**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

**FORM 10-Q**

S

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2011

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 Employer

incorporation 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to post such files). Yes  £     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 filer    S  Smaller 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 April 30, 2011

Common Stock, $.05 par value

75,575,773 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

29

            Item 4.   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

31

            Item 4.   [REMOVED AND RESERVED]

31

            Item 5.   Other Information

31

            Item 6.   Exhibits

31

Signatures

34

2

**PART I.   FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**BROADCAST INTERNATIONAL, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 

 

 

December 31, 2010

 

March 31, 

2011

 

 

 

 

(Unaudited)

 

ASSETS:

 

 

 

 

 

Current Assets

 

 

 

 

 

     Cash and cash equivalents

$

6,129,632 

$

3,304,891 

 

     Trade accounts receivable, net

 

1,125,055 

 

1,018,513 

 

     Inventory

 

52,175 

 

111,595 

 

     Prepaid expenses

 

190,877 

 

275,862 

 

         Total current assets

 

7,497,739 

 

4,710,861 

 

Property and equipment, net

 

2,419,891 

 

2,233,512 

 

Other Assets, non current

 

 

 

 

 

     Patents, net

 

167,410 

 

164,872 

 

     Deposits and other assets

 

624,598 

 

584,946 

 

          Total other assets, non current

 

792,008 

 

749,818 

 

 

 

 

 

 

 

          Total assets

$

10,709,638 

$

7,694,191 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS EQUITY

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Current Liabilities

 

 

 

 

 

     Accounts payable

$

1,552,006 

$

943,075 

 

     Payroll and related expenses

 

341,255 

 

349,059 

 

     Other accrued expenses

 

381,015 

 

40,673 

 

     Unearned revenue

 

139,437 

 

107,808 

 

     Current notes payable 

 

775,000 

 

-- 

 

     Other current obligations

 

1,426,834 

 

1,477,283 

 

     Derivative valuation

 

14,759,300 

 

11,394,100 

 

          Total current liabilities

 

19,374,847 

 

14,311,998 

 

Long-term Liabilities

 

 

 

 

 

     Long-term portion of notes payable (net of discount of 992,832

     and $909,498, respectively

 

6,187,984 

 

6,271,318 

 

     Other long-term obligations

 

1,067,649 

 

679,068 

 

          Total long-term liabilities

 

7,255,633 

 

6,950,386 

 

          Total liabilities

 

26,630,480 

 

21,262,384 

 

Commitments and contingencies 

 

 

 

 

 

STOCKHOLDERS’ DEFICIT:

 

 

 

 

 

      Preferred stock, no par value, 20,000,000 shares authorized; 

         none issued

 

--

 

--

 

     Common stock, $.05 par value, 180,000,000 shares authorized; 

        74,078,153 and 75,575,733 shares issued as of December 31, 

        2010 and March 31, 2011, respectively

 

3,703,908 

 

3,778,802 

 

     Additional paid-in capital

 

92,867,561 

 

95,892,281 

 

     Accumulated deficit

 

(112,492,311)

 

(113,239,276)

 

          Total stockholders’ deficit

 

(15,920,842)

 

(13,568,193)

 

 

 

 

 

 

 

          Total liabilities and stockholders’ deficit

$

10,709,638 

$

7,694,191 

See accompanying notes to condensed consolidated financial statements.

3

**BROADCAST INTERNATIONAL, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

(Unaudited**)**

 

 

For the three months ended

 

 

March 31,

 

 

2010

 

2011

 

 

 

 

 

Net sales

$

1,787,067 

$

1,687,264 

Cost of sales

 

1,273,043 

 

1,275,537 

Gross profit 

 

514,024 

 

411,727 

 

 

 

 

 

Operating expenses:

 

 

 

 

     Administrative and general

 

1,210,974 

 

2,608,372 

     Selling and marketing

 

82,451 

 

159,937 

     Research and development

 

736,135 

 

597,771 

     Depreciation and amortization

 

192,637 

 

180,793 

          Total operating expenses

 

2,222,197 

 

3,546,873 

          Total operating loss

 

(1,708,173)

 

(3,135,146)

 

 

 

 

 

Other income (expense):

 

 

 

 

     Interest income

 

2,403 

 

788 

     Interest expense

 

(1,715,025)

 

(381,189)

     Gain on derivative valuation

 

518,000 

 

4,219,300 

     Equity issuance costs related to warrants 

 

-- 

 

(476,234)

     Loss on extinguishment of debt

 

-- 

 

(970,033)

     Loss on disposition of assets

 

-- 

 

(602)

     Other income (expense), net

 

2,064 

 

(3,849)

          Total other income (expense)

 

(1,192,558)

 

2,388,181 

 

 

 

 

 

Loss before income taxes

 

(2,900,731)

 

(746,965)

Provision for income taxes

 

- 

 

- 

Net loss

$

(2,900,731)

$

(746,965)

 

 

 

 

 

Net loss per share – basic & diluted

$

(0.07)

$

(0.01)

 

 

 

 

 

Weighted average shares – basic & diluted

 

40,039,200 

 

74,249,600 

See accompanying notes to condensed consolidated financial statements.

4

**BROADCAST INTERNATIONAL, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited)

 

 

**Three Months Ended**

 

 

**March 31,**

 

 

**2010**

 

**2011**

**Cash flows from operating activities**:

 

 

 

 

Net loss

$

(2,900,731)

$

(746,965)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

    Depreciation and amortization

 

389,017 

 

382,995 

    Common stock issued for services 

 

160,178 

 

-- 

    Common stock issued for interest

 

-- 

 

19,634 

    Accretion of discount on convertible notes payable

 

1,047,825 

 

83,334 

    Capitalized interest on convertible note 

 

368,916 

 

-- 

    Stock based compensation

 

383,958 

 

1,546,542 

    Loss on sale of assets

 

-- 

 

602 

    Loss on extinguishment of Debt

 

-- 

 

970,033 

    Gain on derivative liability valuation

 

(518,000)

 

(4,219,300)

    Warrants issued for interest

 

-- 

 

157,400 

    Warrants issued for debt extinguishment costs

 

-- 

 

404,000 

    Allowance for doubtful accounts

 

(23,910)

 

1,126 

Changes in assets and liabilities:

 

 

 

 

    Decrease in accounts receivable

 

220,998 

 

105,416 

    Decrease (increase) in inventories 

 

28,746 

 

(59,420)

    Decrease in debt offering costs 

 

114,750 

 

-- 

    Decrease (increase) in prepaid and other assets

 

28,779 

 

(45,333)

    Increase (decrease) in accounts payable and accrued expenses

 

358,506

 

(754,590)

    Decrease in deferred revenues

 

(89,873)

 

(31,629)

 

 

 

 

 

    Net cash used in operating activities

 

(430,841)

 

(2,186,155)

 

 

 

 

 

**Cash flows from investing activities:**

 

 

 

 

Purchase of equipment

 

(142,433)

 

(194,680)

 

 

 

 

 

    Net cash provided by investing activities

 

(142,433)

 

(194,680)

 

 

 

 

 

**Cash flows from financing activities:**

 

 

 

 

Proceeds from the exercise of options and warrants

 

-- 

 

18,304 

Principal payments on debt

 

(303,146)

 

(438,132)

Equity issuance costs

 

-- 

 

(24,078)

Proceeds from notes payable 

 

1,025,000 

 

-- 

 

 

 

 

 

    Net cash provided (used) by financing activities

 

721,854 

 

(443,906)

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

148,580

 

(2,824,741)

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

263,492 

 

6,129,632 

 

 

 

 

 

Cash and cash equivalents, end of period

$

412,072 

$

3,304,891 

 

 

 

 

 

**Supplemental disclosure of cash flow information:**

 

 

 

 

    Interest paid

$

130,182 

$

88,254 

    Income taxes paid

$

-- 

$

-- 

See accompanying notes to condensed consolidated financial statements.

5

**BROADCAST INTERNATIONAL, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

**March 31, 2011**

**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, 2010 and March 31, 2011 and the results of operations for the three months ended March 31, 2010 and 2011, respectively, with the cash flows for each of the three month periods ended March 31, 2010 and 2011, 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, 2010.  Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ended December 31, 2011.

**Note 2 - Reclassifications**

Certain 2010 financial statement amounts have been reclassified to conform to 2011 presentations.

**Note 3 – Weighted Average Shares**

The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the year, plus the dilutive common stock equivalents that would rise from the exercise of stock options, warrants and restricted stock units outstanding during the year, using the treasury stock method and the average market price per share during the year.

As we experienced net losses during the three month periods ending March 31, 2011 and 2010, no common stock equivalents have been included in the diluted earnings per common share calculations as the effect of such common stock equivalents would be anti-dilutive.

Options and warrants to purchase 21,261,952 and 12,302,005, shares of common stock at prices ranging from $0.05 to $36.25 and $0.02 to $45.90 per share were outstanding at March 31, 2011 and 2010, respectively. Additionally, restricted stock units of 2,250,000 and 850,000 were outstanding at March 31, 2011 and 2010, respectively. Furthermore, the Company had convertible debt that was convertible into 5,740,741 and 4,092,844 shares of common stock at March 31, 2011 and 2010, respectively that was excluded from the calculation of diluted earnings per share because the effect was anti-dilutive.

**Note 4 – Stock-based Compensation**

In accordance with ASC Topic 718, stock-based compensation cost is estimated at the grant date, based on the estimated fair value of the awards, and recognized as expense ratably over the requisite service period of the award for awards expected to vest.  

*Stock Incentive Plans*

Under the Broadcast International, Inc. 2004 Long-term Incentive Plan (the “2004 Plan”), the board of directors may issue incentive stock options to employees and directors and non-qualified stock options to consultants of the company.  Options generally may not be exercised until twelve months after the date granted and expire ten years after being granted. Options granted vest in accordance with the vesting schedule determined by the board of directors, usually ratably over a three-year vesting schedule upon anniversary date of the grant.  Should an employee terminate before the vesting period is completed, the unvested portion of each grant is forfeited. 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.  The number of unissued stock options authorized under the 2004 Plan at March 31, 2011 was 1,586,519.

