**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**








**FORM
      10-K**








(Mark
      One)





**xANNUAL
      REPORT PURSUANT
      TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**





For
      the
      fiscal year ended: **December 31, 2005**


or





**oTRANSITION
          REPORT PURSUANT TO SECTION 13
          OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.**





For
      the
      transition period from _____ to _____.





Commission
      file number **08016**










**SMARTVIDEO
      TECHNOLOGIES, INC.**





(Exact
      Name of Registrant as Specified in Its Charter)








**Delaware**
            **91-1962104**(State
                or Other Jurisdiction of Incorporation of Organization)
            (I.R.S.
                Employer Identification No.)





**3505
                Koger Boulevard, Suite 400**
              **Duluth,
                Georgia**
            **30096**(Address
                of Principal Executive Offices)
            (Zip
                Code)





Registrant's
      Telephone Number, Including Area Code: **(770)
      279-3100**








Securities
      registered pursuant to Section 12(b) of the Act: **None.**





Securities
      registered pursuant to Section 12(g) of the Act: **Common
      Stock, $0.001 par value**








Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes
o  No
x





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


Yes x  No
o





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 twelve 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 if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10K or any amendments to
      this
      Form 10-K. x





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





Large
      accelerated filer o Accelerated
      filer o Non-accelerated
      filer 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




The
      aggregate market value of voting common stock held by non-affiliates of the
      issuer as of June 30, 2005, was approximately $15,031,717 (computed based on
      the
      closing sale price of the common stock as reported on the OTC Bulletin Board
      at
      $1.12 per share as of such date).




As
      of the
      close of business on March
      10,
      2006, 37,966,679 shares of the registrant’s common stock were
      outstanding.





Documents
      Incorporated by Reference: None.






-2-




**Table
                  of Contents**
              PagePART
                  IItem
                  1.
              Business
              5Item
                  1A
              Risk
                  Factors
              11Item
                  1B
              Unresolved
                  SEC Comments
              20Item
                  2.
              Properties
              21Item
                  3.
              Legal
                  Proceedings
              21Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              23PART
                  IIItem
                  5.
              Market
                  for the Registrant's Common Equity, Related Stockholder Matters
                  and Issuer
                  Purchases of Equity Securities
              23Item
                  6.
              Selected
                  Financial Data
              24Item
                  7.
              Management's
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              25Item
                  7A.
              Quantitative
                  and Qualitative Disclosure about Market Risk
              33Item
                  8.
              Financial
                  Statements and Supplementary Data
              33Item
                  9.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              33Item
                  9A.
              Controls
                  and Procedures
              33Item
                  9B
              Other
                  Information
              34PART
                  IIIItem
                  10.
              Directors
                  and Executive Officers of the Registrant
              35Item11.
              Executive
                Compensation
              38Item
                  12.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              42Item
                  13.
              Certain
                  Relationships and Related Transactions
              44Item
                  14
              Principal
                  Accountant Fees and Services
              45PART
                  IVItem
                  15.
              Exhibits
                  and Financial Statement Schedules
              47Signatures
              51CONSOLIDATED
                BALANCE SHEETS
              F-2CONSOLIDATED
                  STATEMENTS OF OPERATIONS
              F-3CONSOLIDATED
                  STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
              F-4CONSOLIDATED
                  STATEMENTS OF CASH FLOWS
              F-6NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS
              F-7






-3-


*Unless
      the context otherwise requires, all references to “SmartVideo,” the “Company,”
“we,” “us” or “our” include SmartVideo Technologies, Inc. and its subsidiaries.
      References in this report to annual financial data for SmartVideo refer to
      fiscal years ended December 31.*




*General
      information about SmartVideo can be found at www.smartvideo.com. We make our
      annual report on Form 10-K, quarterly reports on Form 10-Q, current report
      on
      Form 8-K and amendments to these reports filed or furnished pursuant to Section
      13 or 15(d) of the Securities Exchange Act of 1934 available free of charge
      on
      our Website, as soon as reasonably practicable after they are electronically
      filed with the SEC.*




**FORWARD-LOOKING
      STATEMENTS**




We
      caution readers that this report includes “forward-looking statements” as that
      term is used in the Private Securities Litigation Reform Act of 1995.
      Forward-looking statements are based on current expectations rather than
      historical facts and they are indicated by words or phrases such as
“anticipate,” “could,” “may,” “might,” “potential,” “predict,” “should,”
“estimate,” “expect,” “project,” “believe,” “intend,” “plan,” “envision,”
“continue,” “target,” “contemplate,” or “will” and similar words or phrases or
      comparable terminology. We have based such forward-looking statements on our
      current expectations, assumptions, estimates and projections. While we believe
      these expectations, assumptions, estimates and projections are reasonable,
      such
      forward-looking statements are only predictions and involve known and unknown
      risks and uncertainties, and other factors that may cause actual results,
      performance or achievements to be materially different from any future results,
      performance or achievements expressed or implied by such forward-looking
      statements, many of which are beyond our control. Some of the factors that
      could
      affect our financial performance, cause actual results to differ from our
      estimates, or underlie such forward-looking statements, are as set forth below
      and in various places in this report, including under the headings Item 1A.
      “Risk Factors,” and Item 7 “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations” in this report. These factors
      include:




·
            general
                economic conditions,




·
            a
                significant decrease in business from or loss of any of our major
                customers,




·
            our
                ability to contain costs,




·
            disruptions
                in the supply chain,




·
            our
                future capital needs and our ability to obtain
                financing,




·
            our
                ability to predict consumer preferences and consumer acceptance of
                our
                entertainment services and the entertainment industry as a
                whole,




·
            our
                ability to carry out growth
                strategies,




·
            our
                ability to compete,




·
            other
                factors set forth in this report.




You
      are
      cautioned not to place undue reliance on these forward-looking statements,
      which
      are valid only as of the date they were made. We undertake no obligation to
      update or revise any forward-looking statements to reflect new information
      or
      the occurrence of unanticipated events or otherwise.





-4-


**PART
      I**




**Item
      1.**  **Business**




SmartVideo
      Technologies, Inc. (hereinafter sometimes referred to as "SmartVideo," the
      "Company," "we," "us," or "our") is a provider of video content distribution
      services and technology. Incorporated in 1984, the Company acquired OVT, Inc.,
      d/b/a SmartVideo, in November 2002. Since the acquisition of OVT, the Company’s
      business has been that of SmartVideo Technologies, Inc. Although the core
      business of the Company has remained constant, the Company has changed its
      focus
      from distributing business-to-business services to the distribution of video
      content to consumers.




Since
      2002, the Company has been a video content aggregator, a technology provider
      and
      a distributor of video content to consumers connected to the public Internet.
      We
      are in the business of purchasing the rights to video/television content and
      delivering that video content to subscribers for a fee. Additionally, we
      anticipate being in the business of providing managed services for Internet
      network operators (carriers) and for major content producers, owners and
      distributors. We intend to continue expanding our market opportunity by
      delivering video services to all forms of devices capable of receiving an
      Internet Protocol (IP) data stream and rendering this data stream into visible
      images on displays.




In
      January 2005, the Company launched its direct-to-consumer mobile video service.
      The Company provides its customers with access to high-quality video programming
      that is transmitted directly to its customers’ SmartPhone cellular handsets and
      to Wi-Fi enabled PDA devices. The Company believes that it is the only service
      provider who currently has subscribers on all of the major U.S. Cellular
      Carriers. The Company provides demonstration accounts, where we have acquired
      the necessary video distribution rights, to viewers in more than 75 countries,
      operating on more than 200 carriers.




The
      Company believes it provides one of the most extensive collections of
      programming available in the mobile video industry. In general, the Company
      pays
      for the distribution rights on either a fixed-fee per subscriber, per month
      basis or on a revenue-sharing basis. Some of the content deals have minimum
      guarantees per month.




The
      Company licenses the distribution rights on either a “fixed-fee, per subscriber,
      per month” basis or on a revenue-sharing basis. These license fees are payable
      to the content owners, producers, or distributors for each respective channel.
      Licensee fees range from $0.04 per subscriber, per month to $.50 cents on our
      subscription model. In the area of our Premium offerings we share at a rate
      of
      50% of the net collected revenue model. The pricing is based on individual
      negotiations of the specific rights (including geographic and technology
      platforms), the amount and quality of the content, and the estimated appeal
      of
      the content to our current and prospective subscribers. For 2005, the majority
      of our revenue has come from a per subscriber, per month, fixed fee arrangement.
      For 2006 and subsequent years, we are targeting a diverse subscriber base in
      the
      mobile entertainment industry.




Content
      Line Up




The
      Company currently delivers the following video content to our subscribers:
      ABC
      News Now, ABC News, CNBC, MSNBC, NBC Mobile, The Weather Channel Live, The
      Weather Channel Local & Regional Forecast, Court TV, FOX Sports, Vegas
      Sports, DIC Cartoons, E! Entertainment, Fun Little Movies, IFILM, Professional
      Championship Wrestling, and Rascals Comedy Classics.




We
      also
      have obtained the necessary rights, and anticipate including the following
      video
      content to our subscribers over the next quarter: BMANIA, CHRONICLE, COLOURS,
      PUMA TV, TV SUPERSTORE, Gospel Music Television, 3ABN, BYU, Daystar Television
      Network, Golden Eagle Broadcasting, INSP, JCTV, NuGospel Broadcasting, TBN,
      The
      Church Channel, FAMILYNET, CINE MEXICANO, LTV (LATIN TV), TBN, ENLACE USA,
      TV
      CHILE, TV COLOMBIA and VIDAVISION.




-5-


We
      are in
      continuous discussion with content owners and distributors and we intend to
      obtain the rights to distribute additional content. We intend to add content
      in
      the areas of sports, music and other general entertainment. Additionally, we
      believe that local news, weather, sports, community affairs, and event
      programming (“local programming”) will play a key part in our subscriber growth,
      long-term service adoption, and subscriber loyalty.




Subscription
      Process




To
      subscribe to our service, customers download a small software application to
      their mobile handset or computer, which includes security features and a desktop
      icon. Subscribers use their credit card to pay for and activate their service.
      The activation process requires no special equipment, nor does it typically
      require technical assistance. For those subscribers that have technical
      difficulty or questions, we provide a toll-free number to access a 24-hour
      call
      center.




The
      Company launched the service with only a monthly subscription package with
      up-charges for additional premium content offerings. In addition to the monthly
      subscription, we currently offer weekly and daily packages, which are more
      appealing to consumers connected through Wi-Fi hotspots.




Since
      the
      launch of the service in January 2005, we have acquired subscribers through
      a
      commerce portal included on the Company Website, as well as from links from
      various third-party Websites. We have also promoted our service through an
      aggressive public relations campaign that featured articles and information
      about the Company utilizing print, on-line, radio and television channels,
      geared towards driving potential subscribers to sample our service on a trial
      basis and ultimately subscribe to the service. Our successful public relations
      campaign has generated coverage in *Wireless
      Week* , *TV
      Week* , *Broadcast
      & Cable* , *ABC
      News* , *Wall
      Street Journal Online* , *CBS
      News* , *Chicago
      Tribune* , *Los
      Angeles Times* , *Forbes* , *Boston
      Globe* , *The
      Tony Danza Show* ,
      and *Dow
      Jones Newswire* ,
      as well
      as many other prestigious media outlets. Moving forward, the Company plans
      to
      market and promote our service to potential subscribers through a combination
      of
      general media advertising, co-op advertising with partners and distributors,
      and
      through co-marketing arrangements with our content providers.




Subscription
      Figures




As
      of
      March 1, 2006, we had approximately 2,500 subscribers for all our subscription
      packages. Additionally, we had approximately 1,500 non-paying trial subscribers.
      These numbers are indicative of: 1) insufficient funding for deployment of
      all
      the content channels for which we have obtained rights; 2) insufficient funding
      to develop and support distribution programs; and 3) insufficient financial
      support for marketing resources. With the latest infusion of operating capital,
      these indices are being addressed.




**Key
      Strengths**




Our
      principal business is characterized by the following key strengths:




**Core
      Technology.**  We
      have
      developed a core technology platform that is optimized for the efficient
      utilization of Internet bandwidth in conjunction with streaming video. We
      believe that we deliver the highest quality video stream for any given Internet
      bandwidth utilized. Surrounding the core technology are a series of modules
      that
      aid content owners in the protection of their intellectual property, aid us
      in
      the execution of our geographic rights commitments to content owners, provide
      for the programming, billing, reporting, data-mining and quality of service
      (QOS) monitoring, and provide tools that allow carriers to manage the
      utilization of their networks.




**Compatibility.** We **** believe
      that we have deployed a technological infrastructure that is compatible with
      nearly all data network configurations, Wi-Fi data networks, and a significant
      number of handset models. We believe that our key technological strengths
      include:




1.
            Delivery
                of live, on-demand, and download-and-play television and video programming
                to SmartPhones, computers and set-top
                boxes;




-6-




2.
            Microsoft
                Windows OS, Linux and Symbian OS (6.0 and above) handsets, which
                accounts
                for more than 15% of mobile handsets, MS Windows and Linux computers
                along
                with set-top boxes;




3.
            Microsoft
                PocketPC and Windows CE OS handsets, which accounts for nearly 50%
                of all
                PDA handsets; and




4.
            15+
                Frames Per Second (FPS) on 2.5g cellular data
                networks;




5.
            24+
                FPS on current and planned 3g cellular data
                networks;




6.
            25+
                FPS on Wi-Fi data networks, which is virtually a “TV-like” experience for
                the subscriber;




7.
            25+
                FPS on fixed-wire networks for compatability with computers and set-top
                boxes connected to televisions;
                and,




8.
            A
                real-time monitoring capability and the deployable tools enabling
                the
                carrier to actively manage the consumption of carrier network resources
                at
                a system-wide level, a regional level, the MTSO level, and the base
                station level.




**High-Quality
      Picture and Sound.** We
      believe our programming provides customers with high quality video for a given
      bandwidth. We believe that our live linear video feed compares favorably to
      download-and-play technology, without the extended wait time for the download
      to
      complete. This reduced wait time and high quality provide a significant
      competitive advantage. We believe that quality is a key differentiation between
      our service and all competing services.




**Substantial
      Channel Capacity and Programming Content.** As a
      result of our technical architecture and system capacity, we believe that we
      are
      able **** to
      deliver to our customers one of the widest selections **** of
      programming available today.




**Access
      to Global Media Companies.** We
      formed a Board of Advisors in 2004, whose primary role is to advise us on the
      development of relationships with global media companies. Our Board of Advisors
      consists of leading current and past executives from media production and
      distribution companies. The Board of Advisors is actively engaged with the
      Board
      of Directors and the Company management. The Board of Advisors consists
      of:




**Herman
      Rush** - Former
      Chairman and Chief Executive Officer of Coca-Cola Telecommunications, former
      Chief Executive Officer of Columbia Picture Television Group, Executive Producer
      of the Montel Williams Show for seven years. Mr. Rush is a past Governor of
      the
      Board of Governors of the Television Academy of Arts and Sciences.




**Joseph
      Indelli** - Former
      President of MTM (Mary Tyler More) Television Distribution Group, former
      President of Columbia Pictures TV Distribution, and former Senior Vice President
      of Metromedia Producers Corp.




**Peter
      Sealey** -
      Founder and Chief Executive Officer of Los Altos Group. He spent 21 years at
      The
      Coca-Cola Company holding a variety of key positions including Chief Marketing
      Officer. Mr. Sealey has served as a management consultant to leading firms
      including Sony New Technologies, Anheuser-Busch, Visa U.S.A., UPS, Johnson
&
Johnson, Hewlett-Packard, Eastman Kodak and Nokia.




**James
      Rosenfield** -
      Owner/President of JHR & Associates. He is the former Managing Director at
      Veronis Suhler & Associates Investment **** Bankers,
      past Chairman and Chief Executive Officer of John Blair Communications, and
      has
      held various senior management positions at CBS.




-7-


**Frederick
      Pierce** - Former
      President of **** the
      American Broadcasting Companies including the acquisition, operation and
      creation of ESPN, Lifetime and Arts & Entertainment Networks. Mr. Pierce
      also served as President of ABC Television and Executive Vice President and
      President of ABC, Inc. He has also served on the board of directors of Capital
      Cities/ABC Inc.




**Robert
      L. Friedman** - Former
      President of AMC Theatres Entertainment International. Prior to AMC, Mr.
      Friedman was President of Columbia Pictures Distribution and was also associated
      for 20 years in various executive positions at United Artists Corporation,
      including Executive Vice President of Distribution and Marketing.




**Our
      Business Strategy**




Our
      overall goal is to provide customers a high quality Internet television
      experience. For our consumer branded service, our strategy focuses on offering
      our customers differentiated and exclusive content, attaining leadership in
      technology and enhancing our sales and marketing, distribution and customer
      service.




For
      our
      prospective managed service offerings, we provide a range of services. We have
      developed a tiered deployment strategy ranging from a pure sell-thru
      relationship with the carrier, the Fast-Start program, to the Partner Program,
      a
      fully integrated technology solution that is deployed within the carrier
      network. We recognize that each carrier has different business goals,
      objectives, timing, and deployment processes - the Programs are guideposts
      that
      can be tailored for each carrier's specific needs. We intend to consult with
      the
      carrier to develop the most appropriate support program, create an
      implementation process, and support the carrier throughout the
      relationship.




**Fast-Start
      Program** ***.*** The
      Fast-Start Program is a television service sell-thru program whereby we provide
      all the necessary program elements for the carrier; including content, a
      subscriber commerce portal, a demonstration portal, and all the network elements
      to deliver the service.




The
      carrier actively markets the service to its SmartPhone subscribers in their
      general advertising, press and publicity campaigns. The Fast-Start Program
      may
      be activated on a six-week expedited schedule.




The
      Fast-Start Program is technically an accessory, meaning it is non-invasive,
      no
      technical modifications, and no infrastructure additions, no certifications
      or
      adaptations required. The carrier simply promotes live TV to their SmartPhones
      “Powered by The Company.” At this level, the carrier is a reseller of the
      Company branded service.




**The
      Co-Op Program** .
      In the
      Co-Op Program, the carrier takes a more active role in providing content, where
      they may already have content relationships. Carriers may include their own
      content, branded as proprietary carrier content or The Company content, or
      both.
      We deliver infrastructure, Digital Rights Management (DRM) and program
      management. The carrier usually provides all subscriber commerce and significant
      marketing and promotion.




**Partner
      Program** .
      The
      Partner Program is designed to leverage the technical, marketing, and content
      relationships of the carrier. As a participant in the Partner Program, the
      carrier will deploy video publishing points within the carrier's network
      significantly reducing their costs for public Internet access. The deployment
      of
      the video publishing points requires an investment in media servers and the
      licensing of publishing software from us. We retain the responsibility for
      the
      content management and DRM.




Under
      the
      Partner Program, our services may be branded by the carrier. Under this
      scenario, the carrier is responsible for marketing the service to its
      subscribers and for the entire commerce transaction.




-8-


Carriers
      who wish to participate in the Partner Program but are concerned about the
      initial upfront investment involved in installing the publishing points may
      lease and install the hardware and software directly through us. We will also
      provide primary support for the system.




**Key
      Initiatives:**




**Increase
      Number of Subscribers** .
      We have
      reported three major issues that need immediate improvement: 1) Deploy all
      content channels where we have obtained the necessary rights; 2) Implement
      diverse and effective distribution programs; and 3) Increase marketing
      resources. The recent funding has provided the necessary resources to initiate
      solutions for each of these issues.




1.
            To
                date, we have deployed approximately 15 channels of content. We are
                re-addressing the type, format, mix and packaging of all our content
                offerings.




2.
            The
                Company has developed programs that are designed to be appealing
                to
                traditional retailers, Internet retailers, and distributors of mobile
                handset devices and plans. The Company is actively developing distribution
                relationships.




3.
            The
                Company has increased the available manpower in the Marketing Group.
                These
                resources are building and implementing the distribution programs,
                developing advertising strategies, producing literature, updating
                the
                Company Website, and marketing to potential distribution
                partners.




**Enhanced
      Electronic Program Guide.**  We
      believe it is essential for customers to easily navigate through the multitude
      of channels that we offer. The issues associated with channel navigation are
      particularly critical for mobile devices due to the limited space available
      on
      each screen, the limited functionality of many handsets, and the relatively
      limited bandwidth available, especially for 2.5g cellular devices.




**Expand
      International Programming.** We
      intend to continue expanding our international programming because we believe
      there is a large underserved market for our **** services
      in markets outside of the U.S. We have obtained worldwide rights to certain
      content and plan to expand our subscriber base beyond the U.S.




**Technology
      Leadership.** We
      believe that technological leadership will play an important role in our ability
      to introduce services that are customer-friendly and reduce **** costs.
      We
      intend to continue the development of our core technology, with particular
      interest in the area of integration of third-party high-performance video and
      audio codecs.




**Expand
      the number of Compatible Handsets.** Our
      services are compatible with Microsoft Windows Mobile O/S, Symbian O/S, and
      Linux O/S handsets, representing about 15% of the U.S. market and all Windows
      O/S PDA devices, which comprise about 90% of all PDA handsets. We intend to
      expand our market opportunity by providing support for additional handset types
      and operating systems.




**Enhanced
      Sales Distribution.** We
      intend to increase subscriber **** growth
      by
      expanding our distribution while enhancing our sales and marketing along with
      customer service.




**Competition**




Our
      industry is early in its development, with each competitor offering distinctive
      services and distinctive business models. Our competition includes companies
      that offer video, audio, interactive programming, telephony, data and other
      entertainment services, including cable television, wireless companies,
      Direct-to-Home (DTH) companies, Regional Bell Operating Companies (RBOCs) and
      companies that are developing new technologies. Many of our competitors have
      access to substantially greater financial and marketing resources than we have.
      We believe that the quality and variety of video, audio, interactive
      programming, access to service, customer service and price are the key elements
      for gaining and maintaining market share.




-9-


**Cellular
      Carriers.**  We
      face
      substantial competition in the mobile video industry from cellular telephone
      companies. Most cellular carriers have a large, established customer base,
      and
      many have significant investments in companies that provide programming content.
      It is unclear whether a carrier developed and deployed product will be a
      long-term player in this market, or whether the carrier will co-brand and adopt
      the services of a content aggregator who provides a high value-added service
      and
      delivery infrastructure.




**Content
      Aggregators.** We
      encounter competition in the mobile video industry from third-party content
      aggregators. These content aggregators perform services similar to us; however,
      such companies presently do not deliver the quality of video image that we
      do on
      2.5g cellular networks.




**Regulation**




At
      this
      time, our service is not subject to any governmental regulation; however, in
      the
      future, we may be subject to U.S. government regulation, primarily by the FCC
      and, to a certain extent, by Congress, other federal agencies, state and local
      authorities and the International Telecommunications Union (ITU), a specialized
      agency of the United Nations within which governments and the private sector
      coordinate global telecommunications networks and services. Depending upon
      the
      circumstances, noncompliance with legislation or regulations promulgated by
      these entities could result in the suspension or revocation of our licenses
      or
      registrations, the termination or loss of contracts or the imposition of
      contractual damages, civil fines or criminal penalties.




**Employees**




We
      presently have 20 full-time employees. We believe that our employee relations
      are good. None of our employees is represented by labor unions.





**Segment
      Reporting**




The
      Company has been operated and evaluated by management as a single operations
      segment in accordance with the provisions of Statement of Financial Accounting
      Standards (“SFAS”) No. 131 - “Disclosures about Segments of an Enterprise and
      Related Information.”





**Seasonality
      and Backlog**




Our
      business is not subject to significant seasonal fluctuations. There are no
      material backlogs in our business.





**Recent
      Developments**




Effective
      as of October 31, 2005, we entered into a securities purchase agreement with
      60
      accredited investors. Under the terms of this agreement, we obtained $8 million
      in gross proceeds from a Private
      Placement of 10,666,666 shares of the Series A-1 Convertible Preferred Stock.





On
      November 21, 2005, we completed the first closing under the Private Placement
      and issued to the investors 5,333,333 shares of the Series A-1 Convertible
      Preferred Stock, five-year warrants exercisable at $1.75 per share to purchase
      up to 5,333,333 shares of common stock and five-year warrants exercisable at
      $2.00 per share to purchase up to 1,333,333 shares of common stock. In
      consideration for the issuance of such securities, we received gross proceeds
      of
      $4 million.




On
      December 2, 2005, the investors waived the conditions to complete the second
      closing under the securities purchase agreement. As a result, we issued to
      the
      investors, for aggregate gross proceeds of $4,000,000, an additional 5,333,333
      shares of the Series A-1 Convertible Preferred Stock, five-year warrants
      exercisable at $1.75 per share to purchase 5,333,333 shares of the our common
      stock and five-year warrants exercisable at $2.00 per share to purchase
      1,333,333 shares of our common stock. We have agreed to register our shares
      of
      common stock underlying the Series A-1 Convertible Preferred Stock and the
      warrants issued to the investors.





-10-


Each
      share of Preferred Stock shall be convertible without the payment of additional
      consideration by the holder thereof into such number of fully paid and
      nonassessable shares of common stock as is determined by dividing $0.75 by
      the
      Series A-1 Conversion Price in effect at the time of
      conversion. Such Series A-1 Conversion Price is subject to
      certain adjustments in accordance with the terms set forth in the Company’s
      Certificate of Designation as filed with the Secretary of the State of Delaware
      on November 2, 2005. The conversion price of the Preferred Stock is subject
      to a
      weighted average price adjustment as provided in the Certificate of Designation
      and the respective exercise prices of the warrants are subject to full ratchet
      adjustment.





**Item
      1A.**  **Risk
      Factors**





*The
      risks described below are not the only ones facing our company. Additional
      risks
      not presently known to us or that we currently believe are immaterial may also
      impair our business operations. Our business could be harmed by any of these
      risks. The trading price of our common stock could decline due to any of these
      risks.*





**Independent
      Auditor’s Report Contains Going Concern Qualification; Losses From Operations;
      Accumulated Deficit**





The
      report of our independent registered public accounting firm for the fiscal
      year
      ended December 31, 2005, contains an explanatory paragraph which states that
      we
      have suffered recurring losses from operations and a working capital deficiency
      that raise substantial doubt about our ability to continue as a going concern.
      We have incurred substantial net losses of $3,859,141, $6,792,930 and
      $19,740,274 for the years ended December 31, 2003, 2004 and 2005,
      respectively.





At
      December 31, 2005, we had an accumulated deficit of $39,953,756, a working
      capital deficit of $2,653,622, a loss from operations of $19,740,274 and cash
      flows used in operations of $5,351,783. Our ability to continue our operations
      is contingent upon obtaining additional financing and attaining profitable
      operations.





We
      used
      the proceeds received from a Private Placement conducted in March 2005 for
      the
      acquisition of programming rights, marketing and sales initiatives, and further
      improvements to our technology, as well as increase staffing levels to support
      these marketing and technology efforts, all of which will adversely affect
      operating results until revenues from sales of our services reach a level at
      which operating costs can be supported. In our efforts to strengthen our
      marketing and sales initiatives of the distribution of our services, it is
      critical that we obtain distribution partners in order to begin generating
      revenues.





We
      do not
      expect to generate cash flows from operating activities during fiscal 2006
      sufficient to offset our operating expenditures. Our operations to date have
      been financed primarily through sales of our securities. We anticipate, based
      on
      our currently proposed plans and assumptions relating to operations, that the
      net proceeds from the closings of our most recent financings in November and
      December 2005, together with revenues generated from operations, will not be
      sufficient to meet our cash requirements for working capital and capital
      expenditures through December 31, 2006. As a result, it will be necessary for
      us
      to secure additional financing to support our operations. There can be no
      assurance that we will be able to obtain such financing on acceptable terms,
      or
      at all. If adequate funds are not available or not available on acceptable
      terms, we will be unable to continue as a going concern.





-11-


**We
      have a limited operating history and insufficient revenue to generate positive
      cash flows from our operations.**





We
      formally launched our Internet based products and services in 2003. We have
      earned only minimal revenues from these services. The revenue received from
      these services is presently insufficient to generate positive cash flows from
      our operations. Additionally, the income potential of our business and from
      our
      markets is unproven. Because of the emerging nature of the industry, our
      executives have limited experience in it. As a young company operating in an
      emerging market, we face risks and uncertainties relating to our ability to
      implement our business plan successfully. Our future revenues and success depend
      significantly upon acceptance of our mobile entertainment services and the
      mobile entertainment industry as a whole. Our future revenues and success also
      depend on the development of revenue growth from our services. Our ability
      to
      successfully introduce new services and the expected benefits to be obtained
      from these new services may be adversely affected by a number of factors, such
      as unforeseen costs and expenses, technological changes, economic downturns,
      competitive factors or other events beyond our control. We expect to incur
      operating losses in fiscal 2006 and cannot be assured that we will successfully
      market any services, or operate profitably in the future.





**Our
      quarterly financial results will continue to fluctuate making it difficult
      to
      forecast our operating results.**




Our
      quarterly operating results have fluctuated in the past and we expect our
      revenues and operating results may vary significantly from quarter-to-quarter
      due to a number of factors, many of which are beyond our control,
      including:




·
            variability
                in demand and usage for our product and
                services;




·
            market
                acceptance of new and existing services offered by us, our competitors
                and
                potential competitors; and




·
            governmental
                regulations affecting the use of the Internet, including regulations
                concerning intellectual property rights and security
                features.




Our
      current and future levels of expenditures are based primarily on our growth
      plans and estimates of expected future revenues. Such expenditures are primarily
      fixed in the short-term and our sales cycle can be lengthy. Accordingly, we
      may
      not be able to adjust spending or generate new revenue sources timely to
      compensate for any shortfall in revenues. If our operating results fall below
      the expectation of investors, our stock price will likely decline significantly.
      In addition, potential fluctuations in our operating results could lead to
      fluctuations in the market price for our common stock.




**Because
      we expect to continue incurring net losses, we may not be able to implement
      our
      business strategy and the price of our stock may decline.**




As
      of
      December 31, 2005, we had an accumulated deficit of approximately $39,953,756.
      We have incurred net losses quarterly from inception through December 31, 2005,
      and we expect to continue to incur net losses for the foreseeable
      future.




Accordingly,
      our ability to operate our business and implement our business strategy may
      be
      hampered by negative cash flows in the future, and the value of our stock may
      decline as a result. Our capital requirements may vary materially from those
      currently planned if, for example, we incur unforeseen capital expenditures
      or,
      unforeseen operating expenses or make investments to maintain our competitive
      position. If this is the case, we may have to delay or abandon some or all
      of
      our development plans or otherwise forego market opportunities. We will need
      to
      generate significant additional revenues to be profitable in the future and
      we
      may not generate sufficient revenues to be profitable on either a quarterly
      or
      annual basis in the future. To address the risks and uncertainties facing our
      business strategy, we must, among other things:






-12-




·
            achieve
                broad customer adoption and acceptance of our products and
                services;




·
            successfully
                raise additional capital in the
                future;




·
            successfully
                integrate, leverage and expand our sales
                force;




·
            successfully
                scale our current operations;




·
            implement
                and execute our business and marketing
                strategies;




·
            address
                intellectual property rights issues that affect our
                business;




·
            develop
                and maintain strategic relationships to enhance the development and
                marketing our existing and new products and services;
                and




·
            respond
                to competitive developments in the mobile entertainment services
                industry.




