10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2012

OR

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

For the transition period from ________ to ________

Commission File No.0-13316

BROADCAST INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

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

7050 Union Park Ave. #600, Salt Lake City, Utah 84047

(Address of principal executive offices and zip code)

(801) 562-2252

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  S     No £ 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to post such files). Yes S     No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

£ Large accelerated filer   £ Accelerated filer    £ Non-accelerated filer    S  Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)   Yes   £    No   S

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

Class	Outstanding as of November 5, 2012
Common Stock, $.05 par value	107,543,220 shares

1

Broadcast International, Inc.

Form 10-Q

Table of Contents

PART I - FINANCIAL INFORMATION		Page
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition
	and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	35
Item 4.	Controls and Procedures	36
PART II -OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	[REMOVED AND RESERVED]	37
Item 5.	Other Information “Not Applicable”	37
Item 6.	Exhibits	37
Signatures		41

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BROADCAST INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	December 31, 2011			September 30, 2012
				(Unaudited)
ASSETS:
Current Assets
Cash	$	961,265		$	373,119
Trade accounts receivable, net		1,239,903			1,161,101
Inventory		60,851			362,335
Prepaid expenses		203,973			178,008
Total current assets		2,465,992			2,074,563
Property and equipment, net		1,417,134			664,750
Other Assets, non current
Debt offering costs		123,278			61,643
Patents, net		131,079			123,466
Deposits and other assets		406,004			226,794
Total other assets, non current		660,361			411,903
Total assets	$	4,543,487		$	3,151,216
LIABILITIES AND STOCKHOLDERS DEFICIT:
Current Liabilities
Accounts payable	$	1,252,538		$	2,002,821
Payroll and related expenses		390,206			329,203
Other accrued expenses		175,008			221,031
Unearned revenue		10,449			30,521
Current portion of notes payable (net of discount of $103,859 and           $861,335, respectively)		2,068,016			1,938,665
Other current obligations		1,067,649			--
Derivative valuation		3,760,200			4,346,021
Total current liabilities		8,724,066			8,868,262
Long-term Liabilities
Long-term portion of notes payable (net of discount of $659,496           and $409,494, respectively)		6,349,445			590,506
Total long-term liabilities		6,349,445			590,506
Total liabilities		15,073,511			9,458,768
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;           75,975,656 and 107,405,328 shares issued as of December 31,           2011 and September 30, 2012, respectively		3,798,783			5,370,266
Additional paid-in capital		96,859,058			99,559,404
Accumulated deficit		(111,187,865	)		(111,237,222	)
Total stockholders’ deficit		(10,530,024	)		(6,307,552	)
Total liabilities and stockholders’ deficit	$	4,543,487		$	3,151,216

See accompanying notes to condensed consolidated financial statements.

3

BROADCAST INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the three months ended						For the nine months ended
	September 30,						September 30,
	2011			2012			2011			2012
Net sales	$	2,277,074		$	2,045,278		$	6,321,495		$	5,790,363
Cost of sales		1,518,310			1,266,224			4,414,402			3,857,682
Gross profit		758,764			779,054			1,907,093			1,932,681
Operating expenses:
Administrative and general		1,280,183			1,001,001			5,124,883			3,589,602
Selling and marketing		401,826			442,495			824,771			1,557,735
Research and development		570,197			325,126			1,793,596			1,346,540
Depreciation and amortization		169,592			127,334			517,751			454,009
Total operating expenses		2,421,798			1,895,956			8,261,001			6,947,886
Total operating loss		(1,663,034	)		(1,116,902	)		(6,353,908	)		(5,015,205	)
Other income :
Interest income		338			--			2,324			1
Interest expense		(176,047	)		(460,388	)		(745,925	)		(1,066,599	)
Gain (loss) on derivative valuation		5,851,300			1,051,516			12,257,500			5,639,996
Equity issuance costs related to warrants		--			--			(476,234	)		(1,095,309	)
Loss on note conversion offering expense		--			(47,348	)		--			(47,348	)
Gain (loss) on extinguishment of debt		16,000			(83,754	)		(954,033	)		1,588,821
Loss on retirement of debt offering costs		--			(53,150	)		--			(53,150	)
Gain (loss) on sale of assets		--			2,421			(362	)		781
Other income (expense), net		5,597			(3,467	)		151			(1,345	)
Total other income		5,697,188			405,830			10,083,421			4,965,848
Profit (loss) before income taxes		4,034,154			(711,072	)		3,729,513			(49,357	)
Provision for income taxes		--			--			--			--
Net profit (loss)	$	4,034,154		$	(711,072	)	$	3,729,513		$	(49,357	)
Net profit (loss) per share – basic	$	0.05		$	(0.01	)	$	0.05		$	(0.00	)
Net profit (loss) per share – diluted	$	0.05		$	(0.01	)	$	0.05		$	(0.00	)
Weighted average shares – basic		75,844,526			107,263,073			75,240,313			98,564,531
Weighted average shares –diluted		78,414,453			107,263,073			77,970,216			98,564,531

See accompanying notes to condensed consolidated financial statements.

