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 June 30, 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 July 28, 2008Common Stock, $.05
par value
38,641,585
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 28 Item
4T  Controls and Procedures 29 Part
II -Other Information Item
1.   Legal Proceedings 30 Item
1A. Risk Factors 30 Item
2.   Unregistered Sales of Equity Securities and Use of Proceeds 30 Item
3.   Defaults Upon Senior Securities 30 Item
4.   Submission of Matters to a Vote of Security Holders 30 Item
5.   Other Information 30 Item
6.   Exhibits 31 Signatures 34        2    Part I.  Financial Information  Item
1. Financial Statements    BROADCAST
INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS December
31,

June
30,2007

2008(Unaudited)ASSETS:Current assetsCash
and cash equivalents
$
16,598,300
$
9,296,764Trade
accounts receivable, net

220,834

643,889Inventory

57,218

26,682Prepaid
expenses

2,449,236

1,568,821Total current assets

19,325,588

11,536,156Property and equipment,
net

641,314

1,554,669Other assetsDebt
offering Costs

1,367,583

1,136,025Patents,
net

197,346

195,356Available-for-sale
securities (note 7)

--

2,605,674Deposits
and other assets

8,795

9,058Total other assets

1,573,724

3,946,113Total assets
$
21,540,626
$
17,036,938 See accompanying notes to consolidated financial statements.      3    BROADCAST
INTERNATIONAL, INC. CONDENSED
CONSOLIDATED BALANCE SHEETS (Continued)  December
31,

June
30,2007

2008LIABILITIES:



(Unaudited)Current liabilitiesAccounts
payable
$
640,292
$
529,525Payroll
and related expenses

460,236

334,400Other
accrued expenses

55,356

67,750Unearned
revenue

169,359

110,376Current
debt obligations

47,692

--Derivative
valuation

14,267,600

7,942,300Total current
liabilities

15,640,535

8,984,351Long-term liabilitiesConvertible
debt (net of $13,068,755 and $10,806,437discount,
respectively)

2,931,245

5,193,563Total liabilities

18,571,780

14,177,914Commitments 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 38,631,585 shares issued asof
December 31, 2007 and June 30, 2008, respectively

1,888,752

1,931,579Additional paid-in
capital

69,078,449

72,493,063Accumulated other comprehensive
loss

-

(194,326)Subscriptions receivable

(25,000)

-Accumulated deficit

(67,973,355)

(71,371,292)Total stockholders
equity

2,968,846

2,859,024Total liabilities and
stockholders equity
$
21,540,626
$
17,036,938 See accompanying notes to consolidated financial statements.     4    BROADCAST
INTERNATIONAL, INC. CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)  For the three
months

For the six
monthsended June
30,

ended June
30,2007

2008

2007

2008Net
sales
$
763,784
$
810,803
$
2,362,850
$
1,998,195Cost
of sales

800,835

968,859

2,395,610

2,105,305Gross
profit (loss)

(37,051)

(158,056)

(32,760)

(107,110)Operating
expenses:Administrative
and general

1,304,508

1,454,560

2,879,192

2,988,741Selling
and marketing

166,814

356,309

309,435

602,501Research
and development

199,026

1,052,153

384,089

1,828,786Impairment
of license rights

1,142,400

-

1,142,400

-Total
operating expenses

2,812,748

2,863,022

4,715,116

5,420,028Total
operating loss

(2,849,799)

(3,021,078)

(4,747,876)

(5,527,138)Other
income (expense):Interest
income

3,543

101,670

12,578

264,289Interest
expense

(353,008)

(1,492,785)

(1,126,839)

(2,994,577)Derivative
valuation gain (loss)

1,982,480

(1,145,240)

328,090

4,863,823Other
income (expense), net

(3,015)

513

(349)

(4,334)Total
other income (expense)

1,630,000

(2,535,842)

(786,520)

2,129,201Loss
before income taxes

(1,219,799)

(5,556,920)

(5,534,396)

(3,397,937)Provision
for income taxes

--

--

--

--Net
loss
$
(1,219,799)
$
(5,556,920)
$
(5,534,396)
$
(3,397,937)Net
loss per share  basic & diluted
$
(0.04)
$
(0.15)
$
(0.19)
$
(0.09)Weighted
average shares  basic & diluted

30,125,300

38,357,400

28,995,900

38,575,600    See accompanying notes
to consolidated financial statements.       5    BROADCAST
INTERNATIONAL, INC. CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months
EndedJune
30,2007

