During the nine months ended September 30, 2010, we entered into five short-term notes with two individuals and three corporations totaling $400,000 of which $200,000 has been repaid to the noteholders, and $50,000 (plus $1,150 of earned interest) was converted into 51,150 shares of our common stock. We used the proceeds from this financing to support our CodecSys commercialization and development and for general working capital purposes. The notes with the two individuals were dated June 7, 2010, each in the principal amount of $50,000 and due on July 31, 2010 with an annual interest rate of 12%. During the three and nine months ended September 30, 2010, one of these notes was paid in full and the other was converted into shares of our common stock mentioned above.

One of the notes with one of the corporations was dated June 29, 2010 in the principal amount of $100,000, with an annual interest rate of 12%, and was originally due on July 31, 2010. The due date, however, has been extended to December 31, 2010 and remains outstanding at September 30, 2010. Another obligation resulting from payment due on a commission agreement of $50,000, with an annual interest rate of 1% per month was paid in full during the three and nine months ended September 30, 2010. On July 1, 2010, we entered into a revolving line of credit promissory note with a company with a maximum line of credit of $500,000 to finance the purchase of

equipment to be placed at customer locations. Payment on this note is due the earlier of December 31, 2010 or receipt of payment from our customer for the financed equipment. During the three and nine months ended September 30, 2010, we borrowed $150,000 on the line of credit note and repaid $100,000 resulting in a $50,000 outstanding balance. For the three and nine months ended September 30, 2010, an aggregate of $12,076 and $13,758, respectively was included in interest expense related to these obligations.

During the nine months ended September 30, 2010, we entered into four convertible notes with three individuals and one corporation totaling $925,000. We used the proceeds from this financing to support our CodecSys commercialization and development and for general working capital purposes. The unsecured 3% convertible notes bear an interest rate of 3% per annum paid in cash and are due on December 31, 2012. The principal of the notes is convertible into shares of our common stock at a conversion price of $1.00 per share or at the price per share of the equity sold before September 30, 2010, and is convertible any time during the term of the notes at the option of the holders or the Company.

During the three and nine months ended September 30, 2010, $900,000 of the principal balance plus $8,925 of accrued interest was converted into 908,925 shares of our common stock. The remaining $25,000 principal balance was returned, at the individual’s request, and the transaction was voided.

In connection with the financing, the unsecured 3% convertible note holders received warrants to acquire 925,000 shares of our common stock exercisable at $1.50 per share. The number of warrants and the conversion price of the stock may be changed based on sales of equity sold before September 30, 2010. The warra nts are exercisable any time for a three-year period beginning on the date of grant. The warrants and the embedded conversion feature and prepayment provision of the unsecured 3% convertible notes have been accounted for as derivatives. These warrants were cancelled upon conversion of the notes to equity and new warrants were issued under the provisions of the private placement offering memorandum.

The principal value of $900,000 of the unsecured 3% convertible notes had been accreted over the term of the obligations, for which $40,129 and $107,885 was included in interest expense for the three and nine months ended September 30, 2010, respectively. The notes bore a 3% annual interest rate, and for the three and nine months ended September 30, 2010, $3,321 and $8,925, respectively was included in interest expense.

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

On November 6, 2009, we entered into a Commercial Premium Finance Promissory Note with AFCO Credit Corporation. The beginning principal of the note was $36,547 and is payable in 11 monthly installments beginning Jan 1, 2010 and bears a 7.8% annual interest rate.

In 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 m onthly 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. During the nine months ended September 30, 2010, we redeemed the remaining balance of $300,000 (par value) of our ARPS and recognized a $49,264 loss on sale of available for sale securities. During the nine months ended September 30, 2010 we retired the remaining $162,500 balance of ARPS secured note.

On December 24, 2007, we ~~entere d~~entered into a securities purchase agreement in which we raised $15,000,000 (less $937,000 of prepaid interest). We used the proceeds from this financing to support our CodecSys commercialization and development and for general working capital purposes. Pursuant to the financing, we issued a senior secured convertible note in the principal amount of $15,000,000 (which principal amount has been increased as discussed below).The senior secured convertible note was originally due December 21, 2010, but has been conditionally extended to December 21, 2011 depending on our future financing efforts as discussed below. Because of this financing condition, the note may revert back to December 21, 2010.$15,000,000. The senior secured convertible note ~~bears~~bore interest at 6.25% per annum ~~(which rate has been changed as discussed below)~~ if paid in cash. Interest for the first year was prepaid at closing. Interest-only payments thereafter in the amount of $234,375 ~~are~~were due quarterly and commenced in April 2009. ~~Interest payments may be made through issuance of common stock in certain circumstances or may be capitalized and added to the principal.~~ The

original principal of the note iswas convertible into 2,752,294 shares of our common stock at a conversion price of $5.45 per share, convertible any time during the term of the note. We granted a first priority security interest in all of our property and assets and of our subsidiaries to secure our obligations under the note and related transaction agreements. ~~In August 2009 we received a waiver from the note holder releasing their security interest for the equipment purchased under our sale lease back financing. See Note 9.~~

In connection with the 2007 financing, the senior secured convertible note holder received warrants to acquire 1,875,000 shares of our common stock exercisable at $5.00 per share. We also issued to the convertible note ~~h older~~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~~was amortized over the term of the note.

From March 26, 2010 through October 29, 2010, we entered into a series of amendments to the senior secured convertible ~~note. Each of these amendments is described below.~~

~~On July 30, 2010, we entered into a further amendment agreement with~~ the holder of the senior secured convertible note regarding the note and warrant reset provisions. The July 30, 2010 amendment conditionally amended the maturity date of the note to June 21, 2012. If we are unsuccessful in raising the $6.0 million in equity financing referenced above, the maturity date of the note will automatically be restored to its original date of December 21, 2010. The holder of the note agreed to a conversion price of the note of $1.80 per share instead of the price at which we sell equity between now and September 30, 2010 and reduced the required cash balance referenced in the March 26, 2010 amendment above from $1,250,000 to $950,000. In addition, the number of warrants originally granted to the holder pursuant to the 2007 financing increased from 1,875,000 to 5,208,333 and are now exercisable at $1.80 per share instead of $5.00 per share. The warrants continue to be exercisable any time for the five years from the original date of grant. In consideration of entering into the July 30, 2010 amendment the note holder was issued 2,000,000 shares of common stock and will be issued an additional ~~800,000~~3,000,000 shares of our common stock, ~~at the completion of the required equity raise.~~

On September 27, 2010, we entered into a further amendment agreement with the holder of the senior secured convertible note regarding the note. Pursuant to this amendment, the due date for the required equity financing was extended to October 31, 2010.

~~On October 29, 2010, we entered into a fourth amendment agreement with the holder of the senior secured convertible note regarding the note and warrant provisions. The fourth amendment (i)~~ increased the amount of the required equity raise to $8.0 million, approximately $2.5 million of which has been raised or committed by investors; (ii) extended the time in which we can complete the equity financing to December 3, 2010; (iii) deleted the provision of the senior secured convertible note that granted the Company the option to redeem the note prior to its maturity date; (iv) changed the conversion price of the note if we are successful in completing the required capital raise to an amount equal to 150% of the lowest price at which Company common stock is sold during calendar year 2010; (v) changed the exercised price of the warrants to an amount equal to 150% of the lowest price at which Company common stock is sold during calendar year 2010; (vi) provides that if we are successful in completing the required capital raise the number of warrants ~~will be increased~~by 3,333,333 shares, and reduced the warrant exercise price to $1.80 per share for all warrants, all as ~~currently provided~~consideration for the amendments.

On December 24, 2010, we closed on the Debt Restructuring (as defined below). In connection therewith, we (i) issued an Amended and Restated Senior Convertible Note in the ~~6.25% senior secured convertible promissory note;~~principal amount of $5.5 million (the “Amended and ~~(vii) extended the expiration date~~Restated Note”) to Castlerigg Master Investment Ltd. (“Castlerigg”), (ii) paid $2.5 million in cash to Castlerigg, (iii) cancelled warrants previously issued to Castlerigg that were exercisable for a total of ~~the warrants to December 31, 2013.~~

If the additional funding is not completed by December 3, 2010, certain provisions of the prior amendments will be void in that the maturity date will revert back to December 21, 2010, the conversion price will become the lowest price at which equity securities have been sold, the exercise price will become the lowest price at which equity securities have been sold, the number of warrants then outstanding will be determined by the original purchase documents, and the Company will not have an obligation to maintain a balance of cash and marketable securities equal to $950,000.

The conversion price of the senior secured convertible note and the exercise price of the warrants continue to be subject to adjustment pursuant to standard anti-dilution rights. If we are not successful in completing the $8.0 million equity raise by December 3, 2010, then the conversion price of the note and the exercise price of the warrants will reset to the lowest price at which we will have sold equity. 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 new5,208,333 shares of common stock, or(iv) issued 800,000 shares of common stock ~~equivalents~~to Castlerigg in ~~certain transactions~~satisfaction of an obligation under a prior loan amendment, (v) entered into the Letter Agreement pursuant to which we paid Castlerigg an additional $2.75 million in cash in lieu of the issuance of $3.5 million in stock and warrants as provided in the loan restructuring agreement under which the Amended and Restated Note and other documents was issued (the “Loan Restructuring Agreement”), and (vi) entered into an Investor Rights Agreement with Castlerigg dated December 23, 2010. As a result of the foregoing, Castlerigg forgave approximately $7.2 million of principal and accrued but unpaid interest. The Debt Restructuring was considered a troubled-debt restructuring and a gain on debt restructuring of $3,062,457 was recorded during the year ended December 31, 2010, which was the difference between the adjusted carrying value of the original note and the carrying value of the Amended and Restated Note.

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

The Investor Rights Agreement provides Castlerigg with certain registration rights with respect to the Company’s securities held by Castlerigg. These registration rights include an obligation of the Company to issue additional warrants to Castlerigg if certain registration deadlines or conditions are not satisfied. The agreement also contains full-ratchet anti-dilution price protection provisions in the event the Company issues stock or convertible debt with a purchase price or conversion price less than the ~~then curre nt market~~conversion 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 150% of the lowest price at which Company common stock is sold during calendar year 2010. described above.

As of ~~September 30,~~March 31, 2011 and 2010, ~~and 2009,~~ we recorded an aggregate derivative liability of ~~$1,000,500~~$1,711,100 and ~~$1,321,700,~~$378,600 respectively, related to the conversion features of the Amended and ~~a derivative valuation loss of $235,200~~Restated Note and athe conversion feature and warrants related to the Original Note. A derivative valuation gain of ~~$2,461,200~~$896,300 and $386,600 was recorded during the three months ended March 31, 2011 and 2010, to reflect the change in value of the aggregate derivative liability since December 31, ~~2009~~2010 and ~~2008,~~2009, respectively. The aggregate derivative liability of ~~$1,000,500 included $10,900~~$1,711,100 for the ~~note~~Amended and Restated Note conversion feature ~~and $989,600 for the warrants. These values were~~was calculated at March 31,211 using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate of ~~0.16% for the note and 0.42%for the warrants,~~1.29%, (ii) ~~ex pected~~expected life (in years) of ~~0.20~~2.7, (iii) expected volatility of 84.11% for the conversion feature, ~~and 2.20 for the warrants; (iii) expected volatility of 81.37% for the conversion feature and 85.52% for the warrants;~~ (iv) expected dividend yield of 0.00%; and (v) stock trading price of ~~$0.75.~~$0.96.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2010, the principal value of the 6.25% senior secured convertible note was increased by $1,131,836 to $17,528,086 (convertible into 9,737,826 common shares), for interest capitalized rather than making a payment in cash. During the nine months ended September 30, 2009, the principal value of the 6.25% senior secured convertible note was increased by $1,035,452 for interest capitalized. Capitalized interest is computed at 9%.

~~The original principal value of the note is being~~debt discounts were accreted over the term of the obligation, for which $1,047,825 ~~and $3,143,475~~ was included in interest ~~expense for the three and nine months ended September 30, 2010 and 2009, respectively.~~expense. The note ~~now~~ bears a 6.25% annual interest rate payable quarterly

and for the ~~nine~~three months ended ~~September 30,~~March 31, 2010, ~~$27,388~~$26,196 was ~~accrued and~~ included asin interest expense. For the ~~nine~~three months ended ~~September 30,~~March 31, 2010, ~~$1,106,217~~$343,297 ($~~1,131,836~~368,916 offset by $25,619 note interest accrued in 2009) was included in interest expense for capitalized interest. ~~For the nine months ended September 30, 2009, $1,012,014 ($1,035,452 offset by $23,438 note interest accrued in 2009) was included in interest expense for capitalized interest.~~

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

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;~~share subject to full-ratchet anti-dilution price protection provisions ; and (iv) we issued to the convertible note holder four classes of warrants (A Warrants, B Warrants, C Warrants and D Warrants), which give the convertible note holder the right to purchase a total of 5,500,000 shares of our common stock as described below. The A and B Warrants originally expired one year after the effective date of a registration statement filed under the Securities Act of 1933, as amended (the “Securities Act”), to register the subsequent ~~s ale~~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 ~~hold er~~holder exercised 454,000 A Warrants. We entered into an exchange agreement dated October 31, 2007 in which the convertible note holder received 650,000 shares of our common stock in exchange for cancellation of the C and the D Warrants. The expiration date of the A Warrants and the B Warrants was extended from January 11, 2008 to December 3, 2008. During the year ended December 31, 2008, the convertible note holder exercised 64,400 A Warrants. On December 3, 2008, the remaining 231,600 A Warrants and 750,000 B Warrants were unexercised and expired.

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

AsOn December 24, 2010 we closed on a Debt Restructuring as mentioned above, In connection with that Debt Restructuring the Company amended the note with the holder of ~~September 30,~~a $1.0 million unsecured convertible note, pursuant to which the maturity date of the note was extended to December 31, 2013. We issued 150,000 shares to the holder of this note as consideration to extend the term of the note.

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

At March 31, 2011 and 2010 ~~and 2009,~~ we recorded an aggregate derivative liability of ~~$2,800~~$1,016,300 and ~~$100,000, and a~~$73,300, respectively, related to the conversion feature of the note. A derivative valuation gain of ~~$197,200~~$385,600 and ~~$626,700,~~$126,700, respectively, was recorded to reflect the change in value of the aggregate derivative liability since December 31, ~~2009~~2010 and ~~2008,~~December 31, 2009, respectively. The aggregate derivative liability of ~~$2,800~~$1,016,300 for the conversion feature of the note was calculated using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate ~~0.16%~~1.29%, (ii) expected life (in years) of ~~0.20;~~2.8; (iii) expected volatility of ~~81.37%~~83.92%; (iv) expected dividend yield of 0.00%; and (v) stock trading price of ~~$0.75.~~$0.96.