4

BROADCAST INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
	2011			2012
Cash flows from operating activities:
Net income (loss)	$	3,729,513		$	(49,357	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,117,703			918,206
Common stock issued for research and development		903			--
Common stock issued for services		--			167,494
Common stock issued for interest		19,634			--
Accretion of discount on convertible notes payable		250,002			593,297
Stock based compensation		2,072,993			255,001
Loss (gain) on sale of assets		362			(781	)
Loss (gain) on extinguishment of debt		954,033			(1,588,821	)
Gain on derivative liability valuation		(12,257,500	)		(5,639,996	)
Warrants issued for interest		157,400			--
Warrants issued for debt extinguishment costs		404,000			--
Warrants issued and expensed for issuance costs		--			1,095,309
Expensed offering costs		--			47,348
Retirement of debt offering costs		--			53,150
Allowance for doubtful accounts		1,414			4,493
Changes in assets and liabilities:
Increase (decrease) in accounts receivable		(68,607	)		74,309
Increase in inventories		(54,399	)		(301,484	)
Decrease in debt offering costs		--			86,338
Decrease in prepaid and other assets		126,704			205,175
Increase (decrease) in accounts payable and accrued expenses		(485,735	)		773,903
Increase (decrease) in deferred revenues		(103,629	)		20,072
Net cash used in operating activities		(4,135,209	)		(3,286,344	)
Cash flows from investing activities:
Purchase of equipment		(422,978	)		(160,599	)
Proceeds from the sale of assets		240			3,171
Net cash used by investing activities		(422,738	)		(157,428	)

5

BROADCAST INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

CONTINUED

(Unaudited)

	Nine Months Ended
	September 30,
	2011			2012
Cash flows from financing activities:
Proceeds from equity financing		--			6,150,000
Proceeds from issuance of convertible note and warrants		--			1,774,799
Principal payments on debt		(1,151,439	)		(4,017,649	)
Equity issuance costs		(24,078	)		(776,483	)
Proceeds from the exercise of options and warrants		18,304			--
Payments for debt extinguishment costs		--			(275,041	)
Net cash provided (used) by financing activities		(1,157,213	)		2,855,626
Net decrease in cash		(5,715,160	)		(588,146	)
Cash beginning of period		6,129,632			961,265
Cash end of period	$	414,472		$	373,119
Supplemental disclosure of cash flow information:
Interest paid	$	244,966		$	307,102
Income taxes paid	$	--		$	--

See accompanying notes to condensed consolidated financial statements.

6

BROADCAST INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2012

Note 1 – Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of Broadcast International, Inc. (“we” or the “Company”) contain the adjustments, all of which are of a normal recurring nature, necessary to present fairly our financial position at December 31, 2011 and September 30, 2012 and the results of operations for the three and nine months ended September 30, 2011 and 2012, respectively, with the cash flows for each of the nine months ended September 30, 2011 and 2012, in conformity with U.S. generally accepted accounting principles.

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2011.  Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012.

Note 2 - Reclassifications

Certain 2011 financial statement amounts have been reclassified to conform to 2012 presentations.

Note 3 – Weighted Average Shares

Basic earnings per common share is computed by dividing net income or loss applicable to common shareholders by the weighted average number of shares outstanding during each period. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the year, plus the dilutive common stock equivalents that would rise from the exercise of stock options, warrants and restricted stock units outstanding during the period, using the treasury stock method and the average market price per share during the period, plus the effect of assuming conversion of the convertible debt. The computation of diluted earnings per share does not assume conversion or exercise of securities that would have an anti-dilutive effect on earnings.

The following table sets forth the computation of basic and diluted earnings per common share for the three and nine month periods ended September 30, 2011 and 2012:

	For the three months ended					For the nine months ended
	September 30,					September 30,
	2011		2012			2011		2012
Numerator
Net income (loss)	$	4,034,154	$	(711,072	)	$	3,729,513	$	(49,357	)
Denominator
Basic weighted average shares outstanding		75,844,526		107,263,073			75,240,313		98,564,531
Effect of dilutive securities:
Stock options and warrants		19,927		--			179,903		--
Restricted stock units		2,550,000		--			2,550,000		--
Diluted weighted average shares outstanding		78,414,453		107,263,073			77,970,216		98,564,531
Net income (loss) per common share
Basic	$	0.05	$	(0.01	)	$	0.05	$	(0.00	)
Diluted	$	0.05	$	(0.01	)	$	0.05	$	(0.00	)

Potentially dilutive securities representing 25,193,934 and 24,723,934 shares of common stock were excluded from the computation of diluted earnings per common share for the three and nine months ended September 30, 2011, respectively, because their effect would have been anti-dilutive.

