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, 2009  OR  £ Transition report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  For the transition
period from ________ to ________  Commission File
No.0-13316  BROADCAST INTERNATIONAL, INC. (Exact name of registrant as
specified in its charter)  Utah

87-0395567(State or other
jurisdiction of

(IRS
Employerincorporation or
organization)

Identification
No.)  7050 Union Park Ave.
#600, Salt Lake City, Utah 84047 (Address of principal
executive offices and zip code)  (801)
562-2252 (Registrants telephone
number, including area code)  Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes  S
    No £  Indicate by check mark whether the
registrant 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 g 12 months (or for such
shorter period that the registrant was required to post such files) Yes
 S     No
£  Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definitions of  large
accelerated filer,  accelerated filer, and smaller reporting company
in Rule 12b-2 of the Exchange Act.  £Large accelerated filerSAccelerated filer£Non-accelerated filer£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 20, 2009Common Stock, $.05
par value
38,931,760
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 20 Item
3.   Quantitative and Qualitative Disclosures about Market Risk 26 Item
4   Controls and Procedures 27 Part
II -Other Information Item
1.   Legal Proceedings 27 Item
1A. Risk Factors 27 Item
2.   Unregistered Sales of Equity Securities and Use of Proceeds 27 Item
3.   Defaults Upon Senior Securities 27 Item
4.   Submission of Matters to a Vote of Security Holders 27 Item
5.   Other Information 28 Item
6.   Exhibits 28 Signatures 30        2     Item
1. Financial Information  BROADCAST
INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS December
31,

March
31,2008

2009(Unaudited)ASSETS:Current assetsCash
and cash equivalents
$
3,558,336
$
2,830,283Trade
accounts receivable, net

357,221

230,355Inventory

28,118

20,217Prepaid
expenses

209,636

221,994Total current assets

4,153,311

3,302,849Property and equipment,
net

2,378,615

2,309,008Other assetsDebt
offering Costs

906,525

791,774Patents,
net

185,190

183,276Long-term
investments

2,416,235

2,370,646Deposits
and other assets

9,058

9,058Total other assets

3,517,008

3,354,754Total assets
$
10,048,934
$
8,966,611 See accompanying
notes to consolidated financial statements.    3     BROADCAST
INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) December
31,

March
31,2008

2009LIABILITIES:



(Unaudited)Current liabilitiesAccounts
payable
$
893,130
$
619,985Payroll
and related expenses

380,162

385,838Other
accrued expenses

541,435

151,592Unearned
revenue

428

3,333Current
debt obligations (net of discount of $274,188 and$190,854,
respectively)

725,812

809,146Other
current obligations

3,236

3,317Derivative
valuation

4,549,500

1,197,900Total current
liabilities

7,093,703

3,171,111Long-term liabilitiesConvertible
debt (net of $8,269,931 and $5,822,106discount,
respectively)

6,730,069

9,515,394Other
long-term obligations

6,937

6,070Total liabilities

13,830,709

12,692,575Commitments and contingenciesSTOCKHOLDERS
DEFICIT:Preferred
stock, no par value, 20,000,000 sharesauthorized;
none issued

-

-Common stock,
$.05 par value, 180,000,000 sharesauthorized;
38,761,760 and 38,871,760 shares issued asof
December 31, 2008 and March 31, 2009, respectively

1,938,088

1,943,588Additional paid-in
capital

74,727,642

75,426,001Accumulated deficit

(80,447,505)

(81,095,553)Total stockholders
deficit

(3,781,775)

(3,725,964)Total liabilities and
stockholders deficit
$
10,048,934
$
8,966,611 See accompanying notes to consolidated financial statements.    4     BROADCAST INTERNATIONAL, INC. CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)  For the three
months ended March 31,2008

2009Net sales
$
1,187,392
$
376,089Cost of sales

1,060,244

419,476Gross profit (loss)

127,148

(43,387)Operating expenses:Administrative
and general

1,534,181

1,058,239Selling
and marketing

246,192

117,017Research
and development

773,787

1,002,003Depreciation
and amortization

79,048

186,367Total operating expenses

2,633,208

2,363,626Total operating loss

(2,506,060)

(2,407,013)Other income (expense):Interest
income

162,619

8,860Interest
expense

(1,501,792)

(1,602,378)Gain on
derivative valuation

6,009,063

3,351,600Gain on
securities available for sale

--

4,411Loss on
sale of assets

--

(1,093)Other
expense

(4,847)

(2,435)Total other income
(expense)

4,665,043

1,758,965Income (loss) before income
taxes

2,158,983

(648,048)Provision for income
taxes

--

--Net Income (loss)
$
2,158,983
$
(648,048)Net income (loss) per share 
basic
$
0.06
$
(0.02)Net income (loss) per share 
diluted
$
0.05
$
(0.02)Weighted average shares 
basic

38,139,100

38,849,100Weighted average shares 
diluted

43,762,197

38,849,100   See accompanying notes
to consolidated financial statements.      5     BROADCAST
INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS (Unaudited) Three Months
EndedMarch
31,2008

2009Cash flows from operating
activities:Net income (loss)
$
2,158,983
$
(648,048)Adjustments to reconcile net
income (loss) to
net cash used in operating
activities:Depreciation
and amortization

83,441

192,970Common
stock issued for services

54,600

--Common
stock issued for in process research and development

19,667

135,000Accretion
of discount on convertible notes payable

1,131,916

1,131,159Capitalized
interest on convertible note

--

337,500Stock
based compensation

188,471

158,359Loss on
sale of assets

--

1,093Derivative
liability valuation

(6,009,063)

(3,351,600)Extinguishment
of debt

6,056

--Gain on
sale of securities available for sale

--

(4,411)Allowance
for doubtful accounts

56,232

(14,185)Changes in assets and
liabilities:Accounts
receivable

(263,657)

141,051Inventories

5,876

7,901Debt
offering costs

116,808

114,751Prepaid
and other assets

661,070

8,701Accounts
payable and accrued expenses

(26,958)

(242,045)Deferred
revenues

(61,922)

2,905Net
cash used in operating activities

(1,878,480)

(2,028,899)Cash flows from investing
activities:Purchase of equipment

(592,845)

(209,269)Purchase of available-for-sale
securities

(11,600,000)

--Proceeds from the sale of
available-for-sale securities

--

50,000Proceeds from sale of
assets

--

2,401Net
cash used in investing activities

(12,192,845)

(156,868)Cash flows from financing
activities:Proceeds from the exercise of
warrants

750,000

58,500Principal payments on
debt

--

(786)Proceeds from subscription
receivable

25,000

--Proceeds from the exercise of
options

750

--Loan proceeds

--

1,400,000Net
cash provided by financing activities

775,750

1,457,714Net decrease in cash and cash
equivalents

(13,295,575)

(728,053)Cash and cash equivalents,
beginning of period

16,598,300

3,558,336Cash and cash equivalents, end
of period
$
3,302,725
$
2,830,283  See accompanying notes
to consolidated financial statements.    6     **BROADCAST
INTERNATIONAL, INC. AND SUBSIDIARIES** **NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)** **March 31,
2009**  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, 2008 and March 31, 2009 and the results of
operations for the three months ended March 31, 2008 and 2009, respectively,
with the cash flows for each of the three month periods ended March 31, 2008 and
2009, 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, 2008.  Operating results for the three
months ended March 31, 2009 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2009.  Note 2 - Reclassifications  Certain 2008 financial statement
amounts have been reclassified to conform to 2009 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 a net loss during the three months ended March 31, 2009, no common
stock equivalents have been included in the diluted earnings per common share
calculation as the effect of such common stock equivalents would be
anti-dilutive. The following table sets forth the
computation of basic and diluted net income per share for March 31, 2009 and
2008:  Three Months Ended March
31,2009

2008Net
income (loss)
$
(648,048)
$
2,158,983Basic weighted average shares
outstanding