We
      may
      not be successful in achieving any or all of these business objectives in a
      cost-effective manner, if at all, and the failure to achieve these could have
      a
      serious adverse impact on our business, results of operations and financial
      position. Each of these objectives may require significant additional
      expenditures on our part. Even if we ultimately do achieve profitability, we
      may
      not be able to sustain or increase profitability on a quarterly or annual
      basis.





**Our
      failure to respond to rapid changes in technology and its applications and
      intense competition in the mobile entertainment services industry products
      could
      make our services obsolete.**




The
      mobile entertainment services industry is subject to rapid and substantial
      technological development and product innovations. To be successful, we must
      respond to new developments in technology, new applications of existing
      technology and new treatment methods. Our response may be stymied if we require,
      but cannot secure, rights to essential third-party intellectual property. We
      compete against numerous companies offering alternative systems to ours, some
      of
      which have greater financial, marketing and technical resources to utilize
      in
      pursuing technological development. Our financial condition and operating
      results could be adversely affected if our mobile entertainment services fail
      to
      compete favorably with these technological developments, or if we fail to be
      responsive on a timely and effective basis to competitors’ new services or price
      strategies.




**Our
      success is dependent on the performance and retention of our executive officers,
      consultants and key employees.**





Our
      business and operations are substantially dependent on the performance of our
      executive officers and key employees, including Richard E. Bennett, Jr., David
      Ross, William R. Dunavant, Scott Hughes and Ronald A. Warren, all of whom are
      employed on an at-will basis and have worked together for only a relatively
      short period of time. We do not maintain “key person” life insurance on any of
      our executive officers. The loss of one or several executives could seriously
      harm our business. Any reorganization or reduction in the size of our employee
      base could harm our ability to attract and retain other valuable employees
      critical to the success of our business.




**Our
      mobile entertainment services and any of our future services may fail to gain
      market acceptance, which would adversely affect our competitive
      position.**




We
      have
      not conducted any independent studies with regard to the feasibility of our
      proposed business plan, present and future business prospects and capital
      requirements. We have generated limited commercial distribution for our mobile
      entertainment services. Our services may fail to gain market acceptance and
      our
      infrastructure to enable such expansion is still limited. Even if adequate
      financing is available and our services are ready for market, we cannot be
      certain that our services will find sufficient acceptance in the marketplace
      to
      fulfill our long and short-term goals. Failure of our services to achieve market
      acceptance would have a material adverse effect on our business, financial
      condition and results of operations.





-13-


**We
      depend on a limited number of customers and distribution channels for a majority
      of our revenues so the loss of, or delay in payment from, one or a small number
      of customers or distribution channel partners could have a significant impact
      on
      our revenues and operating results.**




During
      2005, two of our customers accounted for approximately 28% of our revenues.
      During 2005, we experienced a shift from a business-to-business model to a
      subscription-based model reducing much of our reliance on revenues from related
      parties. We are in the process of developing relationships with distribution
      channel partners to increase the size of our customer base. We cannot
      successfully accomplish our business objectives by relying solely on our
      existing customer base. If we are unsuccessful in increasing and broadening
      our
      customer base, our ability to maintain and grow our business will
      suffer.




**Average
      selling prices of our products and services may decrease, which may harm our
      gross margins.**





The
      average selling prices of our products and services may be lower than expected
      as a result of competitive pricing pressures and promotional programs. We expect
      to experience pricing pressure and anticipate that the average selling prices
      and gross margins for our products may decrease over product life cycles. We
      may
      not be successful in developing and introducing on a timely basis new products
      with enhanced features and services that can be sold at higher gross
      margins.




**We
      may face third-party intellectual property infringement claims and other related
      claims that could severely impact our business.**




We
      may be
      liable or alleged to be liable to third-parties for video, music, software,
      and
      other content that we encode, distribute, or make available to our
      customers:




·
            If
                the content or the performance of our services violates third-party
                copyright, trademark, or other intellectual property
                rights;




·
            If
                our customers violate the intellectual property rights of others
                by
                providing content to us or by having us perform digital media services;
                or




·
            If
                content that we encode or otherwise handle for our customers is deemed
                obscene, indecent, or defamatory.




Any
      alleged liability could damage our business by damaging our reputation,
      requiring us to incur legal costs in defense, exposing us to awards of damages
      and costs and divert management’s attention, all which could have an adverse
      effect on our business, results of operations and financial condition. Our
      customers generally agree to hold us harmless from claims arising from their
      failure to have the right to encode or distribute multimedia software and other
      content given to us for that purpose. However, customers may contest this
      responsibility or not have sufficient resources to defend claims. In addition,
      we have limited insurance coverage for claims of this nature and may not be
      able
      to cover losses above our insurance coverage limits.




Because
      we host, stream and deploy audio and video content on or from our Websites
      for
      customers and provide services related to digital media content, we face
      potential liability or alleged liability for negligence, infringement of
      copyright, patent, or trademark rights, defamation, indecency and other claims
      based on the nature and content of the materials. Claims of this nature have
      been brought and sometimes successfully pressed, against content distributors.
      In addition, we could be exposed to liability with respect to the unauthorized
      duplication of content or unauthorized use of other parties’ proprietary
      technology. Any imposition of liability that is not covered by insurance or
      is
      in excess of insurance coverage or any alleged liability could harm our
      business.





-14-


We
      cannot
      be certain that third-parties will not claim infringement by us with respect
      to
      past, current, or future technologies. We expect that participants in our
      markets will be increasingly subject to infringement claims as the number of
      services and competitors in our industry segment grows. In addition, these
      risks
      are difficult to quantify in light of the continuously evolving nature of laws
      and regulations governing the Internet. Any claim relating to proprietary
      rights, whether meritorious or not, could be time-consuming, result in costly
      litigation, cause service upgrade delays or require us to enter into royalty
      or
      licensing agreements, and we cannot be sure that we will have adequate insurance
      coverage or that royalty or licensing agreements will be made available on
      terms
      acceptable to us or at all.





**We
      cannot be certain that we will be able to protect our intellectual property,
      which could harm our business.**




Our
      intellectual property is critical to our business, and we seek to protect our
      intellectual property through copyrights, trademarks, patents, trade secrets,
      confidentiality provisions in our customer, supplier, potential investors,
      and
      strategic relationship agreements, nondisclosure agreements with third-parties,
      and invention assignment agreements with our employees and contractors. We
      cannot be certain that measures we take to protect our intellectual property
      will be successful or that third-parties will not develop alternative solutions
      that do not infringe upon our intellectual property.




Further,
      we plan to offer our mobile entertainment services and applications to customers
      worldwide including customers in foreign countries that may offer less
      protection for our intellectual property than the United States. Our failure
      to
      protect against misappropriation of our intellectual property, or claims that
      we
      are infringing the intellectual property of third-parties could have a negative
      effect on our business, revenues, financial condition and results of
      operations.




**We
      will rely on strategic relationships to promote our services and for access
      to
      licensed technology; if we fail to develop, maintain or enhance these
      relationships, our ability to serve our customers and develop new services
      and
      applications could be harmed.**




Our
      ability to provide our services to users of multiple technologies and platforms
      depends significantly on our ability to develop, maintain or enhance our
      strategic relationships with wireless carriers, handset distributors, key
      streaming media technology companies and content providers. We will rely on
      these relationships for licensed technology and content. Obtaining comprehensive
      multimedia content licenses is challenging, as doing so may require us to obtain
      copyright licenses with various third-parties in the fragmented multimedia
      recording and publishing industries. These copyrights often address differing
      activities related to the delivery of digital media, including reproduction
      and
      performance, some of which may require separate licensing arrangements from
      various rights holders such as publishers, content providers, artists and record
      labels. The effort to obtain the necessary rights by such third-parties is
      often
      significant, and could disrupt, delay, or prevent us from executing our business
      plans. Because of the large number of potential parties from which we must
      obtain licenses, we may never be able to obtain a sufficient number of licenses
      to allow us to provide services that will meet our customers’
expectations.




Due
      to
      the evolving nature of our industry, we will need to develop additional
      relationships to adapt to changing technologies and standards and to work with
      newly emerging companies with whom we do not have pre-existing relationships.
      We
      cannot be certain that we will be successful in developing new relationships
      or
      that our partners will view these relationships as significant to their own
      business, or that our partner will continue their commitment to us in the
      future. If we are unable to maintain or enhance these relationships, we may
      have
      difficulty strengthening our technology development and increasing the adoption
      of our brand and services.




-15-


**Competition
      may decrease our market share, revenues, and gross
      margins.**




We
      face
      intense and increasing competition in the multimedia broadcast market. If we
      do
      not compete effectively or if we experience reduced market share from increased
      competition, our business will be harmed. In addition, the more successful
      we
      are in the emerging market for multimedia broadcast services, the more
      competitors are likely to emerge. We believe that the principal competitive
      factors in our market include:




·
            service
                functionality, quality and
                performance;




·
            ease
                of use, reliability and security of
                services;




·
            establishing
                a significant base of customers and distribution
                partners;




·
            ability
                to introduce new services to the market in a timely
                manner;




·
            customer
                service and support; and




·
            pricing.




Although
      we do not currently compete against any one entity with respect to all aspects
      of multimedia broadcast products and services, there are various competitors
      that provide various products and services in the following
      categories:




·
            collaboration,
                which provides for document and application sharing as well as user
                interactivity,




·
            live
                video and streaming multimedia,




·
            hosted
                services,




·
            training,
                which provides e-learning applications,
                and




·
            on-premise
                software.




There
      are
      a number of companies, such as Verizon, Sprint and MobiTV, that provide
      outsourced digital media services. As the multimedia broadcast market continues
      to develop, we expect to see increased competition from traditional
      telecommunication service providers or resellers of those services. We also
      face
      competition from the in-house encoding services, streaming networks and content
      management systems and encoding services.




All
      of
      our competitors have substantially more capital, longer operating histories,
      greater brand recognition, larger customer bases and significantly greater
      financial, technical and marketing resources than we do. These competitors
      may
      also engage in more extensive development of their technologies, adopt more
      aggressive pricing policies and establish more comprehensive marketing and
      advertising campaigns than we can. Our competitors may develop products and
      service offerings that we do not offer or that are more sophisticated or more
      cost effective than our own. For these and other reasons, our competitors’
products and services may achieve greater acceptance in the marketplace than
      our
      own, limiting our ability to gain market share and customer loyalty and to
      generate sufficient revenues to achieve a profitable level of operations. Our
      failure to adequately address any of the above factors could harm our business
      and operating results.





-16-


**Our
      industry is experiencing consolidation that may intensify
      competition.**




The
      multimedia broadcast services industries are undergoing substantial change
      that
      has resulted in increasing consolidation and a proliferation of strategic
      transactions. Many companies in these industries have been going out of business
      or are being acquired by larger entities. As a result, we are increasingly
      competing with larger competitors that have substantially greater resources
      than
      we do. We expect this consolidation and strategic partnering to continue.
      Acquisitions or strategic relationships could harm us in a number of ways.
      For
      example:




·
            competitors
                could acquire or enter into relationships with companies with which
                we
                have strategic relationships and discontinue our relationship, resulting
                in the loss of distribution opportunities for our products and services
                or
                the loss of certain enhancements or value-added features to our products
                and services;




·
            competitors
                could obtain exclusive access to desirable multimedia content and
                prevent
                that content from being available in certain formats, thus decreasing
                the
                use of our products and services to distribute and experience the
                content
                that audiences most desire, and hurting our ability to attract
                customers;




·
            a
                competitor could be acquired by a party with significant resources
                and
                experience that could increase the ability of the competitor to compete
                with our products and services; and




·
            other
                companies with related interests could combine to form new, formidable
                competition, which could preclude us from obtaining access to certain
                markets or content; or which could dramatically change the market
                for our
                products and services




Any
      of
      these results could put us at a competitive disadvantage that could cause us
      to
      lose customers, revenue and market share. They could also force us to expend
      greater resources to meet the competitive threat, which could also harm our
      operating results.




**If
      we fail to enhance our existing services and product applications or develop
      and
      introduce new multimedia broadcast services, applications and features in a
      timely manner to meet changing customer requirements and emerging industry
      trends or standards, our ability to grow our business will
      suffer.**




The
      market for multimedia broadcast service solutions is characterized by rapidly
      changing technologies and short product life cycles. These market
      characteristics are heightened by the emerging nature of the Internet and the
      continuing trend of companies from many industries to offer Internet-based
      applications and services. The widespread adoption of the new Internet,
      networking, streaming media, or telecommunications technologies or other
      technological changes could require us to incur substantial expenditures to
      modify or adapt our operating practices or infrastructure. Our future success
      will depend in large part upon our ability to:




·
            identify
                and respond to emerging technological trends in the
                market;




·
            enhance
                our products by adding innovative features that differentiate our
                digital
                media services and applications from those of our
                competitors;




·
            acquire
                and license leading technologies;




·
            bring
                multimedia broadcast services and applications to market and scale
                our
                business on a timely basis at competitive prices;
                and




·
            respond
                effectively to new technological changes or new product announcements
                by
                others.






-17-


We
      will not be competitive unless we continually introduce new services and
      applications or enhancements to existing services and applications that meet
      evolving industry standards and customer needs. In the future, we may not be
      able to address effectively the compatibility and operability issues that arise
      as a result of technological changes and evolving industry standards. The
      technical innovations required for us to remain competitive are inherently
      complex, require long development schedules and are dependent in some cases
      on
      sole source suppliers. We will be required to continue to invest in research
      and
      development in order to attempt to maintain and enhance our existing
      technologies and products, but we may not have the funds available to do so.
      Even if we have sufficient funds, these investments may not serve the needs
      of
      customers or be compatible with changing technological requirements or
      standards. Most development expenses must be incurred before the technical
      feasibility or commercial viability of new or enhanced services and applications
      can be ascertained. Revenue from future services and applications or
      enhancements to services and applications may not be sufficient to recover
      the
      associated development costs.




**The
      technology underlying our services and applications is complex and may contain
      unknown defects that could harm our reputation, result in product liability
      or
      decrease market acceptance of our services and
      applications.**




The
      technology underlying our multimedia broadcast services and applications is
      complex and includes software that is internally developed and software licensed
      from third-parties. These software products may contain errors or defects,
      particularly when first introduced or when new versions or enhancements are
      released. We may not discover software defects that affect our current or new
      services and applications or enhancements until after they are sold.
      Furthermore, because our digital media services are designed to work in
      conjunction with various platforms and applications, we are susceptible to
      errors or defects in third-party applications that can result in a lower quality
      product for our customers. Because our customers depend on us for digital media
      management, any interruptions could:




·
            damage
                our reputation;




·
            cause
                our customers to initiate product liability suits against
                us;




·
            increase
                our product development resources;




·
            cause
                us to lose revenues; and




·
            delay
                market acceptance of our digital media services and
                applications.




**Our
      business will suffer if our systems fail or our third-party facilities become
      unavailable.**




A
      reduction in the performance, reliability and availability of our systems and
      network infrastructure may harm our ability to distribute our products and
      services to our customers and other users, as well as harm our reputation and
      ability to attract and retain customers and content providers. Our systems
      and
      operations are susceptible to, and could be damaged or interrupted by, outages
      caused by fire, flood, power loss, telecommunications failure, Internet
      breakdown, earthquake and similar events. We may not have any redundancy in
      our
      Internet multimedia broadcasting facilities and therefore any damage or
      destruction to these would significantly harm our multimedia broadcasting
      business. Our systems are also subject to human error, security breaches, power
      losses, computer viruses, break-ins, “denial of service” attacks, sabotage,
      intentional acts of vandalism and tampering designed to disrupt our computer
      systems, Websites and network communications. This could lead to slower response
      times or system failures.





Our
      operations also depend on receipt of timely feeds from our content providers,
      and any failure or delay in the transmission or receipt of such feeds could
      disrupt our operations. We also depend on Web browsers, ISPs and online service
      providers to provide access over the Internet to our product and service
      offerings. Many of these providers have experienced significant outages or
      interruptions in the past, and could experience outages, delays and other
      difficulties due to system failures unrelated to our systems. These types of
      interruptions could continue or increase in the future.




-18-


Our
      digital distribution activities are managed by sophisticated software and
      computer systems. We must continually develop and update these systems over
      time
      as our business and business needs grow and change, these systems may not
      adequately reflect the current needs of our business. We may encounter delays
      in
      developing these systems, and the systems may contain undetected errors that
      could cause system failures. Any system error or failure that causes
      interruption in availability of products or content or an increase in response
      time could result in a loss of potential or existing business services,
      customers, users, advertisers or content providers. If we suffer sustained
      or
      repeated interruptions, our products, services and Websites could be less
      attractive to such entities or individuals and our business could be
      harmed.




Significant
      portions of our business are dependent on providing customers with efficient
      and
      reliable services to enable customers to broadcast content to large audiences
      on
      a live or on-demand basis. Our operations are dependent in part upon
      transmission capacity provided by third-party telecommunications network
      providers. Any failure of such network providers to provide the capacity we
      require may result in a reduction in, or interruption of, service to our
      customers. If we do not have access to third-party transmission capacity, we
      could lose customers and, if we are unable to obtain such capacity on terms
      commercially acceptable to us our business and operating results could
      suffer.





Our
      computer and communications infrastructure is located at a single leased
      facility in Atlanta, Georgia. We do not have fully redundant systems, and we
      may
      not have adequate business interruption insurance to compensate us for losses
      that may occur from a system outage. Despite our efforts, our network
      infrastructure and systems could be subject to service interruptions or damage
      and any resulting interruption of services could harm our business, operating
      results and reputation.




**Government
      regulation could adversely affect our business prospects.**




We
      do not
      know with certainty how existing laws governing issues such as property
      ownership, copyright and other intellectual property issues, taxation, illegal
      or obscene content, and retransmission of media, personal privacy and data
      protection will apply to the Internet or to the distribution of multimedia
      and
      other proprietary content over the Internet. Most of these laws were adopted
      before the advent of the Internet and related technologies and therefore do
      not
      address the unique issues associated with the Internet and related technologies.
      Depending on how these laws are developed and are interpreted by the judicial
      system, they could have the effect of:




·
            increasing
                our costs due to new or changes in tax
                legislation;




·
            limiting
                the growth of the Internet;




·
            creating
                uncertainty in the marketplace that could reduce demand for our products
                and services;




·
            limiting
                our access to new markets which may include countries and technology
                platforms;




·
            increasing
                our cost of doing business;




·
            increasing
                our cost of doing business attributed to the
                unforeseen;




·
            exposing
                us to significant liabilities associated with content distributed
                or
                accessed through our products or services;
                or




·
            leading
                to increased product and applications development costs, or otherwise
                harm
                our business.




Specifically
      with respect to one aspect of copyright law, on October 28, 1998, the Digital
      Millennium Copyright Act (or “DMCA”) was enacted. The DMCA includes statutory
      licenses for the performance of sound recordings and for the making of
      recordings to facilitate transmissions. Under these statutory licenses,
      depending on our future business activities, we and our customers may be
      required to pay licensing fees in connection with digital sound recordings
      we
      deliver or our customers provide on their Website and through retransmissions
      of
      radio broadcasts and/or other audio content.





-19-


Because
      of this rapidly evolving and uncertain regulatory environment, both domestically
      and internationally, we cannot predict how existing or propose laws and
      regulations might affect our business. In addition, these uncertainties make
      it
      difficult to ensure compliance with the laws and regulations governing digital
      music. These laws and regulations could harm us by subjecting us to liability
      or
      forcing us to change our business.





**Our
      stock price has been and continues to be volatile.**




The
      market price for our common stock could fluctuate due to various factors. These
      factors include:




·
            announcements
                regarding developments in our business, acquisitions and financing
                transactions;




·
            announcements
                by us or our competitors of new contracts, technological innovations
                or
                new products;




·
            changes
                in government regulations;




·
            fluctuations
                in our quarterly and annual operating results;
                and




·
            general
                market conditions.




In
      addition, the stock markets have, in recent years, experienced significant
      price
      fluctuations. These fluctuations often have been unrelated to the operating
      performance of the specific companies whose stock is traded. Market
      fluctuations, as well as economic conditions, have adversely affected, and
      may
      continue to adversely affect, the market price of our common stock.




**We
      need to raise additional capital in the future, and if we are unable to secure
      adequate funds on terms acceptable to us, we will be unable to execute our
      business plan and current stockholders may experience significant
      dilution** .




As
      of
      December 31, 2005, we had approximately $5,793,000 in cash. We believe that
      the
      current cash and cash equivalents will not be sufficient to meet our anticipated
      cash needs for working capital and capital expenditures through December 31,
      2006. We intend to secure substantial additional financing to meet our future
      capital needs to finance the development and marketing of our existing and
      future services. There can be no assurance that we will be able to obtain such
      financing on acceptable terms, or at all. If adequate funds are not available
      or
      are not available on acceptable terms, we may not be able to pursue our business
      objectives or remain in operation. This inability could seriously harm our
      business, results of operations and financial condition.




If
      we do
      not secure substantial additional funding to meet our capital needs, we may
      have
      to issue additional shares of common stock. If additional funds are raised
      through the issuance of equity or convertible debt securities, the percentage
      ownership of our current stockholders will be reduced and these securities
      may
      have rights and preferences superior to that of our current stockholders. If
      we
      raise capital through debt financing, we may be forced to accept restrictions
      affecting our liquidity, including restrictions on our ability to incur
      additional indebtedness or pay dividends.





**Item
      1B.**  **Unresolved
      SEC Comments**





Not
      applicable.




-20-


**Item
      2.**  **Properties**





We
      currently sub-lease approximately 25,000 square feet of office space. The office
      space currently serves as our corporate headquarters located in Duluth, Georgia.
      We pay rent of approximately $23,000 per month on a two-year sub-lease which
      we
      entered into in May 2005.





**Item
      3.** **Legal
      Proceedings**





From
      time-to-time, we are a party to claims and legal proceedings arising in the
      ordinary course of business. Our management evaluates our exposure to these
      claims and proceedings individually and in the aggregate and allocates
      additional monies for potential losses on such litigation if it is possible
      to
      estimate the amount of loss and if the amount of the loss is
      probable.




On
      or
      about April 6, 2004, Rene Hamouth filed a Writ of Summons in the Supreme Court
      of British Columbia (Case No. SO41955) against us, our Chief Executive Officer
      and director, Richard E. Bennett, Jr. and our securities counsel, Edwards &
Angell, LLP, a predecessor to Edwards Angell Palmer & Dodge LLP, seeking an
      unspecified amount of damages and costs for alleged libel of Mr. Hamouth
      resulting from two letters to his stockbroker, First Associates Investments,
      Inc. We and the other defendants have made an appearance in the court through
      respective legal counsel. On June 29, 2004, Mr. Hamouth filed an Amended
      Statement of Claim with the court. On November 19, 2004, the Court of Appeal
      for
      British Columbia granted Edwards Angell Palmer & Dodge LLP the right to
      appeal a chambers judge’s decision that the alleged libelous correspondence in
      question is covered by absolute privilege and granted a stay of the proceeding
      pending the outcome of the appeal. The appeal was heard in February 2005. On
      March 30, 2005, the court granted the appeal and dismissed the claim against
      Edwards Angell Palmer & Dodge LLP. Since the court’s entry of judgment in
      the appeal and to our knowledge, Mr. Hamouth has taken no further steps in
      his
      claims against us or Mr. Bennett. We intend to vigorously defend any claims
      made
      by Mr. Hamouth should further action be taken by him in this
      dispute.




On
      or
      about April 22, 2004, we filed a complaint in the United States District Court,
      North District of Georgia (Case No. 1:04-CV-1123) against Rene Hamouth, seeking
      the recovery of all profits realized by Mr. Hamouth resulting from his alleged
      violations of Section 16(b) of the Securities Exchange Act of 1934 (the
“Exchange Act”) relating to his purchases and sales of our common stock
      since approximately January 1, 2003. We are seeking damages in the amount of
      at
      least $151,428, interest on the amount of profits recovered and all other
      general and equitable relief to which we may be entitled. Since filing the
      complaint and serving Mr. Hamouth, Mr. Hamouth has filed an answer. The court
      has entered a scheduling order, approving the Joint Preliminary Planning Report
      and Discovery Plan. On March 16, 2005, we received notice that Mr. Hamouth’s
      attorney in this matter has withdrawn from the case. On April 15, 2005, we
      filed
      a motion for summary judgment on this matter. The motion was unopposed. On
      October 5, 2005, the Court granted our motion and executed a judgement for
      us in
      the amount of $172,342.32.




On
      November 15, 2004, we, our subsidiary, OVT, Inc., Robert J. Walters, Richard
      E.
      Bennett, Jr. and William R. Dunavant filed suit against Balboni Law Group,
      LLC,
      Gerardo M. Balboni, II, and Baker Donelson, Bearman, Caldwell & Berkowtiz,
      PC, in the State Court of Fulton County, Georgia, Civil Action (File No.
      04V50744704). The suit alleges breach of contract, negligence and breach of
      fiduciary duty relating to the legal services provided by the defendants to
      the
      plaintiffs. The suit alleges that the defendants committed legal malpractice
      and
      breached their fiduciary duties to the plaintiffs in drafting, advising, and
      negotiating legal documents for the plaintiffs, including the Stock Exchange
      Agreement, dated November 19, 2002, among and between Armagh Group, Inc., OVT,
      Inc., Richard E. Bennett, Jr., Robert J. Walters, and William R. Dunavant.
      The
      suit also alleges certain conflicts of interests resulting from the defendants’
representation of others, including the Armagh Group, Inc. and Rene Hamouth.
      In
      the suit, the plaintiffs seek damages in an excess of $6,000,000. Pursuant
      to
      extensions provided by the plaintiffs, an answer to the suit has not yet been
      filed by the defendants. The parties are currently discussing the use of
      alternative dispute resolution procedures to resolve the suit, including
      mediation.




-21-


On
      March
      9, 2005, SmartVideo Europe, Ltd., or SVEL, which is not an affiliate of ours,
      announced its intention to bring legal action in the form of a
      mediation/arbitration against us in regard to our alleged repudiation and breach
      of a distribution agreement between the parties, dated April 2, 2004, which
      involved certain rights to distribute certain of our products. The dispute
      includes claims of SVEL that we had anticipatorily breached our agreement with
      SVEL, thus allegedly inhibiting the development of SVEL’s business utilizing our
      technology on an exclusive basis in 25 countries throughout the European Union.
      We contend that we had the right to terminate the agreement because of breaches
      by SVEL. We believe that the claim is wholly without merit and intend to defend
      the claim vigorously, if a legal action is ever instituted.





On
      November 29, 2005, ProNetworkTV, Inc. filed a Complaint for Equitable Relief
      in
      the Superior County Court of Gwinnett County, State of Georgia, (Civil Action
      Number 05-A-13684-2) against OVT, Inc. seeking the recovery of late fees in
      the
      amount of $100,614.80 alleged to be owed pursuant to a Promissory Note executed
      by OVT, Inc. in favor of ProNetworkTV, Inc. in the principal amount of $325,000.
      ProNetworkTV, Inc. alleges that OVT, Inc. failed to make payments when due
      under
      the Promissory Note. As a result of the alleged failure to makes such payments,
      ProNetworkTV, Inc. alleges that late fees accrued under the Promissory Note.
      We
      are presently evaluating ProNetworkTV, Inc.’s claim. There can be no assurances
      at this time that we will be successful in defending ProNetworkTV, Inc.'s claim.





On
      December 15, 2005, we received a letter on behalf of Enable Growth Partners,
      L.P. demanding that the Company pay cash damages of $1,757,567.71 within five
      business days thereafter. Enable Growth Partners, L.P. alleges that it sold
      295,001 shares of the our common stock in the public markets during November
      2005 in reliance on our Registration Statement on Form SB-2 that was declared
      effective on July 1, 2005. We were unable to issue unlegended shares to cover
      Enable Growth Partners, L.P.’s alleged sale of 295,001 shares because such
      registration statement did not contain current information regarding the
      Company. As a result, Enable Growth Partners, L.P. alleges that it was required
      to purchase shares of our common stock in the open market to satisfy its sale
      of
      such securities. We believe that we have meritorious defenses to the claims
      for
      damages in the amount of $1,757,567.71 and we intend to vigorously defend
      against any such claims. There can be no assurances at this time that we will
      be
      successful in defending Enable Growth Partners, L.P.’s damage claim.





On
      January 19, 2006, the Company received a letter on behalf of Mantra Films,
      Inc.
      demanding that the Company pay cash damages of $791,244 as a result of the
      Company's breach of its guarantee obligation under the terms of an agreement
      between Cell Phone Entertainment, LLC, Mantra Films, Inc. and the Company (as
      Guarantor) dated September 30, 2004. Mantra Films, Inc. alleges that Cell Phone
      Entertainment, LLC and the Company have failed to make certain guaranteed
      minimum license payments due under the agreement. As a result of the alleged
      failure to make such minimum payments, Mantra Films, Inc. has terminated the
      agreement. The $791,244 amount demanded represents the entire contract amount,
      including both past due payments and future guaranteed license fees, totaling
      minimum payments due pursuant to the agreement totaled $900,000, which amount
      has been reduced by payments made and certain prepaid insurance premiums in
      the
      amount of $108,756. As a result of the alleged failure to pay such minimum
      payment, Mantra Films, Inc. has terminated the agreement. We believe that we
      have meritorious defenses to any claims for payment under the agreement and
      we
      intend to vigorously defend against any such claims. There can be no assurances
      at this time that we will be successful in defending Mantra Films, Inc.'s damage
      claim.





On
      or
      about January 18, 2006, Wilson W. Hendricks, III filed a complaint in the County
      Court, Seventh Judicial Circuit, in and for St. John’s County, Florida against
      the Company for an unspecified amount of damages in excess of $15,000 relating
      to lost wages, unreimbursed business expenses and 500,000 non-qualified stock
      option as a result of the Company’s alleged breach of promise to employ Mr.
      Hendricks. The Company denies all liability to Mr. Hendricks and intends to
      vigorously defend itself against all clams made by him.





-22-


Except
      as
      set forth above, we believe that there are no material litigation matters at
      the
      current time. Although the results of such litigation matters and claims cannot
      be predicted with certainty, we believe that the final outcome of such claims
      and proceedings will not have a material adverse impact on our financial
      position, liquidity, or results of operations.





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





No
      matters were submitted to a vote of our security holders during the fourth
      quarter of the fiscal year ended December 31, 2005.





**PART
      II**





**Item
      5.** **Market
      for the Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities**





**Trading
      History**




Our
      common stock has been listed for trading on the National Association of
      Securities Dealers, Inc. Over-the-Counter Bulletin Board, or the OTC Bulletin
      Board, under the symbol “SMVD.OB” since January 7, 2003. The following is a
      summary of the high and low closing prices of our common stock on the OTC
      Bulletin Board during the periods presented. Such prices represent inter-dealer
      prices, without retail mark-up, mark down or commissions, and may not
      necessarily represent actual transactions. Trading in our common stock has
      not
      been extensive and such trades should not be characterized as constituting
      an
      active trading market.




**Closing
                Sale Price****High**
            
            
            **Low****Year
                Ending December 31, 2005**First
                Quarter
            
            $
            5.82
            
            $
            2.95Second
                Quarter
            
            $
            1.95
            
            $
            0.55Third
                Quarter
            
            $
            7.08
            
            $
            0.95Fourth
                Quarter
            
            $
            7.60
            
            $
            0.92**Year
                Ended December 31, 2004**First
                Quarter
            
            $
            9.60
            
            $
            4.61Second
                Quarter
            
            $
            7.00
            
            $
            2.50Third
                Quarter
            
            $
            3.71
            
            $
            1.92Fourth
                Quarter
            
            $
            5.00
            
            $
            2.25





On
      March
      10 2006, the closing sales price for the common stock was $2.40, as reported
      on
      the Website of the Over-the-Counter Bulletin Board. As of March 10, 2006, there
      were approximately 186 stockholders of record of the common stock (not including
      the number of persons or entities holding stock in nominee or street name
      through various brokerage firms) and 19 holders of record of the Preferred
      Stock.





