**UNITED
                STATES****SECURITIES
                AND EXCHANGE COMMISSION****Washington,
                DC 20549****FORM
                10-Q**x
            **QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934****For
                the quarterly period ended March 31, 2006**OR ̈
            **TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934**Commission
                file number 000-26809**SMARTVIDEO
                TECHNOLOGIES, INC.**(Exact
                name of small business issuer as specified in its
                charter)**Delaware**
            
            **91-1962104**(State
                or other jurisdiction of incorporation)
            
            (IRS
                Employer Identification No.)**3505
                Koger Boulevard, Suite 400, Duluth, Georgia**
            **30096**(Address
                of principal executive offices)
            (Zip
                Code)**(770)
                279-3100**Issuer’s
                telephone number, including area codeCheck
                whether the registrant (1) has filed all reports required to be filed
                by
                Section 13 or 15(d) of the Securities Exchange Act of 1934 during
                the 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. YesxNo ̈Indicate
                by check mark whether the registrant is a large accelerated filer,
                an
                accelerated filer, or a non-accelerated filer. See definition of
                accelerated filer and large accelerated filer in Rule 12(b)-2 of
                the
                Exchange Act.
              
              Large
                Accelerated Filer ̈Accelerated FilerxNon-accelerated FilerIndicate
                by check mark whether the registrant is a shell company (as defined
                in
                Rule 12b-2 of the Exchange Act): Yes ̈NoxThe
                total number of shares of the issuer’s common stock, $.001 par value,
                outstanding on May 8, 2006 was 38,739,137.














**SMARTVIDEO
      TECHNOLOGIES INC.**




**Index
      to Form 10-Q**




**PART
                  I - FINANCIAL INFORMATION**Disclosure
                  Regarding Forward-Looking Statements
              
              
              iiItem1.
                  Financial StatementsHistorical
                  Financial StatementsCondensed
                  Consolidated Balance Sheet (Unaudited)
              
              
              1Condensed
                  Consolidated Statements of Operations (Unaudited)
              
              
              2Condensed
                  Consolidated Statements of Cash Flows (Unaudited)
              
              
              3Notes
                  to Condensed Consolidated Financial Statements (Unaudited)
              
              
              4Item2.
                  Management’s Discussion and Analysis or Plan of Operation
              
              
              16Item3.
                  Controls and Procedures
              
              
              20**PART
                  II - OTHER INFORMATION**Item1.
                  Legal Proceedings
              
              
              22Item2.
                  Unregistered Sales of Equity Securities and Use of
                  Proceeds
              
              
              22Item3.
                  Defaults Upon Senior Securities
              
              
              22Item4.
                  Submission of Matters to a Vote of Security Holders
              
              
              22Item5.
                  Other Information
              
              
              22Item6.
                  Exhibits
              
              
              22Signatures
              
              
              24




-i-




**DISCLOSURE
      REGARDING FORWARD-LOOKING STATEMENTS**





We
      make
“forward-looking statements” within the meaning of the Private Securities
      Litigation Reform Act of 1995 throughout this document. Whenever you read a
      statement that is not simply a statement of historical fact (such as when we
      describe what we “believe,” “intend,” “plan,” “estimate,” “expect” or
“anticipate” will occur and other similar statements), you must remember that
      our expectations may not turn
      out
      to be correct, even though we believe they are reasonable. We do not guarantee
      that any future transactions or events described herein will happen as described
      or that they will happen at all. You should read this document completely and
      with the understanding that actual future results may be materially different
      from what we expect. You should not place undue reliance on these
      forward-looking statements. Whether actual events or results will conform to
      our
      expectations and predictions is subject to a number of risks and uncertainties.
      These risks and uncertainties include, but are not limited to, the
      following:




·
            significant
                uncertainty inherent in the mobile entertainment services
                industry;


·
            intense
                and increasing competition from the telecommunications industry and
                the
                satellite and cable television industry; new competitors are likely
                to
                emerge and new technologies may further increase competition;


·
            our
                ability to obtain future financing or funds when
                needed;


·
            our
                ability to successfully obtain a diverse customer base;


·
            our
                ability to protect our intellectual property through patents, trademarks,
                copyrights and confidentiality agreements;


·
            our
                ability to respond to new developments in technology and new applications
                of existing technology before our competitors;


·
            our
                ability to develop, maintain and enhance our strategic relationships
                with
                wireless carriers, handset distributors, key streaming media technology
                companies and content providers; and


·
            our
                ability to design and execute a successful business
                strategy.





This
      document should be read in conjunction with our Annual Report on Form 10-K.
      You
      should carefully consider the statements under “Risk Factors” in our Form 10-K,
      which address additional factors that could cause our actual results to differ
      from those set forth in the forward-looking statements and could materially
      and
      adversely affect our business, operating results and financial condition. All
      subsequent written and oral forward-looking statements attributable to us or
      persons acting on our behalf are expressly qualified in their entirety by the
      applicable cautionary statements.





All
      cautionary statements made herein should be read as being applicable to all
      forward-looking statements wherever they appear. In this connection, investors
      should consider the risks described herein and should not place undue reliance
      on any forward-looking statements.





The
      forward-looking statements speak only as of the date on which they are made,
      and, except to the extent required by federal securities laws, we undertake
      no
      obligation to update any forward-looking statement to reflect events or
      circumstances after the date on which the statement is made or to reflect the
      occurrence of unanticipated events. In addition, we cannot assess the impact
      of
      each factor on our business or the extent to which any factor, or combination
      of
      factors, may cause actual results to differ materially from those contained
      in
      any forward-looking statements.





In
      this
      document, the words “we,” “our” and “us” refer to SmartVideo Technologies, Inc.
      and its subsidiary, unless the context otherwise requires.