~~The~~In connection with the amendment mentioned above, the principal value of ~~$1,000,000~~the note will be accreted due to the difference in the value of the ~~unsecured convertible note~~conversion feature before and after the amendment. The accretion for the three months ended March 31, 2011, was ~~accreted over the initial term of the obligation, for which $250,002~~$83,334 and was included in interest ~~expense for the nine months ended Septembe r 30, 2009. The note was fully accreted as of the year ended December 31, 2009~~expense. The note currently bears an 8% annual interest rate payable semi-annually, and for each on the three ~~and nine months~~month periods ended ~~September 30,~~March 31, 2011 and 2010, $20,000 ~~and $60,000, respectively was included in interest expense. For the three and nine months ended September 30, 2009 the note bore a 5% annual interest rate and $12,500 and $37,356 respectively~~ was included in interest expense.

~~Senior Secured 6% Convertible Notes~~Accounts Receivable Purchase Agreements

~~On May 16, 2005,~~During the year ended December 31 2010 we ~~consummated a private placement of $3,000,000 principal~~entered into two Accounts Receivable Purchase Agreements with one individual for an aggregate amount of ~~6% senior secured convertible notes~~$775,000. In these agreements, we pledged certain outstanding accounts receivable in exchange for advanced payment and ~~related securities, including common stock warrants~~a commitment to remit to the purchaser the amount advanced upon collection from our customer. Terms of the first agreement under which we were advanced $175,000 include a 3% discount with a 3% interest fee for every 30 days the advances remain outstanding. Terms of the second agreement under which we were advanced $500,000 include a 10% discount with a 0.5% interest fee for every 30 days the advances remain outstanding.

During the three months ended March 31, 2011 we converted the remaining $675,000 of principal along with $109,292 of accrued and ~~additional investment rights, to four institutional funds. The senior secured convertible notes were originally due May 16, 2008 and were originally converti ble~~unpaid interest into ~~1,200,000~~1,307,153 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, which adjusted the conversion rate~~warrants to $1.50 per share. The warrants and the embedded conversion feature of the senior secured convertible notes have been accounted for as derivatives. As of December 31, 2008, the entire $3,000,000 principal balance had been converted into 1,200,000purchase an additional 653,576 shares of our common stock. ~~As of December 31, 2008, 1,167,298 of~~The warrants contain anti-dilution price protection provisions in the ~~original 1,200,000 warrants had been exercised leaving 32,702 which remained unexercised and expired on May 15, 2010.~~event the Company issues stock or convertible debt with a purchase price or conversion price less than $1.00 per share.

~~As of September 30, 2010,~~At March 31, 2011 we recorded noan aggregate derivative liability ~~and a~~of $423,700 related to the warrant reset provision. A derivative valuation gain of ~~$4,600~~$26,400 was recorded to reflect the change in value of the aggregate derivative liability ~~associated~~from the time the warrants were issued. The aggregate derivative liability of $423,700 for the reset provision of the warrants was calculated using the Black-Scholes pricing model with the ~~expiration~~following assumptions: (i) risk free interest rate 2.24%, (ii) expected life (in years) of ~~32,702~~5; (iii) expected volatility of 85.81%; (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.96.

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

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

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

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

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

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

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

On December 24, 2010, we also closed on ~~May 16,~~the Debt Restructuring. In connection therewith, we (i) issued an Amended and Restated Senior Convertible Note in the principal amount of $5.5 million (the “Amended and Restated Note”) to Castlerigg Master Investment Ltd. (“Castlerigg”), (ii) paid $2.5 million in cash to Castlerigg, (iii) cancelled warrants previously issued to Castlerigg that were exercisable for a total of 5,208,333 shares of common stock, (iv) issued 800,000 shares of common stock to Castlerigg in satisfaction of an obligation under a prior loan amendment, (v) entered into the Letter Agreement pursuant to which we paid Castlerigg an additional $2.75 million in cash in lieu of the issuance of $3.5 million in stock and warrants as provided in the loan restructuring agreement under which the Amended and Restated Note and other documents was issued (the “Loan Restructuring Agreement”), and (vi) entered into an Investor Rights Agreement with Castlerigg dated December 23, 2010. As a result of ~~September 30, 2009,~~the foregoing, Castlerigg forgave approximately $7.2 million of principal and accrued but unpaid interest.

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

At March 31, 2011, we recorded an aggregate derivative liability ~~$12,800~~of $368,000 related to these warrants and ~~a derivative~~ valuation gain of ~~$27,100~~$36,000 for the three months ended March 31, 2011 to reflect the change in value of the aggregate derivative from the time of issue. The aggregate derivative liability ~~since~~of $368,000 was calculated using the Black-Schools pricing model with the following assumptions: (i) risk free interest rate of 2.24%, (ii) expected life (in years) of 4.9; (iii) expected volatility of 84.82, (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.96.

In connection with the Debt Restructuring, the Company amended the note with the holder of a $1.0 million unsecured convertible note, pursuant to which the maturity date of the note was extended to December 31, ~~2008.~~2013. We also issued 150,000 shares to the holder of this note as consideration to extend the term of the note.

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

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

The Company has certain financial instruments that are measured at fair value on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market ~~pa rticipants~~participants at the measurement date. A three-tier fair value hierarchy has been established which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:

Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;

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

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

We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at ~~September 30, 2010:~~March 31, 2011:

The table below presents our assets measured at fair value on a recurring basis using ~~signific ant~~significant unobservable inputs (Level 3) at ~~September 30, 2010.~~March 31, 2011. We classify financial instruments in Level 3 of the fair value hierarchy when there is reliance on at least one significant unobservable input to the valuation model.

Derivative

Auction Rate

Valuation

Preferred

Liability

Securities

Total
Balance at December 31, 2009
$
(969,900)
$
  274,264
$
(695,636)
Total gains or losses (realized and unrealized)

    Included in net loss

240,100

   (49,264)

  190,836

Valuation adjustment
               -

      -

-
Purchases, issuances, and settlements, net
(273,500)

  (225,000)

(498,500)
Transfers to Level 3

             -

               -

               -
Balance at September 30, 2010
$
  (1,003,300)
$
  -
$
    (1,003,300)


			Derivative
			Valuation
			Liability
Balance at December 31, 2010		$	(14,759,300)
Total gains or losses (realized and unrealized)
	Included in net loss		4,219,300
	Valuation adjustment		--
Purchases, issuances, and settlements, net			(854,100)
Transfers to Level 3			--
Balance at March 31, 2011		$	(11,394,100)

Money Market Funds and Treasury Securities

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

~~Auction Rate Preferred Securities~~

During the nine months ended September 30, 2010, we redeemed our remaining $300,000 ARPS ($274,264 fair value) for $225,000 through a second market broker and recognized a $49,264 loss on sale of available for sale securities. Additionally, we retired our $162,500 ARPS secured note for which the ARPS had been held as collateral.

The ARPS held by us at September 30, 2009, totaled $625,000 ($570,834 fair value). During the nine months ended September 30, 2009, $2,025,000 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 $122,308 gain on sale of securities held for sale and a net reduction of $1,845,401 in our securities ava ilable for sale.

Fair Value of Other Financial Instruments

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

Note 9 – Equipment Financing

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

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

We also entered into a security agreement with the financial institution pursuant to which we granted a first priority security interest in the equipment, whether now owned or hereafter acquired, and in our ~~cus tomer~~customer service agreement and service payments thereunder during the term of the equipment lease. We received a waiver from our 6.25% convertible note holder releasing their security interest in the equipment purchased under our sale lease back financing. See Note 7.6.

The sale leaseback financing arrangement with the financial institution related to the purchase and deployment of certain digital signage equipment for a new customer. As a result of this financing, we incurred an obligation to make 36 monthly payments of approximately $144,000 plus applicable sales taxes. The proceeds of the financing

are being used to purchase and install the digital signage equipment for our customer and for general working capital purposes. We have the right to terminate the lease after making 33 payments for a termination fee of approximately $451,000 after which time we would own all of the equipment. We have accounted for this arrangement as a capital lease.

During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2011 and 2010 we made lease payments totaling approximately $422,096 and ~~$1,266,287~~$422,096 of which ~~$314,080~~$337,174 and ~~$909,781~~$292,568 was applied toward the outstanding lease with ~~$108,016~~$84,922 and ~~$356,506,~~$129,528, respectively included in interest expense. Additionally, we recognized amortization of the lease

acquisition fee of $12,567 ~~and $37,701~~ which was included in interest expense for each of the three ~~and nine~~ months ended ~~September 30,~~March 31, 2011 and 2010, respectively.

Note 10 – Interact Devices Inc. (IDI)

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

On October 23, 2003, IDI filed for Chapter 11 Federal Bankruptcy protection. We desired that the underlying patent process proceed and that the development of CodecSys technology continue. Therefore, we participated in IDI’s plan of reorganization, whereby we would satisfy the debts of the creditors and obtained certain licensing rights. On May 18, 2004, the debtor-in-possession’s plan of reorganization for IDI was confirmed by the United States Bankruptcy Court. As a result of this confirmation, we issued to the creditors of IDI approximately 111,800 shares of our common stock, and cash of ~~approxi mately~~approximately $312,768 in exchange for approximately 50,127,218 shares of the common stock of IDI, which increased our aggregate common share equivalents in IDI to approximately 51,426,719 shares.

~~During the three and nine months ended September 30, 2010,~~Since May 18, 2004, we have acquired ~~67,000 IDI~~an aggregate of 4,056,278 additional common share equivalents ~~in exchange for 4,467 shares of our common stock valued at $4,024, which was expensed in research and development.~~IDI. As of ~~September 30, 2010,~~March 31, 2011, we owned approximately 55,482,997 IDI common share equivalents, representing approximately ~~93.7%~~94% of the total outstanding IDI share ~~equivalents.~~

~~During the three and nine months ended September 30, 2009, we acquired 2,475,714 IDI common share~~ equivalents ~~in exchange for 165,048 shares of our common stock valued at $256,265, which was expensed in research and development.~~

Since May 18, 2004, we have advanced additional cash to IDI for the payment of operating expenses, which continues ~~marketing~~development and ~~development~~marketing of the CodecSys technology. As of ~~September 30,~~March 31, 2011 and 2010, ~~and 2009,~~ we have advanced an aggregate amount of ~~$2,788,209~~$2,913,360 and ~~$2,482,388~~$2,671,996 respectively, pursuant to a promissory note that is secured by assets and technology of IDI.

Note 11 – Recent Accounting Pronouncements

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

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

In December 2010, the FASB issued ASU ~~No 2010-17,~~2010-29, ~~Revenue Recognition~~Business Combinations (Topic 805) – ~~Milestone Method (Topic 605) – Milestone Method~~Disclosure of ~~Revenue Recognition.~~Supplementary Pro Forma Information for Business Combinations. The ~~amendment~~amendments in this Update ~~affect vendors~~are applicable to Public Entities that ~~provide research or development deliverables~~have had a material business combination(s) in ~~an arrangement in which one or more payments are contingent upon achieving uncertain future eve nts or circumstances. Previous to this~~the current period. The Update ~~authoritative guidance on~~specifies that if a public entity presents comparative financial statements, the ~~use~~entity should disclose revenue and earnings of the ~~milestone method did~~combined entity as though the business combination had occurred as of the beginning of the comparable prior annual reporting period only. For example, for a calendar year-end entity, disclosures would be provided for a business combination that occurs in 20X2, as if it occurred on January 1, 20X1. Such disclosures would not ~~previously exist. This Update provides guidance on defining a milestone under Topic 605 and determining when it may~~ be ~~appropriate to apply~~revised if 20X2 is presented for comparative purposes with the ~~milestone method of revenue recognition for research or development transactions. Consideration~~20X3 financial statements (even if 20X2 is the earliest period presented). Previously, in practice, some preparers have presented the pro forma information in their comparative financial statements as if the business combination that ~~is contingent on achievement of a milestone in its entirety may be recognized as revenue~~occurred in the current reporting period ~~in which~~

had occurred as of the ~~milestone is achieved only~~beginning of each of the current and prior annual reporting periods. Other preparers have disclosed the pro forma information as if the ~~milestone is judged to meet certain criteria to be considered substantive such as being (1) Be commensurate with either~~business combination occurred at the beginning of the ~~following: a.~~prior annual reporting period only, and carried forward the related adjustments, if applicable, through the current reporting period. The ~~vendor’s performance~~Update also expands the disclosures to ~~achieve the milestone or b. The enhancement~~include a description of the ~~value~~nature and amount of material, non-recurring pro forma adjustments attributable to the item delivered as a result of a specific outcome resulting from the vendor’s performance to achieve the milestone (2) Relate solely to past performance and (3) Be reasonable relative to all deliverables and payment terms in the arrangement. Milestones should be considered substantive in their entirety and may not be bifurcated. An arrangement may contain both substantive and nonsubstantive milestones that should be evaluated individually. Other proportional revenue recognition methods are also acceptable. business combination.The amendments in this Update are effective ~~prospectively~~ for ~~fiscal years, and interim periods within those fiscal years,~~business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after ~~June~~December 15, 2010. ~~Early adoption is permitted.~~ The Company ~~does not~~only expects this Update to have an impact if it enters into a material business combination in the upcoming year. If one occurs, the guidance in the Update will be followed.

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

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

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

~~In March 2010, the FASB issued ASU No 2010-12,~~ ~~Income Taxes (Topic 740) – Accounting for Certain Tax Effects of the 2010 Health Care Reform Acts.~~ This update amends Subtopic 740-10 and adds paragraph 740-10-S99-4 related to SEC Staff Announcements. In essence, the announcement provides that the two healthcare bills (Health Care and Education Reconciliation Act of 2010, which reconciles the Patient Protection and Affordable Care Act) should be considered together when considering the accounting impact. This update is effective immediately. The Company does not expect the health care bills to effect the Company’s tax positions, but if they do the bills will be considered together.

