UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549  FORM 10-Q  S Quarterly report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  For the quarterly period
ended March 31, 2008  OR  £ Transition report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  For the transition
period from ________ to ________  Commission File
No.0-13316  BROADCAST INTERNATIONAL, INC. (Exact name of
registrant as specified in its charter)  Utah

87-0395567(State or other
jurisdiction of

(IRS
Employerincorporation or
organization)

Identification
No.)  7050 Union Park Ave.
#600, Salt Lake City, Utah 84047 (Address of principal
executive offices and zip code)  (801)
562-2252 (Registrant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
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes  S
    No £  Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer,  a
non-accelerated filer, or a smaller reporting company. See definitions of
 large accelerated filer,  accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act.  £Large accelerated filer£Accelerated filer£Non-accelerated filerSSmaller
reporting company  Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
 Yes   £
   No   S  Indicate
the number of shares outstanding of each of the registrants classes of common
stock, as of the latest practicable date:  Class
Outstanding as
of May 5, 2008Common Stock, $.05
par value
38,565,696
shares  1


Broadcast International, Inc. Form 10-Q  Table of Contents  Part
I - Financial Information Page Item
1.   Financial Statements 3 Item
2.   Managements Discussion and Analysis of Financial Condition and
Results of Operations 21 Item
3.   Quantitative and Qualitative Disclosures about Market Risk 27 Item
4T  Controls and Procedures 27 Part
II -Other Information Item
1.   Legal Proceedings 28 Item
1A. Risk Factors 28 Item
2.   Unregistered Sales of Equity Securities and Use of Proceeds 28 Item
3.   Defaults Upon Senior Securities 29 Item
4.   Submission of Matters to a Vote of Security Holders 29 Item
5.   Other Information 29 Item
6.   Exhibits 30 Signatures 33        2    Item
1. Financial Information    BROADCAST
INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS December
31,

March
31,2007

2008(Unaudited)ASSETS:Current assetsCash
and cash equivalents
$
16,598,300
$
3,302,725Available-for-sale
securities (note 7)

--

4,075,000Trade
accounts receivable, net

220,834

428,259Inventory

57,218

51,342Prepaid
expenses

2,449,236

2,275,903Total current assets

19,325,588

10,133,229Property and equipment,
net

641,314

1,259,561Other assetsDebt
offering Costs

1,367,583

1,250,775Patents,
net

197,346

196,411Available-for-sale
securities (note 7)

--

6,964,813Deposits
and other assets

8,795

9,058Total other assets

1,573,724

8,421,057Total assets
$
21,540,626
$
19,813,847 See accompanying notes to consolidated financial statements.      3    BROADCAST
INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) December
31,

March
31,2007

2008LIABILITIES:



(Unaudited)Current liabilitiesAccounts
payable
$
640,292
$
491,230Payroll
and related expenses

460,236

351,406Other
accrued expenses

55,356

394,198Unearned
revenue

169,359

107,437Current
debt obligations

47,692

--Derivative
valuation

14,267,600

6,958,200Total current
liabilities

15,640,535

8,302,471Long-term liabilitiesConvertible
debt (net of $13,068,755 and $11,937,596discount,
respectively)

2,931,245

4,062,404Total liabilities

18,571,780

12,364,875Commitments and contingencies
(Note 6)STOCKHOLDERS EQUITY:Preferred
stock, no par value, 20,000,000 sharesauthorized;
none issued

-

-Common stock,
$.05 par value, 180,000,000 sharesauthorized;
37,775,034 and 38,501,296 shares issued asof
December 31, 2007 and March 31, 2008, respectively

1,888,752

1,925,065Additional paid-in
capital

65,289,354

67,920,900Unexercised stock options and
warrants

3,789,095

3,977,566Accumulated other comprehensive
loss

-

(560,187)Subscriptions receivable

(25,000)

-Accumulated deficit

(67,973,355)

(65,814,372)Total stockholders
equity

2,968,846

7,448,972Total liabilities and
stockholders equity
$
21,540,626
$
19,813,847 See accompanying notes to consolidated financial statements.     4    BROADCAST
INTERNATIONAL, INC. CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)  For the three
months ended March 31,2007

2008Net sales
$
1,599,066
$
1,187,392Cost of sales

1,594,775

1,136,446Gross profit

4,291

50,946Operating expenses:Administrative
and general

1,574,684

1,534,181Selling
and marketing

142,621

246,192Research
and development

185,063

776,633Total operating expenses

1,902,368

2,557,006Total operating loss

(1,898,077)

(2,506,060)Other income (expense):Interest
income

9,035

162,619Interest
expense

(773,831)

(1,501,792)Derivative
valuation gain (loss)

(1,654,390)

6,009,063Other
income (expense)

2,666

(4,847)Total other income
(expense)

(2,416,520)

4,665,043Income (loss) before income
taxes

(4,314,597)

2,158,983Provision for income
taxes

--

--Net Income (loss)
$
(4,314,597)
$
2,158,983Net income (loss) per share 
basic
$
(0.15)
$
0.06Net income (loss) per share 
diluted
$
(0.15)
$
0.05Weighted average shares 
basic

27,854,000

38,139,100Weighted average shares 
diluted

27,854,000

43,762,197  See accompanying notes
to consolidated financial statements.    5    BROADCAST INTERNATIONAL, INC.CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited) Three Months
EndedMarch
31,2007

2008Cash flows from operating
activities:Net income (loss)
$
(4,314,597)
$
2,158,983Adjustments to reconcile net
income (loss) to
net cash used in operating
activities:Depreciation
and amortization

60,603

83,441Common
stock issued for services

--

54,600Common
stock issued for in process research and development

--

19,667Accretion
of discount on convertible notes payable

291,669

1,131,916Unexercised
options and warrant expense

611,993

188,471Gain on
sale of assets

(5,100)

--Derivative
liability valuation

1,654,390

(6,009,063)Extinguishment
of debt

281,249

6,056Allowance
for doubtful accounts

19,150

56,232Changes in assets and
liabilities:Accounts
receivable

611,179

(263,657)Inventories

11,185

5,876Debt
offering costs

147,951

116,808Prepaid
and other assets

836,617

661,070Accounts
payable and accrued expenses

(275,054)

(26,958)Deferred
revenues

(465,622)

(61,922)Net
cash used in operating activities

(534,387)

(1,878,480)Cash flows from investing
activities:Purchase of equipment

(18,867)

(592,845)Purchase of available-for-sale
securities

--

(11,600,000)Proceeds from sale of
assets

5,100

--Net
cash used in investing activities

(13,767)

(12,192,845)Cash flows from financing
activities:Proceeds from the exercise of
warrants

--

750,000Principal payments on
debt

(536,460)

--Proceeds from subscription
receivable

--

25,000Proceeds from the exercise of
options

--

750Proceeds for the sale of stock

348,020

--Loan proceeds

249,974

--Net
cash provided by financing activities

61,534

775,750Net decrease in cash and cash
equivalents

(486,620)

(13,295,575)Cash and cash equivalents,
beginning of period

807,741

16,598,300Cash and cash equivalents, end
of period
$
321,121
$
3,302,725  See accompanying notes
to consolidated financial statements.    6    BROADCAST INTERNATIONAL,
INC. AND SUBSIDIARIES NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 31, 2008  NOTE 1 - BASIS OF
PRESENTATION  In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements of Broadcast International, Inc. (we or the Company) contain the
adjustments, all of which are of a normal recurring nature, necessary to present
fairly our financial position at December 31, 2007 and March 31, 2008 and the
results of operations for the three months ended March 31, 2007 and 2008,
respectively, with the cash flows for each of the three month periods ended
March 31, 2007 and 2008, in conformity with U.S. generally accepted accounting
principles.  These condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and related notes included in our Annual
Report on Form 10-K for the year ended December 31, 2007.  Operating
results for the three months ended March 31, 2008 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2008.  NOTE 2 - RECLASSIFICATIONS  Certain 2007 financial statement
amounts have been reclassified to conform to 2008 presentations.  NOTE 3 - WEIGHTED AVERAGE
SHARES  The computation of basic earnings
(loss) per common share is based on the weighted average number of shares
outstanding during each period.  The computation of diluted earnings
per common share is based on the weighted average number of common shares
outstanding during the period, plus the common stock equivalents that would
arise from the exercise of stock options and warrants outstanding, using the
treasury stock method and the average market price per share during the period,
plus the effect of assuming conversion of the convertible debt.  The
computation of diluted earnings per share does not assume conversion or exercise
of securities that would have an anti-dilutive effect on earnings.  Outstanding stock options and
warrants were not included in the calculation of diluted earnings per share for
the period ended March 31, 2007 as their inclusion would be anti-dilutive,
thereby reducing the net loss per common share.  The following table sets forth the
computation of basic and diluted net income per share for March 31, 2007 and
2008:  Three Months Ended
March 31,2007

2008Net income

$  
      (4,314,597)

$
         2,158,983Basic weighted average shares
outstanding

27,854,000

38,139,100Effect of dilutive
securities:Stock options and
warrants

-

5,623,097Dilutive weighted average
shares outstanding

27,854,000

43,762,197Net income per shareBasic

$                 (0.15)

$
      
          0.06Diluted

$  
              (0.15)

$
      
          0.05     7    Options and warrants to purchase
3,080,600 and 15,014,643 shares of common stock at prices ranging from $.02 to
$45.90 per share were outstanding at March 31, 2008 and 2007, respectively, but
were excluded from the calculation of diluted earnings per share because the
effect of the stock options and warrants was anti-dilutive. Furthermore, the
Company had convertible debt that was convertible into 3,418,961 shares of
common stock at March 31, 2008, that was excluded from the calculation of
diluted earnings per share because the effect was anti-dilutive.  NOTE 4 - STOCK COMPENSATION  Beginning on January 1, 2006, we
began accounting for stock-based compensation   under the provisions
of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment
(FAS 123R), which requires the recognition of the fair value of stock-based
compensation. We have used the modified prospective application. Under the fair
value recognition provisions for FAS 123R, stock-based compensation cost is
estimated at the grant date based on the fair value of the awards expected to
vest and recognized as expense ratably over the requisite service period of the
award.  We have used the Black-Scholes valuation model to estimate fair
value of our stock-based awards, which requires various judgmental assumptions
including estimated stock price volatility, forfeiture rates, and expected life.
 Our computation of expected volatility is based on a combination of
historical and market-based implied volatility.  We calculated the fair market value
of each option and warrant awarded on the date of grant using the Black-Scholes
option-pricing model. The following assumptions were used for the grants awarded
for the three months ended March 31, 2008.  Risk-free interest rate
3.45% - 3.70%Expected lives in years
10.0Dividend yield
0Expected volatility
76.73% -
77.43%  Net income (loss) for the three
months ended March 31, 2008 and 2007 includes $188,471 and $611,993,
respectively, of non-cash stock-based compensation expense. Options issued to
directors vest immediately and all other options and warrants are subject to
applicable vesting schedules. Expense is recognized proportionally as each grant
vests.  Included in the $188,471 for the
three months March 31, 2008 is (i) $22,145 for the vested portion of 286,500
options granted to eight employees, (ii) $182,215 resulting from the vesting of
unexpired options and warrants issued prior to January 1, 2008, (iii) ($15,889)
credit for recovery of previously recorded expense of vested options forfeited
during the period.  Included in the $611,993 for the
three months March 31, 2007 is $405,000 resulting from 500,000 options granted
to two directors, $125,941 resulting from the vesting of unexpired options
issued prior to January 1, 2007, $57,330 resulting from 1,300,000 warrants
issued to 5 consultants, $13,362 resulting from the issuance of 366,500 options
issued to non-executive management employees and $10,360 for repriced options
previously granted to executive management. Warrants to acquire 231,999 shares
of our common stock were also granted to certain equity investors.  The impact on our results of
operations for recording stock-based compensation under FAS 123R for the three
months ended March 31, 2008 and 2007 are as follows:  2008