-ii-




PART I - FINANCIAL INFORMATION


**SmartVideo
        Technologies, Inc. and Subsidiary** Consolidated
        Balance SheetsMarch
        31,
        2006 (Unaudited) and December 31, 2005


**March
                  31,**
              
              **December
                  31,****2006**
              
              **2005****Assets****Current
                  Assets**Cash
              
              $
              2,638,245
              
              $
              5,792,566Accounts
                  receivable – net of allowance for doubtful accounts of $99,501 and
                  $77,937
              
              
              —
              
              
              —Broadcast
                  rights - net of accumulated amortization of $2,348,948 and
                  $1,740,552
              
              
              2,384,283
              
              
              2,408,525Prepaid
                  expenses
              
              
              50,000
              
              
              —**Total
                  Current Assets**
              
              
              **5,072,528**
              
              
              **8,201,091****Property
                  and Equipment, net of accumulated depreciation of $407,478 and
                  $350,641**
              
              
              **1,466,717**
              
              
              **716,423****Other
                  Assets**Broadcast
                  rights, net of current portion
              
              
              2,380,845
              
              
              2,880,999Other
              
              
              117,548
              
              
              122,161**Total
                  Other Assets**
              
              
              2,498,393
              
              
              3,003,160**Total
                  Assets**
              
              **$**
              **9,037,638**
              ****
              **$**
              **11,920,674****Liabilities
                  and Stockholders' Equity (Deficit)****Current
                  Liabilities**Accounts
                  payable and accrued expenses
              
              $
              1,424,708
              
              $
              2,905,618Contracts
                  payable - broadcast rights
              
              
              2,429,000
              
              
              2,283,500Accrued
                  settlement expenses
              
              
              791,244
              
              
              5,541,244Due
                  to related parties
              
              
              55,886
              
              
              64,429Loan
                  payable and related accrued interest
              
              
              60,682
              
              
              59,922**Total
                  Current Liabilities**
              
              
              **4,761,520**
              
              
              **10,854,713****Long-Term
                  Liabilities**Contracts
                  payable — broadcast rights - net of current portion
              
              
              2,896,076
              
              
              3,386,576**Total
                  Liabilities**
              
              
              **7,657,596**
              
              
              **14,241,289****Commitments
                  and Contingencies****Stockholders'
                  Equity (Deficit)**Preferred
                  stock, $.001 par value, 12,000,000 shares authorized, 12,000,000
                  sharesissued
                  and no shares outstanding as of March 31, 2006 and December 31,
                  2005
              
              
              —
              
              
              —Preferred
                  stock, Series B, 7% Convertible, $1,000 par value, 2,500 shares
                  authorized,no
                  shares issued and outstanding as of March 31, 2006 and December
                  31,
                  2005
              
              
              —
              
              
              —Preferred
                  stock, Series A-1, Convertible, $.001 par value, 50,000,000 sharesauthorized,
                  11,666,666 shares issued and 3,823,331 outstanding as of March
                  31,2006,
                  10,666,666 shares issued and outstanding as of December 31,
                  2005
              
              
              3,823
              
              
              10,667Common
                  stock, $.001 par value, 50,000,000 shares authorized, 38,346,362
                  shares
                  issuedand
                  outstanding as of March 31, 2006, 28,688,463 shares issued and
outstanding
                  as of December 31, 200538,346
              
              
              28,689Additional
                  paid-in capital
              
              
              47,179,046
              
              
              39,027,618Less:
                  Deferred consulting fees
              
              
              (2,501,013
              )
              
              (1,433,833
              )Accumulated
                  deficit
              
              
              (43,340,160
              )
              
              (39,953,756
              )**Total
                  Stockholders' Equity (Deficit)**
              
              
              **1,380,042**
              
              
              **(2,320,615**
              **)****Total
                  Liabilities and Stockholders' Equity (Deficit)**
              
              **$**
              **9,037,638**
              ****
              **$**
              **11,920,674**


**See
      accompanying  notes to unaudited consolidated financial
      statements**




-1-




**SmartVideo
        Technologies, Inc. and Subsidiary**
 **Consolidated
        Statements of Operations**
 **(Unaudited)**




**For
                    the Three Months Ended****March
                    31,****2006**
                
                **2005****Revenues**Revenue
                
                $
                112,967
                
                $
                25,132**Total
                    Revenues**
                
                
                **112,967**
                
                
                **25,132****Operating
                    Expenses**Broadcast
                    rights
                
                
                527,713
                
                
                —Compensation
                    and benefits
                
                
                491,089
                
                
                302,549Consulting
                    and professional fees
                
                
                732,267
                
                
                255,526Data
                    center
                
                
                219,621
                
                
                128,402Depreciation
                
                
                56,837
                
                
                24,364Stock-based
                    compensation
                
                
                776,560
                
                
                477,230Selling,
                    general and administrative
                
                
                740,091
                
                
                857,399**Total
                    Operating Expenses**
                
                
                **3,544,178**
                
                
                **2,045,470****Loss
                    from Operations**
                
                
                **(3,431,211**
                **)**
                
                **(2,020,338**
                **)****Other
                    Income (Expense)**Interest
                    income
                
                
                45,567
                
                
                —Interest
                    expense
                
                
                (760
                )
                
                (198,220
                )**Total
                    Other Income (Expense), Net**
                
                
                **44,807**
                
                
                **(198,220**
                **)****Net
                    Loss**
                
                $
                (3,386,404
                )
                $
                (2,218,558
                )Net
                    Loss per Share - Basic and Diluted
                
                $
                (0.11
                )
                $
                (0.09
                )Weighted
                    Average Common SharesOutstanding
                    during the Period
                
                
                **29,700,178**
                
                
                **24,236,381**
  **See
        accompanying notes to unaudited consolidated financial
        statements**


-2-


**SmartVideo
        Technologies, Inc. and Subsidiary** Consolidated 
        Statements of  Cash Flows  **(Unaudited)**


**For
                    the Three Months Ended****March
                  31,****2006**
              
              **2005****Cash
                  Flows from Operating Activities**Net
                  loss
              
              $
              (3,386,404
              )
              $
              (2,218,558
              )Adjustments
                  to reconcile net loss to net cash used in
                  operating activities:Amortization
                  of stock based compensation
              
              
              1,346,260
              
              
              —Amortization
                  of broadcast rights
              
              
              608,396
              
              
              —Bad
                  Debt
              
              
              21,564
              
              
              14,027Depreciation
              
              
              56,837
              
              
              24,364Non-cash,
                  stock-based compensation
              
              
              —
              
              
              477,230Valuation
                  adjustment related to non-cash compensation due to
                  advisor
              
              
              —
              
              
              (79,970
              )Additional
                  consideration related to rights of convertible promissory
                  notes
              
              
              —
              
              
              197,500Changes
                  in Operating Assets and Liabilities:(Increase)
                  Decrease in:Accounts
                  receivable
              
              
              (21,564
              )
              
              (16,529
              )Prepaid
                  expenses
              
              
              (50,000
              )
              
              (52,350
              )Other
                  Assets
              
              
              4,613
              
              
              (50,000
              )Increase
                  (Decrease) in:Accounts
                  payable and accrued expenses
              
              
              (1,001,973
              )
              
              739,274Accrued
                  interest payable
              
              
              (7,783
              )
              
              716Investor
                  returns
              
              
              —
              
              
              (50,000
              )Repayments
                  on acquired broadcast rights
              
              
              (758,000
              )
              
              —**Net
                  Cash Used in Operating Activities**
              
              
              **(3,188,054**
              **)**
              
              **(1,014,296**
              **)****Cash
                  Flows from Investing Activities**Purchase
                  of equipment
              
              
              (599,131
              )
              
