**UNITED
STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
D.C. 20549**


**________________________________________________________**




**FORM
10-KSB**




**(Mark
One)**


**x**
    **Annual
      Report Under Section 13 or 15(d) of the Securities Exchange Act of
      1934**





**For
the fiscal year ended December 31, 2004**





**OR**





** ̈**
    **Transition
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934**





**For
the transition period from
            
to**




**Commission
File Number 000-26809**




**__________________________**




**SMARTVIDEO
TECHNOLOGIES, INC.**


(Name of
small business issuer in its charter)





**Delaware**
    **91-1962104**State
      or other jurisdiction of incorporation or organization
    I.R.S.
      Employer Identification No.**1650
      Oakbrook Drive, Suite 405****Norcross,
      Georgia**
    **30093**Address
      of principal executive offices
    Zip
      Code**(770)
      729-8777**Issuer's
      telephone number


Securities
registered under Section 12(b) of the Act: **None**




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


______________________




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




Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.  o




The
issuer's revenues for the fiscal year ended December 31, 2004 were
$118,733.




The
aggregate market value of the voting common stock held by non-affiliates of the
issuer as of April 21, 2005 was approximately $39,937,000 (computed based on the
closing sale price of the common stock at $2.89 per share as of such date).
Shares of common stock held by each officer and director and each person owning
more than 10% of the outstanding common stock have been excluded in that such
persons may be deemed to be affiliates. This determination of the affiliate
status is not necessarily a conclusive determination for other
purposes.




The
number of shares of Common Stock of the registrant outstanding as of April 21,
2005 was 25,999,069.




Documents
incorporated by reference: None




Transitional
Small Business Disclosure Format (Check One): Yes  o   No x

















**TABLE
OF CONTENTS**




**Page**




PART
      I
    
    4Item
      1.
    Description
      of Business
    4Item
      2.
    Description
      of Property
    11Item
      3.
    Legal
      Proceedings
    11Item
      4.
    Submission
      of Matters to a Vote of Security Holders
    13PART
      II
    
    14Item
      5.
    Market
      for Common Equity and Related Stockholder Matters and Small Business
      Issuer Purchase of Equity Securities
    14Item
      6.
    Management's
      Discussion and Analysis or Plan of Operation
    17Item
      7.
    Financial
      Statements
    31Item
      8.
    Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
    54Item
      8A.
    Controls
      and Procedures
    54Item
      8B.
    Other
      Information
    54PART
      III
    
    55Item
      9.
    Directors
      and Executive Officers of the Registrant
    55Item
      10.
    Executive
      Compensation
    57Item
      11.
    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
    59Item
      12.
    Certain
      Relationships and Related Transactions
    61Item
      13.
    Exhibits
    63Item
      14.
    Principal
      Accountant Fees and Services
    64SIGNATURES
    66




2





**CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS**





Statements
contained in this Report that are not purely historical are forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, including our expectations, intentions, beliefs, or strategies
regarding the future. Any
statements in this document about expectations, beliefs, plans, objectives,
assumptions or future events or performance are not historical facts and are
forward-looking statements. These statements are often, but not always, made
through the use of words or phrases such as "may," "should," "could," "predict,"
"potential," "believe," "will likely result," "expect," "will continue,"
"anticipate," "seek," "estimate," "intend," "plan," "projection," "would" and
"outlook," and similar expressions. Accordingly, these statements involve
estimates, assumptions and uncertainties, which could cause actual results to
differ materially from those expressed in them. Any forward-looking statements
are qualified in their entirety by reference to the factors discussed throughout
this document. All
forward-looking statements concerning economic conditions, rates of growth,
rates of income or values as may be included in this document are based on
information available to us on the dates noted, and we assume no obligation to
update any such forward-looking statements. It is important to note that our
actual results may differ materially from those in such forward-looking
statements due to fluctuations in interest rates, inflation, government
regulations, economic conditions, customer disintermediation and competitive
product and pricing pressures in the geographic and business areas in which we
conduct operations, including our plans, objectives, expectations and intentions
and other factors discussed under the section entitled "Certain Factors Which
May Impact Future Results," in this Report.




3





**PART
I**







**Item
      1.**
    **Description
      of Business**




SmartVideo
Technologies, Inc., a Delaware corporation  ("SmartVideo,"
"the Company," "we," "us," or "our," hereafter) i s a
provider of mobile entertainment services. We were incorporated in 1984. We are
in the business of purchasing the rights to video/television content for the
mobile handset market and delivering the video content to mobile subscribers for
a monthly fee. Additionally, we anticipate being in the business of providing
managed services for network operators (carriers) and for major content
owners/distributors. We intend to expand our market opportunity by ultimately
delivering video services to all forms of devices capable of receiving an
Internet Protocol, or IP, data stream and having this data stream rendered into
visible images on displays.




We
specialize in the delivery of high-quality digital media solutions to the
narrowband market space and provide a resource savings for delivery of digital
media to the broadband market. In April 2004, we showcased our cellular
solutions at the National Association of Broadcasters (NAB) trade show in Las
Vegas and demonstrated our unique ability to deliver high-quality video to
cellular/mobile phones at an average frame rate of 15-24 fps (frames per
second). The 2004 NAB show established foundational credibility that enabled us
to pursue the content rights necessary to develop a service. We anticipate that
through the acquisition of these content delivery rights, we will be able to
acquire a large base of customers, network operators and content owners who will
use our services to deliver both free and paid content to mobile subscribers
around the world. Our immediate strategy is to grow and leverage our
technological advantage to excel in the emerging market for premium digital
video content for today's mobile customers. Our mobile solutions are available
using today's 2.5G or 3G cellular data networks and today’s wi-fi networks.




While we
do not intend to abandon the business we have developed of delivering digital
media and multimedia content and presentations to the corporate, educational and
governmental sectors, and business-to-business market, we have analyzed our
business model and have determined it is in our best interest to focus our
efforts on the entertainment and broad-based communications arena. We believe
this arena represents the best opportunity to enhance shareholder value. We
believe the business-to-business market to be highly fragmented with only a
limited opportunity for consolidation at this time. We do expect this market to
develop and mature over the coming years and this represents a significant
opportunity for the future. We do not expect the business-to-business market to
contribute in any significant way to our revenues through 2006.




In
January 2005, we launched our direct-to-the-consumer mobile video service. This
service provides our customers with access to high-quality video programming
that is transmitted directly to our customers' SmartPhone cellular handsets or
to Wi-Fi enabled Personal Data Assistants (PDA) devices that are connected to
the Internet via a wireless local area network. (We define a SmartPhone as a
mobile cellular handset that is Internet enabled, has some type of Internet
browser, and has either a Windows Media Player or has a RealNetworks Media
Player.) We are a service provider to subscribers on all of the major U.S.
cellular carriers. We provide demonstration accounts, where we have acquired the
necessary video distribution rights, to viewers in more than 70 countries,
operating on more than 150 carriers.




In
general, we license the distribution rights on either a “fixed-fee, per
subscriber, per month” 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 as low as $0.04 per subscriber per month to as
much as 50% of the net collected revenue for revenue-sharing arrangements. 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.
In 2004, we derived a substantial portion of our revenues from five customers in
the business-to-business arena, which accounted for 75% of our revenues. We do
not expect this to be the case for 2005 and subsequent years because we expect
to attain a wide, diverse subscriber base in the mobile entertainment
industry.




4


We are
currently delivering the following video content to our
subscribers:




§
    ABC
      News Now




§
    ABC
      News




§
    CNBC




§
    MSNBC




§
    NBC
      Mobile




§
    Weather
      Channel Live




§
    Weather
      Channel Local & Regional Forecast




§
    FOX
      Sports




§
    DIC
      Cartoons




§
    iFilm




§
    Professional
      Championship Wrestling




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




§
    CANAL
      SUR




§
    CINE
      MEXICANO




§
    LTV
      (LATIN TV)




5




§
    TBN
      ENLACE USA




§
    TV
      CHILE




§
    TV
      COLOMBIA





§
    VIDAVISION




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.




To
subscribe to our service, customers download a small software application to
their mobile handset, 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.




Since the
launch of the service in January 2005, we have acquired subscribers through a
commerce portal included on the SmartVideo website, as well as links from
various third-party websites. We have also promoted our service through an
aggressive public relations campaign that featured articles and information
about SmartVideo in print, web, radio and television, 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, Dow Jones Newswire, as well as many other
prestigious media outlets. Moving forward, SmartVideo 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.




Since
January 2005, we have had a total of approximately 16,000 trial users, of which
approximately 1,100 are currently active. We have had approximately 900 paying
subscribers, of which approximately 750 are active. These numbers are indicative
of: 1) insufficient funding for deployment of all the content channels we have
obtained the rights; 2) insufficient funding to develop distribution programs
and support; and 3) insufficient financial support for marketing resources. We
have developed a plan to address these issues and with the recent capital
infusion, we have the short-term resources to execute the plan as described in
Key Initiatives in subsequent pages.




**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:




6




·
    Delivery
      of live, on-demand, and download-and-play television and video programming
      to SmartPhones;




·
    Microsoft
      Windows Mobile OS, Linux and Symbian OS (6.0 and above) handsets, which
      accounts for more than 10% of cellular
handsets;




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




·
    15+
      Frames Per Second (FPS) on 2.5G cellular data networks;




·
    24+
      FPS on current and planned 3G cellular data
networks;




·
    28+
      FPS on Wi-Fi data networks, which is virtually a "TV-like" experience for
      the subscriber;




·
    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
      include:




**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** - Mr.
Indelli is the 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 over 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.


****


**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.




7


**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.




**Background
of Our Business**




Until
recently, mobile phone technology and cellular data network capabilities have
been insufficient to support streaming video to mobile phones at a minimum frame
rate of 15 fps, which is generally considered to be the minimum acceptable
quality for consumers. We believe that we are the only company capable of
delivering video at 15-24 fps to today’s SmartPhones over today’s existing 2.5G
cellular data networks.




We
approached the video streaming challenge at a number of points, with the intent
of making the experience for the user easy, familiar, satisfying and
inexpensive. We use Microsoft’s Windows Media as the basic technology platform.
The keys to our approach lie in our proprietary engineering and proprietary
software processes applied at every stage, from digitizing the original video,
its encoding, the delivery infrastructure and ultimately sensing the viewer’s
connection to the Internet. All of these ingredients are applied to facilitate
our streaming of quality video, be it at 30Kbps or 300Kbps.




