**Table
            of Contents**





**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 September 30, 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 registrant 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 code




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




Indicate
      by check mark whether the registrant is a 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 Filer  ̈ Non-accelerated Filer x




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




The
      total
      number of shares of the issuer’s common stock, $.001 par value, outstanding on
November
      2, 2006 was 47,200,617.





**Table
        of Contents**




**SMARTVIDEO
      TECHNOLOGIES INC.**




**Index
      to Form 10-Q**




**PART
                I - FINANCIAL INFORMATION**Disclosure
                Regarding Forward-Looking
                Statements
            
            
            iiItem
                1. 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)
            
            
            4Item
                2. Management’s Discussion and Analysis of Financial
                Condition and Results of Operations
            
            
            19Item
                3. Quantitative and Qualitative Disclosures About
                Market Risk
            
            
            23Item
                4. Controls and Procedures
            
            
            23**PART
                II - OTHER INFORMATION**Item
                1. Legal Proceedings
            
            
            24Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            
            
            24Item
                6. Exhibits
            
            
            24Signatures
            
            
            25





-i-
 **Table
            of Contents**




**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
                programming costs may increase beyond our current expectations and
                we may
                be unable to obtain or renew programming agreements on acceptable
                terms or
                at all;·
            we
                are heavily dependent on complex information technologies and their
                support infrastructures; weaknesses in our information technology
                systems
                could have an adverse impact on our business; we may have difficulty
                attracting and retaining qualified personnel to maintain our information
                technology infrastructure;·
            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
      for
      the fiscal year ended December 31, 2005. 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,” “us” and “smarTVideoTM” refer to
      SmartVideoTechnologies, Inc. and its subsidiary, unless the context otherwise
      requires.  -ii-
 **Table
            of Contents**


**PART
      I - FINANCIAL INFORMATION**




**smarTVideoTM Technologies,
          Inc. and Subsidiary**
 **Consolidated
          Balance Sheets**
 **(Unaudited)**
 **September
                      30,**
                  
                  **December
                      31,****2006**
                  
                  **2005****Assets****Current
                      Assets**Cash
                  
                  $
                  6,722,830
                  
                  $
                  5,792,566Accounts
                      receivable - net of allowance for doubtful accounts of $48
                      and
                      $77,937
                  
                  
                  -
                  
                  
                  -Broadcast
                      rights - net of accumulated amortization of $3,564,576 and
                      $1,740,552
                  
                  
                  2,264,961
                  
                  
                  2,408,525Prepaid
                      expenses
                  
                  
                  106,640
                  
                  
                  -Other
                      current assets
                  
                  
                  224,162
                  
                  
                  -**Total
                      Current Assets**
                  
                  
                  **9,318,593**
                  
                  
                  **8,201,091****Property
                      and Equipment, net of accumulated depreciation of $601,742
                      and
                      $350,641**
                  
                  
                  **1,357,514**
                  
                  
                  **716,423****Other
                      Assets**Broadcast
                      rights, net of current portion
                  
                  
                  1,284,538
                  
                  
                  2,880,999Other
                  
                  
                  25,079
                  
                  
                  122,161**Total
                      Other Assets**
                  
                  
                  1,309,617
                  
                  
                  3,003,160**Total
                      Assets**
                  
                  **$**
                  **11,985,724**
                  
                  **$**
                  **11,920,674****Liabilities
                      and Stockholders' Equity (Deficit)****Current
                      Liabilities**Accounts
                      payable and accrued expenses
                  
                  $
                  1,885,771
                  
                  $
                  2,905,618Contracts
                      payable - broadcast rights
                  
                  
                  2,716,150
                  
                  
                  2,283,500Escrow
                      payable / Deposit liability
                  
                  
                  -
                  
                  
                  -Accrued
                      settlement expenses
                  
                  
                  791,244
                  
                  
                  5,541,244Due
                      to related parties
                  
                  
                  -
                  
                  
                  64,429Loan
                      payable and related accrued interest
                  
                  
                  62,247
                  
                  
                  59,922**Total
                      Current Liabilities**
                  
                  
                  **5,455,412**
                  
                  
                  **10,854,713****Long-Term
                      Liabilities**Contracts
                      payable - broadcast rights - net of current portion
                  
                  
                  1,651,926
                  
                  
                  3,386,576**Total
                      Liabilities**
                  
                  
                  **7,107,338**
                  
                  
                  **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 September 30, 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 September 30, 2006 and
                      December 31,
                      2005
                  
                  
                  -
                  
                  
                  -Preferred
                      stock, Series A-1, Convertible, $.001 par value, 50,000,000
                      sharesauthorized,
                      11,666,666 shares issued and 3,169,998 outstanding as of
                      September30,
                      2006, 10,666,666 shares issued and outstanding as of December
                      31,
                      2005
                  
                  
                  3,170
                  
                  
                  10,667Common
                      stock, $.001 par value, 150,000,000 shares authorized, 46,677,510
                      shares
                      issuedand
                      outstanding as of September 30, 2006, 28,688,463 shares issued
                      andoutstanding
                      as of December 31, 2005
                  
                  
                  46,677
                  
                  
                  28,689Additional
                      paid-in capital
                  
                  
                  59,884,481
                  
                  
                  39,027,618Less:
                      Deferred consulting fees
                  
                  
                  (1,357,191
                  )
                  
                  (1,433,833
                  )Accumulated
                      deficit
                  
                  
                  (53,698,751
                  )
                  
                  (39,953,756
                  )**Total
                      Stockholders' Equity (Deficit)**
                  
                  
                  **4,878,386**
                  
                  
                  **(2,320,615**
                  **)****Total
                      Liabilities and Stockholders' Equity (Deficit)**
                  
                  **$**
                  **11,985,724**
                  
                  **$**
                  **11,920,674**




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


-1-
 **Table
            of Contents**




**smarTVideoTM
      Technologies, Inc. and Subsidiary**


**Consolidated
      Statements of Operations**


**(Unaudited)**


**For
                  the Three Months Ended**
              
              **For
                  the Nine Months Ended****September
                  30,**
              
              **September
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****Revenues**Revenue
              
              $
              197,302
              
              $
              58,248
              
              $
              476,700
              
              $
              121,740**Total
                  Revenues**
              
              
              **197,302**
              
              
              **58,248**
              
              
              **476,700**
              
              
              **121,740****Operating
                  Expenses**Broadcast
                  rights
              
              
              616,756
              
              
              776,997
              
              
              1,774,781
              
              
              1,286,348Compensation
                  and benefits
              
              
              727,324
              
              
              469,017
              
              
              2,029,062
              
              
              1,235,413Consulting
                  and professional fees
              
              
              522,931
              
              
              1,103,782
              
              
              2,790,547
              
              
              1,742,536Data
                  center
              
              
              200,163
              
              
              260,038
              
              
              705,375
              
              
              603,120Depreciation
              
              
              156,757
              
              
              87,627
              
              
              407,858
              
              
              190,284Settlement
                  expense
              
              
              57,000
              
              
              -
              
              
              705,000
              
              
              -Stock-based
                  compensation
              
              
              1,658,705
              
              
              965,633
              
              
              3,833,498
              
              
              4,067,248Selling,
                  general and administrative
              
              
              541,689
              
              
              387,717
              
              
              2,187,770
              
              
              1,457,709**Total
                  Operating Expenses**
              
              
              **4,481,325**
              
              
              **4,050,811**
              
              
              **14,433,891**
              
              
              **10,582,658****Loss
                  from Operations**
              
              
              **(4,284,023**
              **)**
              
              **(3,992,563**
              **)**
              
              **(13,957,191**
              **)**
              
              **(10,460,918**
              **)****Other
                  Income (Expense)**Interest
                  income (expense)
              
              
              136,129
              
              
              (4,831
              )
              
              212,196
              
              
              (195,421
              )**Total
                  Other Income (Expense), Net**
              
              
              **136,129**
              
              
              **(4,831**
              **)**
              
              **212,196**
              
              
              **(195,421**
              **)****Net
                  Loss**
              
              **$**
              **(4,147,894**
              **)**
              **$**
              **(3,997,394**
              **)**
              **$**
              **(13,744,995**
              **)**
              **$**
              **(10,656,339**
              **)**Net
                  Loss per Share - Basic and Diluted
              
              $
              (0.09
              )
              $
              (0.15
              )
              $
              (0.36
              )
              $
              (0.42
              )Weighted
                  Average Common SharesOutstanding
                  during the Period
              
              
              45,260,203
              
              
              26,634,849
              
              
              37,959,443
              
              
              25,632,388




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


-2-
 **Table
            of Contents**




smarTVideoTM
      Technologies, Inc. and
      SubsidiaryConsolidated Statements of Cash
      Flows(Unaudited)