              (567,938
              )**Net
                  Cash Used in Investing Activities**
              
              
              **(599,131**
              **)**
              
              **(567,938**
              **)****Cash
                  Flows from Financing Activities**Issuance
                  of common stock for cash
              
              
              —
              
              
              3,729,875Proceeds
                  from warrant exercises
              
              
              632,864
              
              
              —**Net
                  Cash Provided By Financing Activities**
              
              
              **632,864**
              
              
              **3,729,875**Net
                  Increase (Decrease) in Cash and Cash Equivalents
              
              
              (3,154,321
              )
              
              2,147,641Cash
                  - Beginning of period
              
              
              5,792,566
              
              
              387,592**Cash
                  - End of period**
              
              $
              2,638,245
              
              $
              2,535,233**Supplemental
                  Disclosure of Cash Flow Information**Cash
                  paid for:Income
                  Taxes
              
              $
              —
              
              $
              —Interest
              
              $
              —
              
              $
              —**Supplemental
                  Disclosure of Non-Cash Investing and Financing
                  Activities**Acquisition
                  of Broadcast Rights
              
              $
              84,000
              
              
              —Issuance
                  of common stock to acquire software
              
              $
              208,000
              
              
              —Issuance
                  of Common Stock for settlement of accounts payable
              
              $
              149,937
              
              
              —Issuance
                  of convertible preferred stock to settle accrued
                  litigation
              
              $
              4,750,000Issuance
                  of common stock pursuant to anti-dilution agreement
              
              $
              1,122
              
              
              —Conversion
                  of convertible preferred stock to common stock
              
              $
              7,844
              
              
              —Forfieture
                  of stock based compensation
              
              $
              271,563
              
              
              —
   **See
        accompanying notes to unaudited consolidated financial
        statements**


-3-




**SmartVideo
        Technologies, Inc. and Subsidiary**
 **Notes
        to condensed consolidated financial statements**
 **(Unaudited)**
  **Note
      1 - Organization**





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




**Note
      2 - Going Concern**




As
      reflected in the accompanying unaudited consolidated financial statements,
      the
      Company has a net loss of $3,386,404 and net cash used in operations of
      $3,188,054, respectively for the three month period ended March 31, 2006. The
      Company also has an accumulated deficit of $43,340,160 at March 31, 2006.





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





**Note
      3 -Basis of Presentation and Significant Accounting
      Policies**





*(A)
      Basis of Presentation*




The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in accordance with accounting principles generally accepted in the
      United States (“GAAP”) and with the instructions to Form 10-Q for interim
      financial information. Accordingly, these unaudited condensed consolidated
      financial statements do not include all of the information and notes required
      for complete financial statements. In the Company’s opinion, all adjustments
      (consisting of normal recurring adjustments) considered necessary for a fair
      presentation have been included. Certain prior year amounts have been
      reclassified to conform to the current year presentation. Operating results
      for
      the three months ended March 31, 2006 are not necessarily indicative of the
      results that may be expected for the year ending December 31, 2006. For
      further information, refer to the consolidated financial statements and notes
      thereto included in the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2005 (“2005 10-K”).





*(B)
      Principles of Consolidation*




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





*(C)
      Cash and Cash Equivalents*




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


-4-




**SmartVideo
        Technologies, Inc. and Subsidiary**
 **Notes
        to condensed consolidated financial statements**
 **(Unaudited)**




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 March 31, 2006, the balance
      exceeded the federally insured limit by $2,553,532. Additionally, at March
      31,
      2006, the Company had $15,000 maintained under a compensating balance agreement.
      The $15,000 is retained due to potential credit card chargebacks that are
      unforeseen.




**** *(D)
      Equipment*




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 $56,837 and
      $24,364 for the three month periods ended March 31, 2006 and 2005,
      respectively.




Equipment
      consists of the following:




**March
                  31,**
              
              **December
                  31,****2006**
                **(unaudited)**
              
              **2005**Computer
                  equipment
              
              $
              1,267,222
              
              $
              987,564Proprietary
                  software development
              
              
              606,973
              
              
              79,5001,874,195
              
              
              1,067,064Less
                  accumulated depreciation
              
              
              (407,478
              )
              
              (350,641
              )Property
                  and equipment, net
              
              $
              1,466,717
              
              $
              716,423





*(E)
      Broadcast Rights*




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





*(F)
      Accounts Receivable*





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





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





Management
      estimates the amount of required allowances for potential non-collectibility
      of
      accounts receivable based upon past collection experience and consideration
      of
      other relevant factors. However, past experience may not be indicative of future
      collections and therefore additional charges could be incurred in the future
      to
      reflect differences between estimated and actual collections. In January 2005,
      the Company launched its direct-to-the-consumer mobile video service. While
      the
      Company uses many of the features developed for the core technology in
      delivering this new service, its focus on a direct-to-the-consumer model
      represents a significant change in direction. As a result of this change in
      business focus, the Company has fully reserved against all of its accounts
      receivable as of March 31, 2006. The allowance for doubtful accounts at March
      31
      2006 was $99,501.





-5-




**SmartVideo
        Technologies, Inc. and Subsidiary**
 **Notes
        to condensed consolidated financial statements**
 **(Unaudited)**





*(H)
      Earnings Per Share*




In
      accordance with SFAS No. 128, “Earnings per Share” (“EPS”), basic earnings per
      share is computed by dividing the net income (loss) less preferred dividends
      for
      the period by the weighted average number of shares outstanding. Diluted
      earnings per share is computed by dividing net income (loss) less preferred
      dividends by the weighted average number of shares outstanding including the
      effect of share equivalents. Common share equivalents consist of shares issuable
      upon the exercise of certain common stock purchase warrants, stock options,
      and
      Convertible Preferred Stock. The Company has excluded these common share
      equivalents from its computation of earnings per share due to their antidilutive
      effect as the Company has reflected a net loss at March 31, 2006 and 2005,
      respectively. Accordingly, the basic and diluted EPS are the same.





The
      following table is a summary of common stock equivalents outstanding at March
      31, 2006 and 2005, respectively.


**For
                  the Quarter ended March 31,****2006**
              
              **2005****(Unaudited)**Common
                  Stock Options
              
              
              4,630,000
              
              
              2,445,000Common
                  Stock Warrants
              
              
              20,875,302
              
              
              10,945,564Total
                  Common Stock Options and Warrants
              
              
              25,505,302
              
              
              13,390,564





*(I)
      Stock-based Compensation*




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





See
      additional disclosure in Notes 5 and 9





*(J)
      Revenue Recognition*




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




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




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




-6-




**SmartVideo
        Technologies, Inc. and Subsidiary**
 **Notes
        to condensed consolidated financial statements**
 **(Unaudited)**


*(K)
      Use of Estimates*




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





Significant
      estimates during 2006 and 2005 include depreciable lives on property and
      equipment, the valuation of stock options/warrants granted for services, the
      value of warrants issued in connection with debt and equity related financings,
      valuation and related amortization of intangible broadcast rights pursuant
      to
      Statement of Financial Accounting Standards (“SFAS”) No. 63 and the valuation
      allowance for deferred tax assets since the Company had continuing operating
      losses.