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Note 4 – Stock-based Compensation

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

Stock Incentive Plans

Under the Broadcast International, Inc. 2004 Long-Term Incentive Plan (the “2004 Plan”), the board of directors may issue incentive stock options to employees and directors and non-qualified stock options to consultants of the company.  Options generally may not be exercised until twelve months after the date granted and expire ten years after being granted. Options granted vest in accordance with the vesting schedule determined by the board of directors, usually ratably over a three-year vesting schedule upon the anniversary date of the grant.  Should an employee terminate before the vesting period is completed, the unvested portion of each grant is forfeited. We have used the Black-Scholes valuation model to estimate fair value of our stock-based awards, which requires various judgmental assumptions including estimated stock price volatility, forfeiture rates, and expected life.  Our computation of expected volatility is based on a combination of historical and market-based implied volatility.  The number of unissued stock options authorized under the 2004 Plan at September 30, 2012 was 3,585,008.

The Broadcast International, Inc. 2008 Equity Incentive Plan (the “2008 Plan”) has become our primary plan for providing stock-based incentive compensation to our eligible employees and non-employee directors and consultants of the company. The provisions of the 2008 Plan are similar to the 2004 Plan except that the 2008 Plan allows for the grant of share equivalents such as restricted stock awards, stock bonus awards, performance shares and restricted stock units in addition to non-qualified and incentive stock options. We continue to maintain and grant awards under our 2004 Plan which will remain in effect until it expires by its terms. The number of unissued shares of common stock reserved for issuance under the 2008 Plan was 962,367 at September 30, 2012.

Stock Options

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

The fair values for the options granted for the nine months ended September 30, 2011 and 2012 were estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	Nine Months Ended September 30, 2011			Nine Months Ended September 30, 2012
Risk free interest rate		1.96	%		1.65	%
Expected life (in years)		6.28			10.0
Expected volatility		81.03	%		78.97	%
Expected dividend yield		0.00	%		0.00	%

The weighted average fair value of options granted during the nine months ended September 30, 2011 and 2012 was $0.63 and $0.27, respectively.

Warrants

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

8

The fair values for the warrants issued for the nine months ended September 30, 2011 and 2012 estimated at the date of issuance using the Black-Scholes option-pricing model with the following weighted average assumptions:

	Nine Months Ended September 30, 2011			Nine Months Ended September 30, 2012
Risk free interest rate		2.04	%		1.17	%
Expected life (in years)		5.00			5.76
Expected volatility		85.82	%		82.78	%
Expected dividend yield		0.00	%		0.00	%

The weighted average fair value of warrants issued during the nine months ended September 30, 2011 and 2012 was $0.79 and $0.23, respectively.

Results of operations for the nine months ended September 30, 2011 and 2012 includes $2,072,993 and $255,001, respectively, of non-cash stock-based compensation expense. Restricted stock units and options issued to directors vest immediately. All other restricted stock units, options and warrants are subject to applicable vesting schedules. Expense is recognized proportionally as each award or grant vests.

Included in the $2,072,993 non-cash stock-based compensation expense for the nine months ended September 30, 2011 are (i) $1,544,000 for 1,400,000 restricted stock units issued to 5 members of the board of directors, (ii) $124,000 for 200,000 restricted stock units issued to one employee, (iii) $263,572 for 600,000 options issued to one individual and one corporation for consulting services, (iv) $51,207 for 874,200 options granted to 38 employees, (v) $4,263 for 8,700 options granted to 15 of our non-employee installation technicians and (vi) $85,951 resulting from the vesting of unexpired options and warrants issued prior to January 1, 2011.

Included in the $255,001 non-cash stock-based compensation expense for the nine months ended September 30, 2012 are (i) $50,500 for 202,633 restricted stock units issued to 5 members of the board of directors, (ii) $484 for 50,000 options granted to 4 employees and (iii) $204,017 resulting from the vesting of unexpired options and warrants issued prior to January 1, 2012.

