and may involve preferential
      rights over common shareholders. Debt financing, with or without equity
      conversion features, may involve restrictive covenants.





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




6





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





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





**Use
      of Estimates**





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





**Principals
      of Consolidation**




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





**Foreign
      Currency**





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





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





**Fair
      Value of Financial Instruments**





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





**Revenue
      Recognition**





*Product
      Sales*





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




7





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.





*Advertisement
      Sales*





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





**Concentrations**





*Concentration
      of Credit Risk*





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





At
      June
      30, 2007, one retailer accounted for approximately 82% of gross accounts
      receivable before the allowance for doubtful accounts.





*Concentration
      of Revenues*





In
      the
      six months ended June 30, 2007, Wal-Mart represented 61% 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*





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





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




8





Purchases
      during the three and six months ended June 30, 2007 from our manufacturing
      partner were approximately $269,000 and $601,000, respectively. This compares
      to
      approximately $1.5 million and $2.0 million, respectively, for the three and
      six
      months ended June 30, 2006. Amounts payable due to this vendor at June 30,
      2007 were approximately $341,000 and are included in accounts payable. The
      balance due is fully collateralized by substantially all assets of the Company.





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





Product
      Concentration





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





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





Accounts
      Receivable at June 30, 2007 were as follows:





Accounts
                receivable
            
            $
            561,524Less:
                Allowance for doubtful accounts
            
            
            (72,167
            )**Total
                Accounts Receivable, net**
            
            $
            489,357





The
      Company recorded bad debt expense of $6,725 and $9,025 for the three and six
      months ended June 30, 2007, respectively, and none in the same periods of
      2006.


9





**4.** **Inventories**





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





Finished
                Goods
            
            $
            647,618Less:Valuation
                Allowance
            
            
            (6,250
            )**Total
                Inventories**
            
            $
            641,368





For
      the
      three and six months ended June 30, 2007, the Company did not change the
      inventory valuation reserve. During
      the six months ended June 30, 2007, the Company wrote off inventory of
      $25,623.  There were no write offs during the three months ended June 30,
      2007.


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





At
      June
      30, 2007 Intangible Assets, net consists of the following:




**Dorks
                LLC**
            
            **FunMansion.com**
            
            **YourDailyMedia.com**
            
            **Putfile.com**
            
            **UnOriginal.co.uk**
            
            **HolyLemon.com**
            
            **TOTAL**Transaction
                Close Date
            
            
            Nov
                13, 2006
            
            
            Dec
                1, 2006
            
            
            Dec
                15, 2006
            
            
            Feb
                5, 2007
            
            
            March
                26, 2007
            
            
            April
                20, 2007Amortization
                Period
            
            
            3
                Years
            
            
            3
                Years
            
            
            3
                Years
            
            
            3
                Years
            
            
            3
                Years
            
            
            3
                YearsAt
                Cost
            
            $
            1,533,651
            
            $
            1,114,758
            
            $
            1,075,256
            
            $
            7,071,275
            
            $
            500,135
            
            $
            900,000
            
            $
            12,195,075Less:
                Amortization
            
            
            (322,351
            )
            
            (214,320
            )
            
            (194,908
            )
            
            (953,963
            )
            
            (46,245
            )
            
            (50,251
            )
            
            (1,782,038
            )Net
                Book Value
            
            $
            1,211,300
            
            $
            900,438
            
            $
            880,348
            
            $
            6,117,312
            
            $
            453,890
            
            $
            849,749
            
            $
            10,413,037





Amortization
      expense is computed using the straight-line method over the estimated useful
      life of 3 years. We incurred amortization expenses of approximately $989,000
      and
      $1,668,000 for the three and six months ended June 30, 2007, respectively.


10





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


**Dorks
                    LLC**
                
                **FunMansion.com**
                
                **YourDailyMedia.com**
                
                **Putfile.com**
                
                **UnOriginal.co.uk**
                
                **HolyLemon.com**
                
                **TOTAL**Transaction
                    Close Date
                
                
                Nov
                      13, 2006
                
                
                Dec
                    1, 2006
                
                
                Dec
                    15, 2006
                
                
                February
                    5, 2007
                
                
                March
                    26, 2007
                
                
                April
                    20, 2007Tangible
                    Assets
                
                
                —
                
                
                —
                
                
                —
                
                $
                84,421
                
                
                —
                
                
                
                
                $
                84,421Intangible
                    assets
                
                $
                1,533,651
                
                $
                1,114,758
                
                $
                1,075,256
                
                $
                7,071,275
                
                $
                500,135
                
                $
                900,000
                
                $
                12,195,075Total
                    Assets
                
                $
                1,533,651
                
                $
                1,114,758
                
                $
                1,075,256
                
                $
                7,155,696
                
                $
                500,135
                
                $
                900,000
                
                $
                12,279,496Total Liabilities
                
                
                —
                
                
                —
                
                
                —
                
                $
                88,531
                
                
                —
                
                
                
                
                $
                88,531Net
                    assets acquired
                
                $
                1,533,651
                
                $
                1,114,758
                
                $
                1,075,256
                
                $
                7,067,165
                
                $
                500,135
                
                $
                900,000
                
                $
                12,190,965


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





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





***Acquisition
      of Dorks LLC***





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





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





As
      part
      of the purchase agreement, the Company and Zeus entered into an escrow agreement
      whereby $25,000 of the cash paid under the purchase agreement would be deposited
      into an escrow account and held for six months to fund any post closing
      indemnity claims. At June 30, 2007, no claims had been identified and the
      $25,000 was released to Mr. Kowal.




11





Additionally,
      the Company and John Kowal entered into an 18 month employment agreement whereby
      the Company agreed to pay Mr. Kowal $1,667 per month for services to be rendered
      by him to assist the Company in transitioning the acquired entity to the
      Company. Additionally, under the employment agreement, Mr. Kowal is entitled
      to
      certain bonuses if the Company acquires other companies and he is materially
      involved in those transactions. The bonuses are based on the acquisition price
      of the target and range from 3 - 5% of the total price, depending on several
      factors. Under the terms of this agreement, Mr. Kowal was issued 23,342 and
      143,854 restricted common shares in 2006 and 2007, respectively, in
      consideration for his involvement in various of our acquisition
      transactions.





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





***Acquisition
      of FunMansion.com***





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





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





As
      part
      of the purchase agreement, the Company and Aperio entered into an escrow
      agreement whereby $25,000 of the cash paid under the purchase agreement would
      be
      deposited into an escrow account and held for six months to fund any post
      closing indemnity claims. At June 30, 2007, no claims had been identified and
      the $25,000 was released to Ms. Mary Dunne who is the owner of
      Aperio.