38,849,100

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

-

5,623,097Dilutive weighted average
shares outstanding

38,849,100

43,762,197Net income (loss) per
shareBasic
$
(0.02)
$
0.06Diluted
$
(0.02)
$
0.05  Options and warrants to purchase
13,946,375 and 15,780,465, shares of common stock at prices ranging from $.02 to
$45.90 per share were outstanding at March 31, 2009 and 2008, respectively and
585,000 restricted stock units were outstanding at March 31, 2009. Furthermore,
the Company had convertible debt that was convertible    7    into
3,480,557 and 3,418,961 shares of common stock at March 31, 2009 and 2008, that
was excluded from the calculation of diluted earnings per share because the
effect was anti-dilutive.  Note 4 
Stock-based Compensation Beginning on
January 1, 2006, we began accounting for stock-based compensation under the
provisions of Financial Accounting Standards No. 123R (revised 2004),
Share-Based Payment (FAS 123R), which requires the recognition of the fair
value of stock-based compensation. We have used the modified prospective
application. Under the fair value recognition provisions for FAS 123R,
stock-based compensation cost is estimated at the grant date, based on the
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 2004 Plan (the 2004 Plan), the board of
directors may issue incentive stock options to employees and directors and
non-qualified stock options (warrants) 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 remaining stock options authorized under
the 2004 Plan at March 31, 2009 was 935,098.  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 shares of common stock reserved for issuance
under the 2008 Plan was 3,415,000 at March 31, 2009. Stock
Options In
connection with the adoption of SFAS No. 123R, 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, 2009 and
2008 were estimated at the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions: Three Months Ended
March 31,2009
2008Risk free interest rate
2.77%
3.69%Expected life (in years)
10.0
10.0Expected volatility
80.47%
76.97%Expected dividend yield
0.00%
0.00%  The weighted
average fair value of options granted during the years ended March 31, 2009 and
2008, was $1.27 and $2.61, respectively.    8    Net loss
for the three months ended March 31, 2009 and 2008 includes $158,359 and
$188,471, 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 $158,359 for the
three months ended March 31, 2009 is (i) $3,028 for the vested portion of 25,000
options granted to three employees, (ii) $235,331 resulting from the vesting of
unexpired options and warrants issued prior to January 1, 2009, and (iii)
$80,000 valuation credit related to 125,000 restricted stock units awarded to
six members of the board of directors, and 35,000 restricted stock units awarded
to two consultants of the company for services rendered in 2007 and 2008 awarded
in 2009. At December 31, 2008 a $352,000 liability was recorded for the value of
the above mentioned restricted stock units, at February 16, 2009, the award
date, and the value was $272,000 resulting in an $80,000 expense credit.   Included in the $188,471 for the
three months ended March 31, 2008 is (i) $22,145 for the vested portion of
286,500 options granted to eight employees, (ii) $182,215 resulting from the
vesting of unexpired options and warrants issued prior to January 1, 2008, (iii)
($15,889) credit for recovery of previously recorded expense of vested options
forfeited during the period.   The impact on our results of
operations for recording stock-based compensation under FAS 123R for the three
months ended March 31, 2009 and 2008 are as follows:  2009

2008General and
administration
$
83,534
$
103,581Research and development in
process

74,825

84,890Total
$
158,359
$
188,471   Due to unexercised options and
warrants outstanding at March 31, 2009, we will recognize an aggregate total of
$1,258,598 of compensation expense over the next four years for employees and
consultants as a result of the adoption of FAS 123R based upon option and
warrant award vesting parameters as shown below:  2009
$
667,5272010

472,7932011

117,9982012

280Total
$
1,258,598  The following unaudited tables
summarize option and warrant activity during the three months ended March 31,
2009.     9     Options
And
Warrants
Outstanding

Weighted
Average
Exercise
PriceOutstanding at December 31,
2008
14,943,393

2.20Options
granted
25,000

1.53Warrants
issued
--

--Expired
(457,500)

1.11Forfeited
(514,518)

1.10Exercised
(50,000)

1.17Outstanding at March 31,
2009
13,946,375
$
2.27   The
following table summarizes information about stock options and warrants
outstanding at March 31, 2009. Outstanding
ExercisableWeighted
Average
Remaining

Weighted
Average


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

Exercise
Price
Number
Exercisable

Exercise
Price$
0.02-0.04
1,264,495
1.07
$
0.03
1,264,495
$
0.030.33-0.95
1,664,299
5.60

0.72
1,580,966

0.711.06-6.25
11,014,381
2.64

2.76
10,538,548

2.759.50-11.50
1,600
2.92

10.50
1,600

10.5036.25-45.90
1,600
1.42

41.08
1,600

41.08$
0.02-45.90
13,946,375
2.85
$
2.27
13,387,209
$
2.26  Restricted
Stock Units For the three
months ended March 31, 2009, 160,000 restricted stock units were awarded. The
cost of restricted stock units is determined using the fair value of our common
stock on the date of the grant and compensation expense is recognized in
accordance with the vesting schedule.  All of the restricted stock units
vested during the three months ended March 31, 2009. The following
is a summary of restricted stock unit activity for the three months ended March
31, 2009: Restricted
Stock
Units
Weighted
Average
Grant
Date Fair
ValueOutstanding at January 1,
2009
425,000
$ 
2.40Awarded at
fair value
160,000
1.70Canceled/Forfeited
--
--Outstanding at March 31,
2009
585,000
$ 
2.21Vested at March 31, 2009
585,000
$  2
21  For the three months ended March 31,
2009, we recognized an $80,000 valuation credit of (i) $59,500 for 125,000
restricted stock units which had been awarded to five directors for services
rendered in 2007 with a value of    10    $275,000
at December 31, 2008 and with a value of $212,500 on February 16, 2009 and (ii)
$17,500 for 35,000 restricted stock units which had been awarded to two
consultants of the company for services rendered in 2008 with a value of $77,000
on December 31, 2008 and with a value of $59,500 on February 16, 2009.  The offset for the aggregate expense
of $352,000 at December 31, 2008 for all restricted stock units awarded on
February 16, 2009 for services rendered prior to December 31, 2008 was included
in accrued liabilities at December 31, 2008. Settlement restrictions on the
units awarded to board members allow for settlement on the date service with the
Company terminates. Settlement restrictions on the units awarded to the
consultants require settlement any time after January 2, 2010. The Committee may
in accordance with the 2008 Plan, accelerate the expiration of the restrictive
period as to some or all of these units mentioned above.  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, 2009 and December 31,
2008, we had bank balances in the excess of amounts insured by the Federal
Deposit Insurance Corporation. We have not experienced any losses in such
accounts, and believe we are not exposed to any significant credit risk on cash
and cash equivalents. Current
financial market conditions have had the effect of restricting liquidity of cash
management investments and have increased the risk of even the most liquid
investments and the viability of some financial institutions.  We do not
believe, however, that these conditions will materially affect our business or
our ability to meet our obligations or pursue our business plans. Account
Receivables Trade
account receivables are carried at original invoice amount less an estimate made
for doubtful receivables based on a review of all outstanding amounts on a
monthly basis. Management determines the allowance for doubtful accounts by
identifying troubled accounts and by using historical experience applied to an
aging of accounts. Trade receivables are written off when deemed uncollectible.
Recoveries of trade receivables previously written off are recorded when
received. Included in
our $230,355 and $357,221 net accounts receivable for the three months ended
March 31, 2009 and the year ended December 31, 2008, respectively, were (i)
$268,075 and $437,955 for billed trade receivables, respectively; (ii) $37,760
and $12,856 of unbilled trade receivables, respectively; and (iii) $75,480 and
$93,590 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, 2009, the United States Patent and Trademark Office had approved
four patents.  Additionally, seven foreign countries had approved patent
rights.  While we are unsure whether we can develop the technology in order
to obtain the full benefits, the patents themselves hold value and could be sold
to companies with more resources to complete the development. On-going legal
expenses incurred for patent follow-up have been expensed from July 2005
forward.    11    Amortization
expense recognized on all patents totaled $1,915 and $935 for the three months
ended March 31, 2009 and 2008, respectively. Estimated
amortization expense, if all patents were issued at the beginning of 2009, for
each of the next five years is as follows: Year ending
December
31:2009
$     12,1132010
12,1132011
12,1132012
12,1132013
11,740  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 Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes.  Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.  Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to the taxable income in the years in which those
temporary differences are expected to be recovered or settled. Revenue
Recognition We recognize
revenue when evidence exists that there is an arrangement between us and our
customers, delivery of equipment sold or service has occurred, the selling price
to our customers is fixed and determinable with required documentation, and
collectability is reasonably assured. We recognize as deferred revenue, payments
made in advance by customers for services not yet provided. When we
enter into a multi-year contract with a customer to provide installation,
network management, satellite transponder and help desk, or combination of these
services, we recognize this revenue as services are performed and as equipment
is sold.  These agreements typically provide for additional fees, as
needed, to be charged if on-site visits are required by the customer in order to
ensure that each customer location is able to receive network communication. As
these on-site visits are performed the associated revenue and cost are
recognized in the period the work is completed. If we install, for an additional
fee, new or replacement equipment to an immaterial number of new customer
locations, and the equipment immediately becomes the property of the customer,
the associated revenue and cost are recorded in the period in which the work is
completed. Research
and Development Research and
development costs are expensed when incurred.  We expensed $1,002,003 and
$773,787 of research and development costs for the three months ended March 31,
2009 and 2008, 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    12    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, 2009 we had 3 customers that individually
constituted 10% or more of our total revenues, which represented 17%, 15% and
11% of our revenues, respectively.  For the three months ended March 31,
2008 we had 3 customers that individually constituted 10% or more of our total
revenues, which represented 22%, 19% and 19% of our revenues, respectively. The
customers in 2009 are not the same customers as in 2008. Off-Balance
Sheet Arrangements We have no
off-balance sheet arrangements. Note 6 
Notes Payable The recorded
value of our notes payable for the three months ended March 31, 2009 and year
ended December 31, 2008 was as follows: December 31,
2008