The impact on our results of operations for recording stock-based compensation for the three and nine months ended September 30, 2011 and 2012 is as follows:

	For the three months ended September 30,				For the nine months ended September 30,
	2011		2012		2011		2012
General and administrative	$	234,185	$	38,719	$	1,915,969	$	158,947
Research and development		51,934		22,696		157,024		96,054
Total	$	286,119	$	61,415	$	2,072,993	$	255,001

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Due to unexercised options and warrants outstanding at September 30, 2012, we will recognize an additional aggregate total of $286,733 of compensation expense over the next four years based upon option and warrant award vesting parameters as shown below:

2012	$	42,572
2013		164,085
2014		79,224
2015		892
Total	$	286,733

The following unaudited tables summarize option and warrant activity during the nine months ended September 30, 2012.

	Options and Warrants Outstanding			Weighted Average Exercise Price
Outstanding at December 31, 2011		20,440,551		$	1.10
Options granted		50,000			0.37
Warrants issued		24,317,900			0.33
Expired		(140,169	)		1.31
Forfeited		(1,464,419	)		1.35
Exercised		--			--
Outstanding at September 30, 2012		43,203,863		$	0.52

The following table summarizes information about stock options and warrants outstanding at September 30, 2012.

		Outstanding						Exercisable
				Weighted Average Remaining		Weighted Average				Weighted Average
Range of Exercise Prices		Number Outstanding		Contractual Life (years)		Exercise Price		Number Exercisable		Exercise Price
$	0.17-0.95		39,173,684		4.62	$	0.43		38,728,684	$	0.43
	1.00-1.65		3,411,179		3.60		1.04		3,207,646		1.04
	2.25-5.00		619,000		2.98		3.05		619,000		3.05
$	0.17-5.00		43,203,863		4.52	$	0.52		42,555,330	$	0.51

Restricted Stock Units

The value of restricted stock units is determined using the fair value of our common stock on the date of the award and compensation expense is recognized in accordance with the vesting schedule. During the nine months ended September 30, 2011 and 2012, we awarded 1,600,000 and 202,633 restricted stock units, respectively.

The following is a summary of restricted stock unit activity for the nine months ended September 30, 2012.

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	Restricted Stock Units		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2011		2,550,000	$	1.25
Awarded at fair value		202,633		0.25
Canceled/Forfeited		--		--
Settled by issuance of stock		--		--
Outstanding at September 30, 2012		2,752,633	$	1.18
Vested at September 30, 2012		2,752,633	$	1.18

Note 5 - Significant Accounting Policies

Cash and Cash Equivalents

We consider all cash on hand and in banks, and highly liquid investments with maturities of three months or less, to be cash equivalents. At September 30, 2012 and December 31, 2011, we had bank balances of $0 and $909,182, respectively, in excess of amounts insured by the Federal Deposit Insurance Corporation. We have not experienced any losses in such accounts, and believe we are not exposed to any significant credit risk on cash and cash equivalents.

Current financial market conditions have had the effect of restricting liquidity of cash management investments and have increased the risk of even the most liquid investments and the viability of some financial institutions.  We do not believe, however, that these conditions will materially affect our business or our ability to meet our obligations or pursue our business plans.

Accounts Receivable

Trade accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when collected.

Included in our $1,161,101 and $1,239,903 net accounts receivable for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively, were (i) $1,122,643 and $1,269,579 for billed trade receivables, respectively; and (ii) $96,418 and $23,814 of unbilled trade receivables; less (iii) ($57,960) and ($53,490) for allowance for uncollectible accounts, respectively.

Inventories

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

Property and Equipment

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

Patents and Intangibles

Patents represent initial legal costs incurred to apply for United States and international patents on the CodecSys technology, and are amortized on a straight-line basis over their useful life of approximately 20 years.  We have filed several patents in the United States and foreign countries. As of September 30, 2012, the United States Patent and Trademark Office had approved four patents.  Additionally, eleven foreign countries had approved patent rights.  While we are unsure whether we can develop the technology in order to obtain the full benefits, the patents themselves hold value and could be sold to companies with more resources to complete the development.  On-going legal expenses incurred for patent follow-up have been expensed from July 2005 forward.

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Amortization expense recognized on all patents totaled $2,538 and $7,613 for both the three and nine months ended September 30, 2012 and 2011, respectively.  Estimated amortization expense, if all patents were issued at the beginning of 2012, for each of the next five years is as follows:

Year ending December 31:
2012	$	11,588
2013		11,343
2014		10,121
2015		10,121
2016		10,121

Long-Lived Assets

We review our long-lived assets, including patents, annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset.  If such assets are considered to be impaired, then the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets.  Fair value is determined by using cash flow analyses and other market valuations.