6

The Broadcast International, Inc. 2008 Equity Incentive Plan (the “2008 Plan”) has become our primary plan for providing stock-based incentive compensation to our eligible employees and non-employee directors and consultants of the company. The provisions of the 2008 Plan are similar to the 2004 Plan except that the 2008 Plan allows for the grant of share equivalents such as restricted stock awards, stock bonus awards, performance shares and restricted stock units in addition to non-qualified and incentive stock options. We continue to maintain and grant awards under our 2004 Plan which will remain in effect until it expires by its terms. The number of unissued shares of common stock reserved for issuance under the 2008 Plan was 1,465,000 at March 31, 2011.

*Stock Options*

We estimate the fair value of stock option awards granted beginning January 1, 2006 using the Black-Scholes option-pricing model. We then amortize the fair value of awards expected to vest on a straight-line basis over the requisite service periods of the awards, which is generally the period from the grant date to the end of the vesting period. The Black-Scholes valuation model requires various judgmental assumptions including the estimated volatility, risk-free interest rate and expected option term.  Our computation of expected volatility is based on a combination of historical and market-based implied volatility.  The risk-free interest rate was based on the yield curve of a zero-coupon U.S. Treasury bond on the date the stock option award was granted with a maturity equal to the expected term of the stock option award. The expected option term is derived from an analysis of historical experience of similar awards combined with expected future exercise patterns based on several factors including the strike price in relation to the current and expected stock price, the minimum vest period and the remaining contractual period.

The fair values for the options granted for the three months ended March 31, 2011 and 2010 were estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: 

 

**Three Months Ended March 30, 2011**

**Three Months Ended March 30, 2010**

Risk free interest rate

0.98%

3.14%

Expected life (in years)

3.0

7.5

Expected volatility

84.76%

80.71%

Expected dividend yield

0.00%

0.00%

The weighted average fair value of options granted during the three months ended March 31, 2011 and 2010 was $0.60 and $0.80, respectively.

*Warrants*

We estimate the fair value of issued warrants on the date of issuance as determined using a Black-Scholes pricing model. We amortize the fair value of issued warrants using a vesting schedule based on the terms and conditions of each associated underling contract, as earned. The Black-Scholes valuation model requires various judgmental assumptions including the estimated volatility, risk-free interest rate and warrant expected exercise term.  Our computation of expected volatility is based on a combination of historical and market-based implied volatility.  The risk-free interest rate was based on the yield curve of a zero-coupon U.S. Treasury bond on the date the warrant was issued with a maturity equal to the expected term of the warrant.

The fair values for the warrants issued for the three months ended March 31, 2011 and 2010 estimated at the date of issuance using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

**Three Months Ended March 31, 2011**

**Three Months Ended March 31, 2010**

Risk free interest rate

2.04%

1.53%

Expected life (in years)

5.00

3.00

Expected volatility

85.82%

93.75%

Expected dividend yield

0.00%

0.00%

The weighted average fair value of warrants issued during the three months ended March 31, 2011 and 2010 was $0.79 and $0.64, respectively.

7

Net loss for the three months ended March 31, 2011 and 2010 includes $1,546,542 and $383,958, respectively, of non-cash stock-based compensation expense. Restricted stock units and options issued to directors vest immediately. All other restricted stock units, options and warrants are subject to applicable vesting schedules. Expense is recognized proportionally as each award or grant vests. 

Included in the $1,546,542 for the three months ended March 31, 2011 is (i) $1,433,000 for 1,300,000 restricted stock units issued to all 5 members of the board of directors, (ii) $50,000 for 500,000 options issued to one individual for consulting services and (iii) $63,542 resulting from the vesting of unexpired options and warrants issued prior to January 1, 2011.

Included in the $383,958 for the three months ended March 31, 2010 is (i) $80,000 for 100,000 options granted to one member of the board of directors, (ii) $96,000 for 150,000 warrants issued to three individuals for consulting services and (iii) $207,958 resulting from the vesting of unexpired options and warrants issued prior to January 1, 2010.

The impact on our results of operations for recording stock-based compensation for the three months ended March 31, 2011 and 2010 is as follows:

 

 

**Three months**

**ended**

**March 31,2011**

 

**Three months**

**ended**

**March 31,2010**

General and administrative

$

1,478,417

$

296,725

Research and development

 

68,125

 

87,233

 

 

 

 

 

Total

$

1,546,542

$

383,958

Due to unexercised options and warrants outstanding at March 31, 2011, we will recognize an additional aggregate total of $413,061 of compensation expense over the next two years based upon option and warrant award vesting parameters as shown below:

 

 

 

2011

$

330,530

2012

 

82,531

 

 

 

Total

$

413,061

The following unaudited tables summarize option and warrant activity during the three months ended March 31, 2011.

 

**OptionsandWarrantsOutstanding**

 

**Weighted Average Exercise Price**

 

 

 

 

Outstanding at December 31, 2010

20,442,170 

$

1.13 

Options granted

500,000 

 

1.11 

Warrants issued

1,275,334 

 

0.68 

Expired

(454)

 

0.33 

Forfeited

(900,000)

 

1.22 

Exercised

(55,098)

 

0.33 

 

 

 

 

Outstanding at March 31, 2011

21,261,952 

$

1.12 

8

The following table summarizes information about stock options and warrants outstanding at March 31, 2011.

 

 

Outstanding

Exercisable

 

 

 

Weighted Average Remaining

 

Weighted Average

 

 

Weighted Average

 

Range of Exercise Prices

Number Outstanding

 Contractual Life (years)

 

Exercise Price

Number Exercisable

 

Exercise Price

$

0.05-0.95

2,166,285

4.22

 

$   0.64

2,166,285

 

$   0.64

 

1.06-6.25

19,093,267

4.51

 

1.17

18,900,158

 

1.17

 

9.50-11.50

1,600

0.92

 

10.50

1,600

 

10.50

 

36.25

800

0.17

 

36.25

800

 

35.25

$

0.05-36.25

21,261,952

4.48

 

$    1.12

21,068,843

 

$    1.12

*Restricted Stock Units*

The value of restricted stock units is determined using the fair value of our common stock on the date of the award and compensation expense is recognized in accordance with the vesting schedule. During the three months ended March 31, 2011, 1,300,000 restricted stock units were awarded. No restricted stock units were awarded in the three months ended March 31, 2010.

The following is a summary of restricted stock unit activity for the three months ended March 31, 2011.

 

 

**Restricted**

**Stock Units**

 

**Weighted**

**Average**

**Grant**

**Date Fair**

**Value**

 

 

 

 

Outstanding at December 31, 2010

950,000 

$

1.63 

Awarded at fair value

1,300,000 

 

1.11 

Canceled/Forfeited

-- 

 

-- 

Settled by issuance of stock

-- 

 

-- 

Outstanding at March 31, 2011

2,250,000 

$

1.33 

Vested at March 31, 2011

2,250,000 

$

1.33 

**Note 5 - Significant Accounting Policies**

***Cash and Cash Equivalents***

We consider all cash on hand and in banks, and highly liquid investments with maturities of three months or less, to be cash equivalents. At March 31, 2011 and December 31, 2010, we had bank balances of $3,054,891 and $5,879,632, respectively, in 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. 

***Accounts Receivable***

Trade accounts receivable 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 collected. 

9

Included in our $1,018,513 and $1,125,055 net accounts receivable for the three months ended March 31, 2011 and the year ended December 31, 2010, respectively, were (i) $950,393 and $1,031,795 for billed trade receivables, respectively; (ii) $99,377 and $143,542 of unbilled trade receivables (iii) $18,603 and $208 for employee travel advances and other receivables, respectively; less (iv) ($49,860) and ($50,490) for allowance for uncollectible accounts, respectively.

***Inventories***

Inventories consisting of electrical and computer parts are stated at the lower of cost or market determined using the first-in, first-out method.

***Property and Equipment***

Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the property, generally from three to five years.  Repairs and maintenance costs are expensed as incurred except when such repairs significantly add to the useful life or productive capacity of the asset, in which case the repairs are capitalized. 

***Patents and Intangibles***

Patents represent initial legal costs incurred to apply for United States and international patents on the CodecSys technology, and are amortized on a straight-line basis over their useful life of approximately 20 years.  We have filed several patents in the United States and foreign countries. As of March 31, 2011, the United States Patent and Trademark Office had approved four patents.  Additionally, eleven 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 $2,538 and $2,390 for the three months ended March 31, 2011 and 2010, respectively.

Estimated amortization expense, if all patents were issued at the beginning of 2011, for each of the next five years is as follows:

Year endingDecember 31:

 

2011

$      12,231

2012

11,763

2013

11,763

2014

11,763

2015

11,763

***Long-Lived Assets***

We review our long-lived assets, including patents, annually or 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 ASC Topic 740.  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.

10

***Revenue Recognition***

We recognize revenue when evidence exists that there is an arrangement between us and our customers, delivery of equipment sold or service has occurred, the selling price to our customers is fixed and determinable with required documentation, and collectability is reasonably assured. We recognize as deferred revenue, payments made in advance by customers for services not yet provided.

When we enter into a multi-year contract with a customer to provide installation, network management, satellite transponder and help desk, or combination of these services, we recognize this revenue as services are performed and as equipment is sold.  These agreements typically provide for additional fees, as needed, to be charged if on-site visits are required by the customer in order to ensure that each customer location is able to receive network communication. As these on-site visits are performed the associated revenue and cost are recognized in the period the work is completed. If we install, for an additional fee, new or replacement equipment to an immaterial number of new customer locations, and the equipment immediately becomes the property of the customer, the associated revenue and cost are recorded in the period in which the work is completed. 

In instances where we have entered into license agreements with a third parties to use our technology within their product offering, we recognize any base or prepaid revenues over the term of the agreement and any per occurrence or periodic usage revenues in the period they are earned. 

