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


                                   FORM 10-QSB



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

                  For the quarterly period ended JUNE 30, 2006
                                                 -------------


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

               For the transition period from: _______ to _______

                        Commission File Number 333-124421



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




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

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

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

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



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

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



As of August 14, 2006, 10,235,731 shares of Issuer's common stock, with $0.0001
par value per share, were outstanding.

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








                          HANDHELD ENTERTAINMENT, INC.

                                TABLE OF CONTENTS




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

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


PART II - OTHER INFORMATION                                                   35
--------------------------------------------------------------------------------

         ITEM 6- EXHIBITS                                                     35

SIGNATURES                                                                    36
--------------------------------------------------------------------------------


INDEX TO EXHIBITS:                                                            37
--------------------------------------------------------------------------------






                                       2




                         PART I - FINANCIAL INFORMATION


ITEM 1- CONDENSED FINANCIAL STATEMENTS




HANDHELD ENTERTAINMENT, INC.
CONDENSED BALANCE SHEETS
                                                                                                          DECEMBER 31,
                                                                                     JUNE 30, 2006            2005
                                                                                    ----------------    -----------------
                                                                                       UNAUDITED         RESTATED; SEE
                                                                                                            NOTE 14

ASSETS
   Current assets:
     Cash and cash equivalents, net                                                      $1,570,566             $277,734
     Restricted Cash                                                                         50,000                   --
     Accounts Receivables, net                                                              691,088              902,492
     Receivables from escrow Account                                                        102,226                   --
     Inventories, net                                                                       653,841              165,732
     Other current assets - Related Party                                                   348,000                   --
     Prepaid expenses and other current assets                                              242,050              118,354
                                                                                    ----------------    -----------------
   TOTAL CURRENT ASSETS                                                                   3,657,771            1,464,312

   Fixed assets, net                                                                         54,298               27,813
   Capitalized software, net                                                                  7,959               10,034
   Deferred equity offering costs                                                           297,373                   --
   Deposit and other non-current assets                                                     256,433               12,394
                                                                                    ----------------    -----------------

TOTAL ASSETS                                                                              4,273,834            1,514,553
                                                                                    ================    =================

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
     Current liabilities:
        Trade accounts payable                                                              794,914            1,184,086
        Accrued and other liabilities                                                       758,266              705,675
        Trade accounts and other obligations payable to officers, affiliates
         and related parties                                                              1,274,828            1,348,241
        Short term convertible and non-convertible notes and loans                               --              109,500
        Short term notes and loans, related party                                                --            3,741,049
                                                                                    ----------------    -----------------
     TOTAL CURRENT LIABILITIES                                                            2,828,008            7,088,551
                                                                                    ----------------    -----------------

   TOTAL LIABILITIES                                                                      2,828,008            7,088,551
                                                                                    ----------------    -----------------

   SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, $0.0001 par value; 50,000,000 authorized; 10,228,742 issued and
outstanding at June 30, 2006 and 3,644,106 issued and outstanding at
December 31, 2005.                                                                            1,023                  365
Additional paid in capital - Warrants and stock options                                   2,678,152            2,482,073
Additional paid in capital                                                               16,109,838            2,792,839
Accumulated deficit                                                                    (17,343,187)         (10,849,269)
                                                                                    ----------------    -----------------
   TOTAL SHAREHOLDERS' EQUITY (DEFICIT)                                                   1,445,826          (5,573,998)
                                                                                    ----------------    -----------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)                                     $4,273,834           $1,514,553
                                                                                    ================    =================

                                       See Notes to Condensed Financial Statements




                                       3



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


                                                              THREE MONTHS ENDED JUNE 30,            SIX MONTHS ENDED JUNE 30,
                                                            --------------------------------     ----------------------------------
                                                                2006               2005              2006                2005
                                                            --------------     -------------     --------------     ---------------

 Sales                                                           $591,787          $371,465         $1,176,021            $417,688
 Cost of goods sold                                               464,991          404,260           1,065,695             447,643
                                                            --------------     -------------     --------------     ---------------
 GROSS MARGIN                                                     126,796          (32,795)            110,326            (29,955)

 COSTS AND EXPENSES
    Sales and marketing                                           793,568           130,812          1,495,508             204,853
   General and administrative (including stock based
compensation expense of $188,424 and $109,103 for the
three months ended June 30, 2006 and 2005 and $953,685
and $218,205 for the six months ended June 30, 2006
and 2005)                                                       1,398,245           435,762          3,096,357             855,594
    Research and development                                      606,328           191,245            960,753             361,955
                                                            --------------     -------------     --------------     ---------------
 TOTAL OPERATING EXPENSES                                       2,798,141           757,819          5,552,618           1,422,402
                                                            --------------     -------------     --------------     ---------------

 LOSS FROM OPERATIONS                                         (2,671,345)         (790,614)        (5,442,292)         (1,452,357)

 OTHER INCOME AND (EXPENSE)
    Interest income                                                28,763                --             52,849                  --
    Interest expense                                                4,747          (26,947)           (65,732)            (43,275)
    Gain/(loss) on conversion of debt                              54,941                --        (1,038,743)                  --
                                                            --------------     -------------     --------------     ---------------
 TOTAL OTHER INCOME (EXPENSE)                                      88,451          (26,947)       (1,051,626)            (43,275)
                                                            --------------     -------------     --------------     ---------------
 NET LOSS                                                    ($2,582,894)        ($817,561)      ($6,493,918)        ($1,495,632)
                                                            ==============     =============     ==============     ===============


 NET LOSS PER SHARE - BASIC AND DILUTED                          ($0.26)           ($0.25)            ($0.78)             ($0.46)
                                                            ==============     =============     ==============     ===============