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





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




12





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





***Acquisition
      of YourDailyMedia.com***





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





As
      part
      of the purchase agreement, the Company and Mr. Worsnop entered into an escrow
      agreement whereby $25,000 of the cash paid under the purchase agreement would
      be
      deposited into an escrow account and held for six months to fund any post
      closing indemnity claims. At June 30, 2007, no claims had been identified and
      the $25,000 was released to Mr. Worsnop.





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





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





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





***Acquisition
      of Putfile Limited***





On
      February 5, 2007, we acquired 100% of the outstanding shares of
      Putfile Limited. Puftile Limited operates a leading free digital media
      website, Putfile.com, featuring user-generated content. The purchase price
      of $7.07 million for Putfile Limited was comprised of a combination of
      approximately $1,035,000 of cash ($535,000 at closing and $500,000 over the
      following twelve months) and $6,000,000 of our restricted common stock
      (2,092,050 shares). In addition we had $32,165 of acquisition costs. For
      accounting purposes, the common shares were valued at $2.87 per share or
      $6,000,000 based on the 5-day average closing price prior to the closing date
      since the quantity of shares we were required to issue to the seller was not
      determinable until the closing date.




13





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





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





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





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





Transaction
                Close Date
            
            February
                5, 2007Tangible
                Assets
            
            $
            84,421Intangible
                assets
            
            $
            7,071,275Total
                Assets
            
            $
            7,155,696Total Liabilities
            
            $
            88,531Net
                assets acquired
            
            $
            7,067,165


14





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





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





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





On
      March
      26, 2007, our wholly-owned subsidiary, Dorks LLC, acquired certain assets
      from Gareth Coote, including all of the assets and business of
      Unoriginal.co.uk, an internet website that aggregates
      user-generated content and is based in the United Kingdom. The purchase
      price for the assets and business of Unoriginal.co.uk was comprised of a
      combination of $250,000 in cash payable over 15 months beginning April 1, 2007
      and $250,000 of our restricted common stock based on the five day average of
      the
      closing price preceding the close of the transaction or 92,456 shares. In
      addition we had $135 of acquisition costs recorded as of June 30, 2007, and
      expect an additional approximate $20,000 of additional closing costs to be
      recorded in the next quarter as they are determined. For accounting purposes,
      the common shares were valued at $2.70 per share or $250,000 based on the 5-day
      average closing price prior to the closing date since the quantity of shares
      we
      were required to issue to the seller was not determinable until the closing
      date. The site, which in February 2007 attracted approximately 900,000 unique
      monthly visitors, is currently generating ad-based revenues. Additionally,
      the
      Company and Mr. Coote entered into an 18 month consulting agreement whereby
      the
      Company agreed to pay Mr. Coote $2,000 per month for services to be rendered
      by
      him to assist the Company in transitioning the acquired entity to the Company.





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





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





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





***Acquisition
      of HolyLemon.com***





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




15





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





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





**6.** **Debt**





The
      following tables details our short and long-term convertible notes as of June
      30, 2007:





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




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




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




16




If
      Handheld enters into any private placement of equity securities or securities
      convertible into equity securities while any 2008 Notes are outstanding, then
      each holder of 2008 Notes shall be entitled, subject to the terms of the 2008
      Notes, to participate in such subsequent offering on the same terms and
      conditions as the other investors therein, except that, in lieu of paying a
      cash
      purchase price in the subsequent offering, such holders shall exchange their
      2008 Notes for the securities being sold in the subsequent offering.
      Furthermore, if any subsequent offering raises gross proceeds in excess of
      $5
      million, then subject to the terms of the 2008 Notes, each such note holder
      that
      did not elect to participate in the subsequent offering may elect to have the
      entire principal and accrued interest on such holder’s 2008 Notes prepaid.




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




Pursuant
      to the several subscription agreements, **** we
      granted the purchasers of 2007 Notes certain “piggy-back” registration rights
      with respect to the shares of common stock issuable upon exercise of any
      warrants that may be issued pursuant to the terms of the 2008 Notes. (See Note
      11).




The
      warrants granted as a result of the exchange of the 2008 notes for the 2007
      notes were valued using the Black-Scholes valuation model with the following
      assumptions: volatility of 182.7 % based on historical volatility analysis,
      expected term equal to the expiration terms of the warrants, zero expected
      dividends, and risk free interest rates ranging of 4.55%. We determined that
      the
      warrants had a fair value of $1.59 per warrant or a total of approximately
      $291,000 which will be recorded as a debt issue cost and amortized to interest
      expense through the June 2008 maturity date of the 2008 Notes.





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





On
      December 15, 2006, we acquired certain assets from John Paul Worsnop,
      including all of the assets and business of YourDailyMedia.com, an internet
      website that aggregates user-generated content. The purchase price of $1.06
      million for the assets and business of YourDailyMedia.com was comprised of
      a combination of $260,000 in cash and a five-year $800,000 convertible
      promissory note in favor of John Paul Worsnop and bearing interest at 4.9%
      and
      due on December 31, 2011. The note is convertible into 186,306 shares of
      our common stock at a fixed conversion price of $4.29 per share. We
      can force the conversion of the note into our common stock under certain
      conditions including if our common stock trades more than 50,000
      shares per day and the trading price of the stock for 5 days is twice the
      conversion price of the shares or $8.58. To date we have not met the
      conditions to force conversion. As of June 30, 2007 we had accrued approximately
      $25,000 of interest related to the notes.




17




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





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





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





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





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





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





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





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




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





The
      total
      interest expense was approximately $15, 100 and $37,500 for the three and
      six months ended June 30, 2007, respectively.




18





**7.** **Net
          Loss per Share**





Basic
      earnings per share are computed using the weighted average number of common
      shares outstanding during the period. Diluted earnings per share are computed
      using the weighted average number of common and potentially dilutive securities
      outstanding during the period. Potentially dilutive securities consist of the
      incremental common shares issuable upon exercise of stock options and warrants
      and conversion of convertible debt (using the treasury stock method).
      Potentially dilutive securities are excluded from the computation if their
      effect is anti-dilutive. The treasury stock effect of options, warrants and
      conversion of convertible debt to shares of common stock outstanding at June
      30,
      2007 and 2006, respectively, has not been included in the calculation of the
      net
      loss per share as such effect would have been anti-dilutive. As a result of
      these items, the basic and diluted loss per share for all periods presented
      are
      identical. The following table summarizes the weighted average shares
      outstanding:





**Three
                months ended June 30,**
            
            **Six
                months ended June 30,****2007**
            
            **2006**
            
            **2007**
            
            **2006****Basic
                Weighted Average Shares Outstanding**
            
            
            **16,869,770**
            
            
            **10,113,819**
            
            
            **15,809,275**
            
            
            **8,322,182**Total
                Unvested Stock
            
            
            105,264
            
            
            192,237
            
            
            105,264
            
            
            192,237Less:
                Anti Dilutive Unvested stock
            
            
            (105,264
            )
            
            (192,237
            )
            
            (105,264
            )
            
            (192,237
            )Total
                Convertible Debt into Common Stock
            
            
            186,306
            
            
            —
            
            
            186,306
            
            
            —Less:
                Convertible Debt into Common Stock
            
            
            (186,306
            )
            
            —
            
            
            (186,306
            )
            
            —Total
                Stock Options Outstanding
            
            
            1,608,234
            
            
            1,704,421
            
            
            1,608,234
            
            
            1,704,421Less:
                Anti Dilutive Stock Options due to loss
            
            
            (1,608,234
            )
            
            (1,704,421
            )
            
            (1,608,234
            )
            
            (1,704,421
            )Total
                Warrants Outstanding
            
            
            3,515,689
            
            
            827,624
            
            
            3,515,689
            
            
            827,624Less:
                Anti Dilutive Warrants due to loss
            
            
            (3,515,689
            )
            
            (827,624
            )
            
            (3,515,689
            )
            
            (827,624
            )**Diluted
                Weighted Average Shares Outstanding**
            
            
            **16,869,770**
            
            
            **10,113,819**
            
            
            **15,809,275**
            
            
            **8,322,182**





In
      total,
      at June 30, 2007 and 2006 there were financial instruments convertible into
      5,416,953 and 2,724,282 common shares which may potentially dilute future
      earnings per share.





**8.** **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 95% of our sales for the three and six months ended
      June
      30, 2007 , respectively, were to customers in the United States of America;
      the
      remaining percentage were principally to customers in Europe. This
      compares to approximately 100% and 98% of sales in the three and six months
      ended June 30, 2006, respectively, were to customers in the United States of
      America; the remaining percentage were primarily to customers in Australia.




19





**9.** **Shareholders’
          Equity**




**Preferred
      Stock**





As
      a
      result of the reverse merger completed on February 10, 2006, which was accounted
      for as a recapitalization, the outstanding preferred stock of Handheld
      Entertainment, Inc. (privately held California entity) have been retroactively
      converted to common stock for financial accounting purposes and reflected as
      such on the balance sheet at June 30, 2007.




Since
      the
      reverse merger completed on February 10, 2006, the Company has 1,000,000 shares
      of preferred shares authorized of which none is outstanding at June 30,
      2007.




**Common
      Stock**




**Common
      Stock Issued for Cash**





***January
      2007 Private Placement***





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




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





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





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




20




***May
      2007 Sale of Common Stock to a Related Party***





On
      May
      25, 2007, we sold
      1 49,700 shares  of our common
      stock  for
      a
      purchase price of $1.6 7 per
      share  to
      Carl
      Page, our CTO and
      a member of the Board, with total proceeds of approximately $250,000 .
      The
      purchase price was equal to the closing bid price
      of
      the Company’s Common Stock on The NASDAQ Capital Market on the date of the
      transaction. The sale of the Shares was made pursuant to the exemption from
      registration afforded by Rule 506 of Regulation D promulgated under the
      Securities Act of 1933, as amended. The
      shares have piggyback registration rights.




**Common
      Stock Issued for Services**





In
      January 2007 the Company granted 3,000 common shares to employees for services.
      The shares cliff vest in one year from the grant date and were valued at $9,720
      based on the quoted trade price of $3.24 of the Company’s stock on the grant
      date. The Company recognized $2,700 of expense in the six months ended June
      30,
      2007. The Company also recognized approximately $127,000 of expense during
      the
      six months ended June 30, 2007 relating to common stock grants of prior periods
      which have not yet vested. Approximately $544,000 will be recognized in future
      period relating to unvested common stock grants.





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





TotalVested
            
            
            223,659Unvested
            
            
            100,954Cancelled
            
            
            32,205Total
                Granted
            
            
            356,818





During
      January and February 2007, the Company granted 89,760 common shares to
      non-employees for services rendered. The shares vest at various rates through
      June 2007 and were valued at $262,699 based on the quoted trade price of the
      Company’s common stock ranging from $2.89 to $3.83 per share on the grant dates.
      The Company recognized approximately $263,000 of expense in the six months
      ended
      June 30, 2007. The Company also recognized approximately $14,000 of expense
      relating to common stock grants of prior periods which have not yet vested.
      These grants were fully expensed as of June 30, 2007.





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





TotalUnvested
            
            
            4,310Vested
            
            
            278,333Cancelled
            
            
            10,345Total
                Granted
            
            
            292,988




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





During
      the three months ended June 30, 2007, the Company issued 403,424 common
      shares upon the cashless exercise of 403,448 warrants. Bill Keating, the
      chairman of our Board of Directors and Tim Keating, our COO, each cashlessly
      exercised a warrant for 201,724 shares in the second quarter and received
      201,712 shares upon exercise. The Company also issued 8,279 common shares upon
      the exercise of 10,345 warrants in the first quarter.





21




During
      the six months ended June 30, 2007, the Company issued 327,533 common shares
      upon the exercise of 327,533 options for approximately $159,000 of cash
      proceeds.




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





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





**Common
      Stock Issued in Business Combinations**





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





**Common
      Stock Options**





In
      January 2007, the Company granted employee stock options 65,500 common shares
      exercisable at $3.24 per share expiring in 10 years and vesting 25% at 6 months,
      50% at 9 months and 25% at 12 months. The options were valued at $204,587 or
      $3.12 per option using a Black-Scholes option pricing method with the following
      assumptions: stock price $3.24, expected life of 5 years (using the simplified
      method under SAB 107), volatility of 183% (using historical volatility since
      the
      company’s options do not trade to provide an implied volatility) and a discount
      rate of 5.26%. In the six months ended June 30, 2007, based on vesting
      provisions, the Company expensed approximately $80,000 relating to these new
      option grants. In January 2007 the Company also granted employee stock options
      17,241 common shares exercisable at $2.98 per share expiring in 10 years and
      vested immediately. These options were valued at $49,530 or $2.87 per option
      using a Black-Scholes option pricing method with the following assumptions:
      stock price $2.98, expected life of 5 years (using the simplified method under
      SAB 107), volatility of 183% (using historical volatility since the company’s
      options do not trade to provide an implied volatility) and a discount rate
      of
      5.26%. In April 2007 the Company granted employee stock options to
      pur 9,000 common shares exercisable at $2.37 per share expiring in 10 years
      and vesting 25% at 6 months, 50% at 9 months and 25% at 12 months. The options
      were valued at $20,561 or $2.28 per option using a Black-Scholes option pricing
      method with the following assumptions: stock price $2.37, expected life of
      5
      years (using the simplified method under SAB 107), volatility of 183% (using
      historical volatility since the company’s options do not trade to provide an
      implied volatility) and a discount rate of 5.19%. Year to date, the Company
      expensed approximately $3,400 relating to these new option grants. In the six
      months ended June 30, 2007, the Company also expensed approximately $43,000
      relating to option grants that occurred in November 2006.