**For
                  the Nine Months Ended****September
                  30,****2006**
              
              **2005****Cash
                  Flows from Operating Activities**Net
                  loss
              
              $
              (13,744,995
              )
              $
              (10,656,339
              )Adjustments
                  to reconcile net loss to net cashused
                  in operating activities:Amortization
                  of stock options pursuant to SFAS No. 123R
              
              
              2,119,252
              
              
              -Amortization
                  of stock based compensation
              
              
              1,557,690
              
              
              -Amortization
                  of broadcast rights
              
              
              1,824,024
              
              
              904,281Bad
                  debt
              
              
              (77,889
              )
              
              51,759Depreciation
              
              
              407,858
              
              
              190,284Issuance
                  of common stock as compensation for services
              
              
              -
              
              
              750,000Issuance
                  of common stock for legal settlement
              
              
              705,000
              
              
              -Non-cash,
                  stock-based compensation
              
              
              1,852,369
              
              
              4,067,248Valuation
                  adjustment related to non-cash compensation due to
                  advisor
              
              
              -
              
              
              (540,017
              )Additional
                  consideration related to rights of convertible promissory
                  notes
              
              
              -
              
              
              197,500Changes
                  in operating assets and liabilities:(Increase)
                  Decrease in:Accounts
                  receivable
              
              
              77,889
              
              
              (51,891
              )Prepaid
                  expenses
              
              
              (106,640
              )
              
              20,132Other
                  current assets
              
              
              (224,162
              )
              
              -Other
                  assets
              
              
              97,082
              
              
              (107,261
              )Increase
                  (Decrease) in:Accounts
                  payable and accrued expenses
              
              
              (624,742
              )
              
              1,599,126Accrued
                  interest payable
              
              
              (62,104
              )
              
              4,163Investor
                  returns
              
              
              -
              
              
              (114,500
              )Repayments
                  on acquired broadcast rights
              
              
              (1,695,000
              )
              
              -**Net
                  Cash Used in Operating Activities**
              
              
              **(7,894,368**
              **)**
              
              **(3,685,515**
              **)****Cash
                  Flows from Investing Activities**Purchase
                  of equipment
              
              
              (1,048,676
              )
              
              (764,479
              )**Net
                  Cash Used in Investing Activities**
              
              
              **(1,048,676**
              **)**
              
              **(764,479**
              **)****Cash
                  Flows from Financing Activities**Redemption
                  of warrants
              
              
              (70,667
              )
              
              -Issuance
                  of common stock for cash
              
              
              9,000,000
              
              
              3,729,875Proceeds
                  from issuance of convertible promissory notes
              
              
              -
              
              
              200,000Proceeds
                  from issuance of promissory note
              
              
              -
              
              
              225,000Repayments
                  to related parties
              
              
              -
              
              
              (1,000
              )Proceeds
                  from warrant exercises
              
              
              943,975
              
              
              -**Net
                  Cash Provided By Financing Activities**
              
              
              **9,873,308**
              
              
              **4,153,875**Net
                  Increase (Decrease) in cash and cash equivalents
              
              
              930,264
              
              
              (296,119
              )Cash
                  - Beginning of year
              
              
              5,792,566
              
              
              387,592**Cash
                  - End of Period**
              
              **$**
              **6,722,830**
              ****
              **$**
              **91,473****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
              
              $
              7,705,076Issuance
                  of common stock to acquire software
              
              $
              208,000
              
              $
              -Issuance
                  of common stock for settlement of accounts payable
              
              $
              149,637
              
              $
              82,850Issuance
                  of convertible preferred stock for settlement of
                  litigation
              
              $
              4,750,000
              
              $
              -Issuance
                  of common stock pursuant to anti-dilution agreement
              
              $
              1,122
              
              $
              -Conversion
                  of convertible preferred stock to common stock
              
              $
              8,497
              
              $
              -Forfeiture
                  of stock based compensation
              
              $
              271,563
              
              $
              -Options
                  granted for future services
              
              $
              1,775,727
              
              $
              -




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


-3-
 **Table
            of Contents**




**SmartVideo
      Technologies, Inc. and Subsidiary**


**Notes
      to condensed consolidated financial
      statements**


**(Unaudited)**






**Note
      1 - Organization**





SmartVideo
      Technologies, Inc. (“smarTVideoTM” 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 smarTVideoTM (“OVT”) was
      incorporated in the state of Georgia on August 31, 2000. smarTVideoTM is a media
      distribution services company. smarTVideoTM 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.





The
      Company is in the process of developing and intends to market a complete suite
      of new media services that combine TV, radio, and other media brands with user
      friendly personalization, interactivity and targeted marketing. There can be
      no
      assurance that the Company will be successful in the development or marketing
      of
      these services.




**Note
      2 - Going Concern**




As
      reflected in the accompanying unaudited consolidated financial statements,
      the
      Company has a net loss of $13,744,995 and net cash used in operations of
      $7,894,368, respectively for the nine-month period ended September 30, 2006.
      The
      Company also has an accumulated deficit of $53,698,751 at September 30,
      2006.





Notwithstanding
      certain forward-looking statements made during the Company’s last annual meeting
      of shareholders and set forth in a recent Company press release, based on the
      current information available regarding our proposed plans and assumptions
      relating to operations we anticipate that the net proceeds from the closing
      of
      our most recent financing in July 2006, together with revenues generated from
      operations, will not be sufficient to meet our cash requirements for working
      capital and capital expenditures beyond June 2007. There can be no assurance
      that we will be able to secure additional financing on acceptable terms at
      or
      prior to the depletion of existing funds or at all. If adequate funds are not
      available or not available on acceptable terms, we will be unable to continue
      as
      a going concern.





**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 nine months ended September 30, 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.





*(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-
 **Table
            of Contents**




**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
      has frequently exceeded federally insured limits and at September 30, 2006,
      the
      balance exceeded the federally insured limit by $6,637,909. Additionally, at
      September 30, 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. The Company also has approximately $132,000
      held in escrow by Bank of America pursuant to a legal proceeding that will
      be
      refunded upon fulfilling the settlement obligations




****  *(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 for the three-
      and
      nine-month periods are detailed as follows:


**For
                  the Three Months Ended**
              
              **For
                  the Nine Months Ended****September
                  30,**
              
              **September
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Depreciation
              
              $
              156,757
              
              $
              87,627
              
              $
              407,858
              
              $
              190,284




Equipment
      consists of the following:


**September
                    30,**
                
                **December
                    31,****2006**
                
                **2005**Computer
                    equipment
                
                $
                1,328,657
                
                $
                987,564Proprietary
                    software development
                
                
                787,356
                
                
                79,5002,116,013
                
                
                1,067,064Less
                    accumulated depreciation
                
                
                (758,499
                )
                
                (350,641
                )Property
                    and equipment, net
                
                $
                1,357,514
                
                $
                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 Statement of Financial
      Accounting Standards (“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-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-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
      September 30, 2006. The allowance for doubtful accounts at September 30, 2006
      was $48 and at December 31, 2005 was $ 77,937.


-5-
 **Table
            of Contents**




**SmartVideo
      Technologies, Inc. and Subsidiary**


**Notes
      to condensed consolidated financial statements**


**(Unaudited)**






*(H)
      Earnings/(Loss) Per Share*




In
      accordance with SFAS No. 128, “Earnings/(Loss) 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, if dilutive. 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 September 30, 2006 and 2005, respectively.


The
      following table is a summary of common stock equivalents outstanding at
      September 30, 2006 and 2005, respectively.





**For
                  the Nine Months Ended****September
                  30,****2006**
              
              **2005**Common
                  Stock Options
              
              
              8,035,000
              
              
              2,695,000Common
                  Stock Warrants
              
              
              35,010,149
              
              
              10,815,564Total
                  Common Stock Options and Warrants
              
              
              43,045,149
              
              
              13,510,564





*(I)
      Stock-based Compensation*




In
      December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
      replaces SFAS No. 123 and supersedes Accounting Principles Board (“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 (the “SEC”) 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) under the prospective
      method.





See
      additional disclosure in Notes 5 and 9





*(J)
      Revenue Recognition*




The
      Company follows the guidance of the SEC’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. 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 daily subscription fee for smarTVideoTM’s
      mobile entertainment services. Revenue from mobile advertising is recognized
      when the related services are performed.


-6-
 **Table
            of Contents**




**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
      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
      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 as income in the period when the rate changes, 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-
 **Table
            of Contents**




**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 three types of
      products business-to-business, direct-to-consumer mobile video service and
      mobile advertising.


