Unassociated Document

10-Q 1 v131850_10q.htm Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2008

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from: _______ to _______

Commission File Number 001-32985

ZVUE CORPORATION

(Exact name of registrant as specified in its charter)


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

612 HOWARD STREET, SUITE 600, SAN FRANCISCO, CA		94105
(Address of principal executive offices)		(Zip Code)

(415) 495-6470

(Registrant’s telephone number, including area code)

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

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

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

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

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

As of November 11, 2008, there were 44,550,705 shares of Issuer’s common stock, par value $0.0001 per share, outstanding.

ZVUE CORPORATION

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1: Financial Statements

Condensed Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007	3

Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2008 and 2007 (unaudited)	4

Condensed Consolidated Statements of Cash Flows for the three months and nine months ended September 30, 2008 and 2007 (unaudited)	5

Notes to Condensed Consolidated Financial Statements (unaudited)	6

ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations	19

ITEM 4T: Controls and Procedures	29

PART II - OTHER INFORMATION

ITEM 1: Legal Proceedings	29

ITEM 6: Exhibits	30

Signatures	31

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ZVUE Corporation

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)


	September 30,			December 31,
	2008			2007
	(unaudited)
ASSETS
Cash and cash equivalents	$	1,623		$	4,766
Accounts receivable, net		468			3,928
Deferred income taxes, current		481			483
Inventory, net		-			360
Prepaid expenses and other current assets		89			624
Total current assets		2,661			10,161
Fixed assets, net		305			466
Restricted cash		-			1,510
Intangible web site assets, net		14,768			23,243
Goodwill		4,733			3,973
Deferred income taxes, non-current		149			461
Other non-current assets		520			659
Total assets	$	23,136		$	40,473

LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities	$	3,112		$	5,432
Accounts payable, related parties		143			83
Line of credit, related party		1,327			1,327
Deferred income tax liability, current		481			483
Junior secured convertible debentures (net of debt discount of $1,465
and $1,304 as of September 30, 2008 & December 31, 2007, respectively)		234			79
Senior secured convertible debenture (net of debt discount of $5,787
and $6,034 as of September 30, 2008 & December 31, 2007, respectively)		1,241			355
Total current liabilities		6,538			7,759
Long-term convertible note		800			800
Junior secured convertible debentures (net of debt discount of $2,076
and $3,495 as of September 30, 2008 & December 31, 2007, respectively)		331			205
Senior secured convertible debenture (net of debt discount of $10,186
and $15,688 as of September 30, 2008 & December 31, 2007 respectively)		2,185			923
Total long-term debt, net of current portion		3,316			1,928

Deferred income tax liability, non-current		149			461
Total liabilities		10,003			10,148
Commitments and contingencies (Note 6)
Shareholders’ Equity
Preferred stock, $0.0001 par value; 1,000,000 authorized; none
issued and outstanding		-			-
Common stock, $0.0001 par value; 75,000,000 authorized,
37,503,825 issued and outstanding at September 30, 2008 and
20,190,262 issued and outstanding at December 31, 2007		4			2
Additional paid-in capital		78,786			71,541
Accumulated deficit		(65,657	)		(41,218	)
Total shareholders’ equity		13,133			30,325
Total liabilities and shareholders’ equity	$	23,136		$	40,473

See Notes to Unaudited Condensed Consolidated Financial Statements

ZVUE Corporation
Condensed Consolidated Statements of Operations
(in thousands, except share and per share amounts)
(unaudited)

	Three months ended						Nine months ended
	September 30,						September 30,
	2008			2007			2008			2007
Revenues, net
Product sales, net	$	2,010		$	510		$	2,892		$	1,079
Advertising		1,044			106			2,761			246
Total revenue, net		3,054			616			5,653			1,325

Cost of revenues
Product sales		2,140			831			3,340			1,540
Advertising		231			19			680			19
Total cost of revenues		2,371			850			4,020			1,559

Gross profit (loss)		683			(234	)		1,633			(234	)

Operating expenses
Sales and marketing		506			789			2,240			2,242
General and administrative (1)		2,050			1,915			6,538			4,843
Amortization & impairment of intangible website costs		3,818			1,024			8,477			2,692
Total operating expenses		6,374			3,728			17,255			9,777

Operating loss		(5,691	)		(3,962	)		(15,622	)		(10,011	)

Non-operating income (expense)
Interest income		2			5			52			65
Interest expense (1)		(3,071	)		(231	)		(8,869	)		(273	)
Total non-operating income (expense)		(3,069	)		(226	)		(8,817	)		(208	)

Net loss	$	(8,760	)	$	(4,188	)	$	(24,439	)	$	(10,219	)

Net loss per share, basic and diluted	$	(0.25	)	$	(0.24	)	$	(0.88	)	$	(0.62	)

Weighted average shares used in computing
basic and diluted net loss per share		35,015,831			17,584,600			27,675,741			16,481,502

(1)Includes share-based awards as follows:
General and administrative	$	458		$	885		$	1,636		$	1,469
Interest expense		52			181			52			181
	$	510		$	1,066		$	1,688		$	1,650
See Notes to Unaudited Condensed Consolidated Financial Statements

ZVUE Corporation
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

	Nine months ended
	September 30,
	2008			2007
Cash flows from operating activities:
Net loss	$	(24,439	)	$	(10,219	)
Adjustments to reconcile net loss to net cash used by operating activities
Depreciation and amortization		8,833			2,853
Debenture debt discount amortization		7,023			-
Loss on disposal of fixed assets		30			9
Bad debt expense		99			22
Write-down of inventory		459			223
Non-cash share-based awards		1,688			1,650
Changes in operating assets and liabilities
Accounts receivable, trade		3,451			(136	)
Accounts receivable from escrow account		-			90
Prepaid expenses and other current assets		573			(211	)
Inventories		(99	)		145
Accounts payable and accrued liabilities		(113	)		(2,479	)
Accounts payable due related parties		60			29
Net cash used by operating activities		(2,435	)		(8,024	)

Cash flows from investing activities:
Cash paid for acquisitions		(761	)		(1,227	)
Change in restricted cash		1,560			-
Deferred acquisition costs		(267	)		(869	)
Purchases of property and equipment		(70	)		(153	)
Net cash provided (used) by investing activities		462			(2,249	)