**10.** **Commitments
          and Contingencies**





***Legal
      Matters:***





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





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





22


***Other
      Contingencies:***




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





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





***Proposed
      Acquisition of eBaum’s World, Inc. and Sale of $24 Million of Convertible
      Notes***





On
      August
      1, 2007, the Company entered into an asset purchase agreement with eBaum’s
      World, Inc., a New York corporation (“eBaum’s World”), whereby the Company’s
      wholly-owned subsidiary will acquire substantially all of the business and
      assets and assume certain liabilities of eBaum’s World subject to closing. The
      purchase price for the assets of eBaum’s World will be up to $52.5
      million payable as follows:




·
            $15
                million in cash at the closing;




·
            $5
                million in shares of the Company’s common stock will be placed in escrow
                and payable in 24 installments subject to certain restrictive covenants
                and the Company’s right to set-off;




·
            Up
                to $2.5 million in cash payable in six quarterly installments following
                the closing, subject to the achievement of certain development
                milestones;




·
            1,635,056
                shares of our common stock (valued at $2.5 million), subject to forfeiture
                if Eric Bauman, the founder of eBaum’s World, is not continually employed
                by the Company’s subsidiary for 36 months following the closing;
                and




·
            Up
                to $27.5 million dollars of “earn out” payments payable in a combination
                of cash and stock subject to achievement of certain financial and
                operational milestones of the purchased business over a three year
                period
                following the closing.




eBaum’s
      World has also agreed that, if revenues, as defined in the contract, from the
      business for the period from July 1, 2007 through June 30, 2008, do not exceed
      $5 million, then we shall have the right, subject to certain limitations, to
      reduce the purchase price by not paying $2.5 million dollars worth of either
      the
      $2.5 million dollar cash payment or the $5 million stock payment otherwise
      due
      or payable as described above or any combination thereof, at the Company's
      option.




The
      number of shares of the Company’s common stock to be issued from time to time
      pursuant to the asset purchase agreement will be calculated by dividing the
      dollar amount of the purchase price represented thereby by a ten trading day
      moving average of the closing prices of the Company’s common stock on the Nasdaq
      Capital Market at the relevant time. Because the number of shares of the
      Company’s common stock that it may issue as part of the purchase price will
      depend in part on the market prices of the Company’s common stock at the time
      that these shares are required to be issued, the number of shares of common
      stock that the Company will be required to issue cannot be determined at this
      time and such number of shares may be in excess 20% of the Company’s
      pre-transaction outstanding shares of common stock. Accordingly, the Company
      will seek stockholder approval of the acquisition in accordance with the rules
      of the Nasdaq Stock Market. The
      Company expects to close the acquisition upon obtaining stockholder approval
      and
      upon the satisfaction or waiver of certain closing conditions contained in
      the
      asset purchase agreement .




23


In
      addition, on August 2, 2007, the Company entered into a securities purchase
      agreement with YA Global Investments, L.P. (“YA Global”), whereby the Company
      has agreed to sell and YA Global has agreed to purchase (i) $23 million
      principal amount of debentures that will be convertible into shares of the
      Company’s common stock at a conversion price of $1.90 per share; (ii) warrants
      to purchase 3,026,316 shares of the Company’s common stock at an exercise price
      of $1.90 per share and (iii) warrants to purchase 2,751,196 shares of the
      Company’s common stock at an exercise price of $2.09 per share for an aggregate
      purchase price of $23 million. In addition to certain anti-dilution provisions,
      and subject to certain exceptions, if at any time while the convertible debt
      is
      outstanding, Handheld issues shares of its common stock or securities
      exercisable for, or convertible into, shares of its common stock at a price
      per
      share that is less than the conversion price of the common stock, then the
      conversion price shall be reduced to such lesser price. The Company expects
      to
      use $15 million of the proceeds from the sale of the convertible debentures
      and
      warrants to fund the cash portion of the purchase price for the assets of
      eBaum’s World. Additionally, the Company expects to sell an additional $1
      million principal amount of the convertible debentures and the related warrants
      under substantially the same terms and conditions as the convertible debentures
      referred to above to Carl Page, our chief technology officer and a member of
      our
      board of directors, and Eric Bauman and Neil Bauman, who will enter into
      employment relationships with our subsidiary at closing.




The
      Company will have the right to make certain payments due under the convertible
      debentures in shares of its common stock rather than in cash. The number of
      shares of the Company’s common stock that may be issued from time to time in
      payment of principal of and interest under the convertible debentures will
      be
      calculated by dividing the dollar amount of the relevant payment by the lesser
      of (i) $1.90 or (ii) 90% of the lowest daily dollar volume-weighted average
      price of the Company’s common stock on the Nasdaq Capital Market during the ten
      trading days immediately preceding the payment date. Because the number of
      shares of the Company’s common stock that it may issue as part of such payments
      will depend in part on market prices of the Company’s common stock around the
      times that the payments are due, the number of shares that the Company will
      be
      required to issue and the prices at which such shares will be issued cannot
      be
      determined at this time. The Company may issue a number of shares of its common
      stock in excess 20% of the Company’s pre-transaction outstanding shares of
      common stock at prices below the book or market value its common stock.
      Accordingly, the Company will also seek stockholder approval of the sale of
      the
      convertible debentures and in accordance with the rules of the Nasdaq Stock
      Market. The Company expects to close on the sale of the convertible debentures
      and warrant upon obtaining stockholder approval and upon the satisfaction or
      waiver of certain closing conditions contained in the securities purchase
      agreement.





***$5
      million Line of Credit - Related Party***




On
      August
      13, 2007, the Company entered into an agreement with Carl Page, our chief
      technology officer and a member of our board of directors, whereby he has agreed
      to purchase from the Company, from time to time, up to $5 million aggregate
      principle amount of promisory notes. The notes will bear an interest rate of
      6%
      and will be due January 31, 2008. As part of this agreement, Mr. Page has agreed
      to exchange $500,000 of such notes for up to $500,000 of the convertible
      debentures on the same terms and conditions as described above for those notes
      the Company plans to sell to YA Global. To date the Company has not
      utilized the line of credit.