 Weighted Average shares used in computing basic and
diluted net loss per share                                     10,113,819         3,291,351          8,322,182           3,261,246
                                                            ==============     =============     ==============     ===============



                                            See Notes to Condensed Financial Statements






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


                                                                   SIX MONTHS ENDED JUNE 30,
                                                               ----------------------------------
                                                                    2006               2005
                                                               ---------------    ---------------

CASH FLOWS FROM OPERATING ACTIVITIES:
   NET CASH USED IN OPERATING ACTIVITIES                         ($5,644,548)         ($974,299)
                                                               ---------------    ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of equipment                                             (36,335)            (3,482)
   Purchase of Software Licenses                                    (208,000)                 --
                                                               ---------------    ---------------
   NET CASH USED IN INVESTING ACTIVITIES                           ($244,335)           ($3,482)

CASH FLOWS FROM FINANCING ACTIVITIES:
   Bank overdraft                                                          --             14,684
   Short-term borrowings, related parties                             500,000                 --
   Repayments of short-term borrowings, related parties                    --            (8,370)
   Long-term borrowings, related parties                                   --            958,500
   Repayments of long-term borrowings                                (79,500)                 --
   Issuance of common stock                                         7,605,000                 --
   Offering Costs - Secondary Common Stock Offering                 (297,373)                 --
   Offering Costs - Issuance of common Stock                        (546,412)                 --
   Offering costs - Convertible Series D Preferred Stock                   --           (16,017)
                                                               ---------------    ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                          $7,181,715           $948,797

Net increase (decrease) in cash and cash equivalents                1,292,832           (28,984)
Cash and cash equivalents at beginning of period                      277,734             28,984
                                                               ---------------    ---------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD                     $1,570,566                 --
                                                               ===============    ===============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
------------------------------------------------
CASH PAID DURING THE PERIOD
 Interest                                                                  --                 --
 Taxes                                                                     --                 --

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



                               See Notes to Condensed Financial Statements





                                       5




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

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

     INTERIM FINANCIAL STATEMENTS

The interim condensed financial statements have been prepared from the records
of Handheld Entertainment, Inc., a Delaware corporation ("we", "us", "our" or
the "Company") without audit. In the opinion of management, all adjustments,
which consist of only normal recurring adjustments have been made, to present
fairly the financial position at June 30, 2006 and the results of operations and
cash flows for the three and six months ended June 30, 2006 and 2005. The
interim condensed financial statements should be read in conjunction with the
financial statements and notes thereto contained in Amendment #8 to our
registration statement on Form SB-2 (Registration No. 333-133550) filed on
August 14, 2006 with the U.S. Securities and Exchange Commission ("SEC") for the
year ended December 31, 2005. The results of operations for the three and six
months ended June 30, 2006 are not necessarily indicative of the results to be
expected for any other interim period or for the full year.

     GOING CONCERN

As reflected in the accompanying financial statements, the Company has net
losses of $2,582,894 and $6,493,918 for the three and six months ended June 30,
2006, respectively, and net cash used in operations of $5,644,548 for the six
months ended June 30, 2006 and an accumulated deficit of $17,343,187 at June 30,
2006. These matters raise substantial doubt about its ability to continue as a
going concern. Our financial statements do not include any adjustments to
reflect the possible effects on recoverability and classification of assets or
the amounts and classification of liabilities that may result from our inability
to continue as a going concern.

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

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

We believe that actions being taken by management as discussed above provide the
opportunity to allow us



                                       6


to continue as a going concern.

     REVERSE STOCK SPLIT

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


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

     USE OF ESTIMATES

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

     STOCK BASED COMPENSATION

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

     FAIR VALUE OF FINANCIAL INSTRUMENTS

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




                                       7



     CONCENTRATIONS

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

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

At June 30, 2006, Wal-Mart accounted for approximately 91% of gross accounts
receivable before the allowance for doubtful accounts.

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

In the three and six months ended June 30, 2006, Wal-Mart represented 99% and
98%, respectively of our net revenues and, therefore, we were materially
dependent upon them. Due to the nature of our business and the relative size of
the contracts, which are entered into in the ordinary course of business, the
loss of any single significant customer, including the above customer, would
have a material adverse effect on our results.

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

Manufacturing of our ZVUE product is performed in China by our manufacturing
partner who is a related party (see Note 9). Any disruption of the manufacturing
process as a result of political, economic, foreign exchange or other reasons
could be disruptive to our operations. We have no reason to expect such a
disruption but we believe that, if necessary, production could be reestablished
in other territories in a reasonable period of time at reasonable terms. This
is, however, a forward-looking statement that involves significant risks and
uncertainties. It is possible that relocation of production, if it were to
become necessary, would take longer and be more expensive than anticipated. At
June 30, 2006, $4,562 of component inventory was held at the Chinese location
and we recorded $348,000 in "Other Current Assets - Related Party" related to an
advance we made for components as of June 30, 2006 (see Note 5).

Purchases during the three and six months ended June 30, 2006 were approximately
$1.5 million and $2.0 million, respectively. This compares to approximately $0.3
million and $0.5 million, respectively for the three and six months ended June
30, 2005. Amounts payable due to this vendor at June 30, 2006 was approximately
$1,063,000 and are included in accounts payable and other obligations payable to
officers, affiliates and related parties. The balance due is fully
collateralized by substantially all assets of the Company.

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

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




                                       8




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

Accounts Receivable at June 30, 2006 were as follows:

         Accounts receivable                                    $754,230
         Less:  Allowance for doubtful accounts                 (63,142)
                                                          ---------------
         TOTAL ACCOUNTS RECEIVABLE, NET                         $691,088
                                                          ===============

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

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

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

         Finished Goods                                          $717,649
         Components                                                 4,562
         Less:  Valuation Allowance                              (68,370)
                                                          ----------------
         TOTAL INVENTORIES                                       $653,841
                                                          ================

For the six months ended June 30, 2006, the Company increased the inventory
valuation reserve by $11,505 primarily related to sales returns that were
charged to cost of goods sold.