2007General and
administration
$
   
        103,581

$   
        599,188Research and development in
process
84,890

52,805Total
$
     
      188,471

$
   
       611,993        8   Due to
unexercised options outstanding at March 31, 2008, we will recognize a total of
$1,547,656 of compensation expense over the next four years for employees and
consultants as a result of the adoption of FAS 123R based upon option and
warrant award vesting parameters as shown below:  2008
$
     
       672,2002009
473,5832010
360,9422011
40,931Total
$
     
    1,547,656  The following unaudited tables
summarize option and warrant activity during the three months ended March 31,
2008.  Options and
Warrants
Outstanding

Options or
Warrants
Price Per
ShareOutstanding at December 31,
2007
16,034,019

$      0.02

$      45.90Options
granted
286,500

2.60

3.45Warrants
issued
--

--

--Expired
--

--

--Forfeited
(37,796)

0.55

4.00Exercised
(502,258)

0.33

1.50Outstanding at March 31,
2008
15,780,465

$   
  0.02

$     45.90  The
following table summarizes information about stock options and warrants
outstanding at March 31, 2008. Outstanding
ExercisableWeightedAverageRemaining

Weighted
Average


Weighted
AverageRange of
Exercise
Prices
Number
Outstanding
Contractual
Life
(years)

Exercise
Price
Number
Exercisable

Exercise
Price$
0.02-0.04
1,264,495
2.07
$
0.03
1,264,495
$
0.030.33-0.95
1,676,822
6.58