24


***Extension
      of $1.425 million Short-Term Debt***





As
      more
      fully described in Note 6, on July 31, 2007, we exercised our right under the
      notes to require the holders of 2007 Notes to exchange the 2007 Notes for 8%
      Notes due June 27, 2008 in principal amount equal to the principal and accrued
      interest then outstanding on the 2007 Notes for which they are exchanged. Since
      we exercised our right, we issued to the holders of the Notes warrants to
      purchase 498,750 of shares of our common stock in the aggregate. The
      warrants expire on June 27, 2012 and have an exercise price of $1.90 per share
      as described more fully in Note 6.




***Warrants
      Activity***




Subsequent
      to June 30, 2007 and concurrent with extension of the short-term notes described
      in Note 6, we issued 681,000, 5-year warrants expiring July 31, 2012. The
      warrants have an exercise price of $1.90 and we will recognize interest expense
      of approximately $1.1 million through the June 2008 maturity date of the 2008
      Notes. After accounting for that issuance, outstanding warrants are as follows:




**Number
                of Warrants**
            
            **Average
                Exercise Price****Outstanding,
                June 30, 2007**
            
            
            3,515,689
            
            **$**
            **4.32**Granted
            
            
            681,000
            
            $
            1.90Exercised
            
            
            —
            
            
            —Expired
            
            
            —
            
            
            —**Outstanding,
                August 14, 2007**
            
            
            **4,196,689**
            
            **$**
            **3.93**





***Other
      Common Stock Grants for Services***





Subsequent
      to June 30, 2007, the Company granted approximately 764,000 shares
      of restricted common shares for services to various service providers which
      are
      valued at the quoted trading price of the common stock on the respective grant
      dates for a total value of approximately $1.6 million. The expense will be
      recognized over the respective service periods.




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





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


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




25


**Overview,
      Trends and Business Development**





Handheld
      Entertainment, Inc. (“we”, “us”, “our”, or “the Company”) is a Delaware
      corporation.





**Corporate
      History**





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





**Overview**





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





We
      have
      acquired PutFile.com, Dorks.com, HolyLemon.com, FunMansion.com,
      YourDailyMedia.com, and UnOriginal.co.uk and we have built ZVUE.com, our
      commercial web site. Our commercial content is supplied by many commercial
      content providers, including Sony BMG Music Entertainment, Showtime,
      International Marketing Group, National Lampoon, Canadian Broadcasting
      Corporation and others. We also have over two million songs available for
      download through our strategic partnerships with content providers, eMusic
      and
      Rhapsody. Our goal is to provide all of this content, both commercial and user
      generated, to our audience on PCs and mobile devices, which we believe are
      the
      screens that most matter to them. Our business model is to aggregate both
      commercial and user-generated content with a focus on humor, extreme sports
      and
      music videos and monetize the resulting traffic to these websites by selling
      pre
& post roll, skyscraper and banner ads.





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





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




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





26


Our
      media
      players are sold in more than 2,200 Wal-Mart stores in the United States,
      InMotion stores, as well as retail store websites, including Amazon.com and
      WalMart.com.




**Recent
      Developments**





***Proposed
      Acquisition of eBaum’s World, Inc. and Sale of $24 Million of Convertible
      Notes***





On
      August
      1, 2007, Handheld Entertainment, Inc., a Delaware corporation (the “Company”),
      entered into an asset purchase agreement with eBaum’s World, Inc., a New York
      corporation (“eBaum’s World”), whereby the Company’s wholly-owned subsidiary
      will acquire substantially all of the business and assets and assume certain
      liabilities of eBaum’s World subject to closing. The purchase price for the
      assets of eBaum’s World will be up to $52.5 million payable as
      follows:




·
            $15
                million in cash at the closing;




·
            $5
                million in shares of the Company’s common stock will be placed in escrow
                and payable in 24 installments subject to certain restrictive covenants
                and the Company’s right to set-off;




·
            Up
                to $2.5 million in cash payable in six quarterly installments following
                the closing, subject to the achievement of certain development
                milestones;




·
            Up
                to 1,635,056 shares of our common stock (valued at $2.5 million),
                subject
                to forfeiture if Eric Bauman, the founder of eBaum’s World, is not
                continually employed by the Company’s subsidiary for 36 months following
                the closing; and




·
            Up
                to $27.5 million dollars of “earn out” payments payable in a combination
                of cash and stock subject to achievement of certain financial and
                operational milestones of the purchased business over a three year
                period
                following the closing.




eBaum’s
      World has also agreed that, if revenues, as defined in the contract, from the
      business for the period from July 1, 2007 through June 30, 2008, do not exceed
      $5 million, then we shall have the right, subject to certain limitations, to
      reduce the purchase price by not paying $2.5 million dollars worth of either
      the
      $2.5 million dollar cash payment or the $5 million stock payment otherwise
      due
      or payable as described above or any combination thereof, at our
      option.




The
      number of shares of the Company’s common stock to be issued from time to time
      pursuant to the asset purchase agreement will be calculated by dividing the
      dollar amount of the purchase price represented thereby by a ten trading day
      moving average of the closing prices of the Company’s common stock on the Nasdaq
      Capital Market at the relevant time. Because the number of shares of the
      Company’s common stock that it may issue as part of the purchase price will
      depend in part on the market prices of the Company’s common stock at the time
      that these shares are required to be issued, the number of shares of common
      stock that the Company will be required to issue cannot be determined at this
      time and such number of shares may be in excess 20% of the Company’s
      pre-transaction outstanding shares of common stock. Accordingly, the Company
      will seek stockholder approval of the acquisition in accordance with the rules
      of the Nasdaq Stock Market. The Company expects to close the acquisition upon
      obtaining stockholder approval and upon the satisfaction or waiver of certain
      closing conditions contained in the asset purchase agreement.




In
      addition, on August 2, 2007, the Company entered into a securities purchase
      agreement with YA Global Investments, L.P. (“YA Global”), whereby the Company
      has agreed to sell and YA Global has agreed to purchase (i) $23 million
      principal amount of debentures that will be convertible into shares of the
      Company’s common stock at a conversion price of $1.90 per share; (ii) warrants
      to purchase 3,026,316 shares of the Company’s common stock at an exercise price
      of $1.90 per share and (iii) warrants to purchase 2,751,196 shares of the
      Company’s common stock at an exercise price of $2.09 per share for an aggregate
      purchase price of $23 million. In addition to certain anti-dilution provisions,
      and subject to certain exceptions, if at any time while the convertible debt
      is
      outstanding, Handheld issues shares of its common stock or securities
      exercisable for, or convertible into, shares of its common stock at a price
      per
      share that is less than the conversion price of the common stock, then the
      conversion price shall be reduced to such lesser price. The Company expects
      to
      use $15 million of the proceeds from the sale of the convertible debentures
      and
      warrants to fund the cash portion of the purchase price for the assets of
      eBaum’s World. Additionally, the Company expects to sell an additional $1
      million principal amount of the convertible debentures and the related warrants
      under substantially the same terms and conditions as the convertible debentures
      referred to above to Carl Page, our chief technology officer and a member of
      our
      board of directors, and Eric Bauman and Neil Bauman, who will enter into
      employment relationships with our subsidiary at closing.