***Research and Development***

Research and development costs are expensed when incurred.  We expensed $597,771 and $736,135 of research and development costs for the three months ended March 31, 2011 and 2010, respectively.

***Concentration of Credit Risk***

Financial instruments, which potentially subject us to concentration of credit risk, consist primarily of trade accounts receivable. In the normal course of business, we provide credit terms to our customers. Accordingly, we perform ongoing credit evaluations of our customers and maintain allowances for possible losses which, when realized, have been within the range of management’s expectations.

For the three months ended March 31, 2011 and 2010, we had one customer that individually constituted 87% and 90%, respectively of our total revenues.

**Note 6 – Notes Payable**

The recorded value of our notes payable (net of debt discount) for the three months ended March 31, 2011 and year ended December 31, 2010 was as follows:

 

 

December 31, 2010

 

March 31, 2011

 

 

 

 

 

Senior Secured 6.25% Convertible Note

$

6,180,816 

$

6,180,816 

Unsecured Convertible Note

 

7,168 

 

90,502 

Pledged A/R Note Payable

 

675,000 

 

-- 

Short Term Note Payable

 

100,000 

 

-- 

Total

 

6,962,984 

 

6,271,318 

Less Current Portion

 

(775,000)

 

-- 

Total Long-term

$

6,187,984 

$

6,271,318 

***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 used 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.  The senior secured convertible note bore interest at 6.25% per annum if paid in cash.  Interest for the first year was prepaid at closing.  Interest-only payments thereafter in the amount of $234,375 were due quarterly and commenced in April 2009.  The 

11

original principal of the note was 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 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 2007 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.  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 was amortized over the term of the note.

From March 26, 2010 through October 29, 2010, we entered into a series of amendments to the senior secured convertible note under which we issued to the holder of the senior secured convertible note an additional 3,000,000 shares of our common stock, increased the number of warrants by 3,333,333 shares, and reduced the warrant exercise price to $1.80 per share for all warrants, all as consideration for the amendments.

On December 24, 2010, we closed on the Debt Restructuring (as defined below).  In connection therewith, we (i) issued an Amended and Restated Senior Convertible Note in the principal amount of $5.5 million (the “Amended and Restated Note”) to Castlerigg Master Investment Ltd. (“Castlerigg”), (ii) paid $2.5 million in cash to Castlerigg, (iii) cancelled warrants previously issued to Castlerigg that were exercisable for a total of 5,208,333 shares of common stock, (iv) issued 800,000 shares of common stock to Castlerigg in satisfaction of an obligation under a prior loan amendment, (v) entered into the Letter Agreement pursuant to which we paid Castlerigg an additional $2.75 million in cash in lieu of the issuance of $3.5 million in stock and warrants as provided in the loan restructuring agreement under which the Amended and Restated Note and other documents was issued (the “Loan Restructuring Agreement”), and (vi) entered into an Investor Rights Agreement with Castlerigg dated December 23, 2010.  As a result of the foregoing, Castlerigg forgave approximately $7.2 million of principal and accrued but unpaid interest. The Debt Restructuring was considered a troubled-debt restructuring and a gain on debt restructuring of $3,062,457 was recorded during the year ended December 31, 2010, which was the difference between the adjusted carrying value of the original note and the carrying value of the Amended and Restated Note.  

The Amended and Restated Note, dated December 23, 2010, is a senior, unsecured note that matures in three years from the closing and bears interest at an annual rate of 6.25%, payable semi-annually.  We paid the first year’s interest of approximately $344,000 at the closing.  The Amended and Restated Note is convertible into shares of common stock at a conversion price of $1.35 per share, subject to adjustment.  The Amended and Restated Note is convertible in whole or in part at any time upon notice by Castlerigg to us.  The Amended and Restated Note also contains various restrictions, acceleration provisions and other standard and customary terms and conditions.  Two of our consolidated subsidiaries guaranteed our obligations under the Amended and Restated Note.  

The Investor Rights Agreement provides Castlerigg with certain registration rights with respect to the Company’s securities held by Castlerigg.  These registration rights include an obligation of the Company to issue additional warrants to Castlerigg if certain registration deadlines or conditions are not satisfied.  The agreement also contains full-ratchet anti-dilution price protection provisions in the event the Company issues stock or convertible debt with a purchase price or conversion price less than the conversion price described above.  

As of March 31, 2011 and 2010, we recorded an aggregate derivative liability of $1,711,100 and $378,600 respectively, related to the conversion features of the Amended and Restated Note and the conversion feature and warrants related to the Original Note.  A derivative valuation gain of $896,300 and $386,600 was recorded during the three months ended March 31, 2011 and 2010, to reflect the change in value of the aggregate derivative liability since December 31, 2010 and 2009, respectively. The aggregate derivative liability of $1,711,100 for the Amended and Restated Note conversion feature was calculated at March 31,211 using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate of 1.29%, (ii) expected life (in years) of 2.7, (iii) expected volatility of 84.11% for the conversion feature, (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.96.

During the three months ended March 31, 2010, debt discounts were accreted over the term of the obligation, for which $1,047,825 was included in interest expense. The note bears a 6.25% annual interest rate payable quarterly 

12

and for the three months ended March 31, 2010, $26,196 was included in interest expense. For the three months ended March 31, 2010, $343,297 ($368,916 offset by $25,619 note interest accrued in 2009) was included in interest expense for capitalized interest. 

The $6,180,816 value of the note at March 31, 2011 consists of $5,500,000 for the principal due of the note plus $1,031,250 for aggregate future interest less $350,434 for interest withheld at closing for interest due from the initial date of the debt restructuring transaction until December 31, 2011.

***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 subject to full-ratchet anti-dilution price protection provisions ; 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 year ended December 31, 2007, the convertible note holder exercised 454,000 A Warrants. 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 year ended December 31, 2008, the convertible note holder exercised 64,400 A Warrants. On December 3, 2008, the remaining 231,600 A Warrants and 750,000 B Warrants were unexercised and expired.

On December 23, 2009 we entered into an amendment with the holder of our unsecured convertible note in the principal amount of $1.0 million which (i) extended the note maturity date to December 22, 2010 and (ii) increased the annual rate of interest from 5% to 8% commencing October 16, 2009. All other terms and conditions of the note remain unchanged.

On December 24, 2010 we closed on a Debt Restructuring as mentioned above, In connection with that Debt Restructuring the Company amended the note with the holder of a $1.0 million unsecured convertible note, pursuant to which the maturity date of the note was extended to December 31, 2013.  We issued 150,000 shares to the holder of this note as consideration to extend the term of the note.

During March 2011, we issued 135,369 shares of common stock to the holder of our unsecured convertible note in satisfaction of $81,221 of accrued interest on the unsecured convertible note.  Also in connection with the satisfaction of the accrued interest we granted to the holder a warrant to acquire up to 221,758 additional shares of our common stock at an exercise price of $0.96 per share.  The warrant is exercisable at any time for a five year period. For the three months ended March 31, 2011, the $157,400 value of the warrant was included in interest expense.

13

At March 31, 2011 and 2010 we recorded an aggregate derivative liability of $1,016,300 and $73,300, respectively, related to the conversion feature of the note. A derivative valuation gain of $385,600 and $126,700, respectively, was recorded to reflect the change in value of the aggregate derivative liability since December 31, 2010 and December 31, 2009, respectively.  The aggregate derivative liability of $1,016,300 for the conversion feature of the note was calculated using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 1.29%, (ii) expected life (in years) of 2.8; (iii) expected volatility of 83.92%; (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.96.

In connection with the amendment mentioned above, the principal value of the note will be accreted due to the difference in the value of the conversion feature before and after the amendment.  The accretion for the three months ended March 31, 2011, was $83,334 and was included in interest expense. The note currently bears an 8% annual interest rate payable semi-annually, and for each on the three month periods ended March 31, 2011 and 2010, $20,000 was included in interest expense.

**Accounts Receivable Purchase Agreements**

During the year ended December 31 2010 we entered into two Accounts Receivable Purchase Agreements with one individual for an aggregate amount of $775,000. In these agreements, we pledged certain outstanding accounts receivable in exchange for advanced payment and a commitment to remit to the purchaser the amount advanced upon collection from our customer. Terms of the first agreement under which we were advanced $175,000 include a 3% discount with a 3% interest fee for every 30 days the advances remain outstanding. Terms of the second agreement under which we were advanced $500,000 include a 10% discount with a 0.5% interest fee for every 30 days the advances remain outstanding. 

During the three months ended March 31, 2011 we converted the remaining $675,000 of principal along with $109,292 of accrued and unpaid interest into 1,307,153 shares of our common stock and warrants to purchase an additional 653,576 shares of our common stock. The warrants contain anti-dilution price protection provisions in the event the Company issues stock or convertible debt with a purchase price or conversion price less than $1.00 per share.

At March 31, 2011 we recorded an aggregate derivative liability of $423,700 related to the warrant reset provision. A derivative valuation gain of $26,400 was recorded to reflect the change in value of the aggregate derivative liability from the time the warrants were issued.  The aggregate derivative liability of $423,700 for the reset provision of the warrants was calculated using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 2.24%, (ii) expected life (in years) of 5; (iii) expected volatility of 85.81%; (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.96.

**Short Term Note Payable**

During the three months ended March 31, 2011 we remitted $100,000 principal balance and accrued interest of $8,360 to a company pursuant to a short term. The note had originated in June 2010 and bore an annual interest rate of 12%. Of the $8,360 of interest paid, $2,327 was related to and included in interest expense for the three months ended March 31, 2011.

**Note 7 – Equity Financing and the Debt Restructuring**

On December 24, 2010, we closed on an equity financing (the “Equity Financing”) as well as a restructuring of our outstanding convertible indebtedness (the “Debt Restructuring”).  The Equity Financing and the Debt Restructuring are described as follows. 