March 31,
2009Senior Secured 6.25%
Convertible Note
$
6,730,069
$
8,115,394Unsecured Convertible
Note

725,812

809,146Auction Rate Preferred
Securities Secured Note

--

1,400,000Total

7,455,881

10,324,540Less Current Portion

(725,812)

(809,146)Total Long-term
$
6,730,069
$
9,515,394  Auction
Rate Preferred Securities Secured Note On January
5, 2009 we received a $1,400,000 loan from the brokerage company that sold us
our Auction Rate Preferred Securities (ARPS). This loan is subject to the terms
and conditions contained in a promissory note and securities agreement with the
brokerage company dated December 11, 2008. The loan is secured by the ARPS held
by the company in an account at the brokerage company, and bears an interest
rate equal to the federal funds rate (as quoted by Bloomberg) plus 1.75%.
Interest accrues monthly and is payable on the fifth business day of every
month. The principal and any accrued interest are immediately due upon demand by
the Lender. However, due to the current illiquidity of the ARPS, we have
classified both the ARPS and this note as non-current. We intend to use the
proceeds from this financing to support our CodecSys commercialization and
development and for general working capital purposes. Secured
6.25% Convertible Note On December
24, 2007, we entered into a securities purchase agreement in which we raised
$15,000,000 (less $937,000 of prepaid interest).  We intend to use the
proceeds from this financing to support our CodecSys commercialization and
development and for general working capital purposes.  Pursuant to the
financing, we issued a senior secured convertible note in the principal amount
of $15,000,000 which is due December 21, 2010 and bears interest at 6.25% per
annum.  Interest for the first year was prepaid at closing.
 Interest-only payments thereafter in the amount of $234,375 are due
quarterly and commenced in April 2009.  Interest payments may be made
through issuance of common stock or through capitalizing the interest as part of
the loan in certain circumstances.  The note is convertible into 2,752,294
shares of our common stock at a conversion price of $5.45 per share, convertible
any time during the term of the note.  We have granted a first priority
security interest in all of our property and assets and of our subsidiaries to
secure our obligations under the note and related transaction agreements. In
connection with the financing, the senior secured convertible note holder
received warrants to acquire 1,875,000 shares of our common stock exercisable at
$5.00 per share.  The warrants are exercisable any time for a five-year
period beginning on the date of grant.  We also issued to the convertible
note holder 1,000,000 shares of our common stock valued at $3,750,000 and
incurred an additional $1,377,000 for commissions, finders fees and    13    other
transaction expenses, including the grant of a three-year warrant to purchase
112,500 shares of our common stock to a third party at an exercise price of
$3.75 per share, valued at $252,000.  A total of $1,377,000 was included in
debt offering costs and is being amortized over the term of the note.  The
warrants and the embedded conversion feature and prepayment provision of the
senior secured convertible notes have been accounted for as derivatives pursuant
to EITF 00-19 and SFAS No. 133. The $5.45
conversion price of the senior secured convertible note and the $5.00 exercise
price of the warrants are subject to adjustment pursuant to standard
anti-dilution rights.  These rights include (i) equitable adjustments in
the event we effect a stock split, dividend, combination, reclassification or
similar transaction; (ii) weighted average price protection adjustments in the
event we issue new shares of common stock or common stock equivalents in certain
transactions at a price less than the then current market price of our common
stock; and (iii) full ratchet price protection adjustments in the event we
issue new shares of common stock or common stock equivalents in certain
transactions at a price less than $5.45 per share. The
conversion feature and the prepayment provision of the notes were accounted for
as embedded derivatives and valued on the transaction date using a Black-Scholes
pricing model.  The warrants were accounted for as derivatives and were
valued on the transaction date using a Black-Scholes pricing model as well.
 At the end of each quarterly reporting date, the values of the derivatives
are evaluated and adjusted to current fair value.  The note conversion
feature and the warrants may be exercised at any time and, therefore, have been
reported as current liabilities. As of March
31, 2009 and 2008, we recorded an aggregate derivative liability of $1,032,800
and $4,710,800, and derivative valuation gain of $2,750,100 and $3,909,300, to
reflect the change in value of the aggregate derivate liability for the years
ended December 31, 2008 and 2007, respectively.  The aggregate derivative
liability of $1,032,800 included $357,800 for the note conversion feature and
$675,000 for the warrants.  These values were calculated using the
Black-Scholes pricing model with the following assumptions: (i) risk free
interest rate of 0.69% for the note and 1.41%for the warrants, (ii) expected
life (in years) of 1.70 for the conversion feature and 3.7 for the warrants;
(iii) expected volatility of 91.85% for the conversion feature and 86.35% for
the warrants; (iv) expected dividend yield of 0.00%; and (v) stock trading price
of $1.18. During the
three months ended March 31, 2009 the principal value of $15,000,000 of the
6.25% senior secured convertible note was increased by $337,500 to $15,337,500
for interest capitalized rather than making a payment in cash. Capitalized
interest is computed at 9%.  The original principal value of the note is
being accreted over the term of the obligation, for which $1,047,825 was
included in interest expense for the three months ended March 31, 2009 and 2008.
The note bears a 6.25% annual interest rate payable quarterly and for the three
months ended March 31, 2009 and 2008, $23,965 and $234,375, respectively was
included in interest expense.  Additionally for the three months ended
March 31, 2009, $314,062 ($337,500 offset by $23,438 note interest accrued in
2008) was included in interest expense for capitalized interest.  On
December 21, 2007 we paid $937,500 as interest for the first year of the note
and at March 31, 2008 had recorded $679,687 as prepaid interest. Unsecured
Convertible Note On September
29, 2006, we entered into a letter of understanding with Triage Capital