~~In March 2010, the FASB issued ASU No 2010-11,~~ ~~Derivatives and Hedging (Topic 810) – Scope Exception Related to Embedded Credit Derivatives.~~ This update amends Subtopic 815-15 to clarify the scope exception for analyzing embedded credit derivative features related to the transfer of credit risk in the form of subordination of one financial instrument to another for potential bifurcation. The update indicates that only the embedded credit derivative between financial instruments created by subordination should not be analyzed for bifurcation. All others should be analyzed and are not included in the scope exception. The amendment in this Up date is effective for each reporting entity at the beginning of its first fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the beginning of each entity’s first fiscal quarter beginning after issuance of this Update. Since the Company has no embedded credit derivatives, the Update will not have a significant impact on the financials.

~~In February 2010, the FASB issued ASU No 2010-09,~~ ~~Subsequent Events (Topic 855)- Amendments to Certain Recognition and Disclosure Requirements.~~ ~~This update amends a SEC filers disclosure requirement to disclose the date through which subsequent events are evaluated~~. The amendments are effective immediately upon issuance. Based upon the guidance, the date through which subsequent events were evaluated was omitted for the 10-K and will be for the 10-Qs in 2010 as well.

~~In February 2010, the FASB issued ASU No 2010-08,~~ ~~Technical Corrections to Various Topic.~~ This update provides clarifications, eliminates inconsistencies and outdated provisions within the guidance. None of the provisions fundamentally change US GAAP, but certain clarifications regarding hedging and derivatives may cause a change in the application of that Subtopic. The amendments are effective for the first reporting beginning after issuance – March 31, 2010 for the Company. The amendments were reviewed and no items of significance were noted. As such, this update is not expected to have a significant impact on the Company’s financial statements.

~~In January 2010, the FASB issued ASU No 2010-06,~~ ~~Fair Value Measurements and Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements.~~ This update provides amendment to the codification regarding the disclosures required for fair value measurements. The key additions area as follows: 1) Disclose transfer in and out of Level 1 and 2, 2) Activity in Level 3 should show information about purchases, sales, settlements, etc on a gross basis rather than as net basis, and 3) Additional disclosures about inputs and valuation techniques. The new disclosure requirements are effective for interim and annual periods beginning after December 31, 2009, except for the gross disclosures of purchases, etc which is effective for periods beginning after December 15, 2010. The Company adopted this Update on January 1, 2010, but does not expect it will have a significant impact on the financials since there are not many items recorded at fair value, but additional disclosures about inputs and valuation techniques will be made.

~~In January 2010, the FASB issued ASU No 2010-04,~~ ~~Accounting for Various Top ics – Technical Corrections to SEC Paragraphs.~~ This update provides updates/corrections to various topics of the codification with regards to the SEC’s position on various matters. There is no new guidance, but adjustments to the SEC’s position on already

issued updates. Some of the main topics covered are as follows: 1) Requirements for using push down accounting in an acquisition 2) appropriate balance sheet presentation of unvested, forfeitable equity instruments are issued to nonemployees as consideration for future services – these are to be treated as not issued and no entry recorded until the instruments are earned. 3) intangible assets arising from insurance contracts acquired in a business combination. The corrections are applicable for 2009 since the updates relate to already issued guidance. The main issue that may impact the Company is the accounting for unvested, forfeitable equity instruments. The Company will evaluate and determine if there are any contracts with non-employees for which equity instruments are granted and ensure they are accounted for in accordance with the update.

~~In January 2010, the FASB issued ASU No 2010-03,~~ ~~Extractive Activities – Oil and Gas (Topic 932) – Oil and Gas Reserve Estimation and Disclosures.~~ The purpose of this update is to align the oil and gas reserve estimation and disclosure requirements with the SEC’s final rule requirements regarding oil and gas. The update makes the following key changes 1) expands the definition of oil and gas 2) amends the definition of proved oil and gas reserves and 3) requires additional disclosures. The update is effective for annual reporting periods ending on or after December 31, 2009. Since the Company has no oil and gas producing activities, this update did not have a significant impact on the Financial Statements for December 31, 2009.

~~In January 2010, the FASB issued ASU No 2010-02,~~ ~~Consolidation (Topic 810) – Accounting and Reporting for Decreases in Ownership of a Subsidiary – a Scope Clarification.~~ This update provides clarification about Topic 810 (Previously FAS 160) and clarifies that the derecognition provisions of Topic 810 apply to 1) A subsidiary or group of assets that is a business or nonprofit activity 2) A subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture and 3) An e xchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity. This updated is effective when companies adopt FAS 160 or the first annual or interim period after December 15, 2009 – December 31, 2009 for the Company. Since the Company has not had any decreases in ownership, the pronouncement does not have a significant impact on the Financial Statements for December 31, 2009.

~~In January 2010, the FASB issued ASU No 2010-01,~~ ~~Equity (Topic 505) – Accounting for Distributions to Shareholders with Components of Stock and Cash.~~ The amendments in this Update clarify that a stock portion of the distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and i s not a stock dividend. Those distributions should be accounted for and included in EPS calculations in accordance with paragraphs 480-10-25-14 and 260-10-45-45 through 45-47. The amendments are effective for interim and annual periods ending on or after December 15, 2009 so for the annual period of December 31, 2009. This update does not have a significant impact on its Financial Statements for the December 31, 2009 since the Company does not pay any dividends – cash or stock.

~~In December 2009, the FASB issued Accounting Standard Update No 2009-16,~~ ~~Transfers and Servicing (Topic 860) – Accounting for Transfers of Financial Assets.~~ This Update amends Topic 860 and is a result of FASB Statement No 166 which is noted below. As noted in the paragraph about FAS 166, this standard did not have a significant impact on the Company’s Financial Statements when it was adopted on January 1, 2010.

~~In October 2009, the FASB issued Accounting Standard Update No 2009-14,~~ ~~Software (Topic 985) – Certain Revenue Arrangement that Include Software Elements.~~ This Update affects vendors that sell or lease tangible products in an arrangement that contains software that is more than incidental to the tangible product as a whole. This Update does not provide guidance on when revenue should be recognized; however, it is likely that vendors affected by this Update will recognize revenue earlier than current practice because of the different revenue guidance, including the ASU 2009-13. This Update does not affect software revenue arrangements that do not include tangible products and does not affect arrangements with software that includes services if the software is essential to the functionality of the services. The Update indicates that tangible products containing software comp onents and nonsoftware components that function together to deliver the tangible product’s essential functionality are no longer with in the scope of the software revenue recognition guidance (subtopic 985-605). The Update provides guidance on how to determine which software, if any, relating to the tangible product should be excluded from the scope of software revenue recognition. This Update is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 (January 1, 2011). This Update may impact the Company and the Company is determining how this Update will impact its financial statements.

~~In October 2009, the FASB issued Accounting Standard Update No 2009-13,~~ ~~Revenue Recognition (Topic 650) – Multiple-Deliverable Revenue Arrangements a Consensus of the FASB EITF.~~ This Update provides amendments to the criteria in Subtopic 605-25 for separating consideration in multiple-deliverable arrangements. When there are multiple deliverables, this Update indicates a Company should estimate the selling price of each of the deliverables if there is no vendor specific-objective evidence or third party evidence available. Previous to this Update (current practice), if there was no specific-objective or third party evidence, then the deliverable was not separated. The update provides examples regarding how to estimate the selling price. The Update also expands the disclosures related to a vendor’s multiple-deliverable revenue arrangements. A Vendor will be required to disclose th e following information by similar type of arrangement: 1) a description of multiple-deliverable arrangements 2) significant deliverables within the arrangement 3) general timing of their delivery or performance of deliverables 4) significant factors and estimates used to determine vendor-specific evidence, third-party evidence or estimated selling price and significant changes in the selling price or the methodology or assumptions used to estimate the selling price and 5) general timing of revenue recognition for separate units of accounting. This Update is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 (January 2, 2011). This Update may impact the Company and the Company is determining how this Update will impact its financial statements.

~~In September 2009, the FASB issued Accounting Standard Update No 2009-12,~~ ~~Fair Value Measurement and Disclosures (Topic 820) – Investments in Certain Entities that Calculate Net Asset Value per Share.~~ This Update applies to entities that have hold an investment that is required to be measured or disclosed at fair value if the investment meets both of the following criteria 1) the investment does not have a readily determinable fair value and 2) the investment is in an entity that has all of the attributes specified in paragraph 946-10-15-2 (attributes of an investment company). The Update permits an entity to measure the fair value of an investment that is within the scope noted above on the net asset value per share of the investment if the net asset value of the investment is calculated in a manner consistent with the measurement principles of Topic 946. Additional disclosures are also required. This Update is effective for financial statements issued for interim and annual periods after December 15, 2009. This Update does not have a sig nificant impact on the Company’s financial statements since the Company does not have any investments in entities that meet the Scope of the Update.

~~In June 2009, the FASB issued Topic 810-10-65,~~ ~~Amendments to FASB Interpretation No. 46(R).~~ The purpose of this Statement is to improve financial reporting for entities involved with variable interest entities. Amongst other amendments to SFAS 46(R), the statement requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics: (a) The power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (b ) The obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. Furthermore, this statement requires on-going reassessments as to whether an enterprise is the primary beneficiary. This Statement is effective as of the beginning of each reporting entity’s first annual reporting period beginning after November 15, 2009 and for interim periods within that first annual reporting period. Earlier application is prohibited. This standard did not have a significant impact on the Company’s Financial Statements when it was adopted on January 1, 2010.

~~In June 2009, the FASB issued Topic 810-10-65,~~ ~~Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140.~~ The purpose of this Statement is to im prove information about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. The Statement removes the concept of a qualifying special-purpose entity, clarifies the intent of paragraph 9 of SFAS 140 is to determine whether the transferor has surrendered control over financial assets and limits the circumstances in which a financial asset should be derecognized. This Statement is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period. Earlier application is prohibited. The Company does not expect this standard to have a significant impact on its Financial Statements when it is adopted on January 1, 2010.

Note 12 – Supplemental Cash Flow Information

~~2010~~2011

~~During the nine months ended September 30, 2010,~~In January, 2011, we ~~issued 406,927~~granted options to acquire up to 500,000 shares of our common stock valued at $300,000 to a consultant in consideration of consulting services to be rendered by the consultant over a one year period pursuant to a written consulting agreement. The options are exercisable at $1.11 per share and have a three year

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

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

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

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

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

2010

During the three months ended March 31, 2010, we issued 149,164 shares of our common stock valued at ~~$399,466~~$160,178 to three companies and three individuals for consulting services rendered the expense for which is included in our general and administrative expense.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2010 we issued 200,000 shares our common stock valued at ~~$216,00 0~~$216,000 to a corporation for the purchase of a H.264 codec software license to be used in our CodecSys product development. We have included it as an asset on our balance sheet and will amortize it as part of cost of sales.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2010 we issued ~~3,000,000~~1,000,000 shares our common stock valued at ~~$3,290,000~~$990,000 to our senior secured 6.25% convertible note holder as part of ~~amendment and extension agreements. See~~the note 7.due date extension. We included it as an asset on our balance sheet as additional note acquisition costs and will amortize it over the remaining term of the note.

For the ~~nine~~three months ended ~~September 30,~~March 31, 2010 an aggregate non-cash expense of ~~$3,251,360~~$1,047,825 was recorded for the accretion of ~~our convertible notes as follows, (i) $3,143,475 for~~ the senior secured 6.25% convertible ~~note and (ii) $107,885 for our unsecured 3% convertible notes.~~note.

For the ~~nine~~three months ended ~~September 30,~~March 31, 2010, we recognized ~~$1,179,380~~$389,017 in depreciation and amortization expense from the following: (i) ~~$603,524~~$196,380 related to cost of sales for equipment used directly by or for customers, (ii) ~~$568,390~~$190,247 related to equipment other property and equipment, and (iii) ~~$7,466~~$2,390 for patent ~~amortization.~~amortization

During the nine months ended September 30, 2010, the conversion to common stock of all of our unsecured 3% convertible notes and the conversion of $50,000 to common stock of our unsecured short term notes resulted in an $802,190 extinguishment of debt primarily due to unrealized note discounts and accrued interest.

~~2009~~

During the nine months ended September 30, 2 009, we acquired 2,475,714 IDI common share equivalents in exchange for 165,048 shares of our common stock valued at $256,265 which was expensed to research and development.

~~For the nine months ended September 30, 2009, we received $58,500 from the exercise of 50,000 warrants from one individual at an exercise price of $1.17 per share.~~

For the nine months ended September 30, 2009, an aggregate non-cash expense of $3,393,477 was recorded for the accretion of (i) $3,143,475 for our senior secured 6.25% convertible notes, and (ii) $250,002 our unsecured convertible note.

For the nine months ended September 30, 2009, we recognized $581,971 in depreciation and amortization expense from the following: (i) $19,810 related to cost of sales for equipment used directly by or for customers, (ii) $556,396 related to equipment other property and equipment, and (iii) $5,765for patent amortization.

~~We paid no cash for income taxes during the nine months ended September 30, 2010 and 2009.~~

~~We paid $369,591 and $135,301 for interest expense during the nine months ended September 30, 2010 and 2009, respectively.~~

Note 1312 – Subsequent Events

~~On October 5, 2010, we sold 100,000 shares of our common stock~~We evaluated subsequent events pursuant to ASC Topic 855 and ~~issued warrants~~have determined that there are no events that need to ~~purchase 100,000 shares of our common stock at an exercise price of $1.50 per share on a Private Placement Memorandum. This sale provided $100,000 in cash to the Company.~~

~~Between October 1 and November 4, 2010, we issued an aggregate of 52,047 common shares of our stock to one company and one individual for services rendered to the Company.~~be reported.

