**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington
      D.C. 20549





**FORM
      10-Q**





(Mark
      One)





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





For
      the
      quarterly period ended **March
      31, 2008**





Or





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





For
      the
      transition period from: _______ to _______





Commission
      File Number  001-32985





**ZVUE
      CORPORATION**


(Exact
      name of registrant as specified in its charter)


**DELAWARE**
              
              **98-0430675**(State
                  or other jurisdiction of incorporation or organization)
              
              (I.R.S.
                  Employer Identification No.)**612
                  HOWARD STREET, SUITE 600, SAN FRANCISCO, CA**
              
              **94105**(Address
                  of principal executive offices)
              
              (Zip
                  Code)




**(415)
      495-6470**





(Registrant’s
      telephone number, including area code)







(Former
      name, former address and former fiscal year, if changed since last
      report)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes x No   ̈





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      the definition of “large accelerated filer,” “accelerated filer ” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
      accelerated filer  ̈ Accelerated
      filer  ̈ Non-accelerated
      filer  ̈ Smaller
      reporting company x





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





As
      of May
      14, **** 2008,
      there were 30,269,923 shares of Issuer’s common stock, with $0.0001 par value
      per share, were outstanding.





**ZVUE
      CORPORATION**


**Table
      of Contents**





**PART
                I – FINANCIAL INFORMATION****ITEM 1:**
            **Condensed
                Consolidated Financial Statements**Condensed
                  Consolidated Balance Sheets as of March 31, 2008 (unaudited)and
                  December 31, 2007
            3Condensed
                  Consolidated Statements of Operations for the three monthsended
                  March 31, 2008 and 2007 (unaudited)
            4Condensed
                  Consolidated Statements of Cash Flows for the three monthsended
                  March 31, 2008 and 2007 (unaudited)
            5Notes
                to Condensed Consolidated Financial Statements (unaudited)
            6**ITEM 2:**
            **Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations**
            17**ITEM 4:**
            **Controls
                and Procedures**
            23**PART
                II – OTHER INFORMATION****ITEM 1:**
            **Legal
                Proceedings**
            24**ITEM 2.**
            **Unregistered
                Sales of Equity Securities and Use of Proceeds**
            24**ITEM 3.**
            **Defaults
                upon Senior Securities**
            24**ITEM 4.**
            **Submission
                of Matters to a Vote of Security Holders**
            24**ITEM 5.**
            **Other
                Information**
            24**ITEM 6:**
            **Exhibits**
            24**Signatures**
            24


2




**PART
      I. FINANCIAL INFORMATION**


**ITEM
      1.**  **CONDENSED
      CONSOLIDATED FINANCIAL INFORMATION**


**ZVUE
      Corporation**


**Condensed
      Consolidated Balance Sheets**


**(amounts
      in thousands, except share and per share amounts)**




March 31,
            
            December 31,2008
            
            2007(unaudited)**ASSETS**Cash
                and cash equivalents
            
            $
            4,614
            
            $
            4,766Accounts
                receivable, net
            
            
            1,227
            
            
            3,928Deferred
                income taxes, current
            
            
            489
            
            
            483Inventory,
                net
            
            
            666
            
            
            360Prepaid
                expenses and other current assets (includes $50 restricted
                cash)
            
            
            434
            
            
            624**Total
                current assets**
            
            
            7,430
            
            
            10,161Fixed
                assets, net
            
            
            460
            
            
            466Restricted
                cash
            
            
            1,520
            
            
            1,510Intangible
                web site assets, net
            
            
            20,914
            
            
            23,243Goodwill
            
            
            4,409
            
            
            3,973Deferred
                income taxes, non-current
            
            
            296
            
            
            461Other
                non-current assets
            
            
            679
            
            
            659**Total
                assets**
            
            $
            35,708
            
            $
            40,473**LIABILITIES
                AND SHAREHOLDERS' EQUITY**Accounts
                payable and accrued liabilities
            
            $
            4,598
            
            $
            5,432Accounts
                payable, related parties
            
            
            103
            
            
            83Line
                of credit, related party
            
            
            1,327
            
            
            1,327Deferred
                income tax liability, current
            
            
            489
            
            
            483Junior
                secured convertible debentures (net of debt discount of $1,505 and
                $1,304
                as of March 31, 2008 & December 31, 2007,
                respectively)
            
            
            194
            
            
            79Senior
                secured convertible debenture (net of debt discount of $6,791 and
                $6,034
                as of March 31, 2008 & December 31, 2007,
                respectively)
            
            
            876
            
            
            355**Total
                current liabilities**
            
            
            7,587
            
            
            7,759Long-term
                convertible note
            
            
            800
            
            
            800Junior
                secured convertible debentures (net of debt discount of $2,885 and
                $3,495
                as of March 31, 2008 & December 31, 2007,
                respectively)
            
            
            372
            
            
            205Senior
                secured convertible debenture (net of debt discount of $13,016 and
                $15,688
                as of March 31, 2008 & December 31, 2007 respectively)
            
            
            1,679
            
            
            923Total
                long-term debt, net of current portion
            
            
            2,851
            
            
            1,928Deferred
                income tax liability, non-current
            
            
            296
            
            
            461**Total
                liabilities**
            
            
            10,734
            
            
            10,148**Commitments
                and contingencies (Note 6)****Shareholders’
                Equity**Preferred
                stock, $0.0001 par value; 1,000,000 authorized; none issued and
                outstanding
            
            
            -
            
            
            -Common
                stock, $0.0001 par value; 75,000,000 authorized, 22,289,695 issued
                and
                outstanding at March 31, 2008 and 20,190,262 issued and outstanding
                at
                December 31, 2007
            
            
            2
            
            
            2Additional
                paid-in capital
            
            
            73,749
            
            
            71,541Accumulated
                deficit
            
            
            (48,777
            )
            
            (41,218
            )**Total
                shareholders’ equity**
            
            
            24,974
            
            
            30,325**Total
                liabilities and shareholders’ equity**
            
            $
            35,708
            
            $
            40,473




See
      Notes
      to Unaudited Condensed Consolidated Financial Statements


3




**ZVUE
      Corporation**


**Condensed
      Consolidated Statements of Operations**


**(in
      thousands, except share and per share data)**


**(unaudited)**





Three months endedMarch 31,2008
            
            2007Revenues,
                netProduct
                sales, net
            
            $
            21
            
            $
            315Advertising
            
            
            841
            
            
            75Total
                revenue, net
            
            
            862
            
            
            390Cost
                of revenuesProduct
                sales
            
            
            1
            
            
            242Advertising
            
            
            194
            
            
            95Total
                cost of revenues
            
            
            195
            
            
            337Gross
                profit
            
            
            667
            
            
            53Operating
                expensesResearch
                and development
            
            
            188
            
            
            172Sales
                and marketing
            
            
            826
            
            
            650General
                and administrative (includes share-based compensation of $648 and
                $395 for
                the three months ended March 31, 2008 and 2007,
                respectively)
            
            
            4,357
            
            
            2,168Total
                operating expenses
            
            
            5,371
            
            
            2,990Operating
                loss
            
            
            (4,704
            )
            
            (2,937
            )Non-operating
                income (expense)Interest
                income
            
            
            37
            
            
            40Interest
                expense
            
            
            (2,892
            )
            
            (23
            )Total
                non-operating income (expense)
            
            
            (2,855
            )
            
            17Net
                loss
            
            $
            (7,559
            )
            $
            (2,920
            )Net
                loss per share, basic and diluted
            
            $
            (0.36
            )
            $
            (0.20
            )Weighted
                average shares used in computing basic and diluted net loss per
                share
            