-23-


**Dividends**




Since
      inception, we have not declared or paid any dividend on our common stock. We
      do
      not anticipate that any dividends will be declared or paid in the future on
      our
      common stock.





**Equity
      Compensation Plan Information**




The
      following table provides information, as of December 31, 2005, with respect
      to
      options outstanding and available under the 2004 Stock Incentive Plan, which
      is
      our only equity compensation plan other than an employee benefit plan meeting
      the qualification requirements of Section 401(a) of the Internal Revenue
      Code:




**Plan
                Category**
            **Number
                of Securities to be Issued Upon Exercise of Outstanding Options,
                Warrants
                and Rights**
              **(a)**
            **Weighted-Average
                Exercise Price of Outstanding Options, Warrants and Rights**
              **(b)**
            **No.
                of Securities Remaining Available for Future Issuance Under Equity
                Compensation Plans (excluding securities reflected in Column
                a)**
              **(c)**Equity
                compensation plans approved by security holders
            3,480,000
            $2.03
            1,520,000Equity
                compensation plans not approved by security holders
            0
            N/A
            0TOTAL
            3,480,000
            $2.03
            1,520,000





**Item
      6.**   **Selected
      Financial Data**





The
      selected historical financial information presented below is derived from our
      audited consolidated financial statements for the years ended December 31,
      2001,
      2002, 2003, 2004 and 2005.





The
      acquisition of all of the outstanding capital stock of OVT, Inc. on November
      26,
      2002, was treated for accounting purposes as a reverse acquisition, and the
      transaction has been accounted for as a recapitalization. We accounted for
      the
      acquisition using the purchase method of accounting. Therefore, the historical
      financial statements of the predecessor entity are reflected as our historical
      financial statements.





The
      data
      set forth below should be read in conjunction with the financial statements
      and
      accompanying notes incorporated by reference.





-24-


**Selected
      Historical Financial Data**





**For
                the Years Ended****December
                31,****2001**
            
            **2002**
            
            **2003**
            
            **2004**
            
            **2005****Income
                Statement Data:**Total
                revenue
            
            $
            —
            
            $
            2,750
            
            $
            63,451
            
            $
            118,733
            
            $
            197,257Total
                operating expenses
            
            
            434,738
            
            
            611,386
            
            
            3,242,754
            
            
            6,839,685
            
            
            19,021,511Loss
                from operations
            
            
            (434,738
            )
            
            (689,476
            )
            
            (3,179,303
            )
            
            (6,720,952
            )
            
            (18,824,254
            )Net
                loss
            
            
            (444,639
            )
            
            (689,476
            )
            
            (3,859,141
            )
            
            (6,792,930
            )
            
            (19,740,274
            )Loss
                per share
            
            
            (0.16
            )
            
            (0.17
            )
            
            (0.51
            )
            
            (0.35
            )
            
            (0.76
            )Weighted
                average common shares used to compute basic and diluted net loss
                per share
            
            
            2,280,547
            
            
            4,127,243
            
            
            7,540,849
            
            
            19,208,345
            
            
            26,093,554**Other
                Financial Data:**Net
                cash used in operating activities
            
            
            (250,616
            )
            
            (184,850
            )
            
            (1,530,148
            )
            
            (2,566,031
            )
            
            (5,351,783
            )Net
                cash used in investing activities
            
            
            31,749
            
            
            —
            
            
            (102,981
            )
            
            (189,191
            )
            
            (764,479
            )Net
                cash provided by financing activities
            
            
            222,162
            
            
            177,838
            
            
            1,925,385
            
            
            2,844,816
            
            
            11,521,236**Balance
                Sheet Data:**Total
                Assets
            
            $
            29,484
            
            $
            1,335,242
            
            $
            452,309
            
            $
            719,551
            
            $
            11,920,674







**Item
      7.**  **Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations**




This
      discussion presents management’s analysis of our results of operations and
      financial condition as of and for each of the years ended December 31, 2005,
      2004 and 2003, respectively. The discussion should be read in conjunction with
      our audited consolidated financial statements and the notes related thereto
      which appear elsewhere in this report.




**Overview**




The
      Company is a video content aggregator, a technology provider and a distributor
      of video content to consumers connected to the public Internet. We are in the
      business of purchasing the rights to video/television content and delivering
      the
      video content to subscribers for a fee. Additionally, we anticipate being in
      the
      business of providing managed services for Internet network operators (carriers)
      and for major content producers, owners and distributors. We intend to continue
      expanding our market opportunity by delivering video services to all forms
      of
      devices capable of receiving an Internet Protocol (IP) data stream and having
      this data stream rendered into visible images on displays.




In
      January 2005, the Company launched its direct-to-the-consumer mobile video
      service. The Company provides its customers with access to high-quality video
      programming that is transmitted directly to its customers’ SmartPhone cellular
      handsets and to Wi-Fi enabled PDA devices. The Company believes that it is
      the
      only service provider who currently has subscribers on all of the major U.S.
      Cellular Carriers.




-25-


The
      Company provides demonstration accounts, where we have acquired the necessary
      video distribution rights, to viewers in more than 75 countries, operating
      on
      more than 200 carriers.




The
      Company believes it provides one of the most extensive collections of
      programming available in the mobile video industry. In general, the Company
      pays
      for the distribution rights on either a fixed-fee per subscriber, per month
      basis or on a revenue-sharing basis. Some of the content deals have minimum
      guarantees per month.




The
      Company licenses the distribution rights on either a “fixed-fee, per subscriber,
      per month” basis or on a revenue-sharing basis. These license fees are payable
      to the content owners, producers, or distributors for each respective channel.
      Licensee fees range from $0.04 per subscriber per month to $.50 cents on our
      subscription model. In the area of our Premium offerings we share at a rate
      of
      50% of the net collected revenue model. The pricing is based on individual
      negotiations of the specific rights (including geographic and technology
      platforms), the amount and quality of the content, and the estimated appeal
      of
      the content to our current and prospective subscribers. For 2005, the majority
      of our revenue has come from a per subscriber, per month, fixed-fee arrangement.
      For 2006 and subsequent years, we are targeting a wide diverse subscriber base
      in the mobile entertainment industry.




**Critical
      Accounting Policies and Estimates**




The
      Company relies on the use of estimates and makes assumptions that impact its
      financial condition and results. These estimates and assumptions are based
      on
      historical results and trends as well as the Company’s forecasts as to how these
      might change in the future. While we believe that the estimates we use are
      reasonable, actual results could differ from those estimates.




We
      believe that the accounting policies described below are critical to
      understanding our business, results of operations and financial condition
      because they involve more significant judgments and estimates used in the
      preparation of our consolidated financial statements. An accounting policy
      is
      deemed to be critical if it requires an accounting estimate to be made based
      on
      assumptions about matters that are highly uncertain at the time the estimate
      is
      made, and if different estimates that could have been used, or changes in the
      accounting estimates that are reasonably likely to occur periodically, could
      materially impact our consolidated financial statements. We have discussed
      the
      development, selection and application of our critical accounting policies
      with
      the Audit Committee of our Board of Directors, and our Audit Committee has
      reviewed our disclosure relating to our critical accounting policies in this
      “Management’s Discussion and Analysis.”





The
      Company’s most critical accounting policies and estimates that may materially
      impact the Company’s results of operations includes:




***Revenue
      Recognition***




The
      accounting related to revenue recognition in the digital media and multimedia
      broadcast industry is complex and affected by interpretations of the rules
      and
      an understanding of various industry practices, both of which are dynamic in
      nature and subject to change. As a result, revenue recognition accounting rules
      require us to make significant judgments.




We
      typically provide services to our business-to-business customers under
      volume-based usage arrangements of our digital media and multimedia broadcast
      products and services. Under certain arrangements, our customers are subject
      to
      a base monthly fee or minimum monthly usage requirements in order to maintain
      their preferential negotiated rates. From time-to-time, we lease hardware to
      our
      customers enabling them to facilitate a live broadcast. In certain situations,
      we may sell hardware to our resellers under the specific terms of our agreements
      with them.




-26-


Revenue
      is recognized as earned upon the delivery of service to our subscription-based
      customers. This is typically when a digital media or multimedia broadcast is
      viewed. Many of our subscription-based customers access our programming through
      the purchase of a monthly, semi-annual, or annual subscription fee for our
      mobile entertainment services.





***Recent
      Accounting Pronouncements***




See
      Note
      2(S) to the consolidated financial statements for the years ended December
      31,
      2005, 2004, and 2003 for a description of the new accounting pronouncements
      and
      their impact on the Company.





***Valuation
      and Recoverability of Long-Lived Assets***


See
      Note
      2(L) to the consolidated financial statements for the years ended December
      31,
      2005, 2004, and 2003 for a description of the valuation and recoverability
      of
      long-lived assets.





***Income
      Taxes***




We
      continue to record a valuation allowance for the full amount of deferred income
      taxes, which would otherwise be recorded for tax benefits related to operating
      loss carryforwards, as realization of such deferred tax assets cannot be
      determined to be more likely than not likely.





***Accounting
      for Stock-Based Compensation***




We
      account for stock options issued to employees in accordance with the provisions
      of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock
      Issued to Employees,” and related interpretations.  As such, compensation
      cost is measured on the date of grant as the excess of the current market price
      of the underlying stock over the exercise price.  Such compensation
      amounts, if any, are amortized over the respective vesting periods of the option
      grant.  We have adopted the disclosure provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation” and SFAS 148, “Accounting for
      Stock-Based Compensation - Transition and Disclosure”, which permits entities to
      provide pro forma net income (loss) and pro forma earnings (loss) per share
      disclosures for employee stock option grants as if the fair-valued based method
      defined in SFAS No. 123 had been applied.  We account for stock options and
      stock issued to non-employees for goods or services in accordance with the
      fair
      value method of SFAS No. 123.





**Results
      of Operations**





***Year
      Ended December 31, 2005 compared to 2004***





*Revenues*




Revenues
      for the year ended December 31, 2005 consisted primarily of a subscription
      based
      service delivering live and on-demand mobile entertainment services directly
      to
      consumers. Our revenues increased by approximately $80,000 from $118,733 in
      2004
      to $197,257 in 2005. This increase is primarily attributable to our decision
      to
      change our focus to a subscription based model delivering mobile entertainment
      services direct-to-the-consumer.




*Broadcast
      rights*




Broadcast
      rights for the year ended December 31, 2005 ,
      are
      approximately $2,001,000 as compared to $0 for the same period in 2004. This
      change is attributable to our decision to change our focus to a subscription
      based model delivering mobile entertainment services direct to the consumer.
      This amount reflects the costs including amortization of $1,740,552 associated
      with acquiring the rights to deliver our mobile entertainment services.





*Compensation
      and benefits*




Our
      compensation and benefits expenses increased by approximately $720,000 for
      the
      year ended December 31, 2005 ,
      as
      compared to the same period in 2004. As our industry and company continues
      to
      grow and develop, we are continuing to fill key positions that will enable
      us to
      leverage our future prospects and growth and relying less on the use of
      consultants for discrete projects.





-27-


*Consulting
      fees*




Our
      consulting fees have decreased by approximately $596,000 for the year ended
      December 31, 2005 ,
      when
      compared to 2004. We have been experiencing a decrease in consulting fees
      primarily due to our ability to fill key positions with full-time employees
      instead of continuing to utilize outside consultants.




*Professional
        Fees*
  Our
        professional fees increased approximately $1,213,000 for the year ended December
        31, 2005 ,
        when
        compared to the same period in 2004. This increase is primarily attributable
        to
        additional professional fees incurred that were associated with our recent
        financing, the preparation of our registration statement related to the
        financing, litigation associated with the arbitration with Mr. Richard Seifert
        and KC Adventures, Inc., and litigation associated with the contentious proxy
        solicitation.


*Data
      Center*




Our
      data
      center expenses consist primarily of those items related to the maintenance
      of
      certain facilities and equipment at a third-party data center. The increase
      in
      data center expenses of approximately $415,000 for the year ended December
      31,
      2005 ,
      when
      compared to 2004 is primarily due to an increase in the utilization of bandwidth
      and additional services provided by our third-party data center.




*Depreciation*
  Depreciation
        expense for the twelve months ended December 31, 2005 ,
        increased by approximately $231,000 when compared to the same period in 2004.
        This increase is primarily attributable to the deployment of additional
        equipment in the process of increasing the overall capacity and quality of
        our
        services.





*Settlement
      Expense*




Our
      settlement expense increased by approximately $5,541,000, primarily as a result
      of the settlement on January 30, 2006, of a dispute relating to an advisory
      agreement with one of the Company’s consultants and also for the accrual of
      other loss contingencies. As a result of the settlement and other accruals,
      the
      Company has recorded a liability in the approximate amount of $5,541,000 as
      of
      December 31, 2005.




*Non-cash,
        Stock-based Compensation*
  For
        the
        twelve months ended December 31, 2005, we have recorded approximately $4,326,000
        as compared to $3,119,000 in 2004 in non-cash, stock-based compensation expense
        related to the issuance of these warrants reflecting the conclusion of the
        arrangements. The compensation expense has been determined using the
        Black-Scholes fair value method. The remainder of the non-cash, stock-based
        compensation is related to the amortization of the deferred portion of previous
        warrant grants.





*Selling,
      General and Administrative Expenses*




Selling,
      general and administrative expenses consist primarily of travel expenses related
      to the marketing of our product and services, lease payments related to the
      use
      of our corporate facilities, trade shows, and other general and administrative
      expenses. The increase in selling, general and administrative expenses in 2005
      of approximately $1,449,000 when compared to 2004 is primarily due to costs
      associated with our participation in numerous trade shows and the extra costs
      attributable to our decision to develop a prominent presence in each of these
      events. Our focus is to create a presence in each of these events designed
      to
      extend and enhance the awareness of our brand, products and services to
      potential partners, distributors, and content owners. We have also incurred
      additional travel related and marketing costs associated with specialized
      consultants we have hired to assist us in this process.





-28-


*Interest
      Expense*




Interest
      expense for the twelve months ended December 31, 2005 ,
      was
      $930,000 as compared with $72,000 in 2004. Of this amount, $712,000 was
      attributable to the non-cash benefit conversion feature attributed to the
      issuance of warrants that were issued as additional consideration related to
      the
      convertible debt holders.





***Year
      Ended December 31, 2004 compared to 2003***




*Revenues*




Revenues
      consist typically of license fees from volume-based usage arrangements of our
      digital media and multimedia broadcast products and services, and under certain
      circumstances, our customers are subject to a base monthly fee or minimum
      monthly usage requirements in order to maintain their negotiated rates. From
      time-to-time, we will lease hardware to our customers enabling them to
      facilitate a live broadcast. In certain situations, we may sell hardware to
      our
      resellers under the terms of our agreements with them. Our revenues increased
      by
      87% from $63,451 in 2003 to $118,733 in 2004. The increase in revenues for
      the
      year ended December 31, 2004 of approximately $55,000 when compared to the
      same
      period in 2003 is primarily due to increases in the minutes viewed of digital
      media, special broadcast presentations and multimedia broadcasts and a pilot
      program developed for a prospective customer. The majority of our increase
      came
      from new customers that are not related parties.





*Compensation
      and Benefits*




Our
      compensation and benefits expenses increased by approximately $519,000 for
      the
      year ended December 31, 2004, as compared to the same period in 2003. This
      increase from $515,850 in 2003 to $1,034,951 in 2004 is attributable to our
      continuing efforts to fill key positions that will enable us to leverage our
      future prospects and growth.





*Consulting
      Fees*




Our
      consulting fees increased by approximately $315,000 for the year ended December
      31, 2004, as compared to the same period in 2003. This increase from $641,752
      in
      2003 to $956,613 in 2004 is primarily attributable to specialized consulting
      services on new projects and expanded operational services on an ad hoc basis.




*Professional
        Fees*
  Professional
        fees primarily include legal and audit related fees. The increase in
        professional fees of approximately $168,000 is primarily due to legal fees,
        incurred in connection with matters related to being a publicly-traded company,
        litigation, and costs related to content acquisition including negotiations
        and
        contract preparation or review.


*Data
      Center*




Our
      data
      center expenses consist primarily of those items related to the maintenance
      of
      certain facilities and equipment at a third-party data center. The increase
      in
      data center expenses of approximately $52,000 for the year ended December 31,
      2004, when compared to 2003 is due to the moving of our hosting services from
      our facility to a third-party data center and additional variable costs
      associated with an increased volume of viewer minutes.




-29-


*Selling,
      General and Administrative*




Sales,
      general and administrative expenses consist primarily of trade shows, travel
      expenses related to the marketing of our product and services, lease payments
      related to the use of our corporate facilities, increased expenses associated
      with the expansion of our staff and other general and administrative expenses.
      The increase in selling, general and administrative expenses in 2004 of
      approximately $710,000 when compared to 2003 is primarily due to participation
      in multiple trade shows to showcase our cellular and wireless products to
      carriers and content providers/distributors, increased focus on marketing
      efforts, and the higher travel expenses associated with these increased
      marketing efforts for our products and services.





*Non-cash,
      Stock-based Compensation*




Non-cash,
      stock-based compensation consist of the fair value of vested and exercisable
      stock options and warrants issued to non-statutory employees and others on
      the
      conversion of debt to equity. In accordance with SFAS 123, we have computed
      the
      fair value of these options and warrants issued during the year ended December
      31, 2004.





*Amortization
      of Deferred Compensation*




Amortization
      of deferred compensation consist of expenses associated with the issuance of
      shares to a former advisor prior to our November 2002 merger for services to
      be
      provided to us over a 24-month term ending in November 2004. We terminated
      this
      agreement in September 2003. For the year ended December 31, 2003, the entire
      amount of deferred compensation of $1,316,250 is from the amortization of these
      costs.





*Interest
      Expense*




Interest
      expense for the year ended December 31, 2004, consists of interest expense
      associated with various outstanding notes payable and represents an
      approximately $608,000 decrease in interest expense when compared to the same
      period in 2003. This decrease is primarily due to the holders of our convertible
      debt instruments exercising the right to convert the debt into equity. During
      the quarterly period ended March 31, 2003, we issued convertible promissory
      notes which resulted in our recognition of a beneficial conversion feature
      of
      $308,000 related to their issuance that was recognized as additional interest
      expense. No such issuances of convertible promissory notes occurred during
      the
      year ended December 31, 2004. Based on a review of the computation of the
      carrying value of our note payable to an entity owned by the spouse of a
      shareholder, a miscalculation regarding the accrued interest due on the note
      was
      discovered in the amount of approximately $37,900 in our favor. The adjustment
      for the correction of this miscalculation was taken prospectively during the
      quarterly period ended September 30, 2004. The principal and accrued interest
      on
      our two largest notes payable were paid in full as of December 31, 2004. We
      have
      received notice of additional late charges in the amount of $53,311 associated
      with the note payable to a related party. These late charges may be due but
      are
      in dispute as of December 31, 2004.




**Liquidity
      and Capital Resources**





To
      date,
      we have generated only minimal revenues. As a result, our operations are not
      an
      adequate source of cash to fund future operations. To fund our cash
      requirements, we have relied on Private Placements and loans from shareholders
      and other related entities.




It
      is
      anticipated that we will need to raise at least $6,000,000 over the course
      of
      the next twelve months to fund our current level of operations. There can be
      no
      assurance, however, that such financing will be available to us or, if it is
      available, that we will be able to structure such financing on terms acceptable
      to us and that it will be sufficient to fund our cash requirements until we
      can
      reach a level of profitable operations and positive cash flows. If we are unable
      to obtain the financing necessary to support our operations, we may be unable
      to
      continue as a going concern. We currently have no firm commitments for any
      additional capital.





-30-


**Going
      Concern**




We
      have
      incurred recurring losses and negative cash flows since inception. As of and
      for
      the twelve months ended December 31, 2005, we had an accumulated deficit of
      approximately $39,953,756, a net loss of $19,740,274 and cash flows used in
      operations of approximately $5,351,783. These matters raise substantial doubt
      about our ability to continue as a going concern. Our ability to continue our
      operations is contingent upon obtaining additional financing and attaining
      profitable operations.





Proceeds
      received from the March 2005 Private Placement along with the November and
      December issuance of Series A-1 Convertible Preferred Stock have been used
      to
      support the expenses associated with the market roll-out of our services, which
      include the acquisition of programming rights, marketing and sales initiatives,
      and further improvements to our technology, as well as increase staffing levels
      to support these marketing and technology efforts, all of which will adversely
      affect operating results until revenues from sales of our services reach a
      level
      at which operating costs can be supported. In our efforts to strengthen our
      marketing and sales initiatives for the distribution of our services, it is
      critical that we obtain distribution partners in order to begin generating
      revenues.





Cash
      flows generated from operating activities during 2005 were
      not sufficient to offset our operating expenditures. Our operations to date
      have been financed primarily through sales of our securities. We anticipate,
      based on our currently proposed plans and assumptions relating to operations,
      that the net proceeds from our recent financings, together with projected cash
      flow from operations, will not be sufficient to meet our cash requirements
      for
      working capital and capital expenditures through December 31, 2006. As a result,
      it will be necessary for us to secure additional financing to support our
      operations. There can be no assurance that we will be able to obtain such
      financing on acceptable terms, or at all. If adequate funds are not available
      or
      not available on acceptable terms, the Company will be unable to continue as
      a
      going concern. We currently have no firm commitments for any additional capital.





**Debt
      Financing**




***Loan
      from Director***




On
      August
      12, 2005, we borrowed $225,000 from Justin A. Stanley, Jr., one of our
      directors. According to the promissory note issued in connection with the loan,
      we are obligated to pay all principal and interest due under the note by no
      later than September 12, 2006. Interest on the unpaid principal balance of
      the
      note accrues at a rate equal to the fluctuating prime lending rate of LaSalle
      Bank, N.A., Chicago, Illinois, as such rate is in effect less one hundred basis
      points. The principal portion of this note in the amount of $225,000 was repaid
      on November 22, 2005.




***Issuance
      of Convertible Promissory Notes***




On
      October 19, 2005, we borrowed $200,000 from Michael E. Criden, Esq. and $200,000
      from Glenn H. Singer and GHS Holdings Limited Partnership, a company controlled
      by Mr. Singer. Pursuant to the convertible promissory notes issued in connection
      with the loan, we are obligated to pay all principal and interest due under
      the
      note one-year from the date of the loan. Interest on the unpaid principal
      balance of the note accrues at a rate of 8% per annum.




-31-


In
      addition to receiving the convertible promissory notes, Mr. Criden and GHS
      Holdings Limited Partnership, a partnership controlled by Mr. Singer, each
      received a five-year warrant to purchase 66,667 shares of our common stock
      at an
      exercise price of $2.00 per share. Mr. Criden and GHS Holdings Limited
      Partnership were also granted certain piggy-back registration rights with
      respect to the shares of common stock underlying the convertible promissory
      notes and the warrants.




On
      November 10, 2005, GHS Holdings Limited Partnership loaned the Company an
      additional $150,000. In exchange for the loan, the Company issued to GHS
      Holdings Limited Partnership a convertible promissory note for $150,000 and
      a
      five-year warrant to purchase 50,000 shares at a purchase price of $2.00 per
      share. The note was payable in 90 days and the outstanding principal of the
      note
      accrued interest at 15% per year.




On
      November 21, 2005, the Company completed the first closing under the Securities
      Purchase Agreement dated as of October 31, 2005 among the Company and 60
      accredited investors. Accordingly, on November 21, 2005, the convertible
      promissory notes were credited towards Mr. Criden’s and GHS Holdings Limited
      Partnership’s purchase price for the Preferred Stock issued in the Private
      Placement.




***Private
      Placement***




On
      November 21, 2005, the first closing (the “Private Placement”) of the sale of
      securities occurred pursuant to the Securities Purchase Agreement (“SPA”) dated
      as of October 31, 2005 among SmartVideo Technologies, Inc. and 60 accredited
      investors (the “Investors”). Under the terms of the SPA, we received gross
      proceeds of $4,000,000 and issued to the Investors a total of 5,333,333 shares
      of Series A-1 Convertible Preferred Stock (the “Preferred Stock”), five-year
      warrants exercisable at $1.75 per share to purchase up to 5,333,333 shares
      of
      common stock and five-year warrants exercisable at $2.00 per share to purchase
      up to 1,333,333 shares of common stock.





The
      loans
      provided to us by Messrs. Singer and Criden have been credited toward their
      purchase price for the Preferred Stock issued in the Private
      Placement.





On
      December 2, 2005, the second closing of the sale of securities occurred pursuant
      to the SPA. Under the terms of the SPA, we received gross proceeds of $4,000,000
      and issued to the Investors a total of 5,333,333 shares of Series A-1 Preferred
      Stock, five-year
      warrants exercisable at $1.75 per share to purchase up to 5,333,333 shares
      of
      common stock and five-year warrants exercisable at $2.00 per share to purchase
      up to 1,333,333 shares of common stock.





-32-





**Contractual
      Obligations and Commercial Commitments**




**For
                      The Years Ended****December
                    31,****Contractual
                    Obligations**
                
                
                **Total**
                
                
                **2006**
                
                
                **2007**
                
                
                **2008**
                
                
                **2009**
                
                
                **2010**Operating
                    Lease Obligations
                
                $
                463,330
                
                $
                277,998
                
                $
                185,332
                
                $
                —
                
                $
                —
                
                $
                —Broadcast
                    Right
                
                
                5,670,076
                
                
                2,283,500
                
                
                2,418,726
                
                
                787,261
                
                
                144,124
                
                
                36,465Total
                
                $
                6,133,406
                
                $
                2,561,498
                
                $
                2,604,058
                
                $
                787,261
                
                $
                144,124
                
                $
                36,465


**Effects
      of Inflation and Foreign Currency Fluctuations**





We
      do not
      believe that inflation or foreign currency fluctuations significantly affected
      our financial position and results of operations as of and for the fiscal year
      ended December 31, 2005.





**Item
      7A.** **Quantitative
      And Qualitative Disclosures About Market Risk**





Not
      applicable.





**Item
      8.** **Financial
      Statements and Supplementary Data**





See
      pages
      F-1 through F-34 appearing at the end of this report.





**Item
          9.** **Changes
          In And Disagreements With Accountants On Accounting And Financial
          Disclosure**





On
      March
      8, 2004, Spicer Jeffries LLP (“Spicer”) informed the Company that Spicer had
      resigned as independent accountants for the Company because Spicer’s
      professional liability insurance coverage for public reporting companies was
      not
      renewed by its previous insurance carrier and Spicer was unable to obtain new
      insurance coverage for public registrants. For each of the interim periods
      from
      January 1, 2003 through March 8, 2004, there were no disagreements with Spicer
      on any matter of accounting principles or practices, financial statement
      disclosure, or auditing scope or procedure, which, if not resolved to the
      satisfaction of Spicer, would have caused Spicer to make reference to the
      subject matter of the disagreements in connection with its report on the
      Company’s financial statements for such years. Effective March 9, 2004, the
      Company retained Sherb & Co. LLP as its independent registered public
      accounting firm. The Company has authorized Spicer to respond fully to the
      inquiries, if any, of Sherb & Co. LLP.





**Item
      9A.**  **Controls
      and Procedures**





As
      required by Exchange Act Rule 13a-15(b), we carried out an evaluation, under
      the
      supervision and with the participation of Richard E. Bennett, Jr., our Chief
      Executive **** Officer
      and interim Chief Financial Officer, of the effectiveness of the design and
      operation of our disclosure controls and procedures as of December 31, 2005.





The
      purpose of disclosure controls is to ensure that information required to be
      disclosed in our reports filed with the SEC is recorded, processed, summarized
      and reported within the time periods specified in the SEC’s rules and forms.
      Disclosure controls are also designed with the objective of ensuring that such
      information is accumulated and communicated to our management, including Richard
      E. Bennett, Jr., to allow timely decisions regarding required disclosure. The
      purpose of internal controls is to provide reasonable assurance that our
      transactions are properly authorized, our assets are safeguarded against
      unauthorized or improper use and our transactions are properly recorded and
      reported to permit the preparation of our financial statements in conformity
      with generally accepted accounting principles.





-33-


Our
      management does not expect that our disclosure controls or our internal controls
      will prevent all errors and all fraud. A control system, no matter how well
      conceived and operated, can provide only reasonable rather than absolute
      assurance that the objectives of the control system are met. The design of
      a
      control system must also reflect the fact that there are resource constraints,
      with the benefits of controls considered relative to their costs. Because of
      the
      inherent limitations in all control systems, no evaluation of controls can
      provide absolute assurance that all control issues and instances of fraud (if
      any) within the company have been detected. These inherent limitations include
      the realities that judgments in decision-making can be faulty and that simple
      errors or mistakes can occur. Controls can also be circumvented by the
      individual acts of some persons, by collusion of two or more people, or by
      management override of the control. The design of any system of controls also
      is
      based in part upon certain assumptions about the likelihood of future events,
      and there can be no assurance that any design will succeed in achieving its
      stated goals under all potential future conditions; over time, controls may
      become inadequate because of changes in conditions, or the degree of compliance
      with the policies or procedures may deteriorate. Because of the inherent
      limitations in a cost-effective control system, misstatements due to error
      or
      fraud may occur and not be detected.





Our
      internal controls are evaluated on an ongoing basis by personnel in our
      organization. The overall goals of these various evaluation activities are
      to
      monitor our disclosure and internal controls and to make modifications as
      necessary, as disclosure and internal controls are intended to be dynamic
      systems that change (including improvements and corrections) as conditions
      warrant. Part of this evaluation is to determine whether there were any
      significant deficiencies or material weaknesses in our internal controls, or
      whether we had identified any acts of fraud involving personnel who have a
      significant role in our internal controls. Significant deficiencies are control
      issues that could have a significant adverse effect on the ability to record,
      process, summarize and report financial data in the financial statements.
      Material weaknesses are particularly serious conditions where the internal
      control does not reduce to a relatively low level the risk that misstatements
      caused by error or fraud may occur in amounts that would be material in relation
      to the financial statements and not be detected within a timely period by
      employees in the normal course of performing their assigned functions.





Based
      upon this evaluation, our Chief Executive Officer and Interim Chief Financial
      Officer concluded that, subject to the limitations noted above, both our
      disclosure controls and procedures and our internal controls and procedures
      are
      effective in timely alerting them to material information required to be
      included in our periodic SEC filings and that information required to be
      disclosed by us in these periodic filings is recorded, processed, summarized
      and
      reported within the time periods specified in the SEC’s rules and forms and that
      our internal controls are effective to provide reasonable assurance that our
      financial statements are fairly presented in conformity with generally accepted
      accounting principles.





There
      have been no changes in our internal controls over financial reporting that
      occurred during our last fiscal quarter that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting





**Item
      9B.**  **Other
      Information**





Not
      applicable.