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Item 2. ~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder, that involve inherent risk and uncertainties. Any statements about our expectations, beliefs, plans, objectives, strategies or future events or performance constitute forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend” and similar words or phrases. Accordingly, these statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed or implied therein. All forward-looking statements are qualified in their entirety by reference to the factors discussed in this report and to the following risk factors discussed more fully in Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2009:~~2010:

dependence on commercialization of our CodecSys technology;

~~doubt about our ability to continue as a “going concern”;~~

our need and ability to raise sufficient additional capital;

·
uncertainty about our ability to repay our outstanding convertible notes;
·
our continued losses;
·
delays in adoption of our CodecSys technology;
·
concerns of OEMs and customers relating to our financial uncertainty;
·
restrictions contained in our outstanding convertible notes;
·
general economic and market conditions;
·
ineffective internal operational and financial control systems;
·
rapid technological change;
·
intense competitive factors;
·
our ability to hire and retain specialized and key personnel;
·
dependence on the sales efforts of others;
·
dependence on significant customers;
·
uncertainty of intellectual property protection;
·
potential infringement on the intellectual property rights of others;
·
~~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 ~~fo r~~for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

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Critical Accounting Policies
The preparation of financial statements in conformity with U.S. GAAP requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related ~~d isclosure~~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, ~~2009.~~2010. There have been no other significant changes in our critical accounting policies or estimates ~~s ince~~since those reported in our Annual Report.
Executive Overview
The current ~~economic~~recession and market conditions have had substantial impacts on the global and ~~uncertainty in the~~national economies and 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 financialmarkets. These factors, together with soft credit markets, have ~~caused companies across many of the industries we serve, particularly in the financial services~~slowed business growth and ~~retail sectors,~~generally made potential funding sources more difficult to ~~experience downturns in their businesses,~~access. We continue to be affected by prevailing economic and market conditions, which ~~may cause our customers in these industries~~present considerable risks and challenges to ~~reduce the level of services they purchase from~~ us. Additionally, we may experie nce increased difficulty in obtaining financing in the future, which could negatively impact our ability to pursue our business and development of CodecSys products, as well as affect our ability to repay our outstanding indebtedness. As a result, we cannot predict what impact the current economic conditions and uncertainty of the financial markets will have on us, but expect that such events may have an adverse effect on our business, financial condition, results of operation and liquidity in the current quarter and future periods.

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

On July 31, 2009, we entered into a $10.1 million, three-year contract with a Fortune 10 financial institution customer to provide technology and digital signage services to approximately ~~2,000~~2,100 of the customer’s more than 6,000 retail and administrative locations throughout North America. ~~In October, 2010, we received notification that the customers~~The customer is expanding its network ~~was expanding by over 700~~to additional ~~locations~~retail and ~~we would begin site surveys for those new locations in the fourth quarter of 2010.~~administrative locations. In addition, the customer selected us to be its vendor for certain additional audio visual services during ~~the n ext~~this year. A factor in securing this contract was the benefits of the CodecSys technology delivering our services to be utilized in our services. For the nine months ended September 30, 2010, we realized approximately $4,531,832 in revenue from this new customer contract, which contributed approximately 87% of our revenues for the nine month period.

During 2010 we sold 1,601,666 shares of our common stock to 19 separate investors at a purchase price of $1.00 per share together with a warrant to purchase additional shares of our stock for $1.50 per share. The warrant expires at the ~~quarter ended September 30, 2010, our revenues increased by approximately 134% compared~~end of three years. The net proceeds from the sale of these shares were used for general working capital purposes. Each of the investors was given the right to adjust their purchase in the event we sold additional equity at a price and on terms different from the terms on which their equity was purchased. Upon completion of the Equity Financing described below, each of the investors converted their purchase to the ~~same quarter~~terms contained in ~~2009.~~the Equity Financing. This ~~increase~~ resulted ~~primarily~~in the issuance of an additional 956,659 shares of common stock and the cancellation of 2,295,075 warrants with an exercise price of $1.50 and the issuance of 2,079,222 warrants with an exercise price of $1.00 and an expiration date of five years from the ~~new customer contract discussed above. Net cash used for operations in~~conversion.
On December 24, 2010, we closed on an equity financing (the “Equity Financing”) as well as a restructuring of our outstanding convertible indebtedness (the “Debt Restructuring”). The Equity Financing and the ~~nine months ended September 30, 2010 was $4,454,885 less than the net cash used for operations in the nine months ended September, 2009.~~Debt Restructuring are described as follows:

~~Given our existing liquidity and capital position, we are in~~We entered into a Placement Agency Agreement, dated December 17, 2010, with Philadelphia Brokerage Corporation (“PBC”), pursuant to which PBC agreed to act as the ~~process~~exclusive agent of ~~raising additional equity fundin g. We have also raised funding from debt sources as discussed below~~the Company on a “best efforts” basis with respect to ~~support our working capital and liquidity position. We have secured~~the sale of up to a ~~conditional extension~~maximum gross consideration of $15,000,000 of units of the Company’s securities, subject to a minimum gross consideration of $10,000,000. The Units consisted of two shares of our ~~senior secured convertible debt, but such extension is conditioned upon~~common stock and one warrant to purchase a ~~successful equity financing~~share of our common stock. The Company agreed to pay PBC a commission of 8% of the gross offering proceeds received by the Company, to issue PBC 40,000 shares of its common stock for each $1,000,000 raised, and to pay the reasonable costs and expenses of PBC

22

related to the offering. The Company also agreed to pay PBC a restructuring fee in the amount of ~~$8.0 million. Until cash from operations is sufficient~~approximately $180,000 upon the closing of the Equity Financing and the simultaneous Debt Restructuring.
Pursuant to ~~cover all corporate expenses~~the Placement Agency Agreement, we entered into Subscription Agreements dated December 23, 2010 with select institutional and ~~repayment~~other accredited investors for the private placement of 12,500,000 units of our ~~outstanding indebtedness, we will continue~~securities. The Subscription Agreements included a purchase price of $1.20 per unit, with each unit consisting of two shares of common stock and one warrant to ~~deplete our available cash~~

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

25Net proceeds from the Equity Financing, after deducting the commissions and debt restructuring fees payable to PBC and the estimated legal, printing and other costs and expenses related to the financing, were approximately $13.5 million. We used a portion of the net proceeds of the Equity Financing to pay down debt and the remainder will be used for working capital.

and increase our need for future equity and debt financing. Any such financing may not be available on terms favorable to us, if at all, and may result in continued diluti on to our existing shareholders.
~~During the six months ended June 30,~~On November 29, 2010, we entered into ~~four unsecured convertible notes~~a bridge loan transaction with three ~~individuals and one corporation totaling $925,000. During~~accredited investors pursuant to which we issued unsecured notes in the ~~quarter ended September 30, 2010, all~~aggregate principal amount of $1.0 million. Upon the closing of the Equity Financing, the lenders converted the entire principal amount plus accrued interest into the same units offered in the Equity Financing and the proceeds from the bridge loan transaction were treated as funds raised with respect to the financing.

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

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

The Amended and Restated Note, dated December 23, 2010, is a senior, unsecured note that matures in three years from the closing and bears interest at an annual rate of 6.25%, payable semi-annually. We paid the first year’s interest of approximately $344,000 at the closing. The Amended and Restated Note is convertible ~~note holders converted their notes to~~into shares of common stock at a conversion ~~rate~~price of ~~$1.00~~$1.35 per ~~share.~~ share, subject to adjustment. The Amended and Restated Note is convertible in whole or in part at any time upon notice by Castlerigg to us. The Amended and Restated Note also contains various restrictions, acceleration provisions and other standard and customary terms and conditions. Two of our consolidated subsidiaries guaranteed our obligations under the Amended and Restated Note.

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

In connection with ~~this financing,~~ the ~~unsecured 3% convertible~~Debt Restructuring, the Company amended the note holders received warrants to acquire 925,000 shares of our common stock. We used the proceeds from this financing to support our CodecSys commercialization and development and for general working capital purposes, as described more fully under “Liquidity and Capital Resources.”
Also during the nine months ended September 30, 2010, we ente red into two Accounts Receivable Purchase Agreements with one individual for an aggregate amount of $675,000. In these agreements, we pledged certain outstanding accounts receivable, as described more fully under “Liquidity and Capital Resources.”
In July, 2010, we entered into a revolving line of credit, the proceeds of which are to be used to purchase and install equipment for our largest customer. In connection with this financing, we issued 100,000 warrants to acquire our common stock. As of September 30, 2010, there was $50,000 outstanding on the line of credit.
On June 30, 2010, we entered into four short-term unsecured notes with two individuals and two corporations totaling $250,000, which were converted to common stock during the quarter ended September 30, 2010 at a conversion rate of $1.00 per sh are. We used the proceeds from this financing to support our CodecSys commercialization and development and for general working capital purposes, as described more fully under “Liquidity and Capital Resources.”
~~On July 30, 2010, September 27, 2010, and October 29, 2010, we entered into amendment and extension agreements~~ with the holder of ~~our $15.0~~a $1.0 million ~~senior secured~~unsecured convertible ~~note. The amendments provided a conditional extension of~~note, pursuant to which the maturity date of ~~such note and included modifications of the reset provisions of~~ the note ~~and related warrants, as described more fully under “Liquidity and Capital Resources.” If we are unable to successfully raise at least $8.0 million in equity financing prior~~was extended to December ~~3, 2010, then~~31, 2013. We also issued 150,000 shares to the ~~maturity date~~holder of this note ~~will revert~~as consideration to ~~its original maturity date of December 21, 2010. If we are unable to repay our $15.0 million senior secu red convertible note when it becomes due, we may face possible foreclosure on our assets by~~extend the note holder, bankruptcy protection or liquidation. Because the note is secured by all of our assets, any foreclosure could result in the loss of our business and a complete loss of investment by our shareholders.
~~Results of Operations for the Nine Months ended September 30, 2010 and September 30, 2009~~

~~Revenues~~

We generated $5,359,907 in revenue during the nine months ended September 30, 2010. During the same nine-month period in 2009, we generated revenue of $1,515,030. The increase in revenue of $3,844,877 was due primarily to our new digital signage contract with the financial services company, which accounted for approximately 87% of our reven ues for the nine months ending September 30, 2010. License fees increased by $2,300,001 and system sales and installation revenues increased by $1,641,611 in the nine months ended September 30, 2010, almost all of which increases were due to our major digital signage customer. Satellite transmission fees increased by $17,032, which was offset by a decrease of $15,000 from special event programming, a decrease of $60,575 from miscellaneous revenue sources and a decrease of $38,191 from studio and production fees. These decreases were due mainly to a decrease in miscellaneous production jobs and $60,000term of the ~~decrease was due to the expiration of a studio rental contract from one customer.~~note.

Sales revenues from our three largest customers accounted for approximately 93% and 62% of total revenues for the nine months ended September 30, 2010 and 2009, respectively. Two of the three largest customers in 2010 were the same customers as in 2009, including our largest customer. The addition of our new digital signage customer has materially affected our results of operations, financial condition and liquidity.

~~Cost of Revenues~~

Cost of revenues increased by approximately $2,336,912 to $3,847,716 for the nine months ended September 30, 2010 from $1,510,804 for the nine months ended September 30, 2009. Costs of equipment and installation services increased by $1,556,905 due to the installation of new equipment used in the initial installations for our

2623

largest customer. Installation services for all other customers combined decreased by approximately $90,610. In addition, depreciation increased by $583,714 due to the equipment installed for our customer’s digital signage network.
~~Expenses~~

General and administrative expenses for the nine months ended September 30, 20 were $3,180,412 compared to $3,950,059 for the nine months ended September 30, 2009. The decrease of $769,647 resulted primarily from a decrease of $252,241 in the amount of minority interests in IDI that were purchased in 2009 compared to the amount purchased in 2010, a decrease of $164,100 in legal expenses, and a decrease of $115,992 in option and warrant expenses. In addition, direct operational expenses decreased by $226,330 which was primarily the result of a decrease of $119,290 in temporary help and a decrease of $71,480 in telephone and data lines expenses.

Research and development in process decreased by $567,685 for the nine months ended September 30, 2010 to $2,090,212 from $2,657,897 for the nine months ended September 30, 2009. The decrease resulted primarily from a decrease of $359,918 in employee related expenses, a decrease of $344,612 in other professional services, which were partially offset by an increase of $178,650 in consulting fees.

Sales and marketing expenses decreased $275,412 to $197,276 for the nine months ending September 30, 2010 from $472,688 for the nine months ended September 30, 2009. The decrease reflec ts a decrease in employee and related costs of $39,142, a decrease of $124,927 in other professional services and consulting fees, and a decrease of $64,533 in tradeshow and convention expense.

~~Interest Expense~~

For the nine months ended September 30, 2010, we incurred interest expense of $7,379,794 compared to interest expense for the nine months ended September 30, 2009 of $4,925,153. The increase of $2,454,641 resulted primarily from an acceleration of debt offering expenses of $1,304,370 over the same period in 2009 and an expense of $792,115 from the conversion of convertible notes to equity. The remaining increase in interest expense resulted from the company continuing to elect to capitalize the interest on our 6.25% senior secured convertible note, which increases the principal balance on which inte rest is calculated and increased interest of $259,996 related to equipment financing for our largest customer’s digital signage network because the lease financing was outstanding for the entire year. Of the total interest expense recorded for the nine months ended September 30, 2010, $1,106,217 was the amount incurred on the principal outstanding on our 6.25% senior secured convertible note, $533,706 was incurred on all of our other indebtedness and the reminder of our interest expense resulted primarily from amortization of our costs of acquiring and extending our 6.25% senior secured convertible note

~~Net Loss~~

We realized a net loss for the nine months ended September 30, 2010 of $11,649,358 compared with a net loss for the nine months ended September 30, 2009 of $9,273,134. The increase in the net loss of $2,376,224 is primarily due to a decreased gain related to our derivative valuation calculation of $2,874,900 and the increase in interest expense of $2,454,641 discussed above. The decrease was partially offset by an increase in operating margins of $1,507,965 resulting from our increased revenues and decrease operating expenses as explained above and the overall decrease in other operating expenses of $1,599,050 also as discussed above.

Results of Operations for the Three Months ended ~~September 30,~~March 31, 2011 and March 31, 2010 ~~and September 30, 2009~~

Revenues

WeThe Company generated ~~$1,885,600~~$1,687,264 in revenue during the three months ended ~~September 30, 2010.~~March 31, 2011. During the same three-month period in ~~2009, we~~2010, the Company generated revenue of ~~$806,398.~~$1,787,067. The ~~increase~~decrease in revenue of ~~$1,079,202~~$99,803 was due primarily to a reduction of license fees of $167,787 in our digital signage network for our largest customer because we performed certain additional services at the beginning of the contract. The decrease in licensing revenues was partially offset by an increase of ~~$432,523~~$87,964 in ~~license fees, $392,761 of which resulted from~~system sales for our largest ~~customer’s digital signage network~~customer and ~~an increase of $647,200 from system sales and installation and service work $486,768 of~~one other new customer. The revenue generated by our largest customer aggregated $1,467,908, which was ~~from work done for the digital signage network~~$137,987 less than in the ~~three months ended September 30,~~same quarter of 2010.