            
            20,709,988
            
            
            14,453,245





See
      Notes
      to Unaudited Condensed Consolidated Financial Statements


4


**ZVUE
      Corporation**


**Condensed
      Consolidated Statements of Cash Flows**


**(in
      thousands)**


**(unaudited)**





Three
                months endedMarch
                31,2008
            
            2007Cash
                flows from operating activitiesNet
                loss
            
            $
            (7,559
            )
            $
            (2,920
            )Adjustments
                to reconcile net loss to net cash used by operating
                activitiesDepreciation
                and amortization
            
            
            2,431
            
            
            702Debenture
                debt discount amortization
            
            
            2,340
            
            
            -Bad
                debt expense
            
            
            11
            
            
            2Write-down
                of inventory
            
            
            -
            
            
            (5
            )Non-cash
                expense related to stock issued for services
            
            
            175
            
            
            223Share-based
                compensation
            
            
            473
            
            
            172Changes
                in operating assets and liabilitiesAccounts
                receivable, trade
            
            
            2,690
            
            
            442Accounts
                receivable from escrow account
            
            
            -
            
            
            117Prepaid
                expenses and other current assets
            
            
            200
            
            
            80Inventories
            
            
            (306
            )
            
            (18
            )Accounts
                payable and accrued liabilities
            
            
            53
            
            
            (1,338
            )Accounts
                payable due related parties
            
            
            20
            
            
            (1,703
            )Net
                cash provided (used) by operating activities
            
            
            528
            
            
            (4,246
            )Cash
                flows from investing activitiesCash
                paid for acquisitions
            
            
            (597
            )
            
            (566
            )Change
                in restricted cash
            
            
            (10
            )
            
            -Purchases
                of property and equipment
            
            
            (49
            )
            
            (118
            )Net
                cash used by investing activities
            
            
            (656
            )
            
            (684
            )Cash
                flows from financing activitiesProceeds
                from issuance of common stock
            
            
            -
            
            
            3,830Offering
                costs
            
            
            -
            
            
            (89
            )Debt
                issue costs
            
            
            (103
            )
            
            -Proceeds
                from exercise of stock options
            
            
            79
            
            
            133Net
                cash provided (used) by financing activities
            
            
            (24
            )
            
            3,874Net
                increase (decrease) in cash and cash equivalents
            
            
            (152
            )
            
            (1,056
            )Cash
                and cash equivalents at beginning of period
            
            
            4,766
            
            
            3,653Cash
                and cash equivalents at end of period
            
            $
            4,614
            
            $
            2,597Supplemental
                cash flow disclosureConversion
                of notes payable to common stock
            
            $
            -
            
            $
            1,400Common
                stock issued for acquisitions
            
            $
            -
            
            $
            6,250Installment
                payments due from acquisitions
            
            $
            417
            
            $
            830Common
                stock issued in lieu of cash payments for principal and interest
                on
                debentures
            
            $
            1,507
            
            
            -




See
      Notes
      to Unaudited Condensed Consolidated Financial Statements


5


**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


**(in
      thousands, except per share amounts)**


**(unaudited)**





**1.
      The Company, Basis of Presentation and Significant Accounting
      Policies**





The
      Company :





Handheld
      Entertainment, Inc., was formed in February 2003 as a California corporation.
      On
      February 10, 2006 we merged with a wholly-owned subsidiary of Vika Corp., a
      Delaware inactive publicly held corporation, with Handheld Entertainment, Inc.
      (the “Subsidiary”) as the surviving entity and wholly-owned subsidiary of Vika
      Corp. We then changed the name of Vika Corp. to Handheld Entertainment, Inc.
      and
      the name of the subsidiary to HHE Corp. On April 12, 2006 we merged the
      Subsidiary into Handheld Entertainment, Inc. The above transactions were
      accounted for as a recapitalization of Handheld Entertainment, Inc., the
      California corporation. All references to “us”, “we” “our” or “the Company”
refer to the recapitalized entity, Handheld Entertainment Inc. and all
      historical operations in the accompanying financial statements are those of
      Handheld Entertainment, Inc., as recapitalized. On August 14, 2006 we affected
      a
      1.45 for 1 reverse split of our issued and outstanding common stock. All share
      and per share data in the accompanying financial statements have been
      retroactively changed to account for the recapitalization and reverse split.
      On
      October 31, 2007, we changed our name to “ZVUE Corporation” from “Handheld
      Entertainment, Inc.”





Basis
      of Presentation :





These
      interim condensed consolidated financial statements are unaudited and have
      been
      prepared on the same basis as the annual financial statements and, in the
      opinion of management, reflect all adjustments, which include only normal
      recurring adjustments necessary to present fairly the Company’s consolidated
      financial position, consolidated results of operations and consolidated cash
      flows for the periods presented. The condensed consolidated balance sheet data
      as of December 31, 2007 is derived from and should be read in conjunction with
      the audited financial statements, which are included in the Company’s Annual
      Report for the year ended December 31,2007 on Form 10-KSB filed with the
      Securities and Exchange Commission. Pursuant to the rules of the Securities
      and
      Exchange Commission, these financial statements do not include all disclosures
      required by generally accepted accounting principles. The results for the three
      months ended March 31, 2008 are not necessarily indicative of the expected
      results for any other interim period or for the year ending December 31,
      2008.





Going
      Concern :





These
      consolidated financial statements contemplate the realization of assets and
      the
      satisfaction of liabilities in the normal course of business. The Company has
      incurred losses and negative cash flows from operations and has an accumulated
      deficit at March 31, 2008 of $48,777. Because of past losses, and a history
      of
      negative cash flows from operations, the Company’s independent registered public
      accounting firm for the year ended December 31, 2007 included a paragraph in
      their report indicating substantial doubt as to the Company’s ability to
      continue as a going concern.





With
      our
      available cash of $4.6 million at March 31, 2008 and $3.7 million available
      from
      a financing agreement with a related party and the expected growth in our
      business, we believe that we have sufficient funds and anticipated future cash
      flows to continue in operation at least through the end of 2008. While we have
      invested in our content and product strategy, we believe that based on our
      current cash and working capital position, our existing borrowing capacity,
      and
      our assessment of how potential equity investors will view us and the expected
      growth in our business, we will be able to execute our business plan
      successfully and continue operations through December 2008. 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 should we require additional financing, we will not be able to
      obtain it to continue operations. Furthermore, any additional equity or
      convertible debt financing will be dilutive to existing shareholders and may
      involve preferential rights over common shareholders. Debt financing, with
      or
      without equity conversion features, may involve restrictive covenants. We may
      seek additional equity and/or debt financing to sustain our growth strategy
      although as of the date of these financial statements, our financial projections
      do not indicate that our existing operations and our expected growth plans
      will
      require us to. Our business plan is based on our ability to generate future
      revenues from the sale of advertising on our network of humor-based websites
      as
      well as the take advantage of the projected growth of our product business
      which
      we expect to be able to market and sell our existing and future products through
      our established retail channel. However, 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


**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


**(in
      thousands, except per share amounts)**


**(unaudited)**





Principles
      of Consolidation :




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







Use
      of
      Estimates :





The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      in
      the Company’s consolidated financial statements and notes thereto.





Significant
      estimates and assumptions made by management include the allowance on accounts
      receivable, inventory reserves, the valuation and useful life of acquired web
      sites, the valuation of goodwill, the fair value of stock-based awards issued,
      and estimates of allowances for product sales returns. Actual results could
      differ.





Inventories :





Inventories
      consist primarily of finished goods, are valued at the lower of cost or market
      and are accounted for on the first-in, first-out basis. Inventories were valued
      at $666 as of March 31, 2008 and $360 as of December 31, 2007.