Cash flows from financing activities:
Proceeds from issuance of common stock		-			4,080
Offering costs		-			(125	)
Short-term borrowing		-			1,425
Short-term borrowings related parties		750			1,327
Repayment short-term borrowings related parties		(750	)		-
Principal payment on debentures		(1,131	)		-
Debt issue costs		(118	)		(171	)
Proceeds from exercise of stock options		79			250
Net cash provided (used) by financing activities		(1,170	)		6,786
Net decrease in cash and cash equivalents		(3,143	)		(3,487	)
Cash and cash equivalents at beginning of period		4,766			3,653
Cash and cash equivalents at end of period	$	1,623		$	166
Supplemental disclosure of cash flow information: Cash paid for interest	$	168		$	-
Supplemental disclosure of non-cash investing and financing activities:
Conversion of notes payable to common stock	$	-		$	1,618
Common stock issued for acquisitions	$	-		$	6,900
Installment payments due from acquisitions	$	-		$	975
Value of common stock issued in lieu of cash payments for principal and interest on debentures	$	3,462			-

See Notes to Unaudited Condensed Consolidated Financial Statements

ZVUE Corporation

Notes to Condensed Consolidated Financial Statements

September 30, 2008

(in thousands, except per share amounts)

(unaudited)

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

The Company:

Handheld Entertainment, Inc., was formed in February 2003 as a California corporation. On February 10, 2006 we merged with a wholly-owned subsidiary of Vika Corp., a Delaware inactive publicly held corporation, with Handheld Entertainment, Inc. (the “Subsidiary”) as the surviving entity and wholly-owned subsidiary of Vika Corp. We then changed the name of Vika Corp. to Handheld Entertainment, Inc. and the name of the subsidiary to HHE Corp. On April 12, 2006 we merged the Subsidiary into Handheld Entertainment, Inc. The above transactions were accounted for as a recapitalization of Handheld Entertainment, Inc., the California corporation. All references to “us”, “we” “our” or “the Company” refer to the recapitalized entity, Handheld Entertainment Inc. and all historical operations in the accompanying financial statements are those of Handheld Entertainment, Inc., as recapitalized.

On August 14, 2006 we affected a 1.45 for 1 reverse split of our issued and outstanding common stock. All share and per share data in the accompanying financial statements have been retroactively changed to account for the recapitalization and reverse split. On October 31, 2007, we changed our name to “ZVUE Corporation” from “Handheld Entertainment, Inc.”

Basis of Presentation:

These interim condensed consolidated financial statements are unaudited and have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include normal recurring adjustments and other adjustments as necessary to present fairly the Company’s consolidated financial position, consolidated results of operations and consolidated cash flows for the periods presented. The condensed consolidated balance sheet data as of December 31, 2007 is derived from and should be read in conjunction with the audited financial statements, which are included in the Company’s Annual Report for the year ended December 31, 2007 on Form 10-KSB filed with the Securities and Exchange Commission. Pursuant to the rules of the Securities and Exchange Commission, these interim financial statements do not include all disclosures required by generally accepted accounting principles. The results for the three and nine months ended September 30, 2008 are not necessarily indicative of the expected results for any other interim period or for the year ending December 31, 2008.

Going Concern:

These unaudited consolidated financial statements contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses and negative cash flows from operations and has an accumulated deficit at September 30, 2008 of $65,657. Because of past losses, and a history of negative cash flows from operations, the Company’s independent registered public accounting firm for the year ended December 31, 2007 included a paragraph in their report indicating substantial doubt as to the Company’s ability to continue as a going concern.

ZVUE Corporation

Notes to Condensed Consolidated Financial Statements

September 30, 2008

(in thousands, except per share amounts)

(unaudited)

With our cash on hand, recent cost savings measures, projected future cash flows including management of working capital, and assuming we are able to service our convertible debt obligations which will require us to seek a further modification to the current expired standstill agreement on our senior secured convertible debt, we believe that we have sufficient funds with anticipated future cash flows to continue in operation through the end of 2008. We have been able to modify our senior secured convertible debt with short-term standstill agreements, the most recent of which expired on October 31, 2008. We intend to seek further revisions to our senior secured convertible debt or extensions of the standstill agreement in order to avoid defaults, although without such we are in payment default under such loan, having not made the installment payment that was due on November 3, 2008. There can be no assurance we will be able to make the necessary payments on our indebtedness obligations or succeed in obtaining further modifications or extensions. There can be no assurance that the holder of our senior secured convertible debt will not exercise its default remedies, including accelerating such debt and/or converting some portion thereof into our common stock at the default conversion price. In order to meet expected cash requirements to continue our operations in 2009, we will likely need to secure additional equity or debt financing and/or enter into strategic alliances with other companies or consider sales of assets or similar transactions. The issuance of equity securities would likely 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. Strategic alliances may also be dilutive to existing shareholders. In order to preserve our capital, we recently ceased efforts related to our digital media device business and terminated seven employees associated with such business and intend to focus our efforts on our web-related business. There can be no assurance that our efforts will be successful or that our financial resources will be adequate for us to continue in operation for the foreseeable future.

ZVUE Corporation

Notes to Condensed Consolidated Financial Statements

September 30, 2008

(in thousands, except per share amounts)

(unaudited)

Principles of Consolidation:

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

Use of Estimates:

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

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

Inventories:

Inventories consist primarily of finished goods and goods in transit, are valued at the lower of cost or market and are accounted for on the first-in, first-out basis. The Company had no inventory as of September 30, 2008 and $360 as of December 31, 2007.

Foreign Currency:

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

Segment information:

The Company operates in a single segment - Media Distribution.

Fair Value of Financial Instruments:

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

Reclassifications:

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

Revenue Recognition:

Product Sales:

Revenue from product sales is recognized when persuasive evidence of an arrangement exists (generally a purchase order), product has been shipped, the sale price is fixed and determinable, and collection of the resulting account is reasonably assured. The Company records the associated revenue at the time of the sale net of estimated returns. In addition, 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

ZVUE Corporation

Notes to Condensed Consolidated Financial Statements

September 30, 2008

(in thousands, except per share amounts)

(unaudited)

customers are recognized as a cost of sales. Cash incentives provided to our customers are recognized as a reduction of the related sale price, and, therefore, are a reduction in sales.

Advertising Revenue:

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

Concentrations of Credit Risk and Significant Customers and Suppliers:

At September 30, 2008, one customer accounted for 47% of gross accounts receivable before the allowance for doubtful accounts. As of September 30, 2008, the Company has no receivables from Wal-Mart, its largest customer.