27

~~Our three~~The Company's largest ~~customers’~~customer’s sales revenues accounted for approximately ~~90%~~87% and ~~86%~~90% of total revenues for the quarters ended ~~September 30,~~March 31, 2011 and 2010, ~~and 2009,~~ respectively. ~~The three customers with the greatest revenues in 2010 were the same three customers in 2009.~~ Any material reduction in revenues generated from ~~any one of~~ our largest ~~customers~~customer could ~~cause further deterioration in our~~harm the Company’s results of operations, financial condition and liquidity. We, however, continue to expand the customer’s network and are providing additional services for the customer.

Cost of Revenues

Costs of ~~revenues~~Revenues increased by ~~approximately $604,252~~$2,494 to ~~$1,257,954~~$1,275,537 for the three months ended ~~September 30, 2010~~March 31, 2011, from ~~$653,702~~$1,273,043 for the three months ended ~~September 30, 2009.~~March 31, 2010. The increase was due ~~primarily~~ to ~~an increase of $407,504 in~~additional cost of equipment ~~sales~~provided for installation of equipment and ~~services because~~operations of our ~~largest~~ customer’s digital signage network ~~was deployed for~~of $15,371 and an increase in depreciation of $5,821 offset by a decrease of satellite distribution costs of $15,371 due to the ~~full quarter and depreciation expense increased by $197,639 for the same reason.~~   termination of a customer’s satellite delivery of its network.

Expenses

General and ~~administrative~~Administrative expenses for the three months ended ~~September 30, 2010~~March 31, 2011 were ~~$801,351~~$2,608,372 compared to ~~$1,193,198~~$1,210,974 for the three months ended ~~September 30, 2009.~~March 31, 2010. The ~~decrease~~increase of ~~approximately $392,627~~$1,397,398 resulted primarily from ~~a decrease~~an increase in expenses incurred related to the issuance of ~~$127,996 in legal~~options and ~~consulting fees expenses, a decrease~~warrants of ~~$88,803 in temporary help expenses and a decrease~~$1,181,692 primarily for the grant of ~~74,017 in bad debt expenses.~~Restricted Stock Units to members of the Board of Directors. In addition, ~~option~~employee and ~~warrant~~related costs increased $97,783 and operating expenses, ~~decreased by $31,879~~primarily travel related expenses, increased $73,616 and ~~telephone and data line expense decreased by $31,409.~~
legal expenses increased $60,985. Research and development in process decreased by ~~$336,416~~$138,364 for the three months ended ~~September 30, 2010~~March 31, 2011 to ~~$588,147~~$597,771 from ~~$924,563~~$736,135 for the three months ended ~~September 30, 2009. This decrease resulted~~March 31, 2010, primarily ~~from decreased~~due to a reduction in employee and related costs, ~~of $166,995, decreased consulting and professional services of $116,294 and a decrease of $26,712 in outside engineering design expenses.~~
~~Sales~~but sales and marketing expenses ~~decreased $97,230 for the three months ended September 30, 2010~~increased by $77,486 due to ~~$55,007 from $152,237 for the three months September 30, 2009. The decrease was due primarily to decreased professional services of $42,200, decreased payroll~~an increase in employee and related ~~expenses of $33,309~~costs and ~~a decrease of $14,747~~an increase in ~~advertising~~travel and ~~promotion expenses and various other operating expenses related to marketing.~~tradeshow expenses. Depreciation expense decreased by $11,844 in the same period.

Interest Expense

For the three months ended ~~September 30, 2010, we~~March 31, 2011, the Company incurred interest expense of ~~$3,531,090~~$381,189 compared to interest expense for the three months ended ~~September 30, 2009~~March 31, 2010 of ~~$1,711,601.~~$1,715,025. The ~~increase~~decrease of ~~$1,819,489~~$1,333,836 resulted primarily ~~fr om~~from the restructure of our senior debt in which the outstanding balance of the senior note decreased from approximately $17,500,000 to $5,500,000. Interest expense incurred on the remaining balance of $5,500,000 of our senior note has been included in the carrying value of the senior note and as payments are made the carrying value is reduced, but not recorded as an ~~increase in~~expense. The main components of our interest expense due to an acceleration of debt offering expenses of $963,000 over the same period in 2009 and an expense of $792,115 from the conversion of convertible notes to equity. The $3,531,090 interest expense recorded consisted of ~~$1,047,825~~$240,734 recorded to account for the accretion of our unsecured convertible note liability on our balance sheet issuance of equity related to the extension of that note and interest ~~capitalized~~ on our ~~6.25% senior secured convertible note~~equipment leasing obligation of $385,704, amortization of debt offering costs of $1,077,750, and interest recorded of $108,015 related to equipment financing for our largest customer and interest of $792,115 recorded to reflect the interest cost from the conversion of convertible notes to equity. Of the total interest expense recorded for the three months ended September 30, 2010, $385,704 was the amount incurred on the principal outstanding on our 6.25% senior secured convertible note, $164,925 was incurred on all of our other indebtedness and the reminder of our interest expense resulted primarily from amortization of our costs of acquiring and extending our 6.25% senior secured convertible note.$84,921.

Net Loss

WeThe Company realized a net loss for the three months ending March 31, 2011 of $746,965 compared with a net loss for the three months ended ~~September 30,~~March 31, 2010 of ~~$5,524,667 compared to a net loss of $3,845,147 for the three months ended September 30, 2009.~~$2,900,731. The ~~increase~~decrease in net loss of ~~$1,679,520~~$2,153,766 was primarily the result of ~~recording increased interest expenses of $1,819,489 as explained above and a loss of $1,044,993 in the derivative valuation of our convertible notes compared with recording a gain~~an increase in derivative valuation gain of ~~$126,400 for~~our derivative securities of $3,701,300 and the ~~three months ended September 30, 2009. The increase~~decrease in ~~our total loss~~interest expense of $1,333,836 as described above, all of which was partially offset by ~~a decrease in~~increased loss from operations reflected in a decrease of ~~$1,300,820 resulting from increased revenues~~$102,297 in gross margin as described above and ~~decreased~~an increase in operating expenses of $1,324,676 as ~~explained~~described above.
In addition, we realized a loss on the extinguishment of debt related to the restructure of our senior note of $970,033 and incurred an equity issuance cost of $476,234 related to issuance of warrants in connection with our debt restructuring.

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Liquidity and Capital Resources

At ~~September 30, 2010,~~March 31, 2011, we had cash of ~~$311,227,~~$3,304,891, total current assets of ~~$1,557,546,~~$4,710,861, total current liabilities of ~~$23,858,280~~$14,311,998 and total stockholders' deficit of ~~$18,021,574.~~$13,568,193. Included in current liabilities is ~~$18,424,769 of liability related to our 6.25% senior secured convertible note and unsecured convertible note, and $1,003,300 which relates~~$11,394,100 relating to the value of the embedded derivatives for ~~the 6.25%~~our senior ~~secured~~ convertible note and ~~related warrants and $1,377,764 related to the current portion of debt obligations for equipment financing.~~

~~As of September 30, 2009, we held approximately $625,000 of auction rate preferred securities, valued at $570,834 and classified as long term investments. All of~~ our ~~auction rate preferred securities have been redeemed. We recorded a loss of $49,264 in total for redemptions at less than par.~~

Our audited consolidated financial statements for the year ended December 31, 2009 contained a “going concern” qualification. As discussed in Note 3 of the Notes to Condensed Consolidated Financial Statements (Unaudited), we have incurred losses and have not demonstrated the ability to generate sufficient cash flows from operations to satisfy our liabilities and sustain operations. Because of these conditions, there could be substantial dou bt about our ability to continue as a going concern.unsecured convertible note.
We experienced negative cash flow used in operations during the ~~nine months ending September 30, 2010~~fiscal quarter ended March 31, 2011 of ~~$1,992,434~~$2,186,155 compared to negative cash flow used in operations for the ~~nine months~~quarter ended ~~September 30, 2009~~March 31, 2010 of ~~$6,447,319.~~$430,841. Management believes that the level of cash used for operations will significantly decrease in future quarters, because included in the first quarter were the payments of obligations that were not paid until we had completed the Equity Financing. Of the approximately $1,700,000 increase in cash used for operations, approximately $1,300,000 included of cash used for reduction of payables, increase of inventories, and payment of expenses that we do not expect to be repeated in future periods. The negative cash flow was ~~met~~sustained by cash reserves ~~sales of our common stock, and issuances of short term debt.~~from the equity offering completed in December, 2010. We expect to continue to experience negative operating cash flow as long as we continue our technology commercialization and development program or until we ~~begin~~increase our sales and/or licensing revenue.
On December 24, 2010, we also closed on the Debt Restructuring. In connection therewith, we (i) issued the Amended and Restated Note in the principal amount of $5.5 million to ~~receive licensing revenue~~Castlerigg, (ii) paid $2.5 million in cash to Castlerigg, (iii) cancelled warrants previously issued to Castlerigg that were exercisable for a total of 5,208,333 shares of common stock, (iv) issued 800,000 shares of common stock to Castlerigg in satisfaction of an obligation under a prior loan amendment, (v) entered into the Letter Agreement with Castlerigg dated December 23, 2010 pursuant to which we paid Castlerigg an additional $2.75 million in cash in lieu of the issuance of $3.5 million in stock and warrants as provided in the Loan Restructuring Agreement, and (vi) entered into an Investor Rights Agreement with Castlerigg dated December 23, 2010. As a result of the foregoing, Castlerigg forgave approximately $7.2 million of principal and accrued but unpaid interest.

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

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

In connection with the Debt Restructuring, the Company amended the note with the holder of a $1.0 million unsecured convertible note, pursuant to which the maturity date of the note was extended to December 31, 2013. We also issued 150,000 to the holder of this note as consideration to extend the term of the note.
We entered into a Placement Agency Agreement, dated December 17, 2010, with Philadelphia Brokerage Corporation (“PBC”), pursuant to which PBC agreed to act as the exclusive agent of the Company on a “best efforts” basis with respect to the sale of up to a maximum gross consideration of $15,000,000 of units of the Company’s securities, subject to a minimum gross consideration of $10,000,000. The Company agreed to pay PBC a commission of 8% of the gross offering proceeds received by the Company, to issue PBC 40,000 shares of its common stock for each $1,000,000 raised, and to pay the reasonable costs and expenses of PBC related to the offering. The Company also agreed to pay PBC a restructuring fee in the amount of approximately $180,000 upon the closing of the Equity Financing and simultaneous Debt Restructuring.

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

25

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

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

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

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

During March 2010 through October 2010, we ~~have raised investment capital through the sale of our common stock and conversion of convertible notes to various individuals and companies. Through October 31, 2010, we have~~ raised approximately ~~$2,300,000~~$2,485,000 through the sale of common stock and the issuance of ~~debt~~ convertible notes to ~~our common stock to 17 investors~~purchasers at an investment or conversion price of $1.00 per share. The financing included the sale of 1,535,000 shares of our common stock and the issuance of convertible notes in the aggregate principal amount of $950,000. We also issued to these ~~investors~~purchasers warrants to acquire ~~the same number of additional~~ shares of our common stock at an exercise price of $1.50 per share, which are exercisable anytime during a three year period. ~~We have used~~At the ~~proceeds~~time of these sales, we agreed to certain price protection provisions whereby if we were to sell equity at a price lower than $1.00 per share before December 31, 2010, the purchasers would be able to elect to exchange and receive equity on the same financial terms and conditions as the new investors.

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

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

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

During ~~the three months ended September 30,~~ 2010, we entered into a $500,000 line of credit for equipment financing to purchase equipment for our largest customer’s digital signage network. The terms of the line of credit include a 3% interest fee for every 30 days the advances on the line of credit remain outstanding. ~~To date we have~~We received total advances on the line of credit ~~totaling $150,000~~of $500,000 and subsequent to the completion of the Equity Financing repaid ~~$100,000, and have~~the line of credit. We used the proceeds to purchase and install the equipment at our customer’s locations.

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

On December 24, 2007, we entered into a securities purchase agreement in connection with our senior secured convertible note financing in which we raised $15,000,000 (less $937,000 of prepaid interest). We have used the proceeds from this financing to support our CodecSys commercialization and development and for general working capital purposes. The senior secured convertible note ~~was originally due December 21, 2010, but~~ has been ~~conditionally extended to June 21, 2012 depending on our future financing efforts,~~restructured as discussed below. Because of this financing condition, the maturity date may re vert back to December 21, 2010. The senior secured convertible note bears interest at 6.25% per annum if paid in cash.   If the interest payments are deferred, the interest is capitalized at 9% per annum. Because we have deferred certain interest payments, the principal