Foreign
      Currency :





The
      accompanying financial statements are presented under accounting principles
      generally accepted in the United States of America and in U.S. dollars. The
      functional currency of the Company’s United Kingdom subsidiary, Putfile Limited,
      is the U.S. dollar. Gains and losses resulting from foreign currency
      transactions are recognized in operations in the period incurred.





Segment
      information :





The
      Company operates in a single segment - Media Distribution.





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.


Reclassifications:




Certain amounts in the accompanying 2007 financial statements
      have been reclassified to conform to the 2008 presentation.




7


**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


**(in
      thousands, except per share amounts)**


**(unaudited)**





Revenue
      Recognition :





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. 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.





Advertising
      revenues includes amounts charged to customers for advertisements placed on
      our
      web sites and is recognized in the period when the advertisements are placed
      on
      our web sites. 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
      of Credit Risk and Significant Customers and Suppliers :





At
      March
      31, 2008, three customers accounted for 27%, 26% and 17% of gross accounts
      receivable before the allowance for doubtful accounts. At March 31, 2007, one
      customer accounted for 54% of gross accounts receivable before the allowance
      for
      doubtful accounts.





One
      advertising customer accounted for 40% of the net revenue for the three months
      ended March 31, 2008. In the three months ended March 31, 2007, one product
      customer represented 44% of our revenues. The Company is therefore materially
      dependent upon certain customers. Due to the nature of our business and the
      relative size of the contracts, which are entered into in the ordinary course
      of
      business, the loss of any single significant customer, including the above
      customers, would have a material adverse effect on our results.





Our
      ZVUE
      260 was manufactured by one factory in China. Our next model player is to be
      manufactured by a different factory also in China. Purchases were $295 and
      $290
      for the three months ended March 31, 2008 and 2007, respectively. 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.





In
      general, no product was sold during the first three months of 2008. During
      the
      first three months of 2007, product sales were derived primarily from the sale
      of one product model, the ZVUE Model 250.





Stock-Based
      Compensation :





The
      Company accounts for stock-based compensation expenses pursuant to the
      provisions of Statement of Financial Accounting Standards No. 123 (revised
      2004), Share-Based Payment, or SFAS 123R, which requires that all share- based
      payments, including grants of employee stock options, be recognized as an
      expense in the statement of operations based on their grant date fair values
      and
      vesting periods.


8


**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


**(in
      thousands, except per share amounts)**


**(unaudited)**





Recent
      Accounting Pronouncements :





***FASB
      Statement No. 141(R),"Business Combinations", (“SFAS
      141(R)”)*** :
      In
      December 2007, the Financial Accounting Standards Board (FASB) issued No. 141R
      which will change the accounting for and reporting of business combination
      transactions. The most significant changes in the accounting for business
      combinations under SFAS 141(R) include: (1) valuation of any acquirer shares
      issued as purchase consideration will be measured at fair value as of the
      acquisition date; (2) contingent purchase consideration, if any, will generally
      be measured and recorded at the acquisition date, at fair value, with any
      subsequent change in fair value reflected in earnings rather than through an
      adjustment to the purchase price allocation; (3) acquired in-process research
      and development costs, which have historically been expensed immediately upon
      acquisition, will now be capitalized at their acquisition date fair values,
      measured for impairment over the remaining development period and, upon
      completion of a successful development project, amortized to expense over the
      asset's estimated useful life; (4) acquisition related costs will be expensed
      as
      incurred rather than capitalized as part of the purchase price allocation;
      and
      (5) acquisition related restructuring cost accruals will be reflected within
      the
      acquisition accounting only if certain specific criteria are met as of the
      acquisition date; the prior accounting convention, which permitted an acquirer
      to record restructuring accruals within the purchase price allocation as long
      as
      certain, broad criteria had been met, generally around formulating, finalizing
      and communicating certain exit activities, will no longer be permitted. SFAS
      141(R) is effective for reporting periods beginning on or after December 15,
      2008. Earlier adoption is not permitted. The Company anticipates that adoption
      of this pronouncement will significantly impact how the Company accounts for
      business combination transactions consummated after the effective date, in
      the
      various areas outlined above.





***SFAS
      No. 160,*** **“Non-Controlling
      Interests in Consolidated Financial Statements” (“SFAS
      160”):** In
      December 2007, the FASB issued SFAS No. 160, this Statement amends Accounting
      Research Bulletin No. 51, “Consolidated Financial Statements” to establish
      accounting and reporting standards for the non-controlling interest in a
      subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is required
      to
      be adopted simultaneously with SFAS 141R and is effective for reporting periods
      on or after December 15, 2008. An earlier adoption is not permitted. Currently,
      the Company does not have any non-controlling interest in our subsidiary and
      accordingly, the adoption of SFAS 160 is not expected to have a material impact
      on our consolidated financial position, cash flows or results of operations.





***SFAS No. 159,
      The Fair Value Option for Financial Assets and Financial Liabilities
      (“SFAS 159”):*** In
      February 2007, the FASB issued SFAS 159 which permits entities to choose to
      measure many financial instruments and certain other items at fair value that
      are not currently required to be measured at fair value. The adoption of
      SFAS 159 on January 1, 2008 did not impact our financial position,
      cash flows, and results of operations.





***Statement
      No. 157, “Fair Value Measurements” (“FASB No. 157”):*** In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS
      No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring
      fair value, and enhances fair value measurement disclosure. In February 2008,
      the FASB issued FASB Staff Position (FSP) 157-1, “Application of FASB Statement
      No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That
      Address Fair Value Measurements for Purposes of Lease Classification or
      Measurement under Statement 13” (FSP 157-1) and FSP 157-2, “Effective Date of
      FASB Statement No. 157” (FSP 157-2). FSP 157-1 amends SFAS No. 157 to remove
      certain leasing transactions from its scope. FSP 157-2 delays the effective
      date
      of SFAS No. 157 for all non-financial assets and non-financial liabilities,
      except for items that are recognized or disclosed at fair value in the financial
      statements on a recurring basis (at least annually), until the beginning of
      the
      first quarter of fiscal 2010. The measurement and disclosure requirements
      related to financial assets and financial liabilities are effective for the
      Company beginning in the first quarter of 2009. The adoption of SFAS No. 157
      for
      financial assets and financial liabilities will not have a significant impact
      on
      the Company’s consolidated financial statements. However, the resulting fair
      values calculated under SFAS No. 157 after adoption may be different from the
      fair values that would have been calculated under previous guidance. The Company
      is currently evaluating the impact that SFAS No. 157 will have on the Company’s
      consolidated financial statements when it is applied to non-financial assets
      and
      non-financial liabilities beginning in the first quarter of
      2010.


9


**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


**(in
      thousands, except per share amounts)**


**(unaudited)**





**2.
      Accounts Receivable**





Accounts
      receivable, net consists of the following:





March 31,
            
            December 31,2008
            
            2007(unaudited)Accounts
                receivable
            
            $
            1,341
            
            $
            4,031Less:
                allowance for doubtful accounts
            
            
            (114
            )
            
            (103
            )Accounts
                receivable, net
            
            $
            1,227
            
            $
            3,928





The
      Company recorded bad debt expense of $11 and $2 for the three months ended
      March
      31, 2008 and 2007, respectively





**3.
      Intangible Web Site Assets, net**





The
      Company amortizes its intangible website costs on a straight-line basis over
      an
      estimated useful life of three years. Activity related to Intangible asset,
      websites, net for the three months ended March 31, 2008 and March 31, 2007,
      is
      as follows:




Three Months Ended
              March 31,**Unaudited**
            
            2008
            
            2007Net
                amount at beginning of period
            
            $
            23,243
            
            $
            3,607Current
                period additions
            
            
            -
            
            
            7,569Amortization
            
            
            (2,329
            )
            