**For
                  the Three Months Ended**
              
              **For
                  the Nine Months Ended****September
                  30,**
              
              **September
                  30,**Revenues
              
              **2006**
              
              **2005**
              
              **2006**
              
              **2005**Business-to-business
              
              $
              20,409
              
              
              10
              %
              $
              21,466
              
              
              37
              %
              $
              69,380
              
              
              15
              %
              $
              58,150
              
              
              48
              %Direct-to-consumer
              
              
              153,863
              
              
              78
              %
              
              36,782
              
              
              63
              %
              
              384,290
              
              
              81
              %
              
              63,590
              
              
              52
              %Mobile
                  Advertising
              
              
              23,030
              
              
              12
              %
              
              -
              
              
              0
              %
              
              23,030
              
              
              5
              %
              
              -
              
              
              0
              %Total
                  Revenue
              
              $
              197,302
              
              
              100
              %
              $
              58,248
              
              
              100
              %
              $
              476,700
              
              
              100
              %
              $
              121,740
              
              
              100
              %





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 September 30, 2006 and 2005, the Company derived a substantial
      portion of its revenues from two customers accounting for 9% and 32% of its
      revenues, respectively. For the nine months ended September 30, 2006 and 2005,
      the Company derived a substantial portion of its revenues from two customers
      accounting for 13% and 40% of its revenues, respectively.




*(P)
      Recent Accounting Pronouncements*





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. The Company 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.




In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, “Fair Value Measurements” (“FAS 157”). This Statement defines fair value as
      used in numerous accounting pronouncements, establishes a framework for
      measuring fair value in generally accepted accounting principles and expands
      disclosure related to the use of fair value measures in financial statements.
      The Statement is to be effective for the Company’s financial statements issued
      in 2008; however, earlier application is encouraged. The Company is currently
      evaluating the timing of adoption and the impact that adoption might have on
      its
      financial position or results of operations





In
      July
      2006, the FASB issued FASB Interpretation No. 48 (“ FIN
      48”)
“Accounting for Uncertainty in Income Taxes - an interpretation of FASB
      Statement No. 109,” to clarify certain aspects of accounting for uncertain tax
      positions, including issues related to the recognition and measurement of those
      tax positions. This interpretation is effective for fiscal years beginning
      after
      December 15, 2006. The Company is in the process of evaluating the impact of
      the
      adoption of this interpretation on the Company’s results of operations and
      financial condition.





**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 a dispute surrounding one of its content providers. (See
      Note 9(B)). 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-
 **Table
            of Contents**




**SmartVideo
      Technologies, Inc. and Subsidiary**


**Notes
      to condensed consolidated financial statements**


**(Unaudited)**





For
      the
      nine months ended September 30, 2006, amortization expense of broadcast rights
      accounted for $1,824,024 of the total broadcast rights expense of $1,774,780.
      Included in the total expense of $1,774,780 is approximately $97,000 in credits
      that were reflected in the nine months ended September 30, 2006. For the quarter
      ended September 30, 2006, amortization expense of broadcast rights accounted
      for
      $904,281 of the total broadcast rights expense of $1,286,348. For the nine
      months ended September 30, 2005, broadcast rights were $1,286,348.





For
      the
      nine months ended September 30, 2006 the Broadcast Rights Assets - net of
      accumulated amortization was $2,264,961. Broadcast Rights Assets - net of
      current portion was $1,284,538. At December 31, 2005 the Broadcast Rights Assets
      - net of accumulated amortization were $2,408,525. Broadcast Rights Assets
      - net
      of current portion was $2,880,999.





*(B)*
            *Liability*





For
      the
      nine months ended September 30, 2006 and 2005, the Company paid $1,695,000
      and
      $50,000, respectively to content providers pursuant to the terms of the related
      contracts.





Contracts
      payable - short term at September 30, 2006 were $2,716,150. Contracts payable
      -
      long-term at September 30, 2006 were $1,651,926. Contracts payable - short
      term
      at December 31, 2005 were $2,283,500. Contracts payable - long-term at December
      31, 2005 were $3,386,576.





**Note
      5 - Shareholders’ Equity**





**Nine
      Months Ended September 30, 2006:**




*(A)*
            *Preferred
                Stock*




(1)  
      Capital Structure




As
      of
      September 30, 2006, the authorized Preferred Stock of the Company consisted
      of
      50,000,000 shares of $.001 par value Series A-1 Preferred Stock of which
      11,666,666 shares are issued and 3,169,998 shares are outstanding and are
      designated as convertible.




*(B)*
            *Common
                Stock Issuances*




On
      July
      17, 2006, the Company completed an equity financing pursuant to a securities
      purchase agreement dated as of July 7, 2006 among the Company and 74 accredited
      investors. Under the terms of the agreement, the Company received gross proceeds
      of $9,000,000 and issued to the investors a total of 7,200,000 shares of common
      stock and five year warrants exercisable at $2.50 per share to purchase up
      to
      7,200,000 shares of common stock. Such securities were issued pursuant to an
      exemption provided by Section 4(2) of the Securities Act and Rule 506 of
      Regulation D promulgated thereunder. This round of financing triggered an
      anti-dilution provision under a prior financing resulting in the issue of
      additional warrants exercisable at $1.25 per share to purchase an additional
      6,553,663 shares of common stock.





(1)  
      Capital Structure





As
      of
      September 30, 2006, the authorized common stock of the Company consists of
      150,000,000 shares of $.001 par value.





(2)
            Preferred
                Stock Conversions




During
      the nine months ended September 30, 2006, the Company converted 8,496,668 shares
      of the Company’s Series A-1 Convertible Preferred Stock were converted to shares
      of common stock on a one-to-one basis.




(3)
            Accounts
                Payable




During
      the nine months ended September 30, 2006, the Company settled two outstanding
      vendor payables with unrelated third parties by issuing an aggregate of 359,916
      shares of common stock having an aggregate fair value of $414,937. Fair value
      was determined based on the quoted closing trading price on the dates of
      settlement. The share prices on the dates of issuance 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. In the quarter ended September 30, 2006, the Company settled
      with a consultant by issuing 60,000 shares of common stock for all amounts
      due
      and owing.


-9-
 **Table
          of Contents**




**SmartVideo
      Technologies, Inc. and Subsidiary**


**Notes
      to condensed consolidated financial statements**


**(Unaudited)**






(4)
            Warrant
                Exercises




During
      the nine months ended September 30, 2006, the Company issued 1,929,463 shares
      of
      common stock in connection with the exercise of previously issued stock purchase
      warrants. Of the total, 807,607 shares were issued based on the original warrant
      contractual exercise price. These exercise prices ranged from $0.75 - $2.00
      per
      share and total cash proceeds raised from these exercised warrants was $943,975.
      The remaining 1,121,856 shares were issued based on an anti-dilution exercise
      price adjustment feature 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, which was $1,122.





During
      the quarter ended September 30, 2006, the Company redeemed 250,000 callable
      warrants at a price of $.10 per warrant for a total payment of $25,000 which
      also reduced additional paid-in capital by $25,000.




The
      following is a summary of all common stock issued during the nine months ended
      September 30, 2006:


**ACTIVITY**
              
              **QUANTITY
                  OF SHARES**
              
              **VALUATION**Preferred
                  Stock Conversion
              
              
              8,496,668
              
              $
              -Accounts
                  Payable Settlements
              
              
              359,916
              
              
              414,937Warrant
                  Conversions
              
              
              1,929,463
              
              
              943,975Sale
                  of Common Stock
              
              
              7,203,000
              
              
              9,000,003Totals
              
              
              17,989,047
              
              $
              10,358,915





*(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 initial term of the agreement was through
      June 30, 2006, but was extended through September 30, 2006 pursuant to a letter
      agreement dated July 7, 2006. Pursuant to the agreement, the consultant was
      issued 300,000 common stock purchase warrants having an exercise price of $3.00
      per warrant. For the nine months ended September 30, 2006, the Company recorded
      $1,424,250 in consulting expense 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




On
      July
      24, 2006, the Company entered into a Master Consulting Agreement with James
      Morrison for a two-year term expiring on July 24, 2008. Pursuant to the
      agreement, Morrison was issued an aggregate of 400,000 common stock purchase
      warrants, 50,000 of which are exercisable at any time during the exercise period
      and the remaining will only be exercisable upon obtaining certain thresholds
      and
      milestones. 50,000 of these warrants have an exercise price of $1.40 and the
      remaining will have an exercise price equal to the lesser of (i) $1.40 and(ii)
      the closing price quoted on the OTC Bulletin Board or another recognized
      tracking system on the date the applicable thresholds and/or milestones are
      achieved. The Company also is obligated to pay Morrison a specified amount
      per
      month to provide consulting services which includes general advice and
      directions on business development, strategic planning, and engineering and
      design. ****