2008Cash flows from operating
activities:Net loss
$
(5,534,396)
$
(3,397,937)Adjustments to reconcile net
loss to
net cash used in operating
activities:Depreciation
and amortization

116,873

203,101Common
stock issued for services

--

113,400Common
stock issued for in process research and development

--

75,501Accretion
of discount on convertible notes payable

512,502

2,263,075Stock-based
compensation

999,430

350,768Gain on
sale of assets

(5,100)

(363)Derivative
liability valuation

(328,090)

(4,863,823)Impairment
of license rights

1,142,400

--Extinguishment
of debt

318,749

6,056Allowance
for doubtful accounts

50,120

130,802Changes in assets and
liabilities:Accounts
receivable

576,399

(553,857)Inventories

17,602

30,536Debt
offering costs

200,836

231,558Prepaid
and other assets

1,286,809

1,368,152Accounts
payable and accrued expenses

(317,218)

(302,327)Deferred
revenues

(306,059)

(58,983)Net
cash used in operating activities

(1,269,143)

(4,404,341)Cash flows from investing
activities:Purchase of equipment

(41,683)

(1,047,867)Purchase of available-for-sale
securities

--

(11,600,000)Proceeds from sale of
available-for-sale securities

--

8,800,000Proceeds from sale of
assets

5,100

11,882Net
cash used in investing activities

(36,583)

(3,835,985)Cash flows from financing
activities:Proceeds from the exercise of
warrants

--

913,040Principal payments on
debt

(583,285)

--Proceeds from subscription
receivable

--

25,000Proceeds from the exercise of
options

--

750Proceeds for the sale of stock

1,122,999

--Loan proceeds

299,948

--Net
cash provided by financing activities

839,662

938,790Net decrease in cash and cash
equivalents

(466,064)

(7,301,536)Cash and cash equivalents,
beginning of period

807,741

16,598,300Cash and cash equivalents, end
of period
$
341,677
$
9,296,764  See accompanying notes
to consolidated financial statements.    6    BROADCAST
INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 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 June 30, 2008 and the results of
operations for the three and six months ended June 30, 2007 and 2008,
respectively, with the cash flows for each of the six month periods ended June
30, 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
and six months ended June 30, 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.  Options and warrants to purchase
15,821,878 and 15,614,557 shares of common stock at prices ranging from $.02 to
$45.90 per share were outstanding at June 30, 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 June 30, 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 and six months ended June 30, 2008.  Risk-free interest rate
3.17% -  3.99%Expected lives in years
3
        - 10.0Dividend yield
0Expected volatility
76.73% -
84.03%     7    Net loss for the six months ended
June 30, 2008 and 2007 includes $350,768 and $999,430, 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 $350,768 of non-cash
stock based compensation expense for the six months ended June 30, 2008 is (i)
$85,221 for the vested portion of 316,500 options granted to eleven employees,
(ii) $14,800 for the vested portion of 200,000 warrants granted to two
consultants, (iii) $268,876 resulting from the vesting of unexpired options and
warrants issued prior to January 1, 2008, (iv) ($18,129) credit for recovery of
previously recorded expense of unvested options forfeited during the period.  Included in the $999,430 of non-cash
stock based compensation expense for the six months ended June 30, 2007 is (i)
$499,000 resulting from 600,000 options granted to three directors, (ii)
$232,693 resulting from the vesting of unexpired options issued prior to January
1, 2007, (iii) $215,490 resulting from 1,825,000 warrants issued to three
consultants, of which, 500,000 warrants were issued to a current member of our
board of directors, prior to him becoming a member of the board, (iv) $41,887
resulting from the issuance of 366,500 options issued to non-executive
management employees, and (v) $10,360 for repriced options previously granted to
executive management. Warrants to acquire 748,670 shares of our common stock
were also granted to certain equity investors. See note 8.  The impact on our results of
operations for recording stock-based compensation under FAS 123R for the three
and six months ended June 30, 2007 and 2008 are as follows:  For the Three
Months

For the Six
MonthsEnded June
30,

Ended June
30,2007

2008

2007

2008General and administrative

$  
 324,269

$
      70,588

$   
883,457

$  
 174,169Research and development

63,168

91,709

115,973

176,599Total

$   
387,437

$   
 162,297

$  
 999,430

$  
 350,768
  Due to unexercised options and
warrants outstanding at June 30, 2008, we will recognize a total of $1,578,834
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
$
         563,8192009
581,0292010
381,4672011
52,519Total
$
      1,578,834  The following unaudited tables
summarize option and warrant activity during the six months ended June 30,
2008.  Options and
Warrants
Outstanding