Management, or Triage, dated September 25, 2006.  The letter of
understanding provided that Triage loan $1,000,000 to us in exchange for us
entering into, on or prior to October 30, 2006, a convertible note securities
agreement.  It was intended that the funding provided by Triage be replaced
by a convertible note and accompanying warrants, as described below.
 Effective November 2, 2006, we entered into securities purchase agreement,
a 5% convertible note, a registration rights agreement, and four classes of
warrants to purchase our common stock, all of which were with an individual note
holder, the controlling owner of Triage, who caused our agreement with Triage to
be assigned to him, which satisfied our agreement with Triage. Pursuant to
the securities purchase agreement, (i) we sold to the convertible note holder a
three-year convertible note in the principal amount of $1,000,000 representing
the funding received by us on September 29, 2006; (ii) the convertible note
bears an annual interest rate of 5%, payable semi-annually in cash or shares of
our common stock; (iii) the convertible note is convertible into shares of our
common stock at a conversion price of $1.50 per share; and (iv) we issued to the
convertible note holder four classes of warrants (A Warrants, B Warrants, C
Warrants and D Warrants), which give the convertible note holder the right to
purchase a total of 5,500,000 shares of our common stock as described below.
 The A and B Warrants originally expired one year after the effective date
of a registration statement filed under the Securities Act of 1933, as amended
(the Securities Act), to    14    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 at an exercise price of $1.60 per share providing $726,400 in funding
to us. Additionally, we entered into an exchange agreement dated October 31,
2007 in which the convertible note holder received 650,000 shares of our common
stock in exchange for cancellation of the C and the D Warrants.  The
expiration date of the A Warrants and the B Warrants was extended from January
11, 2008 to December 3, 2008. During the
year ended December 31, 2008, the convertible note holder exercised 64,400 A
Warrants at an exercise price of $1.60 per share providing $103,040 in funding
to us. On December 31, 2008, the remaining 231,600 A Warrants and 750,000 B
Warrants were unexercised and expired. As of March
31, 2009 and 2008, we recorded an aggregate derivative liability of $153,300 and
$2,194,400, and a derivative valuation gain of $573,400 and $1,954,300,
respectively, to reflect the change in value of the aggregate derivate liability
for the years ended December 31, 2008 and 2007, respectively.  The
aggregate derivative liability of $153,300 for the conversion feature of the
note was calculated using the Black-Scholes pricing model with the following
assumptions: (i) risk free interest rate 0.43%, (ii) expected life (in years) of
0.50; (iii) expected volatility of 99.82%; (iv) expected dividend yield of
0.00%; and (v) stock trading price of $1.18. The
principal value of $1,000,000 of the unsecured convertible note is being
accreted over the term of the obligation, for which $83,334 was included in
interest expense for the three months ended March 31, 2009 and 2008. The note
bears a 5% annual interest rate payable semi-annually, and for the three months
ended March 31, 2009 and 2008, $12,356 and $12,501, respectively, was included
in interest expense. Senior
Secured 6% Convertible Notes On May 16,
2005, we consummated a private placement of $3,000,000 principal amount of 6%
senior secured convertible notes and related securities, including common stock
warrants and additional investment rights, to four institutional funds.
 The senior secured convertible notes were originally due May 16, 2008 and
were originally convertible into 1,200,000 shares of our common stock at a
conversion price of $2.50 per share.  On March 16, 2006, we entered into a
waiver and amendment agreement (discussed below), which adjusted the conversion
rate to $1.50 per share.  The warrants and the embedded conversion feature
of the senior secured convertible notes have been accounted for as derivatives
pursuant to EITF 00-19 and SFAS No. 133. During the
year ended December 31, 2008, an institutional fund third-party assignee
converted the final $54,505 of the convertible notes into 36,337 shares of our
common stock. During the
year ended December 31, 2008, three of the institutional funds exercised an
aggregate of 500,000 of their A and B warrants at an exercise price of $1.50
providing $750,000 in funding to us.  As of December 31, 2008, there were
32,702 remaining warrants outstanding. As of March
31, 2009 and 2008, we recorded an aggregate derivative liability of $11,800 and
$53,000 and a derivative valuation gain of $28,100 and $145,463 to reflect the
change in value of the aggregate derivate liability since December 31, 2008 and
2007, respectively.  The aggregate derivative liability for the outstanding
warrants of $11,800 was calculated using the Black-Scholes pricing model with
the following assumptions: (i) risk-free interest rate of 0.57%; (ii) expected
life (in years) of 1.10; (iii) expected volatility of 93.80%; (iv) expected
dividend yield of 0.00%; and (v) stock trading price of $1.18. The
principal value of the senior secured convertible notes was converted during the
three months ended March 31, 2008. Prior to conversion the outstanding principle
value was being accreted over the term of the obligation, for which $757 was
included in interest expense for the three months ended March 31, 2008.
 The notes bore a 6% annual interest rate and for the three months ended
March 31, 2008, $136 was included in interest expense.    15    Note
7  Fair Value Measurements We adopted
SFAS No. 157, Fair Value Measurements, (SFAS 157) as of January 1, 2008 for
financial instruments measured at fair value on a recurring basis.  SFAS
157 defines fair value, establishes a framework for measuring fair value in
accordance with accounting principles generally accepted in the United States
and expands disclosures about fair value measurements. 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.  SFAS 157 establishes a three-tier fair value
hierarchy which prioritizes the inputs used in measuring fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (level 1 measurements) and the
lowest priority to unobservable inputs (level 3 measurements).  These tiers
include: · Level
1, defined as observable inputs such as quoted prices 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, 2009: SignificantQuoted Prices
in