29

balance of the note as of September 30, 2010 was $17,528,086. Interest for the first year was prepaid at closing. Interest-only payments thereafter in the amount of $234,375 were due quarterly and commenced in April 2009, but cash payments of interest were not made.described above. During 2010, we ~~have~~ capitalized interest of ~~$1,131,836~~$1,491,161 related to the senior secured convertible note. Interest payments may be made through issuance of common stock in certain circumstances. Pursuant to amendments to the note effective July 30, 2010, September 23, 2010 and October 29, 2010, as discussed below, the note including capitalized interest totaling $17,528,086 as of September 30, 2010, and was convertible into 9,737,826 shares of our common stock at a conversion price of $1.80 per share, convertible any time during the term of the note. The conversion price of the note in the future will be 150% of the lowest amount at which we sell common stock during the year 2010 and may decrease further if we are unable to complete a $8.0 million equity financing by December 3, 2010. 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 2007 financing, the senior secured convertible note holder received warrants to acquire 1,875,000 shares of our common stock exercisable at $5.00 per share. We also issued to the convertible note holder 1,000,000 shares of our common stock valued at $3,750,000 and incurred an additional $1,377,000 for commissions, finders fees and other transaction expenses, including the grant of a three-year warrant to purchase 112,500 shares of our common stock to a third party at an exercise price of $3.75 per share, valued at $252,000. A total of $1,377,000 was included in debt offering costs and is being amortized over the term of the note.
~~From March 26, 2010 through October 29, 2010, we entered into a series of amendments to the senior secured convertible note. Each of these amendments is described below.~~
On March 26, 2010, we entered into an amendment and extension agreement with the holder of the senior secured convertible note. The agreement conditionally amended the maturity date of the note to December 21, 2011. If we are unsuccessful in raising at least $6.0 million in equity financing before September 30, 2010, the maturity date of the note will automatically be restored to its original date of December 21, 2010. In consideration of entering into the agreement, the note holder was issued 1,000,000 shares of our restricted common stock valued at $990,000. In addition, we agreed to the inclusion of three additional terms and conditions in the note: (i) from and after the additional funding, we will be required to maintain a cash balance of at least $1,250,000 and provide monthly certifications of the cash balance to the note holder; (ii) we will not make principal payments on our outstanding $1.0 million unsecured convertible note w ithout the written consent of the holder of the senior secured convertible note; and (iii) we will grant board observation rights to the note holder. Given these additional terms, unless the senior secured convertible note holder provides consent, of which there can be no assurance, we will be precluded from repaying the $1.0 million unsecured convertible note when it becomes due on December 22, 2010.
On July 30, 2010, we entered into a further amendment agreement with the holder of the senior secured convertible note regarding the note and warrant reset provisions. The July 30, 2010 amendment conditionally amended the maturity date of the note to June 21, 2012. If we are unsuccessful in raising the $6.0 million in equity financing referenced above, the maturity date of the note will automatically be restored to its original date of December 21, 2010. The holder of the note agreed to a conversion pri ce of the note of $1.80 per share instead of the price at which we sell equity between now and September 30, 2010 and reduced the required cash balance referenced in the March 26, 2010 amendment above from $1,250,000 to $950,000. In addition, the number of warrants originally granted to the holder pursuant to the 2007 financing increased from 1,875,000 to 5,208,333 and are now exercisable at $1.80 per share instead of $5.00 per share. The warrants continue to be exercisable any time for the five years from the original date of grant. In consideration of entering into the July 30, 2010 amendment the note holder was issued 2,000,000 shares of common stock and will be issued an additional 800,000 shares of our common stock at the completion of the required equity raise.
On September 27, 2010, we entered into a further amendment agreement with the holder of the senior secured convertible note regarding the not e. Pursuant to this amendment, the due date for the required equity financing was extended to October 31, 2010.
On October 29, 2010, we entered into a fourth amendment agreement with the holder of the senior secured convertible note regarding the note and warrant provisions. The fourth amendment (i) increased the amount of the required equity raise to $8.0 million, approximately $2.5 million of which has been raised or committed by investors; (ii) extended the time in which we can complete the equity financing to December 3, 2010; (iii) deleted the provision of the senior secured convertible note that granted the Company the option to redeem the note prior

30

to its maturity date; (iv) changed the conversion price of the note if we are successful in completing the required capital raise to an amount equal to 150% of the lowest price at which Company common stock is sold during calendar year 2010; (v) changed the exercised price of the warrants to an amount equal to 150% of the lowest price at which Company common stock is sold during calendar year 2010; (vi) provides that if we are successful in completing the required capital raise the number of warrants will be increased as currently provided in the 6.25% senior secured convertible promissory note; and (vii) extended the expiration date of the warrants to December 31, 2013.
If the additional funding is not completed by December 3, 2010, certain provisions of the prior amendments will be void in that the maturity date will revert back to December 21, 2010, the conversion price will become the lowest price at which equity securities have been sold, the exercise price will become the lowest price at which equity securities have been sold, the number of warrants then outstanding will be determined by the original purchase documents, and the Company will not have an obligation to maintain a balance of cash and marketable securities equal to $950,000.
The conversion price of the senior secured convertible note and the exercise price of the warrants continue to be subject to adjustment pursuant to standard anti-dilution rights. If we are not successful in completing the $8.0 million equity raise by December 3, 2010, then the conversion price of the note and the exercise price of the warrants will reset to the lowest price at which we will have sold equity. These rights include (i) e quitable 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 150% of the lowest price at which Company common stock is sold during calendar year 2010.
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 o f common stock issuable as interest shares under the note and shares of common stock issuable upon exercise of the warrant under the Securities Act of 1933, as amended. The holder is entitled to demand registration of the above-mentioned shares of common stock after six months from the closing of the securities purchase agreement in certain circumstances.
~~The securities purchase agreement under which the senior secured convertible note and related securities were issued~~Loan Restructuring Agreement contains, among other things, covenants that may restrict our ability to obtain additional capital, to declare or pay a dividend or to engage in other business activities. A breach of any of these covenants could result in a default under our senior secured convertible note, in which event the holder of the note could elect to declare all amounts outstanding to be immediately due and payable, which would require us to secure additional debt or equity financing to repay the indebtedness or to seek bankruptcy protection or liquidation. The ~~securities purchase agreement~~Loan Restructuring Agreement provides that we cannot do any of the following without the prior written consent of the holder:
·
directly or indirectly, redeem, or declare or pay any cash dividend or distribution on, our common stock;
·
incur or guarantee any indebtedness other than indebtedness evidenced by the Amended and Restated Note and other permitted indebtedness as defined in the Amended and Restated Note;
·
repay any indebtedness which is junior to the Amended and Restated Note;
·
issue any additional notes or issue any other securities that would cause a breach or default under the ~~senior secured convertible note;~~Amended and Restated Note;
·
issue or sell any rights, warrants or options to subscribe for or purchase common stock or directly or indirectly convertible into or exchangeable or exercisable for common stock at a price which varies or may vary with the market price of the common stock, including by way of one or more reset(s) to any fixed price unless the conversion, exchange or exercise price of any such security cannot be less than the then applicable conversion price with respect to the common stock into which any note is convertible or the then applicable exercise price with respect to the common stock into which any warrant is exercisable;
·
~~e nter~~enter into or ~~affect~~effect any dilutive issuance (as defined in the note) if the effect of such dilutive issuance is to cause us to be required to issue upon conversion of any note or exercise of any warrant any shares of common stock in excess of that number of shares of common stock which

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we may issue upon conversion of the note and exercise of the warrants without breaching our obligations under the rules or regulations of the principal market or any applicable eligible market;
·
liquidate, wind up or dissolve (or suffer any liquidation or dissolution);
·
convey, sell, lease, license, assign, transfer or otherwise dispose of all or any substantial portion of our properties or assets, other than transactions in the ordinary course of business consistent with past practices, and transactions by non-material subsidiaries, if any and;
·
cause, permit or suffer, directly or indirectly, any change in ~~co ntrol~~control transaction as defined in the ~~senior secured convertible note.~~Amended and Restated Note.
On November 2, 2006, we closed on a convertible note securities agreement dated October 28, 2006 with an individual that provided we issue to the convertible note holder (i) an unsecured convertible note in the principal amount of $1,000,000 representing the funding received by us from an affiliate of the convertible note holder on September 29, 2006, and (ii) four classes of warrants (A warrants, B warrants, C warrants and D warrants) which gave the convertible note holder the right to purchase a total of 5,500,000 shares of our common stock. The

27

holder of the note no longer has any warrants to purchase any of our stock. The unsecured convertible note was due October 16, 2009 and was extended to December 22, 2010 and the annual interest rate was increased to 8%, payable semi-annually in cash or in shares of our common stock if certain conditions ~~ar e~~are satisfied The unsecured convertible note is convertible into shares of our common stock at a conversion price of $1.50 per share, convertible any time during the term of the note, and is subject to standard anti-dilution rights. The term of the convertible note has been extended and now is due December 31, 2013. In connection with the extension of the note, we issued to the holder of the note 150,000 shares of common stock to extend the term of the note. In addition, we committed to pay accrued interest due on the convertible note through the issuance of common stock and warrants on the same terms as the Equity Financing.

The conversion feature and the prepayment provision of our ~~$15.0~~$5.5 million ~~senior secured convertible note~~Amended and Restated Note and our $1.0 million unsecured convertible note have been accounted for as embedded derivatives and valued on the respective transaction dates using a Black-Scholes pricing model. The warrants related to the $1.0 million unsecured convertible notes have been accounted for as derivatives and were valued on the respective transaction dates using a Black-Scholes pricing model as well. At the end of each quarterly reporting date, the values of the embedded derivatives and the warrants are evaluated and adjusted to current market value. The conversion features of the convertible notes and the warrants may be ~~exerc ised~~exercised at any time and, therefore, have been reported as current liabilities. Prepayment provisions contained in the convertible notes limit our ability to prepay the notes in certain circumstances. For all periods since the issuance of the senior secured convertible note and the unsecured convertible note, the derivative values of the respective prepayment provisions have been nominal and have not had any offsetting effect on the valuation of the conversion features of the notes. For a description of the accounting treatment of the senior secured convertible note financing, see Note 7 to the Notes to Condensed Consolidated Financial Statements (Unaudited) included elsewhere herein.
~~Given the conditional extension of the maturity date~~
On March 21, 2011, we converted $784,292 of our ~~$15.0 million senior secured convertible note discussed above, it is possible this note, together with our unsecured convertible note, will both become due~~short-term debt into equity through the issuance of common stock and warrants to two lenders at the same unit pricing as the Company’s recent equity raise in December 2010. ~~Notwit hstanding~~In consideration of converting the ~~recent amendment,~~short- term loans on the basis of $1.20 for two shares of common stock plus one warrant at an exercise price of $1.00, we issued 1,307,153 shares of common stock and warrants to acquire up to 653,576 shares of common stock, which warrants have a five year term and are ~~continuing discussions with~~exercisable at $1.00 per share. Our objective for converting the ~~holder of the senior secured convertible note regarding a possible further extension of the maturity date. We are also continuing~~short-term debt into equity was to explore various financing alternatives. In the event we are unable to repay our convertible notes upon maturity, we will need to secure additional debt or equity financing or face possible foreclosure on our assets by the secured note holder, bankruptcy protection or liquidation.   conserve cash for future market development.

Our monthly operating expenses, including our CodecSys technology research and development expenses, exceeded our monthly net sales by approximately ~~$200,000~~$350,000 per month during the quarter ended ~~September 30, 2010. Our currently available capital resources will be exhausted in~~March 31, 2011. The net proceeds from the ~~next quarter if~~Equity Financing after the payment of debt to the senior note holder, commissions, expenses of the offering, and payment of past due accounts payable is approximately $5,500,000. At our current rate of expenditures, including debt service, over expected revenues, we would have sufficient capital to maintain operations ~~remained relatively constant and if we raise no more equity capital. We are actively pursuing equity financing from var ious sources. To~~at their current level through 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.~~end of 2011. The foregoing estimates, expectations and forward-looking statements are subject to change as we make strategic operating decisions from time to time and as our expenses and sales fluctuate from period to period.

The amount of our operating deficit could decrease or increase significantly depending on strategic and other operating decisions, thereby affecting our need for additional capital. We expect our operating expenses will continue to outpace our net sales until we are able to generate additional revenue. Our business model contemplates that sources of additional revenue include (i) sales from our private communication network services, (ii) sales resulting from new customer contracts, and (iii) sales, licensing fees ~~and /or~~and/or royalties related to

32

commercial applications of our CodecSys technology, including sales resulting from marketing efforts by companies such as IBM, HP and Microsoft.

Our long-term liquidity is dependent upon execution of our business model and the realization of additional revenue and working capital as described above, and upon capital needed for continued commercialization and development of the CodecSys technology. Commercialization and future applications of the CodecSys technology are expected to require ~~addi tional~~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~~will continue to rely on proceeds received from external funding. We expect additional investment capital, if needed, may come from (i) the exercise of outstanding warrants to purchase our capital stock currently held by existing warrant holders; (ii) additional private placements of our common stock with existing and new investors; and (iii) the private placement of other

28

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

We have no off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. We do not issue financial instruments for trading ~~purposes.~~purposes or have any derivative financial instruments. As discussed above, however, ~~th e~~the embedded conversion feature and prepayment option of our senior secured convertible notes and our related warrants are deemed to be derivatives and are subject to quarterly “mark-to-market” valuations.

Our cash and cash equivalents are also exposed to market risk. However, because of the short-term maturities of our cash and cash equivalents, we do not believe that an increase in market rates would have any significant impact on the realized value of our cash and cash equivalent investments. We currently do not hedge interest rate exposure and are not exposed to the impact of foreign currency fluctuations.

Item 4. Controls and Procedures

Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act. As of ~~September, 2010,~~March 31, 2011, an evaluation was performed, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as of ~~September 30, 2010,~~March 31, 2011, were effective in ensuring that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, , and in ensuring that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our system of internal control over financial reporting within the meaning of Rules 13a-15(f) and 15d-15(f) of the Exchange Act is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of our published financial statements in accordance with U.S. generally accepted accounting principles.

33

Our management, including the chief executive officer and the chief financial officer, assessed the effectiveness of our system of internal control over financial reporting as of ~~September 30, 2010.~~March 31, 2011. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on our assessment, we believe that, as of ~~September 30, 2010,~~March 31, 2011, our system of internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial ~~st atements~~statements for external purposes in accordance with U.S. generally accepted accounting principles.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting for the quarter ended ~~September 30, 2010~~March 31, 2011 that have materially affected, or are reasonably likely to materially affect, such control.

29

Limitations on Controls and Procedures
The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these limitations, any system of disclosure controls and procedures or internal control over financial reporting may not be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.
The foregoing limitations do not qualify the conclusions set forth above by our chief executive officer and our chief financial officer regarding the effectiveness of our disclosure controls and procedures and our internal control over financial reporting as of ~~September 30, 2010.~~March 31, 2011.

Part II – Other Information

Item 1.
  Legal Proceedings

The Company is a defendant in ~~three~~one lawsuits, the total amount in dispute in which is ~~$125,000~~approximately $105,000. To the knowledge of management, no other litigation has been filed or threatened.

Item 1A. Risk Factors
`
~~Except as indicated below, there~~There have been no material changes in risk factors from those described in our Annual Report of Form 10-K for the year ended December 31, ~~2009.~~

~~We may not be able to repay our outstanding notes when they become due.~~

The maturity date of our $15.0 million senior secured convertible note has been conditionally extended to June 21, 2012 pursuant to an amendment and extension agreement dated July 30, 2010, or the note amendment. If we are unable to successfully raise at least $8.0 million in equity financing prior to December 3, 2010, then the maturity date of this note will revert to its original maturity date of December 21, 2010. We are in the process of raising additional equity funding, but to date we have only raised or received commitments for approximately $2.5 million. Given the lead time and other requirements for closing a significant equity financing, it is likely we may not be able to raise the required $8.0 million by December 3, 20 10, in which case the original maturity will be reinstated as discussed above. If this happens, we believe raising additional equity financing will become even more difficult and may not be possible. If such financing is available, it would likely result in substantial dilution to existing shareholders. We currently do not have the cash resources or ability to repay the $15.0 million senior secured convertible note. If we are unable to repay the senior secured convertible note when it becomes due, we may face possible foreclosure on our assets by the note holder, bankruptcy protection or liquidation. Because the note is secured by all of our assets, any foreclosure could result in the loss of our business and a complete loss of investment by our shareholders. We may also be unable to repay our other outstanding unsecured debt obligations as they become due, including our $1.0 million unsecured convertible note discussed below.