For
      the
      quarter ended September 30, 2006, the Company recorded $66,720 in compensation
      expense using fair value accounting as prescribed in SFAS 123R and the related
      Black-Scholes pricing model with the following weighted average
      assumptions:


-10-
 **Table
            of Contents**




**SmartVideo
      Technologies, Inc. and Subsidiary**


**Notes
      to condensed consolidated financial statements**


**(Unaudited)**






Exercise
                price
            
            $
            1.40Expected
                dividend yield
            
            
            0
            %Expected
                volatility
            
            
            119.39
            %Risk
                free interest rate
            
            
            4.625
            %Expected
                life of option
            
            
            5
                years




On
      July
      24, 2006, the Company entered into a Master Development Agreement with Skyward
      Mobile for a two-year term expiring on July 24, 2008. Pursuant to the agreement,
      Skyward Mobile was issued an aggregate of 400,000 common stock purchase
      warrants, 50,000 of which are exercisable at any time during the exercise period
      and the remaining will only be exercisable upon obtaining certain thresholds
      and
      milestones. 50,000 of these warrants have an exercise price of $1.40 and the
      remaining will have an exercise price equal to the lesser of (i) $1.40 and
      (ii)
      the closing price quoted on the OTC Bulletin Board or another recognized
      tracking system on the date the applicable thresholds and/or milestones are
      achieved.





For
      the
      quarter ended September 30, 2006, the Company recorded $66,720 in compensation
      expense using fair value accounting as prescribed in SFAS 123R and the related
      Black-Scholes pricing model with the following weighted average
      assumptions:




Exercise
                price
            
            $
            1.40Expected
                dividend yield
            
            
            0
            %Expected
                volatility
            
            
            119.39
            %Risk
                free interest rate
            
            
            4.625
            %Expected
                life of option
            
            
            5
                years




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




(1)
                2004 Equity Incentive Plan




The
      Board
      of Directors of the Company adopted the 2004 Equity Incentive Plan (“2004 Plan”)
      effective January 1, 2004, to provide incentives to attract and retain
      participating officers, directors, and key employees. The 2004 Plan allows
      for
      the issuance of up to 5,000,000 shares of common stock in the form of incentive
      awards, including, without limitation, stock options and restricted stock.
      This
      Plan was approved by the shareholders at the annual meeting held on August
      31,
      2004.


-11-
 **Table
            of Contents**




**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 Equity Incentive Plan (“2005 Plan”)
      on January 3, 2006 to provide incentives to attract and retain participating
      officers, directors, employees, consultants and advisors. The 2005 Plan allows
      for the issuance of 10,000,000 shares of common stock in the form of incentive
      awards, including, without limitation, stock options and restricted 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 September 30, 2006:


**Number
                  of Options**
              
              **Weighted
                  Average Exercise Price**Stock
                  OptionsBalance
                  at December 31, 2005
              
              
              3,480,000
              
              $
              2.03Granted
              
              
              5,455,000
              
              
              1.74ExercisedForfeited
              
              
              (900,000
              )
              
              1.00Balance
                  at September 30, 2006
              
              
              8,035,000
              
              $
              1.88Options
                  exercisable at September 30, 2006
              
              
              4,014,063
              
              $
              1.85Weighted
                  average fair value of options granted during the nine months ended
                  September 30, 2006
              
              
              
              
              $
              1.74


**Options
                  Outstanding**
              
              **Options
                  Exercisable****Exercise
                  Price**
              
              **Number
                  Outstanding at September 30, 2006**
              
              **Weighted
                  Average Remaining Contractual Years**
              
              **Weighted
                  Average Exercise Price**
              
              **Number
                  Exercisable at September 30, 2006**
              
              **Weighted
                  Average Exercise Price**$
              0.90
              
              
              250,000
              
              
              8.78
              
              $
              0.90
              
              
              250,000
              
              $
              0.90$
              0.97
              
              
              200,000
              
              
              9.91
              
              $
              0.97
              
              
              75,000
              
              $
              0.97$
              1.00
              
              
              435,000
              
              
              8.10
              
              $
              1.00
              
              
              360,000
              
              $
              1.00$
              1.36
              
              
              275,000
              
              
              9.66
              
              $
              1.36
              
              
              65,625
              
              $
              1.36$
              1.40
              
              
              350,000
              
              
              9.77
              
              $
              1.40
              
              
              12,500
              
              $
              1.40$
              1.44
              
              
              150,000
              
              
              10.70
              
              $
              1.44
              
              
              62,500
              
              $
              1.44$
              1.48
              
              
              250,000
              
              
              9.40
              
              $
              1.48
              
              
              75,000
              
              $
              1.48$
              1.50
              
              
              450,000
              
              
              9.22
              
              $
              1.50
              
              
              250,000
              
              $
              1.50$
              1.55
              
              
              1,700,000
              
              
              8.61
              
              $
              1.55
              
              
              1,062,500
              
              $
              1.55$
              1.58
              
              
              25,000
              
              
              8.66
              
              $
              1.58
              
              
              7,813
              
              $
              1.58$
              1.75
              
              
              25,000
              
              
              9.57
              
              $
              1.75
              
              
              3,125
              
              $
              1.75$
              1.86
              
              
              100,000
              
              
              9.56
              
              $
              1.86
              
              
              25,000
              
              $
              1.86$
              1.90
              
              
              500,000
              
              
              9.09
              
              $
              1.90
              
              
              375,000
              
              $
              1.90$
              1.91
              
              
              280,000
              
              
              9.52
              
              $
              1.91
              
              
              70,000
              
              $
              1.91$
              1.95
              
              
              100,000
              
              
              9.48
              
              $
              1.95
              
              
              75,000
              
              $
              1.95$
              2.10
              
              
              1,350,000
              
              
              9.42
              
              $
              2.10
              
              
              325,000
              
              $
              2.10$
              2.20
              
              
              150,000
              
              
              9.52
              
              $
              2.20
              
              
              150,000
              
              $
              2.20$
              2.25
              
              
              280,000
              
              
              6.29
              
              $
              2.25
              
              
              184,375
              
              $
              2.25$
              2.30
              
              
              150,000
              
              
              8.18
              
              $
              2.30
              
              
              75,000
              
              $
              2.30$
              2.53
              
              
              25,000
              
              
              9.43
              
              $
              2.53
              
              
              6,250
              
              $
              2.53$
              2.77
              
              
              25,000
              
              
              9.43
              
              $
              2.77
              
              
              6,250
              
              $
              2.77$
              2.90
              
              
              20,000
              
              
              8.53
              
              $
              2.90
              
              
              6,250
              
              $
              2.90$
              2.91
              
              
              30,000
              
              
              8.55
              
              $
              2.91
              
              
              9,375
              
              $
              2.91$
              2.95
              
              
              15,000
              
              
              8.01
              
              $
              2.95
              
              
              7,500
              
              $
              2.95$
              3.27
              
              
              150,000
              
              
              9.40
              
              $
              3.27
              
              
              -
              
              $
              3.27$
              3.50
              
              
              750,000
              
              
              7.77
              
              $
              3.50
              
              
              475,000
              
              $
              3.508,035,000
              
              
              9.38
              
              $
              1.95
              
              
              4,014,063
              
              $
              1.85


-12-
 **Table
            of Contents**




**SmartVideo
      Technologies, Inc. and Subsidiary**


**Notes
      to condensed consolidated financial statements**


**(Unaudited)**






At
      September 30, 2006, the Company had a total of 35,010,149 warrants outstanding.
      All of these warrants 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 warrant activity.




(3)
            Stock
                Plans





In
      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 and nine months ended September 30, 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. 123(R) for the employee share based awards.


**For
                  the Three Months Ended**
              
              **For
                  the Nine Months Ended****September
                  30,**
              
              **September
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Net
                  loss to common shareholders, as reported
              
              $
              (4,147,894
              )
              $
              (3,997,394
              )
              $
              (13,744,995
              )
              $
              (10,656,339
              )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
              
              
              -
              
              
              (636,334
              )
              
              -
              
              
              (1,111,574
              )Pro
                  forma net loss to common shareholders
              
              $
              (4,147,894
              )
              $
              (4,633,728
              )
              $
              (13,744,995
              )
              $
              (11,767,913
              )Basic
                  and diluted net loss per share, as reported
              
              $
              (0.09
              )
              $
              (0.15
              )
              $
              (0.36
              )
              $
              (0.42
              )Pro
                  forma basic and diluted net loss per share
              
              $
              (0.09
              )
              $
              (0.18
              )
              $
              (0.36
              )
              $
              (0.46
              )





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
      4.875%, expected dividend yield of 0%, expected volatility factor was 122.76%
      with an expected life of three years.