We entered into a Placement Agency Agreement, dated December 17, 2010, with Philadelphia Brokerage Corporation (“PBC”), pursuant to which PBC agreed to act as the exclusive agent of the Company on a “best efforts” basis with respect to the sale of up to a maximum gross consideration of $15,000,000 of units of the Company’s securities, subject to a minimum gross consideration of $10,000,000.  The Units consisted of two shares of our common stock and one warrant to purchase a share of our common stock.  The Company agreed to pay PBC a commission of 8% of the gross offering proceeds received by the Company, to issue PBC 40,000 shares of its common stock for each $1,000,000 raised, and to pay the reasonable costs and expenses of PBC related to the offering.  The Company also agreed to pay PBC a restructuring fee in the amount of approximately $180,000 upon the closing of the Equity Financing and the simultaneous Debt Restructuring.  

14

Pursuant to the Placement Agency Agreement, we entered into Subscription Agreements dated December 23, 2010 with select institutional and other accredited investors for the private placement of 12,500,000 units of our securities.  The Subscription Agreements included a purchase price of $1.20 per unit, with each unit consisting of two shares of common stock and one warrant to purchase an additional share of common stock.  The warrants have a term of five years and an exercise price of $1.00 per share.

Net proceeds from the Equity Financing, after deducting the commissions and debt restructuring fees payable to PBC and the estimated legal, printing and other costs and expenses related to the financing, were approximately $13.5 million.  We used a portion of the net proceeds of the Equity Financing to pay down debt and the remainder will be used for working capital.

On November 29, 2010, we entered into a bridge loan transaction with three accredited investors pursuant to which we issued unsecured notes in the aggregate principal amount of $1.0 million.  Upon the closing of the Equity Financing, the lenders converted the entire principal amount plus accrued interest into the same units offered in the Equity Financing and the proceeds from the bridge loan transaction were treated as funds raised with respect to the financing. 

In connection with the Equity Financing and under the terms of the Subscription Agreements, the Company agreed to prepare and file, and did file, within 60 days following the issuance of the securities, a registration statement covering the resale of the shares of common stock sold in the financing and the shares of common stock underlying the warrants.  If the Company fails to have the registration statement declared effective within 120 days following the date of the filing of the registration statement, subject to certain exceptions, the Company will be obligated to issue additional warrants to the investors to purchase an additional 1,250,000 shares for each 30-day period after the deadline, until the registration statement is declared effective.

On December 24, 2010, we also closed on the Debt Restructuring.  In connection therewith, we (i) issued an Amended and Restated Senior Convertible Note in the principal amount of $5.5 million (the “Amended and Restated Note”) to Castlerigg Master Investment Ltd. (“Castlerigg”), (ii) paid $2.5 million in cash to Castlerigg, (iii) cancelled warrants previously issued to Castlerigg that were exercisable for a total of 5,208,333 shares of common stock, (iv) issued 800,000 shares of common stock to Castlerigg in satisfaction of an obligation under a prior loan amendment, (v) entered into the Letter Agreement pursuant to which we paid Castlerigg an additional $2.75 million in cash in lieu of the issuance of $3.5 million in stock and warrants as provided in the loan restructuring agreement under which the Amended and Restated Note and other documents was issued (the “Loan Restructuring Agreement”), and (vi) entered into an Investor Rights Agreement with Castlerigg dated December 23, 2010.  As a result of the foregoing, Castlerigg forgave approximately $7.2 million of principal and accrued but unpaid interest.

The Amended and Restated Note, dated December 23, 2010, is a senior, unsecured note that matures in three years from the closing and bears interest at an annual rate of 6.25%, payable semi-annually.  We paid the first year’s interest of approximately $344,000 at the closing.  The Amended and Restated Note is convertible into shares of common stock at a conversion price of $1.35 per share, subject to adjustment.  The Amended and Restated Note is convertible in whole or in part at any time upon notice by Castlerigg to us.  The Amended and Restated Note also contains various restrictions, acceleration provisions and other standard and customary terms and conditions.  Two of our consolidated subsidiaries guaranteed our obligations under the Amended and Restated Note. 

The Investor Rights Agreement provides Castlerigg with certain registration rights with respect to the Company’s securities held by Castlerigg.  These registration rights include an obligation of the Company to issue additional warrants to Castlerigg if certain registration deadlines or conditions are not satisfied.  The agreement also contains full-ratchet anti-dilution price protection provisions in the event the Company issues stock or convertible debt with a purchase price or conversion price less than the conversion price described above.

During the three months ended March 31, 2011, we issued Castlerigg 400,000 warrants pursuant to a waiver agreement dated March 10, 2011 allowing the issuance of shares and warrants for the conversion of the AR Note Payable without adjusting the conversion price of there 6.25% Convertible Note.  These warrants contain full-ratchet anti-dilution price protection provisions in the event the Company issues stock or convertible debt with a purchase price or conversion price less than the conversion price described above and were accounted for as embedded derivatives and valued on the transaction date using a Black Schools pricing model.

15

At March 31, 2011, we recorded an aggregate derivative liability of $368,000 related to these warrants and valuation gain of $36,000 for the three months ended March 31, 2011 to reflect the change in value of the aggregate derivative from the time of issue. The aggregate derivative liability of $368,000 was calculated using the Black-Schools pricing model with the following assumptions: (i) risk free interest rate of 2.24%, (ii) expected life (in years) of 4.9; (iii) expected volatility of 84.82, (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.96.

In connection with the Debt Restructuring, the Company amended the note with the holder of a $1.0 million unsecured convertible note, pursuant to which the maturity date of the note was extended to December 31, 2013. We also issued 150,000 shares to the holder of this note as consideration to extend the term of the note.

Investor warrants totaling 12,499,9810 issued under the Placement Agency Agreement contain price protection adjustments in the event we issue new common stock or common stock equivalents in certain transactions at a price less than $1.00 per share and were accounted for as embedded derivatives and valued on the transaction date using a Black Schools pricing model.

At March 31, 2011, we recorded an aggregate derivative liability of $7,785,000 related to these warrants and valuation gain of $2,875,000 for the three months ended March 31, 2011 to reflect the change in value of the aggregate derivative from December 31, 2010. The aggregate derivative liability of $7,875,000 was calculated using the Black-Schools pricing model with the following assumptions: (i) risk free interest rate of 2.24%, (ii) expected life (in years) of 4.7; (iii) expected volatility of 84.94%, (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.96.

**Note 8 – Fair Value Measurements**

The Company has certain financial instruments that are measured at fair value on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-tier fair value hierarchy has been established 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 for identical instruments in active markets; 

·

Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and 

·

Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at March 31, 2011: 

 

 

 

 

 

 

 

 

Significant

 

 

 

 

 

 

 

 

Quoted Prices in

 

Other

 

Significant

 

 

 

 

 

 

Active Markets for

 

Observable

 

Unobservable 

 

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

 

 

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

Assets

 

 

 

 

 

 

 

 

 

 

Treasury cash reserves 

 

3,304,891 

 

3,304,891 

 

-- 

 

-- 

Total assets measured at fair value

$

3,304,891 

$

3,304,891 

$

-- 

$

-- 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Derivative valuation (1)

 

$

11,394,100 

$

-- 

$

-- 

$

11,394,100 

Total liabilities measured at fair value

$

11,394,100 

$

-- 

$

-- 

$

11,394,100 

 

 

 

 

 

 

 

 

 

 

 

 

(1) See Note 6 for additional discussion.

16

The table below presents our assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at March 31, 2011.  We classify 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

 

 

 

Valuation

 

 

 

Liability

Balance at December 31, 2010

$

(14,759,300)

Total gains or losses (realized and unrealized)

 

 

Included in net loss

 

4,219,300 

 

Valuation adjustment

-- 

Purchases, issuances, and settlements, net

(854,100)                 

Transfers to Level 3

 

-- 

Balance at March 31, 2011

$

(11,394,100)

**Money Market Funds and Treasury Securities**

The money market funds and treasury cash reserve securities balances are classified as cash and cash equivalents on our condensed consolidated balance sheet. 

***Fair Value of Other Financial Instruments***

The carrying amounts of our accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their immediate or short-term maturities.  The aggregate carrying amount of the notes payable approximates fair value as the individual notes bear interest at market interest rates and there has not been a significant change in our operations and risk profile.

**Note 9 – Equipment Financing**

On August 27, 2009, we completed an equipment lease financing transaction with a financial institution.  Pursuant to the financing, we entered into various material agreements with the financial institution. These agreements are identified and summarized below. 

We entered into a Master Lease Agreement dated as of July 28, 2009 with the financial institution pursuant to which we sold to the financing institution certain telecommunications equipment to be installed at 1981 of our customer’s retail locations in exchange for a one time payment of $4,100,670 by the financial institution. We will pay to the financial institution 36 monthly lease payments and at the expiration of the equipment lease will pay the greater of the then in place fair market value of the equipment or 10% of the original purchase price. 

We also entered into a security agreement with the financial institution pursuant to which we granted a first priority security interest in the equipment, whether now owned or hereafter acquired, and in our customer service agreement and service payments thereunder during the term of the equipment lease. We received a waiver from our 6.25% convertible note holder releasing their security interest in the equipment purchased under our sale lease back financing. See Note 6.

The sale leaseback financing arrangement with the financial institution related to the purchase and deployment of certain digital signage equipment for a new customer.  As a result of this financing, we incurred an obligation to make 36 monthly payments of approximately $144,000 plus applicable sales taxes. The proceeds of the financing are being used to purchase and install the digital signage equipment for our customer and for general working capital purposes.  We have the right to terminate the lease after making 33 payments for a termination fee of approximately $451,000 after which time we would own all of the equipment.  We have accounted for this arrangement as a capital lease. 

During the three months ended March 31, 2011 and 2010 we made lease payments totaling approximately $422,096 and $422,096 of which $337,174 and $292,568 was applied toward the outstanding lease with $84,922 and $129,528, respectively included in interest expense. Additionally, we recognized amortization of the lease 

17

acquisition fee of $12,567 which was included in interest expense for each of the three months ended March 31, 2011 and 2010, respectively.