5.  OTHER CURRENT ASSETS - RELATED PARTY
    ------------------------------------

At June 30, 2006, Other current assets - Related Party of $348,000 consists of
an advance made to our manufacturing partner Eastech Electronics, Inc. for the
purchase of liquid crystal display ("LCD") screens used in the manufacture of
our media player. The advance will be recouped as our partner ships product to
us for sale to end users.

6.  PREPAID EXPENSES AND OTHER CURRENT ASSETS
    -----------------------------------------

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



         Prepaid content                                      $145,037
         Prepaid rent                                           48,510
         Prepaid insurance premiums                             19,706
         Other                                                  28,797
                                                          -------------
         TOTAL PREPAID EXPENSES AND OTHER CURRENT ASSETS      $242,050
                                                          =============





                                       9




7.  REVERSE MERGER
    --------------

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

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

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

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

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





                                       10




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


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




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

Eastech Electronics (Taiwan), Inc.        Manufacturing Partner and former Director            $1,062,908
Jeff Oscodar                              Company Officer  (President & CEO)                       53,242
William Bush                              Company Officer (CFO)                                    43,882
The Ardtully  Group                       Related Party Consultant                                 24,552
Gregory Sutyak                            Company Officer  (EVP)                                   21,070
Gene O'Donnell                            Company Officer  (VP)                                    18,005
Nathan Schulhof                           Former Company Director                                  10,000
Larry Gitlin                              Company Officer (VP)                                      4,885
Garrett Cecchini                          Company Officer (EVP)                                     2,728
Other                                                                                              33,556
                                                                                        ==================
                                                                                               $1,274,828
                                                                                        ==================



9.  RELATED PARTY TRANSACTIONS
    --------------------------

CONVERSION OF CONVERTIBLE NOTES BY RELATED PARTY

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

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

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

CONVERTIBLE 8.0% PROMISSORY NOTES - COMMON STOCK

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

All convertible notes were reviewed by management to determine if the embedded
conversion rights




                                       11


qualified as derivatives under FASB Statement 133 "Accounting for Derivative
Instruments and Hedging Activities" and related interpretations. Management
determined the embedded conversion features were not derivatives and accordingly
each convertible instrument is reflected as one combined instrument in the
accompanying financial statements. Management then reviewed whether a beneficial
conversion feature and value existed. For convertible notes with fixed
conversion terms, there was no beneficial conversion value as the conversion
price equaled the fair market value of the underlying capital shares at the debt
issuance date. For convertible instruments with a variable conversion price
which were issued prior to 2006, due to the contingency of the conversion being
linked to a future offering not under control of the creditor, any beneficial
conversion amount was deferred to be measured and recorded when the contingency
was resolved. In February 2006, the contingency was resolved and all were
converted at the time of the recapitalization and therefore there were no
variable conversion price notes outstanding at June 30, 2006. For the three
months ended June 30, 2006, the Company recognized a gain on conversion of these
variable price convertible notes of $54,491 and a loss for the six months ended
June 30, 2006 on conversion of these variable price convertible notes of
$1,038,743.

10. NET LOSS PER SHARE
    ------------------

Basic earnings per share are computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share are
computed using the weighted average number of common and potentially dilutive
securities outstanding during the period. Potentially dilutive securities
consist of the incremental common shares issuable upon exercise of stock options
and warrants and conversion of convertible debt (using the treasury stock
method). Potentially dilutive securities are excluded from the computation if
their effect is anti-dilutive. The treasury stock effect of options, warrants
and conversion of convertible debt to shares of common stock outstanding at June
30, 2006 and 2005, respectively, has not been included in the calculation of the
net loss per share as such effect would have been anti-dilutive. As a result of
these items, the basic and diluted loss per share for all periods presented are
identical. The following table summarizes the weighted average shares
outstanding:




--------------------------------------------------------------------------------------------------------------------
                                                       THREE MONTHS ENDED JUNE 30,     SIX MONTHS ENDED JUNE 30,
                                                          2006               2005        2006              2005
                                                          ----               ----        ----              ----
   BASIC WEIGHTED AVERAGE SHARES OUTSTANDING         10,113,819          3,291,351   8,322,182         3,261,246
                                                     ---------------------------------------------------------------

   Total Convertible Debt into Common Stock                  --           760,710           --          760,710
   Less:  Convertible Debt into Common Stock                 --          (760,710)          --        (760,710)

   Total Stock Options Outstanding                    1,704,421         1,032,195    1,704,421        1,032,195
   Less: Anti Dilutive Stock Options due to loss     (1,704,421)       (1,032,195)  (1,704,421)      (1,032,195)

   Total Warrants Outstanding                           827,624           972,383      827,624          972,383
   Less: Anti Dilutive Warrants due to loss            (827,624)         (972,383)    (827,624)        (972,383)
                                                     ---------------------------------------------------------------
   DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING       10,113,819         3,291,351    8,322,182        3,261,246
--------------------------------------------------------------------------------------------------------------------


In total, at June 30, 2006 there were financial instruments convertible into
2,532,046 common shares which may potentially dilute future earnings per share.




                                       12


11. SEGMENT INFORMATION
    -------------------

The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires a business
enterprise, based upon a management approach, to disclose financial and
descriptive information about its operating segments. Operating segments are
components of an enterprise about which separate financial information is
available and regularly evaluated by the chief operating decision maker(s) of an
enterprise. Under this definition, the Company operated as a single segment for
all periods presented. The single segment is comprised of our Consumer
Electronics segment. Approximately, 100% and 98% of our sales for the three and
six months ended June 30, 2006, respectively were to customers in the United
States of America; the remaining sales were principally to customers in
Australia. This compares to approximately, 95% and 95% for the comparable
periods ended June 30, 2005, respectively.