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

$       
 0.02

$    45.90Options
granted
316,500

2.60

3.45Warrants
issued
200,000

3.35

3.35Expired
--

--

--Forfeited
(131,983)

0.33

4.00Exercised
(596,658)

0.33

2.00Outstanding at June 30,
2008
15,821,878

$   
     0.02

$   45.90
     8   The
following table summarizes information about stock options and warrants
outstanding at June 30, 2008. Outstanding
ExercisableWeighted
Average
Remaining

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
1.82
$
0.03
1,264,495
$
0.030.33-0.95
1,668,302
6.90

0.72
1,501,635

0.701.06-6.25
12,885,481
3.03

2.55
12,084,981

2.519.50-11.50
2,000
3.02

10.65
2,000

10.6536.25-45.90
1,600
2.17

41.08
1,600

41.08$
0.02-45.90
15,821,878
3.34
$
2.16
14,854,711
$
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. 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 June 30, 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 $643,889 and $220,834 net accounts receivable for the six months ending June
30, 2008 and year ending December 31, 2007, respectively, were, (i) $28,140 and
$35,106 of unbilled trade receivables and (ii) $2,067 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.    9   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 June 30, 2008, the United States Patent and Trademark Office had approved
2 patents.  Additionally, seven 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 $1,055 and $1,990 for the three and
six months ended June 30, 2008, respectively. Amortization expense recognized on
all patents totaled $674 and $1,411 for the three and six months ended June 30,
2007, respectively. Estimated
amortization expense for each of the next five years is as follows: 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    10   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 $1,052,153, and
$1,828,786 of research and development costs for the three and six months ended
June 30, 2008 and $199,026 and $384,089 for the three and six months ended June
30, 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 six
months ended June 30, 2008, we had 3 customers that individually constituted
greater than 10% of our total revenues, which represented 26%, 11% and 11% of
our revenues, respectively.  For the six months ended June 30, 2007, we had
3 customers that individually constituted greater than 10% of our total
revenues, which represented 28%, 19% and 18% of our revenues, respectively. One
of the three customers in 2008 was not the same customer as in 2007 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.    11   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 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;    12   · cause,
permit or suffer, directly or indirectly, any change in control transaction as
defined in the senior secured convertible note.  As of June
30, 2008, we recorded an aggregate derivative liability of $5,607,500, and a
derivative valuation gain of $3,012,600 to reflect the change in value of the
aggregate derivate liability since December 31, 2007.  The aggregate
derivative liability of $5,607,500 included $2,945,000 for the conversion
feature and $2,662,500 for the warrants.  These values were calculated
using the Black-Scholes pricing model with the following assumptions: (i)
risk-free interest rate between 2.77% and 3.34%, (ii) expected life (in years)
of 2.5 for the conversion feature and 4.5 for the warrants; (iii) expected
volatility of 90.15% for the conversion feature and 78.72% for the warrants;
(iv) expected dividend yield of 0.00%; and (v) stock trading price of $2.80. 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 and
$2,095,650 was included in interest expense for the three and six months ended
June 30, 2008, respectively. The note bears a 6.25% annual interest rate payable
quarterly, and for the three and six months ended June 30, 2008, $234,375 and
$468,750, respectively, was included in interest expense. On December 21, 2007,
we paid $937,500 as interest for the first year of the note and at June 30, 2008
have recorded $445,312 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 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. During the
three months ended June 30, 2008 convertible note holder exercised 64,400 A
Warrants at an exercise price of $1.60 per share providing $103,040 in funding
to us. As of June 30, 2008 there were 231,600 A warrants and 750,000 B Warrants
available. As of June
30, 2008 and 2007, we recorded an aggregate derivative liability of $2,276,300
and $2,852,500, and derivative valuation gain of $1,711,260 and derivative
valuation loss $418,300, respectively, to reflect the change in value of the
aggregate derivate liability since December 31, 2007 and 2006, respectively.
 The aggregate    13   derivative
liability of $2,276,300 included $1,100,000 for the conversion feature and
$1,176,300 for the warrants.  These values were calculated using the
Black-Scholes pricing model with the following assumptions: (i) risk-free
interest rate of 2.36% for the conversion feature and 2.17% for the warrants,
(ii) expected life (in years) of 1.30 for the conversion feature and 0.40 for
the warrants; (iii) expected volatility of 90.04% for the conversion feature and
81.35% for the warrants; (iv) expected dividend yield of 0.00%; and (v) stock
trading price of $2.80. 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 and $166,668 was
included in interest expense for the three and six months ended June 30, 2008
and 2007, respectively.  The note bears a 5% annual interest rate payable
semi-annually, and for the three and six months ended June 30, 2008 and 2007,
$12,501 and $25,002, respectively, 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,
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.    14   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 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. 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 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. 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 to
$54,505.  During the three months 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 June 30, 2008 there were 32,702 remaining warrants
available.  As of June 30, 2008 and 2007, we
recorded an aggregate derivative liability of $58,500 and $1,004,000 and a
derivative valuation gain of $139,963 and $90,210 to reflect the change in value
of the aggregate derivate liability since December 31, 2007 and 2006,
respectively.  The aggregate derivative liability of $58,500 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 2.63%; (ii) expected life (in years) of 1.9; (iii) expected
volatility of 90.74%; (iv) expected dividend yield of 0.00%; and (v) stock
trading price of $2.80.  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 $345,834 was included in interest expense for the six months
ended June 30, 2008 and 2007, respectively.  The accretion included in
interest expense for the three months ended June 30, 2007 was $ 137,499.
 The notes bore a 6% annual interest rate payable semi annually for which
(i) $0 and $136 for the three and six months ended June 30, 2008, respectively,
and (ii) $24,817 and $60,942 for the three and six months ended June 30, 2007,
respectively, were included in interest expense.    15   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 and six months ended June 30, 2007, we paid approximately
$17,547 and $35,094, respectively of the $312,768 original obligation. The
balance remaining as of June 30, 2007 was approximately $70,187 and had been
recorded as a current liability (for that year). 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:  · 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 June
30, 2008: Quoted Prices
in