Income Taxes

We account for income taxes in accordance with the asset and liability method of accounting for income taxes prescribed by ASC Topic 740.  Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the taxable income in the years in which those temporary differences are expected to be recovered or settled.

Revenue Recognition

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

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

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

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Research and Development

Research and development costs are expensed when incurred.  We expensed $325,126 and $1,346,540 of research and development costs for the three and nine months ended September 30, 2012, respectively. We expensed $570,197 and $1,793,596 of research and development costs for the three and nine months ended September 30, 2011, respectively.

Concentration of Credit Risk

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

For the nine months ended September 30, 2012 and 2011, we had the same customer that individually constituted 85% and 91%, of our total revenues, respectively.  Although the initial contract for this customer has expired, we received a contract extension through January 2013 continue to provide services.  During that time period the customer is soliciting requests for proposals (“RFP”) from competing vendors.  We are participating in the RFP process and have submitted our response to the customer.

Note 6 – Notes Payable

The recorded value of our notes payable (net of debt discount) for the nine months ended September 30, 2012 and year ended December 31, 2011 was as follows:

	December 31, 2011			September 30, 2012
Amended and Restated Senior 6.25% Convertible Note	$	6,180,816		$	--
Unsecured Convertible Note		340,504			590,506
Bridge Loan Note Payable		1,196,141			--
Equipment Purchase and Sale Agreement		700,000			--
2012 Convertible Notes		--			1,938,665
Total		8,417,461			2,529,171
Less Current Portion		(2,068,016	)		(1,938,665	)
Total Long-term	$	6,349,445		$	590,506

Amended and Restated Senior 6.25% Convertible Note

On December 24, 2007, we entered into a securities purchase agreement in which we raised $15,000,000.  We used the proceeds from this financing to support our CodecSys commercialization and development and for general working capital purposes.  Pursuant to the financing, we issued a senior secured convertible note in the principal amount of $15,000,000.  The senior secured convertible note was originally due December 21, 2010, but was extended to December 21, 2013 and has been subsequently retired as discussed below.

On March 26, 2012, we closed on an equity financing (the “2012 Equity Financing”), as well as a restructuring of our outstanding senior convertible indebtedness (the “2012 Debt Restructuring”), resulting in complete satisfaction of our senior indebtedness under the Amended and Restated Note.

A portion of the net proceeds from the 2012 Equity Financing was used to close on the 2012 Debt Restructuring. The Company paid $2,750,000 and issued 2,000,000 shares of common stock valued at $760,000 in satisfaction of the Amended and Restated Note and remaining interest value of $680,816. In consideration of negotiating the 2012 Debt Restructuring and amending our agreement with our placement agent, we paid $275,041 and issued 586,164 shares of our common stock valued at $222,742 to our placement agent, and recognized a $2,173,033 gain on extinguishment of debt as a result of this retirement.

With the retirement of the Amended and Restated Note we recorded no aggregate derivative liability at March 31, 2012, however at the date of retirement we recorded a derivative valuation gain of $203,700, related to the conversion feature of the Amended and Restated Note to reflect the change in value of the aggregate derivative from December 31, 2011 to the date of retirement. The derivative value of $81,500 at the date of retirement was recorded as additional paid in capital.

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As of March 31, 2011 we recorded an aggregate derivative liability of $1,711,100, related to the conversion features of the Amended and Restated Note and the conversion feature and warrants related to the note.  A derivative valuation gain of $896,300 was recorded during the three months ended March 31, 2011, to reflect the change in value of the aggregate derivative liability from December 31, 2010 to March 31, 2011.

Unsecured Convertible Note

On September 29, 2006, we entered into a letter of understanding with Triage Capital Management, or Triage, dated as of 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, 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 November 2, 2006.

On December 23, 2009 we entered into an amendment with the holder of our unsecured convertible note which increased the annual rate of interest from 5% to 8% commencing as of October 16, 2009.

On December 24, 2010 we closed on a Debt Restructuring. In connection with that Debt Restructuring the maturity date of an amended note was extended to December 31, 2013.

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 year ended December 31, 2011, the $157,400 value of the warrant was included in interest expense.

We recorded an aggregate derivative liability of $224,700 and $256,700 as of September 30, 2012 and 2011, respectively, related to the conversion feature of the note.  Derivative valuation gains of $75,300 and $1,145,200, respectively, were recorded to reflect the change in value of the aggregate derivative liability since December 31, 2011 and December 31, 2010, respectively.  The aggregate derivative liability of $224,700 for the conversion feature of the note was calculated using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate .19%, (ii) expected life (in years) of 1.3; (iii) expected volatility of 86.42%; (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.19.