For
      the
      quarter and nine months ended September 30, 2006, the Company recorded a charge
      to income in the amount of approximately $905,000 and $2,117,000 respectively
      for the effects of the adoption of FASB 123(R) in the current year for employee
      share-based awards.


-13-
 **Table
            of Contents**




**SmartVideo
      Technologies, Inc. and Subsidiary**


**Notes
      to condensed consolidated financial statements**


**(Unaudited)**






**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 September 30, 2006 and 2005 was $69,500
      and
      $79,599, respectively. For the nine months ended September 30, 2006 and 2005,
      rent expense was $208,498 and $203,716, respectively.




**Note
      7 - Promissory Notes**





Concurrent
      with the OVT 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 $12,247 as of September
      30,
      2006. At September 30, 2006, the Company has recorded an aggregate $62,247
      for
      loans payable and related accrued interest.




**Note
      8 - Related Party Transactions**





On
      March
      7, 2006, a Director of the Company exercised 25,000 warrants for 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 the additional 12,500 common shares.





On
      July
      17, 2006, the Company completed an equity financing pursuant to a securities
      purchase agreement dated July 7, 2006 among the Company and 74 accredited
      investors (“Investors”) (See note 5(B)). Included among these Investors are two
      board members along with an officer of the Company who collectively invested
      $350,000 in exchange for 280,000 shares of common stock (at a price of $1.25
      per
      share). These individuals also received 280,000 warrants under the same terms
      as
      all the other Investors who participated in the financing.





In
      conjunction with the equity financing, a family member of one of the Company’s
      directors invested $100,000 in exchange for 80,000 shares of common stock (at
      a
      price of $1.25 per share). This individual also received 80,000 warrants under
      the same terms as the other investors.





**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
      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, at such
      time of sale, our 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. On June 8, 2006, the Company entered into
      a
      settlement and release agreement (the “Settlement Agreement”) with Enable.
      Pursuant to the terms of the Settlement Agreement, the Company issued 450,000
      shares of the Company’s common stock to Enable, in exchange for Enable agreeing
      to release the Company and its directors, officers, shareholders, employees
      and
      agents from all suits, claims, charges, liabilities and causes of action arising
      out of, relating to, or in connection with Enable’s allegations. The closing
      price of the Company’s common stock on June 8, 2006 was $1.44 per share. In
      order to compensate the Company for issuing shares to Enable, Richard E.
      Bennett, Jr., a former director and our former Chief Executive Officer, agreed
      to cause RB Family Holdings Ltd. to return 450,000 shares of the Company’s
      common stock owned by RB Family Holdings Ltd. to the Company for
      cancellation.





On
      January 30, 2006, a settlement was reached with a former consultant and their
      attorneys who received an aggregate of 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, and based on the expected
      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 as of December 31, 2005 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.


-14-
 **Table
            of Contents**




**SmartVideo
      Technologies, Inc. and Subsidiary**


**Notes
      to condensed consolidated financial statements**


**(Unaudited)**






On
      February 1, 2006 Jenkins & Gilchrest, LLP (“J&G”) filed suit against the
      Company in the United States District Court, Central District of California,
      Los
      Angeles Division (Case No: CV06-0620) alleging breach of contract as a result
      of
      the Company's alleged failure to pay fees and costs for professional services
      in
      the amount of $115,345. The Company failed to file a timely answer to the
      Complaint and therefore J&G filed a Motion for Default Judgment in the
      amount of $131,902, plus costs, with the Court. The Motion for Default Judgment
      was granted on March 22, 2006. On August 14, 2006, the Company entered into
      a
      settlement agreement with J&G, pursuant to which the Company has agreed to
      pay J&G $95,000 in exchange for a release of all claims by J&G. As of
      October 11, 2006, the Company has paid J&G the $95,000 due pursuant to the
      settlement agreement.





On
      April
      10, 2006, Christopher Smith and Paramount Trading Co., Inc. (“Paramount”) filed
      a Complaint in the United States District Court, Northern 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 Mr. Smith and Paramount freely tradable. On May 22,
      2006,
      the Company filed a Motion to Dismiss the Complaint. On May 26, 2006, the
      plaintiffs filed an Amended Complaint adding the current directors of the
      Company as additional defendants. In response to the Amended Complaint, the
      Company filed a second Motion to Dismiss on June 12, 2006. On June 30, 2006,
      the
      Company entered into a settlement agreement with Mr. Smith, Paramount, their
      attorney and his law firm and two other individuals not a party to the lawsuit
      (the “Plaintiff Parties”). Pursuant to the terms of the settlement agreement,
      the Company agreed to register the 1,119,167 shares that were the subject of
      the
      lawsuit, as well as an additional 872,500 shares, in exchange for the Plaintiff
      Parties agreeing to release the Company and its owners, predecessors,
      successors, directors, officers, shareholders, employees, representatives,
      attorneys, subsidiaries and affiliates from all suits, claims, charges,
      liabilities and causes of action of any nature whatsoever which the Plaintiff
      Parties had, have or may in the future have, arising out of any acts or events
      occurring up to and including the effective date of the Settlement Agreement.
      Among other items, the Plaintiff Parties further agreed not to use non-public
      and/or confidential information against the Company in the future. The
      Settlement Agreement also contains mutual non-disparagement
      clauses.





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




On
      or
      about April 22, 2004, we filed a complaint in the United States District Court,
      North District of Georgia (Case No. 1:04-CV-1123) against Rene Hamouth, seeking
      the recovery of all profits realized by Mr. Hamouth resulting from his alleged
      violations of Section 16(b) of the Securities Exchange Act of 1934 (the
“Exchange Act”) relating to his purchases and sales of our common stock since
      approximately January 1, 2003. We are seeking damages in the amount of at least
      $151,428, interest on the amount of profits recovered and all other general
      and
      equitable relief to which we may be entitled. Since filing the complaint and
      serving Mr. Hamouth, Mr. Hamouth has filed an answer. The court has entered
      a
      scheduling order, approving the Joint Preliminary Planning Report and Discovery
      Plan. On March 16, 2005, we received notice that Mr. Hamouth's attorney in
      this
      matter has withdrawn from the case. On April 15, 2005, we filed a motion for
      summary judgment on this matter. The motion was unopposed. On October 5, 2005,
      the Court granted our motion and executed a judgment for us in the amount of
      $172,342. As of September 30, 2006 the Company has not yet collected on this
      judgment.




On
      July
      5, 2004, the Company entered into a distribution agreement with Open Systems,
      Ltd. Certain issues arose regarding the terms of the agreement and the parties
      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 directors.
      At
      September 30, 2006, there are no related accrued contingency
      losses.


-15-
 **Table
          of Contents**




**SmartVideo
      Technologies, Inc. and Subsidiary**


**Notes
      to condensed consolidated financial statements**


**(Unaudited)**






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





On
      November 29, 2005, ProNetworkTV, Inc. filed a Complaint for Equitable Relief
      in
      the Superior County Court of Gwinnett County, State of Georgia, (Civil Action
      Number 05-A-13684-2) against OVT, Inc. seeking the recovery of late fees in
      the
      amount of $100,615 alleged to be owed pursuant to a Promissory Note executed
      by
      OVT, Inc. in favor of ProNetworkTV, Inc. in the principal amount of $325,000.
      ProNetworkTV, Inc. alleges that OVT, Inc. failed to make payments when due
      under
      the Promissory Note. As a result of the alleged failure to make such payments,
      ProNetworkTV, Inc. alleges that late fees accrued under the Promissory Note.
      On
      March 26, 2006, the Company filed a Motion to Dismiss with the Court. On
      May 8, 2006, the Company's Motion to Dismiss was granted. On September 11,
      2006,
      ProNetworkTV, Inc. filed a Complaint against the Company and OVT, Inc. in the
      Superior Court of Gwinnett County, State of Georgia (Civil Action Number
      06A-08430-5) seeking recovery of the same late fees referenced above, but this
      time in the amount of $105,262, which is alleged to be owed pursuant to the
      same
      Promissory Note referenced above. Further, the Complaint seeks a declaratory
      judgment that ProNetworkTV, Inc. is the owner of certain technology belonging
      to
      the Company, which is the subject of a services agreement between the parties.
      The Complaint also alleges that ProNetworkTV, Inc. is entitled to monetary
      damages arising out of the Company’s alleged breach of the services agreement.
      The Company believes the claims made by ProNetworkTV, Inc. are without merit
      and
      intends to defend against the claims vigorously. On September 15, 2006, the
      Company reached a settlement agreement with ProNetworkTV, Inc. relating to
      this
      and certain other unrelated matters. Pursuant to the terms of the settlement
      agreement, both parties have agreed, among other things, to provide mutual
      general releases of any existing alleged claims either party may have as of
      the
      date of the settlement agreement, including, but not limited to, any claims
      relating to the promissory note that was the subject of this lawsuit. After
      reaching the September 15, 2006 agreement referenced above, ProNetworkTV, Inc.
      took the position that a “final” agreement had not, in fact, been reached.
      Currently, the parties are proceeding as they were prior to reaching the
      September 15, 2006 settlement agreement.