            (679
            )Net
                amount at end of period
            
            $
            20,914
            
            $
            10,497





The
      additions during the three months ended March 31, 2007 included $7,069 for
      Putfile.com and $500 for UnOriginal.co.uk





**4.
      Accounts Payable and Accrued Liabilities**





Accounts
      payable and accrued liabilities consist of the following:




March 31,
            
            December 31,2008
            
            2007(unaudited)Trade
                accounts payable
            
            $
            2,049
            
            $
            2,102Acquisition
                related payments
            
            
            1,464
            
            
            1,637Payroll
                and benefits
            
            
            318
            
            
            648Reserve
                for sales returns
            
            
            123
            
            
            206Accrued
                interest
            
            
            161
            
            
            354Accrued
                commissions and ad server fees
            
            
            294
            
            
            177All
                other
            
            
            189
            
            
            308Accounts
                payables and accrued liabilities
            
            $
            4,598
            
            $
            5,432


10


**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


**(in
      thousands, except per share amounts)**


**(unaudited)**




**5.
      Debt**





The
      following table details our convertible notes as of March 31, 2008:





Accumulated
            
            ConvertibleDebt
            
            Amortization of
            
            Debt, net ofPrincipal
            
            Discount
            
            Debt Discount
            
            DiscountsConvertible 4.9% note
                payable
            
            $
            800
            
            $
            0
            
            $
            0
            
            $
            800Senior
                secured convertible debenture
            
            
            22,361
            
            
            (23,000
            )
            
            3,193
            
            
            2,554Junior
                secured convertible debentures
            
            
            4,957
            
            
            (5,099
            )
            
            709
            
            
            567Total
            
            $
            28,118
            
            $
            (28,099
            )
            $
            3,902
            
            $
            3,921Less:
                current portionSenior
                secured convertible debenture
            
            $
            7,667
            
            $
            (6,791
            )
            
            
            
            $
            876Junior
                secured convertible debentures
            
            
            1,699
            
            
            (1,505
            )
            
            
            
            
            194$
            9,366
            
            $
            (8,296
            )
            
            
            
            $
            1,070Convertible
                debt, net of current portion
            
            $
            18,752
            
            
            
            
            
            
            
            $
            2,851


Convertible
      Debentures :





Per
      the
      terms of the secured convertible debentures, and as more fully disclosed in
      Note
      6, “Convertible Debt” in our Annual Report on Form 10-KSB filed on March 31,
      2008, the Company issued on March 3, 2008, 1,306,717 shares of common stock
      to
      the holder of our Senior secured convertible debenture. The issuance of the
      shares was in lieu of a cash payment due of $639 for principal and $586 for
      accrued interest. In addition, on March 13, 2008, the holders of our Junior
      secured convertible debentures received 376,747 shares of our common stock
      in
      lieu of a cash payment due of $142 for principal and $140 for accrued interest.
      Of the 376,747 shares issued, 66,505 were issued to our Chief Technology Officer
      (CTO).





The
      results of our operations for the three months ended March 31, 2008 includes
      $2,340 of amortized debt discount, as well as $47 of debt issue
      costs.





On
      April
      1, 2008 we subsequently issued to the holder of our Senior secured convertible
      debenture 1,206,652 shares of our common stock that represented payment of
      $639
      of principal and $133 of accrued interest and on May 1, 2008, we issued an
      additional 2,454,012 shares of common stock that represented payment of $639
      of
      principal and $134 of accrued interest. In addition, on April 1, 2008 we
      subsequently issued to the holders of our Junior secured convertible debentures
      254,036 shares of our common stock that represented payment of $142 of principal
      and $20 of accrued interest and on May 1, 2008, we issued an additional 541,524
      shares of common stock that represented payment of $142 of principal and $30
      of
      accrued interest.





As
      of
      March 31, 2008, the Company has $1,520 of restricted cash from the sale of
      senior secured convertible debentures that is being held in escrow until certain
      covenants are met. The covenants principally relate to the amount of this debt
      outstanding and in general stipulate that once the debt is reduced to $11.5
      million or less, the restricted funds are to be released for general corporate
      use.


11


**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


**(in
      thousands, except per share amounts)**


**(unaudited)**




Convertible
      Note :





On
      December 15, 2006, we issued an $800 convertible note to John Paul Worsnop
      for
      the purchase of YourDailyMedia.com at a rate of 4.9% that is due on December
      31,
      2011. The note is convertible into 186,306 shares of our common stock at a
      conversion price of $4.29. The Company can force the conversion of the note
      into
      common stock under certain conditions including if the Company trades more
      than
      50,000 shares of common stock per day and the trading price of the stock for
      five days is twice the conversion price of the shares. As of March 31, 2008,
      we
      have not met the conditions to force a conversion. As of March 31, 2008, $11
      of
      interest is due on the note.





6%
      Related Party Promissory Notes :





On
      August
      13, 2007, the Company entered into an agreement with its CTO and a member of
      its
      board of directors, in which the CTO agreed to purchase from the Company, from
      time to time, up to $5 million aggregate principal amount of promissory notes
      at
      a 6% interest rate. As of March 31, 2008, $1,327 is outstanding and $3,673
      is
      available under the agreement. Amounts borrowed under the agreement are due
      by
      March 1, 2009. As of March 31, 2008, $52 of interest is due under this
      agreement.





The
      following table details the repayments of the debt detailed through the year
      ending December 31, 2011:





Year ending December 31,Remaining
              2008
            
            2009
            
            2010
            
            2011
            
            TotalRelated party notes
            
            
            
            
            
            1,327
            
            
            
            
            
            
            
            
            1,327Other
                term debt
            
            
            
            
            
            
            
            
            
            
            
            800
            
            
            800Senior
                convertible debentures
            
            
            5,750
            
            
            7,667
            
            
            8,944
            
            
            
            
            
            22,361Junior
                convertible debentures
            
            
            1,275
            
            
            1,700
            
            
            1,983
            
            
            
            
            
            4,9587,025
            
            
            10,694
            
            
            10,927
            
            
            800
            
            
            29,446





Total
      interest expense was $2,892 and $23 for the three months ended March 31, 2008
      and 2007, respectively.





**6.
      Commitments and Contingencies**





Legal
      Matters :


On
      December 21, 2007, Edward John Kowal filed a complaint in the United States
      District Court, Western District of Washington, against us seeking to enforce
      the bonus provisions of his employment contract and receive bonus compensation
      based on the projected value of the eBaum’s World, Inc. acquisition completed in
      October 2007  in
      the
      amount of approximately $2.6 million plus legal fees (Edward
      John Kowal v. ZVUE Corporation, Case No. 07-2-40332-9) .
      The
      Company disputes the
      facts of the case and intends
      to vigorously defend itself. At March 31, 2008, no trial date has been set
      and
      discovery has not commenced.





Other
      Contingencies :


The
      Company has several non-cancelable operating lease agreements primarily for
      office space to host some of its servers in New York. Future minimum
      payments under the non-cancelable operating leases are as follows:


OperatingLeasesRemaining
                fiscal year 2008
            
            $
            223Fiscal
                year 2009
            
            
            298Fiscal
                year 2010
            
            
            260$
            781


12


**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


**(in
      thousands, except per share amounts)**


**(unaudited)**





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.




The
      Company may, as a result of its acquisition of eBaum’s World, Inc., be required
      to pay as much as $29.2 million in earn out payments through March 2010. In
      addition, the Company may be required to buy back certain common shares issued
      to the Sellers of eBaum’s World, Inc. if certain defaults were to occur.