Significant
Other

SignificantActive Markets
for

Observable

UnobservableIdentical
Assets

Inputs

InputsTotal

(Level 1)

(Level 2)

(Level
3)AssetsMoney market funds


$
    1,118,626

$
      1,118,626

$
                -

$
                   -Treasury cash reserve
securities

8,405,000

8,405,000

-

-Auction rate preferred
securities

2,605,674

-

-

2,605,674Total assets measured at fair
value

$
  12,129,300

$
      9,523,626

$
                -

$
   2,605,674LiabilitiesDerivative valuation (1)


$
    7,942,300

$
                    -

$
                -

$
    7,942,300Total liabilities measured at
fair value
$
    7,942,300

$
                    -

$
                -

$
    7,942,300(1) See Note 6 of the Company's
Condensed Consolidated Financial Statements for additional
discussion.
       16   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
June 30, 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 loss

4,863,823

-

4,863,823Included in other comprehensive
loss
-

(194,326)

(194,326)Purchases, issuances, and
settlements, net
1,461,477

2,800,000

4,261,477Transfers to Level 3

-

-

-Balance at June 30, 2008

$
        (7,942,300)

$
    
     2,605,674

$
      (5,336,626)
  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 June 30, 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 events in credit markets, the
auction events for these instruments held by the Company failed during first
quarter 2008.  Therefore, the fair values of these securities were
estimated utilizing a discounted cash flow analysis as of June 30,
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
$194,326 to Accumulated other comprehensive loss.  The ARPS held by
the Company at June 30, 2008, totaling $2,800,000 were in AAA rated
funds.  Due to the Companys belief that the market for these
instruments may take in excess of twelve months to fully recover, the Company
has classified these investments as non-current.  During second quarter
2008, $8.8 million of the Companys ARPS, held at March 31, 2008, were redeemed
at 100% of their par value.  As of June 30, 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
LOSS  Comprehensive loss equaled net loss
of $5,534,396 and $1,219,799 for the three and six months ended June 30, 2007,
respectively. Net loss totaled $5,586,755 and $3,397,937 for the three and six
months ended June 30, 2008, respectively and included unrealized losses on
auction rate preferred securities.  The difference between net loss and
comprehensive loss for the three and six months ended June 30, 2008 was as
follows:  Three Months
Ended
Six Months
EndedJune 30,
2008
June 30,
2008Net Loss
$
                       (5,556,920)
$
                      (3,397,937)Unrealized gain (loss) onavailable-for-sale securities
365,861
(194,326)Comprehensive Loss
$
                       (5,191,059)
$
                       (3,592,263)
    17    
  Accumulated other comprehensive loss
per the Companys Condensed Consolidated Balance Sheet consists of the Companys
unrealized loss of $194,326 on its available-for-sale securities.  NOTE 9 - SUPPLEMENTAL CASH FLOW
INFORMATION  During the six months ended June 30,
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 six months ended June 30,
2008, we issued 42,000 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 $113,400 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 six months ended
June 30, 2008. See Note 6.  During the six months ended June 30,
2008, an aggregate of 2,258 options and 30,000 warrants were exercised by one
and two individuals providing $750 and $60,000, respectively in funding to the
company.  For the six months ended June 30,
2008 and 2007, an aggregate non-cash expense of $2,263,075 and $512,502 was
recorded for the accretion of i) the senior 6% convertible notes of $757 and
345,834, respectively, ii) the unsecured convertible note of $166,668 in each of
the periods and (iii) $2,095,650 for the senior secured 6.25% Convertible note
in 2008, as interest expense. See Note 6.  For the six months ended June 30,
2007, we received $1,122,999 from the sale of 748,683 shares of common stock
pursuant to a Private Placement Offering at a price of $1.50 per share.
Additionally, the holders of 748,670 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 six months ended June 30,
2007, we issued 2,160,000 shares of our common stock to three corporations,
which provide investor relations services for us. 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, and April 4, 2007, three
of the institutional funds converted an aggregate of $850,000 of their senior
secured convertible notes into 566,667 shares of our common stock resulting in
an extinguishment of debt non-cash expense in the amount of $345,834 included as
interest expense for the six months ended June 30, 2007. See Note 7.  On February 28, March 30, and May 11,
2007, we entered into three unsecured promissory 6% notes with a Utah
corporation, in the aggregate of $299,948 included at June 30, 2007 as current
debt obligations.  The Company paid no cash for income