**Note 10 –*****Interact Devices Inc. (IDI)***

We began investing in and advancing monies to IDI in 2001. IDI was developing technology which became CodecSys.

On October 23, 2003, IDI filed for Chapter 11 Federal Bankruptcy protection. We desired that the underlying patent process proceed and that the development of CodecSys technology continue. Therefore, we participated in IDI’s plan of reorganization, whereby we would satisfy the debts of the creditors and obtained certain licensing rights.  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 111,800 shares of our common stock, and cash of approximately $312,768 in exchange for approximately 50,127,218 shares of the common stock of IDI, which increased our aggregate common share equivalents in IDI to approximately 51,426,719 shares. 

Since May 18, 2004, we have acquired an aggregate of 4,056,278 additional common share equivalents IDI. As of March 31, 2011, we owned approximately 55,482,997 IDI common share equivalents, representing approximately 94% of the total outstanding IDI share equivalents

Since May 18, 2004, we have advanced additional cash to IDI for the payment of operating expenses, which continues development and marketing of the CodecSys technology. As of March 31, 2011 and 2010, we have advanced an aggregate amount of $2,913,360 and $2,671,996 respectively, pursuant to a promissory note that is secured by assets and technology of IDI.

**Note 11 –*****Recent Accounting Pronouncements***

In April 2011, the FASB issued ASU 2011-02, *Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.*This Update provides clarification to creditors on what is considered a troubled-debt restructuring. This Update applies to all creditors who that restructure receivables that fall within the scope of Subtopic 301-40, Receivables – Troubled Debt Restructuring by Creditors.  In evaluating whether it is considered a troubled-debt restructuring a creditor must conclude that both of the following exist: 1) The restructuring constitutes a concession and 2) The debtor is experiencing financial difficulties.  The amendment provides clarification on when a concession is granted and also indicates that a debtor may experience financial difficulties, even though the debtor is not currently in payment default. The Amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. An entity should disclose the necessary disclosures delayed in ASU 2011-01 for interim and annual period ending after June 15, 2011. The Company doesn’t expect this guidance to have an impact on its financials since it is not a debt creditor. 

In January 2011, the FASB issued ASU 2011-01, *Receivables (Topic 310) – Deferral of the Effective Date of Disclosure about Troubled Debt Restructurings in Update 2010-20.*The amendments in this Update delay the effective date of the disclosures about troubled debt restructurings in Update 2010-20 for public-entity creditors and is intended to allow the Board to complete its deliberations on what constitutes a troubled-debt restructuring. The effective date of the disclosures per Update 2010-20 for public-entity creditors will be coordinated with the new proposed Update that is expected to be effective for interim and annual periods ending after June 15, 2011. The Company doesn’t expect this guidance to have an impact on its financials since it is not a debt creditor.

In December 2010, the FASB issued ASU 2010-29, *Business Combinations (Topic 805) – Disclosure of Supplementary Pro Forma Information for Business Combinations.*The amendments in this Update are applicable to Public Entities that have had a material business combination(s) in the current period.  The Update specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination had occurred as of the beginning of the comparable prior annual reporting period only.  For example, for a calendar year-end entity, disclosures would be provided for a business combination that occurs in 20X2, as if it occurred on January 1, 20X1. Such disclosures would not be revised if 20X2 is presented for comparative purposes with the 20X3 financial statements (even if 20X2 is the earliest period presented). Previously, in practice, some preparers have presented the pro forma information in their comparative financial statements as if the business combination that occurred in the current reporting period 

18

had occurred as of the beginning of each of the current and prior annual reporting periods. Other preparers have disclosed the pro forma information as if the business combination occurred at the beginning of the prior annual reporting period only, and carried forward the related adjustments, if applicable, through the current reporting period. The Update also expands the disclosures to include a description of the nature and amount of material, non-recurring pro forma adjustments attributable to the business combination.**The amendments in this Update are effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.  The Company only expects this Update to have an impact if it enters into a material business combination in the upcoming year.  If one occurs, the guidance in the Update will be followed. 

In August 2010, the FASB issued ASU No 2010-22, *Accounting for Various Topics. Technical Corrections to SEC Paragraphs- An announcement made by the staff of US Securities and Exchange Commission.*This Update makes changes to several of the SEC guidance literature within the Codification.  Some of the changes relate to (1) Oil and Gas Exchange Offers, (2) Accounting for Divestiture of a Subsidiary or Other Business Operations, (3) Replaces “Push Down” basis accounting references with “New” basis of accounting to be used in the acquired companies financial statements, (4) Fees paid to an investment banker in connection with an acquisition or asset purchase, when the investment banker is also providing interim financing or underwriting services must be allocated between the related service and debt issue costs. The amendments in this Update are effective immediately.  The Company doesn’t expect this guidance to have a significant impact on its financials since there are no changes to accounting that were not already being applied by the Company. 

In July 2010, the FASB issued ASU No 2010-20, *Receivables (Topic 310) – Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.*This Update requires additional disclosures for financing receivables, excluding short-term trade accounts receivables and or receivables measured at fair value.  The new disclosures are designed to allow a user to better evaluate a company’s credit risk in the portfolio of financing receivables, how the risk is analyzed and in allowing for credit losses and the reason for the changes in the allowance for credit losses.  Some of the additional disclosures required are to provide a rollforward of allowance for credit losses by portfolio segment basis, credit quality of indicators of financing receivables by class of financing receivables, the aging of financing receivables by class of financing receivable, significant purchases and sales of financing receivables by portfolio segment, amongst other requirements.  The amendments in this Update are effective for reporting periods ending on or after December 15, 2010 for disclosures as of the end of the reporting period and disclosures related to activity are effective for reporting periods beginning on or after December 15, 2010 for public entities.  For nonpublic entities, the disclosures are effective for annual reporting periods ending on or after December 15, 2011. Comparative disclosures for earlier reporting periods are encouraged, but not required.  This guidance doesn’t have a significant impact on its financials since it doesn’t have any finance receivables.

In April 2010, the FASB issued ASU No 2010-13, *Compensation – Stock Compensation (Topic718) – Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades.*This update provides clarification that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trade **should not**be considered to contain a condition that is not a market, performance or service condition.  Therefore, the award would be classified as an equity award if it otherwise qualifies as equity.  The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The amendments in this Update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. Earlier application is permitted.  This guidance didn’t have a significant impact on its financials since it hasn’t classified any share-based payments to employees noted above as a liability. 

**Note 12 – Supplemental Cash Flow Information**

**2011**

In January, 2011, we granted options to acquire up to 500,000 shares of our common stock valued at $300,000 to a consultant in consideration of consulting services to be rendered by the consultant over a one year period pursuant to a written consulting agreement.  The options are exercisable at $1.11 per share and have a three year 

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life. The value of options is being recognized over the contract period and for the three months ended March 31, 2011, $50,000 was included in stock based compensation.

On March 21, 2011, the Company, converted $784,292 of its short-term debt into equity through the issuance of common stock and warrants to two lenders at the same unit pricing as the Equity Finanacing. In consideration of converting the short- term loans on the basis of $1.20 for two shares of common stock plus one warrant at an exercise price of $1.00, the Company issued 1,307,153 shares of common stock and warrants to acquire up to 653,576 shares of common stock, which warrants have a five year term and are exercisable at $1.00 per share. The Company’s objective for converting the short-term debt into equity is to conserve cash for further market development.  

In March, 2011, we granted to the holder of our senior unsecured convertible note a warrant to acquire 400,000 shares of our common stock at an exercise price of $.05 per share in consideration of a waiver of the holder’s reset provision that allowed us to convert certain short terms loans to equity without causing an adjustment in the conversion price of our senior note.  The warrants have a 5 year life from the date of grant, contain full-ratchet anti-dilution price protection provisions and were valued $404,000 using a black Scholes pricing model on the date of grant.

For the three months ended March 31, 2011 an aggregate non-cash expense of $83,334 was recorded for the accretion of the unsecured convertible note.

For the three months ended March 31, 2011, we recognized $382,995 in depreciation and amortization expense from the following: (i) $202,201 related to cost of sales for equipment used directly by or for customers, (ii) $178,256 related to equipment other property and equipment, and (iii) $2,538 for patent amortization.

**2010**

During the three months ended March 31, 2010, we issued 149,164 shares of our common stock valued at $160,178 to three companies and three individuals for consulting services rendered the expense for which is included in our general and administrative expense.

During the three months ended March 31, 2010 we issued 200,000 shares our common stock valued at $216,000 to a corporation for the purchase of a H.264 codec software license to be used in our CodecSys product development. We have included it as an asset on our balance sheet and will amortize it as part of cost of sales.

During the three months ended March 31, 2010 we issued 1,000,000 shares our common stock valued at $990,000 to our senior secured 6.25% convertible note holder as part of the note due date extension. We included it as an asset on our balance sheet as additional note acquisition costs and will amortize it over the remaining term of the note.

For the three months ended March 31, 2010 an aggregate non-cash expense of $1,047,825 was recorded for the accretion of the senior secured 6.25% convertible note.

For the three months ended March 31, 2010, we recognized $389,017 in depreciation and amortization expense from the following: (i) $196,380 related to cost of sales for equipment used directly by or for customers, (ii) $190,247 related to equipment other property and equipment, and (iii) $2,390 for patent amortization

**Note 12 – Subsequent Events**

We evaluated subsequent events pursuant to ASC Topic 855 and have determined that there are no events that need to be reported.

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**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 and to the following risk factors discussed more fully in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010:

·

dependence on commercialization of our CodecSys technology;

·

our need and ability to raise sufficient additional capital;

 · 

 uncertainty about our ability to repay our outstanding convertible notes; 

·

our continued losses;

 · 

 delays in adoption of our CodecSys technology; 

 · 

 concerns of OEMs and customers relating to our financial uncertainty; 

·

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;

·

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.