12. SHAREHOLDERS' EQUITY
    --------------------

PREFERRED STOCK

As a result of the reverse merger (See Note 7) completed on February 10, 2006,
which was accounted for as a recapitalization, the outstanding preferred stock
of Handheld Entertainment, Inc. (privately held California entity) have been
retroactively converted to common stock and reflected as such on the balance
sheet at December 31, 2005 and the statement of operations for the three and six
months ended June 30, 2005.

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


PRIVATE PLACEMENT

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

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

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



                                       13


the registration statement to be declared effective. The liquidated damages are
limited under the registration rights agreement to a 6% maximum amount. The
registration statement was filed on April 11, 2006 as per the registration
rights agreement. Additionally, the Company has exercised a market standoff
provision included in the registration rights agreement whereby the shares,
subject to the registration statement, will be subject to a 180 day lockup
period following the effectiveness of a second registration statement filed by
the Company on April 26, 2006 which is an underwritten offering.

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

The Company did determine however that the registration rights agreement itself
is a derivative instrument subject to classification as liability at fair value.
We noted that the maximum liquidated damages amount computed at 6% would be
$456,300 and we will value the derivative liability at fair value subject to
that maximum amount. At June 30, 2006 we determined that since the registration
statement had been filed timely and the Securities and Exchange Commission has
notified us that the registration statement would not be reviewed by them, that
the fair value of the registration rights agreements using a probability based
discounted cash flow model is zero. This fair value will continue to be
reevaluated at each reporting date.

Newbridge Securities Corporation served as placement agent in connection with
the Private Placement and was credited with placing 13 units. The placement
agent received (1) a cash fee of $39,000 (representing 6% of the gross proceeds
of the units sold by it in the Private Placement), (2) three-year warrants to
purchase 11,207 shares of common stock (representing 5% of the shares sold by it
in the Private Placement) at an exercise price of $2.90 per share and (3)
additional three-year warrants to purchase 11,207 shares of common stock
(representing 5% of the shares sold by it in the Private Placement) at an
exercise price of $5.80 per share.

OTHER STOCK GRANTS AND ISSUANCES

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

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

During the six months ended June 30, 2006 the Company granted 237,800 common
shares to employees for services of which 187,414 are subject to future service
requirements and 50,386 are for past services rendered. The 55,903 shares
granted prior to March 2006 are valued at the contemporaneous private placement
price of $2.90 per share for a total of $162,120. All shares granted after March
6, 2006 are valued at the quoted trading price of the common stock on the
respective grant dates for a total value of $1,128,000. Of the total value of
$1,290,120, $211,972 has been expensed for the six months ended June 30, 2006
and $1,078,148 will be recognized over the future vesting periods.

During the six months ended June 30, 2006 the Company granted 186,345 common
shares to non-employees for services rendered. The 160,483 shares granted prior
to March 2006 are valued at




                                       14


the contemporaneous private placement price of $2.90 per share for a total of
$465,400. The 25,862 shares granted after March 6, 2006 are valued at the quoted
trading price of the common stock on the respective grant dates for a total
value of $170,750. Of the total shares value of $636,150, $564,263 has been
expensed for the six months ended June 30, 2006 and $71,887 will be recognized
over the future vesting periods.

STOCK BASED AWARDS

During the six months ended June 30, 2006 we granted 68,966 vested warrants
exercisable at $2.90 per share to a service provider. The warrants were valued
at $1.62 (using an expected volatility of 82.7% (based on an analysis of
comparable companies), an expected term of three years, a risk-free interest
rate of 4.66% and a dividend yield of 0%) per a Black-Scholes option pricing
method for a total $111,634 charged to operations. We also issued 11,207
warrants at an exercise price of $2.90 per shares and 11,207 warrants at an
exercise price of $5.80 per share to an investment banking firm for services
rendered. These warrants were valued at $1.62 and $1.15 (using an expected
volatility of 82.7% (based on an analysis of comparable companies), an expected
term of three years, a risk-free interest rate of 4.66% and a dividend yield of
0%) respectively for a total value of $30,981 charged to operations. In
addition, $45,502 of expense and additional paid-in capital was recorded
relating to vesting of portions of warrants granted to non-employees in 2006.

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

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

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




                                       15


------------------------------------------------------------------------------------------------------------
                                                              THREE MONTHS ENDED           SIX MONTHS ENDED
                                                                 JUNE 30, 2005              JUNE 30, 2005
                                                            ------------------------------------------------

Net loss, as reported                                                 ($817,561)               ($1,495,632)
Intrinsic compensation charge recorded under APB 25                      109,102                    218,205
Pro Forma compensation charge under SFAS 123, net of tax               (140,766)                  (281,532)
Pro Forma net loss                                                    ($849,225)               ($1,558,959)
Net Loss Per Share:
          Basic and Diluted --as reported                                ($0.25)                    ($0.46)
          Basic and Diluted --pro forma                                  ($0.26)                    ($0.48)
------------------------------------------------------------------------------------------------------------


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



------------------------------------------------------------------------------------------------------------
                                                              THREE MONTHS ENDED           SIX MONTHS ENDED
                                                                 JUNE 30, 2005              JUNE 30, 2005
                                                            ------------------------------------------------

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


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

CONVERSION OF CONVERTIBLE NOTES BY RELATED PARTY

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

WARRANTS ACTIVITY

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

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




                                       16





Outstanding warrants are as follows:



---------------------------------------------------------------------------------------------
                                                 NUMBER OF WARRANTS    VERAGE EXERCISE PRICE
---------------------------------------------------------------------------------------------

OUTSTANDING, DECEMBER 31, 2005                           1,057,624                     $0.54
---------------------------------------------------------------------------------------------
Granted                                                     91,379                      3.26
Exercised                                                (321,379)                      0.36
Expired                                                   (38,414)                      0.90
---------------------------------------------------------------------------------------------
OUTSTANDING, JUNE 30, 2006                                 789,310                     $0.84
---------------------------------------------------------------------------------------------


13. SUBSEQUENT EVENTS
    -----------------

OFFERING OF COMMON STOCK - SECONDARY FINANCING

On August 14, 2006, the Company concluded the sale of 1,500,000 units, at $4.00
per unit, each unit consisting of one share of common stock and one five year
warrant to purchase a share of common stock at an exercise price equal to 125%
of the unit price. The warrant is redeemable by the Company if the underlying
common stock trades above 175% of the closing bid price for 20 consecutive days.
The units were sold in a "firm commitment" underwritten offering to Newbridge
Securities Corporation and Pali Captial, Inc.

Net proceeds to the Company are estimated to be $5,100,000 which includes
approximately $900,000 of expenses related to the offering. The underwriters
were also granted a 45-day option to purchase an additional 225,000 units to
cover over-allotments. As part of the compensation to the underwriters, the
Company has also agreed to sell to the underwriter 150,000 units for $100. Each
unit will be identical to the units offered to the public except that the
warrant included in the unit will have an exercise price of 145% of the unit
price in the offering.

RESIGNATION OF BOARD MEMBERS

On July 24, 2006, Mr. Nathan Schulhof resigned from the Company's Board of
Directors . The resignation is intended to enable the Company to appoint a
replacement director who will be considered "independent" for purposes of NASDAQ
rules. The resignation did not result from a disagreement with the Company on
any matter relating to the Company's operations, policies or practices.

APPOINTMENT OF BOARD MEMBERS

On July 24, 2006, the Board appointed, pending the effectiveness of the
Company's registration statement on Form SB-2 that has been filed with the
Securities and Exchange Commission and pending listing of the Company's common
stock on the NASDAQ Stock Market, Dr. Carl Goldfischer, Mr. Harvey Kesner and
Mr. David Hadley as additional directors. The new director appointments, once
effective, will provide the Company with a majority of independent directors, as
required by the NASDAQ Capital Market listing requirements. With their
appointment, it is intended that the new directors will join the following
committees of the Board:

Audit Committee - Dr. Goldfischer & Mr. Hadley joining Director Geoff Mulligan
Nominating Committee - Messrs. Hadley & Kesner joining Director Geoff Mulligan
Compensation Committee - Messrs. Hadley & Kesner joining Director Geoff Mulligan




                                       17



OTHER COMMON STOCK GRANTS FOR SERVICES

Subsequent to June 30, 2006, the Company granted 6,988 shares of restricted
common shares for services to various service providers which are valued at the
quoted trading price of the common stock on the respective grant dates for a
total value of approximately $47,000. The expense will be recognized over the
respective service periods.


14. RESTATEMENT
    -----------

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



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

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



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

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

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


OVERVIEW, TRENDS AND BUSINESS DEVELOPMENT

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

We offer consumers easy to use mobile devices at a compelling value, as well as
access to a large and




                                       18


growing library of digital audio and video content. Our players have been
designed to be compatible with virtually every content format. Our portable
media players are sold in more than 2,000 Wal-Mart stores in the United States
and through retail websites, including Amazon.com. Our strategy is to capitalize
on the synergy between portable digital entertainment products and related
digital content.

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

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

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

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

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

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

Concurrent with the reverse merger and financing transaction described above the
Lender converted a series of cash advances, which had been transferred into
notes, totaling $3,741,049 in principal, into our common stock. This amount was
documented in four separate promissory notes. Three of the four notes




                                       19


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


FORWARD LOOKING STATEMENTS

The following information should be read in conjunction with our financial
statements and the notes thereto and in conjunction with "Management's
Discussion and Analysis or Plan of Operations" in Amendment #8 to our
registration statement on Form SB-2 (Registration No. 333-133550). This
quarterly report on Form 10-QSB, and in particular this "Management's Discussion
and Analysis or Plan of Operations," may contain forward-looking statements
regarding future events or our future performance. These future events and
future performance involve certain risks and uncertainties including those
discussed in the "Factors That May Impact Future Operating Results" section of
this Form 10-QSB, as well as contained in Amendment #8 to our registration
statement on Form SB-2 (Registration No. 333-133550). Actual events or our
actual future results may differ materially from any forward-looking statements
due to such risks and uncertainties. We assume no obligation to update these
forward-looking statements to reflect actual results or changes in factors or
assumptions affecting such forward-looking statements. This analysis is not
intended to serve as a basis for projection of future events.

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


RESULTS OF OPERATIONS

         The following table sets forth our results of operations for the three
and six months ended June 30, 2006 and 2005 in absolute dollars and as a
percentage of sales. It also details the changes from the prior fiscal year in
absolute dollars and in percentages.