**7.
      Net Loss per Share**





Basic
      loss per share is computed using the weighted average number of shares of common
      stock outstanding during the period. Diluted loss per share is computed using
      the weighted average number of common stock and common stock equivalents
      outstanding during the period. Basic and diluted loss per share was calculated
      as follows:





Three Months EndedMarch 31,2008
            
            2007Numerator:Net
                loss
            
            $
            (7,559
            )
            $
            (2,920
            )Denominator:Weighted
                average shares used in computing basic and diluted net loss per
                share
            
            
            20,709,988
            
            
            14,453,245Basic
                and diluted net loss per share
            
            $
            (0.36
            )
            $
            (0.20
            )Antidilutive
                securities including options, warrants, and convertible debt not
                included
                in net loss per share calculationConvertible
                debt
            
            
            186,306
            
            
            186,306Convertible
                debentures
            
            
            32,638,061
            
            
            -Stock
                options outstanding
            
            
            1,463,428
            
            
            1,785,708Warrants
                outstanding
            
            
            11,284,963
            
            
            3,919,137Total
                antidilutive securities
            
            
            45,572,758
            
            
            5,891,151





The
      computation of 32,638,061 common shares underlying the convertible debentures
      is
      based on the lower of the lenders’ fixed conversion price of $1.90 or our
      optional variable conversion price for purposes of paying the monthly principal
      and interest payments in common stock. The assumed conversion price used in
      the
      above computation was $0.837.


13


**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


**(in
      thousands, except per share amounts)**


**(unaudited)**





**8.
      Shareholders’ Equity**





Preferred
      Stock :


The
      Company has authorized 1,000,000 shares of preferred stock at a par value of
      $0.0001. No shares are issued and outstanding as of March 31, 2008.





Common
      Stock :





The
      Company has authorized 75,000,000 shares of common stock at a par value of
      $0.0001. As of March 31, 2008, the Company had 22,289,695 shares issued and
      outstanding. As of December 31, 2007, the Company had 20,190,262 shares issued
      and outstanding.




During
      the three months ended March 31, 2008, we issued 1,306,717 shares of common
      stock to our senior secured convertible debenture in lieu of cash payment of
      principal and interest. In addition, we issued 376,747 shares of common stock
      to
      the holders of our junior secured convertible debentures in lieu of cash payment
      of principal and interest. For further details, refer to Note 5.
“Debt.”





Common
      Stock Grants - Employees :





During
      the three months ended March 31, 2008, the Company granted 20,000 shares of
      common stock to two employees for services. The shares granted, which
      immediately vested, were valued at the quoted trading price of the common stock
      on the respective grant dates for a total value of $20. Subsequent to their
      issuance, 10,776 shares were cancelled
      due to the employees not completing the vesting requirements associated with
      the
      grant. The value of the cancelled grants was $22.





During
      the three months ended March 31, 2008, grants totaling 47,862 shares that were
      issued during the current and prior periods vested. The total expense charged
      to
      operations during the three months ended March 31, 2008 related to current
      and
      prior grants was $350. Based on currently issued stock grants, approximately
      $3.5 million is anticipated to be charged to operations in future periods
      related to stock grants made to employees.





Common
      Stock Grants - Non Employees :





During
      the three months ended March 31, 2008, the Company granted 115,371 shares of
      common stock to a non-employee for services. The shares granted, which
      immediately vested, were valued at the quoted trading price of the common stock
      on the respective grant dates for a total value of $150. Subsequent to their
      issuance, 14,400 shares were cancelled due to another non-employee not
      completing the vesting requirement associated with the grant. The value of
      the
      cancelled grant was $29.





During
      the three months ended March 31, 2008, grants totaling 134,007 shares that
      were
      issued during the current and prior periods vested. The total expense charged
      to
      operations during the three months ended March 31, 2008 related to current
      and
      prior grants was $175. Based on currently issued stock grants, approximately
      $205 is anticipated to be charged to operations in future periods related to
      stock grants made to non-employees.


14


**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


**(in
      thousands, except per share amounts)**


**(unaudited)**





Stock
      Option Plans :





The
      Company has adopted certain equity incentive plans as described in Note 11,
      "Employee Stock Incentive Plans and Options and Warrants," of the notes to
      the
      consolidated financial statements in our Annual Report on Form 10-KSB for the
      year ended December 31, 2007. The following table summarizes activity under
      our
      stock option plans for the three months ended March 31, 2008:





WeightedOutstanding
            
            Average
            
            AggregateStock
            
            Exercise
            
            IntrinsicOptions
            
            Price
            
            ValueBalance as of December 31, 2007
            
            
            1,728,109
            
            $
            1.35Options
                granted under all plans
            
            
            50,000
            
            $
            1.01Exercised
            
            
            (229,794
            )
            $
            0.34Cancelled
            
            
            (84,887
            )
            $
            1.13Outstanding
                as of March 31, 2008
            
            
            1,463,428
            
            $
            1.51
            
            $
            685





The
      fair
      value of each option grant was estimated on the date of grant using the
      Black-Scholes option pricing model with the following assumptions and fair
      value
      per share:





Three Months Ended March 31,2008
            
            2007Risk-free
                interest rates
            
            
            1.97
            %
            
            5.26
            %Expected
                term (in years)
            
            
            5
            
            
            5Expected
                volatility
            
            
            108
            %
            
            183
            %Dividend
                yield
            
            
            0
            %
            
            0
            %





The
      expected term of the options of five years is based on utilizing the simplified
      method under SAB 107. The expected stock price volatility is based on historical
      volatility of our stock. The risk-free interest rate is based on the implied
      yield available on U.S. Treasury securities with a term equivalent to the
      expected term of the stock options. The Company has not paid dividends in the
      past.





Stock-based
      compensation expense from the issuance of stock options recognized under SFAS
      123R for the three months ended March 31, 2008 and March 31, 2007 was $122
      and
      $105, respectively. As of March 31, 2008, the aggregate stock compensation
      remaining to be amortized to expenses was $357. The Company expects this stock
      compensation balance to be amortized as follows: $144 during the remainder
      of
      2008; $113 during 2009; and $100 during 2010. The expected amortization reflects
      only outstanding stock awards as of March 31, 2008.





The
      weighted average fair value per share of the stock option awards in the three
      months ended March 31, 2008 and 2007 was $0.77 and $3.12, respectively. During
      the three months ended March 31, 2008, the Company received proceeds of $79
      from
      the exercise of options for 229,794 shares of common stock with exercise prices
      ranging from $0.145 to $0.537 per share. The intrinsic value of all the options
      exercised was $96.





As
      of
      March 31, 2008, the Company has remaining approximately 1,988,000 shares
      authorized to be issued under the 2003 and 2007 plans.


15


**ZVUE
      Corporation**


**Notes
      to Condensed Consolidated Financial Statements**


**(in
      thousands, except per share amounts)**


**(unaudited)**




Warrants :





The
      following reflects activity related to our warrants:




AverageNumber of
            
            ExerciseWarrants
            
            PriceOutstanding
                at December 31, 2007
            
            
            11,298,750
            
            $
            2.71GrantedExercisedExpired
            
            
            (13,793
            )
            $
            3.63Outstanding
                at March 31, 2008
            
            
            11,284,957
            
            $
            2.71




**9.
      Subsequent Events**




In
      addition to shares issued subsequent to March 31, 2008 to the holders of the
      Company’s debentures as more fully disclosed in Note 5, the Company issued
      restricted stock grants to a non-employee for services totaling 185,342 shares
      of common stock that were valued at $100.




See
      note
      5 for additional common stock grants issued subsequent to March 31, 2008 related
      to payments under secured convertible debentures.