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**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, 2010. There have been no other significant changes in our critical accounting policies or estimates since those reported in our Annual Report.

**Executive Overview**

The current recession and market conditions have had substantial impacts on the global and national economies and financial markets.  These factors, together with soft credit markets, have slowed business growth and generally made potential funding sources more difficult to access.  We continue to be affected by prevailing economic and market conditions, which present considerable risks and challenges to us.

On July 1, 2010, we released CodecSys 2.0, which has been installed in various large telecoms and labs for evaluation by potential customers.  We continue to make sales presentations and respond to requests for proposals at other large telecoms, cable companies and broadcasting companies.  These presentations have been made with our technology partners which are suppliers of hardware and software for video transmission applications in media room environments such as IBM, HP and Microsoft. Although license revenue from the CodecSys technology has been minimal to date, we believe we have made significant progress and continue to believe that our CodecSys technology holds substantial revenue opportunities for our business.

On July 31, 2009, we entered into a $10.1 million, three-year contract with a Fortune 10 financial institution customer to provide technology and digital signage services to approximately 2,100 of the customer’s more than 6,000 retail and administrative locations throughout North America.  The customer is expanding its network to additional retail and administrative locations.  In addition, the customer selected us to be its vendor for certain additional audio visual services during this year.  A factor in securing this contract was the benefits of the CodecSys technology delivering our services to be utilized in our services.  

During 2010 we sold 1,601,666 shares of our common stock to 19 separate investors at a purchase price of $1.00 per share together with a warrant to purchase additional shares of our stock for $1.50 per share. The warrant expires at the end of three years. The net proceeds from the sale of these shares were used for general working capital purposes.  Each of the investors was given the right to adjust their purchase in the event we sold additional equity at a price and on terms different from the terms on which their equity was purchased.  Upon completion of the Equity Financing described below, each of the investors converted their purchase to the terms contained in the Equity Financing.  This resulted in the issuance of an additional 956,659 shares of common stock and the cancellation of 2,295,075 warrants with an exercise price of $1.50 and the issuance of 2,079,222 warrants with an exercise price of $1.00 and an expiration date of five years from the conversion. 

 

On December 24, 2010, we closed on an equity financing (the “Equity Financing”) as well as a restructuring of our outstanding convertible indebtedness (the “Debt Restructuring”).  The Equity Financing and the Debt Restructuring are described as follows:

We entered into a Placement Agency Agreement, dated December 17, 2010, with Philadelphia Brokerage Corporation (“PBC”), pursuant to which PBC agreed to act as the exclusive agent of the Company on a “best efforts” basis with respect to the sale of up to a maximum gross consideration of $15,000,000 of units of the Company’s securities, subject to a minimum gross consideration of $10,000,000.  The Units consisted of two shares of our common stock and one warrant to purchase a share of our common stock.  The Company agreed to pay PBC a commission of 8% of the gross offering proceeds received by the Company, to issue PBC 40,000 shares of its common stock for each $1,000,000 raised, and to pay the reasonable costs and expenses of PBC 

22

related to the offering.  The Company also agreed to pay PBC a restructuring fee in the amount of approximately $180,000 upon the closing of the Equity Financing and the simultaneous Debt Restructuring. 

 

Pursuant to the Placement Agency Agreement, we entered into Subscription Agreements dated December 23, 2010 with select institutional and other accredited investors for the private placement of 12,500,000 units of our securities.  The Subscription Agreements included a purchase price of $1.20 per unit, with each unit consisting of two shares of common stock and one warrant to purchase an additional share of common stock.  The warrants have a term of five years and an exercise price of $1.00 per share.

Net proceeds from the Equity Financing, after deducting the commissions and debt restructuring fees payable to PBC and the estimated legal, printing and other costs and expenses related to the financing, were approximately $13.5 million.  We used a portion of the net proceeds of the Equity Financing to pay down debt and the remainder will be used for working capital.

On November 29, 2010, we entered into a bridge loan transaction with three accredited investors pursuant to which we issued unsecured notes in the aggregate principal amount of $1.0 million.  Upon the closing of the Equity Financing, the lenders converted the entire principal amount plus accrued interest into the same units offered in the Equity Financing and the proceeds from the bridge loan transaction were treated as funds raised with respect to the financing. 

In connection with the Equity Financing and under the terms of the Subscription Agreements, the Company agreed to prepare and file, and did file, within 60 days following the issuance of the securities, a registration statement covering the resale of the shares of common stock sold in the financing and the shares of common stock underlying the warrants.  If the registration statement is not declared effective within 120 days following the date of the filing of the registration statement, subject to certain exceptions, the Company will be obligated to issue additional warrants to the investors to purchase an additional 1,250,000 shares for each 30-day period after the deadline, until the registration statement is declared effective.

On December 24, 2010, we also closed on the Debt Restructuring.  In connection therewith, we (i) issued an Amended and Restated Senior Convertible Note in the principal amount of $5.5 million (the “Amended and Restated Note”) to Castlerigg Master Investment Ltd. (“Castlerigg”), (ii) paid $2.5 million in cash to Castlerigg, (iii) cancelled warrants previously issued to Castlerigg that were exercisable for a total of 5,208,333 shares of common stock, (iv) issued 800,000 shares of common stock to Castlerigg in satisfaction of an obligation under a prior loan amendment, (v) entered into the Letter Agreement pursuant to which we paid Castlerigg an additional $2.75 million in cash in lieu of the issuance of $3.5 million in stock and warrants as provided in the loan restructuring agreement under which the Amended and Restated Note and other documents was issued (the “Loan Restructuring Agreement”), and (vi) entered into an Investor Rights Agreement with Castlerigg dated December 23, 2010.  As a result of the foregoing, Castlerigg forgave approximately $7.2 million of principal and accrued but unpaid interest.

The Amended and Restated Note, dated December 23, 2010, is a senior, unsecured note that matures in three years from the closing and bears interest at an annual rate of 6.25%, payable semi-annually.  We paid the first year’s interest of approximately $344,000 at the closing.  The Amended and Restated Note is convertible into shares of common stock at a conversion price of $1.35 per share, subject to adjustment.  The Amended and Restated Note is convertible in whole or in part at any time upon notice by Castlerigg to us.  The Amended and Restated Note also contains various restrictions, acceleration provisions and other standard and customary terms and conditions.  Two of our consolidated subsidiaries guaranteed our obligations under the Amended and Restated Note. 

The Investor Rights Agreement provides Castlerigg with certain registration rights with respect to the Company’s securities held by Castlerigg.  These registration rights include an obligation of the Company to issue additional warrants to Castlerigg if certain registration deadlines or conditions are not satisfied.  The agreement also contains full-ratchet anti-dilution price protection provisions in the event the Company issues stock or convertible debt with a purchase price or conversion price less than the conversion price described above.

In connection with the Debt Restructuring, the Company amended the note with the holder of a $1.0 million unsecured convertible note, pursuant to which the maturity date of the note was extended to December 31, 2013.  We also issued 150,000 shares to the holder of this note as consideration to extend the term of the note.

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**Results of Operations for the Three Months ended March 31, 2011 and March 31, 2010**

**Revenues**

The Company generated $1,687,264 in revenue during the three months ended March 31, 2011.  During the same three-month period in 2010, the Company generated revenue of $1,787,067.  The decrease in revenue of $99,803 was due primarily to a reduction of license fees of $167,787 in our digital signage network for our largest customer because we performed certain additional services at the beginning of the contract.  The decrease in licensing revenues was partially offset by an increase of $87,964 in system sales for our largest customer and one other new customer. The revenue generated by our largest customer aggregated $1,467,908, which was $137,987 less than in the same quarter of 2010.

The Company's largest customer’s sales revenues accounted for approximately 87% and 90% of total revenues for the quarters ended March 31, 2011 and 2010, respectively.  Any material reduction in revenues generated from our largest customer could harm the Company’s results of operations, financial condition and liquidity.  We, however, continue to expand the customer’s network and are providing additional services for the customer. 

**Cost of Revenues**

Costs of Revenues increased by $2,494 to $1,275,537 for the three months ended March 31, 2011, from $1,273,043 for the three months ended March 31, 2010.  The increase was due to additional cost of equipment provided for installation of equipment and operations of our customer’s digital signage network of $15,371 and an increase in depreciation of $5,821 offset by a decrease of satellite distribution costs of $15,371 due to the termination of a customer’s satellite delivery of its network.

**Expenses**

General and Administrative expenses for the three months ended March 31, 2011 were $2,608,372 compared to $1,210,974 for the three months ended March 31, 2010.  The increase of $1,397,398 resulted primarily from an increase in expenses incurred related to the issuance of options and warrants of $1,181,692 primarily for the grant of Restricted Stock Units to members of the Board of Directors. In addition, employee and related costs increased $97,783 and operating expenses, primarily travel related expenses, increased $73,616 and legal expenses increased $60,985.  Research and development in process decreased by $138,364 for the three months ended March 31, 2011 to $597,771 from $736,135 for the three months ended March 31, 2010, primarily due to a reduction in employee and related costs, but sales and marketing expenses increased by $77,486 due to an increase in employee and related costs and an increase in travel and tradeshow expenses. Depreciation expense decreased by $11,844 in the same period.

**Interest Expense**

For the three months ended March 31, 2011, the Company incurred interest expense of $381,189 compared to interest expense for the three months ended March 31, 2010 of $1,715,025.  The decrease of $1,333,836 resulted primarily from the restructure of our senior debt in which the outstanding balance of the senior note decreased from approximately $17,500,000 to $5,500,000.  Interest expense incurred on the remaining balance of $5,500,000 of our senior note has been included in the carrying value of the senior note and as payments are made the carrying value is reduced, but not recorded as an expense. The main components of our interest expense consisted of $240,734 recorded to account for the accretion of our unsecured convertible note liability on our balance sheet issuance of equity related to the extension of that note and interest on our equipment leasing obligation of $84,921. 