                                       20



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

 Sales                                         $591,787     100%            $371,465     100%              $220,322      59%

 Cost of goods sold                             464,991      79%             404,260     109%                60,731      15%
                                         ---------------------------  -------------------------  ------------------------------
 GROSS MARGIN                                   126,796      21%             (32,795)     -9%               159,591    -487%

 COSTS AND EXPENSES

    Sales and marketing                         793,568     134%             130,812      35%               662,756     507%

    General and administrative                1,398,245     236%             435,762     117%               962,483     221%

    Research and development                    606,328     102%             191,245      51%               415,083     217%
                                         ---------------------------  -------------------------  ------------------------------
 TOTAL OPERATING EXPENSES                     2,798,141     473%             757,819     204%             2,040,322     269%
                                         ---------------------------  -------------------------  ------------------------------
 LOSS FROM OPERATIONS                        (2,671,345)   -451%            (790,614)   -213%            (1,880,731)    238%

 OTHER INCOME AND (EXPENSE)

    Interest income                              28,763       5%                   -       0%                28,763     100%

    Interest expense                              4,747       1%            (26,947)      -7%                31,694    -118%

    Gain/(Loss) on conversion of debt            54,941       9%                   -       0%                54,941     100%
                                         ---------------------------  -------------------------  ------------------------------
 TOTAL OTHER INCOME (EXPENSE)                    88,451      15%            (26,947)      -7%               115,398    -428%
                                         ---------------------------  -------------------------  ------------------------------
 NET LOSS                                   ($2,582,894)   -436%          ($817,561)    -220%           ($1,765,333)    216%
                                         ===========================  =========================  ==============================



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

 Sales                                      $ 1,176,021     534%           $417,688       36%          $    758,333     182%

 Cost of goods sold                           1,065,695    1755%            447,643       42%               618,052     138%
                                         ---------------------------  -------------------------  ------------------------------
 GROSS MARGIN                                   110,326      69%            (29,955)     -27%               140,281    -468%

 COSTS AND EXPENSES

    Sales and marketing                       1,495,508     226%            204,853       14%             1,290,655     630%

    General and administrative                3,096,357     322%            855,594       28%             2,240,763     262%

    Research and development                    960,753     231%            361,955       38%               598,798     165%
                                         ---------------------------  -------------------------  ------------------------------
 TOTAL OPERATING EXPENSES                     5,552,618     272%           1,422,402      26%             4,130,216     290%
                                         ---------------------------  -------------------------  ------------------------------
 LOSS FROM OPERATIONS                        (5,442,292)    289%          (1,452,357)     27%            (3,989,935)    275%

 OTHER INCOME AND (EXPENSE)

    Interest income                              52,849     100%                  -      100%                52,849     100%

    Interest expense                           (65,732)    -207%            (43,275)      66%               (22,457)     52%

    Gain/(Loss) on conversion of debt       (1,038,743)     100%                  -      100%            (1,038,743)    100%
                                         ---------------------------  -------------------------  ------------------------------
 TOTAL OTHER INCOME (EXPENSE)               (1,051,626)    -911%            (43,275)       4%            (1,008,351)   2330%
                                         ---------------------------  -------------------------  ------------------------------
 NET LOSS                                   ($6,493,918)    368%        ($1,495,632)      23%           ($4,998,286)    334%
                                         ===========================  =========================  ==============================



                                       21





            SALES

         Sales were approximately $592,000 and $1,176,000 during the three and
six months ended June 30, 2006 as compared to approximately $371,000 and
$418,000 during the comparable periods from 2005. The increase is primarily due
to the expansion of our distribution of our ZVUE product to more than 2,000
Wal-Mart stores. Prior to that distribution contract, our product had primarily
been purchased by customers over the Internet and through smaller retail
outlets.

         At June 30, 2006, Wal-Mart accounted for approximately 91% of the gross
accounts receivable and represented approximately 99% and 98% of our revenues
for the three and six months ended June 30, 2006, respectively. At June 30,
2005, Wal-Mart accounted for approximately 70% of the gross accounts receivable
and represented approximately 87% and 79% of our revenues for the three and six
months ended June 30, 2005. As a result, for the periods being reported, we were
materially dependent upon this customer for our revenues. Due to the nature of
our business and the relative size of the contracts, which are entered into in
the ordinary course of business, the loss of any single significant customer,
especially Wal-Mart, would have a material adverse effect on our results.

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

         Approximately 100% and 98% of our sales for the three and six months
ended June 30, 2006 were to customers in the United States of America; the
remaining percentage were principally to customers in Australia. This compares
to approximately 95% and 95% for the three and six months ended June 30, 2005.

            COST OF GOODS SOLD AND GROSS MARGIN

         The increase in cost of goods sold during the three and six months
ended June 30, 2006 as compared to the prior year is primarily the result of the
expansion of our distribution for the ZVUE product. We purchase our products
from Eastech Electronics (Taiwan) Inc., a contract manufacturer located in
Taiwan that is the sole manufacturer of our ZVUE product. Purchases during the
three and six months ended June 30, 2006 from Eastech were approximately $1.5
million and $2.0 million, respectively. These compare to purchases of
approximately $0.3 million and $0.5 million, respectively for the three and six
months ended June 30, 2005.

         We are dependent on a continuing relationship with Eastech, the sole
manufacturer of our PMP's which is subject to a manufacturing agreement which
expires in January 2007. Eastech manufactures our PMPs based on purchase orders
that we submit. Eastech has been providing us payment terms that permit us to
pay for products once our customers have paid us. This arrangement greatly
reduces our cash needs. However, these terms are expected to change and that may
require us to begin to make advance payments for our purchases of inventory and
components. Our present relationship gives us both the production capacity and
buying power of a much larger company. We do not have alternative financing
available and do not maintain a revolving line of credit for purchases.

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


                                       22


         While gross margin was positive for the three and six months ended June
30, 2006 as a result of our control of the expense related to production of our
handheld media player we cannot guarantee that we will have positive gross
margins in the future. We have historically experienced a negative gross margin
as a result of expenses related to the introduction of the product into retail
distribution, the subsequent expansion of the product's distribution and the
effect of higher component costs associated with low volume production. We
expect that the basic product will continue to have low gross margins in the
future although we expect to offset those margins with the introduction of new
products and services which will be sold to customers of the media player, as
well as other revenue streams which will utilize the ZVUE product as a platform
to distribute content under subscription or single-use contracts.