In connection with the amendment mentioned above, the principal value of the note is being accreted due to the difference in the value of the conversion feature before and after the amendment.  The principal value of $1,000,000 of the unsecured convertible note was accreted over the amended term of the obligation, for which $83,334 and $250,002 was included in interest expense for both the three and nine months ended September 30, 2012 and 2011, respectively.  The note bears an 8% annual interest rate payable semi-annually, and for both the three and nine months ended September 30, 2012 and 2011, $20,000 and $60,000, respectively was included in interest expense, and the note is currently convertible into common stock at a conversion price of $.25 per share.

Accounts Receivable Purchase Agreements

During the year ended December 31, 2010 we entered into two Accounts Receivable Purchase Agreements with one individual for an aggregate amount of $775,000. In these agreements, we pledged certain outstanding accounts receivable in exchange for advanced payment and a commitment to remit to the purchaser the amount advanced upon collection from our customer.  Terms of the first agreement under which we were advanced $275,000 included a 3% discount with a 3% interest fee for every 30 days the advances remained outstanding. Terms of the second agreement under which we were advanced $500,000 included a 10% discount with a 0.5% interest fee for every 30 days the advances remained outstanding.

During the three months ended March 31, 2011 we remitted $100,000 of the principal balance plus accrued interest of $8,360 and converted the remaining $675,000 of principal balance plus $109,292 of accrued and unpaid interest into 1,307,153 shares of our common stock and warrants to purchase an additional 653,576 shares of our common stock. The warrants contain anti-dilution price protection provisions in the event the Company issues stock or convertible debt with a purchase price or conversion price less than $1.00 per share.

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At September 30, 2012 and 2011 we recorded aggregate derivative liabilities of $28,100 and $135,500 related to the warrant reset provision.  Derivative valuation gains of $128,200 and $314,600 were recorded to reflect the change in value of the aggregate derivative liability since December 31, 2010 and 2011, respectively.  The aggregate derivative liability of $28,100 for the reset provision of the warrants was calculated using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 0.39%, (ii) expected life (in years) of 3.5; (iii) expected volatility of 77.42%; (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.19.

Bridge Loan

On December 28, 2011 we entered into a Note and Warrant Purchase and Security Agreement with seven individuals for an aggregate of $1,300,000 (“Bridge Loan”) to be used as working capital. The note bears an annual interest rate of 18%, payable monthly in cash.  Additionally, we granted to the holders of the Bridge Loan warrants with a five year term to purchase an aggregate of 357,500 shares of our common stock at an exercise price of $0.65 and subsequently reset to $0.53, per share.  The note was due on February 28, 2012, but the term was subsequently extended to the earlier of the date nine months from the original maturity date or the date we closed on an additional sale of our securities that resulted in gross proceeds to us of $12 million.  In consideration of the extension of the maturity date of the Bridge Loan, we granted the holders of the Bridge Loan warrants with a six year term to purchase 247,500 shares of our common stock at an exercise price of $0.35 per share. This note is collateralized by a security interest in all of our accounts receivable

In connection with the Bridge Loan, we paid an $84,500 placement fee and issued warrants to purchase 65,000 shares of our common stock at an exercise price of $0.65 per share and subsequently reset to $0.53, to our investment banker for services in completing the above transaction and paid a $3,000 escrow fee to the Escrow Agent in exchange for holding the funds prior to their disbursement to us.

On March 26, 2012, we closed on the 2012 Equity Financing and under the terms of the associated securities purchase agreement, two of the above described bridge lenders converted the principal balance of their portion of the bridge loan in the amount of $400,000 to common stock and warrants as part of and on the same terms as the 2012 Equity Financing, reducing the outstanding principal balance to $900,000. The warrants issued had a total value of $222,426 which resulted in a loss on extinguishment of debt of $222,426. The aggregate derivative liability and valuation gain or loss for the warrants issued for the converted portion of the principal balance are included in the aggregate of 2012 Equity Financing information. See Note 7.

All warrants mentioned above were issued with price protection provisions and were accounted for as derivative liabilities and valued using a Black Scholes pricing model.

On July 13, 2012 the $900,000 principal balance was retired and was included as part of the 2012 Convertible Note (as described below) and recorded a (i) $83,754 loss on extinguishment of debt related to the remaining un-accreted portion of the note and (ii) $53,160 expense related to unrecognized offering costs, at the time of retirement.

At September 30, 2012 we recorded an aggregate derivative liability of $29,800 related to the reset provision for the original and placement warrants issued. A derivative valuation gain of $113,900 was recorded to reflect the change in value of the aggregate derivative liability from December 31, 2011.  The aggregate derivative liability of $29,800 for the reset provision of the warrants was calculated using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 0.47%, (ii) expected life (in years) of 4.2; (iii) expected volatility of 80.82%; (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.19.