**Net Loss**

The Company realized a net loss for the three months ending March 31, 2011 of $746,965 compared with a net loss for the three months ended March 31, 2010 of $2,900,731. The decrease in net loss of $2,153,766 was primarily the result of an increase in derivative valuation gain of our derivative securities of $3,701,300 and the decrease in interest expense of $1,333,836 as described above, all of which was partially offset by increased loss from operations reflected in a decrease of $102,297 in gross margin as described above and an increase in operating expenses of $1,324,676 as described above.  In addition, we realized a loss on the extinguishment of debt related to the restructure of our senior note of $970,033 and incurred an equity issuance cost of $476,234 related to issuance of warrants in connection with our debt restructuring. 

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**Liquidity and Capital Resources**

At March 31, 2011, we had cash of $3,304,891, total current assets of $4,710,861, total current liabilities of $14,311,998 and total stockholders' deficit of $13,568,193.  Included in current liabilities is $11,394,100 relating to the value of the embedded derivatives for our senior convertible note and our unsecured convertible note.

We experienced negative cash flow used in operations during the fiscal quarter ended March 31, 2011 of $2,186,155 compared to negative cash flow used in operations for the quarter ended March 31, 2010 of $430,841. Management believes that the level of cash used for operations will significantly decrease in future quarters, because included in the first quarter were the payments of obligations that were not paid until we had completed the Equity Financing. Of the approximately $1,700,000 increase in cash used for operations, approximately $1,300,000 included of cash used for reduction of payables, increase of inventories, and payment of expenses that we do not expect to be repeated in future periods.  The negative cash flow was sustained by cash reserves from the equity offering completed in December, 2010.  We expect to continue to experience negative operating cash flow as long as we continue our technology commercialization and development program or until we increase our sales and/or licensing revenue.

On December 24, 2010, we also closed on the Debt Restructuring.  In connection therewith, we (i) issued the Amended and Restated Note in the principal amount of $5.5 million to Castlerigg, (ii) paid $2.5 million in cash to Castlerigg, (iii) cancelled warrants previously issued to Castlerigg that were exercisable for a total of 5,208,333 shares of common stock, (iv) issued 800,000 shares of common stock to Castlerigg in satisfaction of an obligation under a prior loan amendment, (v) entered into the Letter Agreement with Castlerigg dated December 23, 2010 pursuant to which we paid Castlerigg an additional $2.75 million in cash in lieu of the issuance of $3.5 million in stock and warrants as provided in the Loan Restructuring Agreement, and (vi) entered into an Investor Rights Agreement with Castlerigg dated December 23, 2010.  As a result of the foregoing, Castlerigg forgave approximately $7.2 million of principal and accrued but unpaid interest.

The Amended and Restated Note, dated December 23, 2010, is a senior, unsecured note that matures in three years from the closing and bears interest at an annual rate of 6.25%, payable semi-annually.  We paid the first year’s interest of approximately $344,000 at the closing.  The Amended and Restated Note is convertible into shares of common stock at a conversion price of $1.35 per share, subject to adjustment.  The Amended and Restated Note is convertible in whole or in part at any time upon notice by Castlerigg to us.  The Amended and Restated Note also contains various restrictions, acceleration provisions and other standard and customary terms and conditions.  Two of our consolidated subsidiaries guaranteed our obligations under the Amended and Restated Note.

The Investor Rights Agreement provides Castlerigg with certain registration rights with respect to the Company’s securities held by Castlerigg, including the right to include 2,500,000 of its shares in this registration.  These registration rights include an obligation of the Company to issue additional warrants to Castlerigg if certain registration deadlines or conditions are not satisfied.  The agreement also contains full-ratchet anti-dilution price protection provisions in the event the Company issues stock or convertible debt with a purchase price or conversion price less than the conversion price described above. 

In connection with the Debt Restructuring, the Company amended the note with the holder of a $1.0 million unsecured convertible note, pursuant to which the maturity date of the note was extended to December 31, 2013.  We also issued 150,000 to the holder of this note as consideration to extend the term of the note.

We entered into a Placement Agency Agreement, dated December 17, 2010, with Philadelphia Brokerage Corporation (“PBC”), pursuant to which PBC agreed to act as the exclusive agent of the Company on a “best efforts” basis with respect to the sale of up to a maximum gross consideration of $15,000,000 of units of the Company’s securities, subject to a minimum gross consideration of $10,000,000.  The Company agreed to pay PBC a commission of 8% of the gross offering proceeds received by the Company, to issue PBC 40,000 shares of its common stock for each $1,000,000 raised, and to pay the reasonable costs and expenses of PBC related to the offering.  The Company also agreed to pay PBC a restructuring fee in the amount of approximately $180,000 upon the closing of the Equity Financing and simultaneous Debt Restructuring.  

Pursuant to the Placement Agency Agreement, we entered into Subscription Agreements dated December 23, 2010 with select institutional and other accredited investors for the private placement of 12,500,000 units of our securities.  The Subscription Agreements included a purchase price of $1.20 per unit, with each unit consisting of 

25

two shares of common stock and one warrant to purchase an additional share of common stock.  The warrants have a term of five years and an exercise price of $1.00 per share.

Net proceeds from the Equity Financing, after deducting the commissions and debt restructuring fees payable to PBC and the estimated legal, printing and other costs and expenses related to the financing, were approximately $13.5 million.  We used a portion of the net proceeds of the Equity Financing to pay down our senior debt, brought our accounts payable current and the remainder will be used for working capital.

On November 29, 2010, we entered into a bridge loan transaction with three accredited investors pursuant to which we issued unsecured notes in the aggregate principal amount of $1.0 million.  Upon the closing of the Equity Financing, the lenders converted the entire principal amount plus accrued interest into the same units offered in the Equity Financing and the proceeds from the bridge loan transaction were treated as funds raised with respect to the financing. 

In connection with the Equity Financing and under the terms of the Subscription Agreements, the Company agreed to prepare and file, and did file, within 60 days following the issuance of the securities, a registration statement covering the resale of the shares of common stock sold in the financing and the shares of common stock underlying the Warrants.  If the Company fails to file the registration statement within 60 days or to have the registration statement declared effective within 120 days following the date of the filing of the registration statement, the Company will be obligated to issue additional warrants to the investors to purchase an additional 1,250,000 shares for each 30-day period after the deadlines, until either the registration statement is filed or declared effective, as the case may be.

During March 2010 through October 2010, we raised approximately $2,485,000 through the sale of common stock and the issuance of convertible notes to purchasers at an investment or conversion price of $1.00 per share. The financing included the sale of 1,535,000 shares of our common stock and the issuance of convertible notes in the aggregate principal amount of $950,000. We also issued to these purchasers warrants to acquire shares of our common stock at an exercise price of $1.50 per share, which are exercisable anytime during a three year period.  At the time of these sales, we agreed to certain price protection provisions whereby if we were to sell equity at a price lower than $1.00 per share before December 31, 2010, the purchasers would be able to elect to exchange and receive equity on the same financial terms and conditions as the new investors.  

All holders of the convertible notes converted the notes and aggregate accrued interest of $10,075 into 960,075 shares of our common stock at a conversion price of $1.00 per share.  In addition, the holders received warrants to acquire up to 960,075 shares our common stock at an exercise price of $1.50 per share.  The shares issued upon conversion of the notes, together with the 1,535,000 shares issued to the purchasers of the common stock, total 2,495,075 shares of our common stock.  In addition, warrants to purchase an aggregate of 2,495,075 shares at an exercise price of $1.50 were held by the purchasers in this financing.  The warrants could be exercised any time for a period of three years.

Upon completion of the Equity Financing, each of the investors in these sales elected to treat their purchases according to the terms contained in the Equity Financing.  This resulted in the issuance of an additional 2,083,374 shares of common stock and the cancellation of 2,495,075 warrants with an exercise price of $1.50 and the issuance of 2,079,222 warrants with an exercise price of $1.00 and an expiration date of five years from the conversion.

During 2010, we entered into two Accounts Receivable Purchase Agreements with one individual for an aggregate amount of $675,000. In these agreements, we pledged certain outstanding accounts receivable in exchange for an advance payment and a commitment to remit to the purchaser the amount advanced upon collection from our customer. Terms of the first agreement under which we were advanced $175,000 include a 3% discount with a 3% interest fee for every 30 days the advances remain outstanding. Terms of the second agreement under which we were advanced $500,000 include a 10% discount with a 0.5% interest fee for every 30 days the advances remain outstanding.

During 2010, we entered into a $500,000 line of credit for equipment financing to purchase equipment for our largest customer’s digital signage network.  The terms of the line of credit include a 3% interest fee for every 30 days the advances on the line of credit remain outstanding.  We received total advances on the line of credit of $500,000 and subsequent to the completion of the Equity Financing repaid the line of credit.  We used the proceeds to purchase and install the equipment at our customer’s locations.

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In August 2009, we entered into a sale and leaseback agreement which financed the purchase and installation of equipment to retrofit our new customer’s approximately 2,100 retail sites with our digital signage product offering.  We received approximately $4,100,000 from the sale of the equipment in exchange for making lease payments over a 36 month period of $144,000 per month.

On December 24, 2007, we entered into a securities purchase agreement in connection with our senior secured convertible note financing in which we raised $15,000,000 (less $937,000 of prepaid interest).  We have used the proceeds from this financing to support our CodecSys commercialization and development and for general working capital purposes.  The senior secured convertible note has been restructured as described above.  During 2010, we capitalized interest of $1,491,161 related to the senior secured convertible note. 

 

The Loan Restructuring Agreement 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 Loan Restructuring 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; 

·

incur or guarantee any indebtedness other than indebtedness evidenced by the Amended and Restated Note and other permitted indebtedness as defined in the Amended and Restated Note;

·

repay any indebtedness which is junior to the Amended and Restated Note;

·

issue any additional notes or issue any other securities that would cause a breach or default under the Amended and Restated 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 effect 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 and;

·

cause, permit or suffer, directly or indirectly, any change in control transaction as defined in the Amended and Restated Note.