For the nine months ended September 30, 2008, two customers accounted for 49% and 24% of net revenues. For the nine months ended September 30, 2007, two customers accounted for 49% and 29% of net revenues. In both time periods Wal-Mart was the primary customer. With the discontinuance of producing MP3 and related players, Wal-Mart will no longer be our significant customer which will have a material adverse effect on our revenues.

Through the quarter ended September 30, 2008, the Company outsourced the manufacturing of its products to two factories in China. As the Company has now ceased producing MP3 and related players, the Company is no longer dependent on these factories or other factories to produce its products.

Stock-Based Compensation:

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

Recent Accounting Pronouncements:

FASB Statement No. 141(R),"Business Combinations", (“SFAS 141(R)”): In December 2007, the Financial Accounting Standards Board (FASB) issued No. 141R which will change the accounting for and reporting of business combination transactions. The most significant changes in the accounting for business combinations under SFAS 141(R) include: (1) valuation of any acquirer shares issued as purchase consideration will be measured at fair value as of the acquisition date; (2) contingent purchase consideration, if any, will generally be measured and recorded at the acquisition date, at fair value, with any subsequent change in fair value reflected in earnings rather than through an adjustment to the purchase price allocation; (3) acquired in-process research and development costs, which have historically been expensed immediately upon acquisition, will now be capitalized at their acquisition date fair values, measured for impairment over the remaining development period and, upon completion of a successful development project, amortized to expense over the asset's estimated useful life; (4) acquisition related costs will be expensed as incurred rather than capitalized as part of the purchase price allocation; and (5) acquisition related restructuring cost accruals will be reflected within the acquisition accounting only if certain specific criteria are met as of the acquisition date; the prior accounting convention, which permitted an acquirer to record restructuring accruals within the purchase price allocation as long as certain, broad criteria had been met, generally around

ZVUE Corporation

Notes to Condensed Consolidated Financial Statements

September 30, 2008

(in thousands, except per share amounts)

(unaudited)

formulating, finalizing and communicating certain exit activities, will no longer be permitted. SFAS 141(R) is effective for reporting periods beginning on or after December 15, 2008. Earlier adoption is not permitted. The Company anticipates that adoption of this pronouncement will significantly impact how the Company accounts for business combination transactions consummated after the effective date, in the various areas outlined above.

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

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

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

2. Accounts Receivable

Accounts receivable, net consists of the following:

	September 30,			December 31,
	2008			2007
	(unaudited)

Accounts receivable	$	477		$	4,031
Less: allowance for doubtful accounts		(9	)		(103	)
Accounts receivable, net	$	468		$	3,928

The Company recorded bad debt expense of $99 for the nine months ended September 30, 2008 and $22 for the nine months ended September 30, 2007.

ZVUE Corporation

Notes to Condensed Consolidated Financial Statements

September 30, 2008

(in thousands, except per share amounts)

(unaudited)

3. Intangible Web Site Assets, net

The Company amortizes its intangible website costs on a straight-line basis over an estimated useful life of three years, recapped as follows:


	September 30,			December 31,
	2008			2007
	(unaudited)

Intangible assets	$	27,942		$	27,942
Accumulated amortization		(13,174	)		(4,699	)
Intangible assets, net	$	14,768		$	23,243

Amortization for the nine months ended September 30, 2008 and 2007 was $8,476 and $2,692. The amortization for the period ending September 30, 2008 includes the write-off of $1,489 related to the Company’s Holylemon, Funmansion and Dorks websites as the Company has determined that these assets are impaired and plans on redirecting web traffic from those websites to one or more of its other websites during the remainder of its 2008 fiscal year.

Additions to intangible assets during the nine months ended September 30, 2007 of $7,071, $917 and $521 resulted from the acquisition of Putfile, Ltd., HolyLemon.com and UnOriginal.co.uk , respectively.

4. Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consist of the following:

	September 30,		December 31,
	2008		2007
	(unaudited)
Trade accounts payable	$	942	$	979
Factories and content providers		1,056		1,238
Payroll and benefits		130		679
Acquisition related accruals		66		1,637
Reserve for sales returns		160		206
Accrued interest		418		321
Accrued commissions and ad server fees		-		177
All other		340		195
Accounts payables and accrued liabilities	$	3,112	$	5,432

ZVUE Corporation

Notes to Condensed Consolidated Financial Statements

September 30, 2008

(in thousands, except per share amounts)

(unaudited)

5. Debt

The following table details our convertible notes as of September 30, 2008:

						Accumulated		Convertible
			Debt			Amortization of		Debt, net of
	Principal		Discount			Debt Discount		Discounts
Convertible 4.9% note payable	$	800	$	0		$	0	$	800
Senior secured convertible debenture		19,399		(23,000	)		7,027		3,426
Junior secured convertible debentures		4,106		(5,099	)		1,558		565
Total	$	24,305	$	(28,099	)	$	8,585	$	4,791

Less: current portion

Senior secured convertible debenture	$	7,028	$	(5,787	)			$	1,241
Junior secured convertible debentures		1,699		(1,465	)				234
	$	8,727	$	(7,252	)			$	1,475

Convertible debt, net of current portion	$	15,578						$	3,316

Convertible Debentures:

Per the terms of the senior secured convertible debenture, and as more fully disclosed in Note 6, “Convertible Debt” of the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007, the Company issued to the holder of its senior secured convertible debenture, 4,968,381 shares for scheduled installment payments through May 1, 2008. For the installment due June 2, 2008, the senior secured convertible debenture holder requested of the Company to only issue 2,453,193 shares instead of the aggregate total due on that day of 3,441,872 so as not to own 10% or more of the Company’s issued and outstanding common stock. The aggregate issuance of the shares was in lieu of cash payments of $2,471 for principal and $853 for accrued interest. The shares withheld represented $85 for principal and $139 for interest which was repaid as described below.