At September 30, 2012 we recorded an aggregate derivative liability of $24,700 related to the reset provision for the warrants issued for an extension of the maturity date.  A derivative valuation gain of $71,825 was recorded to reflect the change in value of the aggregate derivative liability from the time the warrants were issued.  The aggregate derivative liability of $24,700 for the reset provision of the warrants was calculated using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 0.47%, (ii) expected life (in years) of 4.2; (iii) expected volatility of 80.85%; (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.19.

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The principal value of the note was being accreted over the amended term of the obligation, for which $17,662 and $116,630 were included in interest expense for the three and nine months ended September 30, 2012, respectively.  The note bore an 18% annual interest rate, and for the three and nine months ended September 30, 2012, $5,769 and $100,899, respectively were included in interest expense.

Equipment Purchase and Sale Agreement

In October 2011, we entered into an Equipment Purchase and Sale Agreement with a lender whereby we use the funds advanced to purchase certain electronic receiving and digital signage equipment along with installation costs.  A 3% fee was due each month the amount remained outstanding.

On March 26, 2012, we closed on the 2012 Equity Financing and under the terms of the associated securities purchase agreement the above described lender converted the principal balance of its portion of the loan in the amount of $500,000 to common stock and warrants as part of and on the same terms as the 2012 Equity Financing, the remaining $200,000 principal balance plus $105,000 of interest due was paid in cash. Of the $105,000 paid, $42,000 was accrued from 2011 and $63,000 was included in interest expense for the three months ended March 31, 2012. The warrants issued had a total value of $278,032 which resulted in a loss on extinguishment of debt of $278,032. The aggregate derivative liability and valuation gain or loss for the warrants issued for the converted portion of the principal balance are included in the aggregate of 2012 Equity Financing information. See Note 7.

2012 Convertible Notes

We engaged Philadelphia Brokerage Corporation to raise funds through the issuance of convertible promissory notes.  We anticipate issuing promissory notes with an aggregate principal amount of up to $5,000,000 (“2012 Convertible Debt Offering”).As of September 30, 2012 we have issued notes having an aggregate principal value of $2,800,000 as explained below.  The notes are due and payable on or before July 13, 2013.  The notes bear interest at 12% per annum and may convertible to common stock at a $.25 per share conversion price.  We also granted holders of the notes warrants with a five year life to acquire up to 200,000 shares of our common stock for each $100,000 of principal amount of the convertible notes.  The notes are secured by all of our assets with the exception of the equipment and receivables secured by the equipment lessor for equipment used in providing services for our largest customer’s digital signage network.  On July 13, 2012, we entered into a note and warrant purchase and security agreement with individual investors and broke escrow on the initial funding under the 2012 Convertible Debt Offering, the principal amount of which was $1,900,000, which included the conversion of $900,000 of previously issued short term debt (See Bridge Loan described above) to the 2012 convertible Debt Offering, which extinguished the Bridge Loan.  Of the $1,000,000 non-converted principal amount, we realized $923,175 of cash in the initial closing and issued warrants to acquire 3,800,000 shares of our common stock.  We paid $76,825 in investment banking fees and costs of the offering.  On August 15, 2012, we continued sales of convertible debt under the 2012 Convertible Debt Offering by issuing short term debt with a principal amount of $900,000, issued warrants to acquire 1,800,000 shares of our common stock, from which we realized cash of $851,624 after payment of investment banking fees of $48,376.

The notes and warrants mentioned above were issued with price protection provisions and were accounted for as derivative liabilities and valued on the dates issued using a Black Scholes pricing model.

We recorded an aggregate derivative liability of $560,000 as of September 30, 2012, related to the conversion feature of the note. A derivative valuation loss of $72,000 was recorded to reflect the change in value of the aggregate derivative liability from the time the notes were issued.  The aggregate derivative liability of $560,000 was calculated as follows using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 0.17%, (ii) expected life (in years) of 0.80; (iii) expected volatility of 95.97%, (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.19.

Additionally, we recorded an aggregate derivative liability of $616,000 as of September 30, 2012, related to the warrant reset provision. A derivative valuation loss of $16,000 was recorded to reflect the change in value of the aggregate derivative liability from the time the warrants were issued.  The aggregate derivative liability of $616,000 was calculated as follows using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 0.62%, (ii) expected life (in years) of 4.80; (iii) expected volatility of 81.51%, (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.19.