taxes during the six months ended June 30, 2008 and 2007.  The Company paid $26,108 and $94,508
for interest expense during the six months ended June 30, 2008 and 2007,
respectively.       18    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 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.  In May 2008, the FASB issued SFAS No.
162, The Hierarchy of Generally Accepted Accounting Principles(SFAS
162).  SFAS 162 is intended to improve financial reporting by identifying
a consistent framework, or hierarchy, for selecting accounting principles to be
used in preparing financial statements in conformity with U.S. generally
accepted accounting principles (GAAP) for nongovernmental entities.  The
statement establishes that the GAAP hierarchy should be directed to entities
because it is the entity (not its auditor) that is responsible for selecting
accounting principles for financial statements that are presented in conformity
with GAAP.  This statement is effective 60 days following the SECs
approval of the Public Company Accounting Oversight Board    19   Auditing
amendments to AU Section 411, The Meaning of Present Fairly in Conformity
with Generally Accepted Accounting Principles.  The Company does not
believe implementation of SFAS 162 will have a material impact on its
consolidated financial statements.  In May 2008, the FASB issued SFAS No.
163, Accounting for Financial Guarantee Insurance Contracts - an interpretation
of FASB Statement No. 60 (SFAS 163).  SFAS 163 clarifies how Statement
60 applies to financial guarantee insurance contracts, including the recognition
and measurement of premium revenue and claim liabilities. This Statement also
requires expanded disclosures about financial guarantee insurance contracts.
 SFAS 163 is effective for fiscal years beginning on or after December 15,
2008, and interim periods within those fiscal years. The Company does not expect
that the adoption of SFAS 163 will have a material impact on its consolidated
financial statements.  In June 2008, the
FASB issued FASB Staff Position Emerging Issues Task Force
(EITF) No. 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities (FSP EITF No.
03-6-1).  Under FSP EITF No. 03-6-1, unvested share-based payment awards
that contain rights to receive nonforfeitable dividends (whether paid or unpaid)
are participating securities, and should be included in the two-class method of
computing EPS. FSP EITF No. 03-6-1 is effective for fiscal years beginning after
December 15, 2008, and interim periods within those years, and is not
expected to have a significant impact on the Companys consolidated financial
statements.  In May 2008, the FASB issued
FASB Staff Position APB 14-1, Accounting for Convertible Debt Instruments That
May Be Settled in Cash Upon Conversion (including Partial Cash Settlement (FSP
APB 14-1). FSP APB 14-1 clarifies that convertible debt instruments that may be
settled in cash upon conversion are not addressed by APB Opinion No. 14 and
specifies that issuers of such instruments should separately for the liability
and equity components in a matter that will reflect the entitys nonconvertible
debt borrowing rate when interest cost is recognized in subsequent periods.
 FSP APB 14-1 is effective for fiscal years beginning after
December 15, 2008, and interim periods within those years. The Company is
currently assessing the impact of the adoption of FSP APB 14-1 on its
consolidated financial statements.  In April 2008, the FASB issued
FASB Staff Position No. 142-3, Determination of the Useful Life of
Intangible Assets (FSP No. 142-3) to improve the consistency between the
useful life of a recognized intangible asset (under SFAS No. 142) and the
period of expected cash flows used to measure the fair value of the intangible
asset (under SFAS No. 141(R)). FSP No. 142-3 amends the factors to be
considered when developing renewal or extension assumptions that are used to
estimate an intangible assets useful life under SFAS No. 142. The guidance
in the new staff position is to be applied prospectively to intangible assets
acquired after December 31, 2008. In addition, FSP No. 142-3 increases
the disclosure requirements related to renewal or extension assumptions. The
Company is currently assessing the impact of the adoption of FSP No. 142-3
on its 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 EVENT  On July 14, 2008, warrants to
purchase 10,000 shares of our stock were exercised by an individual providing
 $20,000 in financing for the Company.    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 $2,605,674 at June 30, 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 June 30, 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 at March 31, 2008.
During the quarter ended June 30, 2008, we liquidated at par approximately 80%
of our auction rate securities held at March 31, 2008 resulting in the temporary
unrealized decline in fair value being adjusted to $194,326 at June 30, 2008.