-34-


**Part
      III**





**Item
      10.**  **Directors
      and Executive Officers of the Registrant**





The
      following sets forth certain biographical information concerning our current
      directors and executive officers:




**Name**
            **Position**
            **Age**Richard
                E. Bennett, Jr.
            Director,
                Chief Executive Officer and Interim Chief Financial
                Officer
            46Michael
                E. Criden
            Director,
                Member of the Nominating Committee, Member of the Compensation Committee,
                Member of the Audit Committee
            46David
                R. Ross
            President
            56Glenn
                H. Singer
            Director,
                Chairman of the Board, Member of the Audit Committee, Member of the
                Compensation Committee, Member of the Nominating Committee
            47Justin
                A. Stanley, Jr.
            Director,
                Member of the Compensation Committee, Member of the Audit Committee,
                Member of the Nominating Committee
            57Ronald
                A. Warren
            Corporate
                Secretary, Vice President of Investor Relations and Corporate
                Communications
            51





**Richard
      E. Bennett, Jr.** has been
      an officer and director of the Company since November 2002 and presently serves
      as its Chief Executive Officer. Since June 15, 2005 Mr. Bennett has served
      as
      the Company’s interim Chief Financial Officer. From November 2002 to February
      28, 2006, Mr. Bennett served as the Company’s President. From May 2004 through
      February 2004, Mr. Bennett has also served as the Chief Financial Officer of
      the
      Company. Mr. Bennett has been an officer and director of the Company’s wholly
      owned subsidiary, (OVT, Inc. d/b/a/ SmartVideo) since September 2000. Prior
      to
      founding SmartVideo in September 2000, Mr. Bennett served as a consultant and
      advisor to early stage growth companies. Prior to January 2000, Mr. Bennett
      was
      employed by BARCO, N.V. where he served in a variety of capacities over a
      nine-year period, including Product Manager, Sales Executive, Quality Assurance
      Manager, and Customer Support Manager.





**Michael
      E. Criden** has
      been
      a director of the Company since November 2005. From 1994 to the present Mr.
      Criden has been a partner with Hanzman & Criden, P.A., a South Florida law
      firm that devotes much of its practice to class action and complex commercial
      litigation. Mr. Criden has been a practicing attorney for the past 18 years.
      Mr.
      Criden received a Bachelor of Science degree from Florida International
      University in 1984 and obtained a doctorate of jurisprudence with honors from
      the University of Miami in 1987.





**David
      R. Ross** was
      elected President on February 28, 2006. From October
      1994 to February 2006, Mr. Ross served in various capacities at Clear Channel
      Communications, Inc., a diversified media company involved in radio
      broadcasting, outdoor advertising and live entertainment. From October 2003
      to
      February 2006, Mr. Ross served as a Regional Vice-President and was responsible
      for managing a division of Clear Channel consisting of 25 radio properties
      grossing in excess of $82 million annually.





**Glenn
      H. Singer** has
      been
      a director of the Company since November 2005 and has been the Chairman of
      the
      Board since December 7, 2005. From 1997 to the present, Mr. Singer has been
      a
      private investor in numerous ventures and is currently the Mayor of the town
      of
      Golden Beach located in South Florida. From 1991 to 1997, Mr. Singer was a
      co-founder and Executive Vice-President of National Business Solutions, Inc.,
      a
      professional employer organization that was sold to Paychex, Inc., a provider
      of
      payroll, human resource and benefits solutions, in 1996. Mr. Singer is a
      graduate of Florida State University and is a CPA.





-35-


**Justin
      A. Stanley, Jr.** has
      been
      a director of the Company since July 2005. Mr. Stanley **** is
      currently a Managing Principal and the Chief Financial Officer of The Staubach
      Company, Midwest Division, positions he has held since October 2000. He has
      over
      15 years experience in real estate finance, development, and property
      management. Between 1997 and 2000, he served as Chief Financial Officer and
      principal of McCaffery Interests, Inc., a real estate development company
      primarily specializing in retail development. While at McCaffery, the Company
      developed and/or redeveloped projects with a combined cost of over $400 million.
      Before joining the real estate industry, Mr. Stanley spent one-year trading
      at
      the Chicago Mercantile Exchange and eight years at Arthur Andersen & Co. in
      the audit division. He is a graduate of Dartmouth College, received an M.B.A.
      from the University of Chicago and is a CPA. Mr. Stanley is also on the board
      of
      The Children’s Care Foundation and the Chicago Platform Tennis Charities,
      Inc. ****





**Ronald
      A. Warren** joined
      SmartVideo in December 2003 as Vice President of Investor Relations and
      Corporate Communications and was elected as Secretary of the Corporation in
      September 2004. Mr. Warren is a senior level communications professional with
      a
      broad background in financial, technical and regulatory issues. His experience
      includes communications for high growth publicly held companies, national and
      multicultural audiences. He is a published author of “How to Create a Successful
      Annual Report” and a frequent guest speaker at national and local industry
      events. Prior to joining SmartVideo, from 2002 to 2003, Mr. Warren was Director
      of Investor Relations and Corporate Communications at Beazer Homes USA, Inc.
      From 1994 to 2002, Mr. Warren was Director of Investor Relations, Corporate
      Communications and Assistant Secretary of Theragenics Corporation. Mr. Warren
      is
      an active member of the National Investor Relations Institute (NIRI) and served
      as the Atlanta Chapter President from 2002 to 2003 .




**Key
      Employees**




**William
      R. Dunavant** *,* 53,
      serves as Executive Vice President, New Business Development and has been a
      manager of SmartVideo since October 2002. Between January 2002 and September
      2002, Mr. Dunavant served as the President of Seamless Technologies, Inc.,
      a
      business solutions provider that designs and develops integrated applications
      to
      support complex business solutions. From 1999 through 2001, Mr. Dunavant was
      an
      independent business consultant developing marketing and sales strategies,
      offering one-on-one business advice, and management consulting to small and
      mid-sized firms.





**Scott
      Hughes** , 36,
      Vice
      President of Engineering, joined SmartVideo in March 2001 and is responsible
      for
      product design, scope, and development of our services, including the
      development of multiple new video and rich media communications services and
      supporting architecture. From 1996 to 2001, Mr. Hughes was Director of Network
      and Security Consulting Services at Redmond Technology Partners, a Seattle-based
      consulting group, whose clients included Microsoft, Infospace, VoiceStream
      and
      Western Wireless. Mr. Hughes has held various management and technology
      positions with Comnet Cellular/Verizon, BellSouth and Turner Entertainment
      Group’s Worldwide Information Technology Services.





**Audit
      Committee Financial Expert**




The
      Board
      of Directors has an Audit Committee, which is comprised of Michael Criden,
      Glenn
      Singer and Justin Stanley. The board of directors has examined the composition
      of the Audit Committee in light of the listing standards of the Nasdaq stock
      market and the regulations under the Exchange Act applicable to audit
      committees. Based upon this examination, the board of directors has determined
      that each of the Audit Committee members is an “independent” director within the
      meaning of such listing standards and the Exchange Act and the rules and
      regulations thereunder. Each of the Audit Committee members qualifies as an
      “audit committee financial expert” as that term is defined in applicable
      regulations of the Securities and Exchange Commission.





-36-


**Director
      Compensation**




At
      the
      Board of Directors meeting held on December 7, 2005, the Board of Directors
      adopted a director compensation policy that provides the framework to compensate
      our independent directors for their service. Each board member will receive
      an
      option to purchase 250,000 shares of our common stock upon their joining the
      board. For attendance at Board of Director meetings, each director will be
      entitled to receive $500 for each telephonic meeting and $1,500 plus reasonable
      reimbursable expenses for each meeting attended in person. For service on our
      committees, each committee member will receive an additional option to purchase
      25,000 shares of our common stock per committee per year. The Chairman of each
      committee will also receive an additional option to purchase 10,000 shares
      of
      our common stock for service as the Chairman of each committee. Additionally,
      the Chairman of the Board will receive an option to purchase 25,000 shares
      of
      our common stock annually. These options will vest quarterly over the subsequent
      12 months. In the unlikely event that a director is unable to fulfill his entire
      term as a board member, there will be a pro rata allocation of the options
      earned through the date of termination in accordance with the terms of the
      option agreements.




**Summary
      Compensation Table**




The
      following table sets forth certain information concerning compensation paid
      during fiscal years ended December 31, 2003, 2004 and 2005, to the persons
      who
      served as our Chief Executive Officers, and all other executive officers, whose
      total annual salary and bonus exceeded $100,000 during 2005 (collectively,
      the
“Named Executives”):




**Annual
                Compensation**
            **Long-term
                Compensation Awards****Name**
            **Year**
            **Salary****($)**
            **Bonus****($)**
            **Other
                Annual**
              **Compensation****($)**
            **Restricted**
              **Stock**
              **Awards****($)**
            **Securities**
              **Underlying**
              **Options/SARs****(#)**
            **LTIP**
              **Payouts****($)**Richard
                E. Bennett, Jr.
            2005
            75,000
            —
            —
            —
            —
            —2004
            75,000
            —
            
            —
            —
            —2003
            78,125
            —
            
            —
            —
            —Ronald
                A. Warren
            2005
            72,0202004
            72,020
            —
            53,500(1)
            **—**
            100,000
            —2003
            6,003
            —
            —
            —
            —
            —





(1)
      Represents the difference between the market value of the stock, as reported
      on
      the Over-the-Counter Bulletin Board on the date of grant, September 1, 2004
      ($2.07) and the exercise price of the option ($1.00).





**Aggregated
      Option Exercises in Last Fiscal Year and Year-End Option
      Values**





The
      following table sets forth information with respect to the exercised and
      unexercised options to purchase shares of common stock for the Named Executives
      held by them at December 31, 2005. None of the Named Executives exercised any
      options during fiscal year 2005.






-37-





**Number
                of Securities**
              **Underlying
                Unexercised**
              **Options
                at December 31, 2005**
            **Value
                of Unexercised**
              **In
                the Money Options at December 31, 2005(1)****Name**
            **Exercisable**
            **Unexercisable**
            **Exercisable**
            **Unexercisable**Richard
                E. Bennett, Jr.
            —
            —
            $
                  —
            —Ronald
                A. Warren
            —
            100,000
            $
                —
            $
                363,500


______________________





(1) Based
      on
      the difference between the option’s exercise price and a closing price of $5.26
      for the underlying common stock on December 30, 2005 (our last business day
      of
      fiscal year 2005) as reported by the Over-the-Counter Bulletin Board.





**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of the Exchange Act requires our directors, officers and persons who
      beneficially own more than ten percent (10%) of our common
      stock (each, a "Reporting Person") to file reports of ownership and changes
      of
      ownership with the SEC. Copies of all filed reports are required to be furnished
      to the Company pursuant to Section 16(a) of the Exchange Act. Based solely
      upon
      a review of Forms 3, 4 and 5 and amendments thereto furnished to us pursuant
      to
      Rule 16a-3(e) of the Exchange Act during fiscal year ending December 31,
      2005, the Company believes that each Reporting Person complied with all
      applicable filing requirements during its fiscal year ended December 31,
      2005.





**Item
      11.**  **Executive
      Compensation**





The
      following table discloses the compensation earned or received by the Company’s
      Chief Executive Officer during the fiscal years ended December 31, 2003, 2004
      and 2005. No other executive officer of the Company earned or received in excess
      of $100,000 during the past three fiscal years.





**Annual
                Compensation**
            **Long-term
                Compensation Awards****Name**
            **Year**
            **Salary
                ($)**
            **Bonus
                ($)**
            **Other
                Annual Compensation ($)**
            **Restricted**
              **Stock**
              **Awards
                ($)**
            **Securities**
              **Underlying
                Options/SARs (#)**
            **LTIP**
              **Payouts
                ($)**Richard
                E. Bennett, Jr.
            2005
            75,0002004
            75,000
            —
            —
            —
            —
            —2003
            78,125
            —
            —
            —
            —
            —Ronald
                A. Warren
            2005
            72,0202004
            72,020
            —
            53,500(1)
            **—**
            100,000
            —2003
            6,003
            —
            —
            —
            —
            —


______________________




(1) Represents
      the difference between the market value of the stock, as reported on the
      Over-the-Counter Bulletin Board on the date of grant, September 1, 2004 ($2.07)
      and the exercise price of the option ($1.00).





The
      Board
      of Directors may increase the compensation paid to the Company's officers
      depending upon the results of the Company's future operations.





-38-


**Employment
      Agreements**





**Employment
      Agreement with Richard E. Bennett, Jr** ***.*** His
      employment agreement provided for an initial base salary of $75,000 and was
      increased to $150,000 on January 19, 2006, with subsequent increases as
      determined by our Board of Directors. The employment agreement provides, among
      other things, for participation in an equitable manner in any profit-sharing
      or
      retirement plan for employees or executives and for participation in employee
      benefits applicable to our employees and executives, as well as for the
      provision of an automobile allowance of up to $650 per month in any month in
      which we are profitable and other fringe benefits commensurate with his duties
      and responsibilities and for benefits in the event of disability. Pursuant
      to
      the employment agreement, employment may be terminated by us with cause or
      by
      the executive with or without good reason. Termination by us without cause
      or by
      the executive for good reason would subject us to liability for liquidated
      damages in an amount equal to six months of the current salary of the terminated
      executive as of the date of termination.





**Agreement
      with David R. Ross** . On
      February 28, 2006, we entered into an employment agreement with Mr. Ross,
      pursuant to which he will serve as the Company’s President for a period of two
      years. Mr. Ross is entitled to a base salary of $200,000 per annum, which may
      be
      increased at the discretion of the Compensation Committee of the Board of
      Directors. We also granted Mr. Ross an incentive stock option to purchase an
      aggregate of 476,190 shares of the Company’s common stock and a non-qualified
      stock option to purchase an aggregate of 523,810 shares of the Company’s common
      stock. The incentive stock option and the non-qualified stock option are each
      exerciseable at $2.10 per share for a period of 10 years from the date of grant.
      The incentive stock option vests at the following percentages and at the
      following times: (1) 10% of the shares vested on February 28, 2006, and (2)
      10%
      of the shares vest on each anniversary date thereafter for the succeeding nine
      years. The non-qualified stock option vests in the following percentage and
      at
      the following times: (1) 50% of the shares vest on February 28, 2006, and (2)
      the balance of the shares vest on February 28, 2007. We have agreed to reimburse
      Mr. Ross the rental costs of an apartment or condominium unit in Atlanta,
      Georgia, in an amount not to exceed $1,500 per month. The employment agreement
      made with Mr. Ross may be terminated with or without “cause” (as defined in the
      agreement) and contains customary non-competition, confidentiality and
      indemnification provisions. If the employment agreement is terminated by us
      without cause or by Mr. Ross with advance “Notice of Termination,” a pro rata
      portion of Mr. Ross’ unvested options will vest immediately. If the employment
      agreement is terminated by the Company with cause or by Mr. Ross without advance
      Notice of Termination, then Mr. Ross forfeits the options that have not vested
      as of the date of termination or resignation.





**Employment
      Agreement with Ronald A. Warren** ***.***  We
      entered into an employment agreement with Ronald A. Warren on December 9, 2003.
      The employment agreement provides for an initial base salary of $72,020 with
      subsequent increases as determined by our Board of Directors. The employment
      agreement provides, among other things, for participation in employee benefits
      applicable to our employees and executives. Pursuant to the employment
      agreement, employment may be terminated by us or by Mr. Warren with or without
      cause. The agreement also provided for the grant of 25,000 stock
      options.





**Consultant
      Compensation**





In
      November 2004, the Company entered into agreements with CFO Solutions LLC,
      a
      former consultant,  to pay the consultant in common stock and warrants for
      services to the Company over a two-year period.  Pursuant to the
      agreements, the Company issued to the consultant 400,000 units, each of which
      consisted of one share of common stock and two 1/4 warrants to purchase common
      stock with excercise prices of $1.50 per share and $2.00 per share. The Company
      also issued to the consultant a warrant to purchase 1,739,130 units at $1.00
      per
      unit, with each unit consisting of one share of common stock and two 1/4
      warrants to purchase common stock at $1.50 per share and $2.00 per share.  
The warrants also contain a cashless exercise provision.  In addition, the
      Company granted the consultant certain piggy-back registration rights that
      applied to the Company's recent registration statement declared effective by
      the
      SEC on February 10, 2006.  However, the Company did not include the
      consultant's common stock or shares underlying the warrants in the registration
      statement.  The Company is attempting to reduce the amount of equity
      compensation paid to the consultant for the services provided to the
      Company.




On
      January 30, 2006, the Company entered into a
      settlement agreement with Mr. Richard Seifert and KC Ventures, Inc.
      (collectively, the “Claimants”). The Claimants had alleged that they had earned
      or would have earned compensation under two agreements with the Company in
      excess of $10 million for providing customers and content to the Company. The
      Claimants also contended that they had earned fees under an advisory agreement
      in excess of $1 million and certain stock options as a result of raising capital
      for the Company. Pursuant to the terms of the settlement agreement, the Company
      issued 800,000 shares of Series A-1 Convertible Preferred Stock (“Preferred
      Stock”) to Mr. Seifert and 200,000 shares of Preferred Stock to his attorneys,
      Frank, Rosen, Snyder & Moss, L.L.P., in exchange for the Claimants agreeing
      to dismiss their pending arbitration with prejudice and to exchange mutual
      releases with the Claimants. The Company also granted certain piggy-back
      registration rights to the claimants with respect to the shares of common stock
      underlying the Preferred Stock issued to them.




-39-


**Aggregated
      Option Exercises in Last Fiscal Year and Year-End Option
      Values**





The
      following table sets forth information with respect to the exercised and
      unexercised options to purchase shares of common
      stock for the Named Executives held by them at December 31, 2005. None of the
      Named Executives exercised any options during fiscal year 2005.





**Number
                of Securities**
              **Underlying
                Unexercised**
              **Options
                at December 31, 2005**
            
            **Value
                of Unexercised**
              **In
                the Money Options**
              **at
                December 31, 2005(1)****Name**
            
            **Exercisable**
            
            **Unexercisable**
            
            **Exercisable**
            
            **Unexercisable**Richard
                E. Bennett, Jr.
            
            
            —
            
            
            —
            
            $
            —
            
            $
            —Ronald
                A. Warren
            
            
            —
            
            
            100,000
            
            $
            —
            
            $
            363,500


______________________




(1) Based
      on
      the difference between the option's exercise price and a closing price of $5.26
      for the underlying common stock on December 30, 2005 (our last business day
      of
      fiscal year 2005) as reported by the Over-the-Counter Bulletin
      Board.





The
      Board
      of Directors of the Company adopted the 2005 Plan effective January 3, 2006
      to
      provide incentives to attract and retain individuals performing services for
      the
      Company. The 2005 Plan allows for the issuance of up to 10,000,000 shares of
      the
      Company’s common stock. The Company is submitting the 2005 Plan for the
      stockholders’ consent. As of December 31, 2005, no options have been granted
      under the 2005 Plan.





**Compensation
      of Board of Directors**





At
      the
      Board of Directors meeting held on December 7, 2005, the Board of Directors
      adopted an independent director compensation policy that provides the framework
      to compensate our directors for their service. Each board member will receive
      an
      option to purchase 250,000 shares of our common
      stock upon their joining the board. For attendance at Board of Director
      meetings, each director will be entitled to receive $500 for each telephonic
      meeting and $1,500 plus reasonable reimbursable expenses for each meeting
      attended in person. For service on our committees, each committee member will
      receive an additional option to purchase 25,000 shares of our common stock
      per
      committee per year. The Chairman of each committee will also receive an
      additional option to purchase 10,000 shares of our common stock for service
      as
      the Chairman. Additionally, the Chairman of the Board will receive an option
      to
      purchase 25,000 shares of our common stock annually. These options will vest
      quarterly over the subsequent 12 months. In the unlikely event that a director
      is unable to fulfill his entire term as a board member, there will be a pro
      rata
      allocation of the options earned through the date of termination in accordance
      with the terms of the option agreements.




During
      the year ended December 31, 2005, and except as disclosed elsewhere in this
      report, no director of the Company received any form of compensation from the
      Company.





-40-


**Corporate
      Governance**




Pursuant
      to the Company’s Bylaws and Delaware General Corporation Law, the Company’s
      business, property and affairs are managed under the direction of the Company’s
      Board of Directors. Members of the Board of Directors are kept informed of
      the
      Company’s business through discussions with the Chief Executive Officer and
      other senior officers, by reviewing materials provided to them and by
      participating in meetings of the Board of Directors and its committees.




Of
      the
      four current members of the Board of Directors of the Company, Michael Criden,
      Glenn Singer and Justin Stanley are “independent” as such term is defined by the
      applicable listing standards of the Nasdaq Stock Market.




The
      Board
      of Directors held seven
      formal meetings in 2005, and each director who served as a director during
      2005
      attended more than 75% of the meetings of the Board of Directors and the
      committees on which he served. The Board of Directors also took action during
      the year by Unanimous Written Consent on 22 occasions.




The
      Board
      of Directors has the following three committees: (1) Audit, (2) Compensation
      and
      (3) Nominating. The Board of Directors has adopted a written charter for each
      of
      these three committees. The committee charters are posted in the Corporate
      Governance section of our company Website: http://www.smartvideo.com .




The
      Board
      of Directors has also adopted a Code of Business Conduct and Ethics that applies
      to all of our directors, officers (including our Chief Executive Officer and
      our
      Chief Financial Officer) and employees. Our Code of Business Conduct and Ethics
      is posted in the Corporate Governance section of our Company Website: http://www.smartvideo.com .
      If, in
      the future, we should amend our Code of Business Conduct and Ethics or grant
      a
      waiver to our Chief Executive Officer, Chief Financial Officer or principal
      accounting officer with respect to our Code of Business Conduct and Ethics,
      then
      we will post the amendment or description of the waiver in the Corporate
      Governance section of Company Website.




**Nominating
      Committee**




The
      Board
      of Directors has a Nominating Committee, which is comprised of Justin Stanley,
      Glenn Singer and Michael Criden. The Nominating Committee makes recommendations
      to the Board of Directors regarding the size and composition of the Board of
      Directors, establishes and recommends criteria for the selection of new
      directors and recommends candidates for the election to the Board of Directors.
      Each member of the Nominating Committee is “independent” as such term is defined
      by the applicable listing standards of the Nasdaq Stock Market.




The
      Nominating Committee will seek individuals with a variety of experience,
      including chief executive officers, entrepreneurs, independent business owners,
      licensed attorneys and certified public accountants. Additionally, the Board
      of
      Directors is expected to have some members with specialized skills in the
      streaming media industry, including individuals with strong technical
      backgrounds. In addition to such specialized skills and backgrounds, the
      Nominating Committee will seek individuals of high ethical character who share
      in the values of the Company. Absent special circumstances, the Nominating
      Committee is generally of the view that the continuing service of qualified
      incumbent directors promotes stability and continuity in the board room, giving
      the Company the benefit of the familiarity and insight into the Company’s
      affairs that the directors have accumulated during their tenure, while
      contributing to the ability of the Board of Directors to work as a collective
      body. Accordingly, it is the general policy of the Nominating Committee, absent
      special circumstances, to nominate qualified incumbent directors who the members
      of the Nominating Committee believe will continue to make important
      contributions to the Company.




-41-


**Compensation
      Committee**




The
      Board
      of Directors has a Compensation Committee, which is comprised Glenn Singer,
      Justin Stanley and Michael Criden. The Compensation Committee is responsible
      for
      reviewing and approving the executive compensation program for the Company,
      assessing executive performance, making grants of salary and annual incentive
      compensation and approving certain employment agreements. Each member of the
      Compensation Committee is an “independent” director, as such term is defined by
      the applicable listing standards of the Nasdaq Stock Market. The Compensation
      Committee was not formed until December 7, 2005. The Compensation Committee
      held
      zero meetings during the fiscal year ended December 31, 2005.




**Audit
      Committee**




The
      Board
      of Directors has an Audit Committee, which is comprised of Glenn Singer, Michael
      Criden, and Justin Stanley. The Audit Committee assists the Board of Directors
      in monitoring the financial reporting process, the internal control structure
      and the independence and performance of the internal audit department and the
      independent public accountants. Its primary duties are to serve as an
      independent and objective party to monitor the Company’s financial process and
      the internal control system, to review and appraise the audit effort of the
      Company’s independent accountants and to provide an open avenue of communication
      among the independent accountants, financial and senior management of the
      Company and the Board of Directors. The Board of Directors has adopted a written
      charter for the Audit Committee.




During
      the year, the Board of Directors examined the composition of the Audit Committee
      in light of the listing standards of the Nasdaq Stock Market and the regulations
      under the Exchange Act applicable to audit committees. Based upon this
      examination, the Board of Directors determined that each of the Audit Committee
      members is an “independent” director within the meaning of such listing
      standards and the Exchange Act and the rules and regulations thereunder. Each
      of
      the Audit Committee members qualifies as an “audit committee financial expert”
as that term is defined in applicable regulations of the Securities and Exchange
      Commission.




**Item
                12.**
            **Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters**




The
      following table reflects, as of March 10, 2006, the beneficial common stock
      ownership of: (i) each of our directors, (ii) each person known by us to be
      a
      beneficial holder of 5% or more of our common stock, (iii) each Named Executive,
      and (iv) all of our executive officers and directors as a group:




**Name
                and Address of Beneficial Owner (1)**
            
            **Number
                of Shares**
              **Beneficially
                Owned (8)**
            
            **Percentage
                Shares**
              **Beneficially**
              **Owned
                (1)(10)**Richard
                E. Bennett, Jr.****(2)
            
            4,000,000
            
            9.5%William
                R. Dunavant****(3)
            
            3,900,000
            
            9.3%Robert
                J. Walters****(4)
            
            3,866,500
            
            9.2%Wachovia
                Corporation
            
            2,740,900
            
            6.5%Michael
                E. Criden(5)
            
            2,421,251
            
            5.8%Glenn
                H. Singer(6)
            
            3,002,500
            
            7.2%Justin
                A. Stanley(7)
            
            463,291
            
            1.1%David
                Ross (8)
            
            309,524
            
            *Ronald
                A. Warren
            
            62,500
            
            *All
                directors and executive officers as a group (6 persons)
            
            10,259,066
            
            24.5%


*  Less
      than
      1%.






-42-





(1)
            Beneficial
                ownership is determined in accordance with the rules of the SEC.
                Shares of
                common stock subject to options or warrants currently exercisable
                or
                exercisable within 60 days of March 10, 2006, are deemed outstanding
                for
                computing the percentage ownership of the stockholder holding the
                options
                or warrants, but are not deemed outstanding for computing the percentage
                ownership of any other stockholder. Unless otherwise indicated in
                the
                footnotes to this table, we believe that stockholders named in the
                table
                have sole voting and sole investment power with respect to the shares
                set
                forth opposite such stockholder’s name. Unless otherwise indicated, the
                officers, directors and stockholders can be reached at our principal
                offices. Percentage of ownership is based on 41,940,010 shares of
                Capital Stock outstanding (including 3,973,331 shares of common stock
                underlying the Series A-1 Convertible Preferred Stock as of March
                10, 2006.




(2)
            Represents
                4,000,000 shares held by a trust for the benefit of Richard E. Bennett,
                Jr.




(3)
            Represents
                3,900,000 shares held by a trust for the benefit of William R.
                Dunavant.




(4)
            Includes
                2,866,500 shares owned directly by Robert J. Walters and 1,000,000
                shares
                held by a trust for the benefit of Robert J.
                Walters.




(5)
            Represents
                966,667 shares of common stock into which Mr. Criden’s shares of the
                Series A-1 Convertible Preferred Stock are convertible, six warrants
                to
                purchase an aggregate of 1,308,334 shares of common stock at exercise
                prices ranging from $1.75 per share to $2.00 per share, and options
                to
                purchase 335,000 shares of common stock at exercise prices ranging
                from
                $1.20 per share to $5.15 per share, of which options to purchase
                146,250
                shares are exercisable within 60 days of March 10,
                2006.




(6)
            Represents
                1,200,000 shares of common stock into which Mr. Singer’s shares of the
                Series A-1 Convertible Preferred Stock are convertible, seven warrants
                to
                purchase an aggregate of 1,650,000 shares of common stock at exercise
                prices ranging from $1.75 per share to $2.00 per share, and options
                to
                purchase 360,000 shares of common stock at exercise prices ranging
                from
                $1.20 per share to $5.15 per share, of which options to purchase
                152,500
                shares are exercisable within 60 days of March 10, 2006. The warrants
                are
                issued in the name of GHS Holdings Limited Partnership, a company
                that Mr.
                Singer controls.




(7)
            Represents
                166,113 shares of common stock held by Mr. Stanley, three warrants
                to
                purchase 25,928 shares of common stock at an exercise price of $0.75
                per
                share, options to purchase 335,000 shares of common stock at exercise
                prices ranging from $0.90 per share to $5.15 per share, of which
                options
                to purchase 271,250 shares are exercisable within 60 days of March
                10,
                2006, and 10,000 shares of common stock held in a custodial account
                for
                his children.




(8)
            Represents
                options to purchase 309,524 shares of common stock which are exercisable
                at $2.10 per share within 60 days of March 10,
                2006.




(9)
            Does
                not include the following shares issuable in accordance with the
                Stock
                Exchange Agreement dated November 26, 2002 but
                unissued:




**Common
                Shares Issuable**Richard
                E. Bennett, Jr.
            305,555Robert
                J. Walters
            305,556William
                R. Dunavant
            305,555Total
            916,666






-43-


**Item
      13.**  **Certain
      Relationships and Related Transactions**




We
      had a
      $325,000 note payable to an entity owned by the spouse of Robert J. Walters,
      (a
      former holder of more than 10% of our common stock) bearing interest at 8%
      with
      principal and interest payments due as follows: $75,000 within 30 days of the
      funding of a public offering of our securities, monthly principal payments
      of
      $50,000 thereafter plus accrued interest beginning 30 days after the initial
      payment of $75,000. As of December 31, 2004, the principal and interest of
      this
      note payable was paid in full. However, we have received notice of additional
      late charges in the amount of $53,311 associated with this note payable that
      may
      be due but are in dispute as of the date of this report.




Michael
      P. Walsh, our former Chief Financial Officer who resigned on June 15, 2005,
      is a
      member of Forté, one of our stockholders and the finder in connection with our
      March 2005 Private Placement. Forté Capital Partners, LLC received (i) a
      finder’s fee of $238,725 in cash and (ii) a warrant to purchase up to 417,000
      shares of our common stock at $0.75 per share (after giving effect to the
      provisions in the warrant agreement regarding the adjustment of the exercise
      price and number of shares issuable in as a result of the Private Placement
      that
      closed on October 31, 2005, in which we sold shares of our Convertible Preferred
      Stock at a price of $0.75 per share). Forté agreed to invest $1,140,000 in two
      traunches, the first being $400,000 on March 29, 2005 and the remaining balance
      no fewer than 3 days prior to the registration statement going effective, or
      in
      the case that the registration does not go effective, by November 1, 2005,
      to
      acquire up to a total of 506,667 shares of common stock and warrants to purchase
      253,334 shares of common stock at $3.50 per share. We have not received the
      funds owed to us for these shares and warrants to date. On December 14, 2005,
      we
      delivered notice to Forté Capital Partners LLC notifying them of our decision to
      cancel this obligation and right to purchase these shares in accordance with
      the
      terms and conditions of Amendment No. 1 to the Securities Purchase Agreement
      dated as of March 29, 2005 between Forté Capital Partners, LLC and the
      Company.





On
      July
      18, 2005, Justin A. Stanley was appointed a member of the Board of Directors
      of
      the Company. On such date, he received options to purchase 250,000 shares of
      the
      Company’s common stock at an exercise price of $0.90. The options expire on July
      17, 2015. Options to purchase 125,000 shares are vested and the remainder of
      the
      options vest in two equal quarterly installments of 62,500 shares each
      commencing on April 18, 2006.