**Our
Business Strategy**




Our
overall goal is to provide customers a high quality mobile 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 SmartVideo." At this level, the carrier is a reseller of the
SmartVideo branded service.




8


**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 SmartVideo 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.




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.




**o**
    To
      date, we have deployed approximately 11 channels of content. We have
      obtained the necessary rights to distribute another 23 channels of
      content. We plan to roll-out these additional channels by the end of the
      second quarter of fiscal year 2005.




**o**
    SmartVideo
      has developed compelling programs that are designed to be appealing to
      traditional retailers, Internet retailers, and distributors of mobile
      handset devices and plans. SmartVideo is actively developing distribution
      relationships.




**o**
    SmartVideo
      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.****




·
    **Expand
      Local Channel Service.**Over the last several years, expanded local channel service has been a
      significant growth driver for similar services, like cable and direct
      broadcast. In general, we believe that we will attain greater subscriber
      growth, higher subscriber retention and higher Average Revenue per User
      (ARPU) in those markets where we deliver local channels to
      subscribers.




·
    **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.




9




·
    **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
      inside 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 12% 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.




**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.




10


**Employees**




As of
December 31, 2004, we had 12 full time employees. We believe that our employee
relations are good. None of our employees are represented by labor
unions.




**Item
      2.**
    **Description
      of Property**




We
currently sub-lease approximately 8,000 square feet of office space from an
entity owned by the spouse of Robert J. Walters, a holder of more than 10% of
our common stock. The office space currently serves as our corporate
headquarters located in Norcross, Georgia. We pay rent of $8,000 per month on a
lease which expires on August 31, 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 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 sole director, Richard E. Bennett, Jr. and our 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. 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, 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 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 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 or
about June 30, 2004, Rene Hamouth filed a stockholder derivative action on
behalf of us, 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 our Series A
Convertible Preferred Stock in breach of a Stock Exchange Agreement dated
November 9, 2002, among us and Messrs. Bennett, Walters and Dunavant. Mr.
Hamouth alleged that the Preferred Stock was required to be forfeited if we did
not have pre-tax earnings of at least $220,000 for our 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.




11


On July
5, 2004, we 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 are anticipated to provide for a
release of all actual or potential claims against us.




On July
8, 2004, Todd Mann, Sandy Goldman, Stefanie Paulos, David Gregory, Robert
Jetmundsen, Bob Corn, and Jim Douglass filed suit against us, our 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 our 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.




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.




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 throughout 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 March
31, 2005, Mr. Richard Seifert and KC Adventures, Inc. filed with the American
Arbitration Association in Atlanta, Georgia, certain claims against us and our
wholly-owned subsidiary, OVT, Inc. The arbitration case number is 30-181-559-05.
The Statement of Claim filed by the claimants against us 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 us 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 us 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 us. We intend to
vigorously defend against these claims.




12


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 our stockholders, through the solicitation of proxies
or otherwise, during the fourth quarter of the fiscal year ended
December 31, 2004.




13





**PART
II**




**Item
      5.**
    **Market
      for Common Equity and Related Stockholder Matters and Small Business
      Issuer Purchase 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" 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
    
    $
    2.95**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**Year
      Ended****December
      31, 2003**First
      Quarter
    
    $
    2.26
    
    $
    1.53Second
      Quarter
    
    $
    2.08
    
    $
    1.51Third
      Quarter
    
    $
    3.75
    
    $
    1.65Fourth
      Quarter
    
    $
    6.00
    
    $
    2.95




On April
21, 2005, the closing sales price for the common stock was $2.89, as reported on
the website of the Over-the-Counter Bulletin Board. As of April 21, 2005, there
were approximately 1,100 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 25,999,069 outstanding shares of
common stock.




**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.




Information
concerning securities authorized for issuance under our equity compensation
plans appears in Part III, Item 11 of this Report under the caption "Equity
Compensation Plan Information" which is incorporated herein by
reference.




**Recent
Issuances of Unregistered Securities**




In
February 2004, a holder of our 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 shares of common stock were
issued under this conversion including accrued interest through the date of
conversion. The transaction and the shares of common stock were exempt from
registration pursuant to Section 3(a)(9) and Section 4(2) of the Securities Act
of 1933, as amended (the "Securities Act").




14


In March
and April 2004, holder of our 10% Convertible Promissory Note exercised their
conversion rights at a conversion price of $0.75 per share of common stock. We
had originally received aggregate gross proceeds of $130,000 upon the issuance
of these 10% Convertible Promissory Note. A total of 192,729 shares of common
stock were issued under this conversion including accrued interest through the
dates of conversion. The transaction and the shares of common stock were exempt
from registration pursuant to Section 3(a)(9) and Section 4(2) of the Securities
Act.




From
January through August 2004, we completed a series of private financing
transactions. We received an aggregate $1,379,952 of gross proceeds from these
transactions and issued an aggregate of 1,151,048 shares of common stock at
purchase prices ranging between $1.00 and $3.50 per share, with an average
weighted purchase price of $1.20 per share. These securities have been issued to
an aggregate of 29 accredited investors in a private placement exempt from
registration under the Securities Act of 1933 in reliance on exemptions provided
in Section 4(2) and Regulation D promulgated thereunder.




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 stockholders 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 under Section
4(2) of the Securities Act.




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.




On June
1, 2004, the Board of Directors granted an option for 500,000 shares of common
stock under the 2004 Equity Incentive Plan to Darren Breitkreuz, a former
director, to purchase common stock, with an exercise price of $1.00 per share.
At the time of the grant, Mr. Breitkreuz was one of our directors.




On
September 1, 2004, the Board of Directors approved options for an aggregate of
850,000 shares of common stock under the 2004 Equity Incentive Plan. These stock
option awards were awarded to six employees and have an exercise price of $1.00
per share. The closing share price on the date preceding these awards was
$2.07.




During
September 2004, we completed a group of private financing transactions. We
received $120,000 of gross proceeds from these transactions and 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 under Section 4(2) of
the Securities Act and Regulation D as promulgated thereunder.




During
October and November 2004, we completed a series of private financing
transactions. We received an aggregate of $960,000 of gross proceeds from these
transactions and sold 960,000 units of our securities, 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
whole share and the other warrant has an exercise price of $2.00 per whole
share. The shares of common stock have piggy-back registration rights. These
securities have been issued as restricted shares to an aggregate of 20
accredited investors in a private placement exempt from registration under
Section 4(2) of the Securities Act and Regulation D as promulgated
thereunder.


15


In
January 2003, we engaged Interim CFO Solutions LLC to assist us in the
preparation of our U.S. Securities and Exchange Commission filings and to
provide general management consulting services. On November 29, 2004, Interim
CFO Solutions LLC delivered a notice of conversion whereby it converted $800,000
of liabilities owed to it into equity in a transaction consisting of two parts.
The terms of the conversion were priced contemporaneously on the same terms as a
series of private placements during October and November 2004. In part one of
the transaction, $400,000 of the amount due and payable was converted into
equity for an aggregate of 400,000 units. Each unit consisted of one share of
common stock and two 1⁄4 common stock purchase warrants with exercise prices of
$1.50 per share and $2.00 per share. In part two of the transaction, the
remaining $400,000 was used to purchase the right, to purchase 1,739,130 units
at $1.00 per unit, at a total exercise price of $1,739,130. This warrant is
exercisable beginning on October 1, 2005 and expires on September 30, 2010. Each
unit consisted of one share of common stock and two 1⁄4 common stock purchase
warrants with exercise prices of $1.50 per share and $2.00 per share. The shares
of common stock and the common stock underlying the warrant(s) have piggy-back
registration rights. These securities have been issued as restricted shares in a
private placement exempt from registration under Section 4(2) of the Securities
Act and Regulation D as promulgated thereunder.




On
December 6, 2004, we awarded 150,000 stock options under our 2004 Equity
Incentive Plan to a new member of our outside Advisory Committee.




On
December 7, 2004, we 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 under Section 4(2) of the Securities Act and
Regulation D as promulgated thereunder.




Also, on
December 7, 2004, we award 420,000 stock options to eight of our 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.




On
December 31, 2004, we completed a private placement in which we 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 and the shares of common stock
underlying the warrants 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 under Section 4(2) of the
Securities Act and Regulation D as promulgated thereunder.




On March
29, 2005, we completed a private placement in which we issued 1,761,235 shares
of common stock at $2.25 per share and warrants to purchase up to an additional
880,620 shares of common stock at an exercise price of $3.50 per share,
resulting in gross proceeds of approximately $3,962,750. The warrants have a
five-year term. In connection with this private placement, we paid a finders fee
of $238,725 in cash and issued warrants to purchase up to 106,100 shares of
common stock at $2.25 per share and warrants to purchase up to 53,050 shares of
common stock at $3.50 per share to Forte Capital Partners, LLC, the placement
agent in the transaction. Further, the placement agent has agreed to purchase an
additional $740,000 of the securities issued in the transaction, consisting of
328,889 shares of common stock and warrants to purchase up to an additional
164,445 shares of common stock at a purchase price of $3.50 per share, no fewer
than 3 days prior to the registration statement going effective, or in the case
that the registration does not go effective, by the one-year anniversary of the
financing, March 29, 2006. We have agreed to file a registration statement with
respect to the securities issued in this March 2005 private placement. These
securities have been issued as restricted shares to an aggregate of 31
accredited investors in a private placement exempt from registration under
Section 4(2) of the Securities Act and Regulation D as promulgated
thereunder.




16





**Item
      6.**
    **Management's
      Discussion and Analysis or Plan of
Operation**




This
discussion presents management's analysis of our results of operations and
financial condition as of and for each of the years in the two-year period ended
December 31, 2004 and 2003, respectively. The discussion should be read in
conjunction with our financial statements and the notes related thereto which
appear elsewhere in this Report.




**Overview**




We are a
provider of turnkey digital media solutions and the technology that enables the
management and delivery of high quality live or on-demand television or video
presentations to media enabled devices via the Internet and other digital
networks including cellular/mobile phones, and cellular or wireless connections.
We have developed and market products and services enabling audio, video, and
other multimedia content to be viewed through both broadband and narrowband
(dial-up and cellular) Internet connections.