0.72
1,510,155

0.701.06-6.25
12,835,548
3.37

2.52
12,238,714

2.519.50-11.50
2,000
3.27

10.65
2,000

10.6536.25-45.90
1,600
2.42

41.08
1,600

41.08$
0.02-45.90
15,780,465
3.61
$
2.14
15,016,965
$
2.12  NOTE 5- SIGNIFICANT ACCOUNTING
POLICIES  Management
Estimates The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period.  Actual results could differ from those
estimates.      9   Cash
and Cash Equivalents We consider
all cash on hand and in banks, and highly liquid investments with maturities of
three months or less, to be cash equivalents. At March 31, 2008 and 2007, we had
bank balances in the excess of amounts insured by the Federal Deposit Insurance
Corporation. We have not experienced any losses in such accounts, and believe we
are not exposed to any significant credit risk on cash and cash equivalents. Current
financial market conditions have had the effect of restricting liquidity of cash
management investments and have increased the risk of even the most liquid
investments and the viability of some financial institutions.  We do not
believe, however, that these conditions will materially affect our business or
our ability to meet our obligations or pursue our business plans. Account
Receivables Included in
our $428,259 and$220,834 net accounts receivable for the three months ending
March 31, 2008 and year ending December 31, 2007, respectively, were, (i)
$96,214 and $35,106 of unbilled trade receivables and (ii) $19 and $5,421 for
employee travel advances and other receivables, respectively.  Trade
account receivables are carried at original invoice amount less an estimate made
for doubtful receivables based on a review of all outstanding amounts on a
monthly basis. Management determines the allowance for doubtful accounts by
identifying troubled accounts and by using historical experience applied to an
aging of accounts. Trade receivables are written off when deemed uncollectible.
Recoveries of trade receivables previously written off are recorded when
received. A trade
receivable is considered to be past due if any portion of the receivable balance
is outstanding for more than 90 days. After the receivable becomes past due, it
is on non-accrual status and accrual of interest is suspended. Inventories Inventories
consisting of electrical and computer parts are stated at the lower of cost or
market determined using the first-in, first-out method. Property
and Equipment Property and
equipment are stated at cost. Depreciation is provided using the straight-line
method over the estimated useful lives of the property, generally from three to
five years.  Repairs and maintenance costs are expensed as incurred except
when such repairs significantly add to the useful life or productive capacity of
the asset, in which case the repairs are capitalized. Patents Patents
represent initial legal costs incurred to apply for United States and
international patents on the CodecSys technology, and are amortized on a
straight-line basis over their useful life of approximately 20 years.
 We have filed several patents in the United States and foreign countries.
As of March 31, 2008, the United States Patent and Trademark Office had approved
2 patents.  Additionally, five foreign countries had approved patent
rights.  While we are unsure whether we can develop the technology in order
to obtain the full benefits, the patents themselves hold value and could be sold
to companies with more resources to complete the development. On-going legal
expenses incurred for patent follow-up have been expensed from July 2005
forward. Amortization
expense recognized on all patents totaled $935 and $737 for the three months
ended March 31, 2008 and 2007, respectively. Estimated
amortization expense, if all patents were issued at the beginning of 2008, for
each of the next five years is as follows:      10    Year ending
December 31:2008
$10,6522009
10,6522010
10,6522011
10,6522012
10,652 Long-Lived
Assets We review
our long-lived assets, including patents, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.  Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future un-discounted net cash
flows expected to be generated by the asset.  If such assets are considered
to be impaired, then the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the estimated fair value of
the assets.  Fair value is determined by using cash flow analyses and other
market valuations. Income
Taxes We account
for income taxes in accordance with the asset and liability method of accounting
for income taxes prescribed by Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes.  Under the asset and liability method,
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 the taxable income in the years in which those
temporary differences are expected to be recovered or settled. Revenue
Recognition We recognize
revenue when evidence exists that there is an arrangement between us and our
customers, delivery of equipment sold or service has occurred, the selling price
to our customers is fixed and determinable with required documentation, and
collectability is reasonably assured. We recognize as deferred revenue, payments
made in advance by customers for services not yet provided. When we
enter into a multi-year contract with a customer to provide installation,
network management, satellite transponder and help desk, or combination of these
services, we recognize this revenue as services are performed and as equipment
is sold.  These agreements typically provide for additional fees, as
needed, to be charged if on-site visits are required by the customer in order to
ensure that each customer location is able to receive network communication. As
these on-site visits are performed the associated revenue and cost are
recognized in the period the work is completed. If we install, for an additional
fee, new or replacement equipment to an immaterial number of new customer
locations, and the equipment immediately becomes the property of the customer,
the associated revenue and cost are recorded in the period in which the work is
completed. Research
and Development Research and
development costs are expensed when incurred.  We expensed $776,633, and
$185,063 of research and development costs for the three months ended March 31,
2008 and 2007, respectively. Concentration
of Credit Risk Financial
instruments, which potentially subject us to concentration of credit risk,
consist primarily of trade accounts receivable. In the normal course of
business, we provide credit terms to our customers. Accordingly, we perform
ongoing credit evaluations of our customers and maintain allowances for possible
losses which, when realized, have been within the range of managements
expectations. For the
three months ended March 31, 2008, we had 3 customers that individually
constituted greater than 10% of our total revenues, which represented 22%, 19%
and 19% of our revenues, respectively.  For the three months ended March
31, 2007, we had 3 customers that individually constituted greater than 10% of
our total revenues, which represented 42%, 16% and 14% of our revenues,
respectively. One of the three customers in 2008 was not the same customer as in
2007    11   Fair
Value of Financial Instruments Our
financial instruments consist of cash, receivables, notes receivables, payables,
and notes payable.  The carrying amount of cash, receivables and payables
approximates fair value because of the short-term nature of these items.
 The aggregate carrying amount of the notes receivable and notes payable
approximates fair value as the individual notes bear interest at market interest
rates. Off-Balance
Sheet Arrangements We have no
off-balance sheet arrangements. NOTE 6 -
LONG TERM OBLIGATIONS Senior
Secured 6.25% Convertible Note On December
24, 2007, we entered into a securities purchase agreement in which we raised
$15,000,000 (less $937,000 of prepaid interest).  We intend to use the
proceeds from this financing to support our CodecSys commercialization and
development and for general working capital purposes.  Pursuant to the
financing, we issued a senior secured convertible note in the principal amount
of $15,000,000 which is due December 21, 2010 and bears interest at 6.25% per
annum.  Interest for the first year was prepaid at closing.
 Interest-only payments thereafter in the amount of $234,375 are due
quarterly and commence in April 2009.  Interest payments may be made
through issuance of common stock in certain circumstances.  The note is
convertible into 2,752,294 shares of our common stock, at a conversion price of
$5.45 per share, convertible any time during the term of the note.  We have
granted a first priority security interest in all of our property and assets and
of our subsidiaries to secure our obligations under the note and related
transaction agreements. In
connection with the financing, the senior secured convertible note holder
received warrants to acquire 1,875,000 shares of our common stock exercisable at
$5.00 per share.  The warrants are exercisable any time for a five-year
period beginning on the date of grant.  We also issued to the convertible
note holder 1,000,000 shares of our common stock valued at $3,750,000 and
incurred an additional $1,377,000 for commissions, finders fees and other
transaction expenses, including the grant of a three-year warrant to purchase
112,500 shares of our common stock to a third party at an exercise price of
$3.75 per share, valued at $252,000.  A total of $1,377,000 was included in
debt offering costs and is being amortized over the term of the note.  The
warrants and the embedded conversion feature and prepayment provision of the
senior secured convertible notes have been accounted for as derivatives pursuant
to EITF 00-19 and SFAS No. 133. The $5.45
conversion price of the senior secured convertible note and the $5.00 exercise
price of the warrants are subject to adjustment pursuant to standard
anti-dilution rights.  These rights include (i) equitable adjustments in
the event we effect a stock split, dividend, combination, reclassification or
similar transaction; (ii) weighted average price protection adjustments in the
event we issue new shares of common stock or common stock equivalents in certain
transactions at a price less than the then current market price of our common
stock; and (iii) full ratchet price protection adjustments in the event we
issue new shares of common stock or common stock equivalents in certain
transactions at a price less than $5.45 per share. The
conversion feature and the prepayment provision of the notes were accounted for
as embedded derivatives and valued on the transaction date using a Black-Scholes
pricing model.  The warrants were accounted for as derivatives and were
valued on the transaction date using a Black-Scholes pricing model as well.
 At the end of each quarterly reporting date, the values of the derivatives
are calculated using a Black-Scholes pricing model and adjusted to current fair
value.  The note conversion feature and the warrants may be exercised at
any time and, therefore, have been reported as current liabilities. The senior
secured convertible note contains a prepayment provision allowing us to prepay,
in certain limited circumstances, all or a portion of the note.  The
portion of the note subject to prepayment must be purchased at a price equal to
the greater of (i) 135% of the amount to be purchased and (ii) the company
option redemption price, as defined in the note.  Even if we elect to
prepay the note, the note holder may still convert any portion of the note being
prepaid pursuant to the conversion feature thereof. We also
entered into a registration rights agreement with the holder of the senior
secured convertible note pursuant to which we agreed to provide certain
registration rights with respect to the shares of common stock, the    12   shares
of common stock issuable upon conversion of the note, the shares of common stock
issuable as interest shares under the note and shares of common stock issuable
upon exercise of the warrant under the Securities Act of 1933, as amended.
 The holder is entitled to demand registration of the above-mentioned
shares of common stock after six months from the closing of the securities
purchase agreement in certain circumstances. The
securities purchase agreement under which the senior secured convertible note
and related securities were issued contains, among other things, covenants that
may restrict our ability to obtain additional capital, to declare or pay a
dividend or to engage in other business activities.  A breach of any of
these covenants could result in a default under our senior secured convertible
note, in which event the holder of the note could elect to declare all amounts
outstanding to be immediately due and payable, which would require us to secure
additional debt or equity financing to repay the indebtedness or to seek
bankruptcy protection or liquidation.  The securities purchase agreement
provides that we cannot do any of the following without the prior written
consent of the holder: · directly
or indirectly, redeem, or declare or pay any cash dividend or distribution on,
our common stock; · issue
any additional notes or issue any other securities that would cause a breach or
default under the senior secured convertible note; · issue
or sell any rights, warrants or options to subscribe for or purchase common
stock or directly or indirectly convertible into or exchangeable or exercisable
for common stock at a price which varies or may vary with the market price of
the common stock, including by way of one or more reset(s) to any fixed price
unless the conversion, exchange or exercise price of any such security cannot be
less than the then applicable conversion price with respect to the common stock
into which any note is convertible or the then applicable exercise price with
respect to the common stock into which any warrant is exercisable; · enter
into or affect any dilutive issuance (as defined in the note) if the effect of
such dilutive issuance is to cause us to be required to issue upon conversion of
any note or exercise of any warrant any shares of common stock in excess of that
number of shares of common stock which we may issue upon conversion of the note
and exercise of the warrants without breaching our obligations under the rules
or regulations of the principal market or any applicable eligible market; · liquidate,
wind up or dissolve (or suffer any liquidation or dissolution); · convey,
sell, lease, license, assign, transfer or otherwise dispose of all or any
substantial portion of our properties or assets, other than transactions in the
ordinary course of business consistent with past practices, and transactions by
non-material subsidiaries, if any; · cause,
permit or suffer, directly or indirectly, any change in control transaction as
defined in the senior secured convertible note.  As of March
31, 2008, we recorded an aggregate derivative liability of $4,710,800, and a
derivative valuation gain of $3,909,300 to reflect the change in value of the
aggregate derivate liability since December 31, 2007.  The aggregate
derivative liability of $4,710,800 included $2,367,000 for the conversion
feature and $2,343,800 for the warrants.  These values were calculated
using the Black-Scholes pricing model with the following assumptions: (i)
risk-free interest rate between 1.79% and 2.46%, (ii) expected life (in years)
of 2.7 for the conversion feature and 4.7 for the warrants; (iii) expected
volatility of 82.08% for the conversion feature and 76.73% for the warrants;
(iv) expected dividend yield of 0.00%; and (v) stock trading price of $2.60. The
principal value of $15,000,000 of the 6.25% senior secured convertible note is
being accreted over the term of the obligation, for which $1,047,825 was
included in interest expense for the three months ended March 31, 2008. The note
bears a 6.25% annual interest rate payable quarterly, and for the three months
ended March 31, 2008,  $234,375 was included in interest expense. On
December 21, 2007, we paid $937,500 as interest for the first year of the note
and at March 31, 2008 have recorded $679,687 as prepaid interest. Unsecured
Convertible Note On September
29, 2006, we entered into a letter of understanding with Triage Capital
Management, or Triage, dated September 25, 2006.  The letter of
understanding provided that Triage loan $1,000,000 to us in exchange for us
entering into, on or prior to October 30, 2006, a convertible note securities
agreement.  It was intended that the    13   funding
provided by Triage be replaced by a convertible note and accompanying warrants,
as described below.  Effective November 2, 2006, we entered into securities
purchase agreement, a 5% convertible note, a registration rights agreement, and
four classes of warrants to purchase our common stock, all of which were with an
individual note holder, the controlling owner of Triage, who caused our
agreement with Triage to be assigned to him, which satisfied our agreement with
Triage. Pursuant to
the securities purchase agreement, (i) we sold to the convertible note holder a
three-year convertible note in the principal amount of $1,000,000 representing
the funding received by us on September 29, 2006; (ii) the convertible note
bears an annual interest rate of 5%, payable semi-annually in cash or shares of
our common stock; (iii) the convertible note is convertible into shares of our
common stock at a conversion price of $1.50 per share; and (iv) we issued to the
convertible note holder four classes of warrants (A Warrants, B Warrants, C
Warrants and D Warrants), which give the convertible note holder the right to
purchase a total of 5,500,000 shares of our common stock as described below.
 The A and B Warrants originally expired one year after the effective date
of a registration statement filed under the Securities Act of 1933, as amended
(the Securities Act), to register the subsequent sale of shares received from
exercise of the A and B Warrants. The C Warrants and D Warrants originally
expired eighteen months and twenty four months, respectively, after the
effective date of a registration statement to be filed under the Securities Act.
 The A Warrants grant the convertible note holder the right to purchase up
to 750,000 shares of common stock at an exercise price of $1.60 per share, the B
Warrants grant the convertible note holder the right to purchase up to 750,000
shares of common stock at an exercise price of $1.75 per share, the C Warrants
grant the convertible note holder the right to purchase up to 2,000,000 shares
of common stock at an exercise price of $2.10 per share, and the D Warrants
grant the convertible note holder the right to purchase up to 2,000,000 shares
of common stock at an exercise price of $3.00 per share. During the
fourth quarter of the year ended December 31, 2007, the convertible note holder
exercised 454,000 A Warrants at an exercise price of $1.60 per share providing
$726,400 in funding to us. Additionally, we entered into an exchange agreement
dated October 31, 2007 in which the convertible note holder received 650,000
shares of our common stock in exchange for cancellation of the C and the D
Warrants.  The expiration date of the A Warrants and the B Warrants was
extended from January 11, 2008 to December 3, 2008. As of March
31, 2008 and 2007, we recorded an aggregate derivative liability of $2,194,400
and $4,237,200, and derivative valuation gain of $1,954,300 and derivative
valuation loss $1,056,400, respectively, to reflect the change in value of the
aggregate derivate liability since December 31, 2007 and 2006, respectively.
 The aggregate derivative liability of $2,194,400 included $1,006,700 for
the conversion feature and $1,187,700 for the warrants.  These values were
calculated using the Black-Scholes pricing model with the following assumptions:
(i) risk-free interest rate between 1.15% and 1.59%, (ii) expected life (in
years) of 1.50 for the conversion feature and 0.70 for the warrants; (iii)
expected volatility of 89.65% for the conversion feature and 82.16% for the
warrants; (iv) expected dividend yield of 0.00%; and (v) stock trading price of
$2.60. The
principal value of $1,000,000 of the unsecured convertible note is being
accreted over the term of the obligation, for which $83,334 was included in
interest expense for both three month periods ended March 31, 2008 and 2007. The
note bears a 5% annual interest rate payable semi-annually, and for both the
three-month periods ended March 31, 2008 and 2007, $12,501 was included in
interest expense. Senior
Secured 6% Convertible Notes On May 16,
2005, we consummated a private placement of $3,000,000 principal amount of 6%
senior secured convertible notes and related securities, including common stock
warrants and additional investment rights, to four institutional funds.
 The senior secured convertible notes were originally due May 16, 2008 and
were originally convertible into 1,200,000 shares of our common stock at a
conversion price of $2.50 per share.  On March 16, 2006, we entered into a
waiver and amendment agreement (discussed below), which adjusted the conversion
rate to $1.50 per share.  The warrants and the embedded conversion feature
of the senior secured convertible notes have been accounted for as derivatives
pursuant to EITF 00-19 and SFAS No. 133. We issued to
the note holders a total of 600,000 A warrants and 600,000 B warrants to
purchase common stock with an exercise price of $2.50 and $4.00, respectively.
 The $2.50 conversion price of the senior secured convertible notes and the
$2.50 and $4.00 exercise price of the A Warrants and the B Warrants,
respectively, are subject to adjustment pursuant to standard anti-dilution
rights. On March 16, 2006, we entered into a waiver and amendment agreement
(discussed below), which adjusted the exercise price of both the A and B
warrants to $2.00 per share.  These anti-dilution rights include (i)
equitable adjustments in the event we effect a stock split, dividend,    14   combination,
reclassification or similar transaction; (ii) weighted average price
protection adjustments in the event we issue new shares of common stock or
common stock equivalents in certain transactions at a price less than the then
current market price of the common stock; and (iii) full ratchet price
protection adjustments in the event we issue new shares of common stock or
common stock equivalents in certain transactions at a price less than $1.50 per
share. In no event, however, will the conversion price or exercise price be
adjusted below $0.50 per share for the reset provision. The
conversion feature and the prepayment provision of the notes were accounted for
as embedded derivatives and valued on the transaction date using a Black-Scholes
pricing model.  The warrants were accounted for as derivatives and were
valued on the transaction date using a Black-Scholes pricing model as well.
 At the end of each quarterly reporting date, the values of the derivatives
are evaluated and adjusted to current fair value.  The note conversion
feature and the warrants may be exercised at any time and, therefore, have been
reported as current liabilities.  The prepayment provision was not
exercisable by us until May 16, 2007, and then only in certain limited
circumstances.  For all periods since the issuance of the senior secured
convertible notes, the derivative value of the prepayment provision has been
nominal and has not had any offsetting effect on the valuation of the conversion
feature of the notes. The senior
secured convertible notes required that we secure an effective registration
statement with the Securities and Exchange Commission within 120 days from May
16, 2005 (September 13, 2005). Section 4(a) of the senior secured convertible
notes enumerated circumstances that are considered an event of default. The
remedies for default provide that if an event of default occurs and is
continuing, the holders may declare all of the then outstanding principal amount
of the notes and any accrued and unpaid interest thereon to be immediately due
and payable in cash.  In the event of an acceleration, the amount due and
owing to the holders is 125% of the outstanding principal amount of the notes
and interest on such amount is calculated using the default rate of 18% per
annum if the full amount is not paid within one business day after acceleration.
 We were in default under Section 4(a)(viii), related to the effective date
of our registration statement, beginning October 13, 2005 until February 3,
2006, at which time the event of default was cured and is no longer continuing.
 For the years ended December 31, 2006 and 2005, we recorded $66,000 and
$218,000, respectively, as additional interest expense for this default. On March 16,
2006, we entered into a waiver and amendment agreement with the four
institutional funds regarding our default discussed above.  Under the terms
of the waiver, the institutional funds terminated a forbearance agreement and
waived any and all defaults under the senior secured convertible notes and
related transaction agreements.  In consideration of the waiver, we and the
funds agreed to amend the transaction agreements as follows: (i) Section 3.12 of
the securities purchase agreement was deleted, which provision gave the funds a
preemptive right to acquire any new securities issued by us; (ii) Section
3.15(c) of the securities purchase agreement was deleted, which provision
prohibited us from completing a private equity or equity-linked financing; (iii)
the conversion price, at which the notes are convertible into shares of our
common stock, was amended to be $1.50 instead of $2.50; (iv) the exercise price,
at which all warrants (A warrants and B warrants) held by the funds are
exercisable, was changed to $2.00 (which exercise price was subsequently reduced
to $1.50 due to applicable antidilution provisions); and (v) the notes were
amended by adding a new event of default, which is that if we fail to raise and
receive at least $3,000,000 in cash net proceeds through one or more private or
public placements of its securities by September 30, 2006, we would have been in
default under the notes. On April 21,
2006, two of the institutional funds converted an aggregate of $500,000 of their
convertible notes into 333,334 shares of our common stock. Upon completion of
this conversion, the principal amount of the senior secured convertible notes
was reduced from $3,000,000 to $2,500,000. On March 18,
2007, two of the institutional funds converted an aggregate of $750,000 of their
convertible notes into 500,000 shares of our common stock. Upon completion of
this conversion, the principal amount of the senior secured convertible notes
was reduced from $2,500,000 to $1,750,000. On April 4,
2007, one of the institutional funds converted an aggregate of $100,000 of its
convertible notes into 66,667 shares of our common stock. Upon completion of
this conversion, the principal amount of the senior secured convertible notes
was reduced from $1,750,000 to $1,650,000. On September
13, 2007, one of the institutional funds assigned $54,505 of its convertible
note and certain associated warrants to a third party.    15   On
September 25, 2007, two of the institutional funds converted an aggregate of
$225,000 of their convertible notes into 150,000 shares of our common stock.
Upon completion of this conversion, the principal amount of the senior secured
convertible notes was reduced from $1,650,000 to $1,425,000. During
October 2007, four of the institutional funds converted an aggregate of
$1,091,944 of their convertible notes into 727,963 shares of our common stock.
Upon completion of this conversion, the principal amount of the senior secured
convertible notes was reduced from $1,425,000 to $333,056. During
November 2007, one of the institutional funds converted an aggregate of $278,551
of its convertible notes into 185,701 shares of our common stock. Upon
completion of this conversion, the principal amount of the senior secured
convertible notes was reduced from $333,056 to $54,505. During the
fourth quarter of the year ended December 31, 2007, four of the institutional
funds exercised an aggregate of 667,298 of their A and B warrants at an exercise
price of $1.50 providing $1,000,947 in funding to us.  As of December 31,
2007, there were 532,702 remaining warrants outstanding. During the
three months ended March 31, 2008, three of the institutional funds exercised an
aggregate of 500,000 of their A and B warrants at an exercise price of $1.50
providing $750,000 in funding to us.  As of March 31, 2008, there were
32,702 remaining warrants outstanding. As of March
31, 2008 and 2007, we recorded an aggregate derivative liability of $53,000 and
$1,543,700 and a derivative valuation gain of $145,463 and a valuation loss of
$597,990 to reflect the change in value of the aggregate derivate liability
since December 31, 2007 and 2006, respectively.  The aggregate derivative
liability of $53,000 was for the 32,702 remaining warrants.  The value was
calculated using the Black-Scholes pricing model with the following assumptions:
(i) risk-free interest rate of 1.62%; (ii) expected life (in years) of 2.1;
(iii) expected volatility of 87.51; (iv) expected dividend yield of 0.00%; and
(v) stock trading price of $2.60. The
remaining $54,505 principal value of the senior secured convertible notes was
converted during the three months ended March 31, 2008. Prior to conversion the
outstanding principle value was being accreted over the term of the obligations,
for which $757 and $208,335 was included in interest expense for the three
months ended March 31, 2008 and 2007, respectively.  The notes bore a 6%
annual interest rate payable semi annually, and for the three months ended March
31, 2008 and 2007, $136 and $36,125, respectively, was included in interest
expense. IDI
Bankruptcy Settlement On May 18,
2004, the debtor-in-possessions plan of reorganization for IDI was confirmed by
the United States Bankruptcy Court. As a result of this confirmation, we issued
to the creditors of IDI approximately 111,842 shares of our common stock, valued
at approximately $682,222, and assumed cash liabilities of approximately
$312,768 to be paid over a 4-year period in exchange for approximately
50,127,218 shares of the common stock of IDI representing approximately 86% of
the equity of IDI. During the
year ended December 31, 2007, we satisfied our obligation to the creditors of
IDI. For the three months  ended March 31, 2007, we paid approximately
 $17,547 of the $312,768 original obligation. The balance remaining as of
March 31, 2007 was approximately $87,733 of which $70,187 and had been recorded
as the current portion (for that year) with $17,547 as long-term debt. NOTE 7  FAIR VALUE
MEASUREMENTS  The Company
adopted SFAS No. 157, Fair Value Measurements, (SFAS 157) as of January 1,
2008 for financial instruments measured at fair value on a recurring basis.
 SFAS 157 defines fair value, establishes a framework for measuring fair
value in accordance with accounting principles generally accepted in the United
States and expands disclosures about fair value measurements. SFAS 157
establishes a three-tier fair value hierarchy which prioritizes the inputs used
in measuring fair value.  The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities
(level 1 measurements) and the lowest priority to unobservable inputs (level 3
measurements).  These tiers include:    16   · Level
1, defined as observable inputs such as quoted prices in active markets; · Level
2, defined as inputs other than quoted prices in active markets that are either
directly or indirectly observable; and · Level
3, defined as unobservable inputs in which little or no market data exists,
therefore requiring an entity to develop its own assumptions. We measure
certain financial instruments at fair value on a recurring basis. Assets and
liabilities measured at fair value on a recurring basis are as follows at
March 31, 2008: Quoted Prices
in