Other

SignificantActive Markets
for

Observable

UnobservableIdentical
Assets

Inputs

InputsTotal

(Level 1)

(Level 2)

(Level 3)AssetsTreasury cash reserve
securities

2,467,437

2,467,437

-

-Auction rate preferred
securities

2,370,646

-

-

2,370,646Total assets measured at fair
value
$
4,838,083
$
2,467,437
$
-
$
2,370,646LiabilitiesDerivative valuation (1)

$
1,197,900
$
-
$
-
$
1,197,900Total liabilities measured at
fair value
$
1,197,900
$
-
$
-
$
1,197,900(1) See Note 5 for additional
discussion.
  The table
below presents our assets measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) as defined in SFAS 157 at March 31,
2009.  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

Auction RateValuation

PreferredLiability

Securities

TotalBalance at December 31,
2008
$
(4,549,500)
$
2,416,235
$
(2,133,565)Total gains or losses (realized
and unrealized)Included in net loss

3,351,600

-

3,351,600Impairment valuation
adjustment
-

-

-Purchases, issuances, and
settlements, net
-

(45,589)

(45,589)Transfers to Level 3

-

-

-Balance at March 31,
2009
$
(1,197,900)
$
2,370,646
$
1,172,746    16       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 consolidated balance sheet.  Auction
Rate Preferred Securities As of March 31 2009, we had
investments in auction rate preferred securities (ARPS), which are classified
as available-for-sale securities on our consolidated balance sheet and reflected
at fair value.  Due to events in credit markets, the auction events for
these instruments held by us failed during first quarter
2008.  Therefore, the fair values of these securities were estimated
utilizing a discounted cash flow analysis of the estimated future cash flows for
the ARPS as of March 31, 2009.  This analysis considers, among other
items, the collateralization of the underlying security investments, the
creditworthiness of the counterparty, the timing of expected future cash flows
and the expectation of the next time the security is expected to have a
successful auction or the security has been called by the issuer. As a result of
this analysis at March 31, 2009 we recorded no impairment valuation
adjustment.  The ARPS held by us at March 31,
2009, totaling $2,600,000 were in AAA rated funds.  Due to our belief
that the market for these instruments may take in excess of twelve months to
fully recover, we have classified these investments as non-current.  During
the three months ended March 31, 2009, $50,000 of our $2,650,000 ARPS, held at
December 31, 2008, were redeemed at 100% of their par value. As a result of this
redemption we recorded a $4,411 gain on sale of securities held for sale and a
net reduction of $45,589 in our securities available for sale.  As of March
31, 2008, we continue to earn interest on our ARPS under the default interest
rate features of the ARPS.  As of March 31, 2008, as a result of
a temporary decline in fair value of our ARPS, which we attributed to liquidity
issues rather than credit issues, we recorded an unrealized loss of $560,187 to
accumulated other comprehensive loss.  The ARPS held by the Company at
March 31, 2008, totaling $11,039,813, were in AAA rated funds.  Due to
the Companys belief that the market for a portion of these instruments would
take in excess of twelve months to fully recover, we classified $6,964,813 of
these investments as noncurrent.  $4,075,000 of the ARPS were classified as
current since there was a specific plan for redemption by the investments
issuers within the next four months for this portion of ARPS.  At December 31, 2008 for the total
ARPS balance of $2,650,00 held by the company we recorded an aggregate
impairment valuation loss of $233,765, when the decrease in value was considered
other than temporary.  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 hasnt
been a significant change in our operations and risk profile. Note 8 
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
obtain 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 111,842 shares of our common stock, valued at
approximately $682,222, and assumed cash liabilities of approximately $312,768
to be paid over a 4-year period in exchange for approximately 50,127,218 shares
of the common stock of IDI, which increased our aggregate common share
equivalents to approximately 51,426,719 shares. During the year ended December
31, 2007 we satisfied our obligation to the creditors of IDI. Since May 18,
2004, we have    17    advanced
additional cash to IDI for the payment of operating expenses, which continues
development of the CodecSys technology. As of March 31, 2009, we had advanced an
aggregate amount of $2,253,612.  During the year ended December 31,
2008, we acquired 1,513,564 IDI common share equivalents in exchange for 99,731
shares of our common stock valued at $249,500 and a cash payment of $547 both of
which were expensed to research and development. At December 31, 2008, we owned
approximately 52,940,283 IDI common share equivalents, representing
approximately 89% of the total outstanding IDI share equivalents.  During the three months ended March
31, 2009, we acquired 900,000 IDI common share equivalents in exchange for
60,000 shares of our common stock valued at $135,000 which was expensed to
research and development. At March 31, 2009 we owned approximately 53,840,283
IDI common share equivalents, representing approximately 91% of the total
outstanding IDI share equivalents.  Note 9
 Recent Accounting Pronouncements In April 2009, the FASB released FASB
Staff Position (FSP) SFAS 107-1 and Accounting Principles Board (APB) Opinion
No. 28-1, Interim Disclosures about Fair Value of Financial Instruments (SFAS
107-1 and APB 28-1).  This FSP amends FASB Statement No. 107,
Disclosures about Fair Values of Financial Instruments, to require disclosures
about fair value of financial instruments in interim financial statements as
well as in annual financial statements.  The FSP also amends APB
Opinion No. 28, Interim Financial Reporting, to require those disclosures in
all interim financial statements.  This proposal is effective for
interim periods ending after June 15, 2009, but early adoption is permitted for
interim periods ending after March 15, 2009.  The Company plans to
adopt SFAS 107-1 and APB 28-1 and provide the additional disclosure requirements
for second quarter 2009.  In April 2009, the FASB released FSP
SFAS 157-4, Determining Whether a Market Is Not Active and a Transaction Is Not
Distressed (SFAS 157-4).  This FSP provides additional guidance in
determining whether a market for a financial asset is not active and a
transaction is not distressed for fair value measurement purposes as defined in
SFAS 157, Fair Value Measurements.  SFAS 157-4 is effective for
interim periods ending after June 15, 2009, but early adoption is permitted for
interim periods ending after March 15, 2009.  The Company plans to
adopt the provisions of SFAS 157-4 during second quarter 2009, but does not
believe this guidance will have a significant impact on the Companys financial
statements.  In April
2009, the FASB released FSP SFAS 115-2 and SFAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments.  This proposal
provides guidance in determining whether impairments in debt securities are
other than temporary, and modifies the presentation and disclosures surrounding
such instruments.  This FSP is effective for interim periods ending
after June 15, 2009, but early adoption is permitted for interim periods ending
after March 15, 2009.  The Company plans to adopt the provisions of
this Proposed Staff Position during second quarter 2009, but does not believe
this guidance will have a significant impact on the Companys financial
statements. Note 10 
Supplemental Cash Flow Information 2009 During the three months ended March
31, 2009, we acquired 900,000 IDI common share equivalents in exchange for
60,000 shares of our common stock valued at $135,000 which was expensed to
research and development  For the three months ended March 31,
2009 an aggregate non-cash expense of $1,131,159 was recorded for the accretion
of the senior 6.25% convertible notes of $1,047,825 and the unsecured
convertible note of $83,334.  For the three months ended March 31,
2009 we received $58,500 from the exercise of 50,000 warrants from one
individual at an exercise price of $1.17 per share.  2008 During the three months ended March
31, 2008, we issued 160,000 shares of our common stock to a corporation to
provide investor relations services for the Company. The value of these shares
of $488,000 was recorded as a prepaid expense and will be recognized over the
service periods as follows:     18     2008
$  
     427,0032009
60,997$
       488,000  During the three months ended March
31, 2008, we issued 21,000 shares of our common stock pursuant to an existing
consulting agreement to a corporation to provide investor relations services for
the Company. The value of these shares of $54,600 was recorded in general and
administrative expense.  On March 18, 2008, one of the
institutional funds converted an aggregate of $54,505 of its convertible notes
into 36,337 shares of our common stock resulting in an extinguishment of debt
non-cash expense of $6,056 included as interest expense for the three months
ended March 31, 2008.  During the three months ended March
31, 2008, we acquired 99,800 IDI common share equivalents in exchange for 6,667
shares of our common stock valued at $19,667 which was expensed to research and
development  For the three months ended March 31,
2008, an aggregate non-cash expense of $1,131,916 was recorded for the accretion
of i) the senior 6% convertible notes of $757 (ii) the unsecured convertible
note of $83,334 and (iii) $1,047,825 for the senior secured 6.25% Convertible
note, as interest expense.  The Company paid no cash for income
taxes during the quarters ended March 31, 2009 and 2008.  The Company paid $239 and $1,108 for
interest expense during the three months ended March 31, 2009 and March 31,
2008, respectively.  Note 11  Subsequent
 Events  On April 13, 2009, we issued 60,000
shares of our common stock to an individual in exchange for 900,000 share
equivalents of IDI.    19     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 risk factors
discussed in Item 1A of our Annual Report on Form 10-K for the year ended
December 31, 2008, as follows: · dependence
on commercialization of our CodecSys technology; · our
need and ability to raise sufficient additional capital; · our
continued losses; · restrictions
contained in our outstanding convertible notes; · general
economic and market conditions; · ineffective
internal operational and financial control systems; · rapid
technological change; · intense
competitive factors; · our
ability to hire and retain specialized and key personnel; · dependence
on the sales efforts of others; · dependence
on significant customers; · uncertainty
of intellectual property protection; · potential