We
specialize in the delivery of high-quality digital media solutions to the
narrowband market space and provide a resource savings for delivery of digital
media to broadband devices. In April 2004, we showcased our cellular solutions
at the National Association of Broadcasters (NAB) trade show in Las Vegas and
demonstrated our unique ability to deliver high-quality video to cellular/mobile
phones at an average frame rate of 15-24 fps (frames per second). The 2004 NAB
show established foundational credibility that enabled us to pursue the
necessary content rights to develop a service. We anticipate that through the
acquisition of these content delivery rights, we will be able to acquire a large
base of customers, network operators and content owners who will use our
services to deliver both free and paid content to cellular/mobile phone users
around the world. Our strategy is to grow and leverage our technological
advantage to drive the creation of a market for premium digital video content to
today's cellular/mobile phone customers. Our cellular/mobile solutions are
available using today's 2.5G cellular data networks or the new 3G data networks
as they are implemented.




**Critical
Accounting Policies and Estimates**




Our
discussion and analysis of financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent liabilities. We base these
estimates on our historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, and these estimates form the
basis for our judgments concerning the carrying values of assets and liabilities
that are not readily apparent from other sources. We periodically evaluate these
estimates and judgments based on available information and experience. Actual
results will differ from our estimates under different assumptions and
conditions. If actual results significantly differ from our estimates, our
financial condition and results of operations could be materially
impacted.




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 of Financial Condition and Results of
Operations."




17


**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 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
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.




Revenue
is recognized as earned upon the delivery of service to our customers. This is
typically when a digital media or multimedia broadcast is viewed or in the case
of hardware, when it is delivered.




**Software
Development Costs**
  Statement
of Financial Accounting Standards (“SFAS”) No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed, requires certain
development costs to be capitalized upon the establishment of technological
feasibility. The establishment of technological feasibility and the ongoing
assessment of the recoverability of such costs require considerable judgment by
management with respect to certain external factors such as anticipated revenue,
estimated economic life, and changes in software and hardware technologies.
Software development costs incurred beyond the establishment of technological
feasibility have not been significant.
 
 **Accounting
for Stock-Based Compensation**
  We apply
the intrinsic value method of accounting under Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to Employees,” (APB 25”) and
related interpretations in accounting for stock-based compensation plans. Under
APB 25, we generally do not recognize compensation expense on the grant of
options under our 2004 Equity Incentive Plan because typically the option terms
are fixed and the exercise price equals or exceeds the market price of the
underlying stock on the date of grant. We apply the disclosure only provisions
of Statement of Financial Accounting Standards No. 123, “Accounting and
Disclosure of Stock-Based Compensation,” (“SFAS 123”).
 
 Pro forma
information regarding net income and earnings per share is required by SFAS 123
and has been determined as if we had accounted for our 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.


****


**Results
of Operations**




***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.





18


*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.





*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.





*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.





*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.





19


*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 $1,316,000 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 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.




We will
require additional financing for the foreseeable future to sustain and expand
our operations and continue as a going concern. There is
no assurance 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 will be unable to
continue as a going concern. We currently have no commitments for any additional
capital.




**Going
Concern**




We have
incurred recurring losses and negative cash flows since our inception. As of
December 31, 2004, we had an accumulated deficit of approximately $12,213,500
and a working capital deficit of approximately $1,305,000. These matters raise
substantial doubt about our ability to continue as a going concern. We have
financed our business primarily from the proceeds received from private sales of
our common stock. The proceeds from our December 2004 and March 2005 financings
will be used for working capital, and for the expansion of our sales and
marketing activities. We believe our current cash position will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures for
the next seven to nine months. As a
result, it will be necessary to secure additional financing for our business
operations, which we intend to secure in the near future. 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. This
inability could seriously harm our business, results of operations and financial
condition.




20


**Certain
Factors Which May Impact Future Results**




In
addition to the other information in this Report, the following factors should
be considered in evaluating our financial condition and prospects. These factors
may have a significant impact on our business and future operating
results.




**We
have a limited operating history, making it difficult for you to evaluate our
business and your investment.**




We
formally launched our Internet based business-to-business 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. We have a very limited operating history upon which
you may evaluate our operations and future prospects, as well as limited
insights into emerging trends that may affect our business. 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
as we move into fiscal 2005 and cannot assure you 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.




**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
March 31, 2005, we had approximately $2,500,000 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,
2005.  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.




21


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.




**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, 2004, we had an accumulated deficit of approximately $12,213,500.
We have incurred net losses quarterly from inception through December 31, 2004,
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:




·
    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 effect 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, we may not be able to sustain
or increase profitability on a quarterly or annual basis.




22


**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 treatment 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 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., Michael
P. Walsh, William R. Dunavant, Scott Hughes, Ronald A. Warren and Wilson W.
Hendricks, III, 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
sole director is an employee and serves as the sole member of each of our
standing committees.**





Currently,
Richard E. Bennett, Jr. is the sole director of the Company after stockholders
voted against the election of two additional directors at the 2004 Annual
Meeting of Stockholders. Mr. Bennett also serves as our President and Chief
Executive Officer, in addition to being the sole member of each of our standing
board committees: Compensation, Nominations and Audit. Mr. Bennett is not
considered “independent,” under the Exchange Act or any applicable national
exchange or market. We believe Mr. Bennett would benefit by having additional
independent members of the Board of Directors with whom he could confer when
making business decisions. However, we do not have directors and officer's
liability insurance, which has hindered our ability to attract candidates to
join our Board of Directors or with qualifications to satisfy the independence
standards.


****


**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 in new
territories into which we expand, 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 assure you 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.




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




A limited
number of customers have accounted for a majority of our revenues and may
continue to do so for the foreseeable future. Additionally, a majority of our
2004 revenues were from related parties. During 2004, five of our customers
accounted for approximately 75% of our revenues. 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
business will be harmed.




23


**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 which 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 violates 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 and we have
limited insurance coverage for claims of this nature.




Because
we host, stream and deploy audio and video content on or from our Web sites 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.




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 assure you 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.




24


**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 assure you 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.




**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;




25




·
    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.


****


**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;




26




·
    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.




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.




27


**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, Web sites 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.




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, and 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 Web sites 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.




28


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 developed and are interpreted by the judicial
system, they could have the effect of:




·
    limiting
      the growth of the Internet;




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




·
    increasing
      our cost of doing business;




·
    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 Web site and through retransmissions
of radio broadcasts and/or other audio content. A Copyright Arbitration Royalty
Panel has determined that, for eligible non-subscription services, sound
recording performance rates should be $0.0014 per performance for the period
October 1998-2000, with a surcharge of 9% of the total performance fee for the
ephemeral copies used to facilitate such performances. However, that decision is
subject to review and revision by the U.S. Copyright Office, and several appeal
petitions have been filed. Furthermore, the Copyright Office's review is subject
to an appeal to a Federal Court of Appeals. The fees for the same types of
transmissions offered on a subscription basis have not been determined and will
be the subject of another Copyright Arbitration Royalty Panel proceeding, as
will fees for digital phono-record deliveries pursuant to the "mechanical
license" provisions of the U.S. Copyright Act. Depending on the rates and terms
adopted for the statutory licenses, our business could be harmed both by
increasing our own cost of doing business, and by increasing the cost of doing
business for our customers.




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.




29


**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:




·
    acquisition-related
      announcements;




·
    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.




30


****


**Item
7.Financial
Statements**








**SMARTVIDEO
TECHNOLOGIES INC.**




**Index
to Consolidated Financial Statements**




Report
      of Independent Registered Public Accounting
    Firm
    32Consolidated
      Balance Sheet
    33Consolidated
      Statements of Operations
    34Consolidated
      Statements of Changes in Shareholders’ Deficit
    35Consolidated
      Statements of Cash Flows
    37Notes
      to Consolidated Financial Statements
    39




31





**REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM**





To the
Board of Directors


SmartVideo
Technologies, Inc.








We have
audited the accompanying consolidated balance sheet of SmartVideo Technologies,
Inc. as of December 31, 2004, and the related consolidated statements of
operations, changes in shareholders' deficit, and cash flows for the years ended
December 31, 2004 and 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining on a test basis, evidence supporting the amount and disclosures in the
consolidated 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. as of December 31, 2004, and the results of its operations and its cash
flows for the years ended December 31, 2004 and 2003, in conformity with
accounting principles generally accepted in the United States of
America.





The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and a working capital deficiency that raise substantial doubt
about the Company’s ability to continue as a going concern. Management’s plans
in this regard are also discussed in Note 3. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.





****/s/ SHERB & CO.,
      LLPCERTIFIED
      PUBLIC ACCOUNTANTS


Boca
Raton, Florida


April 22,
2005




32





**SMARTVIDEO
TECHNOLOGIES, INC.**


**Consolidated
Balance Sheet**




****December
      31,**2004****ASSETS****CURRENT
      ASSETS**Cash
    
    $
    387,592Accounts
      receivable - net of allowance for doubtful accounts
    
    
    1,000Prepaid
      expenses
    
    
    90,687***Total
      current assets***
    
    
    479,279**PROPERTY
      AND EQUIPMENT,**net of accumulated depreciation of $72,313
    
    
    230,272**OTHER
      ASSETS**
    
    
    10,000***TOTAL
      ASSETS***
    
    $
    719,551**LIABILITIES
      AND SHAREHOLDERS’ DEFICIT****CURRENT
      LIABILITIES**Accounts
      payable and accrued expenses
    
    $
    739,903Private
      placement monies to be refunded
    
    
    114,500Due
      to related parties
    
    
    12,575Payable
      to related party
    
    
    53,311Due
      to advisor
    
    
    807,474Loan
      payable and related accrued interest
    
    
    57,003***Total
      current liabilities***
    
    
    1,784,766**Commitments
      and Contingencies****SHAREHOLDERS’
      DEFICIT**Preferred
      stock, $.001 par value, 50,000,000 shares authorized, no sharesissued
      and outstanding as of December 31, 2004
    
    
    -Common
      stock, $.001 par value, 50,000,000 shares authorized, 24,187,834 shares
      issued and outstanding as of December 31, 2004
    
    
    24,188Additional
      paid-in capital
    
    
    14,259,142Non-cash,
      stock-based compensation attributable
      to future periods
    
    
    (3,135,063
    )Accumulated
      deficit
    
    
    (12,213,482
    )***Total
      shareholders’ deficit***
    
    
    (1,065,215
    )***TOTAL
      LIABILITIES AND SHAREHOLDERS’ DEFICIT***
    
    $
    719,551





The
accompanying notes are an integral part of these statements.