On July 1, 2008, the Company entered into a standstill agreement with its senior secured convertible debenture holder with both parties mutually agreeing to release $1,500 of cash then held in a restricted escrow account. In consideration of such payment, the security holder agreed to defer monthly installment payments that were scheduled for July, August and September 2008 until the security’s maturity. The Company’s $1,500 payment under the standstill agreement was applied to the payment of accrued interest of $257, payment of $1,130 of the outstanding principal and payment of a $113 redemption premium. The security holder also agreed that during the standstill period, neither it nor its affiliates would sell shares of the Company’s common stock (1) at prices less than $0.30 per share, or (2) in excess of 18% of the aggregate daily trading volume of the common stock, at prices of between $0.30 and $0.50. The agreement provided no limitation on sales of common stock at prices of greater than $0.50 per share. Should the security holder breach the trading limitations, then the trading restriction and payment deferral would be extended for an additional period of one or more months, depending on the extent of such breach. In addition, the senior secured convertible debenture holder agreed to: (1) increase the limit for separate asset-based financing related to the Company’s product business to $2.5 million from $0.5 million and (2) consent to the sale of no less than $2.0 million of certain assets or businesses of the Company to occur no later than September 30, 2008. During the quarter ended September 30, 2008, no businesses or assets of the Company were sold. On September 29, 2008, the agreement was amended to defer the October 2008 payment until the debenture’s maturity date and expired on October 31, 2008 without being renewed. The Company has made no further payments in cash or in stock to this

ZVUE Corporation

Notes to Condensed Consolidated Financial Statements

September 30, 2008

(in thousands, except per share amounts)

(unaudited)

security holder, nor has the security holder made demands for additional payments. Both parties are discussing further amendments to the underlying agreement as of this filing.

During the nine months ended September 30, 2008, the holders of our junior secured convertible debentures received a total 5,929,136 shares of our common stock in lieu of a cash payment due of $991 for principal and $302 for accrued interest. Of the 5,929,136 shares issued, 1,532,421 were issued to our Chief Technology Officer (CTO). In addition, in October 2008 the Company subsequently issued to the holders of our Junior secured convertible debentures 2,752,161 shares of our common stock that represented payment of $142 of principal and $25 of accrued interest and in November 2008, the Company issued an additional 2,480,024 shares of common stock that represented payment of $142 of principal and $27 of accrued interest. Of these shares, our CTO received 485,810 shares in October 2008 and 437,772 in November 2008.

The results of our operations for the nine months ended September 30, 2008 includes as a component of interest expense, non-cash charges related to amortized debt discount of $7,023 and $156 of debt issue costs.

Convertible Note:

On December 15, 2006, the Company issued an $800 convertible note to John Paul Worsnop for the purchase of YourDailyMedia.com at a rate of 4.9% that is due on December 31, 2011. The note is convertible into 186,306 shares of our common stock at a conversion price of $4.29. The Company can force the conversion of the note into common stock under certain conditions including if the Company trades more than 50,000 shares of common stock per day and the trading price of the stock for five days is twice the conversion price of the shares. As of September 30, 2008, the conditions to force a conversion have not been met. As of September 30, 2008, $31 of interest is due on the note.

6% Related Party Promissory Notes:

On August 13, 2007, the Company entered into an agreement with its CTO and a member of its board of directors, in which the CTO agreed to purchase from the Company, from time to time, up to $5 million aggregate principal amount of promissory notes at a 6% interest rate. As of September 30, 2008, $1,327 is outstanding and $92 of interest is due under this agreement. Amounts borrowed under the agreement are due by March 1, 2009.

Secured Financing:

On July 15, 2008, the Company completed a $1.0 million secured financing for its hardware business with an interest rate of 12%. The lender of the financing was the Company’s CTO, who is also a director and the beneficial owner of more than 10% of the Company’s common stock. The Company borrowed and repaid $750 under the agreement and incurred interest and transaction charges of $35. The agreement expired on September 30, 2008 with no amounts owed. As part of the financing the Company also issued to its CTO 350,000 fully vested warrants with an exercise price of $0.1621 per share that were valued at $51 and charged to interest expense using the Black-Scholes model with an interest rate of 3.2%, a life of five years and volatility of 152%.

ZVUE Corporation

Notes to Condensed Consolidated Financial Statements

September 30, 2008

(in thousands, except per share amounts)

(unaudited)

Debt Repayments:

The following table details the repayments of the debt detailed through the year ending December 31, 2011 as of September 30, 2008:

	Year ending December 31,
	Remaining 2008		2009		2010		2011		Total
Related party notes				1,327						1,327
Other term debt								800		800
Senior convertible debentures		1,278		7,667		10,454				19,399
Junior convertible debentures		425		1,700		1,981				4,106
		1,703		10,694		12,435		800		25,632

Total interest expense was $3,018 and $231 for the three months ended September 30, 2008 and 2007, respectively, and was $8,816 and $273 for the nine months ended September 30, 2008 and 2007, respectively.

6. Commitments and Contingencies

Legal Matters:

On December 21, 2007, Edward John Kowal filed a complaint in the United States District Court, Western District of Washington, against the Company seeking bonus compensation he alleges is owed from the October 2007 acquisition of eBaum’s World, Inc. (Edward John Kowal v. ZVUE Corporation, Case No. 07-2-40332-9). The Company disputes the facts of the case and intends to vigorously defend itself. On April 28, 2008 the Company issued 303,398 shares of restricted stock to Edward John Kowal that represented what management believes is the earned bonus compensation of $875 pursuant to the employment agreement that was accrued for at the time of the eBaum’s World, Inc. acquisition. On September 18, 2008 the claim was amended under Case No. C08-108RSL alleging that Mr. Kowal is owed compensation based on the aggregate value of consideration paid by the Company for its purchase of eBaum’s World, Inc. and adding our CTO, our former CEO and our former CFO as defendants. No reserve has been established as an amount of loss, if any, cannot be reasonably estimated at this time. A trial date of March 2, 2009 has been set.

Other Contingencies:

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

	Operating
	Leases
Remaining fiscal year 2008	$	95
Fiscal year 2009		379
Fiscal year 2010		260
	$	734

During the quarter ended September 30, 2008, the Company ceased producing and selling digital media players. Players sold prior to the curtailment of these operations carried a 90-day consumer product return policy, which is in excess of the return policy of Wal-Mart, our primary customer for these products. Even though a contingency reserve has been established for future returns from Wal-Mart, no contingency reserve has been established for

ZVUE Corporation

Notes to Condensed Consolidated Financial Statements

September 30, 2008

(in thousands, except per share amounts)

(unaudited)

returns that may not be honored by Wal-Mart, but subject to the 90-day return policy as this amount cannot be accurately determined.

The Company may, as a result of its acquisition of eBaum’s World, Inc., as amended on July 22, 2008, be required to pay as much as $33,717 in earn outs through December 31, 2012. In addition, the Company may be required to buy back certain common shares issued to the sellers of eBaum’s World, Inc. if certain defaults were to occur.