16




**ITEM
      2- Management's Discussion and Analysis** **of Financial Condition and Results of Operations**





Forward-looking
      statements in this Quarterly Report on Form 10-Q, including without limitation,
      statements related to our plans, strategies, objectives, expectations,
      intentions and adequacy of resources, are made pursuant to the safe harbor
      provisions of the Private Securities Litigation Reform Act of 1995. Investors
      are cautioned that such forward-looking statements involve risks and
      uncertainties including without limitation the following: (i) our plans,
      strategies, objectives, expectations and intentions are subject to change at
      any
      time at our discretion; (ii) our plans and results of operations will be
      affected by our ability to manage growth; and (iii) other risks and
      uncertainties indicated from time to time in our filings with the Securities
      and
      Exchange Commission.




In
      some
      cases, you can identify forward-looking statements by terminology such as “may,”
“will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,”
“believes,” “estimates,” “predicts,” “potential,” or ‘‘continue’’ or the
      negative of such terms or other comparable terminology. Although we believe
      that
      the expectations reflected in the forward-looking statements are reasonable,
      we
      cannot guarantee future results, levels of activity, performance, or
      achievements. Moreover, neither we nor any other person assumes responsibility
      for the accuracy and completeness of such statements. Readers are cautioned
      not
      to place undue reliance on these forward-looking statements, which speak only
      as
      of the date hereof. We are under no duty to update any of the forward-looking
      statements after the date of this Report.




**Corporate
      History**




Handheld
        Entertainment, Inc., was formed in February 2003 as a California corporation.
        On
        February 10, 2006 we merged with a wholly-owned subsidiary of Vika Corp.,
        a
        Delaware inactive publicly held corporation, with Handheld Entertainment,
        Inc.
        (the “Subsidiary”) as the surviving entity and wholly-owned subsidiary of Vika
        Corp. We then changed the name of Vika Corp. to Handheld Entertainment, Inc.
        and
        the name of the subsidiary to HHE Corp. On April 12, 2006 we merged the
        Subsidiary into Handheld Entertainment, Inc. The above transactions were
        accounted for as a recapitalization of Handheld Entertainment, Inc., the
        California corporation. All references to “us”, “we” “our” or “the Company”
refer to the recapitalized entity, Handheld Entertainment Inc. and all
        historical operations in the accompanying financial statements are those
        of
        Handheld Entertainment, Inc., as recapitalized. On August 14, 2006 we affected
        a
        1.45 for 1 reverse split of our issued and outstanding common stock. All
        share
        and per share data in the accompanying financial statements have been
        retroactively changed to account for the recapitalization and reverse split.
        On
        October 31, 2007, we changed our name to “ZVUE Corporation” from “Handheld
        Entertainment, Inc.”


**Overview**




Our
      mission is to provide 18-35 year olds with digital entertainment both online
      and
      offline. The ZVUE Network of websites provides our demographic with compelling
      online entertainment, such as commercial and user generated video, games, images
      and other forms of online entertainment. Our ZVUE Products group works with
      content partners to bundle consumer electronics products with desirable content
      and then sell them in retail distribution. Our library of video content comes
      to
      us from both our network of user-generated video sites, which house many
      hundreds of thousands of videos that are created by users, and our commercial
      content providers who have contracted with us to provide us with approximately
      12,000 commercially produced videos. We have acquired eBaumsWorld.com,
      PutFile.com, Dorks.com, HolyLemon.com, FunMansion.com, YourDailyMedia.com,
      and
      UnOriginal.co.uk and we have built ZVUE.com, our commercial web site. Our
      commercial content is supplied by many commercial content providers, including
      Sony BMG Music Entertainment, Warner Music Group, Showtime, International
      Marketing Group, National Lampoon, Comedy Time, Canadian Broadcasting
      Corporation and others. 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 our websites by selling pre & post
      roll, video overlay, skyscraper and banner ads.




On
      October 31, 2007, we acquired eBaumsWorld.com. We believe that eBaumsWorld.com
      has become one of the world’s most significant online publishers of humor
      related content, and as one of the pioneers in the field of user generated
      content, has a strong following among its community of users and contributors.
      Press reports attesting to its success include articles in Men’s Journal, Wired
      Magazine and Maxim Magazine and the Howard Stern Radio Show. The site has also
      been nominated for the nationally televised VH1 Internet Comedy award, awarded
      the #1 spot in FHM Magazine’s “Top 100 Ultimate Websites Guide” and recognized
      as one of the 10 funniest sites on the web by PC World magazine. EbaumsWorld.com
      was recently ranked No. 5 based on market share of visits among all US websites
      in the Hitwise Entertainment-Humor industry segment.


17


In
      addition to our on-line media business, our ZVUE Products group sources, bundles
      and sells 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 per unit with the bulk of our units selling at
      retail prices below $50 per unit. We source our products through select OEM
      manufacturers, bundle them with top-tier content from our content providers
      and
      sell them through established retail distribution channels, creating a scalable
      and relatively low-risk model for our product business. We believe that this
      product business, together with the professional and user-generated content
      available online on the ZVUE Network, gives us an established and diversified
      platform from which we may continue to grow and capture new opportunities.





In
      March
      2008, we announced the launch of our ZVUE Spirit player, a patriotic-themed
      mp3
      player pre-loaded with classic, popular patriotic-themed songs from leading
      popular artists. The ZVUE Spirit is the first in a series of planned value-based
      handheld players featuring the latest in product design pre-packaged with
      compelling special-themed digital content from leading content providers. These
      new players will be sourced entirely through OEM manufacturing relationships
      while being designed and marketed by the ZVUE Products team. The ZVUE Spirit
      player is planned to ship starting in May 2008 and be available in retail stores
      as early as the Memorial Day weekend. In conjunction with this announcement
      a
      major national retailer has placed an order for more than 38,000 units.




Our
      ZVUE
      devices have been designed to be compatible with virtually all formats of
      content ranging from “digital rights management” protected commercial content to
      our user-generated content from our network of web sites.




**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.





**Impairment
      of Long-Lived Assets**





We
      evaluate our 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.





**Goodwill
      and Intangibles**





We
      account for goodwill in a purchase business combination as the excess of the
      cost over the fair value of net assets acquired. Amortization of intangible
      assets, if applicable, occurs over their estimated useful lives. Statement
      of
      Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets"
      ("SFAS 142") requires testing goodwill for impairment on an annual basis (or
      interim basis if an event occurs that might reduce the fair value of a reporting
      unit below its carrying value). We conduct the annual review for all of our
      reporting units during the fourth quarter of the calendar year unless we become
      aware of a triggering event which would cause us to perform the analysis at
      an
      earlier date.


18





**Revenue
      Recognition** ****





**Product
      Sales**





Revenue
      is recognized when persuasive evidence of an arrangement exists (generally
      a
      purchase order), product has been shipped, the sale price is fixed and
      determinable, and collection of the resulting account is reasonably assured.
      Our
      revenue is primarily derived from sales of personal media players to retailers.
      We record the associated revenue at the time of the sale net of estimated
      returns.





We
      follow
      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.





**Advertising
      Revenue**





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.





**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.





**Stock
      Based Awards**





The
      Company accounts for share-based compensation under SFAS 123R and recognizes
      the
      fair value of stock awards on a straight-line basis over the requisite service
      period of the award.





Stock-based
      compensation expense from the issuance of stock options recognized under SFAS
      123R for the three months ended March 31, 2008 and 2007 was $0.1 million for
      both periods. As of March 31, 2008, the aggregate stock compensation remaining
      to be amortized to expenses was $0.3 million. The Company expects this stock
      compensation balance to be amortized as follows: $0.1 million during the
      remainder of 2008; $0.1 million during 2009; and $0.1 million during 2010.
      The
      expected amortization reflects only outstanding stock awards as of March 31,
      2008. In addition, we recognized $0.5 million and $0.3 million of share based
      expense from the current and past issuance of restricted stock to employees
      and
      non-employees for the three months ended March 31, 2008 and 2007, respectively.
      The Company expects to continue to issue share-based awards to our employees
      and
      non-employees in future periods.