34

Our $1.0 million unsecured convertible note is due on December 22, 2010. Under the terms of the $15.0 million senior secured convertible note amendment, the senior secured convertible note was also amended to preclude any principal payment of our $1.0 million unsecured convertible note without the written consent of the senior secured convertible note holder. Therefore, unless the senior secured convertible note holder provides consent, of which there can be no assurance, we will be precluded from repaying the $1.0 million unsecured convertible note when it becomes due on December 22, 2010.

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

In ~~July, 2010, four holders of convertible promissory notes in the aggregate principal amount of $950,000 converted the convertible notes and aggregate accrued interest of $10,075~~January, 2011, we granted options to ~~960,075~~acquire up to 500,000 shares of our common stock to a consultant in consideration of consulting services to be rendered by the consultant over a one year period pursuant to a written consulting agreement. The options are exercisable at ~~a conversion price of $1.00~~$1.11 per ~~share. In addition, the holders received warrants to acquire up to 960,075 shares our common stock at an exercise price of $1.50 per share. The warrants~~share and have a ~~term of~~ three ~~years from the date of issuance. In the event the Company sells equity at a lower price at any time before December 31, 2010, a holder may elect to receive additional equity on the same terms~~year life. The consultant is an accredited investor and conditions as such purchasers of the additional equity receive at the time of their investment with the same warrant coverage as the new equity purchasers receive. We have used the proceeds from the sale of the shares of stock for general working capital.was fully informed regarding his investment. In the transaction, we relied on the exemptions from registration under the Securities Act set forth in Section 4(2) and Section 4(6) thereof.

~~In July, August and September 2010,~~During March 2011, we ~~sold 1,335,000~~issued 293,517 shares of ~~our~~ common stock to ~~13 different individuals and one company for $1,335,000. In addition,~~ the ~~purchasers~~holder of our ~~common stock also received warrants~~unsecured convertible note in satisfaction of $176,110 of accrued interest on the unsecured convertible note. Also in connection with the satisfaction of the accrued interest we granted to ~~purchase an~~the holder a warrant to acquire up to 221,758 additional ~~1,335,000~~ shares of our common stock at an exercise price of ~~$1.50~~$1.00 per share. The warrants have a term of three years from the date of issuance. We have used the proceeds from the sale of the shares of stock for general working capital. In the event the Company sells equity at a lower pricewarrant is exercisable at any time ~~before December 31, 2010,~~for a five year period. The holder ~~may elect to receive additional equity on the same terms and conditions as such purchasers~~ of the additional equity receive at the time of their investment with the same warrant coverage as the new equity purchasers receive. We have used the proceeds from the sale of the shares of stock for general working capital.unsecured convertible note is an accredited investor and was fully informed regarding his investment. In the ~~transaction,~~transactions, we relied on the exemptions from registration under the Securities Act set forth in Section 4(2) and Section 4(6) thereof.

In ~~July, August~~January 2011, the Company granted 1,300,000 Restricted Stock Units to the two executive officers and ~~September 2010, we issued a total~~three members of ~~116,937 shares~~the Board of ~~our common stock to three separate consultants~~Directors as compensation for services ~~performed for us pursuant to written consulting agreements.~~rendered during the past year. The ~~consultants~~officers and directors were accredited investors and were fully informed regarding the investment. In the transaction, we relied on the exemptions from registration under the Securities Act set forth in Section 4(2) and Section ~~4(6 )~~4(6) thereof.

On March 21, 2011, we converted $784,292 of our short-term debt into equity through the issuance of common stock and warrants to two lenders at the same unit pricing as the Equity Financing. In ~~August, 2010, we issued a total~~consideration of ~~4,467~~converting the short- term loans on the basis of $1.20 for two shares of ~~our~~ common stock ~~to two individuals in exchange for 67,000~~plus one warrant at an exercise price of $1.00, the Company issued 1,307,153 shares of ~~the~~ common stock and warrants to acquire up to 653,576 shares of ~~our controlled subsidiary, Interactive Devices, Inc. There~~common stock, which warrants have a five year term and are exercisable at $1.00 per share. The Company’s objective for converting the short-term debt into equity is to conserve cash for further market development. The lenders of the short-term debt were ~~no proceeds from the transaction.~~accredited investors and were fully informed regarding their investment. In the ~~transaction,~~transactions, we relied on the ~~exemption~~exemptions from registration under the Securities Act set forth in Section 4(2). and Section 4(6) thereof.

30

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

Item 3. Defaults Upon Senior Securities

None.

Item 4.
~~[REMOVED AND RESERVED]~~Submission of Matters to Vote of Security Holders.

None.

Item 5.
Other Information

(a) None.

(b) None.

35

Item 6.
  Exhibits

Exhibit Index
(a)
Exhibits
Exhibit
Number

Description of Document
3.1
Amended and Restated Articles of Incorporation of Broadcast International.   (Incorporated by reference to Exhibit No. 3.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed with the SEC on November 14, 2006.)
3.2
Amended and Restated Bylaws of Broadcast International. (Incorporated by reference to Exhibit No. 3.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed with the SEC on November 14, 2006.)
4.1
Specimen Stock Certificate of Common Stock of Broadcast International. (Incorporated by reference to Exhibit No. 4.1 of the Company's Registration Statement on Form SB-2, filed under cover of Form S-3, pre-effective Amendment No. 3 filed with the SEC on October 11, 2005.)
10.1*
Employment Agreement of Rodney M. Tiede dated April 28, 2004. (Incorporated by reference to Exhibit No. 10.1 of the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004 filed with the SEC on May 12, 2004.)
10.2*
Employment Agreement of James E Solomon dated September 19, 2008. (Incorporated by reference to Exhibit No. 10.2 of the Company's Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on Mach 31, 2010.)
10.3*
Broadcast International 2004 Long-Term Incentive Plan. (Incorporated by reference to Exhibit No. 10.4 of the Company's Annual Report on Form 10-KSB for the year ended December 31, 2003 filed with the SEC on March 30, 2004.)
10.4*
Broadcast International 2008 Long-Term Incentive Plan. (Incorporated by reference to the Company’s definitive Proxy Statement on Schedule 14A filed with the SEC on April 17, 2009)

~~Exhibit~~ ~~Number~~ ~~Document~~

~~3.1~~
Amended and Restated Articles of Incorporation of Broadcast International. (Incorporated by reference to Exhibit No. 3.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed with the SEC on November 14, 2006.)
~~3.2~~
Amended and Restated Bylaws of Broadcast International. (Incorporated by reference to Exhibit No. 3.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed with the SEC on November 14, 2006.)
~~4.1~~
Specimen Stock Certificate of Common Stock of Broadcast International. (Incorporated by reference to Exhibit No. 4.1 of the Company's Registration Statement on Form SB-2, filed under cover of Form S-3, pre-effective Amendment No. 3 filed with the SEC on October 11, 2005.)
10.1*
Employment Agreement of Rodney M. Tiede dated April 28, 2004. (Incorporated by reference to Exhibit No. 10.1 of the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004 filed with the SEC on May 12, 2004.)
10.2*
~~Broadcast International, Inc. 2008 Equity Incentive Plan.~~
10.3*
Broadcast International, Inc. 2004 Long-Term Incentive Plan. (Incorporated by reference to Exhibit No. 10.4 of the Company's Annual Report on Form 10-KSB for the year ended December 31, 2003 filed with the SEC on March 30, 2004.)
~~10.4~~

10.5
Securities Purchase Agreement dated October 28, 2006 between Broadcast International and Leon Frenkel. (Incorporated by reference to Exhibit 10.1 ~~of the Company’s Current Report on Form 8-K filed with the SEC on November 6 , 2006.)~~
~~10.5~~
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.)
~~10.6~~
~~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
5% Convertible Note dated October 16, 2006 issued by Broadcast International to Leon Frenkel. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on November 6, 2006.)
10.7
Registration Rights Agreement dated October 28, 2006 between Broadcast International and Leon Frenkel. (Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the SEC on November 6, 2006.)
10.8
Securities Purchase Agreement dated as of December 21, 2007, by and among Broadcast International and the investors listed on the Schedule of Buyers attached thereto. (Incorporated by reference to Exhibit 10.1 ~~of the Company’s Current Report on Form 8-K filed with the SEC on December 26, 2007.)~~
~~10.8~~
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.)
~~10.9~~
~~6.25% Senior Secured Convertible Promissory Note dated December 21, 2007 issued to the holder listed therein. (Incorporated by reference to Exhibit 10.3~~ of the Company’s Current Report on Form 8-K filed with the SEC on December 26, 2007.)
10.9
Registration Rights Agreement dated as of December 21, 2007, by and among Broadcast International and the buyers listed therein. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on December 26, 2007.)
10.10
6.25% Senior Secured Convertible Promissory Note dated December 21, 2007 issued to the holder listed therein. (Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the SEC on December 26, 2007.)
10.11
Warrant to Purchase Common Stock dated December 21, 2007 issued to the holder listed therein. (Incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the SEC on December 26, 2007.)
10.12
Loan Restructuring Agreement between the Company and Castlerigg Master Investments Ltd., dated December 16, 2010 (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on December 22, 2010.)
10.13
Amendment to 8% Convertible Note Due 2010 between the Company and Leon Frenkel, dated December 22, 2010 (Incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K filed with the SEC on December 22, 2010.)
10.14
Placement Agency Agreement between the Company and Philadelphia Brokerage Corporation, dated December 17, 2010 (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on December 28, 2010.)
10.15
Form of Subscription Agreement (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on December 28, 2010.)
10.16
Form of Warrant (Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the SEC on December 28, 2010.)
10.17
Amended and Restated Senior Convertible Note issued by the Company to Castlerigg master Investments Ltd., dated December 23, 2010 (Incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the SEC on December 28, 2010.)
10.18
Investor Rights Agreement between the Company and Castlerigg Master Investments Ltd., dated December 23, 2010 (Incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K filed with the SEC on December 28, 2010.)

   ;                                                                                      36

~~10.11~~
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.)
~~10.12~~
Amendment and Extension Agreement dated March 26, 2010 to 6.25% Senior Secured Convertible Note dated December 21, 2007 between Broadcast International and the holder thereof. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on March 31, 2010)
~~10.13~~
Full Ratchet Amendment and Extension Agreement dated July 30, 2010 to 6.25% S enior Secured Convertible Note dated December 21, 2007 between Broadcast International and the holder thereof. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on July 30, 2010)
~~10.14~~
Amendment and Extension Agreement dated September 27, 2010 to 6.25% Senior Secured Convertible Note dated December 21, 2007 issued to the holder listed therein. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on September 23, 2010)
~~10.15~~
Forth Amendment and Extension Agreement dated October 29, 2010 to 6.25% Senior Secured Convertible Note dated December 21, 2007 issued to the holder listed therein. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on November 1, 2010)
~~10.16~~
Master Lease Agreement dated as of July 28, 2009 between the Company and ACC Capital Corporation. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on August 28, 2009.)
~~10.17~~
Security Agreement and Ass ignment for Security Agreement between the Company and ACC Capital Corporation. Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on August 28, 2009.)
~~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 Secti on 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.~~
10.19
Letter between the Company and Castlerigg Master Investments Ltd., dated December 23, 2010 (Incorporated by reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K filed with the SEC on December 28, 2010.)
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*   Management contract or compensatory plan or ~~arrangement~~arrangement.

37

~~SIGNATURES~~

~~Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.~~

~~Broadcast International, Inc.~~

~~Date: November 12, 2010~~
~~/s/ Rodney M. Tiede~~
~~By: Rodney M. Tiede~~
~~Its: President and Chief Executive Officer (Principal Executive Officer)~~

~~Date: November 12, 2010~~
~~/s/ James E. Solomon~~
~~By: James E. Solomon~~
~~Its: Chief Financial Officer (Principal Financial and Accounting Officer)~~

38

SIGNATURES

Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Broadcast International, Inc.