27




**Forward
      Looking Statements**




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




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




28




**Results
      of Operations**





The
      following table sets forth our results of operations for the three and six
      months ended June 30, 2007 and 2006 in absolute dollars and as a percentage
      of
      sales. It also details the changes from the prior fiscal year in absolute
      dollars and in percentages.




Three
                    Months Ended June 30,
                
                **Change
                    from  previous**
                
                Six
                    Months Ended June 30,
                
                **Change
                    from previous**2007
                
                
                
                2006
                
                
                
                **year**
                
                2007
                
                
                
                2006
                
                
                
                **year****$**
                
                **As
                    % of sales**
                
                **$**
                
                **As
                    % of sales**
                
                **$
                    Increase / (Decrease)**
                
                **%**
                
                **$**
                
                **As
                    % of sales**
                
                **$**
                
                **As
                    % of sales**
                
                **$
                    Increase / (Decrease)**
                
                **%**Sales
                
                $
                319,043
                
                
                100
                %
                $
                591,787
                
                
                100
                %
                
                ($272,744
                )
                
                -46
                %
                $
                708,776
                
                
                100
                %
                $
                1,176,021
                
                
                100
                %
                $
                (467,245
                )
                
                -40
                %Cost
                    of goods sold
                
                
                371,895
                
                
                117
                %
                
                464,991
                
                
                79
                %
                
                (93,096
                )
                
                -20
                %
                
                708,649
                
                
                100
                %
                
                1,065,695
                
                
                91
                %
                
                (357,046
                )
                
                -34
                %**Gross
                    margin**
                
                
                **(52,852**
                **)**
                
                **-17**
                **%**
                
                **126,796**
                
                
                **21**
                **%**
                
                **(179,648**
                **)**
                
                **-142**
                **%**
                
                **127**
                
                
                **0**
                **%**
                
                **110,326**
                
                
                **9**
                **%**
                
                **(110,199**
                **)**
                
                **-100**
                **%****Costs
                    and expenses**Sales
                    and marketing
                
                
                803,047
                
                
                252
                %
                
                793,568
                
                
                134
                %
                
                9,479
                
                
                1
                %
                
                1,453,043
                
                
                205
                %
                
                1,495,508
                
                
                127
                %
                
                (42,465
                )
                
                -3
                %General
                    and administrative
                
                
                2,088,524
                
                
                655
                %
                
                1,398,245
                
                
                236
                %
                
                690,279
                
                
                49
                %
                
                4,256,205
                
                
                601
                %
                
                3,096,357
                
                
                263
                %
                
                1,159,848
                
                
                37
                %Research
                    and development
                
                
                167,629
                
                
                53
                %
                
                606,328
                
                
                102
                %
                
                (438,699
                )
                
                -72
                %
                
                340,074
                
                
                48
                %
                
                960,753
                
                
                82
                %
                
                (620,679
                )
                
                -65
                %**Total
                    operating expenses**
                
                
                **3,059,200**
                
                
                **959**
                **%**
                
                **2,798,141**
                
                
                **473**
                **%**
                
                **261,059**
                
                
                **9**
                **%**
                
                **6,049,322**
                
                
                **853**
                **%**
                
                **5,552,618**
                
                
                **472**
                **%**
                
                **496,704**
                
                
                **9**
                **%****Loss
                    from operations**
                
                
                **(3,112,052**
                **)**
                
                **-975**
                **%**
                
                **(2,671,345**
                **)**
                
                **-451**
                **%**
                
                **(440,707**
                **)**
                
                **16**
                **%**
                
                **(6,049,195**
                **)**
                
                **-853**
                **%**
                
                **(5,442,292**
                **)**
                
                **-463**
                **%**
                
                **(606,903**
                **)**
                
                **11**
                **%****Other
                    income and (expense)**Litigation
                    settlement proceeds, net
                
                
                -
                
                
                0
                %
                
                -
                
                
                0
                %
                
                -
                
                
                n/a
                
                
                -
                
                
                0
                %
                
                -
                
                
                0
                %
                
                -
                
                
                n/aInterest
                    income
                
                
                19,786
                
                
                6
                %
                
                28,763
                
                
                5
                %
                
                (8,977
                )
                
                -31
                %
                
                60,257
                
                
                9
                %
                
                52,849
                
                
                4
                %
                
                7,408
                
                
                14
                %Interest
                    expense
                
                
                (18,369
                )
                
                -6
                %
                
                4,747
                
                
                1
                %
                
                (23,116
                )
                
                -487
                %
                
                (41,716
                )
                
                -6
                %
                
                (65,732
                )
                
                -6
                %
                
                24,016
                
                
                -37
                %Loss
                    on conversion of debt
                
                
                -
                
                
                0
                %
                
                54,941
                
                
                9
                %
                
                (54,941
                )
                
                -100
                %
                
                -
                
                
                0
                %
                
                (1,038,743
                )
                
                -88
                %
                
                1,038,743
                
                
                -100
                %**Total
                    other income (expense)**
                
                
                1,417
                
                
                **0**
                **%**
                
                88,451
                
                
                **15**
                **%**
                
                (87,034
                )
                
                -98
                %
                
                18,541
                
                
                **3**
                **%**
                
                (1,051,626
                )
                
                **-89**
                **%**
                
                1,070,167
                
                
                -102
                %**Net
                    Loss**
                
                
                **(3,110,635**
                **)**
                
                **-975**
                **%**
                
                **(2,582,894**
                **)**
                
                **-436**
                **%**
                
                **($527,741**
                **)**
                
                **20**
                **%**
                
                **(6,030,654**
                **)**
                
                **-851**
                **%**
                
                **(6,493,918**
                **)**
                
                **-552**
                **%**
                **$**
                **463,264**
                
                
                **-7**
                **%**
 29




***Sales***





Sales
      were approximately $319,000 and $709,000 during the three and six months ended
      June 30, 2007 as compared to approximately $592,000 and $1.2 million during
      the
      comparable periods from 2006. The decrease is primarily due to a slow down
      in
      sales in Wal-Mart stores of the Model 250 as compared to the Model 200 partially
      offset by revenues from the sale of banner and skyscraper ads on our network
      of
      humor based web sites.