33





**SMARTVIDEO
TECHNOLOGIES, INC.**




**Consolidated
Statements of Operations**








**For
      the Year Ended****December
      31,****2004**
    
    **2003****REVENUES**Revenue
    
    $
    86,788
    
    $
    41,019Revenue
      - related party
    
    
    31,945
    
    
    22,432***Total
      revenue***
    
    
    118,733
    
    
    63,451**EXPENSES**Compensation
      and benefits
    
    
    1,034,951
    
    
    515,850Consulting
      fees
    
    
    956,613
    
    
    641,752Data
      center
    
    
    355,999
    
    
    303,757Professional
      fees
    
    
    278,910
    
    
    111,183Selling,
      general and administrative
    
    
    1,046,567
    
    
    336,461Amortization
      of non-cash, stock-based compensation to a former
    advisor
    
    
    -
    
    
    1,316,250Non-cash,
      stock-based compensation
    
    
    3,118,996
    
    
    -Depreciation
    
    
    47,649
    
    
    17,501***Total
      operating expenses***
    
    
    6,839,685
    
    
    3,242,754***Loss
      from operations***
    
    
    (6,720,952
    )
    
    (3,179,303
    )**OTHER
      EXPENSES**Interest
      expense
    
    
    (71,978
    )
    
    (679,838
    )**NET
      LOSS**
    
    $
    (6,792,930
    )
    $
    (3,859,141
    )**LOSS
      PER SHARE**Basic
      and diluted net loss per share
    
    $
    (0.35
    )
    $
    (0.51
    )Weighted
      average common shares used to computebasic
      and diluted net loss per share
    
    
    19,208,345
    
    
    7,540,849








The
accompanying notes are an integral part of these statements.







34





**SMARTVIDEO
      TECHNOLOGIES, INC.****Consolidated
      Statements of Changes in Shareholder's Deficit****For
      the Period from January 1, 2003 through December 31,
      2004**
  Preferred
      Stock
    
    Common
      Stock
    
    Additional
    
    Accumulated
    
    Non-cash
    
    TreasuryShares
    
    Par
      Value
    
    Shares
    
    Par
      Value
    
    Paid-in
    
    Deficit
    
    Stock-Based
    
    Stock
    
    TotalCapital
    
    
    
    CompensationBalance,
      January 1, 2003
    
    
    12,000,000
    
    $
    12,000
    
    
    6,949,396
    
    $
    6,949
    
    $
    2,083,956
    
    $
    (1,561,411
    )
    $
    (1,316,250
    )
    $
    -
    
    $
    (774,756
    )Issuance
      of common stock for cash
    
    
    -
    
    
    -
    
    
    1,631,666
    
    
    1,632
    
    
    1,630,034
    
    
    -
    
    
    -
    
    
    -
    
    
    1,631,666Issuance
      of common stock asadditional consideration related to rights of
      convertible promissory notes
    
    
    -
    
    
    -
    
    
    53,000
    
    
    53
    
    
    177,497
    
    
    -
    
    
    -
    
    
    -
    
    
    177,550Issuance
      of common stock in lieuof payment of advances payable to a
      shareholder
    
    
    -
    
    
    -
    
    
    55,000
    
    
    55
    
    
    166,045
    
    
    -
    
    
    -
    
    
    -
    
    
    166,100Issuance
      of common stockpursuant to conversion of convertible
      debt
    
    
    -
    
    
    -
    
    
    223,929
    
    
    224
    
    
    167,721
    
    
    -
    
    
    -
    
    
    -
    
    
    167,945Amortization
      of deferred compensation
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    1,316,250
    
    
    -
    
    
    1,316,250Beneficial
      conversion feature onissuance of convertible promissory
      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 conversion of
      debt to equity
    
    
    -
    
    
    -
    
    
    400,000
    
    
    400
    
    
    399,600
    
    
    -
    
    
    -
    
    
    -
    
    
    400,000







The accompanying notes are an integral part of these
statements.





35




**SMARTVIDEO
      TECHNOLOGIES, INC.****Consolidated
      Statements of Changes in Shareholder's Deficit
      (continued)****For
      the Period from January 1, 2003 through December 31,
      2004**
  Preferred
      Stock
    
    Common
      Stock
    
    Additional
    
    Accumulated
    
    Non-cash
    
    TreasuryShares
    
    Par
      Value
    
    Shares
    
    Par
      Value
    
    Paid-in
    
    Deficit
    
    Stock-Based
    
    Stock
    
    TotalCapital
    
    
    
    CompensationIssuance
      of warrants to purchase units of common stock and common stockpurchase
      warrants on conversion ofdebt to equity and deferred compensation
      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
    
    $
    (12,213,482
    )
    $
    (3,135,063
    )
    $
    -
    
    $
    (1,065,215
    )
  The accompanying notes are an integral part of these
statements.




36


**SMARTVIDEO
TECHNOLOGIES, INC.**


**Consolidated
Statements of Cash Flows**




**For
      the Year Ended****December
      31,****2004**
    
    **2003****CASH
      FLOWS FROM OPERATING ACTIVITES**Net
      loss
    
    $
    (6,792,930
    )
    $
    (3,859,141
    )Adjustments
      to reconcile net loss to net cash used inoperating
      activities:Non-cash,
      stock-based compensation
    
    
    3,118,996
    
    
    -Issuance
      of common stock for services
    
    
    -
    
    
    177,550Beneficial
      conversion feature of convertible debt
    
    
    -
    
    
    308,000Excess
      of fair value of stock issued to individuals inrepayment
      of advance from shareholder
    
    
    -
    
    
    116,240Depreciation
    
    
    47,649
    
    
    17,501Bad
      debt expense
    
    
    68,119
    
    
    -Amortization
      of non-cash,
      stock-based compensation paid to a former advisor
    
    
    -
    
    
    1,316,250Increase
      (decrease) in cash resulting from changes in:Accounts
      receivable
    
    
    (13,539
    )
    
    (55,581
    )Prepaid
      expenses
    
    
    (90,687
    )
    
    -Advance
      from shareholders
    
    
    -
    
    
    36,010Accrued
      interest on notes payable
    
    
    65,306
    
    
    42,734Investor
      returns
    
    
    114,500
    
    
    -Accounts
      payable and accrued expenses
    
    
    1,031,055
    
    
    370,289Net
      cash used in operating activities
    
    
    (2,451,531
    )
    
    (1,530,148
    )**CASH
      FLOWS FROM INVESTING ACTIVITES**Capital
      expenditures
    
    
    (189,191
    )
    
    (102,981
    )Net
      cash used in investing activities
    
    
    (189,191
    )
    
    (102,981
    )**CASH
      FLOWS FROM FINANCING ACTIVITES**Proceeds
      from the issuance of common stock
    
    
    3,228,202
    
    
    1,631,666Payments
      to related parties
    
    
    (497,886
    )
    
    (39,614
    )Proceeds
      from the issuance of convertible promissory notes
    
    
    -
    
    
    333,333Net
      cash provided by financing activities
    
    
    2,730,316
    
    
    1,925,385**NET
      INCREASE IN CASH**
    
    
    89,594
    
    
    292,256**CASH**,
      beginning of year
    
    
    297,998
    
    
    5,742**CASH**,
      end of year
    
    $
    387,592
    
    $
    297,998





The
accompanying notes are an integral part of these statements.




37





**SMARTVIDEO
TECHNOLOGIES, INC.**


**Consolidated
Statements of Cash Flows (Continued)**




**For
      the Year Ended****December
      31,****2004**
    
    **2003****SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTING AND FINANCING
      ACTIVITIES**Issuance
      of common stock in lieu of repayment of anadvance
      payable to one shareholder
    
    $
    -
    
    $
    166,100Issuance
      of common stock pursuant to conversion ofconvertible
      promissory notes including accrued interest
    
    $
    254,377
    
    $
    167,945Issuance
      of common stock, common stock purchasewarrants,
      and a warrant to purchase units consistingof
      common stock and common stock purchasewarrants
      on conversion of debt to equity
    
    $
    800,000
    
    $
    -**CASH
      PAID FOR INTEREST EXPENSE**Interest
      expense paid in connection with notes payableto
      related parties
    
    $
    57,426
    
    $
    30,000


The
accompanying notes are an integral part of these statements.







38





**SMARTVIDEO
TECHNOLOGIES, INC.**


**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**


**December
31, 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. The Company has
developed a video compression and processing technology enabling the delivery of
Internet multimedia broadcast content. The Company markets its products and
services primarily in the United States and Canada through multiple sales
channels such as resellers and agents and its independent sales
force.





**Note
2 - Reclassification of Stock-Based Compensation on Previously Issued Financial
Statements**





In
connection with the engagement of a new accounting firm and the review of the
Company’s financial statements during the quarter ended March 31, 2004, the
Company concluded that it was preferable to classify the value of the deferred
compensation attributable to stock-based compensation as contra-equity instead
of as a prepaid expense. The stock-based compensation was generated from the
Company’s grant of its shares of common stock to a former advisor in November
2002. The market value of the common stock was approximately $1.4 million at the
date of grant. The Company has adjusted its balance sheet as of December 31,
2002, to decrease the prepaid expenses by approximately $1,316,000 with a
corresponding increase in deferred compensation reflected as a contra-equity
item. This reclassification had no impact on its 2004, 2003, and 2002
consolidated statement of operations including its net losses and net losses per
share and no impact on the balance sheets as of December 31, 2004 and 2003.





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




*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.





*Cash*





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, 2004, the balance
exceeded the federally insured limit by $287,592.





*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.


**


39


*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, 2004. The allowance for doubtful accounts at
December 31, 2004 was $44,320.





*Property
and Equipment*





Property
and equipment consisting primarily of computer equipment is stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which is generally three years. Depreciation
expense was $47,649 and $17,501 for the years ended December 31, 2004 and 2003,
respectively.