infringement on the intellectual property rights of others; · factors
affecting our common stock as a penny stock; · extreme
price fluctuations in our common stock; · price
decreases due to future sales of our common stock; · future
shareholder dilution; and · absence
of dividends. Because the
risk factors referred to above could cause actual results or outcomes to differ
materially from those expressed or implied in any forward-looking statements
made by us or on our behalf, you should not place undue reliance on any
forward-looking statement.  Further, any forward-looking statement speaks
only as of the date on which it is made, and we undertake no obligation to
update any forward-looking statement to reflect events or circumstances after
the date on which the statement is made or to reflect the occurrence of future
events or developments.  New factors emerge from time to time, and it is
not possible for us to predict which factors will arise.  In addition, we
cannot assess the impact of each factor on our business or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.      20    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, 2008. Except for the critical
accounting policy set forth below entitled Valuation of Investments, there
have been no other significant changes in our critical accounting policies or
estimates since those reported in our Annual Report. Valuation
of Investments As discussed
in Note 7 to the unaudited condensed consolidated financial statements, we
adopted the provisions of SFAS 157 effective January 1, 2008.  In
valuing our investments, we predominantly use market data or data derived from
market sources. When market data is not available, such as when the investment
is illiquid, we utilize a discounted cash flow analysis to arrive at the
recorded fair value. This process involves incorporating our assumptions about
the anticipated term and the yield that a market participant would require to
purchase the security in the marketplace. We utilized unobservable (Level 3)
inputs in determining the fair value of our auction rate preferred securities,
which totaled $2,370,646 at March 31, 2009. Our auction
rate preferred securities are classified as available-for-sale securities and
reflected at fair value.  In prior periods, due to the auction process
which took place every 7-30 days for most securities, quoted market prices were
readily available, which would qualify as Level 1 under SFAS
157.  However, due to events in credit markets during 2008, the
auction events for most of these instruments failed, and, therefore, we have
determined the estimated fair values of these securities utilizing a discounted
cash flow analysis as of March 31, 2009.  This analysis considers,
among other items, the collateralization of the underlying securities, the
expected future cash flows and the expectation of the next time the security is
expected to have a successful auction.  These securities were also
compared, when possible, to other observable market data with similar
characteristics to the securities held by us.  Due to these events, we
reclassified these instruments as Level 3 during 2008 and recorded a permanent
decline in fair value of $233,765 as of December 31, 2008. No change was made in
the valuation as of March 31, 2009, but the amount changed due to the redemption
of $50,000 of these securities in the three months ended March 31, 2009 and a
$4,411 gain on the sale of securities was recorded and the carrying value was
reduced by $45,589. We believe we have sufficient cash and cash equivalents
available at March 31, 2009 to allow us sufficient time for the securities to
return to full value.  We will re-evaluate each of these factors as
market conditions change in subsequent periods. Executive
Overview The current economic downturn and
uncertainty in the financial markets in the U.S. and internationally may
adversely affect our business, financial results and our liquidity. If economies
remain unstable or weaken, or if businesses or consumers perceive that these
economic conditions may continue or weaken, we may experience declines in the
sales or renewals as customers delay or defer buying or reduce their level of
spending activity. Moreover, these economic conditions and uncertain financial
markets have caused companies across many of the industries we serve,
particularly in the financial services and retail sectors, to experience
downturns in their businesses, which may cause our customers in these industries
to reduce the level of services they purchase from us. Additionally, we may
experience increased difficulty in obtaining financing in the future, which
could negatively impact our ability to pursue our business and development of
CodecSys products. As a result, we cannot predict what impact the current
economic downturn and uncertainty of the financial markets will have on our
business, but expect that such events may have an adverse effect on our
business, financial results and liquidity in the current quarter and future
periods, including the remainder of 2009.  On November
15, 2007, we entered into a two-year license agreement with IBM pursuant to
which we will license our patented CodecSys technology for use by IBM in video
encoders that IBM intends to manufacture and sell.    21    The
initial IBM video encoder was sold in the three months ended March 31, 2009 and
we recorded license revenue of $16,666 on the sale.  In addition, we
received $5,000 of license revenue from the sale of additional products sold by
a licensee of the CodecSys technology. The IBM agreement was our first
significant license of the CodecSys technology for use in a commercial
application.  We believe this agreement may hold substantial revenue
opportunities for our business.  Sales activities with respect to products
incorporating our CodecSys technology have commenced with the initial sales
referenced above.  We have in addition entered into two distributor
agreements with foreign distributors, who have commenced sales efforts During the quarter ended March 31,
2009, our revenues decreased by 215% compared to the same quarter in 2008. This
decrease resulted primarily from customer contracts that were either not renewed
or were completed, as discussed below. Net cash used for operations in the three
months ended March 31, 2009 increased compared to the three months ended March
31, 2008 by 8%.  Until cash from operations is sufficient to cover all
corporate expenses, we will continue to deplete our available cash and increase
our need for future equity and debt financing.  Results of Operations for the
Three Months ended March 31, 2009 and March 31, 2008  Revenues  The Company generated $376,089 in
revenue during the three months ended March 31, 2009.  During the same
three-month period in 2008, the Company generated revenue of $1,187,392.
 The decrease in revenue of $811,303 or approximately 215% was due
primarily to the nonrenewal of two customer contracts and completion of work for
another customer.  The reduction in revenue for these three customers
accounted for $693,559 of the total reduction in revenue for the three months
ended March 31, 2009 compared to revenue for the three months ended March 31,
2008.  The remainder of the decrease in revenues was spread over many
customers for which the Company performed significantly less installation work
and other services in the three months ended March 31, 2009 than it did for
those customers in the first quarter of 2008.  The Company's three largest
customers sales revenues accounted for approximately 43% and 59% of total
revenues for the quarters ended March 31, 2009 and 2008, respectively.  The
three largest customers in 2008 are not the three largest customers in 2009.
 Any material reduction in revenues generated from any one of its largest
customers could harm the Companys results of operations, financial condition
and liquidity.  Cost of Revenues  Costs of Revenues decreased by
approximately $640,768 to $419,476 for the three months ended March 31, 2009,
from $1,060,244 for the three months ended March 31, 2008.  The decrease
was due to decreased activity in installation of equipment, which resulted in a
decrease in the costs related to such installation services for all the
Companys customers of $294,963. There was not a decrease in the cost of
equipment relative to the sales price of equipment sold, but just a decrease in
the amount of installations performed and the general operations department
costs also decreased by approximately $176,150 due to the decrease in
installation activity. In addition, satellite distribution costs decreased by
$171,864, which was primarily the result of one customer no longer receiving
services from us.  Expenses  General and Administrative expenses
for the three months ended March 31, 2009 were $1,058,239 compared to $1,534,181
for the three months ended March 31, 2008.  The decrease of approximately
$475,942 resulted primarily from a decrease in expenses incurred for outside
consultants of $600,603 and a decrease in bad debt expense of $70,417 partially
offset by an increase in expenses of $135,000 resulting from the purchase of
minority interests in one of our subsidiaries and an increase in legal expenses
of $61,781. Research and development in process increased by $228,216 for the
three months ended March 31, 2009 to $1,002,003 from $773,787 for the three
months ended March 31, 2008 and depreciation expense increased by $107,319 in
the same period.  These increases resulted primarily from increased
development staff and related expenses of the development activity and the
purchase of equipment used in the development activity.    22    Interest
Expense  For the three months ended March 31,
2009, the Company incurred interest expense of $1,602,378 compared to interest
expense for the three months ended March 31, 2008 of $1,501,792.  The
increase of $100,586 resulted primarily from the Company electing to capitalize
interest expense on our 6.25% senior secured convertible note, calculated at 9%
for the quarter, rather than paying the 6.25% interest in cash. The interest
expense recorded consisted of interest of $1,131,916 recorded to account for the
accretion of note liability on our balance sheet, capitalized interest on our
6.25% senior secured convertible note of $337,500 and amortization of debt
offering costs of $114,750.  Net Loss  The Company realized a net loss for
the three months ending March 31, 2009 of $648,048 compared with net income for
the three months ended March 31, 2008 of $2,158,983. The decrease in net income
of $2,807,031 was primarily the result of a decrease in derivative valuation
gain of $2,657,463, which resulted primarily from valuation of our 6.25% senior
secured convertible note.  Revenues decreased as described above and gross
margin from work performed also decreased by $170,535 and interest income
decrease by $153,759, which also contributed to the decreased net income.  Liquidity and Capital