Date: May 13, 2011
/s/ Rodney M. Tiede
By: Rodney M. Tiede
Its: President and Chief Executive Officer (Principal Executive Officer)

Date: May 13, 2011
/s/ James E. Solomon
By: James E. Solomon
Its: Chief Financial Officer (Principal Financial and Accounting Officer)

34



Utah		87-0395567
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)


Class	Outstanding as of ~~November 5, 2010~~April 30, 2011
Common Stock, $.05 par value	~~45,659,150~~75,575,773 shares


		December 31, 2009		September 30, 2010
				(Unaudited)
ASSETS:
Current Assets
Cash and cash equivalents	$	263,492	$	311,227
Trade accounts receivable, net		1,187,660		947,544
Inventory		105,410		63,115
Prepaid expenses		128,042		235,660
Total current assets		1,684,604		1,557,546
Property and equipment, net		3,811,377		2,802,420
Other Assets
Debt offering costs		447,525		2,088,905
Patents, net		177,413		169,948
Long-term investments		274,264		-
Deposits and ot her assets		422,974		660,963
Total other assets		1,322,176		2,919,816

Total assets	$	6,818,157	$	7,279,782

LIABILITIES AND STOCKHOLDERS EQUITY
LIABILITIES
Current Liabilities
Accounts payable	$	2,023,378	$	2,050,858
Payroll and related expenses		385,349		526,414
Other accrued expenses		180,695		394,354
Unearned revenue		91,729		80,820
Current portion of notes payable (net of discount of $24,186 and $935,156, respectively)		13,354,166		18,424,769
Other current obligations		1,238,779		1,377,764
Derivative valuation		969,900		1,003,300
Total current liabilities		18,243,996		23,858,279
Long-term Liabilities
Long-term portion of notes payable		162,500		-
Other long-term obligations		2,494,512		1,443,077
Total long-term liabilities		2,657,012		1,443,077
Total liabilities		20,901,008		25,301,356
Commitments and contingencies
STOCKHOLDERS’ DEFICIT:
Preferred stock, no par value, 20,000,000 shares authorized; none issued		--		--
Common stock, $.05 par value, 180,000,000 shares authorized; 39,690,634 and 45,507,103 shares issued as of December 31, 2009 and September 30, 2010, respectively		1,984,532	&nb sp;	2,275,355
Additional paid-in capital		77,760,811		85,180,623
Accumulated deficit		(93,828,194)		(105,477,552)
Total stockholders’ deficit		(14,082,851)		(18,021,574)

Total liabilities and stockholders’ deficit	$	6,818,157	$	7,279,782


		December 31, 2010		March 31, 2011
				(Unaudited)
ASSETS:
Current Assets
Cash and cash equivalents	$	6,129,632	$	3,304,891
Trade accounts receivable, net		1,125,055		1,018,513
Inventory		52,175		111,595
Prepaid expenses		190,877		275,862
Total current assets		7,497,739		4,710,861
Property and equipment, net		2,419,891		2,233,512
Other Assets, non current
Patents, net		167,410		164,872
Deposits and other assets		624,598		584,946
Total other assets, non current		792,008		749,818

Total assets	$	10,709,638	$	7,694,191

LIABILITIES AND STOCKHOLDERS EQUITY
LIABILITIES
Current Liabilities
Accounts payable	$	1,552,006	$	943,075
Payroll and related expenses		341,255		349,059
Other accrued expenses		381,015		40,673
Unearned revenue		139,437		107,808
Current notes payable		775,000		--
Other current obligations		1,426,834		1,477,283
Derivative valuation		14,759,300		11,394,100
Total current liabilities		19,374,847		14,311,998
Long-term Liabilities
Long-term portion of notes payable (net of discount of 992,832 and $909,498, respectively		6,187,984		6,271,318
Other long-term obligations		1,067,649		679,068
Total long-term liabilities		7,255,633		6,950,386
Total liabilities		26,630,480		21,262,384
Commitments and contingencies
STOCKHOLDERS’ DEFICIT:
Preferred stock, no par value, 20,000,000 shares authorized; none issued		--		--
Common stock, $.05 par value, 180,000,000 shares authorized; 74,078,153 and 75,575,733 shares issued as of December 31, 2010 and March 31, 2011, respectively		3,703,908		3,778,802
Additional paid-in capital		92,867,561		95,892,281
Accumulated deficit		(112,492,311)		(113,239,276)
Total stockholders’ deficit		(15,920,842)		(13,568,193)

Total liabilities and stockholders’ deficit	$	10,709,638	$	7,694,191


		For the three months ended				For the nine months ended
		For the three months ended
		September 30,				September 30,				March 31,
		2009		2010		2009		2010		2010		2011

Net sales	$	806,398	$	1,885,600	$	1,515,030	$	5,359,907	$	1,787,067	$	1,687,264
Cost of sales		653,702		1,257,954		1,510,804		3,847,716		1,273,043		1,275,537
Gross profit		152,696		627,646		4,226		1,512,191		514,024		411,727

Operating expenses:
Administrative and general		1,193,978		801,351		3,950,059		3,180,412		1,210,974		2,608,372
Selling and marketing		152,237		55,007		472,689		197,276		82,451		159,937
Research and development		924,563		588,147		2,657,897		2,090,212		736,135		597,771
Depreciation and amortization		190,443		190,846		562,161		575,856		192,637		180,793
Total operating expenses		2,461,221		1,635,351		7,642,806		6,043,756		2,222,197		3,546,873
Total operating loss		(2,308,525)		(1,007,705)		(7,638,580)		(4,531,565)		(1,708,173)		(3,135,146)

Other income (expense):
Interest income		3,249		-		18,231		3,295		2,403		788
Interest expense		(1,711,601)		(3,531,090)		(4,925,153)		(7, 379,794)		(1,715,025)		(381,189)
Gain (loss) on derivative valuation		126,400		(1,044,993)		3,115,00 0		240,100
Gain (loss) on sale of securities		60,558		-		122,308		(49,264)
Loss on sale of assets		(9,690)		-		(11,296)		-
Unrealized gain on long term investments		260		-		57,291		-
Gain on derivative valuation													518,000	4,219,300
Equity issuance costs related to warrants													--	(476,234)
Loss on extinguishment of debt													--	(970,033)
Loss on disposition of assets													--	(602)
Other income (expense), net		(5,798)		59,121		(10,935)		67,870		2,064		(3,849)
Total other income (expense)		(1,536,622)		(4,516,962)		(1,634,554)		(7,117,793)		(1,192,558)		2,388,181

Loss before income taxes		(3,845,147)		(5,524,667)		(9,273,134)		(11,649,358)		(2,900,731)		(746,965)
Provision for income taxes		-		-		-		-		-		-
Net loss	$	(3,845,147)	$	(5,524,667)	$	(9,273,134)	$	(11,649,358)	$	(2,900,731)	$	(746,965)

Net loss per share – basic & diluted	$	(0.10)	$	(0.13)	$	(0.24)	$	(0.28)	$	(0.07)	$	(0.01)

Weighted average shares – basic & diluted		39,483,200		43,098,800		39,141,000		41,402,000		40,039,200		74,249,600


		Nine Months Ended
		Three Months Ended
		September 30,				March 31,
		2009		2010		2010		2011
Cash flows from operating activities:
Net loss	$	(9,273,134)	$	(11,649,358)	$	(2,900,731)	$	(746,965)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		581,971		1,179,380		389,017		382,995
Common stock issued for services		-		399,466		160,178		--
Common stock issued for in process research and development		256,265		4,024
Common stock issued for interest										--		19,634
Accretion of discount on convertible notes payable		3,393,477		3,251,360		1,047,825		83,334
Capitalized interest on convertible note		1,035,452		1,131,836		368,916		--
Stock based compensation		807,597		879,570		383,958		1,546,542
Loss on sale of assets		11,296		-		--		602
Extinguishment of Debt		-		802,190
Loss on extinguishment of Debt										--		970,033
Gain on derivative liability valuation		(3,115,000)		(240,100)		(518,000)		(4,219,300)
Loss (gain) on sale of securities available for sale		(122,308)		49,264
Comprehensive gain on sale of securities available for sale		(57,291)		-
Warrants issued for interest										--		157,400
Warrants issued for debt extinguishment costs										--		404,000
Allowance for doubtful accounts		16,529		(38,904)		(23,910)		1,126
Changes in assets and liabilities:
Accounts receivable		(376,249)		279,020
Inventories		7,219		42,295
Debt offering costs		344,250		1,648,620
&nbs p; Prepaid and other assets		60,482		20,393
Accounts payable and accrued expenses		(19,112)		259,419
Deferred revenues		1,237		(10,909)
Decrease in accounts receivable										220,998		105,416
Decrease (increase) in inventories										28,746		(59,420)
Decrease in debt offering costs										114,750		--
Decrease (increase) in prepaid and other assets										28,779		(45,333)
Increase (decrease) in accounts payable and accrued expenses										358,506		(754,590)
Decrease in deferred revenues										(89,873)		(31,629)

&nbs p; Net cash used in operating activities		(6,447,319)		(1,992,434)
Net cash used in operating activities										(430,841)		(2,186,155)

Cash flows from investing activities:
Purchase of equipment		(1,536,675)		(190,173)		(142,433)		(194,680)
Proceeds from the sale of auction rate preferred securities		2,025,000		225,000
Proceeds from sale of assets		4,451		-

Net cash provided by investing activities		492,776		34,827		(142,433)		(194,680)

Cash flows from financing activities:
Proceeds from the exercise of options and warrants		58,500		-		--		18,304
Proceeds from the sale of equity		-		1,335,000
Principal payments on debt		(1,087,729)		(1,304,658)		(303,146)		(438,132)
Proceeds from equipment financing		4,100,670
Equity issuance costs										--		(24,078)
Proceeds from notes payable		1,400,000		1,975,000		1,025,000		--

Net cash provided by financing activities		4,471,441		2,005,342
Net cash provided (used) by financing activities										721,854		(443,906)

Net increase (decrease) in cash and cash equivalents		(1,483,102)		47,735		148,580		(2,824,741)

Cash and cash equivalents, beginning of period		3,558,336		263,492		263,492		6,129,632

Cash and cash equivalents, end of period	$	2,075,234	$	311,227	$	412,072	$	3,304,891

Supplemental disclosure of cash flow information:
Interest paid									$	130,182	$	88,254
Income taxes paid									$	--	$	--


	Nine Months Ended September 30,
	2010	2009
	Three Months Ended March 30, 2011	Three Months Ended March 30, 2010
Risk free interest rate	3.14%	3.48%	0.98%	3.14%
Expected life (in years)	7.5	10.0	3.0	7.5
Expected volatility	80.71%	81.85%	84.76%	80.71%
Expected dividend yield	0.00%	0.00%	0.00%


		For the three months ended September 30,				For the nine months ended September 30,
			2009		2010		2009	2010
		Three months ended March 31,2011		Three months ended March 31,2010
General and administrative	General and administrative		$ 128,851		$ 96,973		$ 565,769	$ 616,001	$	1,478,417	$	296,725
Research and development	Research and development		91,666		87,593		241, 828	263,570		68,125		87,233

Total	Total		$ 220,517		$ 184,566		$ 807,597	$ 879,571	$	1,546,542	$	383,958




2010	$ 193,203
2011	380,561	$	330,530
2012	121,639		82,531

Total	$ 695,403	$	413,061


	Options and Warrants Outstanding		Weighted Average Exercise Price
	Options and Warrants Outstanding		Weighted Average Exercise Price

Outstanding at December 31, 2009	13,167,337	$	2.19
Outstanding at December 31, 2010						20,442,170	$	1.13
Options granted	100,000		1.05	500,000	1.11
Warrants issued	6,422,232		1.59	1,275,334	0.68
Expired	(3,038,087)		1.66	(454)	0.33
Forfeited	(85,666)		2.26	(900,000)	1.22
Exercised	-		-	(55,098)	0.33

Outstanding at September 30, 2010	16,565,816	$	2.05
Outstanding at March 31, 2011						21,261,952	$	1.12


		Outstanding				Exercisable
			Weighted Average Remaining		Weighted Average			Weighted Average
	Range of Exercise Prices	Number Outstanding	Contractual Life (years)		Exercise Price	Number Exercisable		Exercise Price
$	0.33 - 0.95	2,014,299	3.86	$	0.74	2,014,299	$	0.74
	1.06 - 6.25	14,549,117	2.42		2.23	13,986,008		2.25
	9.50 -11.50	1,600	1.42		10.50	1,600		10.50
	36.25	800	0.67		36.25	800		35.25
$	0.33 - 36.25	16,565,816	2.05	$	2.59	16,002,707	$	2.06


		Outstanding			Exercisable
			Weighted Average Remaining	Weighted Average		Weighted Average
	Range of Exercise Prices	Number Outstanding	Contractual Life (years)	Exercise Price	Number Exercisable	Exercise Price
$	0.05-0.95	2,166,285	4.22	$ 0.64	2,166,285	$ 0.64
	1.06-6.25	19,093,267	4.51	1.17	18,900,158	1.17
	9.50-11.50	1,600	0.92	10.50	1,600	10.50
	36.25	800	0.17	36.25	800	35.25
$	0.05-36.25	21,261,952	4.48	$ 1.12	21,068,843	$ 1.12


	Restricted Stock Units	Weighted Average Grant Date Fair Value

Outstanding at December 31, 2009	885,000	$ 1.69
Awarded at fair value	100,000	$ 0.94
Cance led/Forfeited	-	-
Settled by issuance of stock	(35,000)	$ 1.70
Outstanding at September 30, 2010	950,000	$ 1.61
Vested at September 30, 2010	950,000	$ 1.61


Year ending December 31:
Year ending December 31:
2010	$ 12,231
2011	12,231	$ 12,231
2012	11,763	11,763
2013	11,763	11,763
2014	11,763	11,763
2015			11,763


		December 3 1, 2009		September 30, 2010
		December 31, 2010		March 31, 2011

Senior Secured 6.25% Convertible Note	$	12,317,619	$	16,592,930	$	6,180,816	$	6,180,816
Unsecured Convertible Note		1,000,000		1,000,000		7,168		90,502
Auction Rate Preferred Securities Secured Note		162,500		-
AFCO Note Payable		36,547		6,839
Unsecured Short Term Notes		-		150,000
Pledged A/R Note Payable		-		675,000		675,000		--
Short Term Note Payable									100,000	--
Total		13,516,666		18,424,769		6,962,984		6,271,318
Less Current Portion		(13,354,166)		(18,424,769)		(775,000)		--
Total Long-term	$	162,500	$	-	$	6,187,984	$	6,271,318


							Significant
							Significant
					Quoted Pri ces in		Other		Significant					Quoted Prices in		Other		Significant
					Active Markets for		Observable		Unobservable					Active Markets for		Observable		Unobservable
					Identical Assets		Inputs		Inputs					Identical Assets		Inputs		Inputs
			Total		(Level 1)		(Level 2)		(Level 3)			Total		(Level 1)		(Level 2)		(Level 3)
Assets	Assets									Assets
	Treasury cash reserves		311,227		311,227		-		-	Treasury cash reserves		3,304,891		3,304,891		--		--
Total assets measured at fair value	Total assets measured at fair value	$	311,227	$	331,227	$	-	$	-	Total assets measured at fair value	$	3,304,891	$	3,304,891	$	--	$	--

Liabilities									Liabilities
	Derivative valuation (1)	$	1,003,300	$	-	$	-	$	1,003,300	Derivative valuation (1)	$	11,394,100	$	--	$	--	$	11,394,100
Total liabilities measured at fair value	Total liabilities measured at fair value	$	1,003,300	$	&nbs p; -	$	-	$	1,003,300	Total liabilities measured at fair value	$	11,394,100	$	--	$	--	$	11,394,100
						&n bsp;
	(1) See Note 6 for additional discussion.									(1) See Note 6 for additional discussion.


			Derivative		Auction Rate
			Valuation		Preferred
			Liability		Securities		Total
Balance at December 31, 2009		$	(969,900)	$	274,264	$	(695,636)
Total gains or losses (realized and unrealized)
	Included in net loss		240,100		(49,264)		190,836
	Valuation adjustment		-		-		-
Purchases, issuances, and settlements, net			(273,500)		(225,000)		(498,500)
Transfers to Level 3			-		-		-
Balance at September 30, 2010		$	(1,003,300)	$	-	$	(1,003,300)