7. Net Loss per Share

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Numerator:
Net loss	$	(8,760	)	$	(4,188	)	$	(24,439	)	$	(10,219	)

Denominator:
Weighted average shares used in computing basic and diluted net loss per share		35,015,831			17,584,600			27,675,741			16,481,502

Basic and diluted net loss per share	$	(0.25	)	$	(0.24	)	$	(0.88	)	$	(0.62	)

Antidilutive securities including options, warrants, and convertible debt not included in net loss per share calculation
Convertible debt		186,306			186,306			186,306			186,306
Convertible debentures		217,649,143			-			217,649,143			-
Stock options outstanding		1,340,781			1,639,811			1,340,781			1,639,811
Warrants outstanding		11,982,199			4,197,139			11,982,199			4,197,139
		231,158,429			6,023,256			231,158,429			6,023,256

The computation of 217,649,143 common shares underlying the convertible debentures is based on the lower of the lenders’ fixed conversion price of $1.90 or our optional variable conversion price for purposes of paying the monthly principal and interest payments in common stock. The assumed conversion price used in the above computation was $0.12 which was the closing price of the Company’s common stock on September 30, 2008.

8. Shareholders’ Equity

Preferred Stock:

The Company has authorized 1,000,000 shares of preferred stock at a par value of $0.0001 per share. No shares are issued and outstanding as of September 30, 2008.

ZVUE Corporation

Notes to Condensed Consolidated Financial Statements

September 30, 2008

(in thousands, except per share amounts)

(unaudited)

Common Stock:

The Company has authorized 75,000,000 shares of common stock at a par value of $0.0001 per share. As of September 30, 2008, the Company had 37,503,825 shares issued and outstanding. As of December 31, 2007, the Company had 20,190,262 shares issued and outstanding.

Common Stock Issued as Payment of Debt

During the nine months ended September 30, 2008, the Company issued a total of 7,420,574 shares of common stock to our senior secured convertible debenture in lieu of cash payment of principal and interest. In addition, the Company issued a total of 5,929,136 shares of common stock to the holders of our junior secured convertible debentures in lieu of cash payment of principal and interest. For further details, refer to Note 5. “Debt.”

Common Stock Grants

Activity related to common stock grants for the nine months ended September 30, 2008 is summarized as follows:

	Non-Vested								Shares Expected
	Shares at January 1,		Shares		Shares		Shares Vested		to Vest at September 30,
	2008		Granted		Forfeited		During Year		2008
2007 Plan		485,447		1,727,050		323,559		1,832,287		56,651
Non Plan		1,708,417		940,000		2,396		887,977		1,758,044
		2,193,864		2,667,050		325,955		2,720,264		1,814,695

The shares granted (except 303,398 shares) were valued at the quoted trading price of the common stock on the date of the grant that ranged from $0.12 to $1.65 per share. The 303,398 share grant was issued in conjunction with an employment agreement and related to the acquisition of eBaums World, Inc. in 2007 that was valued at $875 (see Note 6) and was applied against a previously established reserve. Forfeited shares represent awards cancelled due to the recipient not completing the vesting requirements associated with the grant. Net expense associated with common stock grants for the nine months ended September 30, 2008 and September 30, 2007 was $1,461 and $978. Based on currently issued stock grants, approximately $2.7 million is anticipated to be charged to operations in future periods.

Stock Option Plans:

The Company has adopted certain equity incentive plans as described in Note 11, "Employee Stock Incentive Plans and Options and Warrants," of the notes to the consolidated financial statements in our Annual Report on Form 10-KSB for the year ended December 31, 2007. The following table summarizes activity under our stock option plans for the nine months ended September 30, 2008:

				Weighted
	Outstanding			Average
	Stock			Exercise
	Options			Price
Balance as of December 31, 2007		1,728,109		$	1.18
Options granted under all plans		495,000		$	0.26
Exercised		(229,794	)	$	0.34
Cancelled		(652,534	)	$	1.87
Outstanding as of September 30, 2008		1,340,781		$	0.65

ZVUE Corporation

Notes to Condensed Consolidated Financial Statements

September 30, 2008

(in thousands, except per share amounts)

(unaudited)

The weighted average exercise price of the balance as of December 31, 2007 has been restated to reflect the re-pricing of options to purchase an aggregate of 645,179 shares of common stock issued to the Company’s former CEO from $0.537 per share to $0.07 per share. The financial impact of the re-pricing of the shares was immaterial.

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

	Three Months Ended		Nine Months Ended
	September 30, 2008		September 30, 2008
	2008	2007	2008	2007
Risk-free interest rates	2.18%	5.19%	1.97% - 2.78%	5.19% - 5.26%
Expected term (in years)	3	5	3 - 5	5
Expected volatility	153%	183%	99% - 153%	183%
Dividend yield	0%	0%	0%	0%

The expected term of options granted up to March 31, 2008 of five years was based on utilizing the simplified method under SAB 107. The expected term of options granted after March 31, 2008 of three years is based on expectations of future employee behavior. The expected stock price volatility is based on historical volatility of the Company’s stock. The risk-free interest rate is based on the implied yield available on U.S. Treasury securities with a term equivalent to the expected term of the stock options. The Company has not paid dividends in the past.

Stock-based compensation expense from the issuance of stock options recognized under SFAS 123R for the three months ended September 30, 2008 and September 30, 2007 was $8 and $314, respectively. Stock-based compensation expense from the issuance of stock options recognized under SFAS 123R for the nine months ended September 30, 2008 and September 30, 2007 was $142 and $491, respectively. As of September 30, 2008, the aggregate stock compensation remaining to be amortized to expenses was $148. The Company expects this stock compensation balance to be amortized as follows: $26 during the remainder of 2008; $71 during 2009 and $51 during 2010. The expected amortization reflects only outstanding stock awards as of September 30, 2008.

The weighted average fair value per share of the stock option awards in the nine months ended September 30, 2008 and 2007 was $0.21 and $1.98, respectively. During the nine months ended September 30, 2008, the Company received proceeds of $79 from the exercise of options for 229,794 shares of common stock with exercise prices ranging from $0.145 to $0.537 per share. The intrinsic value of all the options exercised was $96.

As of September 30, 2008, the Company has remaining approximately 678,000 shares authorized to be issued under the 2003 and 2007 plans.