Significant
Other

SignificantActive Markets
for

Observable

UnobservableIdentical
Assets

Inputs

InputsTotal

(Level 1)

(Level 2)

(Level
3)AssetsMoney market funds


$
    2,809,554

$
      2,809,554

$
                -

$
                   -Treasury cash reserve
securities

525,000

525,000

$
                -

$
                   -Auction rate preferred
securities

11,039,813

-

-

11,039,813Total assets measured at fair
value

$
  14,374,367

$
      3,334,554

$
                -

$
  11,039,813LiabilitiesDerivative valuation (1)


$
    6,958,200

$
                    -

$
                -

$
    6,958,200Total liabilities measured at
fair value
$
    6,958,200

$
                    -

$
                -

$
    6,958,200(1) See Note 6 of the Company's
Condensed Consolidated Financial Statements for additional
discussion.
  The table
below presents the Companys assets measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) as defined in SFAS 157 at March
31, 2008. The Company classifies financial instruments in Level 3 of the fair
value hierarchy when there is reliance on at least one significant unobservable
input to the valuation model. Derivative

Auction
RateValuation
Liability

Preferred
Securities

TotalBalance at December 31,
2007

$
      (14,267,600)

$
                       -

$
    (14,267,600)Total gains or losses (realized
and unrealized)Included in net income

6,009,063

-

6,009,063Included in other comprehensive
income
-

(560,187)

(560,187)Purchases, issuances, and
settlements, net
1,300,337

11,600,000

12,900,337Transfers to Level 3

-

-

-Balance at March 31,
2008

$
        (6,958,200)

$
       11,039,813

$
       4,081,613
  Money Market Funds and Treasury
Securities  The money market funds and treasury
cash reserve securities balances are classified as cash and cash equivalents on
the Companys Condensed Consolidated Balance Sheet.  Auction Rate Preferred
Securities  As of March 31, 2008, the Company had
investments in auction rate preferred securities (ARPS), which are classified
as available-for-sale securities on the Companys Condensed Consolidated Balance
Sheet and reflected at fair value.  Due to recent events in credit markets,
the auction events for these instruments held by the    17   Company
failed during first quarter 2008.  Therefore, the fair values of these
securities were estimated utilizing a discounted cash flow analysis as of March
31, 2008.  This analysis considers, among other items, the
collateralization of the underlying security investments, the creditworthiness
of the counterparty, the timing of expected future cash flows and the
expectation of the next time the security is expected to have a successful
auction or the security has been called by the issuer.  As a result of the temporary decline
in fair value for the Companys ARPS, which it attributes to liquidity issues
rather than credit issues, the Company has recorded an unrealized loss of
$560,187 to Accumulated other comprehensive loss.  The ARPS held by
the Company at March 31, 2008, totaling $11,039,813, were in AAA rated
funds.  Due to the Companys belief that the market for a portion of
these instruments may take in excess of twelve months to fully recover, the
Company has classified $6,964,813 of these investments as noncurrent.
 $4,075,000 of the ARPS have been classified as current since there is a
specific plan for redemption by the investments issuers within the next four
months for a portion of ARPS held by the Company.  As of March 31,
2008, the Company continues to earn interest on its ARPS under the default
interest rate features of the ARPS. Any future fluctuation in fair value
related to these instruments that the Company deems to be temporary, including
any recoveries of previous write-downs, would be recorded to Accumulated other
comprehensive loss.  If the Company determines that any future
valuation adjustment is other than temporary, it would record a charge to
earnings as appropriate.  NOTE 8  COMPREHENSIVE
INCOME  Comprehensive loss equaled net loss
of $4,314,597 for the three months ended March 31, 2007. Comprehensive income
totaled $1,628,631 for the three months ended March 31, 2008 and included
unrealized losses on auction rate preferred securities.  The difference
between net loss and comprehensive loss for the three months ended March 31,
2008 was as follows:  Three Months
EndedMarch 31,
2008Net income