At
      June
      30, 2007, Wal-Mart accounted for approximately 82% of the gross accounts
      receivable and represented approximately 83% and 61% of our revenues for the
      three and six months ended June 30, 2007, respectively. At June 30, 2006,
      Wal-Mart accounted for approximately 91% of the gross accounts receivable and
      represented approximately 99% and 98% of our revenues for the three and six
      months ended June 30, 2006. As a result, for the periods being reported, we
      were
      materially dependent upon this customer for our revenues. Due to the nature
      of
      our business and the relative size of the contracts, which are entered into
      in
      the ordinary course of business, the loss of any single significant customer,
      especially Wal-Mart, would have a material adverse effect on our
      results.





All
      of
      our sales to Wal-Mart during 2007 are of our ZVUE Model 250 model while 2006
      consisted primarily of the ZVUE Model 200. While we are currently selling the
      ZVUE Model 260 to walmart.com, there can be no assurance that the Wal-Mart
      retail stores will accept the Model 260 or our additional models if, and when,
      our shipments of future models commence, or that if ordered, such products
      will
      be accepted by Wal-Mart as successfully as our ZVUE 200 or 250. The failure
      of
      these events to occur would significantly impact our future sales.





Approximately
      95% and 97% of our sales for the three and six months ended June 30, 2007 were
      to customers in the United States of America; the remaining percentage were
      principally to customers in Europe. This compares to approximately 100%
      and  98% to customers in the United States of America for the three and six
      months ended June 30, 2006.





***Cost
      of Goods Sold***





The
      decrease in cost of goods sold during the three and six months ended June 30,
      2007 as compared to the prior year is primarily the result of the reduction
      of
      unit sales of the ZVUE product. The ZVUE Model 250 is near the end of its
      lifecycle, and as expected, sales have begun to diminish. We purchase our
      products from Eastech Electronics (Taiwan) Inc., a contract manufacturer located
      in Taiwan that is the sole manufacturer of our ZVUE product. Purchases during
      the six months ended June 30, 2007 from Eastech were approximately $601,000.
      There were essentially no purchases during the three months ending June 30,
      2007
      due to a focus on selling the remaining Model 250 in inventory in anticipation
      of the arrival of new Model 260 players. This compares to purchases of
      approximately $1.5 million and $2.0 million, respectively for the three and
      six
      months ended June 30, 2006.





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




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




30


***Gross
      Margin***




While
      gross margin was positive for the six months ended June 30, 2007 as a result
      of
      our control of the expense related to production of our handheld media player
      we
      cannot guarantee that we will have positive gross margins in the future. We
      have
      historically experienced a negative gross margin as a result of expenses related
      to the introduction of the product into retail distribution, the subsequent
      expansion of the product’s distribution and the effect of higher component costs
      associated with low volume production. We expect that the basic product will
      continue to have low gross margins in the future although we expect to offset
      those margins with the introduction of new products and services which will
      be
      sold to customers of the media player, as well as other revenue streams which
      will utilize the ZVUE product as a platform to distribute content under
      subscription or single-use contracts.





***Sales
      and Marketing Expenses***





Sales
      and
      marketing expenses consist primarily of salaries and benefits for sales and
      marketing personnel, commissions, advertising, printing and customer
      acquisition-related costs. These costs have remained essentially level in the
      three and six months ended June 30, 2007 as compared to the same periods from
      the previous year. This is directly related to cost reductions for the hardware
      component of our business offset by marketing investments in the content
      business. We have made marketing investments in personnel and promotional
      expenses related to the content business to accelerate the growth of this high
      margin component of our business strategy. We may increase marketing and
      development efforts in the future as our content business grow, or as new
      versions of the ZVUE are introduced.





***General
      and Administrative Expenses***





Our
      general and administrative expenses consist primarily of salaries and benefits
      for employees, amortization and depreciation expenses, fees to our professional
      advisors, rent and other general operating costs. Our general and administrative
      expenses also include amortization expense related to the issuance of restricted
      common stock and common stock options to employees and contractors, which was
      approximately $188,000 and $583,000 in the three and six months ended June
      30,
      2007 as compared to approximately $188,000 and $954,000 in the three and six
      months ended June 30, 2006, respectively. We also include amortization expense
      related to the acquisition of our network of websites in general and
      administrative expense. In the three and six months ended June 30, 2007 those
      expenses were approximately $989,000 and $1.7 million, respectively as compared
      to $0 for both periods from the prior year.





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 $167,000 and $340,000 during the
      three and six months ended June 30, 2007 as compared to approximately $606,000
      and $961,000 during the three and six months ended June 30, 2006, a decrease
      of
      approximately 72% and 65%, respectively. Our research and development expenses
      consist primarily of salaries and benefits for research and development
      employees and payments to independent contractors. The decrease in research
      and
      development expenses is primarily as a result of the elimination of development
      work on two proposed versions of the ZVUE product and our movement to a hardware
      model which utilizes low cost components which we do not need to do significant
      development work to integrate into our products.





31


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





***Interest
      income***





Interest
      income of approximately $20,000 and $60,000 for the three and six months ended
      June 30, 2007 relate to deposits in our depository accounts as a result of
      funds
      generated by the private placement concluded in January 2007. Interest income
      from three and six months ended June 30, 2006 relates to cash balances resulting
      from the private placement concluded in February 2006.





***Interest
      expense***





Interest
      expense of approximately $22,400 and $37,500 for the three and six months ended
      June 30, 2007 were directly related to the interest payable on notes and other
      borrowings which we have entered into to fund our operations and acquisitions.
      These amounts compare to approximately ($5,000) and $66,000 for the three and
      six months ended June 30, 2006, which result from interest on borrowing which
      were subsequently converted to common stock.




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





Starting
      in December 2003, a member of our board of directors and our Chief Technology
      Officer (the “Lender” and “CTO”) from time to time made cash advances to HHE
      which were subsequently converted into notes totaling $3,741,049 to finance
      HHE’s operations. Three of the four notes provided for an interest rate of 8%
      from the date the advances thereunder were made to HHE and one note provided
      for
      an interest rate of 9.5% from the date the advances thereunder were made to
      HHE.
      As of December 31, 2005, the aggregate principal amount owing on these notes
      was
      $3,741,049 and the total accrued interest was $138,399, for a total of
      $3,879,448 owed to the Lender pursuant to these notes. Pursuant to the terms
      of
      the Lender’s convertible notes, in connection with the Merger, an aggregate of
      $3,889,662 of principal and accrued interest on the convertible notes was
      converted into a total of 1,718,395 shares of the Company’s common stock. The
      Company recognized a loss on conversion of $1,093,684.