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. Mr. Hendricks is claiming damages in excess of $600,000 relating
      to
      lost wages and unreimbursed business expenses. In addition, he is claiming
      the Company failed to issue 500,000 non-qualified stock options, to which he
      alleges he is entitled. Mr. Hendrick's main claims are that he was wrongfully
      discharged from the Company and that the Company failed to grant him promised
      stock options. On June 22, 2006, the Court entered an Order that the parties
      shall proceed to mediation on or before October 31, 2006. The parties began
      the
      mediation process on August 29, 2006. Currently, the mediation is scheduled
      to
      conclude on November 1, 2006. The Company intends to vigorously defend against
      Mr. Hendrick's claims, although there can be no assurances that the Company
      will
      be successful.





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 alleged breach of certain guarantee obligations under 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 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. terminated the agreement. The
      $791,244 demand represents the entire contract amount, including both past
      due
      payments and future guaranteed license fees, totaling minimum payments due
      pursuant to the agreement of $900,000, which amount has been reduced by payments
      made and certain prepaid insurance premiums in the amount of $108,756. On June
      12, 2006, Mantra Films, Inc. filed suit against Cell Phone Entertainment, LLC
      and the Company in the Superior Court for the State of California, County of
      Los
      Angeles (Civil Action File NO. SC090022). Mantra Films, Inc.'s Complaint sets
      forth the same basic facts discussed above, as well as certain additional facts
      regarding the alleged failure of the Company to return certain property to
      Mantra Films, Inc. In its Complaint, Mantra Films, Inc. has asserted claims
      for
      breach of contract, conversion, unjust enrichment, specific recovery of personal
      property accounting and interference with prospective economic advantage. The
      complaint seeks damages in the amount discussed above, in addition to certain
      unspecified damages to be proven at trial. On October 5, 2006, the Company
      filed
      a Motion to Compel Arbitration. A hearing on the Motion has been set down by
      the
      Court for December 27, 2006. The Company intends to vigorously defend against
      Mantra Films, Inc.'s claims, although there can be no assurances that the
      Company will be successful.





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-0850-MHS),
      against the Company, alleging  the breach of certain registration rights
      agreements and subscription agreements. More specifically, the investors claim,
      among other things, that they were denied certain rights they were allegedly
      owed under the agreements, and were inappropriately prevented from exercising
      warrants and selling shares during a specific period of time. The investors
      are
      claiming that as a result of the Company's actions they have suffered damages
      in
      excess of $10 million. The Company intends to vigorously defend against these
      claims, although there can be no assurances that the Company will be successful.
      Further, on August 31, 2006, plaintiffs' counsel sent a demand on behalf of
      certain shareholders of the Company requesting


-16-
 **Table
          of Contents**




**SmartVideo
      Technologies, Inc. and Subsidiary**


**Notes
      to condensed consolidated financial statements**


**(Unaudited)**






that
      a
      shareholders' derivative suit be filed against the Company's SEC counsel as
      well
      as Mr. Ron Warren, Mr. Kevin McNeil and the Company's officers and directors
      arising out of the same alleged facts and circumstances giving rise to the
      claims made in the Complaint filed April 10, 2006 which is described above.
      On
      September 8, 2006, plaintiffs' counsel in this litigation sent a second,
      virtually identical demand to the Company on behalf of three additional
      shareholders of the Company. These three additional shareholders are not
      plaintiffs in this litigation, although they have now filed suit against the
      Company (see Note 10). The Board of Directors of the Company is in receipt
      of
      these  demands
      and is currently conducting an investigation with regard thereto.





On
      April
      14, 2006, smarTVideoTM 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.





On
      or
      about July 18, 2006, Manhattan Investments, Inc. **** (“Manhattan”),
      filed a Complaint against the Company in the United States District Court,
      Northern District of California (Case No. C-06-4379), alleging that the Company
      has wrongfully refused to remove the restrictive legend on a stock certificate
      representing 49,795 shares.  The Complaint includes claims for breach of
      fiduciary and statutory duties, conversion and fraud, and seeks injunctive
      relief, as well as monetary damages.  On October 2, 2006, the Company filed
      a Motion to Transfer for Improper Venue, which is still pending before the
      Court. The Company intends to vigorously defend against these claims,
      although there can be no assurances that the Company will be successful.





Except
      as
      set forth above and in Note 10, the Company believes that there are no material
      commitments or litigation matters at the current time. While no assurance can
      be
      given regarding the outcome of the matters discussed above (and in Note 10),
      if
      the outcome of one or more of these matters is unfavorable, the Company’s
      business, financial condition, results of operations, liquidity and cash flows
      may be materially adversely affected.





(C)
      Employment Agreements




On
      February 28, 2006, we entered into an employment agreement with David R. Ross,
      pursuant to which he will serve as the Company's President for a period of
      two
      years. On August 25, 2006, Mr. Ross was appointed Interim Chief Executive
      Officer of the Company. Mr. Ross is entitled to a base salary of $275,000 per
      annum, which may be increased at the discretion of the Compensation Committee
      of
      the Board of Directors. We also granted Mr. Ross an incentive stock option
      to
      purchase an aggregate of 476,190 shares of the Company's common stock and a
      non-qualified stock option to purchase an aggregate of 523,810 shares of the
      Company's common stock. The incentive stock option and the non-qualified stock
      option are each exercisable at $2.10 per share for a period of 10 years from
      the
      date of grant. The incentive stock option vests at the following percentages
      and
      at the following times: (1) 10% of the shares vested on February 28, 2006,
      and
      (2) 10% of the shares vest on each anniversary date thereafter for the
      succeeding nine years. The non-qualified stock option vests in the following
      percentage and at the following times: (1) 50% of the shares vest on February
      28, 2006, and (2) the balance of the shares vest on February 28, 2007. We have
      agreed to reimburse Mr. Ross the rental costs of an apartment or condominium
      unit in Atlanta, Georgia, in an amount not to exceed $1,500 per month. The
      employment agreement made with Mr. Ross may be terminated with or without
“cause” (as defined in the agreement) and contains customary non-competition,
      confidentiality and indemnification provisions. If the employment agreement
      is
      terminated by us without cause or by Mr. Ross with advance “Notice of
      Termination,” (as defined in the agreement) a pro rata portion of Mr. Ross'
      unvested options will vest immediately. If the employment agreement is
      terminated by the Company with cause or by Mr. Ross without advance Notice
      of
      Termination, then Mr. Ross forfeits the options that have not vested as of
      the
      date of termination or resignation.




Pursuant
      to an agreement with Tatum, LLC, the Company pays William J. Loughman, the
      Chief
      Financial Officer of the Company, a salary of $20,000 per month less the
      amount of the Company's portion of FICA taxes. In addition, on March 20, 2006
      the Company granted Mr. Loughman options to purchase 80,000 shares of the
      Company's common stock at an exercise price of $1.95 per share. The options
      vest
      at the rate of 10,000 per month and expire 10 years from the date of grant.
      The
      agreement commenced on March 20, 2006 and extends through December 31, 2006.
      Thereafter, the agreement will automatically renew for additional three-month
      periods unless either party gives the other party written notice of its intent
      not to renew at least 30 days prior to the end of the then current
      period.


-17-
 **Table
          of Contents**




**SmartVideo
      Technologies, Inc. and Subsidiary**


**Notes
      to condensed consolidated financial statements**


**(Unaudited)**






**Note
      10 - Subsequent Events**





On
      or
      about October 6, 2006, three investors in certain of the Company's private
      placements of common stock and warrants filed a Complaint in the United States
      District Court, Northern District of Georgia (Case No. 1:06-CV-2389), against
      the Company, alleging the breach of certain registration rights agreements
      and
      subscription agreements. More specifically, the investors claim, among other
      things, that they were denied certain rights they were allegedly owed under
      the
      agreements, and were inappropriately prevented from exercising warrants and
      selling shares during a specific period of time. The investors are claiming
      that, as a result of the Company's actions, they have suffered damages in excess
      of $5 million. The Company intends to vigorously defend against these claims,
      although there can be no assurances that the Company will be successful.
      Furthermore, as noted above, on September 8, 2006, these same shareholders
      sent
      a demand to the Company that a shareholders’ derivative suit be filed against
      the Company’s outside counsel at the time of the private placement, as well as
      Mr. Ron Warren, Mr. Kevin McNeil and the Company’s officers and directors
      arising out of the same alleged facts and circumstances giving rise to the
      claims made in the Complaint filed October 6, 2006, which is described above.
      The Board of Directors of the Company is in receipt of this demand and is
      currently conducting an investigation with regard thereto.