*(L)
      Income Taxes*




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





*(M)
      Derivative Liabilities*





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





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




-7-




**SmartVideo
        Technologies, Inc. and Subsidiary**
 **Notes
        to condensed consolidated financial statements**
 **(Unaudited)**


*(N)
      Product Concentration*





The
      Company derives a substantial portion of its revenues from two products and
      related services, business-to-business and direct-to-the-consumer mobile video
      service and is attempting to develop a broad and diverse subscriber base. For
      the quarter ended March 31, 2006, business-to-business and direct-to-consumer
      revenue accounts for 21% and 79% respectively. For the quarter ended March
      31,
      2005, business-to-business and direct-to-consumer revenue accounts for 67%
      and
      33% respectively.





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.





*(O)
      Customer Concentration*





For
      the
      quarter ended March 31, 2006 and 2005, the Company derived a substantial portion
      of its revenues from two customers accounting for 19% and 48% of its revenues,
      respectively.




*(P)
      Recent Accounting Pronouncements*




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





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




**Note
      4 - Broadcast Rights**





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





During
      2005, the Company acquired intangible broadcast rights of $7,705,076 pursuant
      to
      various long term contracts with content providers. The Company recorded the
      fair value of these assets at gross cost with a corresponding credit to
      broadcast rights payable. The fair value of these acquired rights is based
      on
      the entire amount due under the terms of the initial agreement. During 2005,
      the
      Company entered into litigation surrounding one of its content providers. (See
      Note 9(A)). As a result, the Company reduced the gross value of its broadcast
      rights assets by $900,000, the fair value of the previously capitalized amount
      and decreased the related gross liability by $900,000.


-8-




**SmartVideo
        Technologies, Inc. and Subsidiary**
 **Notes
        to condensed consolidated financial statements**
 **(Unaudited)**





At
      March
      31, 2006, amortization expense of broadcast rights accounted for $608,396 of
      the
      total broadcast rights expense of $527,713. Included in the total expense of
      $527,713 is approximately $80,000 in credits that were reflected in the quarter
      ended March 31, 2006.





At
      March
      31, 2006 the Broadcast Rights Assets - net of accumulated amortization was
      $2,384,283. Broadcast Rights Assets - net of current portion was
      $2,380,845.





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





For
      the
      quarter ending March 31, 2006 and 2005, the Company paid $758,000 and $0,
      respectively to content providers pursuant to the terms of the related
      contracts.





Contracts
      payable - short term at March 31, 2006 were $2,429,000. Contracts payable -
      long-term at March 31, 2006 were $2,896,076.








**Note
      5 - Shareholders’ Equity**





**Quarter
      Ended March 31, 2006:**




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




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




As
      of
      March 31, 2006 the authorized preferred stock of the Company consists of
      50,000,000 shares of $.001 par value Series A-1 preferred stock of which
      11,666,666 shares are issued and 3,823,331 shares are outstanding and are
      designated as convertible.




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




**(1)**
            **Preferred
                Stock Conversions**




During
      the quarter ended March 31, 2006, the Company converted 7,843,335 shares of
      Series A-1 Convertible Preferred Stock to shares of common stock on a one-to-one
      basis.




**(2)**
            **Accounts
                Payable**




During
      the quarter ended March 31, 2006, the Company settled two outstanding vendor
      payables with unrelated third parties by issuing an aggregate 299,916 shares
      of
      common stock having an aggregate fair value of $357,937. Fair value was
      determined based on the quoted closing trading price on the dates of grant.
      The
      share prices on the dates of grant ranged from $0.75 - $2.08 per share. Of
      the
      total shares issued, 100,000 shares valued at $208,000, were applied directly
      against a vendor payable in connection with the purchase of computer
      software.


-9-




**SmartVideo
        Technologies, Inc. and Subsidiary**
 **Notes
        to condensed consolidated financial statements**
 **(Unaudited)**


**(3)**
            **Warrant
                Conversions**




During
      the quarter ended March 31, 2006, the Company issued 1,514,648 shares of common
      stock in connection with the exercise of previously granted stock purchase
      warrants. Of the total, 392,792 shares were issued pursuant to the warrant
      contractual exercise price. These exercise prices ranged from $1.50 - $2.00
      per
      share. Total cash proceeds raised from conversions was $632,864. The remaining
      1,121,856 shares were issued pursuant to a antidilution provision as stated
      in
      the related warrant contracts. The Company recorded related offsetting amounts
      in additional paid-in capital and common stock at the par value of the stock
      issued, the total was $1,122.







The
      following is a summary of all common stock issued during the quarter ended
      March
      31, 2006:




**QUANTITY****ACTIVITY**
              
              
              **OF
                  SHARES**
              
              
              **VALUATION**Preferred
                  Stock Conversion
              
              
              7,843,335
              
              $
              -Accounts
                  Payable Settlements
              
              
              299,916
              
              
              357,937Warrant
                  Conversions
              
              
              1,514,648
              
              
              632,864Totals
              
              
              9,657,899
              
              $
              990,801







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




**(1)
                    Services**




On
      January 19, 2006, the Company entered into a consulting agreement with Growth
      Consultants LLC (“consultant”). The term of the agreement is through June 30,
      2006. Pursuant to the agreement, the consultant was issued 300,000 common stock
      purchase warrants having an exercise price of $3.00 per warrant. The Company
      will record approximately $1.4 million in deferred consulting expense at the
      grant date related to these warrants using fair value accounting as prescribed
      by SFAS No. 123R and the related Black-Scholes pricing model with the following
      weighted average assumptions:





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





For
      the
      quarter ended March 31, 2006, the Company recorded $569,700 in consulting
      expense. The remaining $854,550 is a component of deferred
      consulting.




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




**(1)
                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.


-10-


**SmartVideo
        Technologies, Inc. and Subsidiary**
 **Notes
        to condensed consolidated financial statements**
 **(Unaudited)**




**(2)
                2005 Equity Incentive Plan**




The
      Board
      of Directors of the Company adopted the 2005 Stock Incentive Plan (“2005 Plan”).
      The Plan allows for the issuance of 10,000,000 shares of common stock. The
      Plan
      was approved by the shareholders on February 23, 2006.