The
      full
      impact of SFAS 123R in the future is dependent upon, among other things, the
      timing of when the Company hires additional employees, the effect of new
      long-term incentive strategies involving stock awards in order to continue
      to
      attract and retain employees, the total number of stock awards granted, the
      fair
      value of the stock awards at the time of grant and the tax benefit that we
      may
      or may not receive from stock-based expenses. Additionally, the application
      of
      SFAS 123R requires the use of an option-pricing model to determine the fair
      value of stock option awards. This determination of fair value is affected
      by
      our stock price as well as assumptions regarding a number of highly complex
      and
      subjective variables. These variables include, but are not limited to, our
      expected stock price volatility over the term of the
      awards.


19





The
      following table set forth selected data for each of the periods indicated and
      is in
      thousands .
      All
      data is unaudited.




Three
                Months Ended
            
            Three
                Months EndedMarch
                31, 2008
            
            March
                31, 2007%
                of
            
            
            
            %
                of
            
            ChangeAmount
            
            Revenue
            
            Amount
            
            Revenue
            
            Amount
            
            PercentRevenues,
                netProduct
                sales, net
            
            $
            21
            
            
            2
            %
            $
            315
            
            
            81
            %
            
            (294
            )
            
            -93
            %Advertising
            
            
            841
            
            
            98
            %
            
            75
            
            
            19
            %
            
            766
            
            
            1021
            %Total
                revenue, net
            
            
            862
            
            
            100
            %
            
            390
            
            
            100
            %
            
            472
            
            
            121
            %Cost
                of revenuesProduct
                sales
            
            
            1
            
            
            0
            %
            
            242
            
            
            62
            %
            
            241
            
            
            100
            %Advertising
            
            
            194
            
            
            23
            %
            
            95
            
            
            24
            %
            
            (99
            )
            
            -104
            %Total
                cost of revenues
            
            
            195
            
            
            23
            %
            
            337
            
            
            86
            %
            
            142
            
            
            42
            %Gross
                profit
            
            
            667
            
            
            77
            %
            
            53
            
            
            14
            %
            
            614
            
            
            1158
            %Operating
                expensesResearch
                and development
            
            
            188
            
            
            22
            %
            
            172
            
            
            44
            %
            
            (16
            )
            
            -9
            %Sales
                and marketing
            
            
            826
            
            
            96
            %
            
            650
            
            
            167
            %
            
            (176
            )
            
            -27
            %General
                and administrative
            
            
            4,357
            
            
            505
            %
            
            2,168
            
            
            556
            %
            
            (2,189
            )
            
            -101
            %Total
                operating expenses
            
            
            5,371
            
            
            623
            %
            
            2,990
            
            
            767
            %
            
            (2,381
            )
            
            -80
            %Operating
                loss
            
            
            (4,704
            )
            
            -546
            %
            
            (2,937
            )
            
            -753
            %
            
            (1,767
            )
            
            -60
            %Non-operating
                income (expense)Interest
                income
            
            
            37
            
            
            4
            %
            
            40
            
            
            10
            %
            
            (3
            )
            
            -8
            %Interest
                expense
            
            
            (2,892
            )
            
            -335
            %
            
            (23
            )
            
            -6
            %
            
            (2,869
            )
            
            12474
            %Total
                non-operating income (expense)
            
            
            (2,855
            )
            
            -331
            %
            
            17
            
            
            4
            %
            
            (2,872
            )
            
            -16894
            %Net
                loss
            
            $
            (7,559
            )
            
            -877
            %
            $
            (2,920
            )
            
            -749
            %
            
            (4,639
            )
            
            -159
            %





**Results
      of Operations for the Three Months Ended March 31, 2008 Compared to the Three
      Months Ended March 31, 2007**





**Revenues**





Revenues
      increased from $390,000 for the three months ended March 31, 2007 to $862,000
      for the three months ended March 31, 2008. The 121% increase represented
      advertising revenues increasing from $75,000 to $841,000, while product revenues
      dropped from $315,000 to essentially none during the current period as no
      personal media players (PMP) were sold due to the change in our hardware model
      to an Original Equipment Manufacturer (OEM) distribution model whereby we
      source, bundle and sell portable media device units into retail distribution
      with promotional themes. The next scheduled OEM shipment is in late May 2008
      when our new ZVUE Spirit PMP will become available in Wal Mart’s retail stores.
      Wal Mart is our single largest customer for our PMPs, the loss of which would have
      a
      material adverse effect on our future results. The increase in advertising
      revenues was primarily driven by ads on our recently acquired eBaumsworld.com
      web site.


20


**Cost
      of Revenues**





Cost
      of
      revenues decreased from $337,000 for the three months ended March 31, 2007
      to
      $195,000 for the three months ended March 31, 2008. The cost of revenues for
      our
      product sales were essentially none during the current period as no PMPs were
      sold, compared to $242,000 last year. The cost of revenues related to
      advertising of $194,000 this year were primarily commissions on ad sales. Our
      soon to be released ZVUE Spirit is primarily being sourced from a single factory
      in Asia.





**Research
      and Development**





Research
      and development expenses were comparable at $188,000 for the three months ended
      March 31, 2008 and $172,000 for the three months ended March 31, 2007. Our
      research and development expenses consist primarily of salaries and benefits
      for
      research and development employees and payments to independent
      contractors.





**Sales
      and Marketing**





Sales
      and
      marketing expenses increased from $650,000 for the three months ended March
      31,
      2007 to $826,000 for the three months ended March 31, 2008. The increase
      primarily reflects an increase for commissions, consultants and additional
      web
      site related hosting expenses. Sales
      and marketing expenses consist primarily of salaries and benefits of sales
      and
      marketing personnel, commissions, advertising, printing and customer acquisition
      related costs.





**General
      and Administrative**





General
      and administrative expenses increased to $4,357,000 for the three months ended
      March 31, 2008 from $2,168,000 for the three months ended March 31, 2007. These
      amounts include non-cash charges related to web site cost amortization and
      stock-based compensation totaling $2,978,000 and $1,074,000 for three months
      ended March 31, 2008 and 2007, respectively. Excluding these non-cash charges,
      the Company incurred general and administrative expenses of $1,379,000 and
      $1,094,000 for the three months ended March 31, 2008 and 2007, respectively.
      The
      cash related increase of $285,000 is primarily attributable to expenses to
      manage our eBaumsworld.com web site that we purchased in October 2007. Our
      general and administrative cash related expenses consist primarily of salaries
      and benefits for employees, fees to our professional advisors, rent and other
      general operating costs.





**Interest
      Expense**





Interest
      expense increased from essentially none during the three months ended March
      31,
      2007 to $2,892,000 for the three months ended March 31, 2008. The interest
      expense during the current period includes $2,340,000 of non-cash amortization
      of debt discount associated with the issuance of convertible debentures in
      October 2007. During the three months ended March 31, 2008, no cash payments
      for
      interest were made.




**Liquidity
      and Capital Resources**





At
      March
      31, 2008, we had a cash balance of $4,614,000 excluding $1,570,000 of restricted
      cash.





Net
      cash
      provided by operations was $528,000 for the three months ended March 31, 2008
      compared to $4,246,000 net cash used by operations for the three months ended
      March 31, 2007. The net cash provided by operations for the three months ended
      March 31, 2008 was used to fund the net loss of $7,559,000, offset by $5,430,000
      of non-cash charges and a $2,690,000 reduction in accounts receivable. The
      reduction in our receivables was primarily attributable to an approximate
      $2,400,000 payment from Wal-Mart. The net cash used in operations for the three
      months ended March 31, 2007 was to fund the net loss of $2,920,000 and a net
      change in assets and liabilities of $2,417,000, offset by non-cash charges
      of
      $1,092,000.