Property
and equipment consist of the following:

**December
      31,****2004**Computer
      equipment
    
    $
    223,085Proprietary
      software development
    
    
    79,500302,585Less
      accumulated depreciation
    
    
    (72,313
    )Property
      and equipment , net
    
    $
    230,272


*Software
Development Costs*





Statement
of Financial Accounting Standards (“SFAS”) No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed, requires certain
development costs to be capitalized upon the establishment of technological
feasibility. The establishment of technological feasibility and the ongoing
assessment of the recoverability of such costs require considerable judgment by
management with respect to certain external factors such as anticipated revenue,
estimated economic life, and changes in software and hardware technologies.
Software development costs incurred beyond the establishment of technological
feasibility have not been significant.





*Revenue
Recognition*





The
Company markets its products and services through resellers and agents as well
as its independent sales force.





The
Company typically provides its end-users with volume-based arrangements of its
Internet multimedia broadcast products and services, and in certain
circumstances, subject to minimum monthly usage. Resellers and agents are paid a
commission based on the end-user gross revenues. From time to time, the Company
sells hardware related to multimedia broadcasts to resellers.





40


Revenue
is recognized when earned and the Company has no continuing involvement in the
delivery of products or services, which is generally when the multimedia
broadcasts are viewed or when the hardware is delivered.





*Product
Concentration*





Historically,
the Company derived a substantial portion of its revenues from one product and
related services, Internet multimedia broadcasting. The Company does not expect
this trend to continue. SmartVideo recently launched a direct-to-the-consumer
mobile video service and is attempting to develop a broad and diverse subscriber
base.




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.


**


*Customer
Concentration*





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, one of which is
a related party.





*Reclassifications*





Certain
amounts in prior periods have been reclassified to conform to the current
presentation.





*Going
Concern*




The
Company has incurred recurring losses and negative cash flows since inception.
As of December 31, 2004, it had an accumulated deficit of approximately
$12,213,500 and a working capital deficit of approximately $1,305,500. These
matters raise substantial doubt about its ability to continue as a going
concern. The ability of the Company to continue its operations is contingent
upon obtaining additional financing and attaining profitable operations.




The
Company has generated only minimal income from operations and has no assurance
of any significant future revenues. The Company requires substantial additional
financing for the development and marketing of its existing and future products
and services. The Company intends to secure substantial additional 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. If the Company does not secure substantial additional funding to meet
its liabilities, it may have to issue additional shares of its common stock.





*Long-Lived
Assets*




The
Company reviews its long-lived assets for impairment whenever changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. For purposes of evaluating the recoverability of long-lived assets,
the recoverability test is performed using undiscounted net cash flows estimated
to be generated by the asset. The Company believes it will recover the carrying
amount of its long-lived assets.




*Income
Taxes*




The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". Under the asset and
liability method of Statement 109, deferred tax assets and liabilities are
recognized for the estimated 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 in effect for the year in which those
temporary differences are expected to be recovered or settled.





41


*Fair
Value of Financial Instruments*




Substantially
all of the Company’s assets and liabilities are carried at fair value or
contracted amounts that approximate fair value. Estimates of fair value are made
at a specific point in time, based on relative market information and
information about the financial instrument, specifically, the value of the
underlying financial instrument. Assets that are recorded at fair value consist
largely of other assets, which are carried at contracted amounts that
approximate fair value. Similarly, the Company’s liabilities consist of
liabilities recorded at contracted amounts that approximate fair
value.





*Earnings
Per Share*




Common
shares equivalents consist of shares issuable upon the exercise of certain stock
warrants and stock
options. As of December 31, 2004, there were 2,122,284 exercisable warrants and
131,250 exercisable stock options for a total of 2,253,534 common share
equivalents. The Company has excluded these common share equivalents from its
computation of earnings per share due to their antidilutive effect.




*Stock
Splits*




On
January 3, 2003, the Company effected a one-for-three reverse split of the
Company's common stock.





*Use
of Estimates*




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Significant estimates made by management
include the provision for doubtful accounts receivable and accrued expenses.
While the Company believes that such estimates are fair when considered in
conjunction with the consolidated financial position and results of operations
as a whole, the actual amounts of these estimates, when known, will often vary
from these estimates.




*Recent
Accounting Pronouncements*




In
March 2004, the FASB issued EITF Issue No. 03-1, “The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments”
which provides new guidance for assessing impairment losses on debt and equity
investments. Additionally, EITF Issue No. 03-1 includes new disclosure
requirements for investments that are deemed to be temporarily impaired. In
September 2004, the FASB delayed the accounting provisions of EITF Issue
No. 03-1; however, the disclosure requirements remain effective and have
been adopted for the Company’s year ending December 31, 2004. The Company
will evaluate the effect, if any, of EITF Issue No. 03-1 when final
guidance is released.




In
June 2004, the FASB issued EITF Issue No. 02-14, “Whether an Investor
Should Apply the Equity Method of Accounting to Investments Other Than Common
Stock.” EITF Issue No. 02-14 addresses whether the equity method of
accounting applies when an investor does not have an investment in voting common
stock of an investee but exercises significant influence through other means.
EITF Issue No. 02-14 states that an investor should only apply the equity
method of accounting when it has investments in either common stock or
in-substance common stock of a corporation, provided that the investor has the
ability to exercise significant influence over the operating and financial
policies of the investee. The accounting provisions of EITF Issue No. 02-14
are effective for the first quarter of fiscal 2005. The Company does not expect
the adoption of EITF Issue No. 02-14 will have any effect on its financial
statements.




In
December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (Revised 2004), “Share Based
Payment” (“SFAS 123R”) which (i) revises SFAS No. 123, “Accounting for
Stock-Based Compensation,” (“SFAS 123”) to eliminate the disclosure only
provisions of that statement and the alternative to follow the intrinsic value
method of accounting under Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB 25”) and its related
implementation guidance, and (ii) requires a public entity to measure the
cost of employee services received in exchange for an award of equity
instruments, including grants of employee stock options, based on the grant-date
fair value of the award and recognize that cost in its results of operations
over the period during which an employee is required to provide the requisite
service in exchange for that award. On
April 14, 2005, the U.S. Securities and Exchange Commission adopted a new
rule amending the compliance dates for FAS 123R. In accordance with the new
rule, the accounting provisions of FAS 123R will be effective for the Company in
fiscal 2006.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 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 123R will have a material negative impact on
our results of operations.




42


**Note
4 - Private Placement Monies to be Refunded**
 
 Prior to
the closing of its December 31, 2004 private placement, the Company received
requests from four of the individuals who had expressed an interest in
participating in the private placement and had previously sent in the funds for
their prospective investment. All of the refunds requested were processed
subsequent to December 31, 2004.
 
 **Note
5 - Due to Advisor**
 
 Under the
terms of an advisory agreement with one of the Company’s consultants, the
Company has recorded a liability for unissued, non-cash, stock-based
compensation due and outstanding in the approximate amount of $807,500 as of
December 31, 2004. This estimated compensation due to the advisor has been
computed using a Black-Scholes fair value method.
 ****


**Note 6
- Shareholders’ Deficit**





The
authorized capital stock of the Company consists of 50,000,000 shares of $.001
par value common stock and 50,000,000 shares of $.001 par value preferred stock,
in one or more series as determined by the Board of Directors. 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.





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. All warrants
issued during 2003 are outstanding at December 31, 2003. The warrants expire in
2008.




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.




43


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, 2004, the
Company has recorded $279,900 in non-cash, stock-based compensation expense and
$1,819,350 in non-cash, stock-based compensation attributable to future periods
related to these awards. The current and deferred portions of the compensation
have been determined using the Black-Scholes fair value method. Please see Note
11 - Stock Plans for additional information.


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.




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.




44


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. For the
year ended December 31, 2004, the Company has recorded $707,200 in non-cash,
stock-based compensation attributable to future periods related to those awards
granted to non-statutory employees. The compensation attributable to future
periods has been determined using the Black-Scholes fair value method. Please
see Note 11 - Stock Plans for additional information.




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, 2004, the Company has recorded $24,688 in non-cash,
stock-based compensation expense and $370,313 in non-cash, stock-based
compensation attributable to future periods related to this award. The current
and deferred portions of the compensation have been determined using the
Black-Scholes fair value method. Please see Note 11 - Stock Plans for additional
information.




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
January 2003, the Company engaged Interim CFO Solutions LLC to assist us in the
preparation of its U.S. Securities and Exchange Commission filings and to
provide general management consulting services. On November 29, 2004, Interim
CFO Solutions LLC delivered a notice of conversion whereby it converted $800,000
of liabilities owed to it into equity in a transaction consisting of two parts.
The terms of the conversion were priced contemporaneously on the same terms as a
series of private placements during October and November 2004. These private
placements in October and November 2004 were arm’s length transactions with
independent third parties. In part one of the transaction, $400,000 of the
amount due and payable was converted into equity on the same terms as the recent
private placements for an aggregate of 400,000 units. Each unit consisted of one
share of common stock and two 1⁄4 common stock purchase warrants, with exercise
prices of $1.50 per share and $2.00 per share. In part two of the transaction,
the remaining $400,000 was used to purchase the right, to purchase an additional
aggregate of 1,739,130 units at $1.00 per unit, at a total exercise price of
$1,739,130. This warrant is exercisable beginning on October 1, 2005 and expires
on September 30, 2010. Each unit was priced using the same terms as the recent
private placements and consisted of one share of common stock and two 1⁄4 common
stock purchase warrants, with exercise prices of $1.50 per share and $2.00 per
share. The shares of common stock and the common stock underlying the warrant(s)
have piggy-back registration rights. These securities have been issued as
restricted shares in a private placement exempt from registration. For the
year ended December 31, 2004, the Company has recorded $1,190,435 in non-cash,
stock-based compensation expense related to this transaction. This expense has
been determined using the Black-Scholes fair value method.




45


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, 2004, the Company has recorded $238,200 in non-cash,
stock-based compensation attributable to future periods related to this award.
The compensation attributable to future periods has been determined using the
Black-Scholes fair value method. Please see Note 11 - Stock Plans for additional
information.




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. For the
year ended December 31, 2004, the Company has recorded $442,000 in non-cash,
stock-based compensation expense related to this award. This expense has been
determined using the Black-Scholes fair value method.




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 11 - 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.




**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.




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 $7,000 as of
December 31, 2004.





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




46




·
    $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, 2004.