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




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


32




**Liquidity
      and Capital Resources**





At
      June
      30, 2007, the Company had a cash and cash equivalent balance of approximately
      $1.4 million and negative working capital of approximately $1.5 million. Net
      cash used in operations was approximately $6.2 million for the six months ended
      June 30, 2007 as compared to net cash used in operations of approximately $5.6
      million for the six month period ended June 30, 2006. For the six months ended
      June 30, 2007, the Company used cash to fund the Company loss of approximately
      $6.0 million offset by non-cash items such as expenses related to the issuance
      of common stock, common stock options and warrants to employees and service
      providers of approximately $583,000 and amortization expenses related to
      acquisitions of $1.7 million.





Net
      cash
      used in investing activities in the six months ended June 30, 2007 was
      approximately $1.5 million as compared to net cash used in investing activities
      of approximately $244,000 for the six month period ended June 30, 2006. For
      the
      six months ended June 30, 2007, the primary use of the cash was to purchase
      our
      newly acquired subsidiary, Putfile, Ltd and the UnOriginal.co.uk website and
      acquisition costs associated with our proposal acquisition of eBaum's
      World which included a $350,000 cash deposit (see Note 11) as well as some
      fixed assets, primarily computer equipment, to expand our content
      business.





Net
      cash
      provided by financing activities in the six months ended June 30, 2007 was
      approximately $5.5 million as compared to approximately $7.2 million for the
      six
      month period ended June 30, 2006. The completion of the private placement in
      January 2007 resulted in gross proceeds to the company of approximately $3.8
      million offset by approximately $89,000 in offering costs. The sale of common
      stock to Carl Page, our CTO, in May 2007, resulted in cash proceeds to the
      Company of approximately $250,000 while the sale of unsecured notes in June
      2007
      resulted in cash proceeds of approximately $1.4 million offset by approximately
      $82,000 in offering costs. For the six months ended June 30, 2006, the
      completion of the private placement in February 2006 resulted in gross proceeds
      to the company of approximately $7.6 million and a payment of approximately
      $297,000 in offering costs. The company also incurred cash expenses of
      approximately $546,000 as of June 30, 2006, related to the secondary offering
      which was completed in August 2006.





Historically,
      we have financed our working capital and capital expenditure requirements
      primarily from short and long-term notes, sales of common and preferred stock
      and the product financing arrangement we established with Eastech. We
      may seek
      additional equity and/or debt financing to sustain our growth strategy. We
      believe that based on our current cash position, recent bridge note purchase
      agreement, our borrowing capacity, and our assessment of how potential equity
      investors will view us, we will be able to continue operations at least through
      the end of 2007. However it is reasonably possible that we will not be able
      to
      obtain sufficient financing to continue operations. Furthermore, any additional
      equity or convertible debt financing will be dilutive to existing shareholders
      and may involve preferential rights over common shareholders. Debt financing,
      with or without equity conversion features, may involve restrictive
      covenants.


33


**Critical
      Accounting Policies and Estimates**





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





***Inventories***





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




***Software
      Development Costs***





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





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





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





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





***Revenue
      Recognition***





*Product
      Sales*





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





34


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.





*Advertisement
      Sales*





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





***Reserve
      For Sales Returns***





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




**Factors
      That May Impact Future Operating Results**





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




***Since
      Wal-Mart represents approximately 61% of our revenues, 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 61% of our revenues during 2007.
      While we plan to aggressively expand our ad-based model to diminish hardware
      sales as a percentage of our total and market the ZVUE to other major retailers,
      we may not be successful in developing our content model and other major
      retailers may not take on the ZVUE product line. Consequently, our short-term
      business plan depends to a significant extent on continuing our relationship
      with Wal-Mart, 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.





The
      majority of our sales to Wal-Mart, our largest customer during 2006, were of
      our
      ZVUE 200 model and our MP3 player. We expect the majority of our orders shipped
      to Wal-Mart during 2007 to be of our ZVUE 250 model as well as our MP3 player
      and while we are currently shipping our Model 260 to WalMart.com there is no
      guarantee that the product will be accepted by the retail stores and there
      can
      be no assurance that Wal-Mart will accept our additional models if, and when,
      our shipments of future models commences, or that if ordered, such products
      will
      be accepted by Wal-Mart as successfully as our ZVUE 200 or 250.





35


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 and MP3 products. Eastech presently manufactures our PMPs and MP3’s
      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 product 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 December 2008.





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.





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




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





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





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





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





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





36


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





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





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





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




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





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





37


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





During
      2006, nearly all of our revenues were derived from sales of the “ZVUE 200” and
      our MP3 player. Since then we have begun selling additional products, including
      the “ZVUE 250” and the ZVUE 260 which is currently available only on
      walmart.com. Consumers may not accept our new products, on which future revenues
      will rely, or adopt our content services. Our financial success will depend
      largely on our ability to quickly and successfully establish, maintain and
      increase sales of our new products, including through untested new retail
      channels of distribution. We have assumed that there is substantial and growing
      consumer demand for PMP devices priced under $99, 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 61% of our revenues for the first
      six
      months of 2007 and 97% of the 2006 fiscal year revenues, our products and
      content may not achieve the mass market appeal and success on which we have
      based our plans. Our success is significantly dependent upon the accuracy of
      our
      price and positioning assumptions and various other assumptions including
      design, functionality, and consumer acceptance.





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





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





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





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





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





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





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





38


***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.





39


***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.





***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.





40


***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.





***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.





41


***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.





***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.




42


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





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





**RISKS
      RELATING TO OUR INDUSTRY**





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





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





**RISKS
      RELATING TO OUR COMMON STOCK**




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





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





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




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





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




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





43




**Item
      3- Controls and Procedures**





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




**PART
      II - OTHER INFORMATION**




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





On
      May
      14, 2007, we filed with the Securities and Exchange Commission a Definitive
      Proxy Statement on Schedule 14-A pursuant to Section 14(a) of the Securities
      Exchange Act of 1934, as amended, and the Rules promulgated thereunder in
      connection with the solicitation of proxies by the board of directors of
      Handheld Entertainment, Inc. for use at the annual meeting of the
      shareholders.


44





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





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





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





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




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


·
              Against:
                  64,761
 ·
                Abstain:
                    18,
                    208


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


·
              For: 8,424,488
                  (a total of 96.3% in favor)
 ·
                Against:
                    269,879
 ·
                  Abstain:
                      49,996


**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




45




**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 Financial and Accounting
                    Officer)
                  
                  **Date:
                      August 14,
                      2007**
  46




**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




47