Resources  At March 31, 2009, we had cash of
$2,830,283, total current assets of $3,302,849, total current liabilities of
$3,171,111 and total stockholders' deficit of $3,725,964.  Included in
current liabilities is $1,197,900, which relates to the value of the embedded
derivatives for the 6.25% senior secured convertible note and related warrants
and the unsecured convertible note and warrants. Our current liabilities,
without considering the derivative liability, were $1,973,211.  As of March 31, 2009, we held
approximately $2,600,000 of auction rate preferred securities, valued at
$2,370,646 and classified as long-term investments. Beginning in February 2008,
many of these auction rate preferred securities became illiquid because their
scheduled auctions failed to settle. During the second quarter 2008, $8,800,000
of the $11,600,000 auction rate preferred securities held at March 31, 2008 were
liquidated at par, with the Company not sustaining any losses. However, we may
have limited or no opportunities to liquidate the remaining auction rate
investments and fully recover their stated value in the near term. An auction
failure occurs when the parties wishing to sell securities at auction cannot
effect a sale. When an auction fails, the affected securities begin to pay
interest under their default interest rate terms. As a result of this
illiquidity caused by the lack of an active market, these investments were
classified as non-current.   Although approximately 80% of our
investments have been redeemed by the issuers, none of the issuers of the
auction rate preferred securities still held by us have announced a definitive
plan for redemption of the remainder of the securities in the near term.
 We borrowed $1,400,000 from the company that sold us the auction rate
preferred securities using the auction rate preferred securities as collateral.
 A permanent loss of $233,765 was recorded at December 31, 2008. No change
was made in the temporary unrealized loss for the period ending March 31, 2009,
but the amount changed due to the redemption of $50,000 of these securities in
the three months ended March 31, 2009 and a $4,411 gain on the sale of
securities was recorded and the carrying value was reduced by $45,589.
  We utilized a discounted cash flow analysis in determining the fair
value of these securities, which used significant unobservable inputs at March
31, 2009.  All of our remaining auction rate
preferred securities are currently rated AAA, the highest rating given by a
rating agency. We believe we will ultimately be able to liquidate these
investments without significant loss through successful auctions or redemptions
of securities by the issuers. However, it could take a long period of time to
realize the investments full value for a portion of the investments. Based on
our expected operating cash flows and the current illiquidity of the $2,600,000,
less the loan proceeds of $1,400,000, the lack of liquidity of these investments
may adversely affect our operations if we do not increase our sales or find
other sources of capital.  We experienced negative cash flow
used in operations during the three months ended March 31, 2009 of $2,028,899
compared to negative cash flow used in operations for the three months ended
March 31, 2008 of $1,878,480.  The negative cash flow was met by cash
reserves.  We expect to continue to experience negative operating cash flow
as long as we continue our technology development program or until we begin to
receive licensing revenue from licenses of our CodecSys technology or increase
sales in our network division to new or existing customers.    23     On December
24, 2007, we entered into a securities purchase agreement in which we raised
$15,000,000 (less $937,000 of prepaid interest and $1,377,000 of related costs
including commissions).  We are using the proceeds from this financing to
support our CodecSys commercialization and development and for general working
capital purposes.  The senior secured convertible note is due December 21,
2010 and bears interest at 6.25% per annum.  Interest for the first year
was prepaid at closing.  Interest-only payments thereafter in the amount of
$234,375 are due quarterly and commenced in April 2009.  Interest payments
may be made through issuance of common stock in certain circumstances or through
capitalizing the interest, which is the option we elected for the payment due in
April 2009.  The note is convertible into 2,752,294 shares of our common
stock at a conversion price of $5.45 per share, convertible any time during the
term of the note.  We have granted a first priority security interest in
all of our property and assets and of our subsidiaries to secure our obligations
under the note and related transaction agreements. In
connection with the financing, the senior secured convertible note holder
received warrants to acquire 1,875,000 shares of our common stock exercisable at
$5.00 per share.  The warrants are exercisable any time for a five-year
period beginning on the date of grant.  We also issued to the convertible
note holder 1,000,000 shares of our common stock valued at $3,750,000 and
incurred an additional $1,377,000 for commissions, finders fees and other
transaction expenses, including the grant of a three-year warrant to purchase
112,500 shares of our common stock to a third party at an exercise price of
$3.75 per share, valued at $252,000.  A total of $1,377,000 was included in
debt offering costs and is being amortized over the term of the note. See note 6
of our condensed consolidated financial statements included elsewhere in this
report. The $5.45
conversion price of the senior secured convertible note and the $5.00 exercise
price of the warrants are subject to adjustment pursuant to standard
anti-dilution rights.  These rights include (i) equitable adjustments in
the event we effect a stock split, dividend, combination, reclassification or
similar transaction; (ii) weighted average price protection adjustments in the
event we issue new shares of common stock or common stock equivalents in certain
transactions at a price less than the then current market price of our common
stock; and (iii) full ratchet price protection adjustments in the event we
issue new shares of common stock or common stock equivalents in certain
transactions at a price less than $5.45 per share. The senior
secured convertible note contains a prepayment provision allowing us to prepay,
in certain limited circumstances, all or a portion of the note.  The
portion of the note subject to prepayment must be purchased at a price equal to
the greater of (i) 135% of the amount to be purchased and (ii) the company
option redemption price, as defined in the note.  Even if we elect to
prepay the note, the note holder may still convert any portion of the note being
prepaid pursuant to the conversion feature thereof. We also
entered into a registration rights agreement with the holder of the senior
secured convertible note pursuant to which we agreed to provide certain
registration rights with respect to the shares of common stock, the shares of
common stock issuable upon conversion of the note, the shares of common stock
issuable as interest shares under the note and shares of common stock issuable
upon exercise of the warrant under the Securities Act of 1933, as amended (the
Securities Act).  The holder is entitled to demand registration of the
above-mentioned shares of common stock after six months from the closing of the
securities purchase agreement in certain circumstances. The
securities purchase agreement under which the senior secured convertible note
and related securities were issued contains, among other things, covenants that
may restrict our ability to obtain additional capital, to declare or pay a
dividend or to engage in other business activities.  A breach of any of
these covenants could result in a default under our senior secured convertible
note, in which event the holder of the note could elect to declare all amounts
outstanding to be immediately due and payable, which would require us to secure
additional debt or equity financing to repay the indebtedness or to seek
bankruptcy protection or liquidation.  The securities purchase agreement
provides that we cannot do any of the following without the prior written
consent of the holder: · directly
or indirectly, redeem, or declare or pay any cash dividend or distribution on,
our common stock; · issue
any additional notes or issue any other securities that would cause a breach or
default under the senior secured convertible note;     24    · issue
or sell any rights, warrants or options to subscribe for or purchase common
stock or directly or indirectly convertible into or exchangeable or exercisable
for common stock at a price which varies or may vary with the market price of
the common stock, including by way of one or more reset(s) to any fixed price
unless the conversion, exchange or exercise price of any such security cannot be
less than the then applicable conversion price with respect to the common stock
into which any note is convertible or the then applicable exercise price with
respect to the common stock into which any warrant is exercisable; · enter
into or affect any dilutive issuance (as defined in the note) if the effect of
such dilutive issuance is to cause us to be required to issue upon conversion of
any note or exercise of any warrant any shares of common stock in excess of that
number of shares of common stock which we may issue upon conversion of the note
and exercise of the warrants without breaching our obligations under the rules
or regulations of the principal market or any applicable eligible market; · liquidate,
wind up or dissolve (or suffer any liquidation or dissolution); · convey,
sell, lease, license, assign, transfer or otherwise dispose of all or any
substantial portion of our properties or assets, other than transactions in the
ordinary course of business consistent with past practices, and transactions by
non-material subsidiaries, if any; or · cause,
permit or suffer, directly or indirectly, any change in control transaction as
defined in the senior secured convertible note.  On November
2, 2006, we closed on a convertible note securities agreement dated October 28,
2006 with an individual that provided we issue to the convertible note holder
(i) an unsecured convertible note in the principal amount of $1,000,000
representing the funding received by us from an affiliate of the convertible
note holder on September 29, 2006, and (ii) four classes of warrants (A
warrants, B warrants, C warrants and D warrants) which gave the convertible note
holder the right to purchase a total of 5,500,000 shares of our common stock as
described below.  The unsecured convertible note is due October 16, 2009
and bears an annual interest rate of 5%, payable semi-annually in cash or in