$
            2,158,983Unrealized loss on
available-for-sale securities

(560,187)Comprehensive income

$
            1,598,796  Accumulated other comprehensive loss
per the Companys Condensed Consolidated Balance Sheet consists of the Companys
unrealized loss of $560,187 on its available-for-sale securities.  NOTE 9 - SUPPLEMENTAL CASH FLOW
INFORMATION  During the three months ended March
31, 2008, we issued 160,000 shares of our common stock to a corporation, to
provide investor relations services for the Company. The value of these shares
of $488,000 was recorded as a prepaid expense and will be recognized over the
service periods as follows:  2008
$
    427,0032009
60,997$
    488,000  During the three months ended March
31, 2008, we issued 21,000 shares of our common stock pursuant to an existing
consulting agreement to a corporation, to provide investor relations services
for the Company. The value of these shares of $54,600 was recorded in general
and administrative expense.  On March 18, 2007, one of the
institutional funds converted an aggregate of $54,505 of their convertible notes
into 36,337 shares of our common stock resulting in an extinguishment of debt
non-cash expense of $6,056 included as interest expense for the three months
ended March 31, 2008. See Note 6.  For the three months ended March 31,
2008 and 2007, an aggregate non-cash expense of $1,131,916 and 291,669 was
recorded for the accretion of i) the senior 6% convertible notes of $757 and
208,335, respectively, ii) the unsecured convertible note of $83,334 in each of
the periods and (iii) $1,047,825 for the senior secured 6.25% Convertible note
in 2008, as interest expense. See Note 6.     18   During the
three months ended March 31, 2007, we received $348,020 from the sale of 232,012
shares of common stock pursuant to a Private Placement Offering at a price of
$1.50 per share. Additionally, the holders of 231,999 of these shares received a
warrant to acquire one share of our common stock.  The warrants have a
three-year exercise period and are exercisable at a $2.00 exercise price.  During the three months ended March
31, 2007, we issued 2,160,000 shares of our common stock to three corporations,
which provide investor relations services for the Company. The value of these
shares of $2,124,000 was recorded as a prepaid expense and will be recognized
over the service periods as follows:  2007
$
    