The
      following tables summarize all stock option grants to employees and
      non-employees as of March 31, 2006:




**Number
                  of**
                **Options**
              
              **Weighted****Average****Exercise****Price**Stock
                OptionsBalance
                  at December 31, 2005
              
              
              
              
              
              
              
              
              3,480,000
              
              $
              2.03Granted
              
              
              
              
              
              
              
              
              1,650,000
              
              
              2.23Exercised
              
              
              
              
              
              
              
              
              —
              
              
              —Forfeited
              
              
              
              
              
              
              
              
              (500,000
              )
              
              1.00Balance
                  at March 31, 2006
              
              
              
              
              
              
              
              
              4,630,000
              
              $
              2.21Options
                  exercisable at March 31, 2006
              
              
              
              
              
              
              
              
              2,144,063
              
              $
              2.20Weighted
                  average fair value of optionsgranted
                  during the quarter ended March 31, 2006
              
              
              
              
              
              $
              2.21


-11-
 **SmartVideo
        Technologies, Inc. and Subsidiary**
 **Notes
        to condensed consolidated financial statements**
 **(Unaudited)**


**Options
                  Outstanding**
              
              **Options
                  Exercisable****Number**
              
              **Weighted**
              
              
              
              
              **Number****Outstanding**
              
              **Average**
              
              **Weighted**
              
              **Exercisable**
              
              **Weighted****Range
                  of**
              
              **at**
              
              **Remaining**
              
              **Average**
              
              **at**
              
              **Average****Exercise**
              
              **March
                  31,**
              
              **Contractual**
              
              **Exercise**
              
              **March
                  31,**
              
              **Exercise****Price**
              
              **2006**
              
              **Life**
              
              **Price**
              
              **2006**
              
              **Price****$**
              0.90
              
              250,000
              
              9.28
                  Years
              
              **$**
              0.90
              
              62,500
              **$**
              0.90**$**
              1.00
              
              360,000
              
              8.40
                  Years
              
              **$**
              1.00
              
              360,000
              **$**
              1.00**$**
              1.50
              
              200,000
              
              9.17
                  Years
              
              **$**
              1.50
              
              200,000
              **$**
              1.50**$**
              1.58
              
              25,000
              
              9.16
                  Years
              
              **$**
              1.58
              
              4,688
              **$**
              1.58**$**
              1.90
              
              500,000
              
              9.59
                  Years
              
              **$**
              1.90
              
              125,000
              **$**
              1.90**$**
              1.95
              
              100,000
              
              9.94
                  Years
              
              **$**
              1.95
              
              —
              **$**
              1.95**$**
              2.10
              
              1,350,000
              
              9.92
                  Years
              
              **$**
              2.10
              
              280,000
              **$**
              2.10**$**
              2.25
              
              680,000
              
              6.79
                  Years
              
              **$**
              2.25
              
              486,875
              **$**
              2.25**$**
              2.30
              
              150,000
              
              8.68
                  Years
              
              **$**
              2.30
              
              80,000
              **$**
              2.30**$**
              2.53
              
              25,000
              
              9.93
                  Years
              
              **$**
              2.53
              
              —
              **$**
              2.53**$**
              2.77
              
              25,000
              
              9.93
                  Years
              
              **$**
              2.77
              
              —
              **$**
              2.77**$**
              2.90
              
              20,000
              
              9.03
                  Years
              
              **$**
              2.90
              
              3,750
              **$**
              2.90**$**
              2.91
              
              30,000
              
              9.05
                  Years
              
              **$**
              2.91
              
              5,625
              **$**
              2.91**$**
              2.95
              
              15,000
              
              8.51
                  Years
              
              **$**
              2.95
              
              5,625
              **$**
              2.95**$**
              3.27
              
              150,000
              
              9.90
                  Years
              
              **$**
              3.27
              
              5,000
              **$**
              3.27**$**
              3.50
              
              750,000
              
              8.27
                  Years
              
              **$**
              3.50
              
              525,000
              **$**
              3.504,630,000
              
              9.04
                  Years
              
              **$**
              2.21
              
              2,144,063
              $
              2.20


At
      March 31, 2006, the Company had a total of
      25,505,302 warrants outstanding. Of these warrants, 20,875,302 are
      exercisable. The life of the warrants range from zero to five years. The
      exercise price of these warrants range from $0.75 to $6.50. See additional
      disclosure above regarding activity.




**(3)
      Stock Plans**





For
      the
      quarter ended March 31, 2006, the Company adopted SFAS No. 123(R). Under SFAS
      No. 123(R), companies are required to measure the compensation costs of
      share-based compensation arrangements based on the grant-date fair value and
      recognize the costs in the financial statements over the period during which
      employees are required to provide services. Share-based compensation
      arrangements include stock options, restricted share plans, performance-based
      awards, share appreciation rights and employee share purchase
      plans.




For
      the
      quarter ended March 31, 2005, pro forma information regarding net income and
      earnings per share is required by SFAS No. 123 and has been determined as if
      the
      Company had accounted for its stock-based compensation plans using the fair
      value method prescribed by that statement. For purposes of pro forma
      disclosures, the estimated fair value of the options is amortized to expense
      over the options’ vesting period on a straight-line basis. Compensation
      previously recognized is reversed to the extent applicable to forfeitures of
      unvested options. For purposes of presenting the comparative 2005 pro forma
      financial statement information, the Company has determined the amount of share
      based awards previously accounted for pursuant to APB No. 25 prior to January
      1,
      2006 and recorded the appropriate expense as if SFAS No. 123R had been followed
      in the previous comparative period.





The
      following table illustrates the effect on the consolidated net loss and net loss
      per share if the Company had accounted for its stock-based compensation plans
      using SFAS No. 123R for the employee share based awards.




**For
                  the Quarter Ended March 31,****2006**
              
              **2005****(Unaudited)**
              
              **(Unaudited)**Net
                  loss to common shareholders, as reported
              
              $
              (3,386,404
              )
              $
              (2,218,558
              )Add:
                  Stock-based employee compensation expense included in reported
                  net
                  loss,net of related tax effects
              
              
              —
              
              
              —Deduct:
                  Total stock-based employee compensation expense determined under
                  fair
                  valuebased method for all awards, net of related tax effects
              
              
              —
              
              
              (154,434
              )Pro
                  forma net loss to common shareholders
              
              $
              (3,386,404
              )
              $
              (2,372,992
              )Basic
                  and diluted net loss per share, as reported
              
              $
              (0.11
              )
              $
              (0.09
              )Pro
                  forma basic and diluted net loss per share
              
              $
              (0.11
              )
              $
              (0.10
              )




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


-12-


**SmartVideo
        Technologies, Inc. and Subsidiary**
 **Notes
        to condensed consolidated financial statements**
 **(Unaudited)**




For
      the
      quarter ended March 31, 2006, the Company recorded a charge to income in the
      amount of approximately $517,000 for the effects of the adoption of FASB 123(R)
      in the current year for employee share based awards.