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 - Related Party Transactions**
 
 The
Company has a $325,000 note payable to an entity owned by the spouse of a
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, 2004.
  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.
   The
Company had an advance payable to an entity owned by the spouse of a shareholder
of approximately $11,000. This advance was made prior to 2003. This advance was
paid in full on December 31, 2004.





The
Company had advances from holders of preferred shares amounting to $12,575 at
December 31, 2003. These advances are payable on demand and do not bear
interest.





Until
October 2002, the Company was provided the use of office facilities from a
related entity, owned by the spouse of Robert J. Walters (a holder of more than
10% of our common stock), at no cost. In October 2002, an agreement was reached
with this related entity to charge the Company rent for its share of the office
facilities and common expenses. There were no expenses accrued or charged under
the terms of this agreement prior to December 31, 2002. The amount paid by the
Company during 2003 and 2004 under this leasing arrangement amounted to
approximately $71,000 and $122,000, respectively. The amount payable under this
lease agreement amounted to approximately $40,000 at December 31, 2003. The
rental expense associated with this lease is included in the general and
administrative expenses in the accompanying consolidated financial statements.
This lease expires on August 31, 2005. The minimum future lease payments under
the term of this lease for the year ending December 31, 2005 is
$64,000.





During
2003, a related entity, owned by the spouse of Robert J. Walters (a holder of
more than 10% of our common stock), used the Company’s products and services.
Revenues generated from this arrangement during 2003 amounted to approximately
$22,000, all of which was receivable at December 31, 2003.





47


During
2004, a related entity, owned by the spouse of Robert J. Walters (a holder of
more than 10% of our common stock), used the Company’s products and services.
Revenues generated from this arrangement during 2004 amounted to approximately
$31,000, all of which was receivable at December 31, 2004 and is included in the
accounts receivable from related parties in the accompanying consolidated
financial statements. These amounts have been reserved in full pending the
resolution of the dispute regarding the late charges associated with the note
payable as discussed earlier.





**Note 9
- Income Taxes**





At
December 31, 2004, the Company had an unused federal net operating loss
carryforward of approximately $6.5 million for income tax purposes, which
expires in 2020, 2021, and 2022. However, the ability to utilize such losses to
offset future taxable income is subject to various limitations imposed by the
rules and regulations of the Internal Revenue Service. A portion of the net
operating losses are limited each year to offset future taxable income, if any,
due to the change of ownership in the Company’s outstanding shares of common
stock. This net operating loss carryforward may result in future income tax
benefits of approximately $2.5 million; however, because realization is
uncertain at this time, a valuation reserve in the same amount has been
established. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.




Significant
components of the Company’s deferred tax liabilities and assets as of December
31, 2004, are as follows:




**For
      the Years Ended December 31,****2004**
    
    **2003**Deferred
      tax liabilities
    
    $-
    
    $-Deferred
      tax assetsNet
      operating loss carryforwards
    
    
    2,481,000
    
    
    1,126,000Valuation
      allowance for deferred tax assets
    
    
    (2,481,000
    )
    
    (1,126,000
    )Net
      deferred tax assets
    
    $
    -
    
    $
    -




The
valuation allowance for deferred tax assets increased by $1,404,000 during 2004.





The
actual tax provisions for 2004 and 2003 reconcile to the amounts computed by
applying the statutory Federal and state tax rates to income before income taxes
as follows:
  **For
      the Years Ended December 31,****2004**
    
    
    **2003**Statutory
      rate
    
    
    (35.00
    %)
    
    (35.00
    %)State
      income taxes, net of Federal benefit
    
    
    (2.96
    %)
    
    (4.00
    %)Increase
      in valuation allowance
    
    
    37.96
    %
    
    4.00
    %Total
      benefit (provision) for income taxes
    
    
    -
    
    
    -
  The
temporary differences, which give rise to deferred tax assets as of December 31,
2004 and 2003 are as follows:
  48
  **For
      the Years Ended December 31,****2004**
    
    
    **2003**Net
      operating loss carryforwards
    
    $
    6,536,827
    
    $
    2,887,179Less
      valuation allowance
    
    
    (6,536,827
    )
    
    (2,887,179
    )Net
      deferred tax assets
    
    $
    -
    
    $
    -
 
 **Note
10 - Stock Plans**
 
 ***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.


***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. There are 2,445,000 options granted
and outstanding under this plan. The exercise
prices of the options granted under this plan range between $1.00 and $3.50 with
aweighted average exercise price of $2.20. All of the stock options
granted during the year ended 2004 are outstanding as of December 31, 2004.
There were no exercises or forfeitures in 2004. The
weighted average remaining contractual life of the options granted and
outstanding under this plan is 8.25 years. As of December 31, 2004, there were
131,250 options exercisable, but unexercised.In general, stock options
granted through December 31, 2004 have included exercise prices not less than
the fair market value of our common stock at the date of grant, and vest, as
determined by the Company’s Board of Directors.





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.




SmartVideo
reports all non-cash, stock-based compensation to non-statutory employees as a
single expense category in the accompanying consolidated statements of
operations. During the year ended December 31, 2004, the Company recorded
approximately $305,000 in non-cash stock-based compensation to non-statutory
employees.




49


*Accounting
for Stock-Based Compensation*




The
Company applies the intrinsic value method of accounting under Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,”
(APB 25”) and related interpretations in accounting for stock-based compensation
plans, which have been described more fully above. Under APB 25, the Company
generally does not recognize compensation expense on the grant of options under
its 2004 Equity Incentive Plan because typically the option terms are fixed and
the exercise price equals or exceeds the market price of the underlying stock on
the date of grant. The Company applies the disclosure only provisions of
Statement of Financial Accounting Standards No. 123, “Accounting and Disclosure
of Stock-Based Compensation,” (“SFAS 123”).





Pro forma
information regarding net income and earnings per share is required by SFAS 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,****2004**
    
    
    **2003**Net
      loss to common shareholders, as reported
    
    $
    (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
      value based method for all awards, net of related tax
    effects
    
    
    (75,727
    )
    
    -Pro
      forma net loss to common shareholders
    
    $
    (6,868,657
    )
    $
    (3,859,141
    )Basic
      and diluted net loss per share, as reported
    
    $
    (0.35
    )
    $
    (0.51
    )Pro
      forma basic and diluted net loss per share
    
    $
    (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
2.50%, the volatility factor was 115.96%, the estimated average life term was
3.25 years, and the weighted average fair value of the options granted was
$2.20.





The
Company’s wholly owned subsidiary had issued under its stock incentive plan
approximately 1,565,500 options which were still outstanding at December 31,
2004. These options have exercise prices ranging from $0.06 to $0.50 per option.
Such options were granted between October 2000 and April 2002. Under the terms
of the stock incentive plan, all of these options have expired.





**Note
11 - 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.




50


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.




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.




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.




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.




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.




51


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.




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 March
31, 2005, Mr. Richard Seifert and KC Adventures, Inc. 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. The Company intends to vigorously defend
against these claims.




Except as
set forth above, the Company believes 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, 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.




**Note
12 - Subsequent Events**





*New
Service Launch*





In
January 2005, the Company launched its direct-to-the-consumer mobile video
service. This service provides its customers with access to high-quality video
programming that is transmitted directly to its customers' SmartPhone cellular
handsets or to Wi-Fi enabled Personal Data Assistants (PDA) devices that are
connected to the Internet via a wireless local area network. (The Company
defines a SmartPhone as a mobile cellular handset that is Internet enabled, has
some type of Internet browser, and has either a Windows Media Player or has a
RealNetworks Media Player.) The Company is a service provider to subscribers on
all of the major U.S. cellular carriers. The Company also provides demonstration
accounts, where the Company has acquired the necessary video distribution
rights, to viewers in more than 70 countries, operating on more than 150
carriers.




52


*Issuance
of Common Stock*





On March
29, 2005, the Company completed a private placement in which the Company issued
1,761,235 shares of common stock at $2.25 per share and warrants to purchase up
to an additional 880,620 shares of common stock at an exercise price of $3.50
per share, resulting in gross proceeds of approximately $3,962,750. The warrants
have a five-year term. In connection with this private placement, the Company
paid a finder’s fee of $238,725 in cash and issued warrants to purchase up to
106,100 shares of common stock at $2.25 per share and warrants to purchase up to
53,050 shares of common stock at $3.50 per share to Forte Capital Partners, LLC,
the placement agent in the transaction. Further, the placement agent has agreed
to purchase an additional $740,000 of the securities issued in the transaction,
consisting of 328,889 shares of common stock and warrants to purchase up to an
additional 164,445 shares of common stock at a purchase price of $3.50 per
share, no fewer than three days prior to the registration statement
going effective, or in the case that the registration does not go effective, by
the one-year anniversary of the financing, March 29, 2006. The Company has
agreed to file a registration statement with respect to the securities issued in
this March 2005 private placement. These securities have been issued as
restricted shares to an aggregate of 28 accredited investors in a private
placement exempt from registration.





*Consulting
Agreement with Michael P. Walsh.*





Effective
March 1, 2005, the Company entered into a consulting agreement with Forte
Capital Partners, LLC, whose designee is Michael P. Walsh. The term of the
consulting agreement is for a period of six months and provides for a monthly
salary 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.





*Agreement
with Two Holders of the Company’s 10% Convertible Promissory
Notes*
 
 During
March 2005, 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 50,000 shares as
additional consideration related to rights associated with such promissory
notes.


53




**Item
      8.**
    **Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure**




None.




**Item
      8A.**
    **Controls
      and Procedures**




We
carried out an evaluation as of the end of the period covered by this Annual
Report on Form 10-KSB for the year ended December 31, 2004, under the
supervision and with the participation of our management, including our chief
executive officer and chief financial officer, of the effectiveness of the
design and operation of our "disclosure controls and procedures," as such term
is defined under Exchange Act Rule 13a-15(e).




Based on
this evaluation, our chief executive officer and chief financial officer
concluded that, as of the end of the period covered by this report, such
disclosure controls and procedures were reasonably designed to ensure that
information required to be disclosed by us in the reports we file or submit
under the Exchange Act is: (a)  recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission, and (b) accumulated and communicated to our
management, including our chief executive officer and chief financial officer,
as appropriate to allow timely decisions regarding required disclosure.




In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and in reaching a reasonable level of assurance our management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.