ZVUE Corporation

Notes to Condensed Consolidated Financial Statements

September 30, 2008

(in thousands, except per share amounts)

(unaudited)

Warrants:

The following reflects activity related to our warrants:

	Number of Shares Underlying			Weighted Average Exercise
	Warrants			Price
Outstanding at December 31, 2007		11,298,750		$	2.71
Granted		700,000		$	0.17
Exercised		-			-
Expired		(16,551	)	$	3.24
Outstanding at September 30, 2008		11,982,198		$	2.56

Warrants to acquire 350,000 shares of common stock were issued in conjunction with consulting agreements and a warrant to acquire 350,000 shares of common stock were issued to the Company’s CTO and Director in conjunction with purchase order financing. Warrant expense recorded for the nine months ended September 30, 2008 was $85, of which $51 was recorded as a component of interest expense. Warrant expense recorded for the nine months ended September 30 ,2007 was $181 of which all was recorded as a component of interest expense. The warrants were issued using the Black-Scholes model and the following variables:

Issue	Warrant	Exercise	Interest
Date	Shares	Price	Rate	Life	Volatility
5/23/2008	100,000	$0.31	2.78%	3	98.53%
7/15/2008	350,000	$0.16	2.91%	5	152.00%
9/5/2008	250,000	$0.11	2.91%	5	152.00%
	700,000

9. Subsequent Events

Refer to Note 5 in regards to shares of common stock issued to the holders of the Company’s junior debentures in October and November 2008.

On September 29, 2008, the Company entered into an agreement with its senior secured secured convertible debt holder, amending prior agreements entered into by the parties (see Note 5 - Debt), which deferred the October 2008 amount of monthly principal and interest payment until the debenture’s maturity date. The amendment expired on October 31, 2008 without being renewed. The Company has made no further payments in cash or in stock to this security holder, nor has the security holder made demands for additional payments. The Company did not make the installment payment which became due under its senior secured convertible debt on November 3, 2008. There can be no assurance that the holder of the Company’s senior secured convertible debt will not exercise its default remedies, including accelerating such debt and/or converting some portion thereof into the Company’s common stock at the default conversion price. The Company and the holder of its senior secured convertible debt are discussing further modifications and/or extensions as of this filing. However, there can be no assurance that any such further amendment will occur or that such security holder will continue to forbear from exercising its rights under the senior secured convertible debt.

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

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

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

Corporate History

On October 31, 2007, we changed our name to “ZVUE Corporation” from “Handheld Entertainment, Inc.”

Overview

Our websites seek to provide our demographic target of 18-35 year olds with compelling online entertainment, such as commercial and user generated video, games, images and other forms of online entertainment. Our library of video content comes to us from both our network of user-generated video sites, which house many hundreds of thousands of videos that are created by users, and our commercial content providers who have contracted with us to provide us with commercially produced videos. We acquired eBaumsWorld.com, PutFile.com, Dorks.com, HolyLemon.com, FunMansion.com, YourDailyMedia.com, and UnOriginal.co.uk in order to aggregate both commercial and user-generated content with a focus on humor, extreme sports and music videos and monetize the resulting traffic to our websites by selling advertising space. We presently are evaluating the value of our strategy to bundle each of these websites into a consolidated network strategy and as a result may determine to disaggregate, dispose of or terminate any or all of these websites, other than eBaumsWorld.com.

Prior to our acquisition of eBaumsWorld in October 2007, the Company business was the consumer electronics MP3 audio and video players. The Company recently reevaluated this business and has determined that this line of business is too capital intensive, and that the competition for high and low end players from significant well capitalized companies was disadvantageous for for the Company. As the Company has determined that it should focus on its web related business, it has ceased all activity related to players and has disposed of its inventory.

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. Such accounting policies 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.

Goodwill and Intangibles

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

Revenue Recognition

Product Sales

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

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

Advertising Revenue

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

Reserve for Sales Returns

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

Stock Based Awards

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

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

	Three Months Ended						Three Months Ended
	September 30, 2008						September 30, 2007
				% of						% of			Change
	Amount			Revenue			Amount			Revenue			Amount			Percent
Revenues, net
Product sales, net	$	2,010			66	%	$	510			84	%	$	1,500			290	%
Advertising		1,044			34	%		106			16	%		938			934	%
Total revenue, net		3,054			100	%		616			100	%		2,438			396	%

Cost of revenues
Product sales		2,140			70	%		831			135	%		(1,309	)		-157	%
Advertising		231			8	%		19			3	%		(212	)		-1183	%
Total cost of revenues		2,371			78	%		850			138	%		(1,521	)		-179	%

Gross profit (loss)		683			22	%		(234	)		-38	%		917			-392	%

Operating expenses
Sales and marketing		506			17	%		789			128	%		283			-36	%
General and administrative		2,050			67	%		1,915			311	%		(135	)		-7	%
Amortization and impairment of intangible website costs		3,818			125	%		1,024			166	%		(2,794	)		-273	%
Total operating expenses		6,374			209	%		3,728			605	%		(2,646	)		-71	%

Operating loss		(5,691	)		-186	%		(3,962	)		-643	%		(1,729	)		-44	%

Non-operating income (expense)
Interest income		2			-			5			1	%		(3	)		-60	%
Interest expense		(3,071	)		-101	%		(231	)		-38	%		(2,840	)		n/a
Total non-operating expense		(3,069	)		-101	%		(226	)		-37	%		(2,843	)		n/a

Net loss	$	(8,760	)		-287	%	$	(4,188	)		-680	%	$	(4,572	)		-109	%

	Nine Months Ended						Nine Months Ended
	September 30, 2008						September 30, 2007
				% of						% of			Change
	Amount			Revenue			Amount			Revenue			Amount			Percent
Revenues, net
Product sales, net	$	2,892			51	%	$	1,079			81	%	$	1,813			168	%
Advertising		2,761			49	%		246			19	%		2,515			1022	%
Total revenue, net		5,653			100	%		1,325			100	%		4,328			327	%

Cost of revenues
Product sales		3,340			59	%		1,540			116	%		(1,800	)		-117	%
Advertising		680			12	%		19			1	%		(661	)		-3479	%
Total cost of revenues		4,020			71	%		1,559			118	%		(2,461	)		-158	%

Gross profit (loss)		1,633			29	%		(234	)		-18	%		1,867			-798	%

Operating expenses
Sales and marketing		2,240			40	%		2,242			169	%		2			0	%
General and administrative		6,538			116	%		4,843			365	%		(1,695	)		-35	%
Amortization and impairment of intangible website costs		8,477			150	%		2,692			203	%		(5,785	)		-215	%
Total operating expenses		17,255			305	%		9,777			738	%		(7,478	)		-76	%

Operating loss		(15,622	)		-276	%		(10,011	)		-756	%		(5,611	)		-56	%

Non-operating income (expense)
Interest income		52			1	%		65			5	%		(13	)		-20	%
Interest expense		(8,869	)		-157	%		(273	)		-21	%		(8,596	)		n/a
Total non-operating income (expense)		(8,817	)		-156	%		(208	)		-16	%		(8,609	)		n/a

Net loss	$	(24,439	)		-432	%	$	(10,219	)		-771	%	$	(14,220	)		-169	%

Results of Operations for the Three and Nine Months Ended September 30, 2008 Compared to the Three and Nine Months Ended September 30, 2007

Revenues

Total net revenue increased from $0.6 million for the three months ended September 30, 2007 to $3.1 million for the three months ended September 30, 2008. In addition net revenue increased from $1.3 million for the nine months ended September 30, 2007 to $5.7 million for the nine months ended September 30, 2008.