On
      August
      12, 2005, the Company borrowed $225,000 from Justin A. Stanley, Jr. Pursuant
      to
      the promissory note issued in connection with the loan, the Company was
      obligated to pay all principal and interest due under the note by no later
      than
      September 12, 2006. Interest on the unpaid principal balance of the note accrued
      at a rate equal to the fluctuating prime lending rate of LaSalle Bank, N.A.,
      Chicago, Illinois, as such rate was in effect less one hundred basis points.
      The
      principal amount of this note was repaid to Mr. Stanley on November 22,
      2005. ****





On
      September 26 and October 19, 2005, Michael E. Criden and Glenn H. Singer and
      GHS
      Holdings Limited Partnership, a company controlled by Mr. Singer, loaned the
      Company a total of $600,000. In exchange for the loans, the Company issued
      convertible promissory notes and warrants to each of Messrs. Criden and Singer
      and GHS Holdings Limited Partnership. The notes were payable one-year from
      the
      date of each loan. Interest accrued on the outstanding principal amount of
      each
      note at the rate of 8% per annum. If the Company completed a financing of at
      least $2.5 million from the sale of equity securities prior to the maturity
      date
      of each of the notes, the principal amount of each note converted into shares
      or
      units of the equity securities sold in such financing at a per share sale price
      or unit price equal to the per share sale price or unit price of the financing.
      In addition to receiving the convertible notes, GHS Limited Partnership and
      Mr.
      Criden each received five-year warrants to purchase a total of 100,000 shares
      of
      the Company’s common stock at an exercise price of $2.00 per share. They were
      also granted certain piggy-back registration rights with respect to the shares
      of common stock underlying the warrants.




-44-


On
      November 10, 2005, GHS Holdings Limited Partnership loaned the Company an
      additional $150,000. In exchange for the loan, the Company issued to GHS
      Holdings Limited Partnership a convertible promissory note for $150,000 and
      a five-year
      warrant to purchase 50,000 shares at a purchase price of $2.00 per share. The
      note was payable in 90 days and the outstanding principal of the note accrued
      interest at 15% per year.




On
      November 21, 2005, the Company completed the first closing under the Securities
      Purchase Agreement dated as of October 31, 2005 among the Company and 60
      accredited investors, including Messrs. Criden and Singer and GHS Holdings
      Limited Partnership. Under the terms of the Securities Purchase Agreement,
      the
      Company received gross proceeds of $4,000,000 and issued to the investors a
      total of 5,333,333 shares of Preferred
      Stock, five-year warrants exercisable at $1.75 per share to purchase up to
      5,333,333 shares of common stock and five-year warrants exercisable at $2.00
      per
      share to purchase up to 1,333,333 shares of common stock. Mr. Criden acquired
      483,333 shares of Preferred Stock and warrants to purchase 483,333 shares of
      common stock at $1.75 per share and 120,833 shares of common stock at $2.00
      per
      share. The loans provided to the Company by Mr. Criden were credited toward
      the
      purchase price for the Preferred Stock and warrants issued. The remaining
      $62,500 of the purchase price was paid in cash. GHS Holdings Limited Partnership
      received 600,000 shares of Preferred Stock and warrants to purchase 600,000
      shares of common stock at $1.75 per share and 150,000 shares of common stock
      at
      $2.00 per share. The loans provided to the Company by Mr. Singer and GHS
      Holdings Limited Partnership were credited toward the purchase price for the
      Preferred Stock and warrants issued. The remaining $150,000 of the purchase
      price was paid in cash.





On
      December 2, 2005, the investors waived the conditions to complete the second
      closing under the Securities Purchase Agreement. In connection with the second
      closing, the Company received gross proceeds of $4,000,000 and issued to the
      investors an additional 5,333,333 shares of Preferred Stock, five-year warrants
      exercisable at $1.75 per share to purchase up to 5,333,333 shares of common
      stock and five-year warrants exercisable at $2.00 per share to purchase up
      to
      1,333,333 shares of common stock. Mr. Criden acquired 483,334 shares of
      Preferred Stock and warrants to purchase 483,334 shares of common stock at
      $1.75
      per share and 120,834 shares of common stock at $2.00 per share for a purchase
      price of $362,500, which was paid in cash. GHS Holdings Limited Partnership
      received 600,000 shares of Preferred Stock and warrants to purchase 600,000
      shares of common stock at $1.75 per share and 150,000 shares of common stock
      at
      $2.00 per share for a purchase price of $450,000, which was paid in
      cash.




**Item
      14.**  **Principal
      Accountant Fees and Services**





The
      following table represents fees for professional services rendered by Sherb
      & Co. LLP and Spicer Jeffries LLP billed to us for the audit of our annual
      financial statements for the years ended December 31, 2005 and 2004,
      respectively, and fees for other services during those periods.





**Type
                of Fees**
            
            **2005**
            
            **2004**Audit
                Fees
            
            $
            34,500
            
            $
            39,000Audit-Related
                Fees
            
            
            —
            
            
            —Tax
                Fees
            
            
            —
            
            
            —All
                Other Fees
            
            
            —
            
            
            —Total
            
            $
            34,500
            
            $
            39,000




**Audit
      Fees**





We
      incurred the following fees to Sherb & Co. LLP, our independent auditors,
      for services rendered for the year ended December 31, 2005, and Spicer Jeffries
      for services rendered for the year ended December 31, 2004, a total of (i)
      $7,500 incurred in fiscal 2004 for the audit of our financial statements for
      fiscal 2004 and the reviews of the financial statements included in each of
      our
      Quarterly Reports on Form 10-QSB for the year ended December 31, 2004, and
      (ii)
      an additional $31,500 incurred in fiscal 2004 to complete the audit and review
      work for the year ended December 31, 2003, which was billed by Sherb & Co.
      LLP.





-45-


**Audit
      Related Fees**





There
      were no additional fees for 2005 and 2004 billed to us by Sherb & Co. LLP
      and Spicer Jeffries LLP for assurance and related services that are reasonably
      related to the performance of the audit and review of our financial statements
      that are not already reported in the paragraph immediately above.




**Tax
      Fees**




There
      were no additional fees for 2005 and 2004 billed to us by Sherb & Co. LLP
      for tax services.




**All
      Other Fees**





There
      were no additional fees for 2005 and 2004 billed to us by Sherb & Co. LLP
      for products and services rendered, other than as described above.





**Auditor
      Pre-Approval Policies**





T he
      Audit
      Committee is responsible for pre-approving every engagement of the independent
      auditor to perform audit or non-audit services for us. The Audit Committee's
      pre-approval policy provides as follows:




·
            First,
                once a year when the base audit engagement is reviewed and approved,
                management will identify all other services (including fee ranges)
                for
                which management knows it will engage the independent auditor for
                the next
                12 months. Those services typically include quarterly reviews, specified
                tax matters, certifications to lenders as may be required by financing
                documents, consultation on new accounting and disclosure standards
                and, in
                future years, reporting on management's internal controls
                assessment.




·
            Second,
                if any new "unlisted" services are proposed during the year, the
                Audit
                Committee will review each proposed individual engagement. From and
                after
                the effective date of the Commission's rule requiring Audit Committee
                pre-approval of all audit and permissible non-audit services provided
                by
                independent auditors, the Audit Committee had pre-approved all audit
                and
                permissible non-audit services provided by Sherb & Co. LLP, since
                its engagement as our principal independent accountants. The Audit
                Committee gives due consideration to the potential effect of non-audit
                services on maintaining Sherb & Co. LLP’s audit
                independence.







-46-


**PART
      IV**





**Item
      15.**  **Exhibits
      and Financial Statement Schedules**





(a)  Documents
      filed as part of this report





(1)  Consolidated
      Financial Statements.





The
      following consolidated financial statements of SmartVideo are filed as part
      of
      this report :





Report
      of
      Independent Registered Accounting Firm





Consolidated
      Balance Sheets - December 31, 2005 and 2004





Consolidated
      Statements of Operations - Years ended December 31, 2005, 2004 and
      2003





Consolidated
      Statements of Changes in Stockholders' Deficit - Years ended December 31, 2005,
      2004 and 2003





Consolidated
      Statements of Cash Flow - Years ended December 31, 2005, 2004 and
      2003





Notes
      to
      Consolidated Financial Statements





(2)  Consolidated
      Financial Statement Schedule





All
      schedules required by applicable SEC regulations are either not required under
      the related instructions, are inapplicable or the required information has
      been
      included in the Consolidated Financial Statements and therefore such schedules
      have been omitted.





(3)  Exhibits.








**Exhibit
                Number**
            **Exhibit**3.1
            Certificate
                of Incorporation, as amended, incorporated by reference from Exhibit
                3.1
                to the Registrant’s Current Report on Form 8-K filed on January 2, 2001.3.2
            Certificate
                of Amendment to Certificate of Incorporation, incorporated by refered
                from
                Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on
                February 24, 2006.3.2
            Bylaws,
                as amended, of the Company, incorporated by reference from Exhibit
                3.2 to
                the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended
                December 31, 2003.3.3
            Series
                A-1 Convertible Preferred Stock Certificate of Designation as filed
                with
                the Secretary of State of the State of Delaware, incorporated by
                reference
                from Exhibit 3.1 to the Registrant’s Form 8-K filed with the SEC on
                November 4, 2005 (the “November 2005 Form 8-K”).4.1
            Form
                of Securities Purchase Agreement, dated as of March 29, 2005, incorporated
                by reference from Exhibit 10.7 to the Registrant’s Annual Report on Form
                10-KSB for the fiscal year ended December 31, 2004.






-47-





4.2
            Form
                of Subscription Agreement, dated as of December 31, 2004, incorporated
                by
                reference from Exhibit 10.8 to the Registrant’s Annual Report on Form
                10-KSB for the fiscal year ended December 31, 2004.4.3
            Form
                of Registration Rights Agreement, dated as of March 29, 2005, incorporated
                by reference from Exhibit 10.9 to the Registrant’s Annual Report on Form
                10-KSB for the fiscal year ended December 31, 2004.4.4
            Form
                of Registration Rights Agreement, dated as of December 31, 2004,
                incorporated by reference from Exhibit 10.10 to the Registrant’s Annual
                Report on Form 10-KSB for the fiscal year ended December 31,
                2004.4.5
            Registration
                Rights Agreement, dated as of November 29, 2004, between SmartVideo
                Technologies, Inc. and Interim CFO Solutions LLC, incorporated by
                reference from Exhibit 10.11 to the Registrant’s Annual Report on Form
                10-KSB for the fiscal year ended December 31, 2004.4.6
            Form
                of Registration Rights Agreement, incorporated by reference from
                Exhibit
                10.7 to the Registrant’s Annual Report on Form 10-KSB for the fiscal year
                ended December 31, 2003.4.7
            Amendment
                No. 1 dated March 29, 2005 to Securities Purchase Agreement, between
                SmartVideo Technologies, Inc. and Forté Capital Partners, LLC,
                incorporated by reference from Exhibit 4.7 to the Registrant’s May 2005
                Registration Statement on Form SB-2.4.8
            Form
                of warrant issued to each purchaser in the March 2005 Private Placement,
                incorporated by reference from Exhibit 4.1 to the Registrant’s Annual
                Report on Form 10-KSB for the fiscal year ended December 31,
                2004.





4.9
            Form
                of warrant issued to each purchaser in the December 2004 Private
                Placement, incorporated by reference from Exhibit 4.2 to the Registrant’s
                Annual Report on Form 10-KSB for the fiscal year ended December 31,
                2004.4.10
            Warrant
                issued to Interim CFO Solutions LLC to purchase 100,000 shares of
                common
                stock at $1.50 per share, incorporated by reference from Exhibit
                4.3 to
                the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended
                December 31, 2004.4.11
            Warrant
                issued to Interim CFO Solutions LLC to purchase 100,000 shares of
                common
                stock at $2.00 per share, incorporated by reference from Exhibit
                4.4 to
                the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended
                December 31, 2004.4.12
            Warrant
                issued to Interim CFO Solutions LLC to purchase 1,739,130 units,
                incorporated by reference from Exhibit 4.5 to the Registrant’s Annual
                Report on Form 10-KSB for the fiscal year ended December 31,
                2004.4.13
            Form
                of warrant issued to Interim CFO Solutions LLC to purchase 434,783
                shares
                of common stock at $1.50 per share, incorporated by reference from
                Exhibit
                4.6 to the Registrant’s Annual Report on Form 10-KSB for the fiscal year
                ended December 31, 2004.4.14
            Form
                of warrant issued to Interim CFO Solutions LLC to purchase 434,783
                shares
                of common stock at $2.00 per share, incorporated by reference from
                Exhibit
                4.7 to the Registrant’s Annual Report on Form 10-KSB for the fiscal year
                ended December 31, 2004.






-48-




4.15
            Warrant
                issued to Trilogy Capital Partners, Inc. to purchase 150,000 shares
                of
                common stock at $4.30, incorporated by reference from Exhibit 4.15
                to the
                Registrant’s May 2005 Registration Statement on Form
                SB-2.4.16
            Warrant
                issued to Trilogy Capital Partners, Inc. to purchase 275,000 shares
                of
                common stock at $5.00, incorporated by reference from Exhibit 4.16
                to the
                Registrant’s May 2005 Registration Statement on Form
                SB-2.4.17
            Warrant
                issued to Trilogy Capital Partners, Inc. to purchase 375,000 shares
                of
                common stock at $5.50,m incorporated by reference from Exhibit 4.17
                to the
                Registrant’s May 2005 Registration Statement on Form
                SB-2.4.18
            Warrant
                issued to Trilogy Capital Partners, Inc. to purchase 450,000 shares
                of
                common stock at $6.50, incorporated by reference from Exhibit 4.18
                to the
                Registrant’s May 2005 Registration Statement on Form
                SB-2.4.19
            Securities
                Purchase Agreement dated as of October 31, 2005 among the Registrant
                and
                the investors listed on the Schedule of Buyers, incorporated by reference
                from Exhibit 10.1 of the November 2005 Form 8-K.4.20
            Registration
                Rights Agreement entered into as of October 31, 2005 among the Registrant
                and the investor signatory thereto, incorporated by reference from
                Exhibit
                10.2 to the November 2005 Form 8-K.4.21
            Form
                of $1.75 warrant issued to each purchaser in the October 2005 Private
                Placement, incorporated by reference from Exhibit 4.2 of the November
                2005
                Form 8-K.4.22
            Form
                of $2.00 warrant issued to each purchaser in the October 2005 Private
                Placement, incorporated by reference from Exhibit 4.1 of the November
                2005
                Form 8-K.4.23
            Warrant
                issued to Glenn Singer to purchase 33,333 shares of common stock
                at $2.00
                per share, incorporated by reference by Exhibit 10.5 to the November
                2005
                Form 8-K.4.24
            Warrant
                issued to Michael E. Criden to purchase 33,333 shares of common stock
                at
                $2.00 per share, incorporated by reference from Exhibit 10.7 to the
                November 2005 Form 8-K.4.25
            Warrant
                issued to GHS Holdings Limited Partnership to purchase 66,667 shares
                of
                common stock at $2.00 per share, incorporated by reference from Exhibit
                10.9 to the November 2005 Form 8-K.4.26
            Warrant
                issued to Michael E. Criden to purchase 66,667 shares of common stock
                at
                $2.00 per share, incorporated by reference from Exhibit 10.11 to
                the
                November 2005 Form 8-K.10.1
            Convertible
                Promissory Note dated September 26, 2005 issued to Glenn Singer,
                incorporated by reference from Exhibit 10.4 to the November 2005
                Form 8-K.10.3
            Convertible
                Promissory Note issued to Michael E. Criden dated September 26, 2005,
                incorporated by reference from Exhibit 10.6 to the November 2005
                Form 8-K.10.5
            Convertible
                Promissory Note dated October 19, 2005 issued to GHS Holdings Limited
                Partnership, incorporated by reference from Exhibit 10.8 to the November
                2005 Form 8-K.






-49-




10.7
            Convertible
                Promissory Note dated October 19, 2005 issued to Michael E. Criden,
                incorporated by reference from Exhibit 10.10 to the November 2005
                Form
                8-K.10.9
            Waiver
                of Second Closing Conditions under the Securities Purchase Agreement,
                incorporated by reference from Exhibit 10.1 to the December 2005
                Form
                8-K.10.10
            Settlement
                Agreement, dated January 30, 2006, among KC Ventures, Inc., Richard
                Seifert, SmartVideo Technologies, Inc. and OVT, Inc., incorporated
                by
                reference from Exhibit 10.1 to the January 31, 2006 Form
                8-K.10.11
            Consulting
                Agreement, dated January 27, 2006, among Growth Consultants, LLC,
                N. John
                Simmons, Jr., and the Company.10.12
            Employment
                Agreement, dated as of February 28, 2006, between the Registrant
                and David
                Ross, incorporated by reference to Exhibit 10.1 to the Form 8-K filed
                with
                the SEC on March 6, 2006.23.1
            Consent
                of Sherb & Co., LLP, independent registered public accounting firm.23.2
            Consent
                of Spicer Jeffries LLP, independent registered public accounting
                firm.31.1*
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                Rule
                13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange
                Act of 1934, as amended.32.1*
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                18
                U.S.C Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.





*
      Filed
      herewith





(b)
            Item
                601 Exhibits





The
      exhibits required by Item 601 of Regulation S-K are set forth in (a)(3)
      above.





(c)
            Financial
                Statement Schedules





The
      financial statement schedules required by Regulation S-K are set forth in (a)(2)
      above.




-50-





SIGNATURES





Pursuant
      to the requirements of Section 13 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.




SMARTVIDEO
              TECHNOLOGIES, INC.March
              28, 2006
            By:
            /s/ Richard E. Bennett, Jr.Richard
                E. Bennett, Jr.
              Chief
                Executive Officer




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the Registrant and in the
      capacities indicated on March 28, 2006.




Signature
            
            Title
            
            Date/s/
              Richard E. Bennett, Jr.Richard
                E. Bennett, Jr.
            
            Director,
                Chief Executive Officer and interim Chief Financial Officer (Principal
                Executive Officer and Principal Financial and Accounting
                Officer)
            
            March 28,
              2006/s/
                Glenn H. SingerGlenn
                H. Singer
            
            Chairman
                of the Board of Directors
            
            March 28,
              2006/s/
                Michael E. CridenMichael
                E. Criden
            
            Director
            
            March 28,
              2006/s/
                Justin A. StanleyJustin
                A. Stanley
            
            Director
            
            March 28,
              2006





-51-


**FINANCIAL
      STATEMENTS**




**Index
      to Financial Statements**





Report
                of Independent Registered Public Accounting Firm
            F-1Consolidated
                Balance Sheet
            F-2Consolidated
                Statements of Operations
            F-3Consolidated
                Statements of Changes in Stockholders’ Deficit
            F-4
                - F-5Consolidated
                Statements of Cash Flows
            F-6Notes
                to Consolidated Financial Statements
            F-7
                - F-32









REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
      the
      Board of Directors and Shareholders


SmartVideo
      Technologies, Inc.





We
      have
      audited the accompanying consolidated balance sheets of SmartVideo Technologies,
      Inc. and Subsidiary as of December 31, 2005 and 2004 and the related
      consolidated statements of operations, changes in Stockholders’ deficit and cash
      flows for the years ended December 31, 2005, 2004 and 2003, respectively. These
      consolidated financial statements are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these consolidated
      financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements. An audit also includes assessing the
      accounting principles used and significant estimates made by management, as
      well
      as evaluating the overall financial statement presentation. We believe that
      our
      audits provide a reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of SmartVideo Technologies,
      Inc. and Subsidiary as of December 31, 2005 and 2004 and the results of
      their operations and their cash flows for the years ended December 31, 2005,
      2004 and 2003, respectively, in conformity with accounting principles generally
      accepted in the United States of America.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As discussed in Note 2 to the
      financial statements, the Company has suffered recurring losses from operations,
      has net cash used in operations, a net working capital deficit, a stockholders’
deficit and an accumulated deficit that raises substantial doubt about its
      ability to continue as a going
      concern. Management’s plan in regard to these matters is also described in Note
      2. The consolidated financial statements do not include any adjustments that
      might result from the outcome of this uncertainty.








SHERB
      & CO., LLP


Certified
      Public Accountants





Boca
      Raton, Florida


February
      28, 2006





F-1


**SMARTVIDEO
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**Consolidated
      Balance Sheets**


**December
      31, 2005 and 2004**


**2005**
              
              **2004****Assets****Current
                  Assets**Cash
              
              $
              5,792,566
              
              $
              387,592Accounts
                  receivable – net of allowance for doubtful accounts of $77,937 and
                  $44,319
              
              
              -
              
              
              1,000Broadcast
                  rights - net of accumulated amortization of $1,740,552 and
                  $0
              
              
              2,408,525
              
              
              -Prepaid
                  expenses
              
              
              -
              
              
              90,687**Total
                  Current Assets**
              
              
              8,201,091
              
              
              479,279**Property
                  and Equipment, Net of Accumulated Depreciation of $350,641 and
                  $72,313**
              
              
              716,423
              
              
              230,272**Other
                  Assets**Broadcast
                  rights, net of current portion
              
              
              2,880,999
              
              
              -Other
              
              
              122,161
              
              
              10,000**Total
                  Other Assets**
              
              
              3,003,160
              
              
              10,000**Total
                  Assets**
              
              $
              11,920,674
              
              $
              719,551**Liabilities
                  and Stockholders' Deficit****Current
                  Liabilities**Accounts
                  payable and accrued expenses
              
              $
              2,905,618
              
              $
              739,903Contracts
                  payable - broadcast rights
              
              
              2,283,500
              
              
              -Accrued
                  settlement expenses
              
              
              5,541,244
              
              
              -Private
                  placement monies to be refunded
              
              
              -
              
              
              114,500Due
                  to related parties
              
              
              64,429
              
              
              65,886Due
                  to advisor
              
              
              -
              
              
              807,474Loan
                  payable and related accrued interest
              
              
              59,922
              
              
              57,003**Total
                  Current Liabilities**
              
              
              10,854,713
              
              
              1,784,766**Long-Term
                  Liabilities**Contracts
                  payable — broadcast rights - net of current portion
              
              
              3,386,576
              
              
              -**Total
                  Liabilities**
              
              
              14,241,289
              
              
              1,784,766**Commitments
                  and Contingencies****Stockholders'
                  Deficit**Preferred
                  stock, $.001 par value, 12,000,000 shares authorized, 12,000,000
                  sharesissued
                  and no shares outstanding as of December 31, 2005 and 2004
              
              
              -
              
              
              -Preferred
                  stock, Series B, 7% Convertible, $1,000 par value, 2,500 shares
                  authorized,no
                  shares issued and outstanding as of December 31, 2005 and
                  2004
              
              
              -
              
              
              -Preferred
                  stock, Series A-1, Convertible, $.001 par value, 50,000,000 sharesauthorized,
                  10,666,666 shares issued and outstanding as of December 31, 2005,no
                  shares issued and outstanding as of December 31, 2004
              
              
              10,667
              
              
              -Common
                  stock, $.001 par value, 50,000,000 shares authorized, 28,688,463
                  shares
                  issuedand
                  outstanding as of December 31, 2005, 24,187,834 shares issued andoutstanding
                  as of December 31, 2004
              
              
              28,689
              
              
              24,188Additional
                  paid-in capital
              
              
              39,027,618
              
              
              14,259,142Less:
                  Deferred consulting fees
              
              
              (1,433,833
              )
              
              (3,135,063
              )Accumulated
                  deficit
              
              
              (39,953,756
              )
              
              (12,213,482
              )**Total
                  Stockholders' Deficit**
              
              
              (2,320,615
              )
              
              (1,065,215
              )**Total
                  Liabilities and Stockholders' Deficit**
              
              $
              11,920,674
              
              $
              719,551




**See
        accompanying notes to consolidated financial
        statements**


F-2


**SMARTVIDEO
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**Consolidated
      Statements of Operations**


**For
      the Years Ended December 31, 2005, 2004 and 2003**


**2005**
              
              **2004**
              
              **2003****Revenues**Revenue
              
              $
              142,029
              
              $
              86,788
              
              $
              41,019Revenue
                  – related party
              
              
              55,228
              
              
              31,945
              
              
              22,432**Total
                  Revenues**
              
              
              197,257
              
              
              118,733
              
              
              63,451**Operating
                  Expenses**Amortization
                  of stock-based compensationto
                  a former advisor
              
              
              -
              
              
              -
              
              
              1,316,250Broadcast
                  rights
              
              
              2,001,584
              
              
              -
              
              
              -Compensation
                  and benefits
              
              
              1,757,088
              
              
              1,034,951
              
              
              515,850Consulting
                  and professional fees
              
              
              1,851,781
              
              
              1,235,523
              
              
              752,935Data
                  center
              
              
              770,702
              
              
              355,999
              
              
              303,757Depreciation
              
              
              278,328
              
              
              47,649
              
              
              17,501Settlement
                  expense
              
              
              5,541,244
              
              
              -
              
              
              -Stock-based
                  compensation
              
              
              4,325,680
              
              
              3,118,996
              
              
              -Selling,
                  general and administrative
              
              
              2,495,104
              
              
              1,046,567
              
              
              336,461**Total
                  Operating Expenses**
              
              
              19,021,511
              
              
              6,839,685
              
              
              3,242,754**Loss
                  from Operations**
              
              
              (18,824,254
              )
              
              (6,720,952
              )
              
              (3,179,303
              )**Other
                  Income (Expense)**Interest
                  income
              
              
              14,037
              
              
              -
              
              
              -Interest
                  expense
              
              
              (930,057
              )
              
              (71,978
              )
              
              (679,838
              )**Total
                  Other Expense, Net**
              
              
              (916,020
              )
              
              (71,978
              )
              
              (679,838
              )**Net
                  Loss**
              
              $
              (19,740,274
              )
              $
              (6,792,930
              )
              $
              (3,859,141
              )Net
                  Loss per Share - Basic and Diluted
              
              $
              (0.76
              )
              $
              (0.35
              )
              $
              (0.51
              )Weighted
                  Average Common SharesOutstanding
                  during the Year
              
              
              26,093,554
              
              
              19,208,345
              
              
              7,540,849




**See
        accompanying notes to consolidated financial
        statements**


F-3




**SMARTVIDEO
      TECHNOLOGIES, INC. AND SUBSIDIARY**


**Consolidated
      Statements of Changes in Stockholders’ Deficit**


**For
      the Period from December 31, 2005, 2004 and 2003**


**Series
                B, 7% Convertible**
            
            **Series
                A-1, Convertible**
            
            
            
            
            
            **Additional**
            
            **Deferred****Preferred
                Stock**
            
            **Preferred
                Stock**
            
            **Common
                Stock**
            
            **Paid-in**
            
            **Consulting**
            
            **Accumulated****Shares**
            
            **Par
                Value**
            
            **Shares**
            
            **Par
                Value**
            
            **Shares**
            
            **Par
                Value**
            
            **Capital**
            
            **Fees**
            
            **Deficit**
            
            **Total**Balance,
                December 31, 2002
            
            
            -
            
            $
            -
            
            
            12,000,000
            
            $
            12,000
            
            
            6,949,396
            
            $
            6,949
            
            $
            2,083,956
            
            $
            (1,316,250
            )
            $
            (1,561,411
            )
            $
            (774,756
            )Issuance
                of common stock for cash
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,631,666
            
            
            1,632
            
            
            1,630,034
            
            
            -
            
            
            -
            
            
            1,631,666Issuance
                of common stock asadditional
                consideration relatedto
                rights of convertiblepromissory
                notes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            53,000
            
            
            53
            
            
            177,497
            
            
            -
            
            
            -
            
            
            177,550Issuance
                of common stock in lieuof
                payment of advances payableto
                a shareholder
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            55,000
            
            
            55
            
            
            166,045
            
            
            -
            
            
            -
            
            
            166,100Issuance
                of common stockpursuant
                to conversion ofconvertible
                debt
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            223,929
            
            
            224
            
            
            167,721
            
            
            -
            
            
            -
            
            
            167,945Amortization
                of deferred compensation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,316,250
            
            
            -
            
            
            1,316,250Beneficial
                conversion feature onissuance
                of convertiblepromissory
                notes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            308,000
            
            
            -
            
            
            -
            
            
            308,000Net
                Loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,859,141
            )
            
            (3,859,141
            )Balance,
                December 31, 2003
            
            
            -
            
            $
            -
            
            
            12,000,000
            
            $
            12,000
            
            
            8,912,991
            
            $
            8,913
            
            $
            4,533,253
            
            $
            -
            
            $
            (5,420,552
            )
            $
            (866,386
            )Issuance
                of common stock for cash
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            94,096
            
            
            94
            
            
            260,906
            
            
            -
            
            
            -
            
            
            261,000Issuance
                of common stock pursuant toconversions
                of convertible debt
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            302,559
            
            
            303
            
            
            254,074
            
            
            -
            
            
            -
            
            
            254,377Conversion
                of preferred stock intocommon
                stock
            
            
            -
            
            
            -
            
            
            (12,000,000
            )
            
            (12,000
            )
            
            12,000,000
            
            
            12,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -Issuance
                of common stock for cash
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            723,000
            
            
            723
            
            
            784,777
            
            
            -
            
            
            -
            
            
            785,500Issuance
                of common stock for cash
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            333,952
            
            
            334
            
            
            333,618
            
            
            -
            
            
            -
            
            
            333,952Issuance
                of stock options toemployees
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            374,500
            
            
            -
            
            
            -
            
            
            374,500Issuance
                of stock options toto
                non-employees
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            395,000
            
            
            (370,313
            )
            
            -
            
            
            24,687Issuance
                of common stock and commonstock
                purchase warrants for cash
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            120,000
            
            
            120
            
            
            119,880
            
            
            -
            
            
            -
            
            
            120,000Issuance
                of common stock and commonstock
                purchase warrants for cash
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            960,000
            
            
            960
            
            
            959,040
            
            
            -
            
            
            -
            
            
            960,000Issuance
                of common stock and commonstock
                purchase warrants on conversionof
                debt to equity
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            400,000
            
            
            400
            
            
            399,600
            
            
            -
            
            
            -
            
            
            400,000Issuance
                of warrants to purchase units ofcommon
                stock and common stockpurchase
                warrants on conversion ofdebt
                to equity and deferredcompensation
                related to conversion
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,590,435
            
            
            -
            
            
            -
            
            
            1,590,435Issuance
                of warrants to purchase sharesof
                common stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            442,000
            
            
            -
            
            
            -
            
            
            442,000Issuance
                of stock options toto
                non-employees
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,044,650
            
            
            (2,764,750
            )
            
            -
            
            
            279,900Issuance
                of common stock and commonstock
                purchase warrants for cash
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            341,236
            
            
            341
            
            
            767,409
            
            
            -
            
            
            -
            
            
            767,750Net
                Loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (6,792,930
            )
            
            (6,792,930
            )Balance,
                December 31, 2004
            
            
            -
            
            $
            -
            
            
            -
            
            $
            -
            
            
            24,187,834
            
            $
            24,188
            
            $
            14,259,142
            
            $
            (3,135,063
            )
            $
            (12,213,482
            )
            $
            (1,065,215
            )




**See
        accompanying notes to consolidated financial
        statements**




F-4
 
  **SMARTVIDEO
          TECHNOLOGIES, INC. AND SUBSIDIARY**
 **Consolidated
          Statements of Changes in Stockholders’ Deficit**
 **For
          the Period from December 31, 2005, 2004 and 2003**
 **Series
                    B, 7% Convertible**
                