          996,9972008
968,6552009
158,348$
      
     2,124,000  On March 18, 2007, two of the
institutional funds converted an aggregate of $750,000 of their convertible
notes into 500,000 shares of our common stock resulting in an extinguishment of
debt, a non-cash expense included as interest expense for the three months ended
March 31, 2007. See Note 6.  On February 28 and March 30, 2007, we
entered into two unsecured promissory 6% notes with a Utah corporation, in the
aggregate of $249,974 included at March 31, 2007 as current debt obligations.
Payment of principal and interest were due on December 31, 2007, but were paid
before maturity.  The Company paid no cash for income
taxes during the quarters ended March 31, 2008 and 2007.  The Company paid $1,108 and $3,586
for interest expense during the three months ended March 31, 2008 and March 31,
2007, respectively.  NOTE 10 - RECENT ACCOUNTING
PRONOUNCEMENTS  In September
2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157),
which establishes specific criteria for the fair value measurements of financial
and nonfinancial assets and liabilities that are already subject to fair value
under current accounting rules. SFAS 157 also requires expanded disclosures
related to fair value measurements. In February 2008, the FASB approved FASB
Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement No. 157
(FSP 157-2) which allows companies to elect a one-year delay in applying SFAS
157 to certain fair value measurements of non-financial instruments, except for
those recognized or disclosed at fair value on at least an annual basis. We
elected the delayed adoption date for the portions of SFAS 157 impacted by FSP
157-2 and, as a result, we partially adopted SFAS 157 on January 1, 2008.
The partial adoption of SFAS 157 was prospective and did not have a significant
effect on our Condensed Consolidated Financial Statements. See Note 7 for
information about fair value measurements. We are currently evaluating the
impact of applying the deferred portion of SFAS 157 to the nonrecurring fair
value measurements of our nonfinancial assets and nonfinancial liabilities. In
accordance with FSP 157-2, the fair value measurements for these items will be
adopted effective January 1, 2009. In February
2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial LiabilitiesIncluding an amendment of SFAS 115 (SFAS
159). SFAS 159 permits a company to voluntarily elect to use fair value,
instead of historic or original cost, to account for certain financial assets
and liabilities. The fair value option is designated on an item-by-item basis,
is irrevocable and requires that changes in fair value in subsequent periods be
recognized in earnings in the period of change. We adopted SFAS 159 on
January 1, 2008. The adoption had no impact on our Condensed Consolidated
Financial Statements as we did not make a fair value election for any of our
existing financial assets and liabilities. Any election to use the fair value
method for future eligible transactions will be made on a case-by-case and
instrument-by-instrument basis. In December
2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (SFAS 141R). Under SFAS 141R, an entity is required to
recognize the assets acquired, liabilities assumed, contractual contingencies,
and contingent consideration at their fair value on the acquisition date. It
further requires that acquisition-related costs be recognized separately from
the acquisition and expensed as incurred, restructuring costs generally be
expensed in periods subsequent to the acquisition date, and changes in
accounting for deferred tax asset valuation allowances and acquired income tax
uncertainties after the measurement period impact income tax expense. In
addition, acquired in-process research and development is capitalized as an
intangible asset and    19   amortized
over its estimated useful life. The adoption of SFAS 141R will change our
accounting treatment for business combinations on a prospective basis beginning
in the first quarter of fiscal year 2009. In December
2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statementsan amendment of Accounting Research Bulletin
No. 51 (SFAS 160), which establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to
the noncontrolling interest, changes in a parents ownership interest, and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS 160 also establishes disclosure requirements that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS 160 is effective for fiscal
years beginning after December 15, 2008. We do not expect that the adoption
of SFAS 160 will have a significant impact on our Condensed Consolidated
Financial Statements. In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activitiesan amendment of FASB Statement No. 133
(SFAS 161), which requires enhanced disclosures about an entitys
derivative and hedging activities and thereby improves the transparency of
financial reporting. SFAS 161 is effective for fiscal years beginning after
November 15, 2008. We are currently evaluating the impact of SFAS 161 on
our Condensed Consolidated Financial Statements. The Company
has reviewed all other recently issued, but not yet adopted, accounting
standards in order to determine their effects, if any, on its condensed
consolidated financial statements.  Based on that review, the Company
believes that none of these pronouncements will have a significant effect on its
current or future consolidated financial statements. NOTE 11 - SUBSEQUENT
EVENTS  During the
April 2008, the unsecured convertible note holder exercised 64,400 A Warrants at
an exercise price of $1.60 per share providing $103,040 in funding to us.    20    Item 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS   Cautionary
Note Regarding Forward-Looking Statements This report
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and
Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6
promulgated thereunder, that involve inherent risk and uncertainties.  Any
statements about our expectations, beliefs, plans, objectives, strategies or
future events or performance constitute forward-looking statements.  These
statements are often, but not always, made through the use of words or phrases
such as anticipate, estimate, plan, project, continuing, ongoing,
expect, believe, intend and similar words or phrases.  Accordingly,
these statements involve estimates, assumptions and uncertainties that could
cause actual results to differ materially from those expressed or implied
therein.  All forward-looking statements are qualified in their entirety by
reference to the factors discussed in this report, including, among others, the
following risk factors discussed more fully in Item 1A hereof: · dependence
on commercialization of our CodecSys technology; · our
need and ability to raise sufficient additional capital; · our
continued losses; · restrictions
contained in our outstanding convertible notes; · general
economic and market conditions; · ineffective
internal operational and financial control systems; · rapid
technological change; · intense
competitive factors; · our
ability to hire and retain specialized and key personnel; · dependence
on the sales efforts of others; · dependence
on significant customers; · uncertainty
of intellectual property protection; · potential
infringement on the intellectual property rights of others; · factors
affecting our common stock as a penny stock; · extreme
price fluctuations in our common stock; · price
decreases due to future sales of our common stock; · future
shareholder dilution; and · absence
of dividends. Because the
risk factors referred to above could cause actual results or outcomes to differ
materially from those expressed or implied in any forward-looking statements
made by us or on our behalf, you should not place undue reliance on any
forward-looking statement.  Further, any forward-looking statement speaks
only as of the date on which it is made, and 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 future
events or developments.  New factors emerge from time to time, and it is
not possible for us to predict which factors will arise.  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.      21   Critical
Accounting Policies The
preparation of financial statements in conformity with U.S. GAAP requires that
we make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and the related disclosure of contingent
assets and liabilities. On an ongoing basis, we evaluate our assumptions and
estimates, including those related to recognition of revenue, valuation of
investments, valuation of inventory, valuation of intangible assets, valuation
of derivatives, measurement of stock-based compensation expense and litigation.
We base our estimates on historical experience and on various assumptions that
are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. We
discuss our critical accounting policies in Managements Discussion and Analysis
of Financial Condition and Results of Operations in our Annual Report on Form
10-K for the year ended December 31, 2007. Except for the critical
accounting policy set forth below entitled Valuation of Investments, there
have been no other significant changes in our critical accounting policies or
estimates since those reported in our Annual Report. Valuation
of Investments As discussed
in Note 6 to the unaudited condensed consolidated financial statements, we
adopted the provisions of Statement 157 effective January 1, 2008.  In
valuing our investments we predominantly use market data or data derived from
market sources. When market data is not available, such as when the investment
is illiquid, we utilize a discounted cash flow analysis to arrive at the
recorded fair value. This process involves incorporating our assumption about
the anticipated term and the yield that a market participant would require to
purchase the security in the marketplace. We utilized unobservable (Level 3)
inputs in determining the fair value of our auction rate preferred securities,
which totaled $11,039,813 at March 31, 2008. Our auction
rate preferred securities are classified as available-for-sale securities and
reflected at fair value.  In prior periods, due to the auction process
which took place every 7-30 days for most securities, quoted market prices were
readily available, which would qualify as Level 1 under Statement
157.  However, due to events in credit markets during first quarter
2008, the auction events for most of these instruments failed, and, therefore,
we have determined the estimated fair values of these securities utilizing a
discounted cash flow analysis as of March 31, 2008.  This analysis
considers, among other items, the collateralization of the underlying
securities, the expected future cash flows and the expectation of the next time
the security is expected to have a successful auction.  These
securities were also compared, when possible, to other observable market data
with similar characteristics to the securities held by us.  Due to
these events, we reclassified these instruments as Level 3 during first quarter
2008 and recorded a temporary unrealized decline in fair value of $560,187, with
an offsetting entry to Accumulated other comprehensive loss. We currently
believe that this temporary decline in fair value is due entirely to liquidity
issues and not credit issues, because they are in AAA closed-end bond mutual
funds that are over-collateralized by at least 200% and are backed by the
underlying marketable securities. We believe we have sufficient cash and
cash equivalents available at March 31, 2008 to allow us sufficient time for the
securities to return to full value.  We will re-evaluate each of these
factors as market conditions change in subsequent periods. Executive
Overview In March
2007, we commenced a private placement offering of our securities by selling
shares of our common stock at a price of $1.50 per share.  In the offering,
the purchaser of each share received a warrant to acquire one share of common
stock.  The warrants have a three-year exercise period and are exercisable
at an exercise price of $2.00 per share.  In the fourth quarter of 2007, we
completed the offering pursuant to which we raised $5,975,317 from the sale of
3,983,557 shares of our common stock. On October
31, 2007, we entered into an exchange agreement with the holder of our unsecured
convertible note in the principal amount of $1.0 million and related warrants.
 Pursuant to the exchange agreement, we cancelled the holders warrants to
acquire up to 2,000,000 shares of our common stock at $2.10 per share and other
warrants to acquire up to 2,000,000 additional shares of our common stock at
$3.00 per share in exchange for the issuance of 650,000 shares of our common
stock to the holder. In the
fourth quarter of 2007, the institutional fund holders of our outstanding senior
secured convertible notes issued in 2005 completed conversion of substantially
all of their convertible notes into shares of our common stock.    22   At
December 31, 2007, only an immaterial amount of the senior secured convertible
notes remained outstanding, and has since been converted. On November
15, 2007, we entered into a two-year license agreement with IBM pursuant to
which we will license our patented CodecSys technology for use by IBM in video
encoders that IBM intends to manufacture and sell. The IBM video encoder is not
completed in a commercially deployable form.  The IBM agreement is our
first significant license of the CodecSys technology for use in a commercial
application.  We believe this agreement may hold substantial revenue
opportunities for our business.  Although IBM has commenced marketing and
sales activities with respect to products incorporating our CodecSys technology,
no sales of products have been made, and we have not derived any material
revenue from our CodecSys technology to date. On December
24, 2007, we completed a $15.0 million private placement of securities with an
institutional investor.  Pursuant to the financing, we entered into various
agreements with the investor, including (i) a securities purchase agreement
pursuant to which we, in exchange for $15.0 million, issued and sold to the
investor (A) 1,000,000 shares of our common stock, (B) a 6.25% senior secured
convertible promissory note in the principal amount of $15.0 million which is
convertible into shares of our common stock at a conversion price of $5.45 per
share, and (C) a five-year warrant that is exercisable to purchase up to
1,875,000 shares of common stock at an exercise price of $5.00 per share; (ii) a
registration rights agreement pursuant to which we agreed to provide certain
registration rights with respect to the shares of common stock, the shares of
common stock issuable upon conversion of the note, the shares of common stock
issuable as interest shares under the note and shares of common stock issuable
upon exercise of the warrant; and (iii) a security agreement granting a first
priority security interest in all of our property and assets to secure the
note. Our revenues declined for the quarter
ended March 31, 2008 compared to the quarter ended March 31, 2007, and the net
cash used for operations similarly increased in 2008 compared to 2007 although
not by the same percentages.  Until cash from operations are sufficient to
cover all corporate expenses, we will continue to deplete our available cash and
increase our need for future equity and debt financing.  The
conversion feature and the prepayment provision of the $15.0 million senior
secured convertible note and the $1.0 million unsecured convertible note have
been accounted for as embedded derivatives and valued on the respective
transaction dates using a Black-Scholes pricing model.  The warrants
related to the convertible notes have been accounted for as derivatives and were
valued on the respective transaction dates using a Black-Scholes pricing model
as well.  At the end of each quarterly reporting date, the values of the
embedded derivatives and the warrants are evaluated and adjusted to current
market value.  The conversion features of the convertible notes and the
warrants may be exercised at any time and, therefore, have been reported as
current liabilities.  Prepayment provisions contained in the convertible