On
      or
      about October 6, 2006, an investor in certain of the Company's private
      placements of common stock and warrants filed a Complaint in the United States
      District Court, Northern District of Georgia (Case No. 1:06-CV-2388), against
      the Company, alleging the breach of certain registration rights agreements,
      as
      well as breach of contract, unjust enrichment and promissory estoppel. More
      specifically, the investor claims, among other things, that he was denied
      certain rights he was allegedly owed under the registration rights agreements,
      and was inappropriately prevented from exercising warrants and selling shares
      during a specific period of time. Furthermore, the investor claims that in
      exchange for several investments, loans made to the Company and expertise
      provided to the Company, he was promised, but never given, a position on the
      Company’s Advisory Board and 100,000 warrants as compensation for serving on the
      Advisory Board. The investor is claiming that, as a result of the Company's
      actions, he has suffered damages in excess of $1 million. The Company intends
      to
      vigorously defend against these claims, although there can be no assurances
      that
      the Company will be successful.





On
      or
      about October 6, 2006, two investors in certain of the Company's private
      placements of common stock and warrants filed a Complaint in the United States
      District Court, Northern District of Georgia (Case No. 1:06-CV-2391), against
      the Company, alleging the breach of certain registration rights agreements.
      More
      specifically, the investors claim, among other things, that they were denied
      certain rights they were allegedly owed under the agreements, and were
      inappropriately prevented from exercising warrants and selling shares during
      a
      specific period of time. The investors are claiming that, as a result of the
      Company's actions, they have suffered damages in excess of $1 million. The
      Company intends to vigorously defend against these claims, although there can
      be
      no assurances that the Company will be successful.





On
      or
      about October 6, 2006, two investors in certain of the Company's private
      placements of common stock and warrants filed a Complaint in the United States
      District Court, Northern District of Georgia (Case No. 1:06-CV-2390), against
      the Company, alleging the breach of certain registration rights agreements.
      More
      specifically, the investors claim, among other things, that they were denied
      certain rights they were allegedly owed under the agreements, and were
      inappropriately prevented from exercising warrants and selling shares during
      a
      specific period of time. The investors are claiming that, as a result of the
      Company's actions, they have suffered damages in excess of $1 million. The
      Company intends to vigorously defend against these claims, although there can
      be
      no assurances that the Company will be successful.





On
      or
      about October 20, 2006, Hamouth Family Trust (“Hamouth”) filed a Complaint
      against the Company in the Court of Chancery of the State of Delaware, in which
      Hamouth seeks declaratory and injunctive relief, as well as damages in an
      unspecified amount, related to the Company’s alleged wrongful refusal to issue
      new stock certificates without restrictive legends for 800,000 shares of stock
      owned by Hamouth. The Company intends to vigorously defend against these claims,
      although there can be no assurances that the Company will be
      successful.


-18-
 **Table
            of Contents**




**Item
      2. Management’s Discussion and Analysis of Financial Condition
      and Results of Operations**





*The
      discussion in this report contains forward-looking statements that involve
      risks
      and uncertainties. smarTVideoTM’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 elsewhere in
      this
      report. You should also carefully review the risk factors set forth in other
      reports or documents that smarTVideoTM 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 elsewhere in
      this
      report.*





***Overview***




SmartVideo
      Technologies, Inc. is a provider of media 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 media 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 media 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.





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 content distribution rights on either a fixed-fee per subscriber, per
      month basis or on a revenue-sharing basis. Some of the content arrangements
      have
      minimum purchase guarantees per month.





The
      Company licenses the content 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
      $0.50 cents on our subscription model. In the area of our Premium offerings
      we
      typically share at a rate of 50% of the net collected revenue on our revenue
      sharing 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. In fiscal year 2005, the majority of our revenue was
      derived from a per subscriber, per month, fixed-fee arrangement. For fiscal
      year
      2006 and subsequent years, we are targeting a diverse subscriber base in the
      mobile entertainment industry.





The
      Company and MSNBC.com completed a beta test for MSNBC.com's new
      advertising-supported news service. This mobile news service is offered free
      of
      charge to MSNBC.com users. The Company provides MSNBC.com with the ability
      to insert advertising as part of the news service, and the Company intends
      to
      expand into other advertising-supported revenue services.





The
      Company is in the process of developing and intends to market a complete suite
      of new media services that combine TV, radio and other media brands with
      user-friendly personalization, interactivity and targeted advertising. The
      capital expenditures required to develop the software for these new services
      are
      anticipated to be approximately $250,000. There
      can
      be no assurance that the Company will be successful in the development or
      marketing of these services.





***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
      results and trends 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 any changes in the different estimates that could have been used
      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.”


-19-
 **Table
          of Contents**




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




*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. 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 daily subscription fee for our mobile entertainment
      services. Revenue from mobile advertising is recognized when the related
      services are performed. See Note 3(J) (Basis of Presentation and Significant
      Accounting Policies) to the Financial Statements included elsewhere in this
      report.




*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 123(R). 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
      Note 3(I) (Basis of Presentation and Significant Accounting Policies) to the
      Financial Statements included elsewhere in this report.




***Results
      of Operations***




*For
      the Three Months Ended September 30, 2006 compared to Three Months Ended
      September 30, 2005*





*Revenues*




Revenues
      for the three-month period ended September 30, 2006 consisted primarily of
      a
      subscription based service delivering live and on-demand mobile entertainment
      services directly to consumers. Our revenues increased by approximately $139,000
      for the three months ended September 30, 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-consumer along with mobile advertising revenue of approximately
      $23,000.





*Broadcast
      rights*




Broadcast
      rights expenses for the three months ended September 30, 2006 were approximately
      $617,000 as compared to $777,000 for the same period in 2005. Broadcast rights
      expenses were greater in 2005 versus 2006 due to the initial up front roll
      out
      costs bringing the services to market. This change is attributable to our
      decision to change our focus to a subscription based model delivering mobile
      entertainment services direct-to-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 $258,000 for
      the
      three months ended September 30, 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 rely less on the use of consultants for discrete
      projects.


-20-
 **Table
          of Contents**


*Consulting
      and professional fees*




Our
      consulting and professional fees decreased by approximately $580,000 for the
      three months ended September 30, 2006 as compared to the same period in 2005.
      This decrease in consulting fees for the three months ended September 30, 2006
      is primarily attributable to the Company’s reduced reliance on outside
      professionals for services as discussed above.





*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 decrease
      in
      data center expenses of approximately $60,000 for the three months ended
      September 30, 2006 when compared to 2005 is primarily due to a one-time vendor
      certification expense during the quarter ended September 30, 2005.





*Settlement
      Expense*





Settlement
      expense for the three months ended September 30, 2006 and 2005 was $57,000
      and
      $0, respectively.





*Stock-based
      Compensation*




For
      the
      three months ended September 30, 2006, we have recorded approximately $1,659,000
      as compared to $966,000 for the three months ended September 30, 2005 in
      non-cash, stock-based compensation. 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 September 30, 2006 increased by approximately
      $70,000 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
      Income (Expense)*




Interest
      income for the three months ended September 30, 2006 of $136,129 included a
      reversal of a previously recorded interest expense in the amount of $53,000.
      Interest expense for the three months ended September 30, 2005 was $4,831.





*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 increased approximately
      $154,000 for the three months ended September 30, 2006 when compared to the
      same
      period in 2005. This increase is attributable to additional staffing, call
      center costs, increased insurance and SEC report filing costs.





*For
      The Nine Months Ended September 30, 2006 compared to Nine Months Ended September
      30, 2005*





*Revenues*




Revenues
      for the nine-month period ended September 30, 2006 consisted primarily of a
      subscription based service delivering live and on-demand mobile entertainment
      services directly to consumers. Our revenues increased by approximately $355,000
      for the nine months ended September 30, 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 along with mobile advertising revenue of approximately
      $23,000.  -21-
 **Table
            of Contents**




*Broadcast
      rights*




Broadcast
      right expenses for the nine months ended September 30, 2006 were approximately
      $1,775,000 as compared to $1,286,000 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 $794,000 for
      the
      nine months ended September 30, 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 rely less on the use of consultants for discrete
      projects.