**Note
      6 – Office
      Space**





In
      May
      2005, the Company assumed a sublease for approximately 25,000 square feet of
      office space in Duluth, Georgia. This office space currently serves as the
      Company’s corporate headquarters. This sublease calls for monthly rental
      payments of approximately $23,000 and terminates on August 31, 2007. Rent
      expense for the three months ended March 31, 2006 and 2005 was $69,499 and
      $30,433, respectively.




**Note
      7 –
      Promissory Notes**





Concurrent
      with the merger on November 26, 2002, 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 $10,682
      as of
      March 31, 2006. At March 31, 2006, the Company has recorded an aggregate $60,682
      for loans payable and related accrued interest.




The
      Company had a $325,000 note payable to an entity owned by the spouse of a former
      shareholder, bearing interest at 8%. 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 and are accrued as
      of
      March 31, 2006, but are in dispute as of September 30, 2005. At March 31, 2006,
      the company has recorded an aggregate $55,886 for amounts due to former related
      parties. (See Note 8)




**Note
      8 – Related
      Party Transactions**





The
      Company had a $325,000 note payable to an entity owned by the spouse of a
      shareholder, bearing interest at 8%. (See Note 7)





The
      Company had advances from individual holders of more than 10% of the Company’s
      common stock amounting to $2,575 at March 31, 2006. These advances are payable
      on demand and do not bear interest.





On
      March
      7, 2006, a Director of the Company converted 25,000 warrants to 25,000 shares
      of
      common stock. These warrants were exercised at a price of $1.50 for 12,500
      common shares and $2.00 for an additional 12,500 common shares.





**Note
      9 –
      Commitments and Contingencies**





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





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




On
      January 30, 2006, a settlement was reached whereby this former consultant and
      their attorneys received an aggregate 1,000,000 registered shares of Series
      A-1,
      Convertible Preferred Stock in full settlement of related claims for
      compensation of past services. At December 31, 2005, based on the settlement
      date of January 30, 2006, the Company accrued a settlement liability and related
      settlement expense of $4,750,000 based on the quoted closing trading price
      of
      $4.75 per share for the underlying common shares of the Series A-1, Convertible
      Preferred Stock in an assumed conversion. On March 7, 2006, these shares were
      converted into 1,000,000 shares of common stock.


-13-




**SmartVideo
        Technologies, Inc. and Subsidiary**
 **Notes
        to condensed consolidated financial statements**
 **(Unaudited)**





On
      or
      about January 18, 2006, Wilson W. Hendricks, III filed a complaint in the County
      Court, Seventh Judicial Circuit, in and for St. John’s County, Florida against
      the Company for an unspecified amount of damages in excess of $15,000 relating
      to lost wages, unreimbursed business expenses and 500,000 non-qualified stock
      option as a result of the Company’s alleged breach of promise to employ Mr.
      Hendricks. The Company denies all liability to Mr. Hendricks and intends to
      vigorously defend itself against all clams made by him. Currently, there is
      no
      accrued contingency loss as a resolution to this matter is in the discussion
      phase only. Additionally, pursuant to SFAS No. 5, there is no basis for accrual
      at March 31, 2006.





On
      January 19, 2006, the Company received a letter on behalf of Mantra Films,
      Inc.
      demanding that the Company pay cash damages of $791,244 as a result of the
      Company’s breach of its guarantee obligation under the terms of an agreement
      between Cell Phone Entertainment, LLC, Mantra Films, Inc. and the Company (as
      Guarantor) dated September 30, 2004. Mantra Films, Inc. alleges that Cell Phone
      Entertainment, LLC and the Company have failed to make certain guaranteed
      minimum license payments due under the agreement. As a result of the alleged
      failure to make such minimum payments, Mantra Films, Inc. has terminated the
      agreement. The $791,244 amount demanded represents the entire contract amount,
      including both past due payments and future guaranteed license fees, totaling
      $900,000, which amount has been reduced by payments made and certain prepaid
      insurance premiums in the amount of $108,756. We believe that we have
      meritorious defenses to any claims for payment under the agreement and we intend
      to vigorously defend against any such claims. There can be no assurances at
      this
      time that we will be successful in defending Mantra Film, Inc.’s damage claim.
      As a result the Company has accrued approximately $791,000 for settlement at
      March 31, 2006.





**(B)
      Other Litigation**




On
      or
      about April 6, 2004, Rene Hamouth filed a Writ of Summons in the Supreme Court
      of British Columbia (Case No. SO41955) against the Company, the Chief Executive
      Officer and sole director, Richard E. Bennett, Jr. and the Company’s securities
      counsel, Edwards & Angell, LLP, seeking an unspecified amount of damages and
      costs for alleged libel of Mr. Hamouth resulting from two letters to his
      stockbroker, First Associates Investments, Inc. The Company and the other
      defendants have made an appearance in the court through respective legal
      counsel. On June 29, 2004, Mr. Hamouth filed an Amended Statement of Claim
      with
      the court. On November 19, 2004, the Court of Appeal for British Columbia
      granted Edwards & Angell, LLP the right to appeal a chambers judge’s
      decision that the alleged libelous correspondence in question is covered by
      absolute privilege and granted a stay of the proceeding pending the outcome
      of
      the appeal. The appeal was heard in February 2005. On March 30, 2005, the court
      granted the appeal and dismissed the claim against Edwards & Angell, LLP.
      Since the court’s entry of judgment in the appeal, Mr. Hamouth has taken no
      further steps in his claims against the Company or Mr. Bennett. The Company
      intends to vigorously defend any claims made by Mr. Hamouth should further
      action be taken by him in this dispute. At March 31, 2006, there are no related
      accrued contingency losses.




On
      July
      5, 2004, the Company entered into a distribution agreement with Open Systems
      Solution, Ltd. certain issues arose regarding the terms of the agreement and
      the
      parties have mutually agreed to terminate the contract. The parties are
      currently engaged in the process of ending the relationship pursuant to the
      terms and conditions of a settlement agreement which is anticipated to provide
      for a release of all actual or potential claims against the Company, its
      officers and its directors. At March 31, 2006, there are no related accrued
      contingency losses.