There
were no changes in our internal controls over financial reporting during the
fourth fiscal quarter for the fiscal year ended December 31, 2004, that
materially affected, or were reasonably likely to materially affect, our
internal controls over financial reporting.




**Item
      8B.**
    **Other
      Information**




On
December 31, 2004, we completed a private placement in which we 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 registrations
rights.




54




**PART
III**




**Item
      9.**
    **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.
    Sole
      Director, President and Chief Executive Officer
    45Ronald
      A. Warren
    Corporate
      Secretary,Vice
      President of Investor Relations and Corporate
    Communications
    50Michael
      P. Walsh
    Chief
      Financial Officer
    42




**Richard
E. Bennett, Jr.** has been
an officer and director since November 2002 and serves as its Chief Executive
Officer and 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.




**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.




**Michael
P. Walsh** , joined
SmartVideo in March 2005 as Chief Financial Officer. He also is a Business
Consultant of one of our stockholders and the placement agent for our March 2005
private placement, Forté Capital Partners, LLC since January 2003. Since January
2004, Mr. Walsh has also served as the Chief Financial Officer, Treasurer and
Controller of IQ Biometrix, Inc (OTCBB: IQBM). From May 2001 until January 2004,
Mr. Walsh was acting Chief Financial Officer and Director of Finance for
Financial Interactive, Inc., a private software company. From January 2000 until
April 2001, Mr. Walsh was the Controller for OnLight, Inc. a private
telecommunications company. From April 1998 until January 2000, Mr. Walsh was
Director of Planning, Analysis and Reporting for First Franklin Financial
Corporation, a financial services company, wholly-owned by National City
Corporation.




**Key
Employees and Consultant** **s**




**William
R. Dunavant** *,* 51,
serves as 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.




55


**Scott
Hughes** , 38,
Vice President of Engineering, joined SmartVideo in March 2001 and is
responsible for product design, scope, and development of our services,
including the d evelopment
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.





**Wilson
W. Hendricks, III** , 62,
Vice President of Operations joined SmartVideo as VP Operations in 2005. From
1998 to March 2005, Mr. Hendricks was a director with Bearingpoint, Inc.
(formerly KPMG Consulting) and a member of Bearingpoint's Communications and
Content practice. Mr. Hendricks was a founding member of KPMG Consulting's
wireless group. As a director with KPMG Consulting's Asia Pacific Region, Mr.
Hendricks was responsible for starting the regions communications practice. Mr.
Hendricks most recent Bearingpoint assignment was as Operations Director for the
Department of Homeland Security/Transportation Security Authorities TWIC
Program.




**Director
Compensation**




On June
1, 2004, we granted one of our former directors, Darren J. Breitkreuz, options
to purchase up to 500,000 shares of common stock at an exercise price of $1.00
per share. At the time of the grant, Mr. Breitkreuz was one of our directors. At
present, we do not pay our directors for attending meetings of the Board of
Directors, although we may adopt a director compensation policy in the future.
We have no standard arrangement pursuant to which our directors are compensated
for any services provided as a director or for committee participation or
special assignments.




**Audit
Committee**




The Board
of Directors has an Audit Committee. The sole member of the Audit Committee is
Mr. Bennett. Mr. Bennett is not an “audit committee financial expert,” as
defined under Item 401(e) or Regulation S-B under the Exchange Act. The Board is
actively seeking an audit committee financial expert, however, the Company does
not have director’s and officer’s liability insurance, which has hindered its
ability to attract a person with such qualifications to join the Board of
Directors and serve on the Audit Committee. The Board believes that Mr. Bennett
has sufficient knowledge in financial and auditing matters to serve on the Audit
Committee. During fiscal year ended December 31, 2004, a former director, Darren
Breitkreuz, served as the sole member of the Audit Committee until August 31,
2004. Prior to his departure, the Board had determined that Mr. Breitkreuz was
an "independent" director; as such term is defined under the Exchange Act or any
applicable national exchange or market, but was not an audit committee financial
expert. The Audit Committee held no formal meetings during the fiscal year ended
December 31, 2004.




The Audit
Committee works closely with management as well as our independent auditors. The
Audit Committee has the authority to obtain advice and assistance from, and
receive appropriate funding from us for, outside legal, accounting or other
advisors as the Audit Committee deems necessary to carry out its
duties.




56


**Committee
Interlocks and Insider Participation**





No
interlocking relationship exists between any member of our Board or Compensation
Committee and any member of the Board of Directors or compensation committee of
any other companies, nor has such interlocking relationship existed in the
past.




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




Section
16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")
requires our directors and executive officers and beneficial holders of more
than 10% of our common stock to file with the Commission initial reports of
ownership and reports of changes in ownership and reports of changes in
ownership of our equity securities. As of the date of this Report, to our
knowledge, based solely on our review of the copies of such reports received by
us, we believe that all Section 16 reporting persons have timely filed the
reports under Section 16(a) of the Exchange Act for the year ended December 31,
2004, except Form 4’s for Rene Hamouth (one filing) and Ronald A. Warren (one
filing).




**Code
of Ethics**




We have
adopted a code of ethics that applies to all of our directors, officers and
employees, which includes our chief executive officer, chief financial officer,
chief accounting officer, controller, and any other person performing similar
functions. A copy of our code of ethics is publicly available on our website at http://www.smartvideo.com/corpgov.html . If we
make any substantive amendments to our code of ethics or grant any waiver,
including any implicit waiver, from a provision of the code to our chief
executive officer, chief financial officer, chief accounting officer or
controller, we will disclose the nature of such amendment or waiver in a report
on Form 8-K.




**Item 10.**
    **Executive
      Compensation**




**Summary
Compensation Table**





The
following table sets forth certain information concerning compensation paid
during fiscal years ended December 31, 2002, 2003 and 2004, 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 2004 (collectively, the
“Named Executives”):




**Annual
      Compensation**
    
    **Long
      Term Compensation Awards****Name**
    
    **Year**
    
    **Salary($)**
    
    **Bonus
      ($)**
    
    **Other
      Annual Compensation ($)**
    
    **RestrictedStockAwards
      ($)**
    
    **SecuritiesUnderlying
      Options/SARs (#)**
    
    **LTIPPayouts
      ($)**Richard
      E. Bennett, Jr.
    
    2004
    
    75,000
    
    -
    
    -
    
    -
    
    -
    
    -2003
    
    78,1252002
    
    34,154Ronald
      A. Warren
    
    2004
    
    72,020
    
    -
    
    53,500(1)
    
    **-**
    
    100,000
    
    -2003
    
    6,0032002
    
    -





(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).




57


**Option/SAR
Grants Table in the Last Fiscal Year**




The
following table sets forth certain information concerning grants of stock
options to the Named Executives, for the year ended December 31,
2004:




**Individual
      Grants**
    
    
    
    
    
    **Potential
      Realizable Value at**
      **Assumed
      Annual Rate of Stock Price**
      **Appreciation**
      **For
      Option Term (1)****(a)**
    
    **(b)**
    
    **(c)**
    
    **(d)**
    
    **(e)**
    
    **(f)**
    
    **(g)****Name**
    
    **Number
      of**
      **Securities**
      **Underlying**
      **Options/SARs**
      **Granted
      (#)**
    
    **%
      of Total**
      **Options/SARs**
      **Granted
      to**
      **Employees
      In**
      **Fiscal
      Year**
    
    **Exercise
      Or**
      **Base
      Price**
      **($/Share)**
    
    **Expiration
      Date**
    
    **5%
      ($)**
    
    **10%
      ($) (1)**Ronald
      A. Warren
    
    50,000
      (2)
    
    2.0%
    
    $1.00
    
    8/31/2009
    
    $
      230,500
    
    $
      304,000Ronald
      A. Warren
    
    50,000
      (3)
    
    2.0%
    
    $2.25
    
    12/6/2009
    
    $
      168,000
    
    $
      241,500


**___________________**




1.
    This
      chart assumes a market price of $4.40 for the common stock, the closing
      sale price for our common stock on the Over-the Counter Bulletin Board as
      of December 31, 2004, as the assumed market price for the common stock
      with respect to determining the "potential realizable value" of the shares
      of common stock underlying the options described in the chart, as reduced
      by any lesser exercise price for such options. Further, the chart assumes
      the annual compounding of such assumed market price over the relevant
      periods, without giving effect to commissions or other costs or expenses
      relating to potential sales of such securities. Our common stock has a
      very limited trading history. These values are not intended to forecast
      the possible future appreciation, if any, price or value of the common
      stock.2.
    This
      option was granted on September 1, 2004 under our 2004 Equity Incentive
      Plan and became exercisable with respect to 6.25% on March 1, 2005. The
      remaining 93.75% of the underlying shares will vest equally on a quarterly
      basis through September 1, 2008.3.
    This
      option was granted on December 7, 2004 under our 2004 Equity Incentive
      Plan and will become exercisable with respect to 6.25% on June 1, 2005.
      The remaining 93.75% of the underlying shares will vest equally on a
      quarterly basis through March 1, 2009.




**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, 2004. None of the Named Executives exercised any
options during fiscal year 2004.




**Number
      of Securities**
    
    **Value
      of Unexercised****Underlying
      Unexercised**
    
    **In
      the Money Options****Name**
    
    **Options
      at December 31, 2004**
    
    **at
      December 31,****2004(1)****Exercisable**
    
    **Unexercisable**
    
    **Exercisable**
    
    **Unexercisable**Richard
      E. Bennett, Jr.
    
    -
    
    -
    
    $   
      -
    
    $  
      -Ronald
      A. Warren
    
    -
    
    100,000
    
    $   
      -
    
    $
      277,500





(1)
    Based
      on the difference between the option's exercise price and a closing price
      of$4.40 for the underlying common stock on December 31, 2004 (our last
      business day of fiscal year 2004) as reported by the Over-the-Counter
      Bulletin Board.


****


58


**Employment
Agreements**




**Employment
Agreement with Richard E. Bennett, Jr** ***.*** We have
entered into an employment agreement with Richard E. Bennett, Jr. The employment
agreement provides for an initial base salary of $75,000 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.




**Consulting
Agreement with Michael P. Walsh** ***.*** Effective March 1, 2005, we entered into a consulting agreement with Forte
Capital Partners, LLC, whose designee is Michael P. Walsh. 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 we terminate the
agreement without cause, we 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.