*Consulting
      and professional fees*




Our
      consulting and professional fees increased by approximately $1,458,000 for
      the
      nine months ended September 30, 2006 as compared to the same period in 2005.
      This increase in consulting fees for the nine months ended September 30, 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 $102,000 for the nine months ended
      September 30, 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.





*Settlement
      Expense*





Settlement
      expense for the nine months ended September 30, 2006 and 2005 was $705,000
      and
      $0, respectively.





*Stock-based
      Compensation*




For
      the
      nine months ended September 30, 2006, we have recorded approximately $3,833,000
      as compared to $4,067,000 for the nine months ended September 30, 2005 in
      non-cash, stock-based compensation. 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 nine months ended September 30, 2006 increased by approximately
      $218,000 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
      Income( Expense)*




Interest
      income for the nine months ended September 30, 2006 of $212,196 included a
      reversal of a previously recorded interest expense in the amount of $53,000.
      Interest expense for the nine months ended September 30, 2005 was $195,421.
      The
      decrease was attributed to the issuance of additional shares of common stock
      as
      additional consideration related to the rights of certain convertible debt
      holders in 2005.




*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 increased approximately
      $321,000 for the nine months ended September 30, 2006 when compared to the
      same
      period in 2005. This increase is attributable to additional staffing, call
      center costs, and SEC report filing costs.


-22-
 **Table
            of Contents**




*Liquidity
      and Capital Resources and Going Concern*




We
      have
      incurred recurring losses and negative cash flows since inception. As of and
      for
      the nine months ended September 30, 2006, we had an accumulated deficit of
      $53,698,751, a consolidated net loss of $13,744,995 and consolidated net cash
      flows used in operations of $7,894,368. As a result, our operations are not
      an
      adequate source of cash to fund future operations and these matters raise
      substantial doubt about our ability to continue as a going concern. To fund
      our
      cash requirements, we have relied on private placements of equity and loans
      from
      shareholders and other related entities. Although we closed on a $9.0 million
      equity financing on July 17, 2006, our ability to continue our operations is
      contingent upon obtaining additional financing and attaining profitable
      operations.





Cash
      flows generated from operating activities during the nine months ended
      September 30, 2006 were not sufficient to offset our operating
      expenditures. Notwithstanding, certain forward-looking statements made during
      the Company’s last annual meeting of shareholders and set forth in a recent
      Company press release, based on the current information available regarding
      our
      proposed plans and assumptions relating to operations, we anticipate that the
      net proceeds from our most recent financing, together with projected cash flow
      from operations, will not be sufficient to meet our cash requirements for
      working capital and capital expenditures beyond June 2007. 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.




*Contractual
      Obligations and Commercial Commitments*





See
      Note
      4 (Broadcast Rights) and Note 6 (Office Lease) included elsewhere in this
      report. There have been no material changes in contractual obligations and
      commercial commitments subsequent to December 31, 2005.





**Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk**





There
      have been no material changes regarding the Company's market risk position
      from
      the information provided on Form 10-K for the fiscal year ended December 31,
      2005.





**Item
      4. 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
      their 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 reports
      we file and submit under the Exchange Act is recorded,
      processed, summarized and reported as and when required .
      In
      addition, the Certifying Officers have concluded that our disclosure controls
      and procedures have been designed to ensure that information required to be
      disclosed in reports filed by us under the Exchange Act is accumulated and
      communicated to management, including our principal executive officers as
      appropriate, in a manner to allow timely decisions regarding the required
      disclosure.





There
      were no changes in our internal control over financial reporting (as defined
      in
      Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection
      with the foregoing evaluation that occurred during the quarter ended September
      30, 2006, that have materially affected, or are reasonably likely to materially
      affect, our internal control over financial reporting.




Our
      management, including the Certifying Officers, 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.


-23-
 **Table
            of Contents**




**PART
      II - OTHER INFORMATION**




**Item
      1. Legal Proceedings**





See
      Notes
      9(A), 9(B) and 10 to the Financial Statements included elsewhere in this report
      which discuss material pending legal proceedings to which the Company is a
      party
      and which are incorporated herein by reference.





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





On
      July
      17, 2006, the Company completed an equity financing pursuant to a securities
      purchase agreement dated as of July 7, 2006 among the Company and 74 accredited
      investors. Under the terms of the agreement, the Company received gross proceeds
      of $9,000,000 and issued to the investors a total of 7,200,000 shares of common
      stock and five year warrants exercisable at $2.50 per share to purchase up
      to
      7,200,000 shares of common stock. Such securities were issued pursuant to an
      exemption provided by Section 4(2) of the Securities Act and Rule 506 of
      Regulation D promulgated thereunder. This round of financing triggered an
      anti-dilution provision under a prior financing resulting in the issue of
      additional warrants exercisable at $1.25 per share to purchase 6,553,663 shares
      of common stock. **




**Item
      6. Exhibits**




*Exhibits*


4.1(1)
            
            Redeemable
                Warrant issued to Skyward Mobile.4.2(1)
            
            Redeemable
                Warrant issued to James Morrison.4.3*(1)
            
            Redeemable
                Warrant issued to Skyward Mobile, LLC.4.4*(1)
            
            Redeemable
                Warrant issued to Skyward Mobile, LLC.4.5*(1)
            
            Redeemable
                Warrant issued to Skyward Mobile, LLC.4.6*(1)
            
            Redeemable
                Warrant issued to Skyward Mobile, LLC.4.7*(1)
            
            Redeemable
                Warrant issued to Skyward Mobile, LLC.4.8*(1)
            
            Redeemable
                Warrant issued to Skyward Mobile, LLC.4.9*(1)
            
            Redeemable
                Warrant issued to Skyward Mobile, LLC.4.10*(1)
            
            Redeemable
                Warrant issued to Skyward Mobile, LLC.4.11*(1)
            
            Redeemable
                Warrant issued to James Morrison.4.12*(1)
            
            Redeemable
                Warrant issued to James Morrison.4.13*(1)
            
            Redeemable
                Warrant issued to James Morrison.4.14*(1)
            
            Redeemable
                Warrant issued to James Morrison.4.15*(1)
            
            Redeemable
                Warrant issued to James Morrison.4.16*(1)
            
            Redeemable
                Warrant issued to James Morrison.4.17*(1)
            
            Redeemable
                Warrant issued to James Morrison.4.18*(1)
            
            Redeemable
                Warrant issued to James Morrison4.19(2)
            
            Form
                of Warrant4.20(3)
            
            Form
                of Anti-Dilution Warrant4.21(2)
            
            Securities
                Purchase Agreement dated July 7, 2006 between the Company and the
                investors party thereto.4.22(2)
            
            Registration
                Rights Agreement dated July 7, 2006 between the Company and the investors
                party thereto.10.1*(1)
            
            Master
                Development Agreement dated July 24, 2006, between Skyward Mobile,
                LLC and the Company.10.2*(1)
            
            Master
                Consulting Agreement dated July 24, 2006, between James
                Morrison and the Company.10.3*(1)
            
            Letter
                Agreement dated August 22, 2006, between Joseph S. Johnson and the
                Company.10.4
            
            Letter
                dated July 7, 2006 regarding extension of the Growth Consultants,
                LLC
                Consulting Agreement.31.1
            
            Certification
                of the Chief Executive Officer and President pursuant to Rule
                13a-14(a)/15d-14(a) of the Securities and Exchange Act of
                1934.31.2
            
            Certification
                of the Chief Financial Officer and Principal Accounting 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 President pursuant to 18 U.S.C.
                Section
                1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
                of
                2003.32.2
            
            Certification
                of the Chief Financial Officer and Principal Accounting Officer pursuant
                to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
                the
                Sarbanes-Oxley Act of 2003.


_________________________


*  Confidential
      Treatment has been requested for the marked portion and filed separately with
      the Commission.


(1)  Incorporated
      herein by reference to the exhibits to the Company’s Registration Statement on
      Form S-1/A (Registration No. 333-137034) filed on September 27,
      2006.


(2)  Incorporated
      herein by reference to the exhibits to the Company’s Form 8-K filed on July 21,
      2006.


(3)  Incorporated
      herein by reference to the exhibits to the Company’s Form 8-K filed on November
      4, 2005.





-24-
 **Table
            of Contents**




**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/
              William
              J. Loughman
            
            Date:
            November
                6, 2006William
                J. LoughmanChief
                Financial Officer
              *(Chief
                Financial Officer and**Principal
                Accounting Officer)*




-25-