 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 June 30, 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    22   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.  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 decreased by 18% for the
six months ended June 30, 2008 compared to the six months ended June 30, 2007,
and the net cash used for operations in the six months ended June 30, 2008
increased compared to the six months ended June 30, 2007 by 247%.  Until
cash from operations is 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 Six
Months ended June 30, 2008 and June 30, 2007  Revenues  We generated $1,998,195 in revenue
during the six months ended June 30, 2007.  During the same six-month
period in 2007, we generated revenue of $2,362,850.  The decrease in
revenue of $ 364,655 was due primarily to (i) the Company completing
installation services for one client in 2007 that was not repeated in 2008,
which resulted in a decrease in installation related revenues of $269,534 and
(ii) a decrease in satellite fees charged of $172,356 due to the expiration of a
customer contract that was not renewed.  However, the loss of revenues from
installation services performed for the former customer of $668,771 and the loss
of revenues from the expiration of the customer contract of $220,800 were offset
by increased installation and satellite usage revenues from new and    23   existing
customers.   In addition, license fee revenue increased by $58,582,
and other revenues increased by $65,282.  Sales revenues from our three largest
customers accounted for approximately 50% and 65% of total revenues for the six
months ended June 30, 2008 and 2007, respectively. Any material reduction in
revenues generated from any one of our largest customers could harm our results
of operations, financial condition and liquidity.  Cost of Revenues  Cost of revenues decreased by $
290,305 to $2,105,305 for the six months ended June 30, 2008 from $2,395,610 for
the six months ended June 30, 2007.  The decrease was due primarily to
decreased activity in installation of equipment for one customer, which resulted
in a decrease of $ 239,550 in the costs related to such installations. In
addition, the general operations department costs decreased by approximately
$81,931, due primarily to the decrease in installation activity, and satellite
distribution costs decreased by $58,077, which were offset by an increase in
depreciation and amortization of approximately $89,253.  Expenses  General and administrative expenses
for the six months ended June 30, 2008 were $2,988,741 compared to $2,879,192
for the six months ended June 30, 2007.  The increase of $109,549 resulted
from an increase in employee salary and related expenses of $166,717, increased
travel expenses of $36,103, and an increase of $83,151 in bad debt expense. In
2007 technical development departmental expenses of $129,615 were classified as
general and administrative expenses, but all of the technical development
department expenses in 2008 are classified as research and development expenses.
Research and development in process increased by $1,444,697 for the six months
ended June 30, 2008 to $1,828,786 from $384,089 for the six months ended June
30, 2007 not including a one-time expense for impairment of license rights of
$1,142,400 recorded in 2007.  The increase resulted primarily from an
increase of $838,572 in employee related expenses, an increase of $129,214 in
professional services, and increase of $156,551 in software maintenance and
patent related expenses, an increase in general operating expenses of $97,483
related to the increased number of employees and an increase of $65,851 in
materials and supplies expense.  Sales and marketing expenses increased
$293,066 to $602,501 for the six months ending June 30, 2008 from $309,435 for
the six months ending June 30, 2007.  The increases reflect additional
sales personnel hired to begin marketing of our CodecSys products and related
overhead expenses.  Interest Expense  For the six months ended June 30,
2008, we incurred interest expense of $2,994,577 compared to interest expense
for the six months ended June 30, 2007 of $1,126,839.  The increase of
$1,867,738 resulted primarily from the Company recording more non cash interest
expense related to the accretion of note liability on our 6.25% senior secured
convertible note and related amortization of debt offering costs, which was not
outstanding in 2007 and on our unsecured convertible note. In addition, interest
expense paid or accrued on the 6.25% senior secured convertible note is likewise
greater due to the increased principal balance outstanding.  Net Loss  We realized a net loss for the six
months ended June 30, 2008 of $ 3,397,937 compared with a net loss for the six
months ended June 30, 2007 of $5,534,396. The decrease in the net loss of
$2,136,459 is primarily due to, an increase in gain of $4,535,733 related to our
derivative valuation calculation offset by (i) the increase of $1,867,738 in
interest expense, (ii) an increase in operating expenses of $704,912 as
explained above, and (iii) a $74,350 decrease in gross margin as a result of