Advertising revenues increased from $0.1 million for the three months ended September 30, 2007 to $1.0 million for the three months ended September 30, 2008 and increased from $0.2 million for the nine months ended September 30, 2007 to $2.8 million for the nine months ended September 30, 2008. The increase in revenue was primarily derived from advertisements served on our eBaumsworld.com web site that was acquired in October 2007.

Cost of Revenues

Cost of revenues increased from a total of $0.9 million for the three months ended September 30, 2007 to $2.4 million for the three months ended September 30, 2008 and from $1.6 million for the nine months ended September 30, 2007 to $4.0 million for the nine months ended September 30, 2008.

Cost of revenues associated with product sales increased from $0.8 million for the three months ended September 30, 2007 to $2.4 million for the three months ended September 30, 2008 and from $1.6 million for the nine months ended September 30, 2007 to $4.0 million for the nine months ended September 30, 2008. The increase in cost of revenues reflects the sale of a total of approximately 110,000 players during the current year. The results of the three and nine months ended September 30, 2008 reflect an inventory write-down of $0.5 million for prior players produced. No further production of players is planned due to the curtailment of this business activity. The cost of revenue for the prior year period was all related to the sale of the Model 250 player.

Cost of revenue associated with advertising increased from $18,000 for the three months ended September 30, 2007 to $231,000 for the three months ended September 30, 2008 and from $19,000 for the nine months ended September 30, 2007 to $680,000 for the nine months ended September 30, 2008. The current period amounts primarily reflect commissions earned by our contract sales agent. During the prior year period, the Company did not utilize the services of a contract sales agent.

Sales and Marketing

Sales and marketing expenses, which include marketing and sales efforts, as well as all efforts related to our content business, decreased from $0.8 million for the three months ended September 30, 2007 to $0.5 million for the three months ended September 30, 2008 and was $2.2 million for both the nine months ended September 30, 2008 and 2007. The decrease for the three months ended September 30, 2008 compared to the prior period amounts reflects a reduction of payroll related costs as various positions were eliminated between the periods. Sales and marketing expenses for the nine months ended September 30, 2008 and 2007 were both $2.2 million, with the 2008 results reflecting a $0.3 million reduction in payroll related costs, offset by a like increase in consulting fees.

General and Administrative

Amortization and Impairment of Intangible Website Cost

Amortization of intangible website costs increased from $1.0 million for the three months ended September 30, 2007 to $3.8 million for the three months ended September 30, 2008 and from $2.7 million for the nine months ended September 30, 2007 to $8.5 million for the nine months ended September 30, 2008.

The increase between years is primarily attributable to amortizing the value of the eBaumsworld.com web site of $1.3 million for the three months ended September 30, 2008 and $3.9 million for the six months ended September 30, 2008 with no comparable amounts the prior year as this website was purchased in October 2007. In addition, the Company has decided that it is no longer cost effective to continue to operate its Holylemon, Funmansion and Dork’s web sites and will re-direct web traffic from those sites to other Company web sites by the end of the year. As a result, the Company incurred a non-cash impairment charge of $1.5 million to write-off the remaining value of those web sites.

Interest Expense

Interest expense increased from $0.2 million for the three month period ended September 30, 2007 to $3.1 million for the three month period ended September 30, 2008. In addition, interest expense increased from $0.3 million for the nine month period ended September 30, 2007 to $8.9 million for the nine month period ended September 30, 2008

The current year results include the non-cash amortization of debt discount and debt issue costs associated with the issuance of convertible debentures in October 2007 of $2.4 million and $7.2 million for the three and nine month periods ended September 30, 2008. During the three months ended September 30, 2008, approximately $0.2 million cash payments for interest were made. Interest expense for the three and nine months ended September 30, 2007 includes $0.2 million for the value of warrants issued in conjunction with a financing.

Restricted Cash

In July 2008, the Company entered into a standstill agreement with its senior secured convertible debenture holder and released $1.5 million of cash then held in a restricted escrow account. In consideration of such payment, the security holder agreed to defer monthly installment payments that were scheduled for July, August and September 2008 until the securities maturity. The Company’s $1.5 million payment under the standstill agreement was applied to the payment of accrued interest of approximately $0.3 million, payment of $1.1 million of the outstanding principal and payment of a $0.1 million of redemption premium classified as a component of interest expense. The security holder also agreed that during the standstill period, neither it nor its affiliates will sell shares of the Company’s common stock (1) at prices less than $0.30 per share, or (2) in excess of 18% of the aggregate daily trading volume of the common stock, at prices of between $0.30 and $0.50. The agreement provided no limitation on sales of common stock at prices of greater than $0.50 per share. Should the security holder breach the trading limitations, then the trading restriction and payment deferral were to be extended for an additional period of one or more months, depending on the extent of such breach. In addition, the senior secured convertible debenture holder agreed to: (1) increase the limit for separate asset-based financing related to the Company’s product business to $2.5 million from $0.5 million and (2) consent to the sale of no less than $2.0 million of certain assets or businesses of the Company to occur no later than September 30, 2008.

Liquidity and Capital Resources

At September 30, 2008, the Company had a cash balance of $1.6 million. Net cash used by operations was $2.4 million for the nine months ended September 30, 2008 and $8.0 million for the nine months ended September 30, 2007. The net cash used by operations for the nine months ended September 30, 2008 was used to fund the net loss of $24.4 million, offset by $18.1 million of non-cash charges and a $3.5 million reduction in accounts receivable. The reduction in our receivables was primarily attributable to payments received from Wal-Mart. As of September 30, 2008 the Company has no remaining receivables from Wal-Mart. The net cash used in operations for the nine months ended September 30, 2007 was to fund the net loss of $10.2 million and a decrease of accounts payable and accrued liabilities of $2.5 million, offset by non-cash charges of $4.8 million.