-14-


**SmartVideo
        Technologies, Inc. and Subsidiary**
 **Notes
        to condensed consolidated financial statements**
 **(Unaudited)**




On
      December 15, 2005, we received a letter on behalf of Enable Growth Partners,
      L.P. demanding that the Company pay cash damages of $1,757,568 within five
      business days thereafter. Enable Growth Partners, L.P. alleges that it sold
      295,001 shares of the our common stock in the public markets during November
      2005 in reliance on our Registration Statement on Form SB-2 that was declared
      effective on July 1, 2005. We were unable to issue unlegended shares to cover
      Enable Growth Partners, L.P.’s alleged sale of 295,001 shares because such
      registration statement did not contain current information regarding the
      Company. As a result, Enable Growth Partners, L.P. alleges that it was required
      to purchase shares of our common stock in the open market to satisfy its sale
      of
      such securities. We believe that we have meritorious defenses to the claims
      for
      damages in the amount of $1,757,568, and we intend to vigorously defend against
      any such claims. At March 31, 2006, there are no related accrued contingency
      losses.





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





**(C)
      Employment Agreement**




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




**Note
      10 - Subsequent Events**





On
      or
      about April 10, 2006, 13 investors in the Company’s private placement of common
      stock and warrants in December 2004 filed a complaint in the United States
      District Court, Northern District of Georgia (Case No. 1:06-CV-0850MHS), against
      the Company, seeking damages in excess of $1.8 million as a result of the
      Company’s alleged breach of the registration rights agreements with the
      plaintiffs by restricting the plaintiffs’ ability to sell their shares and
      exercise their warrants during the period late October 2005 through the third
      week in January 2006. The plaintiffs also seek additional damages in excess
      of
      $1.8 million as a result of the Company’s alleged failure to “ratchet down” or
      reduce the exercise price of certain warrants. The Company believes that it
      has
      meritorious defenses to the claims for damages, and the Company will vigorously
      defend itself against all such claims. At March 31, 2006, there are no related
      accrued contingency losses.


-15-




**SmartVideo
        Technologies, Inc. and Subsidiary**
 **Notes
        to condensed consolidated financial statements**
 **(Unaudited)**





On
      April
      10, 2006, Christopher Smith and Paramount Trading Co., Inc. (“Paramount”) filed
      a complaint in the United States District Court, North District of Georgia
      (Case
      No. 1:06-00849-MHS), against the Company, seeking damages in excess of $10.7
      million for the Company’s alleged breach of its obligation to make certain
      shares held by the Mr. Smith and Paramount freely tradable. The plaintiffs
      have
      also alleged that the Company has failed to cause each of Richard Bennett,
      Roger
      Dunavant and Robert Walters to return 1 million shares of common stock to the
      Company pursuant to the terms of a stock exchange agreement dated November
      19,
      2002. The Company believes that it has meritorious defenses to plaintiffs’
claims, and the Company will vigorously defend itself against all such claims.
      At March 31, 2006, there are no related accrued contingency losses.




On
      April
      14, 2006, SmartVideo Technologies, Inc. (the “Company”), OVT, Inc., a
      wholly-owned subsidiary of the Company, Richard E. Bennett, Jr., Robert J.
      Walters and William R. Dunavant entered into an agreement, pursuant to which
      each of Messrs. Bennett, Walters and Dunavant forfeited their right to receive
      305,555 shares of the Company’s common stock which they were entitled to receive
      pursuant to the terms of that certain Amended and Restated Stock Exchange
      Agreement (“Stock Exchange Agreement”) dated as of November 19, 2002 among
      Armagh Group Inc., a predecessor to the Company, OVT, Inc., and Messrs. Bennett,
      Walters and Dunavant. In exchange for forfeiting the 916,665 shares of the
      Company’s common
      stock, waiving their rights to rescind the transaction set forth in the Stock
      Exchange Agreement and in consideration of the effort that Messrs. Bennett,
      Walters and Dunavant put forth to create and improve the Company's technology
      and to position the Company for growth, the Company waived its right to require
      each of Messrs. Bennett, Walters and Dunavant to return 1,000,000 shares of
      the
      Company’s common stock to the Company under the terms of the Stock Exchange
      Agreement. On February 28, 2006, the Company's Board of Directors authorized
      the
      Company to enter into the agreement.




**** **Item
      2. Management’s Discussion and Analysis or Plan of
      Operation**





*The
      discussion in this report contains forward-looking statements that involve
      risks
      and uncertainties. SmartVideo’s actual results could differ materially from
      those discussed below. Factors that could cause or contribute to such
      differences include, but are not limited to, those identified below. You should
      also carefully review the risk factors set forth in other reports or documents
      that SmartVideo files from time to time with the United States Securities and
      Exchange Commission, particularly our Annual Reports on Form 10-K, other
      Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K. You
      should also read the following discussion and analysis in conjunction with
      our
      condensed consolidated financial statements and related notes to condensed
      consolidated financial statements included in this report.*





***Overview***




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




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




-16-




**SmartVideo
        Technologies, Inc. and Subsidiary**
 **Notes
        to condensed consolidated financial statements**
 **(Unaudited)**





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




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




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




***Critical
      Accounting Policies and Estimates***




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




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





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


-17-


**SmartVideo
        Technologies, Inc. and Subsidiary**
 **Notes
        to condensed consolidated financial statements**
 **(Unaudited)**


*Revenue
      Recognition*




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




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




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




*Accounting
      for Stock-Based Compensation*




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




***Results
      of Operations***




*Three
      Months Ended March 31, 2006 compared to 2005*





*Revenues*




Revenues
      for the three month period ended March 31, 2006 consisted primarily of a
      subscription based service delivering live and on-demand mobile entertainment
      services directly to consumers. Our revenues increased by approximately $88,000
      for the three months ended March 31, 2006 as compared to the same period in
      2005. This increase is primarily attributable to our decision to change our
      focus to a subscription based model delivering mobile entertainment services
      direct-to-the-consumer.


-18-




**SmartVideo
        Technologies, Inc. and Subsidiary**
 **Notes
        to condensed consolidated financial statements**
 **(Unaudited)**


*Broadcast
      rights*




Broadcast
      rights for the three months ended March 31, 2006 are approximately $528,000
      as
      compared to $0 for the same period in 2005. This change is attributable to
      our
      decision to change our focus to a subscription based model delivering mobile
      entertainment services direct to the consumer. This amount reflects the costs
      associated with acquiring the rights to deliver our mobile entertainment
      services.





*Compensation
      and benefits*




Our
      compensation and benefits expenses increased by approximately $189,000 for
      the
      three months ended March 31, 2006 as compared to the same period in 2005. As
      our
      industry and company continues to grow and develop, we are continuing to fill
      key positions that will enable us to leverage our future prospects and growth
      and relying less on the use of consultants for discrete projects.





*Consulting
      and professional fees*




Our
      consulting and professional fees have increased by approximately $477,000 for
      the three months ended March 31, 2006 when compared to the same period in 2005.
      This increase in consulting fees for the three months ended March 31, 2006
      is
      primarily attributable to the consulting agreement with Growth Consultants
      LLC.