              SALES AND MARKETING EXPENSES

         Sales and marketing expenses consist primarily of salaries and benefits
of sales and marketing personnel, commissions, advertising, printing and
customer acquisition-related costs. The increase in these expenses in the three
and six months ended June 30, 2006 as compared to the same period from the
previous year is directly related to sustaining marketing for the currently
shipping version of the ZVUE product (Model 200) and market introduction costs
for the upcoming versions of the ZVUE product (Models 250, 400 and 500). We
expect to continue to increase marketing and development efforts in the future
as new versions of the ZVUE are introduced, and as a result expect this class of
expenses to continue to increase.

              GENERAL AND ADMINISTRATIVE EXPENSES

         Our general and administrative expenses consist primarily of salaries
and benefits for employees, amortization and depreciation expenses, fees to our
professional advisors, non-cash stock based expenses, rent and other general
operating costs. Our general and administrative expenses also include
amortization expense related to the issuance of restricted common stock, common
stock options to employees and contractors, which was approximately $188,000 and
$954,000 in the three and six months ended June 30, 2006 as compared to
approximately $109,000 and $218,000 in the three and six months ended June 30,
2005, respectively. In February 2006, our Board of Directors accelerated the
vesting of all outstanding options as of December 31, 2005. As a result of the
decision by the Board, approximately 828,000 options became vested as of
December 31, 2005 and the Company recognized all of the remaining intrinsic
value in the underlying options. The expense in 2006 is primarily related to the
issuance of common stock to employees and other service providers.

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

              RESEARCH AND DEVELOPMENT EXPENSES

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



                                       23


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

              INTEREST INCOME

         Interest income of approximately $29,000 and $53,000 for the three and
six months ended June 30, 2006 relate to deposits in our depository accounts as
a result of funds generated by the private placement concluded in February 2006.
We did not record any interest income during 2005.

              INTEREST EXPENSE

         Interest expense of approximately ($5,000) and $66,000 for the three
and six months ended June 30,2006 were directly related to the interest payable
on notes and other borrowings which we have entered into to fund our operations.
These amounts compare to approximately $27,000 and $43,000 for the three and six
months ended June 30, 2005.

              GAIN/(LOSS) ON CONVERSION OF DEBT

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

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

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


LIQUIDITY AND CAPITAL RESOURCES

         At June 30, 2006, the Company had a cash and cash equivalent balance of
approximately $1.6 million and a working capital of approximately $830,000. Net
cash used in operations was approximately $5.6 million for the six months ended
June 30, 2006 as compared to net cash used in operations of approximately
$974,000 for the six month period ended June 30, 2005. For the six months ended
June 30, 2006, the Company used cash to fund the Company loss of approximately
$6.5 million offset by non-cash



                                       24


items such as expenses related to the issuance of common stock, common stock
options and warrants to employees and service providers of approximately
$954,000 as well as a non cash loss on conversion of debt of $1.1 million. There
were also changes in assets and liabilities of approximately $857,000.

         Net cash used in investing activities in the six months ended June 30,
2006 was approximately $244,000 as compared to net cash used in investing
activities of approximately $3,000 for the six month period ended June 30, 2005.
For the six months ended June 30, 2006, the primary use of the cash for
investing was to purchase software licenses.

         Net cash provided by financing activities in the six months ended June
30, 2006 was approximately $7.2 million as compared to approximately $949,000
for the six month period ended June 30, 2005. The completion of the private
placement in February 2006 resulted in gross proceeds to the company of
$7,605,000 and a payment of $297,000 in offering costs. The company also
incurred cash expenses of approximately $546,000 related to the proposed
secondary offering. For the six month period ended June 30, 2005, the primarily
source of cash was loan term borrowings from related parties.

         Historically, we have financed our working capital and capital
expenditure requirements primarily from short and long-term notes, sales of
common and preferred stock and the product financing arrangement we established
with Eastech. We are seeking additional equity and/or debt financing to sustain
our growth strategy. With the completion of the private placement in February
2006 we were able to obtain funds to continue our operations at least through
November 2006. We believe that based on our current cash position, the just
completed secondary offering, our borrowing capacity, and our assessment of how
potential equity investors will view us, we will be able to continue operations
at least through the end of 2006. It is reasonably possible that we will not be
able to obtain sufficient financing to continue operations. Furthermore, any
additional equity or convertible debt financing will be dilutive to existing
shareholders and may involve preferential rights over common shareholders. Debt
financing, with or without equity conversion features, may involve restrictive
covenants.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

         INVENTORIES

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

         SOFTWARE DEVELOPMENT COSTS

         Costs incurred in the initial design phase of software development are
expensed as incurred in research and development. Once the point of
technological feasibility is reached, direct production costs are capitalized in
compliance with Statement of Financial Accounting Standards SFAS No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed" for software that is



                                       25


embedded in our products. We cease capitalizing computer software costs when the
product is available for general release to customers. Costs associated with
acquired completed software are capitalized.

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

         IMPAIRMENT OF LONG-LIVED ASSETS

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

         REVENUE RECOGNITION

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

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

         RESERVE FOR SALES RETURNS

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


FACTORS THAT MAY IMPACT FUTURE OPERATING RESULTS

Set forth below and elsewhere in this report are some of the risks and
uncertainties that could cause actual results to differ materially from the
results contemplated by the forward-looking statements contained in this report.
For a more complete list of risks and uncertainties, see Amendment #6 to our
registration statement on Form SB-2 (Registration No. 333-133550).