notes limit our ability to prepay the notes in certain circumstances.  For
all periods since the issuance of the senior secured convertible note and the
unsecured convertible note, the derivative values of the respective prepayment
provisions have been nominal and have not had any offsetting effect on the
valuation of the conversion features of the notes.  For a description of
the accounting treatment of the senior secured convertible note financing, see
Note 5 of our notes to consolidated financial statements included elsewhere
herein. Results of Operations for the
Three Months ended March 31, 2008 and March 31, 2007  Revenues  The Company generated $ 1,187,392 in
revenue during the three months ended March 31, 2008.  During the same
three-month period in 2007, the Company generated revenue of $1,599,066.
 The decrease in revenue of $411,674 or approximately 35% was due primarily
to the Company performing significantly less installation work in the three
months ended March 31, 2008, for two customers than it did for those customers
in the first quarter of 2007. The Company realized $791,507 less revenue from
services performed for these two customers in the quarter ended March 31, 2008,
than in the first quarter of 2007.  We do not expect to perform any
services for these customers in the remainder of 2008.  The decrease in
revenues from these two customers was partially offset by the addition of two
new customers.  The Company's three largest
customers sales revenues accounted for approximately 59% and 71% of total
revenues for the quarters ended March 31, 2008 and 2007, respectively.  Any
material reduction in revenues generated from any one of its largest customers
could harm the Companys results of operations, financial condition and
liquidity.    23    Cost of Revenues  Costs of Revenues decreased by
approximately $458,329 to $1,136,446 for the three months ended March 31, 2008,
from $1,594,775 for the three months ended March 31, 2007.  The decrease
was due primarily to decreased activity in installation of equipment, which
resulted in a decrease in the costs related to such installation services for
all the Companys customers of $399,813. There was not a decrease in the cost of
equipment relative to the sales price of the equipment, but the general
operations department costs decreased by approximately $93,859 due to the
decrease in installation activity. The cost decreases were partially offset by
an increase of approximately $10,654 in satellite distribution costs and a
$24,690 increase in depreciation and amortization, which was the result of
purchases of network and development equipment.  Expenses  General and Administrative expenses
for the three months ended March 31, 2008 were $1,534,181 compared to $1,574,684
for the three months ended March 31, 2007.  The decrease of approximately
$40,503 resulted primarily from an increase in expenses incurred for outside
consultants of $215,852 offset by a decrease in expenses of $465,228 for options
and warrants granted.  Research and development in process increased by
$591,570 for the three months ended March 31, 2008 to $776,633 from $185,063 for
the three months ended March 31, 2007.  This increase resulted primarily
from increased development staff and related expenses of increasing the
development activity.  Interest Expense  For the three months ended March 31,
2008, the Company incurred interest expense of $1,501,792 compared to interest
expense for the three months ended March 31, 2007 of $773,831.  The
increase of $727,961 resulted primarily from the Company recording interest
expense of $1,047,825 related to note accretion of our 6.25% senior secured
convertible note, which was not outstanding during the first quarter of 2007.
The interest expense recorded primarily consisted of interest of $1,131,916
recorded to account for the accretion of note liability on our balance sheet,
interest payable on all notes of $247,012 and amortization of debt offering
costs of $114,750.  Net Loss  The Company realized net income for
the three months ending March 31, 2008 of $2,158,983 compared with a net loss
for the three months ended March 31, 2007 of $4,314,597. The increase in net
income of $6,473,580 was primarily the result of an increase in derivative
valuation gain of $7,663,453, which resulted primarily from valuation of our
6.25% senior secured convertible note, which was issued in December of 2007.
 Even though revenues decreased as described above, gross margin from work
performed actually increased by $46,655, which also contributed slightly to the
increased net income.  The gain in derivative valuation was partially
offset by an increase in research and development in process of $591,570 and an
increase in interest expense of $727,961, all as explained above.  Liquidity and Capital
Resources  At March 31, 2008, we had cash of
$3,302,725, total current assets of $10,133,229, and total current liabilities
of $8,302,471 and total stockholders' equity of $7,448,972.  Included in
current liabilities is $6,958,200 which relates to the value of the embedded
derivatives for the 6.25% senior secured convertible note and related warrants
and the unsecured convertible note and warrants. Our current liabilities,
without considering the derivative liability are $1,344,271.  As of March 31, 2008, we held
approximately $11,039,816 of auction rate preferred securities, of which
$4,075,000 was classified as current assets and $6,964,813 was classified as
non-current assets. Beginning in February 2008, many of these auction rate
preferred securities became illiquid because their scheduled auctions failed to
settle. As a result, we may have limited or no opportunities to liquidate a
portion of these investments and fully recover their stated value in the near
term. An auction failure occurs when the parties wishing to sell securities at
auction cannot. When an auction fails the affected securities begin to pay
interest under their default interest rate terms. As a result of this
illiquidity caused by the lack of an active market, $6,964,813 of these
investments were classified as non-current.   However, some of the
issuers of the auction rate preferred securities held by us have announced a
definitive plan for redemption of these securities in the near term.  As a
result, $4,075,000 of these investments    24   were
classified as current. A temporary unrealized loss of $560,187 was recorded in
the first quarter of 2008. We utilized a discounted cash flow analysis in
determining the fair value of these securities, which used significant
unobservable inputs at March 31, 2008.  We believe the impairment of these
securities is temporary because they are backed by more than 200% collateral.
Substantially all of our auction rate preferred securities are currently rated
AAA, the highest rating by a rating agency. We believe we will ultimately be
able to liquidate these investments without significant loss through successful
auctions or redemptions of securities by the issuers. However, it could take a
long period of time to realize the investments full value for a portion of the
investments. Based on our expected operating cash flows, and our other sources
of cash, we do not anticipate that the current illiquidity of $6,964,813 of
these investments will adversely affect our operations.  We experienced negative cash flow
used in operations during the three months ending March 31, 2008 of
$1,878,480 compared to negative cash flow used in operations for the three
months ended March 31, 2007 of $534,387.  The negative cash flow was
met by cash reserves.  We expect to continue to experience negative
operating cash flow as long as we continue our technology development program or
until we begin to receive licensing revenue from licenses of our CodecSys
technology or increase our sales by adding new customers.  On December
24, 2007, we entered into a securities purchase agreement described above in
which we raised $15,000,000 (less $937,000 of prepaid interest).  We intend
to use the proceeds from this financing to support our CodecSys
commercialization and development and for general working capital purposes.
 The senior secured convertible note is due December 21, 2010 and bears
interest at 6.25% per annum.  Interest for the first year was prepaid at
closing.  Interest-only payments thereafter in the amount of $234,375 are
due quarterly and commence in April 2009.  Interest payments may be made
through issuance of common stock in certain circumstances.  The note is
convertible into 2,752,294 shares of our common stock at a conversion price of
$5.45 per share, convertible any time during the term of the note.  We have
granted a first priority security interest in all of our property and assets and
of our subsidiaries to secure our obligations under the note and related
transaction agreements. In
connection with the financing, the senior secured convertible note holder
received warrants to acquire 1,875,000 shares of our common stock exercisable at
$5.00 per share.  The warrants are exercisable any time for a five-year
period beginning on the date of grant.  We also issued to the convertible
note holder 1,000,000 shares of our common stock valued at $3,750,000 and
incurred an additional $1,377,000 for commissions, finders fees and other
transaction expenses, including the grant of a three-year warrant to purchase
112,500 shares of our common stock to a third party at an exercise price of
$3.75 per share, valued at $252,000.  A total of $1,377,000 was included in
debt offering costs and is being amortized over the term of the note. The $5.45
conversion price of the senior secured convertible note and the $5.00 exercise
price of the warrants are subject to adjustment pursuant to standard
anti-dilution rights.  These rights include (i) equitable adjustments in
the event we effect a stock split, dividend, combination, reclassification or
similar transaction; (ii) weighted average price protection adjustments in the
event we issue new shares of common stock or common stock equivalents in certain
transactions at a price less than the then current market price of our common
stock; and (iii) full ratchet price protection adjustments in the event we
issue new shares of common stock or common stock equivalents in certain
transactions at a price less than $5.45 per share. The senior
secured convertible note contains a prepayment provision allowing us to prepay,
in certain limited circumstances, all or a portion of the note.  The
portion of the note subject to prepayment must be purchased at a price equal to
the greater of (i) 135% of the amount to be purchased and (ii) the company
option redemption price, as defined in the note.  Even if we elect to
prepay the note, the note holder may still convert any portion of the note being
prepaid pursuant to the conversion feature thereof. We also
entered into a registration rights agreement with the holder of the senior
secured convertible note pursuant to which we agreed to provide certain
registration rights with respect to the shares of common stock, the shares of
common stock issuable upon conversion of the note, the shares of common stock
issuable as interest shares under the note and shares of common stock issuable
upon exercise of the warrant under the Securities Act of 1933, as amended.
 The holder is entitled to demand registration of the above-mentioned
shares of common stock after six months from the closing of the securities
purchase agreement in certain circumstances. The
securities purchase agreement under which the senior secured convertible note
and related securities were issued contains, among other things, covenants that
may restrict our ability to obtain additional capital, to declare    25   or
pay a dividend or to engage in other business activities.  A breach of any
of these covenants could result in a default under our senior secured
convertible note, in which event the holder of the note could elect to declare
all amounts outstanding to be immediately due and payable, which would require
us to secure additional debt or equity financing to repay the indebtedness or to
seek bankruptcy protection or liquidation.  The securities purchase
agreement provides that we cannot do any of the following without the prior
written consent of the holder: · directly
or indirectly, redeem, or declare or pay any cash dividend or distribution on,
our common stock; · issue
any additional notes or issue any other securities that would cause a breach or
default under the senior secured convertible note; · issue
or sell any rights, warrants or options to subscribe for or purchase common
stock or directly or indirectly convertible into or exchangeable or exercisable
for common stock at a price which varies or may vary with the market price of
the common stock, including by way of one or more reset(s) to any fixed price
unless the conversion, exchange or exercise price of any such security cannot be
less than the then applicable conversion price with respect to the common stock
into which any note is convertible or the then applicable exercise price with
respect to the common stock into which any warrant is exercisable; · enter
into or affect any dilutive issuance (as defined in the note) if the effect of
such dilutive issuance is to cause us to be required to issue upon conversion of
any note or exercise of any warrant any shares of common stock in excess of that
number of shares of common stock which we may issue upon conversion of the note
and exercise of the warrants without breaching our obligations under the rules
or regulations of the principal market or any applicable eligible market; · liquidate,
wind up or dissolve (or suffer any liquidation or dissolution); · convey,
sell, lease, license, assign, transfer or otherwise dispose of all or any
substantial portion of our properties or assets, other than transactions in the
ordinary course of business consistent with past practices, and transactions by
non-material subsidiaries, if any; · cause,
permit or suffer, directly or indirectly, any change in control transaction as
defined in the senior secured convertible note.  On November 2, 2006, we closed on a
convertible note securities agreement dated October 28, 2006 with an individual
that provided we issue to the convertible note holder (i) an unsecured
convertible note in the principal amount of $1,000,000 representing the funding
received by us from an affiliate of the convertible note holder on September 29,
2006, and (ii) four classes of warrants (A warrants, B warrants, C warrants and
D warrants) which gave the convertible note holder the right to purchase a total
of 5,500,000 shares of our common stock as described below.  The unsecured
convertible note is due October 16, 2009 and bears an annual interest rate of
5%, payable semi-annually in cash or in shares of our common stock if certain
conditions are satisfied.  The unsecured convertible note is convertible
into shares of our common stock at a conversion price of $1.50 per share,
convertible any time during the term of the note, and is subject to standard
anti-dilution rights. The A
warrants and B warrants expire December 3, 2008.  The original expiration
date was to be one year after the effective date of a registration statement
filed under the Securities Act registering the subsequent sale of shares
received from exercise of the A warrants and B warrants, but was extended in
connection with the exchange agreement described below.  The A warrants
grant the convertible note holder the right to purchase up to 750,000 shares of
common stock at an exercise price of $1.60 per share and the B warrants grant
the convertible note holder the right to purchase up to 750,000 shares of common
stock at an exercise price of $1.75 per share.  The convertible note holder
also received C warrants to purchase 2,000,000 shares of common stock and D
warrants to purchase 2,000,000 shares of common stock, all of which have been
cancelled as discussed below.  The A warrants and B warrants are
exercisable at any time until their expiration date and are subject to
adjustment pursuant to standard anti-dilution rights.  As of March 15,
2008, the convertible note holder had exercised 475,000 A warrants and no B
warrants. In October
2007, we entered into an exchange agreement with the convertible note holder.