*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 $91,000 for the three months ended March
      31, 2006 when compared to 2005 is primarily due to an increase in the
      utilization of bandwidth and additional services provided by our third-party
      data center.





*Stock-based
      Compensation*




For
      the
      three months ended March 31, 2006, we have recorded approximately $777,000
      as
      compared to $477,000 for the three months ended March 31, 2005 in non-cash,
      stock-based compensation expense related to the issuance of these warrants
      reflecting the conclusion of the arrangements. The compensation expense has
      been
      determined using the Black-Scholes fair value method. The remainder of the
      non-cash, stock-based compensation is related to the amortization of the
      deferred portion of previous warrant grants.





*Depreciation*




Depreciation
      expense for the three months ended March 31, 2006 increased by approximately
      $32,000 when compared to the same period in 2005. This increase is primarily
      attributable to the deployment of additional equipment in the process of
      increasing the overall capacity and quality of our services.





*Interest
      Expense*




Interest
      expense for the three months ended March 31, 2006 and 2005 was approximately
      $800 and $198,000, respectively. The increase was attributed to the issuance
      of
      additional shares of common stock as additional consideration related to the
      rights of certain convertible debtholders.




*Selling,
      General and Administrative Expenses*




Selling,
      general and administrative expenses consist primarily of travel expenses related
      to the marketing of our product and services, lease payments related to the
      use
      of our corporate facilities, trade shows, and other general and administrative
      expenses. Our selling, general and administrative costs decreased approximately
      $125,000 for the three months ended March 31, 2006 when compared to the same
      period in 2005.


-19-




**SmartVideo
        Technologies, Inc. and Subsidiary**
 **Notes
        to condensed consolidated financial statements**
 **(Unaudited)**


*Liquidity
      and Capital Resources*




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




It
      is
      anticipated that we will need to raise at least $6,000,000 over the course
      of
      the next 12 months to fund our current level of operations. There can be no
      assurance, however, that such financing will be available to us or, if it is
      available, that we will be able to structure such financing on terms acceptable
      to us and that it will be sufficient to fund our cash requirements until we
      can
      reach a level of profitable operations and positive cash flows. If we are unable
      to obtain the financing necessary to support our operations, we may be unable
      to
      continue as a going concern. We currently have no firm commitments for any
      additional capital.





*Going
      Concern*




We
      have
      incurred recurring losses and negative cash flows since inception. As of and
      for
      the three months ended March 31, 2006, we had an accumulated deficit of
      $43,340,160, a consolidated net loss of $3,386,404 and consolidated net cash
      flows used in operations of $3,188,054. These matters raise substantial doubt
      about our ability to continue as a going concern. Our ability to continue our
      operations is contingent upon obtaining additional financing and attaining
      profitable operations.





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




**Item
      3. Controls and Procedures**





Our
      chief
      executive officer and chief financial officer (the “Certifying Officers”) are
      responsible for establishing and maintaining disclosure controls and procedures
      for our company and our subsidiary. Such officers have concluded (based upon
      his
      evaluation of these controls and procedures as of the end of the period covered
      by this report) that our disclosure controls and procedures are effective to
      ensure that information required to be disclosed by us in this report is
      accumulated and communicated to management, including our principal executive
      officers as appropriate, to allow timely decisions regarding required
      disclosure.





The
      Certifying Officers have also indicated that there were no significant changes
      in our internal controls or other factors that could significantly affect such
      controls subsequent to the date of his evaluation, and there were no corrective
      actions with regard to significant deficiencies and material
      weaknesses.


-20-


**SmartVideo
        Technologies, Inc. and Subsidiary**
 **Notes
        to condensed consolidated financial statements**
 **(Unaudited)**




Our
      management, including the Certifying O fficers, do
      not
      expect that our disclosure controls or our internal controls will prevent all
      error and all fraud. A control system, no matter how well conceived and
      operated, can provide only reasonable, not absolute, assurance that the
      objectives of the control system are met. In addition, the design of a control
      system must reflect the fact that there are resource constraints, and the
      benefits of controls must be considered relative to their costs. Because of
      the
      inherent limitations in all control systems, no evaluation of controls can
      provide absolute assurance that all control issues and instances of fraud,
      if
      any, within a company have been detected. These inherent limitations include
      the
      realities that judgments in decision-making can be faulty, and that breakdowns
      can occur because of simple error or mistake. Additionally, controls can be
      circumvented by the individual acts of some persons, by collusion of two or
      more
      people or by management override of the control. The design of any systems
      of
      controls also is based in part upon certain assumptions about the likelihood
      of
      future events, and there can be no assurance that any design will succeed in
      achieving its stated goals under all potential future conditions. Because of
      these inherent limitations in a cost-effective control system, misstatements
      due
      to error or fraud may occur and not be detected.


-21-


**SmartVideo
        Technologies, Inc. and Subsidiary**
 **Notes
        to condensed consolidated financial statements**
 **(Unaudited)**




**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings**




There
      have been no material developments in any of the previously disclosed litigation
      matters.




**Item
      1A. Risk Factors**





None.





**Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds**





During
      the quarter ended March 31, 2006, the Company issued 392,792 shares of common
      stock as a result of the exercise of previously granted stock purchase warrants.
      The Company received gross proceeds from the exercise of the warrants in the
      amount of $632,875. The Company will use the proceeds from the exercise of
      the
      warrants for general corporate purposes. The shares were issued pursuant to
      the
      exemption from registration set forth in Section 4(2) of the Securities Act
      of
      1933.




**Item
      3. Defaults on Senior Securities**




None




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




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




**Item
      5. Other Information**




None




-22-


**SmartVideo
        Technologies, Inc. and Subsidiary**
 **Notes
        to condensed consolidated financial statements**
 **(Unaudited)**




**Item
      6. Exhibits**




*Exhibits*








31.1
            
            Certification
                of the Chief Executive Officer and Chief Financial Officer pursuant
                to
                Rule 13a-14(a)/15d-14(a) of the Securities and Exchange Act of
                1934.32.1
            
            Certification
                of the Chief Executive Officer and Chief Financial Officer pursuant
                to 18
                U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2003.





-23-






SmartVideo
        Technologies, Inc. and SubsidiaryNotes
        to
        condensed consolidated financial statements (Unaudited)


**SIGNATURES**




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




**SMARTVIDEO
                TECHNOLOGIES, INC.**By:
            /s/
              Richard E. Bennett, Jr.
            
            
            May
                12, 2006Richard
                E. Bennett, Jr.
            
            
            DateChief
                Executive Officer, &
              Chief
                Financial Officer
                *(Principal
                  Executive Officer)*
                *(Chief
                    Financial Officer and*
                  *Principal
                    Accounting Officer)*




-24-