                **Series
                    A-1, Convertible**
                
                
                
                
                
                **Additional**
                
                **Deferred****Preferred
                    Stock**
                
                **Preferred
                    Stock**
                
                **Common
                    Stock**
                
                **Paid-in**
                
                **Consulting**
                
                **Accumulated****Shares**
                
                **Par
                    Value**
                
                **Shares**
                
                **Par
                    Value**
                
                **Shares**
                
                **Par
                    Value**
                
                **Capital**
                
                **Fees**
                
                **Deficit**
                
                **Total**Balance,
                    December 31, 2004
                
                
                -
                
                $
                -
                
                
                -
                
                $
                -
                
                
                24,187,834
                
                $
                24,188
                
                $
                14,259,142
                
                $
                (3,135,063
                )
                $
                (12,213,482
                )
                $
                (1,065,215
                )Issuance
                    of convertible preferred stockstock
                    for cash
                
                
                -
                
                
                -
                
                
                8,919,999
                
                
                8,920
                
                
                -
                
                
                -
                
                
                6,681,080
                
                
                -
                
                
                -
                
                
                6,690,000Issuance
                    of convertible preferred stock in connectionwith
                    conversion of convertible debt
                
                
                -
                
                
                -
                
                
                1,746,667
                
                
                1,747
                
                
                -
                
                
                -
                
                
                1,308,253
                
                
                -
                
                
                -
                
                
                1,310,000Dividend
                    recorded on convertible preferred stock issuance
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                8,000,000
                
                
                -
                
                
                (8,000,000
                )
                
                -Issuance
                    of common stock for cash
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,761,345
                
                
                1,761
                
                
                3,961,239
                
                
                -
                
                
                -
                
                
                3,963,000Cash
                    paid as direct offering cost
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (233,125
                )
                
                -
                
                
                -
                
                
                (233,125
                )Issuance
                    of common stock in connectionwith
                    cash based warrant exercises
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                527,779
                
                
                528
                
                
                722,807
                
                
                -
                
                
                -
                
                
                723,335Issuance
                    of common stock in connectionwith
                    cashless based warrant exercises
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,338,623
                
                
                1,339
                
                
                (1,339
                )
                
                -
                
                
                -
                
                
                -Issuance
                    of common stock ascompensation
                    to investors
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                50,000
                
                
                50
                
                
                197,450
                
                
                -
                
                
                -
                
                
                197,500Issuance
                    of stock for services
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                750,000
                
                
                750
                
                
                711,750
                
                
                -
                
                
                -
                
                
                712,500Issuance
                    of common stock for settlement ofvendor
                    payables
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                72,882
                
                
                73
                
                
                82,777
                
                
                -
                
                
                -
                
                
                82,850Issuance
                    of warrants for services
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                2,624,450
                
                
                -
                
                
                -
                
                
                2,624,450Amortization
                    of beneficial conversion feature onconvertible
                    debt
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                713,134
                
                
                -
                
                
                -
                
                
                713,134Amortization
                    of stock based compensation
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,701,230
                
                
                -
                
                
                1,701,230Net
                    Loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (19,740,274
                )
                
                (19,740,274
                )Balance,
                    December 31, 2005
                
                
                -
                
                $
                -
                
                
                10,666,666
                
                $
                10,667
                
                
                28,688,463
                
                $
                28,689
                
                $
                39,027,618
                
                $
                (1,433,833
                )
                $
                (39,953,756
                )
                $
                (2,320,615
                )
 **See
          accompanying notes to consolidated financial
          statements**





F-5
 
  **SMARTVIDEO
          TECHNOLOGIES, INC. AND SUBSIDIARY**
 **Consolidated
          Statements of Cash Flows**
 **For
          the Years Ended December 31, 2005, 2004 and 2003**   **2005**
                  
                  **2004**
                  
                  **2003****Cash
                      Flows from Operating Activities**Net
                      loss
                  
                  $
                  (19,740,274
                  )
                  $
                  (6,792,930
                  )
                  $
                  (3,859,141
                  )Adjustments
                      to reconcile net loss to net cashused
                      in operating activities:Bad
                      Debt
                  
                  
                  77,937
                  
                  
                  68,119
                  
                  
                  -Depreciation
                  
                  
                  278,328
                  
                  
                  47,649
                  
                  
                  17,501Issuance
                      of warrants for services
                  
                  
                  2,624,450
                  
                  
                  -
                  
                  
                  -Issuance
                      of common stock for services
                  
                  
                  712,500
                  
                  
                  -
                  
                  
                  177,550Issuance
                      of common stock as compensation for investors
                  
                  
                  197,500
                  
                  
                  -
                  
                  
                  -Amortization
                      of beneficial conversion feature on convertible debt
                  
                  
                  713,134
                  
                  
                  -
                  
                  
                  308,000Amortization
                      of stock based compensation
                  
                  
                  1,701,230
                  
                  
                  3,118,996
                  
                  
                  1,316,250Amortization
                      of broadcast rights
                  
                  
                  1,740,552
                  
                  
                  -
                  
                  
                  -Excess
                      of fair value of stock issued to individuals inrepayment
                      of advance from shareholder
                  
                  
                  -
                  
                  
                  -
                  
                  
                  116,240Changes
                      in Operating Assets and Liabilities:(Increase)
                      Decrease in:Accounts
                      receivable
                  
                  
                  (76,937
                  )
                  
                  (13,539
                  )
                  
                  (55,581
                  )Prepaid
                      expenses
                  
                  
                  90,687
                  
                  
                  (90,687
                  )
                  
                  -Other
                      Assets
                  
                  
                  (112,161
                  )
                  
                  -
                  
                  
                  36,010Increase
                      (Decrease) in:Accounts
                      payable and accrued expenses
                  
                  
                  1,633,565
                  
                  
                  1,031,055
                  
                  
                  370,289Accrued
                      interest payable
                  
                  
                  11,462
                  
                  
                  65,306
                  
                  
                  42,734Repayments
                      on acquired broadcast rights
                  
                  
                  (520,000
                  )
                  
                  -
                  
                  
                  -Accrued
                      settlement payable
                  
                  
                  5,316,244
                  
                  
                  -
                  
                  
                  -**Net
                      Cash Used in Operating Activities**
                  
                  
                  (5,351,783
                  )
                  
                  (2,566,031
                  )
                  
                  (1,530,148
                  )**Cash
                      Flows from Investing Activities**Purchase
                      of equipment
                  
                  
                  (764,479
                  )
                  
                  (189,191
                  )
                  
                  (102,981
                  )**Net
                      Cash Used in Investing Activities**
                  
                  
                  (764,479
                  )
                  
                  (189,191
                  )
                  
                  (102,981
                  )**Cash
                      Flows from Financing Activities**Issuance
                      of convertible preferred stock for cash
                  
                  
                  6,690,000
                  
                  
                  -
                  
                  
                  333,333Issuance
                      of common stock for cash
                  
                  
                  3,963,000
                  
                  
                  3,228,202
                  
                  
                  1,631,666Cash
                      paid as direct offering cost for common stock
                      issuance
                  
                  
                  (233,125
                  )
                  
                  -
                  
                  
                  -Proceeds
                      from warrant exercises
                  
                  
                  723,335
                  
                  
                  -
                  
                  
                  -Proceeds
                      from issuance of convertible debt
                  
                  
                  1,310,000
                  
                  
                  -
                  
                  
                  -Proceeds
                      from related party borrowings
                  
                  
                  225,000
                  
                  
                  -
                  
                  
                  -Repayments
                      of related party borrowings
                  
                  
                  (235,000
                  )
                  
                  (497,886
                  )
                  
                  (39,614
                  )Repayments
                      on advisor borrowings
                  
                  
                  (807,474
                  )
                  
                  -
                  
                  
                  -Proceeds
                      from (Repayments of) PPM funds
                  
                  
                  (114,500
                  )
                  
                  114,500
                  
                  
                  -**Net
                      Cash Provided By Financing Activities**
                  
                  
                  11,521,236
                  
                  
                  2,844,816
                  
                  
                  1,925,385Net
                      Increase in Cash and Cash Equivalents
                  
                  
                  5,404,974
                  
                  
                  89,594
                  
                  
                  292,256Cash
                      - Beginning of Year
                  
                  
                  387,592
                  
                  
                  297,998
                  
                  
                  5,742**Cash
                      - End of Year**
                  
                  $
                  5,792,566
                  
                  $
                  387,592
                  
                  $
                  297,998**Supplemental
                      Disclosure of Cash Flow Information**Cash
                      paid for:Income
                      Taxes
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  -Interest
                  
                  $
                  -
                  
                  $
                  57,426
                  
                  $
                  30,000**Supplemental
                      Disclosure of Non-Cash Investing and Financing
                      Activities**Acquisition
                      of broadcast rights
                  
                  $
                  7,705,076
                  
                  $
                  -
                  
                  $
                  -Cancellation
                      of acquired broadcast rights due to litigation
                  
                  $
                  900,000
                  
                  $
                  -
                  
                  $
                  -Dividend
                      on issuance of convertible preferred stock
                  
                  $
                  8,000,000
                  
                  $
                  -
                  
                  $
                  -Issuance
                      of common stock in lieu of repayment ofan advance
                      payable to one shareholder
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  166,100Issuance
                      of common stock pursuant to conversionof
                      convertible promissory notes including accrued interest
                  
                  $
                  -
                  
                  $
                  254,377
                  
                  $
                  167,945Issuance
                      of common stock for settlement of accounts payable
                  
                  $
                  82,850
                  
                  $
                  -
                  
                  $
                  -Issuance
                      of convertible preferred stock in exchange forConversion
                      of convertible debt
                  
                  $
                  1,310,000
                  
                  $
                  -
                  
                  $
                  -Issuance
                      of common stock, common stock purchasewarrants,
                      and a warrant to purchase units consistingof
                      common stock and common stock purchase warrantson
                      conversion of debt to equity
                  
                  $
                  -
                  
                  $
                  800,000
                  
                  $
                  -Issuance
                      of common stock in cash-less exercise
                  
                  $
                  1,339
                  
                  $
                  -
                  
                  $
                  -
  **See
        accompanying notes to consolidated financial statements**
  F-6
 **SmartVideo
          Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2005, 2004 and 2003**


**Note
      1 - Organization**




SmartVideo
      Technologies, Inc. (“SmartVideo” or “the Company”) was incorporated in Florida
      on August 17, 1984, and on December 19, 2000, changed its corporate domicile
      to
      Delaware. Its wholly-owned subsidiary, OVT, Inc., d/b/a SmartVideo (“OVT”) was
      incorporated in the state of Georgia on August 31, 2000. SmartVideo
      Technologies, Inc. (“SmartVideo” or “the Company”) is a media distribution
      services company. SmartVideo is in the business of obtaining the rights to
      video
      and television content for the mobile handset market and delivering the video
      content to mobile subscribers for a monthly fee or a portion of the associated
      advertising revenue. The Company specializes in the distribution of high-quality
      video and television programming through devices connected to the public
      internet and is currently focused on distribution to consumers with mobile
      display devices, cell phones and PDAs connected to the public Internet via
      cellular data networks and Wi-Fi.





**Note
      2 - Going Concern, Significant Accounting Policies and Risks and
      Uncertainties**




***(A)
      Going Concern***




As
      reflected in the accompanying consolidated financial statements, the Company
      has
      a net loss of $19,740,274 and net cash used in operations of $5,351,783,
      respectively for the year ended December 31, 2005, and a working capital deficit
      of $2,653,622, accumulated deficit of $39,953,756 and a stockholders’ deficit of
      $2,320,615 at December 31, 2005.




The
      ability of the Company to continue as a going concern is dependent on the
      Company’s ability to further implement its business plan, ability to obtain
      additional financing for the development and marketing of its existing and
      future products and services. The Company intends to secure substantial
      additional debt or equity financing in the near future. There are no assurances
      that the Company will obtain sufficient additional financing, that such
      financing terms will be satisfactory to the Company and that the Company’s
      operations will be profitable in the foreseeable future. The Company has
      generated only minimal income from operations and has no assurance of any
      significant future revenues. The Company requires substantial additional
      financing. The consolidated financial statements do not include any adjustments
      that might be necessary if the Company is unable to continue as a going concern.





***(B)
      Basis of Presentation***





The
      consolidated financial statements of the Company include the accounts of its
      wholly owned subsidiary, OVT, Inc. All significant transactions and balances
      between the Company and its subsidiaries have been eliminated in
      consolidation.





On
      January 3, 2003, by a written consent of a majority of the shareholders,
      SmartVideo approved an amendment to affect a one-for-three reverse stock split
      with effect to the outstanding common stock, the creation of the 2002 Stock
      Incentive Plan and to change the name of the corporation to SmartVideo
      Technologies, Inc. All references to shares and share amounts, except par value
      per share, have been retroactively adjusted to reflect the stock split. This
      reverse split did not affect the issued and outstanding Preferred
      Shares.





***(C)
      Use of Estimates***





In
      preparing financial statements, management is required to make estimates and
      assumptions that affect the reported amounts of assets and liabilities,
      disclosure of contingent assets and liabilities at the date of the financial
      statements, and revenues and expenses during the periods presented. Actual
      results may differ from these estimates.





F-7
 
  **SmartVideo
          Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2005, 2004 and 2003**


Significant
      estimates during 2005, 2004 and 2003 include depreciable lives on property
      and
      equipment, the valuation of stock options/warrants granted for services, the
      value of warrants issued in connection with debt and equity related financings,
      valuation and related amortization of intangible broadcast rights pursuant
      to
      Statement of Financial Accounting Standards (“SFAS”) No. 63 and the valuation
      allowance for deferred tax assets since the Company had continuing operating
      losses.





***(D)
      Principles of Consolidation***




The
      Company consolidates its wholly owned subsidiary. All significant intercompany
      accounts and transactions have been eliminated in consolidation.





***(E)
      Cash and Cash Equivalents***





For
      the
      purpose of the cash flow statements, the Company considers all highly liquid
      investments with original maturities of three months or less at the time of
      purchase to be cash equivalents.




The
      Company minimizes its credit risk associated with cash by periodically
      evaluating the credit quality of its primary financial institution. The balance
      at times may exceed federally insured limits. At December 31, 2005 and 2004,
      the
      balance exceeded the federally insured limit by $5,693,000 and $288,000
      respectively. Additionally, at December 31, 2005, the Company had $15,000
      maintained under a compensating balance agreement. The $15,000 is retained
      due
      to potential credit card chargebacks that are unforeseen.





***(F)
      Accounts Receivable***





Substantially
      all of the Company’s accounts receivable are due from end-users. Collateral is
      not required. Credit losses are provided for in the consolidated financial
      statements. The Company has a limited history in evaluating such credit losses.





***(G)
      Allowance for Doubtful Accounts***





Management
      estimates the amount of required allowances for potential non-collectibility
      of
      accounts receivable based upon past collection experience and consideration
      of
      other relevant factors. However, past experience may not be indicative of future
      collections and therefore additional charges could be incurred in the future
      to
      reflect differences between estimated and actual collections. In January 2005,
      the Company launched its direct-to-the-consumer mobile video service. While
      the
      Company uses many of the features developed for the core technology in
      delivering this new service, its focus on a direct-to-the-consumer model
      represents a significant change in direction. As a result of this change in
      business focus, the Company has fully reserved against all of its accounts
      receivable as of December 31, 2005. The allowance for doubtful accounts at
      December 31, 2005 and 2004 was $77,937 and $44,319 respectively.





***(H)
      Equipment***





Equipment
      is stated at cost, less accumulated depreciation. Expenditures for maintenance
      and repairs are charged to expense as incurred. Equipment consists primarily
      of
      computer equipment. Depreciation is computed using the straight-line method
      over
      the estimated useful lives of the assets, which is generally three years.





***(I)
      Revenue Recognition***





The
      Company follows the guidance of the Securities and Exchange Commission’s Staff
      Accounting Bulletin No. 104 for revenue recognition.  In general, the
      Company records revenue when persuasive evidence of an arrangement exists,
      services have been rendered or product delivery has occurred, the sales price
      to
      the customer is fixed or determinable, and collectability is reasonably
      assured.  The following policies reflect specific criteria for the various
      revenues streams of the Company:




F-8
 
  **SmartVideo
          Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2005, 2004 and 2003**


**(1)**
            **Core
                Business**




The
      Company provides services to our business-to-business customers under
      volume-based usage arrangements of our digital media and multimedia broadcast
      products and services. Under certain arrangements, the customers are subject
      to
      a base monthly fee or minimum monthly usage requirement in order to maintain
      a
      customer’s preferential negotiated rates. From time-to-time, the Company may
      also lease hardware to its customers enabling them to facilitate a live
      broadcast. In certain situations, the Company may sell hardware to its resellers
      under the specific terms of the agreements with them.




Revenue
      is also recognized as earned upon the delivery of services to the Company’s
      subscription-based customers. This is typically when a digital media or
      multimedia broadcast is viewed. Many of the Company’s subscription-based
      customers access its programming through the purchase of a monthly, semi-annual,
      or annual subscription fee for SmartVideo’s mobile entertainment
      services.




**(2)**
            **Related
                Party**




The
      Company provides business-to-business services to a former related party. (See
      Note 10)





***(J)
      Product Concentration***





The
      Company derives a substantial portion of its revenues from two products and
      related services, business-to-business and direct-to-the-consumer mobile video
      service and is attempting to develop a broad and diverse subscriber base. During
      2005, business-to-business and direct-to-consumer revenue accounts for 42%
      and
      58% respectively. During 2004 and 2003, business-to-business revenue accounted
      for 100% of the Company’s sales.





The
      Company could experience declines in demand for products, whether as a result
      of
      general economic conditions, new competitive product releases, price
      competition, lack of market acceptance, technological change or other
      factors.





***(K)
      Customer Concentration***





For
      the
      year ended December 31, 2005, the Company derived a substantial portion of
      its
      revenues from two customers accounting for 28% of its revenues. For the year
      ended December 31, 2004, the Company derived a substantial portion of its
      revenues from five customers accounting for 75% of its revenues. For the year
      ended December 31, 2003, the Company derived a substantial portion of its
      revenues from three customers accounting for 79% of its revenue.





***(L)
      Long-Lived Assets***





The
      Company accounts for long-lived assets in accordance with the provisions of
      SFAS
      No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS
      No. 144 requires that long-lived assets be reviewed for impairment whenever
      events or changes in circumstances indicate that the carrying amount of an
      asset
      may not be recoverable. Recoverability of assets to be held and used is measured
      by a comparison of the carrying amount of an asset to future undiscounted net
      cash flows expected to be generated by the asset. If such assets are considered
      to be impaired, the impairment to be recognized is measured by the amount by
      which the carrying amount of the assets exceeds the fair value of the assets.
      Assets to be disposed of are reported at the lower of the carrying amount or
      fair value less costs to sell the asset. There were no impairment charges taken
      during the years ended December 31, 2005, 2004 and 2003,
      respectively.





F-9
 
  **SmartVideo
          Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2005, 2004 and 2003**


***(M)
      Income Taxes***




The
      Company accounts for income taxes under the Financial Accounting Standards
      (“FAS”) No. 109 “Accounting for Income Taxes” (“Statement 109”). Under Statement
      109, deferred tax assets and liabilities are recognized for the future tax
      consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective tax
      bases. Deferred tax assets and liabilities are measured using enacted tax rates
      expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. Under Statement 109, the
      effect on deferred tax assets and liabilities of a change in tax rates is
      recognized in income in the period, which includes the enactment date.




***(N)
      Fair Value of Financial Instruments***




SFAS
      No.
      107, “Disclosures about Fair Value of Financial Instruments,” requires
      disclosures of information about the fair value of certain financial instruments
      for which it is practicable to estimate the value. For purpose of this
      disclosure, the fair value of a financial instrument is the amount at which
      the
      instrument could be exchanged in a current transaction between willing parties,
      other than in a forced sale or liquidation.





The
      carrying amounts of the Company’s short-term financial instruments, including
      accounts receivable, broadcast rights (asset), accounts payable, broadcast
      rights payable, and loans payable/due to - related party approximate fair value
      due to the relatively short period to maturity for these
      instruments.





***(O)
      Earnings per Share***




In
      accordance with SFAS No. 128, “Earnings per Share” (“EPS”), basic earnings per
      share is computed by dividing the net income (loss) less preferred dividends
      for
      the period by the weighted average number of shares outstanding. Diluted
      earnings per share is computed by dividing net income (loss) less preferred
      dividends by the weighted average number of shares outstanding including the
      effect of share equivalents. Common share equivalents consist of shares issuable
      upon the exercise of certain common stock purchase warrants, stock options,
      and
      Convertible Preferred Stock. The Company has excluded these common share
      equivalents from its computation of earnings per share due to their antidilutive
      effect as the Company has reflected a net loss at December 31, 2005, 2004 and
      2003, respectively. Accordingly, the basic and diluted EPS are the same.




The
      following table shows all common stock equivalents outstanding at December
      31,
      2005, 2004 and 2003, respectively.





**December
                  31****2005**
              
              **2004**
              
              **2003**Common
                  Stock Options
              
              
              3,480,000
              
              
              2,445,000
              
              
              -Common
                  Stock Warrants
              
              
              24,640,917
              
              
              4,837,534
              
              
              1,331,666Total
                  Common Stock Options and Warrants
              
              
              28,120,917
              
              
              7,282,534
              
              
              1,331,666





F-10
 
  **SmartVideo
          Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2005, 2004 and 2003**





***(P)
      Stock Based Compensation***





The
      Company accounts for stock options issued to employees in accordance with the
      provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting
      for Stock Issued to Employees,” and related interpretations.  As such,
      compensation cost is measured on the date of grant as the excess of the current
      market price of the underlying stock over the exercise price.  Such
      compensation amounts, if any, are amortized over the respective vesting periods
      of the option grant.  The Company adopted the disclosure provisions of SFAS
      No. 123, “Accounting for Stock-Based Compensation” and SFAS 148, “Accounting for
      Stock-Based Compensation -Transition and Disclosure”, which permits entities to
      provide pro forma net income (loss) and pro forma earnings (loss) per share
      disclosures for employee stock option grants as if the fair-valued based method
      defined in SFAS No. 123 had been applied.  The Company accounts for stock
      options and stock issued to non-employees for goods or services in accordance
      with the fair value method of SFAS No. 123.





***(Q)
      Broadcast Rights***




The
      Company acquires rights to programming so that it may deliver this programming
      to its subscribers. The costs incurred in acquiring programs are capitalized
      and
      amortized over the license period or projected useful life of the programming.
      The broadcast rights are accounted for according to SFAS No. 63 “Financial
      Reporting by Broadcasters”. Program rights and the related liabilities are
      recorded at the gross amount of the liabilities when the license period has
      begun, the cost of the program is determinable, and the program is accepted
      and
      available for airing.





***(R)
      Derivative Liabilities***





In
      order
      to determine whether the Company had a derivative liability the Company reviewed
      Emerging Issues Task Force (“EITF’) - EITF 05-02, “The Meaning of Convertible
      Debt Instrument in Issue No. 00-19”.





Pursuant
      to the terms of the Convertible Preferred Stock and convertible debt and the
      associated detachable warrants issued, management determined that the warrants
      do qualify as liability instruments under the provisions of EITF No. 00-19,
      Accounting for Derivative Financial Instruments Index to, and Potentially
      Settled in, a Company’s Own Stock, and, therefore, should be accounted for as
      derivatives under the provisions of SFAS No. 133. As such, effective with the
      issuance of the Convertible Preferred Stock and convertible debt, the fair
      value
      of all warrants were initially accounted for as derivative liabilities under
      the
      provisions of SFAS No. 133. However, in connection with the Company’s filing of
      a registration statement in February 2006 which occurred during the grace period
      allotted, the Company believes that these instruments should be classified
      as
      equity. The Company maintains that the contingency has been satisfactorily
      resolved. Moreover, these instruments existed at December 31, 2005, yet were
      resolved as to their appropriate classification prior to the release of the
      accompanying audit report.




***(S)
      Recent Accounting Pronouncements***




In
      December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
      replaces SFAS No. 123 and supersedes APB Opinion No. 25. Under SFAS No. 123(R),
      companies are required to measure the compensation costs of share-based
      compensation arrangements based on the grant-date fair value and recognize
      the
      costs in the financial statements over the period during which employees are
      required to provide services. Share-based compensation arrangements include
      stock options, restricted share plans, performance-based awards, share
      appreciation rights and employee share purchase plans. In March 2005 the SEC
      issued Staff Accounting Bulletin No. 107, or “SAB 107”. SAB 107 expresses views
      of the staff regarding the interaction between SFAS No. 123(R) and certain
      SEC
      rules and regulations and provides the staff's views regarding the valuation
      of
      share-based payment arrangements for public companies. SFAS No. 123(R) permits
      public companies to adopt its requirements using one of two methods. On
      April 14, 2005, the U.S. Securities and Exchange Commission adopted a new
      rule amending the compliance dates for SFAS 123R. Companies may elect to apply
      this statement either prospectively, or on a modified version of retrospective
      application under which financial statements for prior periods are adjusted
      on a
      basis consistent with the pro forma disclosures required for those periods
      under
      SFAS No. 123. The Company is currently evaluating which transitional provision
      and fair value methodology it will follow. The Company expects that any expense
      associated with the adoption of the provisions of SFAS No. 123R will have a
      material negative impact on our results of operations. We are evaluating the
      requirements of SFAS No. 123(R) and SAB 107 to assess what impact its adoption
      will have on our financial position, results of operations and cash flows.
      Effective January 1, 2006, we have adopted SFAS No. 123(R).





F-11
 
  **SmartVideo
          Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2005, 2004 and 2003**


In
      May
      2005, the Financial Accounting Standard Board ("FASB") issued Statement No.
      154,
      "Accounting Changes and Error Corrections, a replacement of APB Opinion No.
      20,
      Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim
      Financial Statements" (SFAS 154). SFAS 154 changes the requirements for the
      accounting for, and reporting of, a change in accounting principle. Previously,
      most voluntary changes in accounting principles were required to be recognized
      by way of a cumulative effect adjustment within net income during the period
      of
      the change. SFAS 154 requires retrospective application to prior periods'
      financial statements, unless it is impracticable to determine either the
      period-specific effects or the cumulative effect of the change. SFAS 154 is
      effective for accounting changes made in fiscal years beginning after December
      15, 2005; however, the Statement does not change the transition provisions
      of
      any existing accounting pronouncements. We do not believe adoption of SFAS
      154
      will have a material effect on our financial position, results of operations
      or
      cash flows.





In
      June
      2005, the Emerging Issues Task Force ("EITF") issued EITF 05-2, “The Meaning of
      Conventional Convertible Debt Instrument in Issue No. 00-19". EITF 05-2 retained
      the definition of a conventional convertible debt instrument as set forth in
      EITF 00-19, and which is used in determining certain exemptions to the
      accounting treatments prescribed under SFAS 133, "Accounting for Derivative
      Instruments and Hedging Activities". EITF 05-2 also clarified that certain
      contingencies related to the exercise of a conversion option would not be
      outside the definition of "conventional" and determined that Convertible
      Preferred Stock with a mandatory redemption date would also qualify for similar
      exemptions if the economic characteristics of the preferred stock are more
      akin
      to debt than equity. EITF 05-2 is effective for new instruments entered into
      and
      instruments modified in periods beginning after June 29, 2005. We adopted the
      provisions of EITF 05-2 on July 1, 2005, which had a material effect on our
      financial position, results of operations and cash flows.





In
      July
      2005, the FASB issued FASB Staff Position ("FSP") 150-5, "Accounting Under
      SFAS
      150 for Freestanding Warrants and Other Similar Instruments on Redeemable
      Shares". FSP 150-5 clarifies that warrants on shares that are redeemable or
      puttable immediately upon exercise and warrants on shares that are redeemable
      or
      puttable in the future qualify as liabilities under SFAS 150, regardless of
      the
      redemption feature or redemption price. The FSP is effective for the first
      reporting period beginning after June 30, 2005, with resulting changes to prior
      period statements reported as the cumulative effect of an accounting change
      in
      accordance with the transition provisions of SFAS 150. We adopted the provisions
      of FSP 150-5 on July 1, 2005, which did not have a material effect on our
      financial position, results of operations and cash flows.





In
      February 2006 the FASB issued SFAS 155, "Accounting for Certain Hybrid Financial
      Instruments" which amends SFAS No. 133 to narrow the scope exception for
      interest-only and principal-only strips on debt instruments to include only
      such
      strips representing rights to receive a specified portion of the contractual
      interest or principal cash flows. SFAS No. 155 also amends SFAS No. 140 to
      allow
      qualifying special-purpose entities to hold a passive derivative financial
      instrument pertaining to beneficial interests that it is a derivative financial
      instrument. We will adopt SFAS No. 155 on January 1, 2007 and do not expect
      it
      to have a material effect on financial position, results of operations, and
      cash
      flows.





F-12
 
  **SmartVideo
          Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2005, 2004 and 2003**


***(T)
      Reclassifications***





Certain
      amounts in the year 2004 consolidated financial statements have been
      reclassified to conform to the year 2005 consolidated presentation. Such
      reclassifications had no effect on the financial position, results operations
      or
      cash flows.





**Note
      3 - Accounts Receivable**


**December
                  31****2005**
              
              **2004**Accounts
                  Receivable
              
              $
              77,937
              
              $
              45,319Allowance
                  for doubtful accounts
              
              
              (77,937
              )
              
              (44,319
              )Accounts
                  receivable - net of allowance for doubtful accounts
              
              $
              -
              
              $
              1,000





Bad
      debt
      expense for the years ending 2005, 2004 and 2003 was $77,937, $68,119 and $0
      respectively. These amounts are included as a component of Selling, General
      and
      Administrative Expenses.





**Note
      4 - Broadcast Rights**





**(A)**
            **Asset**





During
      2005, the Company acquired intangible broadcast rights of $7,705,076 pursuant
      to
      various long term contracts with content providers. The Company recorded the
      fair value of these assets at gross cost with a corresponding credit to
      broadcast rights payable. The fair value of these acquired rights is based
      on
      the entire amount due under the terms of the initial agreement. During 2005,
      the
      Company entered into litigation surrounding one of its content providers. (See
      Note 8(A)). As a result, the Company reduced the gross value of its broadcast
      rights assets by $900,000, the fair value of the previously capitalized amount
      and decreased the related gross liability by $900,000.


**For
                  The Years Ended****December
                  31,****Broadcast
                  Rights**
              
              **Total**
              
              **2006**
              
              **2007**
              
              **2008**
              
              **2009**
              
              **2010**Broadcast
                  rights -- current
              
              $
              2,880,999
              
              $
              2,156,615
              
              $
              558,615
              
              $
              132,615
              
              $
              33,154
              
              $
              -Broadcast
                  rights -- long-term
              
              
              923,307
              
              
              724,384
              
              
              165,769
              
              
              33,154
              
              
              -
              
              
              -Total
              
              $
              3,804,306
              
              $
              2,880,999
              
              $
              724,384
              
              $
              165,769
              
              $
              33,154
              
              $
              -Amortization
                  of broadcast rights
              
              $
              5,289,524
              
              $
              2,408,525
              
              $
              2,156,615
              
              $
              558,615
              
              $
              132,615
              
              $
              33,154




At
      December 31, 2005, amortization expense of broadcast rights accounted for
      $1,740,552 of the total broadcast rights expense of $2,001,584. The additional
      $261,032 represented expenses paid to content providers due to subscriber usage
      exceeding minimum monthly guarantees or to content providers where no long
      term
      contract commitment exists. There were no similar expenses for the years ending
      December 31, 2004 and 2003 as there was no activity relating to this business
      operation and also since various rollout periods were not effective until
      2005.