21


Net
      cash
      used by investing activities was comparable at $656,000 for the three months
      ended March 31, 2008 and $684,000 for the three months ended March 31, 2007.
      Both periods include approximately $600,000 associated with the purchase of
      the
      Putfile.com web site on February 5, 2007.





Net
      cash
      provided by financing activities was essentially none for the three months
      ended
      March 31, 2008 compared to $3,874,000 for the three months ended March 31,
      2007.
      The net cash provided by financing activities during the current period included
      $79,000 received from the exercise of stock options, offset by $103,000 of
      costs
      associated with the 2007 issuance of convertible debentures. The net cash
      provided by financing activities during the three months ended March 31, 2007
      included $3,830,000 from the January 2007 private placement of common stock,
      offset by $89,000 of offering costs. In addition, the Company received $133,000
      from the exercise of stock options.





With
      our
      available cash of $4,614,000 at March 31, 2008 and $3,673,000 available
      from a financing agreement with a related party and the expected growth in
      our
      business, we believe that we have sufficient funds and anticipated future cash
      flows to continue in operation at least through the end of 2008. While we have
      invested in our content and product strategy, we believe that based on our
      current cash and working capital position, our existing borrowing capacity,
      and
      our assessment of how potential equity investors will view us and the expected
      growth in our business, we will be able to execute our business plan
      successfully and continue operations through December 2008. 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 should we require additional financing, we will not be able to
      obtain it to continue operations. Furthermore, any additional equity or
      convertible debt financing will be dilutive to existing shareholders and may
      involve preferential rights over common shareholders. Debt financing, with
      or
      without equity conversion features, may involve restrictive covenants. We may
      seek additional equity and/or debt financing to sustain our growth strategy
      although as of the date of these financial statements, our financial projections
      do not indicate that our existing operations and our expected growth plans
      will
      require us to.





Our
      business plan is based on our ability to generate future revenues from the
      sale
      of advertising on our network of humor-based websites as well as to take
      advantage of the projected growth of our product business which we expect to
      be
      able to market and sell our existing and future products through our established
      retail channel. However, 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.





**Recent
      Accounting Pronouncements**





***FASB
      Statement No. 141(R),"Business Combinations", (“SFAS
      141(R)”)*** :
      In
      December 2007, the Financial Accounting Standards Board (FASB) issued No. 141R
      which will change the accounting for and reporting of business combination
      transactions. The most significant changes in the accounting for business
      combinations under SFAS 141(R) include: (1) valuation of any acquirer shares
      issued as purchase consideration will be measured at fair value as of the
      acquisition date; (2) contingent purchase consideration, if any, will generally
      be measured and recorded at the acquisition date, at fair value, with any
      subsequent change in fair value reflected in earnings rather than through an
      adjustment to the purchase price allocation; (3) acquired in-process research
      and development costs, which have historically been expensed immediately upon
      acquisition, will now be capitalized at their acquisition date fair values,
      measured for impairment over the remaining development period and, upon
      completion of a successful development project, amortized to expense over the
      asset's estimated useful life; (4) acquisition related costs will be expensed
      as
      incurred rather than capitalized as part of the purchase price allocation;
      and
      (5) acquisition related restructuring cost accruals will be reflected within
      the
      acquisition accounting only if certain specific criteria are met as of the
      acquisition date; the prior accounting convention, which permitted an acquirer
      to record restructuring accruals within the purchase price allocation as long
      as
      certain, broad criteria had been met, generally around formulating, finalizing
      and communicating certain exit activities, will no longer be permitted. SFAS
      141(R) is effective for reporting periods beginning on or after December 15,
      2008. Earlier adoption is not permitted. The Company anticipates that adoption
      of this pronouncement will significantly impact how the Company accounts for
      business combination transactions consummated after the effective date, in
      the
      various areas outlined above.


22


***SFAS
      No. 160,*** **“Non-Controlling
      Interests in Consolidated Financial Statements” (“SFAS
      160”):** In
      December 2007, the FASB issued SFAS No. 160, this Statement amends Accounting
      Research Bulletin No. 51, “Consolidated Financial Statements” to establish
      accounting and reporting standards for the non-controlling interest in a
      subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is required
      to
      be adopted simultaneously with SFAS 141R and is effective for reporting periods
      on or after December 15, 2008. An earlier adoption is not permitted. Currently,
      the Company does not have any non-controlling interest in our subsidiary and
      accordingly, the adoption of SFAS 160 is not expected to have a material impact
      on our consolidated financial position, cash flows or results of operations.





***SFAS No. 159,
      The Fair Value Option for Financial Assets and Financial Liabilities
      (“SFAS 159”):*** In
      February 2007, the FASB issued SFAS 159 which permits entities to choose to
      measure many financial instruments and certain other items at fair value that
      are not currently required to be measured at fair value. The adoption of
      SFAS 159 on January 1, 2008 did not impact our financial position,
      cash flows, and results of operations.





***Statement
      No. 157, “Fair Value Measurements” (“FASB No. 157”):*** In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS
      No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring
      fair value, and enhances fair value measurement disclosure. In February 2008,
      the FASB issued FASB Staff Position (FSP) 157-1, “Application of FASB Statement
      No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That
      Address Fair Value Measurements for Purposes of Lease Classification or
      Measurement under Statement 13” (FSP 157-1) and FSP 157-2, “Effective Date of
      FASB Statement No. 157” (FSP 157-2). FSP 157-1 amends SFAS No. 157 to remove
      certain leasing transactions from its scope. FSP 157-2 delays the effective
      date
      of SFAS No. 157 for all non-financial assets and non-financial liabilities,
      except for items that are recognized or disclosed at fair value in the financial
      statements on a recurring basis (at least annually), until the beginning of
      the
      first quarter of fiscal 2010. The measurement and disclosure requirements
      related to financial assets and financial liabilities are effective for the
      Company beginning in the first quarter of 2009. The adoption of SFAS No. 157
      for
      financial assets and financial liabilities will not have a significant impact
      on
      the Company’s consolidated financial statements. However, the resulting fair
      values calculated under SFAS No. 157 after adoption may be different from the
      fair values that would have been calculated under previous guidance. The Company
      is currently evaluating the impact that SFAS No. 157 will have on the Company’s
      consolidated financial statements when it is applied to non-financial assets
      and
      non-financial liabilities beginning in the first quarter of 2010.




**ITEM
      4 - Controls and Procedures**





We
      carried out an evaluation, under the supervision and with the participation
      of
      our management, including our chief executive officer and interim 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 issuer’s 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 interim
      chief financial officer concluded that our disclosure controls and procedures
      are effective, as of the period ended March 31, 2008, 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 Securities and Exchange Commission rules
      and
      forms.





There
      were no changes in our internal control over financial reporting during the
      three months ended March 31, 2008 that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.


23


**PART
      II – OTHER INFORMATION**




**ITEM
      1 – Legal Proceedings**





Not
      applicable





**ITEM
      2 – Unregistered Sales of Equity Securities and Use of
      Proceeds**





Not
      applicable





**ITEM
      3 – Defaults upon Senior Securities**





Not
      applicable


**ITEM
      4 – Submission of Matters to a Vote of Securities Holders**





Not
      applicable





**ITEM
      5 – Other Information**





Not
      applicable





**ITEM
      6 – Exhibits**




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




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





**SIGNATURES**





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





**ZVUE
                CORPORATION****By:**/s/**Jeff Oscodar**Jeff
                OscodarDirector,
                Chief Executive Officer & President (Principal Executive
                Officer)**By:**/s/**Thomas Hillman**Thomas
                HillmanInterim
                Chief Financial Officer (Principal Financial and Accounting
                Officer)**Date:
                May 15, 2008**


24


**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


25