decreased sales activity.  Results of Operations for the
Three Months ended June 30, 2008 and June 30, 2007  Revenues  The Company generated $810,803 in
revenue during the three months ended June 30, 2008.  During the same
three-month period in 2007, the Company generated revenue of $763,784.  The
increase in revenue of $ 47,019 was due primarily to the Company performing
sufficient installation and service work in the three months ended June 30,
2008, to offset a decrease in satellite fees resulting from the expiration of a
long time satellite customer.    24   The
Company realized $ 201,867 more revenue from installation services performed in
the quarter ended June 30, 2008, than in the second quarter of 2007, but we
realized $166,911 less revenue from satellite fees in the quarter ended June 30,
2008 than we did in the quarter ended June 30, 2007.  The Company's three largest
customers sales revenues accounted for approximately 62% and 67% of total
revenues for the quarters ended June 30, 2008 and 2007, respectively.  The
three customers with the greatest revenues in 2007 were not the same three
customers in 2008. 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 unless we could replace the lost revenues with new
customers.  Cost of Revenues  Costs of Revenues increased by
$168,024 to $968,859 for the three months ended June 30, 2008, from $800,835 for
the three months ended June 30, 2007.  The increase was due primarily to
increased activity in installation of equipment, which resulted in an increase
in the costs related to such installation services for all the Companys
customers of $160,263. There was not an increase in the cost of equipment
relative to the sales price of the equipment, but the general operations
department costs increased by approximately $51,388 due to the increase in
installation activity. In addition, depreciation increased by $64,563 due to
purchases of equipment and upgrades of our internal network primarily for our
development activities. The cost increases were partially offset by a decrease
of approximately $68,731 in satellite distribution costs.  Expenses  General and Administrative expenses
for the three months ended June 30, 2008 were $1,454,560 compared to $1,304,508
for the three months ended June 30, 2007.  The increase of $150,052
resulted primarily from increases in expenses incurred for outside consultants
of $167,389, in payroll and related expenses of $134,398, legal expenses of
$65,061 and outside director fees of $62,750 offset by a decrease in expenses of
$243,681 for options and warrants granted.  Research and development in
process increased by $853,127 for the three months ended June 30, 2008 to
$1,052,153 from $199,026 for the three months ended March 31, 2007.  This
increase resulted primarily from increased development staff and related
expenses of increasing the development activity. Sales and marketing expenses
increased $189,495 for the three months ended June 30, 2008 to $356,309 from
$166,814 for the three months ended June 30, 2007.  The increase was due
primarily to increased payroll and related expenses resulting from hiring of
additional personnel devoted to sales. Total operating expenses were only
$80,109 greater for the three months ended June 30, 2008 when compared to total
operating expenses for the three months ended June 30, 2007.  However,
expenses for impairment of license rights was recorded in the period ending June
30, 2007 that was not repeated in the period ending June 30, 2008, which
accounted for total expenses in the two quarters being more nearly comparable.  Interest Expense  For the three months ended June 30,
2008, the Company incurred interest expense of $1,492,785 compared to interest
expense for the three months ended June 30, 2007 of $353,008.  The increase
of $1,139,777 resulted primarily from the Company recording non cash interest
expense of $1,245,909 related to note accretion of our 6.25% senior secured
convertible note, which was not outstanding during the second quarter of 2007,
partially offset by note accretion of our 6.0% senior secured convertible notes
in 2007, which have since been converted and are no longer outstanding. The
$1,492,785 interest expense recorded primarily consisted of $1,131,159 recorded
to account for the accretion of note liability on our balance sheet, interest
payable on all notes of $246,876 and amortization of debt offering costs of
$114,750.  Net Loss  The Company realized net loss for the
three months ending June 30, 2008 of $5,556,920 compared with a net loss for the
three months ended June 30, 2007 of $1,219,799. The increase in net loss
$4,337,121 was primarily the result of an increase in derivative valuation loss
of $3,127,720, which resulted primarily from valuation of our 6.25% senior
secured convertible note, which was issued in December of 2007, and the increase
of $1,139,777 in interest expense.       25   Liquidity
and Capital Resources  At June 30, 2008, we had cash of $
9,296,764, total current assets of $11,536,156, and total current liabilities of