Net cash provided by investing activities was $0.5 million for the nine months ended September 30, 2008 and net cash used by investing activities was $2.2 million for the nine months ended September 30, 2007. The current year amounts include the use of $1.6 million of previously restricted cash, offset by earn-out related payments of $0.7 million related to the purchase of the eBaumsworld.com web site and approximately $0.3 million of installment payments for the purchase of other websites. The amounts for the prior year include $0.2 million for the purchase of equipment, and $2.0 million for the purchase of various web sies as well as a $0.4 million deposit related to the eventual acquisition of eBaumsworld.com.

Net cash provided (used) by financing activities was ($1.2 million) for the nine months ended September 30, 2008 compared to $6.8 million for the nine months ended September 30, 2007. The net cash used by financing activities during the current period included $0.7 million received from short term borrowing from the Company’s CTO, who is also a Director, and $0.1 million received from the exercise of stock options, offset by a $1.1 million payment of principal on the senior secured convertible debenture and $0.1 million of costs associated with the 2007 issuance of convertible debentures. The $1.1 million payment on the principal of the senior secured convertible debenture was facilitated by the lifting of restrictions on $1.5 million of cash.

The net cash provided by financing activities during the nine months ended September 30, 2007 of $5.5 million include $3.8 million from the January 2007 private placement of common stock, offset by $0.1 million of offering costs and approximately $0.3 million from the additional sale of common stock to the Company’s CTO. The sale of unsecured notes in June 2007 resulted in cash proceeds of $1.4 million, offset by $0.1 million of offering costs. During this time period, the Company’s CTO purchased notes under a line of credit in which the Company received $1.3 million. The Company also received $0.3 million from the exercise of stock options.

Recent Accounting Pronouncements

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

ITEM 4T - Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’) as of the end of the period covered by this Quarterly Report on Form 10-Q. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon our evaluation, our interim chief executive officer concluded that our disclosure controls and procedures are effective, as of the period ended September 30, 2008, in ensuring that material information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

There were no changes in our internal control over financial reporting during the nine months ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1 - Legal Proceedings

On December 21, 2007, Edward John Kowal filed a complaint in the United States District Court, Western District of Washington, against us seeking bonus compensation he alleges is owed under his employment contract based on the potential value of the eBaums World, Inc. acquisition completed in October 2007 (Edward John Kowal v. ZVUE Corporation, Case No. 07-2-40332-9). On September 18, 2008 the claim was amended under Case No. C08-108RSL alleging that Mr. Kowal is owed compensation based on the aggregate value of consideration paid by the Company of its purchase of eBaum’s World, Inc. A trial date of March 2, 2009 has been set. The Company disputes the facts of the case and intends to vigorously defend itself.

ITEM 6 - Exhibits

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

Number	Exhibit Title

10.1	Agreement, dated as of July 1, 2008, between ZVUE Corporation and YA Global Investments, L.P. (Incorporated herein by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K dated July 1, 2008)

10.2	Loan Agreement, dated as of July 15, 2008, between Carl Page and ZVUE Corporation (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated July 15, 2008)

10.3	Security Agreement, dated as of July 15, 2008, between Carl Page and ZVUE Corporation (Incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated July 15, 2008)

10.4	Amendment No.1 to Asset Purchase Agreement, dated as of July 20, 2008, among ZVUE Corporation, eBaum’s World, Inc. and Eric’s Universe, Inc. (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated July 20, 2008)

10.5	Amendment No.1 to Employment Agreement, dated as of July 20, 2008, between ZVUE Corporation and Eric Bauman (Incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated July 20, 2008)

10.6	Amendment No.1 to Employment Agreement, dated as of July 20, 2008, between ZVUE Corporation and Neil Bauman (Incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated July 20, 2008)

10.7	Separation and Release Agreement, dated as of September 19, 2008, between Jeffrey Oscodar and ZVUE Corporation, and its parents, subsidiaries and affiliates (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated September 19, 2008)

10.8	Letter Agreement, dated as of September 29, 2008, between YA Global Investments, L.P. and ZVUE Corporation (Incorporated herein by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K dated September 29, 2008)

10.9	Letter Agreement, dated as of October 6, 2008, among ZVUE Corporation, eBaum’s World, Inc. and Eric’s Universe, Inc. (Incorporated herein by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated October 6, 2008)

31.1	Certification of Interim Chief Executive Officer (Principal Executive, Financial and Accounting Officer) Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1	Certification of Interim Chief Executive Officer (Principal Executive, Financial and Accounting Officer) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURE

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


	ZVUE CORPORATION

Date : November 14, 2008	By:	/s/ Ulysses Curry
		Ulysses Curry Chairman and Interim Chief Executive Officer (Principal Executive, Financial and Accounting Officer)

INDEX TO EXHIBITS:

Number	Exhibit Title

10.1	Agreement, dated as of July 1, 2008, between ZVUE Corporation and YA Global Investments, L.P. (Incorporated herein by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K dated July 1, 2008)

10.2	Loan Agreement, dated as of July 15, 2008, between Carl Page and ZVUE Corporation (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated July 15, 2008)

10.3	Security Agreement, dated as of July 15, 2008, between Carl Page and ZVUE Corporation (Incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated July 15, 2008)

10.4	Amendment No.1 to Asset Purchase Agreement, dated as of July 20, 2008, among ZVUE Corporation, eBaum’s World, Inc. and Eric’s Universe, Inc. (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated July 20, 2008)

10.5	Amendment No.1 to Employment Agreement, dated as of July 20, 2008, between ZVUE Corporation and Eric Bauman (Incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated July 20, 2008)

10.6	Amendment No.1 to Employment Agreement, dated as of July 20, 2008, between ZVUE Corporation and Neil Bauman (Incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated July 20, 2008)

10.7	Separation and Release Agreement, dated as of September 19, 2008, between Jeffrey Oscodar and ZVUE Corporation, and its parents, subsidiaries and affiliates (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated September 19, 2008)

10.8	Letter Agreement, dated as of September 29, 2008, between YA Global Investments, L.P. and ZVUE Corporation (Incorporated herein by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K dated September 29, 2008)

10.9	Letter Agreement, dated as of October 6, 2008, among ZVUE Corporation, eBaum’s World, Inc. and Eric’s Universe, Inc. (Incorporated herein by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated October 6, 2008)

31.1	Certification of Interim Chief Executive Officer (Principal Executive, Financial and Accounting Officer) Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1	Certification of Interim Chief Executive Officer (Principal Executive, Financial and Accounting Officer) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002