At
      December 31, 2005, Broadcast Rights Assets - net of accumulated amortization
      was
      $2,408,525. Broadcast Rights Assets - net of current portion was
      $2,880,999.





F-13
 
  **SmartVideo
          Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2005, 2004 and 2003**


**(B)**
            **Liability**





The
      following represents broadcast rights commitments during the remaining term
      of
      the agreement.


**For
                  The Years Ended****December
                  31,****Contracts
                  payable - broadcast rights**
              
              **Total**
              
              **2006**
              
              **2007**
              
              **2008**
              
              **2009**
              
              **2010**Contracts
                  payable-broadcast rights -- current
              
              $
              3,386,575
              
              $
              2,418,725
              
              $
              787,261
              
              $
              144,124
              
              $
              36,465
              
              $
              -Contracts
                  payable-broadcast rights -- long-term
              
              
              1,184,905
              
              
              967,851
              
              
              180,589
              
              
              36,465
              
              
              -
              
              
              -Total
              
              $
              4,571,480
              
              $
              3,386,576
              
              $
              967,850
              
              $
              180,589
              
              $
              36,465
              
              $
              -





During
      2005, the Company paid $520,000 to content providers pursuant to the terms
      of
      the related contracts.





Contracts
      payable - short term at December 31, 2005 were, $2,283,500. Contracts payable
      -
      long-term at December 31, 2005 were $3,386,576.





**Note
      5 - Property and Equipment**





Property
      and equipment consist of the following:


**December
                  31,**
              
              **December
                  31,****2005**
              
              **2004**Computer
                  equipment
              
              $
              987,564
              
              $
              223,085Proprietary
                  software development
              
              
              79,500
              
              
              79,5001,067,064
              
              
              302,585Less
                  accumulated depreciation
              
              
              (350,641
              )
              
              (72,313
              )Property
                  and equipment, net
              
              $
              716,423
              
              $
              230,272





Depreciation
      expense was $278,328, $47,649, and $17,501 for the years ended December 31,
      2005, 2004 and 2003, respectively.





**Note
      6 - Convertible Promissory Notes**





On
      September 26, 2005 and October 19, 2005, the Company borrowed an aggregate
      $600,000 from two different related parties (4 separate notes) pursuant to
      the
      terms of a Convertible Promissory Note. Under the terms of the agreement, the
      convertible notes bore interest at 8%, were unsecured and due in one-year.
      These
      Convertible Promissory Notes were each issued with five-year warrants to
      purchase an aggregate 200,000 shares of the Company’s common stock at an
      exercise price of $2.00 per share. The warrant holders were also granted certain
      piggy-back registration rights with respect to the shares of common stock
      underlying the Convertible Promissory Notes and the warrants. Additionally,
      if
      the Company was able to successfully complete a financing of at least $2,500,000
      from the sale of its equity securities prior to the maturity date of the
      Convertible Promissory Notes, the principal amount of each note would
      automatically convert into shares or units of the equity securities sold in
      such
      financing at a per share sale price or unit price of the financing on a one
      for
      one ratio. The financing was completed in November 2005, and all related debt
      principal was converted into Series A-1, Convertible Preferred Stock. This
      $600,000 was converted at $0.75 into 800,000 shares of Series A-1, Convertible
      Preferred Stock. At December 31, 2005, outstanding related party accrued
      interest was $5,422. (See Notes 9(A) (3) and 10)).





F-14
 
  **SmartVideo
          Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2005, 2004 and 2003**


On
      November 10, 2005, the Company borrowed $150,000 from a related party pursuant
      to the terms of a Convertible Promissory Note. Under the terms of the agreement,
      the convertible note bore interest at 15%, was unsecured and due in one-year.
      This Convertible Promissory Note was issued with a five-year warrant to purchase
      50,000 shares of the Company’s common stock at an exercise price of $2.00 per
      share. The warrant holder was also granted certain piggy-back registration
      rights with respect to the shares of common stock underlying the Convertible
      Promissory Note and the warrants. Additionally, if the Company was able to
      successfully complete a financing of at least $2,500,000 from the sale of its
      equity securities prior to the maturity date of the Convertible Promissory
      Note,
      the principal amount of the note would automatically convert into shares or
      units of the equity securities sold in such financing at a per share sale price
      or unit price of the financing on a one for one ratio. The financing was
      completed in December 2005, and all related debt principal was converted into
      Series A-1, Convertible Preferred Stock. This $150,000 was converted at $0.75
      into 200,000 shares of Series A-1, Convertible Preferred Stock. At December
      31,
      2005, outstanding related party accrued interest was $688. (See Notes 9(A)
      (3)
      and 10).





On
      November 10, 2005, the Company borrowed an aggregate $560,000 from unrelated
      third parties pursuant to the terms of a Convertible Promissory Note. Under
      the
      terms of the agreement, the convertible notes bore interest at 15%, were
      unsecured and due in one-year. These Convertible Promissory Notes were issued
      with a five-year warrant to purchase an aggregate 186,667 shares of the
      Company’s common stock at an exercise price of $2.00 per share. The warrant
      holders were also granted certain piggy-back registration rights with respect
      to
      the shares of common stock underlying the Convertible Promissory Notes and
      the
      warrants. Additionally, if the Company was able to successfully complete a
      financing of at least $2,500,000 from the sale of its equity securities prior
      to
      the maturity date of the Convertible Promissory Notes, the principal amount
      of
      each note would automatically convert into shares or units of the equity
      securities sold in such financing at a per share sale price or unit price of
      the
      financing on a one for one ratio. The financing was completed in December 2005,
      and all related debt principal was converted into Series A-1, Convertible
      Preferred Stock. This $560,000 was converted at $0.75 into 746,667 shares of
      Series A-1, Convertible Preferred Stock. At December 31, 2005, outstanding
      related accrued interest was $2,433. (See Note 9 (A) (3)).





In
      connection with the above convertible debt issuances, the convertible debt
      and
      freestanding warrants issued were classified as conventional convertible debt
      pursuant to EITF 00-19. EITF 00-19 does not
      apply if the hybrid contract is a conventional convertible debt instrument
      in
      which the holder may only realize the value of the conversion option by
      exercising the option and receiving the entire proceeds in a fixed number of
      shares or the equivalent amount of cash (at the discretion of the issuer). 
Since the time that Issue No. 00-19 was issued, complex structures have arisen
      such that the term "conventional convertible debt instrument" is no longer
      adequately defined.





In
      Issue
      No. 05-2, "The Meaning of 'Conventional Convertible Debt Instrument' in EITF
      00-19," the EITF concluded that an instrument with the following characteristics
      should be considered "conventional" for purposes of applying Issue No. 00-19:




·
            The
                holder has an option to convert the instrument into a fixed number
                of
                shares (or a corresponding amount of cash at the issuer’s discretion); and





·
            The
                holder's ability to exercise the option is based on either the passage
                of
                time or a contingent event.




F-15
 
  **SmartVideo
          Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2005, 2004 and 2003**


As
      a
      result of applying the definitions of EITF 00-19 and EITF 05-2, the Company
      has
      accounted for the convertible debt financings pursuant to the provisions of
      EITF
      98-5 and 00-27. The Company computed a debt discount on the aggregate $1,310,000
      in convertible debt financing based on the provisions of APB No. 14 totaling
      $713,134. The allocation was based on the allocable proceeds of the debt
      financings between the fair value of the beneficial conversion option of the
      related convertible debt instruments and detachable freestanding warrants.
      The
      Company began amortizing the debt discount to interest expense over the one-year
      life of the related convertible debt. Upon full conversion of the convertible
      debt in November 2005, all remaining unamortized debt discount was charged
      to
      the statement of operations for the year ended December 31, 2005. The Company
      recorded the effect of the conversion by debiting interest expense and crediting
      additional paid in capital.





The
      following is a summary of the activity for convertible debt issuances the year
      ended December 31, 2005.





Convertible
                Notes Payable -Related Party
            
            $
            750,000Convertible
                Notes Payable
            
            
            560,000Total
                Convertible Notes Payable
            
            $
            1,310,000





There
      were no related issuances during the year ended December 31, 2004.





Pursuant
      to the terms of the convertible debt, the entire $1,310,000 debt financing
      was
      automatically converted into the Company’s Convertible Preferred Stock offering
      in November 2005 at $0.75 per share for an aggregate 1,746,667 shares. The
      conversions were triggered due to an amount greater than $2,500,000 being raised
      in a subsequent equity financing. The conversion to Convertible Preferred Stock
      is discussed further in Note 9(A) (3).





At
      December 31, 2005, there are no outstanding convertible debt instruments. The
      following is a summary of total accrued interest payable that remained
      unconverted from these convertible debt instruments at December 31,
      2005:




Convertible
                Notes Payable -Related Party
            
            $
            6,110Convertible
                Notes Payable
            
            
            2,433Total
                Accrued Interest Payable
            
            $
            8,543





**Note
      7 - Promissory Notes**





In
      February 2004, a holder of the Company’s 10% Convertible Promissory Note
      exercised his conversion rights at a conversion price of $1.00 per share of
      common stock. We had originally received gross proceeds of $100,000 upon the
      issuance of this 10% Convertible Promissory Note. A total of 109,830 restricted
      shares of common stock were issued under this conversion including accrued
      interest of $9,830 through the date of conversion. These shares of common stock
      were issued as restricted shares.




In
      March
      2004, a holder of the Company’s 10% Convertible Promissory Note exercised his
      conversion rights at a conversion price of $0.75 per share of common stock.
      The
      Company had originally received gross proceeds of $100,000 upon the issuance
      of
      this 10% Convertible Promissory Note. A total of 147,184 restricted shares
      of
      common stock were issued under this conversion including accrued interest of
      $10,388 through the date of conversion. These shares of common stock were issued
      as restricted shares.




In
      April
      2004, a holder of the Company’s 10% Convertible Promissory Note exercised his
      conversion rights at a conversion price of $0.75 per share of common stock.
      The
      Company had originally received gross proceeds of $30,000 upon the issuance
      of
      this 10% Convertible Promissory Note. A total of 45,545 restricted shares of
      common stock were issued under this conversion including accrued interest of
      $4,159 through the date of conversion. These shares of common stock were issued
      as restricted shares.




F-16


Concurrent
      with the merger between Armagh and OVT, the Company agreed to assume a $50,000
      loan payable to a third-party. The loan bears interest at 5% and is payable
      on
      demand. The accrued interest on the loan payable was approximately $9,922 as
      of
      December 31, 2005.




The
      Company had a $325,000 note payable to an entity owned by the spouse of a former
      shareholder, bearing interest at 8% with principal and interest payments due
      as
      follows:





·
            $75,000
                within 30 days of the funding of the Company;
                and




·
            Monthly
                principal payments of $50,000 thereafter plus accrued interest beginning
                30 days after the initial payment of
                $75,000.





The
      principal due under the terms of this note payable, including accrued interest,
      was paid in full on December 31, 2004. However, we have received notice of
      additional late charges in the amount of $53,311 associated with this note
      payable that may be due but are in dispute as December 31, 2005. The entire
      $53,311 is accrued at December 31, 2005.




The
      Company has a $150,000 note payable to a former shareholder of its subsidiary
      in
      connection with a stock repurchase, bearing interest at 5.18%. The note was
      secured by 2,500,000 shares of the subsidiary’s common stock. The principal due
      under the terms of this note payable, including accrued interest, was paid
      in
      full on December 31, 2004.





**Note
      8 - Commitments and Contingencies**





From
      time-to-time, the Company is a party to claims and legal proceedings arising
      in
      the ordinary course of business. The Company’s management evaluates the exposure
      to these claims and proceedings individually and in the aggregate and allocates
      additional monies for potential losses on such litigation if it is possible
      to
      estimate the amount of loss and determine if the loss is probable.





**(A)
      Legal Settlement and Related Loss Contingency Accruals**





On
      March
      31, 2005, an unrelated third-party filed with the American Arbitration
      Association in Atlanta, Georgia, certain claims against the Company and its
      wholly-owned subsidiary, OVT, Inc. The arbitration case number is 30-181-559-05.
      The Statement of Claim filed by the claimants against the Company and OVT,
      Inc.
      asserts causes of action for breach of contract, breach of fiduciary duty,
      unjust enrichment, violation of Pennsylvania’s Commissioned Sales Representative
      Act, accounting and declaratory judgment. The claims are based upon a
      Representation Agreement, dated February 6, 2003, between KC Ventures Group
      and
      OVT, Inc. and the Advisory Agreement dated February 19, 2003, between OVT,
      Inc.
      and KC Ventures. One or both claimants contend that they have earned or will
      earn compensation under the Representation Agreement in excess of $10,000,000
      for providing customers and content to the Company and OVT, Inc. Further, one
      or
      both claimants also contend that they have earned fees under the Advisory
      Agreement in excess of $1,000,000 and certain stock options as a result of
      capital raised for the Company.





On
      January 30, 2006, a settlement was reached whereby this former consultant and
      their attorney’s received an aggregate 1,000,000 registered shares of Series
      A-1, Convertible Preferred Stock in full settlement of related claims for
      compensation of past services. The claim existed at December 31, 2005, yet
      was
      resolved prior to the release of the accompanying audit report. The Company
      also
      believes that the provisions of SFAS No. 5 as it pertains to contingencies
      is
      relevant literature for purposes of accruing a contingent loss.





F-17
 
  **SmartVideo
          Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2005, 2004 and 2003**


At
      December 31, 2005, based on the settlement date of January 30, 2006, the Company
      accrued a settlement liability and related settlement expense of $4,750,000
      based on the quoted closing trading price of $4.75 per share for the underlying
      common shares of the Series A-1, Convertible Preferred Stock in an assumed
      conversion. (See Note 12)





On
      January 19, 2006, the Company received a letter on behalf of Mantra Films,
      Inc.
      demanding that the Company pay cash damages of $791,244 as a result of the
      Company’s breach of its guarantee obligation under the terms of an agreement
      between Cell Phone Entertainment, LLC, Mantra Films, Inc. and the Company (as
      Guarantor) dated September 30, 2004. Mantra Films, Inc. alleges that Cell Phone
      Entertainment, LLC and the Company have failed to make certain guaranteed
      minimum license payments due under the agreement. As a result of the alleged
      failure to make such minimum payments, Mantra Films, Inc. has terminated the
      agreement. The $791,244 amount demanded represents the entire contract amount,
      including both past due payments and future guaranteed license fees, totaling
      $900,000, which amount has been reduced by payments made and certain prepaid
      insurance premiums in the amount of $108,756. We believe that we have
      meritorious defenses to any claims for payment under the agreement and we intend
      to vigorously defend against any such claims. There can be no assurances at
      this
      time that we will be successful in defending Mantra Film, Inc.’s damage claim.
      The case is expected to be settled in 2006. (See Note 12)





As
      a
      result of the above two loss contingencies, the Company has accrued an aggregate
      $5,541,244 for settlement liability and related settlement expense for claims
      existing at December 31, 2005.





**(B)
      Other Litigation**




On
      or
      about April 6, 2004, Rene Hamouth filed a Writ of Summons in the Supreme Court
      of British Columbia (Case No. SO41955) against the Company, the Chief Executive
      Officer and sole director, Richard E. Bennett, Jr. and the Company’s securities
      counsel, Edwards & Angell, LLP, seeking an unspecified amount of damages and
      costs for alleged libel of Mr. Hamouth resulting from two letters to his
      stockbroker, First Associates Investments, Inc. The Company and the other
      defendants have made an appearance in the court through respective legal
      counsel. On June 29, 2004, Mr. Hamouth filed an Amended Statement of Claim
      with
      the court. On November 19, 2004, the Court of Appeal for British Columbia
      granted Edwards & Angell, LLP the right to appeal a chambers judge’s
      decision that the alleged libelous correspondence in question is covered by
      absolute privilege and granted a stay of the proceeding pending the outcome
      of
      the appeal. The appeal was heard in February 2005. On March 30, 2005, the court
      granted the appeal and dismissed the claim against Edwards & Angell, LLP.
      Since the court’s entry of judgment in the appeal, Mr. Hamouth has taken no
      further steps in his claims against the Company or Mr. Bennett. The Company
      intends to vigorously defend any claims made by Mr. Hamouth should further
      action be taken by him in this dispute. At December 31, 2005, there are no
      related accrued contingency losses.




On
      or
      about April 22, 2004, the Company filed a complaint in the United States
      District Court, North District of Georgia (Case No. 1:04-CV-1123) against Rene
      Hamouth, seeking the recovery of all profits realized by Mr. Hamouth resulting
      from his alleged violations of Section 16(b) of the Securities Exchange Act
      of
      1934 relating to his purchases and sales of our common stock since approximately
      January 1, 2003. The Company is seeking damages in the amount of at least
      $151,428, interest on the amount of profits recovered and all other general
      and
      equitable relief to which the Company may be entitled. Since filing the
      complaint and serving Mr. Hamouth, Mr. Hamouth has filed an answer. The court
      has entered a scheduling order, approving the Joint Preliminary Planning Report
      and Discovery Plan. On March 16, 2005, the Company received notice that Mr.
      Hamouth’s attorney in this matter has withdrawn from the case. On April 15,
      2005, the Company filed a motion for summary judgment in this matter. At
      December 31, 2005, there are no related accrued contingency losses.





F-18
 
  **SmartVideo
          Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2005, 2004 and 2003**


On
      or
      about June 30, 2004, Rene Hamouth filed a stockholder derivative action on
      behalf of the Company, as a nominal defendant, against Richard E. Bennett,
      Jr.,
      Robert J. Walters and William R. Dunavant in the United States District Court
      for the Northern District of Georgia, Atlanta Division, Civil Action (File
      No.
      1:04-CV-1921-TWT). In his complaint, Mr. Hamouth alleged that Messrs. Bennett,
      Walters and Dunavant failed to forfeit three million shares of the Company’s
      Series A Convertible Preferred Stock in breach of a Stock Exchange Agreement
      dated November 9, 2002, among the Company and Messrs. Bennett, Walters and
      Dunavant. Mr. Hamouth alleged that the Preferred Stock was required to be
      forfeited if the Company did not have pre-tax earnings of at least $220,000
      for
      the fiscal year ended September 30, 2003. On January 21, 2005, Mr. Hamouth
      filed
      his Consent Motion to Dismiss without Prejudice. On February 8, 2005, the Court
      granted Mr. Hamouth’s Consent Motion to Dismiss without Prejudice and dismissed
      the case without prejudice. At December 31, 2005, there are no related accrued
      contingency losses.





On
      July
      5, 2004, the Company entered into a distribution agreement with Open Systems
      Solution, Ltd. certain issues arose regarding the terms of the agreement and
      the
      parties have mutually agreed to terminate the contract. The parties are
      currently engaged in the process of ending the relationship pursuant to the
      terms and conditions of a settlement agreement which is anticipated to provide
      for a release of all actual or potential claims against the Company, its
      officers and its directors. At December 31, 2005, there are no related accrued
      contingency losses.




On
      July
      8, 2004, Todd Mann, Sandy Goldman, Stefanie Paulos, David Gregory, Robert
      Jetmundsen, Bob Corn, and Jim Douglass filed suit against the Company, its
      wholly-owned subsidiary, OVT, Inc., Richard E. Bennett, Jr., Robert J. Walters,
      and Kevin D. McNeil in the Superior Court of Gwinnett County, Georgia, Civil
      Action (File No. 04A-07491-7). The suit sought to enforce certain alleged option
      rights against OVT, Inc. and to convert those option rights to options for
      shares of its common stock. The suit also sought compensatory damages for the
      value of the alleged options. The suit also asserted claims against Messrs.
      Bennett, Walters, and McNeil for alleged tortuously interference with the option
      rights. On November 22, 2004, the plaintiffs dismissed their suit without
      prejudice. At December 31, 2005, there are no related accrued contingency
      losses.




On
      November 15, 2004, the Company, its subsidiary, OVT, Inc., Robert J. Walters,
      Richard E. Bennett, Jr. and William R. Dunavant filed suit against Balboni
      Law
      Group, LLC, Gerardo M. Balboni, II, and Baker Donelson, Bearman, Caldwell &
Berkowtiz, PC, in the State Court of Fulton County, Georgia, Civil Action (File
      No. 04V50744704). The suit alleges breach of contract, negligence and breach
      of
      fiduciary duty relating to the legal services provided by the defendants to
      the
      plaintiffs. The suit alleges that the defendants committed legal malpractice
      and
      breached their fiduciary duties to the plaintiffs in drafting, advising, and
      negotiating legal documents for the plaintiffs, including the Stock Exchange
      Agreement, dated November 19, 2002, among and between Armagh Group, Inc., OVT,
      Inc., Richard E. Bennett, Jr., Robert J. Walters, and William R. Dunavant.
      The
      suit also alleges certain conflicts of interests resulting from the defendants’
representation of others, including the Armagh Group, Inc. and Rene Hamouth.
      In
      the suit, the plaintiffs seek damages in an excess of $6,000,000. Pursuant
      to
      extensions provided by the plaintiffs, an answer to the suit has not yet been
      filed by the defendants. The parties are currently discussing the use of
      alternative dispute resolution procedures to resolve the suit, including
      mediation.




F-19
 
  **SmartVideo
          Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2005, 2004 and 2003**


On
      March
      9, 2005, SmartVideo Europe, Ltd., or SVEL, which is not an affiliate of the
      Company, announced its intention to bring legal action in the form of a
      mediation/arbitration against the Company in regard to its alleged repudiation
      and breach of a distribution agreement between the parties, dated April 2,
      2004,
      which involved certain rights to distribute certain of its products. The dispute
      includes claims of SVEL that the Company had anticipatorily breached its
      agreement with SVEL, thus allegedly inhibiting the development of SVEL’s
      business utilizing its technology on an exclusive basis throughout 25 countries
      throughout the European Union. The Company contends that it had the right to
      terminate the agreement because of breaches by SVEL. The Company believes that
      the claim is wholly without merit and intends to defend the claim vigorously,
      if
      a legal action is ever instituted.




On
      October 25, 2005, Forté filed a Motion for Temporary Restraining Order and
      Application with the Court of Chancery, New Castle County, Delaware (the
“Court”), pursuant to Section 225 of the Delaware General Corporation Laws for a
      hearing to determine and enforce the replacement of the Company’s Board of
      Directors (the “TRO Motion”). In the TRO Motion, Forté requested a hearing to
      determine whether the consent solicitation it engineered and carried out
      successfully removed and replaced the Company’s Board of Directors. On October
      26, 2005, Forté filed a Supplemental Motion for Temporary Restraining Order (the
“Supplemental TRO Motion”). In addition to requesting an expedited hearing to
      determine the validity of its consent solicitation, Forté sought a variety of
      temporary relief.





The
      Court
      held a hearing on the TRO Motion and the Supplemental TRO Motion on October
      31,
      2005. At the hearing, the Court scheduled a November 21, 2005 trial on the
      merits to determine the validity of the consent solicitation. Pending a
      determination on the merits, the Court entered a Status Quo Order on November
      3,
      2005, directing, among other things, that the Company’s Board of Directors be
      left in place and that the Company provide five days notice to Forté prior to
      entering into certain business transactions outside the ordinary course of
      business of the Company.




On
      November 19, 2005, the Court dismissed Forté’s TRO Motion and the Supplemental
      TRO Motion with prejudice. In addition, the Court vacated its Status Quo Order.





On
      December 15, 2005, we received a letter on behalf of Enable Growth Partners,
      L.P. demanding that the Company pay cash damages of $1,757,568 within five
      business days thereafter. Enable Growth Partners, L.P. alleges that it sold
      295,001 shares of the our common stock in the public markets during November
      2005 in reliance on our Registration Statement on Form SB-2 that was declared
      effective on July 1, 2005. We were unable to issue unlegended shares to cover
      Enable Growth Partners, L.P.’s alleged sale of 295,001 shares because such
      registration statement did not contain current information regarding the
      Company. As a result, Enable Growth Partners, L.P. alleges that it was required
      to purchase shares of our common stock in the open market to satisfy its sale
      of
      such securities. We are presently evaluating Enable Growth Partners, L.P.’s
      claim. There can be no assurances at this time that we will be successful in
      defending Enable Growth Partners, L.P.’s damage claim.





Except
      as
      set forth above, the Company believes that there are no material commitments
      or
      litigation matters at the current time. Although the results of such litigation
      matters and claims cannot be predicted with certainty, the Company believes
      that
      the final outcome of such claims and proceedings will not have a material
      adverse impact on its financial position, liquidity, or results of
      operations.





See
      Note12 for additional matters.





F-20
 
  **SmartVideo
          Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2005, 2004 and 2003**


**(C)
      Employment and Consulting Agreement**


**(** **1)
        Employment Agreement**
 
 The
        Company employs its CEO
        on an
        at will basis. There is no committed
        agreement of employment at December 31, 2005. During 2005.
        the
        Company paid this individual $75,000 Effective
        2006, the Board
        of
        Directors approved an increase in compensation to $150,000 per annum.
 
 **(2)
        Consulting Agreement**
 
 Effective
        March 1,
        2005,
        the Company entered into a consulting agreement
        with Forte Capital Partners, LLC. The term of the consulting agreement
        is for a period of six months and provides for a monthly retainer
        of $7,500 plus reimbursement of all reasonable travel and other out-of-pocket
        expenses incurred in performing the consulting services. The
        consulting agreement also provides for a warrant to purchase 150,000 shares
        of
        common stock at an exercise price of $3.50 per share. The warrant
        includes certain cashless exercise provisions and piggyback registration
        rights.
        Either party may terminate the agreement with or without
        reason. If the Company terminates the agreement without cause, the
        Company would be obligated to pay all amounts then owed, as well as liquidated
        damages equal to the monthly salary for the remainder of the term. At
        December 31, 2005, the Company included $30,000 in accounts payable
        relating to the monthly retainer.
 
 See
        Note
        12 for additional matters.


**(D)
      Commitments**




In
      May
      2005, the Company assumed a sublease for approximately 25,000 square feet of
      office space in Duluth, Georgia. This office space currently serves as the
      Company’s corporate headquarters. This sublease calls for monthly rental
      payments of approximately $23,000 and terminates on August 31, 2007. Rent
      expense for the year ended December 31, 2005, 2004 and 2003 was $273,215,
      $122,000 and $71,000, respectively.





The
      following represents minimum rental payments due pursuant to non-cancelable
      operating lease commitments during the remaining term of the operating lease
      agreement.


**For
                  The Years Ended****December
                  31,****Contractual
                  Obligations**
              
              **Total**
              
              **2006**
              
              **2007**Operating
                  Lease Obligations
              
              $
              463,330
              
              $
              277,998
              
              $
              185,332





**Note
      9 - Stockholders’ Deficit**





**Year
      Ended December 31, 2005:**





**(A)**
            **Preferred
                Stock**




**(1)**  **Capital
      Structure**




As
      of
      December 31, 2005 and 2004, the authorized preferred stock of the Company
      consists of 50,000,000 shares of $.001 par value preferred stock of which
      10,666,666 and 0 shares are issued and outstanding, respectively and are
      designated as convertible. Prior to its conversion in March 2004, each share
      of
      preferred stock was entitled to the same voting preferences as the Company’s
      common stock.





In
      March
      2004, the holders of the 12,000,000 shares of Convertible Preferred Stock
      provided notification to us for the conversion of their shares into common
      stock. Under the terms of the Convertible Preferred Stock, the shareholders
      were
      issued a total of 12,000,000 shares of common stock. These shares of common
      stock were issued as restricted shares exempt from registration.





F-21
 
  **SmartVideo
          Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2005, 2004 and 2003**


On
      August
      9, 2005 our Board of Directors authorized the issuance of 2,500 shares of Series
      B 7% Convertible Preferred Stock. As of the date of this report, no shares
      of
      such stock have been issued. Each share of Series B 7% Convertible Preferred
      Stock is convertible into that number of shares of common stock determined
      by
      dividing the Stated Value of the Series B 7% Convertible Preferred Stock, which
      is presently equal to $1,000.





**(2)**
            **Preferences**




Currently,
      the board has not designated any preferences.





**(3)
      Issuance of Convertible Preferred Stock, Series A-1**




In
      November 2005, the Company issued 5,333,333 shares of Convertible Preferred
      Stock, Series A-1. Of the total, 1,746,667 shares were issued in connection
      with
      the conversion of $1,310,000 in convertible debt at $0.75 per share (see Notes
      6
      and 10). The remaining 3,586,666 shares were sold for cash of $2,690,000 or
      $0.75 per share. This represented the first of two Convertible Preferred Stock
      offerings traunches.




In
      December 2005, the Company issued 5,333,333 shares of Convertible Preferred
      Stock, Series A-1. All shares were sold for cash of $4,000,000 or $0.75 per
      share. (See Notes 6 and 10) This represented the second of two Convertible
      Preferred Stock offerings traunches.


In
      connection with the issuance of these aggregate 10,666,666 Series A-1,
      Convertible Preferred Shares, the Company issued 13,333,333 stock purchase
      warrants. For each share of Convertible Preferred Stock purchased, the holder
      is
      entitled to receive freestanding warrants having an exercise price of either
      $1.75 or $2.00. The quantity of warrants granted at $1.75 was equivalent to
      the
      investment multiplied by 133 1/3 %; the quantity of warrants granted at $2.00
      was equivalent to the investment multiplied by 33 1/3 %. All stock purchase
      warrants have an exercise period of five years.




The
      Company followed the provisions of EITF No. 98-5, EITF 00-27 and APB No. 14
      by
      allocating the proceeds raised between the Convertible Preferred Stock and
      freestanding warrants. The allocation is deemed to be analogous to a dividend
      to
      be recognized over the term in which the preferred shareholders can realize
      the
      return. Since the Convertible Preferred Stock is immediately convertible at
      the
      option of the holder, the benefit is realized immediately. The value of the
      dividend was equivalent to $8,000,000 as the allocation exceeded the face amount
      of the gross proceeds raised. The Company charged retained earnings and credited
      additional paid-in capital. Additionally, the Company evaluated the underlying
      common stock for purposes of determining fair value and the related conversion
      price, however, the conversion price of $0.75 used to determine the allocable
      amounts was based on the recent cash offering price of $0.75 for the same
      Convertible Preferred Stock offering as opposed to any value ascribed to the
      common stock.




The
      Company also reviewed this transaction and determined that derivative accounting
      and the related issues of EITF No. 00-19 do not apply.




Management
      used the following weighted average assumptions on the date of issue when
      determining the fair value of the freestanding warrants issued in connection
      with the Series A-1, Convertible Preferred Shares:





Exercise
                price
            $1.75
                or $2.00Expected
                dividend yield
            0%Expected
                volatility
            175.48%
                - 176.68%Risk
                free interest rate
            4.25%Expected
                life of option
            2
                years





F-22
 
  **SmartVideo
          Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2005, 2004 and 2003**


**(B)**
            **Common
                Stock Issuances**




**(1)**
            **Issued
                for Cash**




During
      March 2005, the Company issued 1,761,345 shares of common stock for gross cash
      proceeds of $3,963,000 in connection with a Private Placement requiring a
      purchase price of $2.25 per share. Additionally, the Company paid a cash fee
      of
      $233,125 to a placement agent in connection with the equity raise representing
      a
      direct offering cost. The $233,125 was netted against the gross cash proceeds
      and resulted in the Company raising $3,729,875 in net cash proceeds. All shares
      issued in this Private Placement had piggy back registration rights and the
      related registration statement was declared effective in July 2005.