 Pursuant to the exchange agreement, we cancelled the C warrant holders
right to acquire up to 2,000,000 shares of our common stock at $2.10 per share
and the D warrant holders right to acquire up to 2,000,000 shares of our common
stock at $3.00 per share in exchange for the issuance of 650,000 shares of our
common stock.    26   In
2005, we secured a new customer contract, which resulted in revenues of
approximately $1,400,000 for 2005 and $8,775,000 for 2006 and was our largest
customer in 2007.  We realized revenues of only $668,771 from this customer
in 2007.  We have, however, recently secured an additional customer that
could partially replace the revenues lost from our largest customer in 2006, but
we do not yet know the extent of the work or services that we will be providing
for this customer.  We anticipate that our negative cash flow will diminish
as our new customers make projects and equipment available and as we are able to
perform under their respective contracts. Our monthly
operating expenses currently exceed our monthly net sales by approximately
$500,000 per month.  This amount could increase significantly.  We
expect our operating expenses will continue to outpace our net sales until we
are able to generate additional revenue.  Our business model contemplates
that sources of additional revenue include (i) sales from our private
communication network services, (ii) sales resulting from new customer
contracts, and (iii) sales, licensing fees and/or royalties related to
commercial applications of our CodecSys technology, including from our IBM
license agreement. Our
long-term liquidity is dependent upon execution of our business model and the
realization of additional revenue and working capital as described above, and
upon capital needed for continued commercialization and development of the
CodecSys technology.  Commercialization and future applications of the
CodecSys technology are expected to require additional capital estimated to be
approximately $2.0 million annually for the foreseeable future.  This
estimate will increase or decrease depending on specific opportunities and
available funding. To date, we have met our working
capital needs primarily through funds received from sales of our common stock
and from convertible debt financings.  Until our operations become
profitable, we must continue to rely on external funding.  Off-Balance Sheet
Arrangements  We have no off-balance sheet
arrangements.  Item 3.
 Quantitative and Qualitative Disclosures about Market Risk Market risk represents the risk of
loss that may impact our financial position due to adverse changes in financial
market prices and rates.  We do not issue financial instruments for trading
purposes or have any derivative financial instruments.  As discussed above,
however, the embedded conversion feature and prepayment option of our senior
secured convertible notes and our related warrants are deemed to be derivatives
and are subject to quarterly mark-to-market valuations.  We have investments in auction rate
preferred securities, which are classified as available-for-sale securities and
reflected at fair value.  Due primarily to instability in credit
markets, we have classified $6,964,813 of these investments as non current
assets in the unaudited Condensed Consolidated Balance Sheet as of March 31,
2008.  The remaining investment in auction rate preferred securities
totaling $4,075,000 are classified as current assets since the issuers of these
securities have announced definitive plans for redemption, which will happen in
the near future.  For a complete discussion on auction rate preferred
securities, including our methodology for estimating their fair value, see Note
7 to the unaudited condensed consolidated financial statements.  Our cash and cash equivalents are
also exposed to market risk.  However, because of the short-term maturities
of our cash and cash equivalents, we do not believe that an increase in market
rates would have any significant impact on the realized value of our cash and
cash equivalent investments.  We currently do not hedge interest rate
exposure and are not exposed to the impact of foreign currency fluctuations.  Item 4T.  Controls and
Procedures  Evaluation of Disclosure Controls and
Procedures  We maintain disclosure controls and
procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934,
as amended.  Our disclosure controls and procedures include controls and
procedures designed to ensure that information required to be disclosed in our
reports filed or submitted under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosures.     27   As
required by Rule 13a-15(b) of the Exchange Act, we conducted an evaluation,
under the supervision of our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of March 31, 2008.  Based on this evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were not effective as of March 31, 2008 in
alerting them in a timely manner to material information required to be included
in our reports filed under the Exchange Act.  Our evaluation identified a
deficiency that existed in the design or operation of our disclosure controls
and procedures related to the identification and reporting of certain
transactions required to be included in current reports on Form 8-K filed with
the SEC.  Our management has disclosed the deficiency to our audit
committee and board of directors.  Additional effort is needed to fully
remedy the deficiency and we are continuing efforts to improve and strengthen
our system of disclosure controls and procedures.  Important Considerations  The effectiveness of our disclosure
controls and procedures and our internal control over financial reporting is
subject to various inherent limitations, including cost limitations, judgments
used in decision making, assumptions about the likelihood of future events, the
soundness of our systems, the possibility of human error, and the risk of fraud.
 Moreover, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes
in conditions and the risk that the degree of compliance with policies or
procedures may deteriorate over time.  Because of these limitations, there
can be no assurance that any system of disclosure controls and procedures or
internal control over financial reporting will be successful in preventing all
errors or fraud or in making all material information known in a timely manner
to the appropriate levels of management.  Changes in Internal Control over
Financial Reporting  During the most recent fiscal quarter
covered by this report, there has been no change in our internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.   Part II  Other
Information  Item
1. Legal
Proceedings  None.  Item 1A. Risk Factors ` There have been no material changes
in risk factors from those described in our Annual Report of Form 10-K for the
year ended December 31, 2007.  Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds  In January, 2008, we issued 41,000
shares of our common stock in consideration of services performed in
2007 by two consultants for the Company, both of whom are accredited
investors.  No underwriting discounts or commissions were paid.
   In the transactions, we relied on the exemptions from
registration under the Securities Act set forth in Section 4(2) and Section 4(6)
thereof.  In March, 2008, we issued 160,000
shares of our common stock in consideration of services performed by a
consultant for the Company who is an accredited investor. No underwriting
discounts or commissions were paid.  In the transaction, we relied on the
exemptions from registration under the Securities Act set forth in Section 4(2)
and Section 4(6) thereof.  In April, 2008, we issued 21,000
shares of our common stock to a consultant for services performed for the
Company who is an accredited investor.  No underwriting discounts or
commissions were paid.  In the transaction, we relied on the exemption from
registration under the Securities Act set forth in Section 4(2) and Section 4(6)
thereof.     28   At various
times during the three months ending March 31, 2008, we granted options to eight
employees pursuant to our Long Term Incentive Plan to acquire up to 286,500
shares of our common stock at various prices, but not less than the fair market
value on the date of grant. In the transaction, we relied on the exemption from
registration under the Securities Act set forth in Section 4(2) and Section 4(6)
thereof.  In February, 2008, we issued 6,667
shares of our common stock to a shareholder of IDI in exchange for 100,000
shares of common stock of IDI. The shareholder is an accredited investor and in
the transaction, we relied on the exemption from registration under the
Securities Act set forth in Section 4(2).  In February, 2008, we issued 2,258
shares of our common stock to one employee who exercised his option granted
pursuant to our Long Term Incentive Plan in consideration of the payment of
$750, the option exercise price.  The employee was fully informed regarding
his exercise transaction. We relied on the exemption from registration under the
Securities Act set forth in Section 4(2).  Item 3.  Defaults Upon Senior
Securities  None.  Item
4. Submission
of Matters to Vote of Security Holders.  None.  Item
5. Other
Information  (a) None.  (b) None.    29    Item
6. Exhibits   ExhibitNumber
Description of Document3.1
Amended
and Restated Articles of Incorporation of Broadcast International.
  (Incorporated by reference to Exhibit No. 3.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2006
filed with the SEC on November 14, 2006.)3.2
Amended
and Restated Bylaws of Broadcast International.  (Incorporated by
reference to Exhibit No. 3.2 of the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2006 filed with the SEC on
November 14, 2006.)4.1
Specimen
Stock Certificate of Common Stock of Broadcast International.
 (Incorporated by reference to Exhibit No. 4.1 of the Company's
Registration Statement on Form SB-2, filed under cover of Form S-3,
pre-effective Amendment No. 3 filed with the SEC on October 11,
2005.)4.2
Form of
A Warrant issued by Broadcast International to each of Gryphon Master
Fund, L.P., GSSF Master Fund, LP, Bushido Capital Master Fund, LP and
Gamma Opportunity Capital Partners, LP (the Institutional Funds).
 (Incorporated by reference to Exhibit No. 4.3 of the Company's
Registration Statement on Form SB-2, filed under cover of Form S-3,
pre-effective Amendment No. 3 filed with the SEC on October 11,
2005.)4.3
Form of
B Warrant issued by Broadcast International to each of the Institutional
Funds.  (Incorporated by reference to Exhibit No. 4.4 of the
Companys Registration Statement on Form SB-2, filed under cover of Form
S-3, pre-effective Amendment No. 3 filed with the SEC on October 11,
2005.)10.1*
Employment
Agreement of Rodney M. Tiede dated April 28, 2004.  (Incorporated by
reference to Exhibit No. 10.1 of the Company's Quarterly Report on Form
10-QSB for the quarter ended March 31, 2004 filed with the SEC on May 12,
2004.)10.2*
Employment
Agreement of Reed L. Benson dated April 28, 2004.  (Incorporated by
reference to Exhibit No. 10.3 of the Company's Quarterly Report on Form
10-QSB for the quarter ended March 31, 2004 filed with the SEC on May 12,
2004.)10.3*
Broadcast
International Long-Term Incentive Plan.  (Incorporated by reference
to Exhibit No. 10.4 of the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2003 filed with the SEC on March 30,
2004.)10.4*
Registration
Rights Agreement dated May 16, 2005 among Broadcast International and the
Institutional Funds.  (Incorporated by reference to Exhibit No. 10.7
of the Company's Registration Statement on Form SB-2, filed under cover of
Form S-3, pre-effective Amendment No. 3 filed with the SEC on October 11,
2005.)10.5
Stock
Purchase and Option Grant Agreement dated February 6, 2004 among Broadcast
International and certain principals and shareholders of Streamware
Solutions AB.  (Incorporated by reference to Exhibit No. 10.9 of the
Company's Registration Statement on Form SB-2, filed under cover of Form
S-3, pre-effective Amendment No. 3 filed with the SEC on October 11,
2005.)    30    10.6
Technology
License Agreement  e-publishing technology  dated August 15, 2006
between Broadcast International and Yang Lan Studio Ltd. (Incorporated by
reference to Exhibit 10.9 of the Companys Current Report on Form 8-K
filed with the SEC on August 22, 2006.)10.7
Termination
and Release Agreement dated January 17, 2007 among Broadcast
International, Yang Lan Studio Ltd., Broadvision Global, Ltd. and Sun
Media Investment Holdings, Ltd. (Incorporated by reference to Exhibit No.
10.1 of the Companys Current Report on Form 8-K filed with the SEC on
January 25, 2007.)10.8
Securities
Purchase Agreement dated October 28, 2006 between Broadcast International
and Leon Frenkel.  (Incorporated by reference to Exhibit 10.1 of the
Companys Current Report on Form 8-K filed with the SEC on November 6,
2006.)10.9
5%
Convertible Note dated October 16, 2006 issued by Broadcast International
to Leon Frenkel.  (Incorporated by reference to Exhibit 10.2 of the
Companys Current Report on Form 8-K filed with the SEC on November 6,
2006.)10.10
Registration
Rights Agreement dated October 28, 2006 between Broadcast International
and Leon Frenkel.  (Incorporated by reference to Exhibit 10.3 of the
Companys Current Report on Form 8-K filed with the SEC on November 6,
2006.)10.11
Form of
A Warrant dated October 28, 2006 issued by Broadcast International to Leon
Frenkel.  (Incorporated by reference to Exhibit 10.4 of the Companys
Current Report on Form 8-K filed with the SEC on November 6,
2006.)10.12
Form of
B Warrant dated October 28, 2006 issued by Broadcast International to Leon
Frenkel.  (Incorporated by reference to Exhibit 10.5 of the Companys
Current Report on Form 8-K filed with the SEC on November 6,
2006.)10.13
Exchange
Agreement dated October 31, 2007 between Broadcast International and Leon
Frenkel.  (Incorporated by reference to Exhibit 10.1 of the Companys
Current Report on Form 8-K filed with the SEC on November 7,
2007.)10.14
Securities
Purchase Agreement dated as of December 21, 2007, by and among Broadcast
International and the investors listed on the Schedule of Buyers attached
thereto. (Incorporated by reference to Exhibit 10.1 of the Companys
Current Report on Form 8-K filed with the SEC on December 26,
2007.)10.15
Registration
Rights Agreement dated as of December 21, 2007, by and among Broadcast
International and the buyers listed therein.  (Incorporated by
reference to Exhibit 10.2 of the Companys Current Report on Form 8-K
filed with the SEC on December 26, 2007.)10.16
6.25%
Senior Secured Convertible Promissory Note dated December 21, 2007 issued
to the holder listed therein.  (Incorporated by reference to Exhibit
10.3 of the Companys Current Report on Form 8-K filed with the SEC on
December 26, 2007.)10.17
Warrant
to Purchase Common Stock dated December 21, 2007 issued to the holder
listed therein.  (Incorporated by reference to Exhibit 10.4 of the
Companys Current Report on Form 8-K filed with the SEC on December 26,
2007.)10.18
Security
Agreement dated as of December 21, 2007, made by each of the parties set
forth on the signatures pages thereto, in favor of the collateral agent
listed therein.  (Incorporated by reference to Exhibit 10.5 of the
Companys Current Report on Form 8-K filed with the SEC on December 26,
2007.)    31    14.1
Code of
Ethics.  (Incorporated by reference to Exhibit No. 14 of the
Companys Annual Report on Form 10-KSB filed with the SEC on March 30,
2004.)21.1
Subsidiaries.
 (Incorporated by reference to Exhibit No. 21.1 of the Companys
Annual Report on Form 10-KSB filed with the SEC on April 1,
2005.)31.1
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.31.2
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.32.1
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*   Management
contract or compensatory plan or arrangement     32    SIGNATURES  Pursuant to the
requirements of the Exchange Act, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.  Broadcast
International, Inc.   Date: May
15, 2008 /s/ Rodney
M. Tiede By:  Rodney
M. Tiede Its:
 President and Chief Executive Officer (Principal Executive Officer)   Date: May
15, 2008 /s/ Reed L.
Benson By:  Reed
Benson Its: Chief
Financial Officer (Principal Financial and Accounting Officer)    33