$8,984,351 and total stockholders' equity of $2,859,024.  Included in
current liabilities is $7,942,300, 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 $1,042,051.  As of June 30, 2008, we held
approximately $2,800,000 of auction rate preferred securities, valued at
$2,605,674 and classified as long term investments. Beginning in February 2008,
many of these auction rate preferred securities became illiquid because their
scheduled auctions failed to settle. During the second quarter 2008, $8,800,000
of the $11,600,000 auction rate preferred securities held at March 31, 2008 were
liquidated at par, with the Company not sustaining any losses. However, we may
have limited or no opportunities to liquidate the remaining auction rate
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, these investments were classified as non-current.
  Although approximately 80% of our investments have been redeemed by
the issuers, none of the issuers of the auction rate preferred securities still
held by us have announced a definitive plan for redemption of the remainder of
the securities in the near term.  A temporary unrealized loss of $560,187
was recorded in the first quarter of 2008, which was decreased to $ 194,326 at
June 30, 2008 to reflect the redemptions which occurred in the second quarter.
We utilized a discounted cash flow analysis in determining the fair value of
these securities, which used significant unobservable inputs at June 30, 2008.  We believe the impairment of these
securities is temporary because they are backed by more than 200% collateral and
approximately 80% have already been redeemed. All of our remaining 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 $2,800,000 of these investments will
adversely affect our operations.  We experienced negative cash flow
used in operations during the six months ending June 30, 2008 of $4,404,341
compared to negative cash flow used in operations for the six months ended June
30, 2007 of $1,269,143.  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 and $1,377,000 of
related costs including commissions).  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.     26   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 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.        27   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 June 30, 2008,
the convertible note holder had exercised 518,400 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. 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,
but no revenues in 2008.  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 $3.0 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.    28    We have investments in auction rate
preferred securities, which are classified as available-for-sale securities and
reflected at fair value.  Approximately 80% of our auction rate
preferred securities have been redeemed by the issuers at par.  The
remaining amount of these securities, which are approximately $2,800,000 we have
classified as non current assets in the unaudited Condensed Consolidated Balance
Sheet as of June 30, 2008 and valued them at 2,605,674. 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.  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 June 30,
2008.  Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of June 30, 2008.  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, we  further implementedone 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. In order to
insure that we timely file reports on Form 8-K regarding issuance of equity
securities, we instituted a procedure in which a report is prepared of all
issuances of equity securities (stock, warrants, options, and convertibles), and
reviewed each time a change is made to determine if a filing is required.     29    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  During June and July, 2008, we
granted options to four employees pursuant to our Long Term Incentive Plan to
acquire up to 330,000 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) thereof.  In June, 2008, we issued 10,000
shares of our common stock to one warrant holder who exercised his warrants
purchased in 2007 as part of a private placement of our stock.  The
exercise price was $2.00 per share and he paid $20,000 in consideration of the
issuance.  The warrant holder was fully informed regarding his exercise
transaction. We relied on the exemption from registration under the Securities
Act set forth in Section 4(2) and Section 4(6).  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.    30    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.)    31    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.)    32    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     33    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:
August 11, 2008 /s/ Rodney
M. Tiede By:  Rodney
M. Tiede Its:
 President and Chief Executive Officer (Principal
Executive Officer)   Date:
August 11, 2008 /s/ Reed L.
Benson By:  Reed
Benson Its: Chief
Financial Officer (Principal Financial and Accounting
Officer)     34