**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 provides for the grant of 25,000 stock options.




**Item 11.**
    **Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters**




The
following table reflects, as of April 22, 2005, 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****(5)**
    
    **Percentage**
      **Shares**
      **Beneficially**
      **Owned****(1)
      (5)**Richard
      E. Bennett, Jr.**(2)**
    
    4,000,000
    
    
    15.4%Robert
      J. Walters**(3)**
    
    4,000,000
    
    
    15.4%William
      R. Dunavant**(4)**
    
    4,000,000
    
    
    15.4%Ronald
      A. Warren
    
    15,625
    
    
    *Michael
      P Walsh
    
    2,000
    
    
    *All
      directors and officers as a group (3 persons)
    
    4,017,625
    
    
    15.5%




59




*
    Less
      than 1%.(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 April 22, 2005, 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 25,999,069 shares of common
      stock outstanding as of April 22, 2005.(2)
    Includes
      4,000,000 shares held by a trust for the benefit of Richard E. Bennett,
      Jr.(3)
    Includes
      3,000,000 shares owned directly by Robert J. Walters and 1,000,000 shares
      held by a trust for the benefit of Robert J. Walters.(4)
    Includes
      4,000,000 shares held by a trust for the benefit of William R.
      Dunavant.(5)
    Does
      not include the following shares issuable in accordance with the Stock
      Exchange Agreement dated November 26, 2002 but
unissued:





Common
      SharesIssuableRichard
      E. Bennett, Jr.
    
    
    305,555Robert
      J. Walters
    
    
    305,556William
      R. Dunavant
    
    
    305,555Total
    
    
    916,666







**Equity
Compensation Plan Information**




The
following table provides information, as of December 31, 2004, with respect to
options outstanding and available under the 2004 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:




60







**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)**
    **Number
      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
    2,445,000
    $2.20
    2,555,000Equity
      compensation plans not approved by security holders
    0
    N/A
    0TOTAL
    2,445,000
    $2.20
    2,555,000





**Item 12.** **Certain
Relationships and Related Transactions**




We had a
$325,000 note payable to an entity owned by the spouse of Robert J. Walters, the
Former Chairman of our Board of Directors 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.




We had a
$150,000 note payable to a former stockholder of our subsidiary, OVT, Inc., in
connection with a stock repurchase, bearing interest at 5.18%. The note was
secured by 2,500,000 shares of OVT's common stock. The principal due under the
terms of this note payable, including accrued interest, was paid in full on
December 31, 2004.




We had an
advance payable to an entity owned by the spouse of a shareholder of
approximately $11,000. This advance was made prior to 2003. This advance was
paid in full on December 31, 2004.





We have
advances from holders of preferred shares amounting to $12,575 at December 31,
2003. These advances are payable on demand and do not bear interest.





Until
October 2002, we were provided the use of office facilities from a related
entity, owned by the spouse of Robert J. Walters (a holder of more than 10% of
our common stock), at no cost. In October 2002, an agreement was reached with
this related entity to charge us rent for its share of the office facilities and
common expenses. There were no expenses accrued or charged under the terms of
this agreement prior to December 31, 2002. The amount paid by us during 2003 and
2004 under this leasing arrangement amounted to approximately $71,000 and
$122,000, respectively. The amount payable under this lease agreement amounted
to approximately $40,000 at December 31, 2003. The rental expense associated
with this lease is included in the general and administrative expenses in the
accompanying consolidated financial statements. This lease expires on August 31,
2005. The minimum future lease payments under the term of this lease for the
year ending December 31, 2005 is $64,000.




61


During
2003, a related entity, owned by the spouse of Robert J. Walters (a holder of
more than 10% of our common stock) used our products and services. Revenues
generated from this arrangement during 2003 amounted to approximately $22,000,
all of which was receivable at December 31, 2003 and is included in the accounts
receivable from related parties in the accompanying consolidated financial
statements. These amounts were received in full in March 2004.











Our Chief
Financial Officer, Michael P. Walsh, is also a business consultant to Forte
Capital Partners, LLC, one of our stockholders and the placement agent in
connection with our March 2005 private placement. Forte Capital Partners, LLC
received (i) a finder’s fee of $238,725 in cash; (ii) a warrant to purchase up
to 106,100 shares of our common stock at $2.25 per share; and (iii) a warrant to
purchase up to 53,050 shares of our common stock at $3.50 per share. Forte
Capital Partners, LLC has agreed to invest an additional $740,000 no fewer than
3 days prior to the registration statement going effective, or in the case that
the registration does not go effective, by the one-year anniversary of the
financing, March 29, 2006.




62




**Item
      13.**
    **Exhibits**


The
following is a complete list of exhibits filed as part of the Annual Report on
form 10-KSB, some of which are incorporated herein by reference from the
reports, registration statements and other filings of the issuer with the
Securities and Exchange Commission, as referenced below:


(1)
    Financial statementsThe SmartVideo
      Technologies, Inc. financial statements found in ITEM 7. FINANCIAL
      STATEMENTS for the year ended December 31, 2004 are incorporated herein by
      reference.(2)
    Exhibits:2.1
    Agreement
      relating to the Acquisition of OVT, Inc., d/b/a SmartVideo Technologies,
      Inc. (as amen)13.1
    Certificate
      of Incorporation, as amended23.2
    Bylaws,
      as amended34.1
    Form
      of warrant issued to each purchaser in the March 2005 private
      placement4.2
    Form
      of warrant issued to each purchaser in the December 2004 private
      placement4.3
    Warrant
      issued to Interim CFO Solutions LLC to purchase 100,000 shares of common
      stock at $1.50 per share4.4
    Warrant
      issued to Interim CFO Solutions LLC to purchase 100,000 shares of common
      stock at $2.00 per share4.5
    Warrant
      issued to Interim CFO Solutions LLC to purchase 1,739,130
      units4.6
    Form
      of Warrant issued to Interim CFO Solutions LLC to purchase 434,783 shares
      of common stock at $1.50 per share4.7
    Form
      of Warrant issued to Interim CFO Solutions LLC to purchase 434,783 shares
      of common stock at $2.00 per share10.1*
    2004
      Equity Incentive Plan310.2*
    Employment
      Agreement for Richard E. Bennett, Jr.410.3*
    Employment
      Agreement for Ronald A. Warren10.4*
    Consulting
      Agreement for Michael P. Walsh10.5
    Form
      of Registration Rights Agreement310.6
    Promissory
      Note to ProNetworkTV, Inc.310.7
    Form
      of Securities Purchase Agreement, dated as of March 29,
    200510.8
    Form
      of Subscription Agreement, dated as of December 31,
200410.9
    Form
      of Registration Rights Agreement, dated as of March 29, 200510.10
    Form
      of Registration Rights Agreement, dated as of December 31,
      200410.11
    Registration
      Rights Agreement, dated as of November 29, 2004, between SmartVideo
      Technologies, Inc. and Interim CFO Solutions LLC10.12
    Services
      Agreement, dated September 1, 2002, between OVT, Inc. and Business
      Ventures for facilities sub-lease and services21
    Subsidiaries
      of the Registrant31.1
    Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
    Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.1
    Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


__________________________________




63




*
    Management
      contract or compensatory plan or arrangement.1
    Incorporated
      by reference to the Exhibits to the Company’s Current Report on Form 8-K,
      as amended, as filed with the Commission on December 13,
    2002.2
    Incorporated
      by reference to the Exhibits to the Company's Current Report on Form 8-K,
      as filed with the Commission on January 2, 2001.3
    Incorporated
      by reference to the Exhibits to the Company's Form 10-KSB for the year
      ended December 31, 2003, as filed with the Commission on April 30,
      2004.4
    Incorporated
      by reference to the Exhibits to the Company's Form 10-KSB for the year
      ended December 31, 2002, as filed with the Commission on May 15,
      2003.




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




**Independent
Auditor for 2004** . Our
Audit Committee recommended
and approved the engagement of Sherb and Co., LLP as our principal independent
accountants, effective January 1, 2004.




**Fees
billed for Fiscal Years 2004 and 2003** The
following table represents fees for professional services rendered by Sherb and
Co., LLP and Spicer
Jeffries LLP billed to
us for the audit of our annual financial statements for the years ended
December 31, 2004 and 2003, respectively and fees for other services billed
by Sherb and
Co., LLP and Spicer
Jeffries LLP during
those periods:





**Fees**
    
    **2004**
    
    **2003**Audit
      Fees
    
    $
    39,000
    
    $
    14,197Audit
      Related Fees
    
    
    0
    
    
    0Tax
      Fees
    
    
    0
    
    
    2,500All
      Other Fees
    
    
    0
    
    
    0Total
    
    $
    39,000
    
    $
    16,697




***Audit
Fees***




We
incurred the following fees to Sherb
and Co., LLP , our
independent auditors, for services rendered for the year ended December 31,
2004, and Spicer Jeffries for services rendered for the year ended December 31,
2003, 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 and Co., LLP.




***Audit
Related Fees***




There
were no additional fees for 2004 and 2003 billed to us by Sherb and
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***




The
aggregate fees billed to us by Sherb and
Co., LLP  for 2004
and by Spicer Jeffries LLP for 2003, for tax compliance, tax advice and tax
planning were zero and $2,500, respectively.




***All
Other Fees***




There
were no additional fees for 2004 and 2003 billed to us by Sherb and
Co., LLP  or by Spicer
Jeffries LLP for products
and services rendered, other than as described above.




64


**Auditor
Pre-Approval Policies** . The
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 bySherb and Co., LLP,
      since its engagement as our principal independent
    accountants.







65





**SIGNATURES**




In
accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.




SMARTVIDEO TECHNOLOGIES,
      INC.Date: April 27,
2005
    By:
    /s/ **Richard E.
      Bennett, Jr.**Richard E. Bennett, Jr.President
      and Chief Executive Officer





In
accordance with the Exchange Act, this Report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.




**Signature**
    
    **Title**
    
    **Date**/s/Richard
      E. Bennett, Jr.
    
    President,
      Chief Executive Officer,
    
    April
      27, 2005Richard
      E. Bennett, Jr.
    
    and Sole
      Director/s/Michael
      P. Walsh
    
    Chief
      Financial Officer
    
    April
      27, 2005Michael
      P. Walsh




66