                                       26




         SINCE WAL-MART REPRESENTS APPROXIMATELY 98% OF OUR REVENUES, AND
WAL-MART HAS ONLY PURCHASED A SINGLE MODEL, IF THEY WERE NO LONGER OUR CUSTOMER,
DEMANDED DIFFERENT TERMS, OR DID NOT ACCEPT OUR FUTURE PLANNED MODELS, THAT
WOULD HAVE A NEGATIVE IMPACT ON OUR REVENUES.

Wal-Mart currently is, and for the foreseeable future is expected to remain, our
largest customer. Wal-Mart represented approximately 98% of our revenues during
2006. While we plan to aggressively market the ZVUE to other major retailers,
other major retailers may not take on the ZVUE product line. Consequently, our
short-term business plan depends to a significant extent on continuing our
relationship with Wal-Mart, which may not happen. We do not have any long term
or supply agreement for the sale of our products to Wal-Mart and our business
plans are based upon estimates for orders from Wal-Mart that could be
inaccurate.

All of our sales to Wal-Mart, our largest customer during 2005 and 2006, were of
our ZVUE 200 model which has been our sole product sold. We expect the majority
of our orders shipped to Wal-Mart during 2006 to be of our ZVUE 200 model. None
of our other products are presently being ordered by Wal-Mart, and there can be
no assurance that Wal-Mart will accept our additional models if, and when, our
shipments of future models commences, or that if ordered, such products will be
accepted by Wal-Mart as successfully as our ZVUE 200.

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


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

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

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

Eastech is one of our significant investors. In 2004, Eastech purchased 383,142
shares of our series B convertible preferred stock (which was converted into our
common stock in the reverse merger) for an aggregate purchase price of $500,000.
In addition, Eastech's founder, chairman and CEO who was a member of our board
of directors at the time (he resigned in November 2005), purchased 18,390 shares
of our series D convertible preferred stock (which was converted into our common
stock in the reverse merger) for an aggregate purchase price of $100,000. The
terms of Eastech's relationship with us may be significantly influenced by
Eastech's ownership interest. We may not be able to locate replacement
manufacturing or assembly facilities from independent parties that would provide
payment, supply and other terms equivalent to those provided us by Eastech,
particularly in light of the incentive provided by the ownership relationship
which would not exist with any successor manufacturer to Eastech.




                                       27





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

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

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

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

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

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

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

Most of our competitors or potential competitors in both devices, and content,
have significantly greater financial, technical and marketing resources than we
do. They may be able to respond more rapidly than we can to new or




                                       28


emerging technologies or changes in customer requirements. They may also devote
greater resources to developing, promoting and selling their products and
services than we can.


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

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

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

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

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


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

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





                                       29



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

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


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

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


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

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


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

Major retailers such as Wal-Mart, Best Buy, Target, and Toys "R" Us may require
manufacturers and distributors to provide them various inventory and price
protections and incentives. Major retailers may require a variety of
protections, including holdbacks on payment, reducing the price paid if the
retailer cannot sell the product or the product requires discounting, or
requiring the manufacturer to buy back unsold goods. If our products do not sell
as well as we or retail distributors anticipate, such protections could lead to
excess inventory and costs, and our 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.




                                       30





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

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


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

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


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

Our ability to compete depends upon internally developed technology and
technology from third parties. To protect our proprietary rights, we rely on a
combination of patent, trademark, copyright and trade secret laws,
confidentiality agreements, and protective contractual provisions. Despite these
efforts, our applications for patents and trademarks relating to our business
may not be granted and, if granted, may not provide us with any competitive
advantages. Additionally, another party may obtain a blocking patent and we
would need to either obtain a license or design around the patent in order to
continue to offer the contested feature or service in our products.
Further, effective protection of intellectual property rights may be unavailable
or limited in some foreign countries. Our inability to adequately protect our
proprietary rights would have an adverse impact on our ability to competitively
manufacture and distribute our products on a world-wide basis.


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

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




                                       31




         OUR ANTICIPATED GROWTH COULD STRAIN OUR RESOURCES.

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


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

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


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

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


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

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


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

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




                                       32


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

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


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

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

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


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

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


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

Our ability to provide our products and services to our customers and operate
our business depends, in part, on the continued operation of our systems and
networks and those of third parties. A significant or repeated reduction in the
performance, reliability or availability of these information systems and
network infrastructure could harm our ability to conduct our business, our
reputation and our ability to attract and retain users and content providers.
Problems with these systems and networks could result from our failure to
adequately maintain and enhance these systems and networks, natural disasters,
power failures, intentional actions to disrupt our systems, and networks and
many other man-made and natural causes. The vulnerability of our computer and
communications infrastructure is enhanced because it is located in San
Francisco, California, an area that is at heightened risk of earthquakes and
fires. We do not currently have fully redundant systems or a formal disaster
recovery plan, and we may not have adequate business interruption insurance to
compensate us for losses that may occur from a system outage. We intend to




                                       33


utilize a portion of the proceeds of this offering to promote fully-redundant
systems and enhance our business interruption insurance from the present levels.


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

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


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

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


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

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


ITEM 3- CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision and with the participation
of our management, including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by an issuer in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the issuers management,
including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. Based upon our evaluation, our chief executive officer and
chief financial officer concluded that our disclosure controls and procedures
are effective, as of the end of the period covered by this report (June 30,
2006), in ensuring that material information that we are required to disclose in
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC rules and




                                       34


forms. There were no changes in our internal control over financial reporting
during the three month period ended June 30, 2006 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.


                           PART II - OTHER INFORMATION



ITEM 6- EXHIBITS

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

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

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

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

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







                                       35




                                   SIGNATURES
                                   ----------

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

                                  HANDHELD ENTERTAINMENT, INC.

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


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

                                  DATE: AUGUST 14, 2006






                                       36




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


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

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

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

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





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