shares of our common stock if certain conditions are satisfied.  The
unsecured convertible note is convertible into shares of our common stock at a
conversion price of $1.50 per share, convertible any time during the term of the
note, and is subject to standard anti-dilution rights. The original
expiration date of the A Warrants and the B Warrants was to be one year after
the effective date of a registration statement filed under the Securities Act
registering the subsequent sale of shares received from exercise of the A
warrants and B warrants, but was extended in connection with the exchange
agreement described below.  The A warrants granted the convertible note
holder the right to purchase up to 750,000 shares of common stock at an exercise
price of $1.60 per share and the B warrants granted 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.  On December 3, 2008, all of the then unexercised A
Warrants, which totaled 231,600 warrants, and all of the B Warrants expired
unexercised.  The convertible note holder also received C warrants to
purchase 2,000,000 shares of common stock and D warrants to purchase 2,000,000
shares of common stock, all of which have been cancelled as discussed below. In October
2007, we entered into an exchange agreement with the convertible note holder.
 Pursuant to the exchange agreement, we cancelled the C warrant holders
right to acquire up to 2,000,000 shares of our common stock at $2.10 per share
and the D warrant holders right to acquire up to 2,000,000 shares of our common
stock at $3.00 per share in exchange for the issuance of 650,000 shares of our
common stock.  At this time, the convertible note holder has no warrants to
acquire shares of our common stock. We have
recently secured an additional customer that has the potential to partially
replace the revenues lost from two of our three largest customers in 2008, but
we do not yet know the extent of the work or services that we will be providing
for this customer and to date the revenues have been immaterial.  We
anticipate that our negative cash flow will diminish as our new customers make
projects and equipment available and as we are able to perform under their
respective contracts. Our monthly
operating expenses, including our CodecSys technology research and development
expenses, currently exceed our monthly net sales by approximately $600,000 per
month.  Given this operating deficit, we estimate that our currently
available capital resources will be exhausted in approximately 6 to 8 months if
our current operations remained relatively constant.  We do not anticipate,
however, that our operations will continue    25    without
material change in the near-term.  Specifically, management expects we will
commence sales of our CodecSys CE 1000 and CE 100 products and derive increased
revenue from our recently acquired Fortune 50 client.  We received our
first licensing revenues from CodecSys products of approximately $22,000 in the
three months ended March 31, 2009. We are also pursuing debt and equity
financing from various sources.  To the extent sales and new financing
expectations do not materialize, we intend to decrease operating expenses in
order to preserve and extend our existing cash resources.  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 from
our IBM license agreement. Our
long-term liquidity is dependent upon execution of our business model and the
realization of additional revenue and working capital as described above, and
upon capital needed for continued commercialization and development of the
CodecSys technology.  Commercialization and future applications of the
CodecSys technology are expected to require additional capital estimated to be
approximately $2.0 million annually for the foreseeable future.  This
estimate will increase or decrease depending on specific opportunities and
available funding. To date, we
have met our working capital needs primarily through funds received from sales
of our common stock and from convertible debt financings.  Until our
operations become profitable, we must continue to rely on external funding.
 We expect additional investment capital to 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 securities
with institutional investors similar to those institutions that have provided
funding in the past. 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 features and prepayment options of our
convertible notes and our related warrants are deemed to be derivatives and are
subject to quarterly mark-to-market valuations.  We have investments in auction rate
preferred securities, which are classified as available-for-sale securities and
reflected at fair value.  Approximately 80% of our auction rate
preferred securities have been redeemed by the issuers at par.  The
remaining amount of these securities, which are approximately $2,600,000, we
have classified as non-current assets in the unaudited Condensed Consolidated
Balance Sheet as of March 31, 2009 and valued them at $2,370,646. For a complete
discussion on auction rate preferred securities, including our methodology for
estimating their fair value, see Note 7 to the unaudited condensed consolidated
financial statements.  Our cash and cash equivalents are
also exposed to market risk.  However, because of the short-term maturities
of our cash and cash equivalents, we do not believe that an increase in market
rates would have any significant impact on the realized value of our cash and
cash equivalent investments.  We currently do not hedge interest rate
exposure and are not exposed to the impact of foreign currency fluctuations.    26    Item 4.
 Controls and Procedures  Evaluation of Disclosure Controls and
Procedures  We maintain disclosure controls and
procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934,
as amended.  Our disclosure controls and procedures include controls and
procedures designed to ensure that information required to be disclosed in our
reports filed or submitted under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosures.  As required by Rule 13a-15(b) of the
Exchange Act, we conducted an evaluation, under the supervision of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of March 31,
2009.  Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of March 31, 2009.  Changes in Internal Control over
Financial Reporting  During the most recent fiscal quarter
covered by this report, we made no changes in our internal control over
financial reporting.  Important Considerations  The effectiveness of our disclosure
controls and procedures and our internal control over financial reporting is
subject to various inherent limitations, including cost limitations, judgments
used in decision making, assumptions about the likelihood of future events, the
soundness of our systems, the possibility of human error, and the risk of fraud.
 Moreover, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes
in conditions and the risk that the degree of compliance with policies or
procedures may deteriorate over time.  Because of these limitations, there
can be no assurance that any system of disclosure controls and procedures or
internal control over financial reporting will be successful in preventing all
errors or fraud or in making all material information known in a timely manner
to the appropriate levels of management.  Part II  Other
Information Item
1. Legal
Proceedings  We have been
named as a defendant in a lawsuit containing certain breach of contract claims.
 The plaintiff alleges damages in the amount of $120,000 plus warrants to
acquire 120,000 shares of our common stock at an exercise price of $3.25 per
share.  We believe these claims are meritless and intend to defend the
lawsuit vigorously.  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 on Form 10-K for the
year ended December 31, 2008.  Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds **** On April 13,
2009, we issued 60,000 shares of our common stock to one individual in exchange
for 900,000 shares of common stock of one of our subsidiaries.  The
individual is an accredited investor and was fully informed concerning his
investment.  In the transaction, we relied on the exemptions from
registration under the Securities Act set forth in Sections 4(2) and 4(6)
thereof. Item 3.  Defaults Upon Senior
Securities  None.    27     Item
4. Submission
of Matters to Vote of Security Holders. **** (a) None.  (b) None.  (c) None.  Item
5. Other
Information  (a) None.   Item
6. Exhibits  Exhibit
Number
Description
of Document3.1
Amended
and Restated Articles of Incorporation of Broadcast International.
  (Incorporated by reference to Exhibit No. 3.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2006
filed with the SEC on November 14, 2006.)3.2
Amended
and Restated Bylaws of Broadcast International.  (Incorporated by
reference to Exhibit No. 3.2 of the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2006 filed with the SEC on
November 14, 2006.)4.1
Specimen
Stock Certificate of Common Stock of Broadcast International.
 (Incorporated by reference to Exhibit No. 4.1 of the Company's
Registration Statement on Form SB-2, filed under cover of Form S-3,
pre-effective Amendment No. 3 filed with the SEC on October 11,
2005.)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*
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.)10.3
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.)10.4
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.)10.5
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.)10.6
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.)10.7
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.)10.8
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.)    28     10.9
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.)10.10
Security
Agreement dated as of December 21, 2007, made by each of the parties set
forth on the signatures pages thereto, in favor of the collateral agent
listed therein.  (Incorporated by reference to Exhibit 10.5 of the
Companys Current Report on Form 8-K filed with the SEC on December 26,
2007.)14.1
Code of
Ethics.  (Incorporated by reference to Exhibit No. 14 of the
Companys Annual Report on Form 10-KSB filed with the SEC on March 30,
2004.)21.1
Subsidiaries.  (Incorporated by reference to Exhibit No.
21.1 of the Companys Annual Report on Form 10-KSB filed with the SEC on
April 1, 2005.)31.1
Certification of Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
Certification of Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. *   Management contract or compensatory plan or
arrangement.    29     SIGNATURES  Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.  Broadcast
International, Inc.   Date: May
5, 2009 /s/ Rodney M. Tiede By:  Rodney
M. Tiede Its:
 President and Chief Executive Officer (Principal Executive Officer)   Date: May
5, 2009 /s/ James E. Solomon By: James E.
Solomon Its: Chief
Financial Officer (Principal Financial and Accounting Officer)      30