In
      connection with the issuance of these shares of common stock, the Company issued
      to each investor an aggregate 1,019,675 stock purchase warrants. These warrants
      have an exercise price ranging from $2.25-3.50 and a life of 5 years. There
      is
      no separate valuation for the attached warrants pursuant to fair value
      accounting as they are deemed to be part of the aggregate gross proceeds raised
      for the related 1,761,345 shares of common stock.




See
      Note
      9 (B) (5) for additional common shares issued in connection with conversion
      of
      stock purchase warrants.




**(2)**
            **Compensation
                to Investors**




During
      March 2005, the Company issued an aggregate 50,000 shares of common stock to
      two
      individuals pursuant to the terms of a debt instrument held that required the
      issuance of additional shares based upon certain market conditions. The value
      of
      these shares was $3.95 per share based on the quoted closing trading price
      on
      the date of grant. Total additional consideration charged to the statement
      of
      operations as interest expense was $197,500.




**(3)**
            **Accounts
                Payable**




During
      2005, the Company settled various outstanding vendor payables with unrelated
      third parties by issuing an aggregate 72,882 shares of common stock having
      an
      aggregate fair value of $82,850. Fair value was determined based on the quoted
      closing trading price on the dates of grant. The share prices on the dates
      of
      grant ranged from $0.79 - $3.04 per share and averaged $1.14 per
      share.




**(4)**
            **Consulting
                Services**




In
      July
      2005, the Company issued 750,000 shares of common stock to an unrelated
      third-party as consideration for entering into a business advisory agreement.
      The term of the agreement was for six months. The shares had a fair value of
      $712,500 or $0.95 per share. Fair value was determined based on the quoted
      closing trading price on the date of grant. There were no other services
      provided to the Company as described in the terms of the agreement and there
      are
      no outstanding accrued liabilities to this service provider at December 31,
      2005. All shares had piggy back registration rights and as of the date of the
      accompanying report were awaiting registration.




**(5)**
            **Warrant
                Conversions**




During
      2005, the Company issued 1,866,402 shares of common stock in connection with
      the
      exercise of previously granted stock purchase warrants. Of the total, 527,779
      shares were issued pursuant to the warrant contractual exercise price. These
      exercise prices ranged from $0.75 - $2.50 per share and averaged $1.37 per
      share. Total cash proceeds raised from conversions was $723,335. The remaining
      1,338,623 shares were issued pursuant to a cashless exercise provision as stated
      in the related warrant contracts. The Company recorded related offsetting
      amounts in the statements of changes in stockholders’ deficit for common stock
      and additional paid-in capital at the par value of the stock issued, the total
      was $1,339.




F-23
 
  **SmartVideo
          Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2005, 2004 and 2003**


See
      Note
      9 (B) (1) for issuance of common stock and stock purchase warrants for
      cash.





The
      following is a summary of all common stock issued during 2005:




**ACTIVITY**
            
            **QUANTITY
                OF SHARES**
            
            **VALUATION**Cash
            
            
            1,761,345
            
            $
            3,729,875Compensation
                to Investors
            
            
            50,000
            
            
            197,500Accounts
                Payable Settlements
            
            
            72,882
            
            
            82,850Consulting
                Services
            
            
            750,000
            
            
            712,500Warrant
                Conversions
            
            
            1,866,402
            
            
            723,335Totals
            
            
            4,500,629
            
            $
            5,446,060





**(C)**
            **Common
                Stock Options and Warrants**




**(1)**
            **Services**




On
      March
      1, 2005, the Company entered into two separate consulting agreements with
      unrelated third parties to provide professional services for an aggregate
      $17,500 per month for a period of one-year. Under the terms of these agreements,
      the Company issued an aggregate 1,400,000 stock purchase warrants having a
      fair
      value of $2,624,450. The value of these warrants was based on a computation
      derived from the use of a Black-Scholes option pricing model. Management used
      the following weighted average assumptions at the grant date:





Exercise
                price
            $3.50
                - $6.50Expected
                dividend yield
            0%Expected
                volatility
            151.06%Risk
                free interest rate
            4.25%Expected
                life of option
            4-4.25
                years




In
      June
      2005, both agreements were terminated. At December 31, 2005, there were no
      outstanding accrued liabilities to either service provider. At December 31,
      2005, the Company had charged the statement of operations for the entire
      $2,624,450 to consulting expense with an offsetting credit to additional paid
      in
      capital, additionally, all 1,400,000 warrants remain outstanding.





**(D)**
            **Other
                Grants of Common Stock Options and
                Warrants**





**(1)
      2002 Stock Incentive Plan**




The
      Company adopted the 2002 Stock Incentive Plan in January 2003 to provide stock
      incentives to a key advisor who was instrumental in advising the Company in
      connection with its acquisition of OVT, Inc. This Plan allowed for the issuance
      of up to 1,200,000 shares of common stock. All the shares available to be issued
      under this plan have been issued pursuant to a November 14, 2002 advisory
      agreement between the Company and the outside advisor. No further issuances
      were
      available without an amendment to this plan. The Board of Directors retired
      this
      plan in 2003.




Pursuant
      to a November 14, 2002 advisory agreement between the Company and a former
      outside advisor, the Company issued 1,200,000 shares of its stock in non-cash,
      stock-based compensation for the services of the outside advisor. Under the
      provisions of the agreement, the term was for a 24-month period beginning with
      the acceptance of the agreement. At December 31, 2002, the unamortized portion
      of the non-cash, stock-based compensation related to this agreement was
      $1,316,250. In September 2003, the Company terminated the advisory agreement
      prior to its expiration. Accordingly, the Company accelerated the recognition
      of
      the unamortized portion of non-cash, stock-based compensation related to this
      agreement during 2003.





F-24
 
  **SmartVideo
          Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2005, 2004 and 2003**


**(2)
      2004 Equity Incentive Plan**




The
      Board
      of Directors of the Company adopted the 2004 Stock Incentive Plan (“2004 Plan”)
      effective January 1, 2004, to provide incentives to attract and retain officers,
      directors, and key employees. The 2004 Plan allows for the issuance of up to
      5,000,000 shares of common stock. This Plan was approved by the shareholders
      at
      the annual meeting held on August 31, 2004.





On
      September 1, 2004, the Company granted 50,000 stock options to an officer.
      On
      December 7, 2004, the Company granted an additional 50,000 stock options to
      this
      same officer. No other officer or director of the Company holds any options,
      warrants or other rights allowing such person to acquire additional shares
      of
      the Company’s common stock.





The
      following tables summarize all stock option grants to employees and
      non-employees as of




**Number
                of Options**
            
            **Weighted
                Average Exercise Price**Stock
                OptionsBalance
                at December 31, 2003
            
            
            -
            
            $
            -Granted
            
            
            2,445,000
            
            
            2.20Exercised
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -Balance
                at December 31, 2004
            
            
            2,445,000
            
            $
            2.20Granted
            
            
            1,345,000
            
            
            1.61Exercised
            
            
            -
            
            
            -Forfeited
            
            
            (310,000
            )
            
            1.58Balance
                at December 31, 2005
            
            
            3,480,000
            
            $
            2.03Options
                exercisable at December 31, 2005
            
            
            1,808,437
            
            $
            2.06Weighted
                average fair value of options granted during 2005
            
            
            
            
            $
            1.61




F-25
 
  **SmartVideo
          Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2005, 2004 and 2003**


December
      31, 2005, 2004 and 2003, and changes during these periods are presented
      below.




**Options
                Outstanding**
            
            **Options
                Exercisable****Range
                of Exercise Price**
            
            **Number**
              **Outstanding
                at**
              **December
                31, 2005**
            
            **Weighted
                Average**
              **Remaining**
              **Contractual
                Life**
            
            **Weighted
                Average Exercise Price**
            
            **Number**
              **Exercisable
                at**
              **December
                31, 2005**
            
            **Weighted
                Average Exercise Price**$0.90
            
            
            250,000
            
            
            9.52
                Years
            
            
            $0.90
            
            
            62,500
            
            
            $0.90$1.00
            
            
            860,000
            
            
            8.64
                Years
            
            
            $1.00
            
            
            547,500
            
            
            $1.00$1.50
            
            
            200,000
            
            
            9.42
                Years
            
            
            $1.50
            
            
            200,000
            
            
            $1.50$1.58
            
            
            25,000
            
            
            9.41
                Years
            
            
            $1.58
            
            
            3,125
            
            
            $1.58$1.90
            
            
            500,000
            
            
            9.84
                Years
            
            
            $1.90
            
            
            -
            
            
            $1.90$2.25
            
            
            680,000
            
            
            7.04
                Years
            
            
            $2.25
            
            
            469,375
            
            
            $2.25$2.30
            
            
            150,000
            
            
            8.92
                Years
            
            
            $2.30
            
            
            65,000
            
            
            $2.30$2.90
            
            
            20,000
            
            
            9.27
                Years
            
            
            $2.90
            
            
            2,500
            
            
            $2.90$2.91
            
            
            30,000
            
            
            9.29
                Years
            
            
            $2.91
            
            
            3,750
            
            
            $2.91$2.95
            
            
            15,000
            
            
            8.76
                Years
            
            
            $2.95
            
            
            4,687
            
            
            $2.95$3.50
            
            
            750,000
            
            
            8.52
                Years
            
            
            $3.50
            
            
            450,000
            
            
            $3.503,480,000
            
            
            8.97
                Years
            
            
            $2.03
            
            
            1,808,437
            
            
            $2.06





At
      December 31, 2005, the Company had a total of 31,161,589 warrants outstanding.
      Of these warrants, 30,336,589 are exercisable. The life of the warrants
      range from zero to five years. The exercise price of these warrants range from
      $0.75 to $6.50. See additional disclosure above regarding activity.




**(3)
      Stock Plans**




Pro
      forma
      information regarding net income and earnings per share is required by SFAS
      No.
      123 and has been determined as if the Company had accounted for its stock-based
      compensation plans using the fair value method prescribed by that statement.
      For
      purposes of pro forma disclosures, the estimated fair value of the options
      is
      amortized to expense over the options’ vesting period on a straight-line basis.
      All options are initially assumed to vest. Compensation previously recognized
      is
      reversed to the extent applicable to forfeitures of unvested options. The
      following table illustrates the effect on the net loss per share if the Company
      had accounted for its stock-based compensation plans using the fair value
      method:


**December
                  31,****2005**
              
              **2004**
              
              **2003**Net
                  loss, as reported
              
              $
              (19,740,274
              )
              $
              (6,792,930
              )
              $
              (3,859,141
              )Add:
                  Stock-based employee compensation expense included in reported
                  net
                  loss,net
                  of related tax effects
              
              
              -
              
              
              -
              
              
              -Deduct:
                  Total stock-based employee compensation expense determined under
                  fair
                  valuebased
                  method for all awards, net of related tax effects
              
              
              (1,090,181
              )
              
              (75,727
              )
              
              -Pro
                  forma net loss
              
              $
              (20,830,455
              )
              $
              (6,868,657
              )
              $
              (3,859,141
              )Basic
                  and diluted net loss per share, as reported
              
              $
              (0.76
              )
              $
              (0.35
              )
              $
              (0.51
              )Pro
                  forma basic and diluted net loss per share
              
              $
              (0.80
              )
              $
              (0.36
              )
              $
              (0.51
              )




For
      purposes of this pro forma presentation, the fair value of each option grant
      was
      estimated at the date of the grant using a Black-Scholes option pricing model
      with the following weighted average assumptions: the risk-free interest rate
      was
      4.50%, expected dividend yield of 0%, expected volatility factor was 179.5%
      with
      an expected life of three years.





F-26
 
  **SmartVideo
          Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2005, 2004 and 2003**


**(E)
      Deferred Compensation**




During
      2005, the Company amortized $1,701,230 to the statement of operations as
      consulting expense relating to prior period deferred consulting arrangements.
      The balance at December 31, 2005 to be amortized was $1,433,833.





**Year
      Ended December 31, 2004:**





In
      February 2004, a holder of the Company’s 10% Convertible Promissory Note
      exercised his conversion rights at a conversion price of $1.00 per share of
      common stock. The Company had originally received gross proceeds of $100,000
      upon the issuance of this 10% Convertible Promissory Note. A total of 109,830
      restricted shares of common stock were issued under this conversion including
      accrued interest of $9,830 through the date of conversion.





In
      March
      2004, a holder of the Company’s 10% Convertible Promissory Note exercised his
      conversion rights at a conversion price of $0.75 per share of common stock.
      The
      Company had originally received gross proceeds of $100,000 upon the issuance
      of
      this 10% Convertible Promissory Note. A total of 147,184 restricted shares
      of
      common stock were issued under this conversion including accrued interest of
      $10,388 through the date of conversion.





In
      April
      2004, a holder of the Company’s 10% Convertible Promissory Note exercised his
      conversion rights at a conversion price of $0.75 per share of common stock.
      The
      Company had originally received gross proceeds of $30,000 upon the issuance
      of
      this 10% Convertible Promissory Note. A total of 45,545 restricted shares of
      common stock were issued under this conversion including accrued interest of
      $4,159 through the date of conversion.





During
      January, February, and March 2004, the Company completed a group of private
      financing transactions. The Company received $261,000 of gross proceeds from
      these transactions. In these transactions, we sold 94,096 shares of common
      stock
      at purchase prices ranging between $1.00 and $3.50 per share. These securities
      have been issued as restricted shares to seven accredited investors in a Private
      Placement exempt from registration.





In
      March
      2004, the holders of the 12,000,000 shares of Convertible Preferred Stock
      provided notification to us for the conversion of their shares into common
      stock. Under the terms of the Convertible Preferred Stock, the shareholders
      were
      issued a total of 12,000,000 shares of common stock. These shares of common
      stock were issued as restricted shares exempt from registration.





On
      May 1,
      2004, the Board of Directors granted options for an aggregate of 750,000 shares
      of common stock under the 2004 Equity Incentive Plan. These stock options were
      awarded to five members of our outside Advisory Committee, Herman Rush, Joseph
      Indelli, Peter Sealey, James Rosenfield, and Frederick Pierce, with have an
      exercise price of $3.50 per share. For the year ended December 31, 2005, the
      Company has recorded $839,700 in non-cash, stock-based compensation expense
      and
      $979,650 in non-cash, stock-based compensation attributable to future periods
      related to these awards. For purposes of computing the fair value of each option
      of common stock purchase warrants, the Company used the Black-Scholes option
      pricing model with the following assumptions: the risk-free interest rate was
      4.25%, the volatility factor was 143.68%, the estimated life term was 3.0 years,
      and the fair value of the option granted was $3.50.





During
      April and May 2004, the Company completed a group of private financing
      transactions. SmartVideo received $785,500 of gross proceeds from these
      transactions. In these transactions, the Company sold 723,000 shares of common
      stock at purchase prices ranging between $1.00 and $2.00 per share. These
      securities have been issued as restricted shares to fourteen accredited
      investors in a Private Placement exempt from registration.





F-27
 
  **SmartVideo
          Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2005, 2004 and 2003**


During
      July and August 2004, the Company completed a group of private financing
      transactions. SmartVideo received $333,952 of gross proceeds from these
      transactions. In these transactions, the Company sold 333,952 shares of common
      stock at purchase prices of $1.00 per share. These securities have been issued
      as restricted shares to eight accredited investors in a Private Placement exempt
      from registration.





On
      September 1, 2004, the Board of Directors approved 350,000 incentive stock
      option awards under the 2004 Equity Incentive Plan. These incentive stock option
      awards were awarded to six of the Company’s current employees and have an
      exercise price of $1.00 per share. The closing share price on the date preceding
      these awards was $2.07.





Also
      on
      September 1, 2004, the Company issued an incentive stock option award to Darren
      Breitkreuz, a former director, in the amount of 500,000 options. These options
      were previously authorized by the Board of Directors subject to shareholder
      approval of the 2004 Equity Incentive Plan. These options have an exercise
      price
      of $1.00 per share. The closing share price on the date preceding this award
      was
      $2.07. For the year ended December 31, 2005, the Company has recorded $98,750
      in
      non-cash, stock-based compensation expense and $271,563 in non-cash, stock-based
      compensation attributable to future periods related to this award. For purposes
      of computing the fair value of each option of common stock purchase warrants,
      the Company used the Black-Scholes option pricing model with the following
      assumptions: the risk-free interest rate was 4.25%, the volatility factor was
      112.77%, the estimated life term was 4.5 years, and the fair value of the option
      granted was $1.00.





During
      September 2004, the Company completed a group of private financing transactions.
      SmartVideo received $120,000 of gross proceeds from these transactions. In
      these
      transactions, the Company sold 120,000 units consisting of one share of common
      stock and two 1⁄4 common stock purchase warrants. The warrants are callable and
      redeemable. One of the warrants has an exercise price of $1.50 per share and
      the
      other warrant has an exercise price of $2.00 per share. The shares of common
      stock have piggy-back registration rights. These securities have been issued
      as
      restricted shares to five accredited investors in a Private Placement exempt
      from registration.





During
      October and November 2004, the Company completed a group of private financing
      transactions. SmartVideo received $960,000 of gross proceeds from these
      transactions. In these transactions, the Company sold 960,000 units consisting
      of one share of common stock and two 1⁄4 common stock purchase warrants. The
      warrants are callable and redeemable. One of the warrants has an exercise price
      of $1.50 per share and the other warrant has an exercise price of $2.00 per
      share. The shares of common stock have piggy-back registration rights. These
      securities have been issued as restricted shares to five accredited investors
      in
      a Private Placement exempt from registration.





In
      November 2004, the Company entered into agreements with CFO Solutions LLC,
      a
      former consultant, to pay the consultant in common stock and warrants for
      services to the Company over a two year period.  Pursuant to the
      agreements, the Company issued to the consultant 400,000 units, each of which
      consisted of one share of common stock and two 1/4 warrants to purchase common
      stock with exercise prices of $1.50 per share and $2.00 per share. The
      Company also issued to the consultant a warrant to purchase 1,739,130 units
      at
      $1.00 per unit, with each unit consisting of one share of common stock and
      two
      1/4 warrants to purchase common stock at $1.50 per share and $2.00 per share.
        The warrants also contain a cashless exercise provision.  In
      addition, the Company granted the consultant certain piggy-back registration
      rights that applied to the Company's recent registration statement declared
      effective by the SEC on February 10, 2006.  However, the Company did not
      include the consultant's common stock or shares underlying the warrants in
      the
      registration statement.  The Company is attempting to reduce the amount of
      equity compensation paid to the consultant for the services provided to the
      Company.





F-28
 
  **SmartVideo
          Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2005, 2004 and 2003**


On
      December 6, 2004, the Company awarded 150,000 stock options under its 2004
      Equity Incentive Plan to a new member of the outside Advisory Committee. For
      the
      year ended December 31, 2005, the Company has recorded $55,580 in non-cash,
      stock-based compensation and $182,620 in non-cash, stock-based compensation
      attributable to future periods related to this award. For purposes of computing
      the fair value of each option of common stock purchase warrants, the Company
      used the Black-Scholes option pricing model with the following assumptions:
      the
      risk-free interest rate was 4.25%, the volatility factor was 112.43%, the
      estimated life term was 3.0 years, and the fair value of the option granted
      was
      $2.30.





On
      December 7, 2004, the Company awarded one of our advisors with 250,000 common
      stock purchase warrants with an exercise price of $2.25 per share. These
      warrants are exercisable immediately and expire five years from the date of
      issuance. The shares of common stock underlying the warrants have piggy-back
      registration rights. These securities have been issued as restricted shares
      in a
      Private Placement exempt from registration.





Also,
      on
      December 7, 2004, the Company awarded 420,000 stock options to eight of its
      employees and 250,000 stock options to four advisors with an exercise price
      of
      $2.25 per share under the terms of our 2004 Equity Incentive Plan. Please see
      Note 10 - Stock Plans for additional information.





On
      December 31, 2004, the Company completed a Private Placement in which the
      Company issued 341,236 shares of common stock at $2.25 per share and warrants
      to
      purchase up to an additional 170,618 shares of common stock at an exercise
      price
      of $3.50 per share, resulting in gross proceeds of approximately $767,750.
      The
      warrants have a five-year term. The shares of common stock have piggy-back
      registration rights. These securities have been issued as restricted shares
      to
      an aggregate of 18 accredited investors in a Private Placement exempt from
      registration.





**Year
      Ended December 31, 2003:**





During
      2003, the Company issued 1,631,666 shares of common stock in consideration
      of
      $1,631,666. In connection with such issuances, the Company issued 1,216,666
      warrants to certain stockholders at an exercise price of
      $2.50.





During
      2003, the Company issued 55,000 shares of common stock to certain individuals
      unrelated to the Company in lieu of repayment of advances payable to an employee
      who is also a holder of Preferred Shares. The shares were valued at $3.02 per
      share, the fair market value of the shares at the date of issuance. The value
      of
      the consideration based on the number of shares issued amounted to approximately
      $166,000. The advances payable to such employee amounted to approximately
      $50,000. Accordingly, the additional consideration resulting from the issuance
      of the shares amounted to approximately $116,000 and is recognized as interest
      expense in the accompanying consolidated financial statements.





During
      2003, three holders of the Company’s 10% Convertible Promissory Notes exercised
      their conversion rights at a conversion price of $0.75 per share of common
      stock. The Company had originally received gross proceeds of $163,000 upon
      the
      issuance of these 10% Convertible Promissory Notes. A total of 223,929 shares
      of
      common stock were issued under these conversions including accrued interest
      through the date of conversion. These shares of common stock were issued as
      restricted shares.





During
      2003, the Company’s reached an agreement with two shareholders who were
      originally holders of the Company’s 10% Convertible Promissory Notes. Under the
      terms of the agreement, the shareholders were issued a total of 53,000 shares
      as
      additional consideration related to rights associated with such promissory
      notes. The shares were valued at $3.33 per share, the fair market value of
      the
      shares at the date of issuance. Accordingly, the additional consideration
      resulting from the issuance of the shares amounted to approximately $178,000,
      based on the fair value of the common stock at the date of issuance and is
      recognized as interest expense in the accompanying consolidated financial
      statements.





F-29
 
  **SmartVideo
          Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2005, 2004 and 2003**


During
      2003, the Company recorded $308,000 in the beneficial conversion associated
      with
      the issuance of the Convertible Promissory Notes.





During
      2003, the Company amortized $1,316,250 of non-cash stock compensation that
      was
      expensed.





**Note
      10 - Related Party Transactions**





The
      Company had advances from holders of Preferred Shares, which included the CEO,
      amounting to $12,575 at December 31, 2003. These advances were due on demand,
      non-interest bearing and unsecured. On September 15, 2005, the Company repaid
      an
      advance in the amount of $10,000. The balance sheet currently reflects a balance
      due of $2,575.





On
      August
      12, 2005, the Company borrowed $225,000 from one of its directors. Pursuant
      to
      the promissory note issued in connection with the loan, the Company is obligated
      to pay all principal and interest due under the note by no later than September
      12, 2006. Interest on the unpaid principal balance of the note accrues at a
      rate
      equal to the fluctuating prime lending rate of LaSalle Bank, N.A., Chicago,
      Illinois; as such rate is in effect less one hundred basis points. This
      principal portion of this note in the amount of $225,000 was repaid on November
      22, 2005. The Company had related outstanding accrued interest of $3,845 at
      December 31, 2005.





Until
      August 31, 2005, the Company was provided the use of office facilities from
      a
      former related party. The amount paid by the Company during 2005 under this
      leasing arrangement amounted to approximately $81,000.





On
      September 26, 2005 and October 19, 2005, the Company borrowed an aggregate
      $600,000 from two different related parties (4 separate notes) pursuant to
      the
      terms of a Convertible Promissory Note. (See Note 6)





On
      November 10, 2005, the Company borrowed $150,000 from a related party pursuant
      to the terms of a Convertible Promissory Note. (See Note 6)





In
      connection with these offerings, a family member of a board member invested
      $50,000 in exchange for 66,667 shares of common stock ($0.75 per share). This
      individual also received 83,334 warrants under the same terms as all other
      investors participating in the Series A-1, Convertible Preferred Stock offerings
      in November and December 2005. See Note 9 (A) (3)





During
      the years ending December 31, 2005, 2004 and 2003, the Company generated revenue
      from a former related party accounting for $55,228, $31,945 and $22,432
      respectively. These amounts were fully reserved at year-end.





**Note
      11 - Income Taxes** ****


There
        was
        no provision for income taxes for 2005, 2004 and 2003 due to continuing
        operating losses.





Income
      tax expense (benefit) differed from the amounts computed by applying the
      statutory U.S. federal income tax rate of 35% to income (loss) before provision
      for income taxes as a result of the following (in thousands):





F-30
 
  **SmartVideo
          Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2005, 2004 and 2003**


**2005**
              
              
              
              **2004**
              
              
              
              **2003**Computed
                  “expected” tax expense (benefit)
              
              $
              (6,909,096
              )
              
              35.00
              %
              $
              (2,377,526
              )
              
              35.00
              %
              $
              (1,350,699
              )
              
              35.00
              %Increase
                  (decrease) in income taxes resulting from:State
                  income taxes, net of federal income taxes
              
              
              (582,338
              )
              
              2.96
              %
              
              (201,071
              )
              
              2.96
              %
              
              (154,366
              )
              
              4.00
              %Nondeductible
                  expenses
              
              
              257,424
              
              
              (1.31
              %)
              
              -
              
              
              0.00
              %
              
              -
              
              
              0.00
              %Increase
                  in valuation allowance
              
              
              7,199,753
              
              
              (36.54
              %)
              
              2,578,597
              
              
              (37.96
              %)
              
              1,505,065
              
              
              (39.00
              %)Other,
                  net
              
              
              34,257
              
              
              -0.11
              %
              
              -
              
              
              0.00
              %
              
              -
              
              
              0.00
              %$
              -
              
              
              
              
              $
              -
              
              
              
              
              $
              -




The
      income tax effects of temporary differences that give rise to significant
      portions our deferred income tax assets and liabilities are presented below
      (in
      thousands):


**December
                  31****2005**
              
              **2004**Deferred
                  income tax assets:Net
                  operating loss and research and experimentationcredit
                  carryforwards
              
              $
              4,416,475
              
              $
              2,481,000Noncash
                  stock-based compensation
              
              
              2,600,882
              
              
              -Accruals
                  not deducted for tax
              
              
              2,180,160
              
              
              -Property
                  and equipment, principally due todifferences
                  in depreciation
              
              
              483,236
              
              
              -Total
                  gross deferred income tax assets
              
              $
              9,680,753
              
              $
              2,481,000Less
                  valuation allowance
              
              
              (9,680,753
              )
              
              (2,481,000
              )Net
                  deferred income tax assets
              
              $
              -
              
              $
              -


At
        December 31, 2005, the valuation allowance for deferred income tax assets
        increased by $7,199,753 from December 31, 2004. In assessing the realizability
        of deferred tax assets, management considers whether it is more likely than
        not
        that some portion or all of the deferred income tax assets will not be realized.
        The ultimate realization of deferred income tax assets is dependent upon
        the
        generation of future taxable income during the periods in which those temporary
        differences become deductible. Management considers the scheduled reversal
        of
        deferred income tax liabilities, projected future taxable income, and tax
        planning strategies in making this assessment. Based on consideration of
        these
        items, Management has determined that enough uncertainty exists relative
        to the
        realization of the deferred income tax asset balances to warrant the application
        of a full valuation allowance as of December 31, 2005.
  At
        December 31, 2005, we had net operating loss carryforwards for U.S. federal
        income tax purposes of $11.6 million available for offset against future
        taxable
        income. Such net operating losses expire in varying amounts beginning in
        the
        year 2025. Utilization
        of these net operating losses may be limited due to potential ownership changes
        under section 382 of the Internal Revenue Code.


F-31
 
  **SmartVideo
          Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2005, 2004 and 2003**





**Note
      12 - Subsequent Events**





On
      or
      about January 18, 2006, Wilson W. Hendricks, III filed a complaint in the County
      Court, Seventh Judicial Circuit, in and for St. John’s County, Florida against
      the Company for an unspecified amount of damages in excess of $15,000 relating
      to lost wages, unreimbursed business expenses and 500,000 non-qualified stock
      option as a result of the Company’s alleged breach of promise to employ Mr.
      Hendricks. The Company denies all liability to Mr. Hendricks and intends to
      vigorously defend itself against all clams made by him. The claim did not exist
      at December 31, 2005; as a result, there is no potential accrued contingency
      loss.





On
      January 19, 2006, the Company entered into a consulting agreement with Growth
      Consultants LLC (“consultant”). The term of the agreement is through June 30,
      2006. Pursuant to the agreement, the consultant is entitled to receive a
      consulting fee of $100 per hour for services to be provided. The consultant
      was
      issued 300,000 common stock purchase warrants having an exercise price of $3.00
      per warrant. The Company will record approximately $1.3 million in deferred
      consulting expense at the grant date related to these warrants using fair value
      accounting as prescribed by SFAS No. 123R and the related Black-Scholes pricing
      model with the following weighted average assumptions:





Exercise
                price
            $3.00Expected
                dividend yield
            0%Expected
                volatility
            122.37%Risk
                free interest rate
            4.50%Expected
                life of option
            5
                years





Pursuant
      to this agreement, on April 1, 2006, the Company shall issue an additional
      150,000 options to purchase shares of common stock. The Company will value
      these
      grants pursuant to SFAS No. 123R.





On
      January 30, 2006, the Company and OVT, Inc. entered into a settlement agreement.
      (See Note 8(A)).





On
      February 23, 2006, we received the consent of a majority of the outstanding
      holders of record of our common stock and our Series A-1 Convertible Preferred
      Stock, par value $0.001 per share, to: (i) elect Richard E. Bennett., Jr.;
      Michael E. Criden; Glenn H. Singer; and Justin A. Stanley, Jr. as our directors
      until the next Annual Meeting of Stockholders and until their respective
      successors shall be elected and qualified; (ii) amend our Certificate of
      Incorporation to increase the number of authorized shares of common stock from
      50 million shares to 150 million shares; (iii) adopt our 2005 Stock Incentive
      Plan; and (iv) ratify the appointment of Sherb & Co. LLP (“Sherb”) as our
      independent accountants for the fiscal year ended December 31, 2005.
      Ratification of Sherb was also voted on and unanimously approved by our audit
      committee.





On
      February 28, 2006, SmartVideo Technologies, Inc. (the “Company”) entered into an
      employment agreement (“Employment Agreement with the President for a period of
      two years. The President is entitled to a base salary of $200,000 per annum,
      which may be increased at the discretion of the Compensation Committee of the
      Board of Directors. The Company also granted Mr. Ross an Incentive Stock Option
      (“ISO”) to purchase an aggregate of 476,190 shares of the Company’s common stock
      (“Common Stock”) and a Non-qualified Stock Option (“NQSO”) to purchase an
      aggregate of 523,810 shares of the common stock. The ISO and the NQSO are each
      exercisable at $2.10 per share for a period of ten years from the grant date.
      The ISO vests in the following percentages and at the following times: (1)
      10%
      of the shares vested on February 28, 2006, and (2) 10% of the shares vest on
      each anniversary date thereof for the succeeding nine years. The NQSO vests
      in
      the following percentages and at the following times: (1) 50% of the shares
      vested on February 28, 2006, and (2) the balance of the shares vest on February
      28, 2007. The Company will value these grants pursuant to SFAS No.
      123R.





F-32