On November 2, 2006, we closed on a convertible note securities agreement dated October 28, 2006 with an individual that provided we issue to the convertible note holder (i) an unsecured convertible note in the principal amount of $1,000,000 representing the funding received by us from an affiliate of the convertible note holder on September 29, 2006, and (ii) four classes of warrants (A warrants, B warrants, C warrants and D warrants) which gave the convertible note holder the right to purchase a total of 5,500,000 shares of our common stock.  The 

27

holder of the note no longer has any warrants to purchase any of our stock.  The unsecured convertible note was due October 16, 2009 and was extended to December 22, 2010 and the annual interest rate was increased to 8%, 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 term of the convertible note has been extended and now is due December 31, 2013.  In connection with the extension of the note, we issued to the holder of the note 150,000 shares of common stock to extend the term of the note.  In addition, we committed to pay accrued interest due on the convertible note through the issuance of common stock and warrants on the same terms as the Equity Financing.   

The conversion feature and the prepayment provision of our $5.5 million Amended and Restated Note and our $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 $1.0 million unsecured 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 7 to the Notes to Condensed Consolidated Financial Statements (Unaudited) included elsewhere herein.

On March 21, 2011, we converted $784,292 of our short-term debt into equity through the issuance of common stock and warrants to two lenders at the same unit pricing as the Company’s recent equity raise in December 2010. In consideration of converting the short- term loans on the basis of $1.20 for two shares of common stock plus one warrant at an exercise price of $1.00, we issued 1,307,153 shares of common stock and warrants to acquire up to 653,576 shares of common stock, which warrants have a five year term and are exercisable at $1.00 per share. Our objective for converting the short-term debt into equity was to conserve cash for future market development.

Our monthly operating expenses, including our CodecSys technology research and development expenses, exceeded our monthly net sales by approximately $350,000 per month during the quarter ended March 31, 2011.  The net proceeds from the Equity Financing after the payment of debt to the senior note holder, commissions, expenses of the offering, and payment of past due accounts payable is approximately $5,500,000.  At our current rate of expenditures, including debt service, over expected revenues, we would have sufficient capital to maintain operations at their current level through the end of 2011.  The foregoing estimates, expectations and forward-looking statements are subject to change as we make strategic operating decisions from time to time and as our expenses and sales fluctuate from period to period.  

The amount of our operating deficit could decrease or increase significantly depending on strategic and other operating decisions, thereby affecting our need for additional capital.  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 sales resulting from marketing efforts by companies such as IBM, HP and Microsoft. 

Our long-term liquidity is dependent upon execution of our business model and the realization of additional revenue and working capital as described above, and upon capital needed for continued commercialization and development of the CodecSys technology.  Commercialization and future applications of the CodecSys technology are expected to require additional capital estimated to be approximately $2.0 million annually for the foreseeable future.  This estimate will increase or decrease depending on specific opportunities and available funding.

To date, we have met our working capital needs primarily through funds received from sales of our common stock and from convertible debt financings.  Until our operations become profitable, we will continue to rely on proceeds received from external funding.  We expect additional investment capital, if needed, may come from (i) the exercise of outstanding warrants to purchase our capital stock currently held by existing warrant holders; (ii) additional private placements of our common stock with existing and new investors; and (iii) the private placement of other 

28

securities with institutional investors similar to those institutions that have provided funding in the past.  We have no arrangements for any such additional external financings, whether debt or equity, and are not certain whether any new external financing would be available on acceptable terms or at all. Any new debt financing would require the cooperation and agreement of existing note holders, of which there is no assurance.

** **

**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.  

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 4.  Controls and Procedures**

*Disclosure Controls and Procedures*

Our management is responsible for establishing and maintaining effective disclosure controls and procedures,  as  defined  under  Rules  13a-15(e)  and  15d-15(e)  of  the  Exchange  Act.  As of March 31, 2011, an evaluation was performed, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures.  Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as of March 31, 2011, were effective in ensuring that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and in ensuring that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.  

*Management’s Annual Report on Internal Control Over Financial Reporting*

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our system of internal control over financial reporting within the meaning of Rules 13a-15(f) and 15d-15(f) of the Exchange Act is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of our published financial statements in accordance with U.S. generally accepted accounting principles.  

Our management, including the chief executive officer and the chief financial officer, assessed the effectiveness of our system of internal control over financial reporting as of March 31, 2011.  In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.  Based on our assessment, we believe that, as of March 31, 2011, our system of internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with U.S. generally accepted accounting principles. 

*Changes in Internal Control Over Financial Reporting*

There were no changes in our internal control over financial reporting for the quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, such control.  

29

*Limitations on Controls and Procedures*

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, any system of disclosure controls and procedures or internal control over financial reporting may not 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.

The foregoing limitations do not qualify the conclusions set forth above by our chief executive officer and our chief financial officer regarding the effectiveness of our disclosure controls and procedures and our internal control over financial reporting as of March 31, 2011.

**Part II – Other Information**

**Item 1.**

**  Legal Proceedings**

The Company is a defendant in one lawsuits, the total amount in dispute in which is approximately $105,000. To the knowledge of management, no other litigation has been filed or threatened. 

**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, 2010.

**Item 2.**

**  Unregistered Sales of Equity Securities and Use of Proceeds**

 In January, 2011, we granted options to acquire up to 500,000 shares of our common stock to a consultant in consideration of consulting services to be rendered by the consultant over a one year period pursuant to a written consulting agreement.  The options are exercisable at $1.11 per share and have a three year life.  The consultant is an accredited investor and was fully informed regarding his investment.  In the transaction, we relied on the exemptions from registration under the Securities Act set forth in Section 4(2) and Section 4(6) thereof.

During March 2011, we issued 293,517 shares of common stock to the holder of our unsecured convertible note in satisfaction of $176,110 of accrued interest on the unsecured convertible note.  Also in connection with the satisfaction of the accrued interest we granted to the holder a warrant to acquire up to 221,758 additional shares of our common stock at an exercise price of $1.00 per share.  The warrant is exercisable at any time for a five year period.  The holder of the unsecured convertible note is an accredited investor and was fully informed regarding his investment.  In the transactions, we relied on the exemptions from registration under the Securities Act set forth in Section 4(2) and Section 4(6) thereof.

In January 2011, the Company granted 1,300,000 Restricted Stock Units to the two executive officers and three members of the Board of Directors as compensation for services rendered during the past year. The officers and directors were accredited investors and were fully informed regarding the investment. In the transaction, we relied on the exemptions from registration under the Securities Act set forth in Section 4(2) and Section 4(6) thereof.

On March 21, 2011, we converted $784,292 of our short-term debt into equity through the issuance of common stock and warrants to two lenders at the same unit pricing as the Equity Financing. In consideration of converting the short- term loans on the basis of $1.20 for two shares of common stock plus one warrant at an exercise price of $1.00, the Company issued 1,307,153 shares of common stock and warrants to acquire up to 653,576 shares of common stock, which warrants have a five year term and are exercisable at $1.00 per share. The Company’s objective for converting the short-term debt into equity is to conserve cash for further market development.  The lenders of the short-term debt were accredited investors and were fully informed regarding their investment.  In the transactions, we relied on the exemptions from registration under the Securities Act set forth in Section 4(2) and Section 4(6) thereof.

30

In March, 2011, we granted to the holder of our senior unsecured convertible note a warrant to acquire 400,000 shares of our common stock at an exercise price of $.05 per share in consideration of a waiver of the holder’s reset provision that allowed us to convert certain short terms loans to equity without causing an adjustment in the conversion price of our senior note.  The warrants have a 5 year life from the date of grant.  The holder of the unsecured senior convertible note is an accredited investor and was fully informed regarding his investment.  In the transaction, we relied on the exemptions from registration under the Securities Act set forth in Section 4(2) and Section 4(6) thereof.

**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.

**Item 6.**

**  Exhibits**

**Exhibit Index**

(a)

Exhibits

**Exhibit**

**Number**

**Description of Document**

3.1

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.)

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 James E Solomon dated September 19, 2008.  (Incorporated by reference to Exhibit No. 10.2 of the Company's Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on Mach 31, 2010.)

10.3*

Broadcast International 2004 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*

Broadcast International 2008 Long-Term Incentive Plan.  (Incorporated by reference to the Company’s  definitive Proxy Statement on Schedule 14A filed with the SEC on April 17, 2009)

31

10.5

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.)

10.6

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.)

10.7

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.)

10.8

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.)

10.9

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.)

10.10

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.)

10.11

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.)

10.12

Loan Restructuring Agreement between the Company and Castlerigg Master Investments Ltd., dated December 16, 2010 (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on December 22, 2010.)

10.13

Amendment to 8% Convertible Note Due 2010 between the Company and Leon Frenkel, dated December 22, 2010 (Incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K filed with the SEC on December 22, 2010.)

10.14

Placement Agency Agreement between the Company and Philadelphia Brokerage Corporation, dated December 17, 2010 (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on December 28, 2010.)

10.15

Form of Subscription Agreement (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on December 28, 2010.)

10.16

Form of Warrant (Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the SEC on December 28, 2010.)

10.17

Amended and Restated Senior Convertible Note issued by the Company to Castlerigg master Investments Ltd., dated December 23, 2010 (Incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the SEC on December 28, 2010.)

10.18

Investor Rights Agreement between the Company and Castlerigg Master Investments Ltd., dated December 23, 2010 (Incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K filed with the SEC on December 28, 2010.)

32

10.19

Letter between the Company and Castlerigg Master Investments Ltd., dated December 23, 2010 (Incorporated by reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K filed with the SEC on December 28, 2010.)

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:  May 13, 2011

*/s/ Rodney M. Tiede*

*By:  Rodney M. Tiede*

Its:  President and Chief Executive Officer (Principal Executive Officer)

Date: May 13, 2011

*           /s/ James E. Solomon*

By:  James E. Solomon

Its: Chief Financial Officer (Principal Financial and Accounting Officer)

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