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Note 7 – 2012 Equity Financing and the Debt Restructuring

On March 26, 2012, we closed on an equity financing (the “2012 Equity Financing”) as well as a restructuring of our outstanding senior convertible indebtedness (the “2012 Debt Restructuring”) resulting in complete satisfaction of our senior indebtedness.

We entered into an Engagement Agreement, dated October 28, 2011, with MDB Capital Group, LLC (“MDB”), pursuant to which MDB 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 $6,000,000, subsequently verbally increased to $10,000,000, of the Company’s securities, subject to a minimum gross consideration of $3,000,000.  The Company agreed to pay to MDB a commission of 10% of the gross offering proceeds received by the Company, to grant to MDB warrants to acquire up to 10% of the shares of our common stock and warrants issued in the financing, and to pay the reasonable costs and expenses of MDB related to the offering.

Pursuant to the Engagement Agreement, we entered into a Securities Purchase Agreement (“SPA”) dated March 23, 2012 with select institutional and other accredited investors for the private placement of 27,800,000 units of our securities.  The SPA included a purchase price of $0.25 per unit, with each unit consisting of one share of common stock and two forms of Warrant: (1) The “A” Warrant grants the investors the right to purchase an additional share of common stock for each two shares of common stock purchased, for a term of six years and at an exercise price of $0.35 per share; and (2) The “B” Warrant will not be exercisable unless and until the occurrence of a future issuance of stock at less than $0.25 per share, but, in the event of such issuance, grants the investors the right to acquire additional shares at a price of $0.05 to reduce the impact of the dilution caused by such issuance, but in no event shall the number of shares to be issued under the B Warrant cause us to exceed the number of authorized shares of common stock. The shares in excess of our authorized shares that would have been issuable under the B Warrant shall be “net settled” by payment of cash in an amount equal to the number of shares in excess of the authorized common shares multiplied by the closing price of our common stock as of the trading day immediately prior to the applicable date of the exercise of such B Warrant. The B Warrant shall be extinguished upon the earlier of: (a) a subsequent financing of at least $5 million on terms no more favorable than that received by the investors in the 2012 Equity Financing; (b) after the effective date of the registration statement registering securities issued in the Equity Financing if the volume-weighted average closing price of the Company’s common stock exceeds $.50 per share for a period of 30 trading days and no Volume Failure (as defined in the B Warrant) (measuring the daily average dollar volume of our Common Stock against a minimum volume of $500,000 per day) exists during such period, and the Company is then current in its public filings; or (c) 78 months.

Net proceeds from the 2012 Equity Financing, after deducting the commissions and the estimated legal, printing and other costs and expenses related to the financing, were approximately $6.1 million.  Coincident to the closing of the 2012 Equity Financing, we also closed on the 2012 Debt Restructuring.  In connection therewith, the Company paid $2,750,000 to Castlerigg Master Investment Ltd. (“Castlerigg”), and issued to Castlerigg 2,000,000 shares of common stock in full and complete satisfaction of the senior convertible note and all accrued interest. In consideration of negotiating the 2012 Debt Restructuring, we issued to one of our placement agents 586,164 shares of our common stock and paid them $275,041.

In December 2011, we entered into a loan with 7 accredited individuals and entities under the terms of which we borrowed $1,300,000 to be used as working capital (“Bridge Loan”).  The Bridge Loan bears an interest rate of 18% per annum and had a maturity date of February 28, 2012, which was subsequently extended to the earlier of the date nine months from the original maturity date or the date we close on an additional sale of our securities that results in gross proceeds to us of $12 million.  In consideration of the Bridge Loan we granted to the holders of the Bridge Loan warrants with a five year term to purchase 357,500 shares of our common stock at an exercise price of $0.65 per share.  In consideration of the extension of the maturity date of the Bridge Loan, we granted the holders of the Bridge Loan warrants with a six year term to purchase 247,500 shares of our common stock at an exercise price of $0.35 per share.

In connection with the 2012 Equity Financing and under the terms of the SPA, two of the above described bridge lenders converted the principal balance of their portion of the bridge loan in the amount of $400,000 to common stock and warrants as part of and on the same terms as the 2012 Equity Financing.  In addition, one other entity converted the amount owed by us for equipment purchases in the amount of $500,000 to common stock and warrants as part of and on the same terms as the 2012 Equity Financing. The proceeds from these conversions were treated as funds raised with respect to the financing.

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In connection with the 2012 Equity Financing and under the terms of the SPA, the Company agreed to prepare and 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.  The Company filed the registration statement on April 9, 2012 and it was declared effective on August 1, 2012.

On April 5, 2012 we secured an additional $154,000 from 1 company and 4 individuals (three of which are members of our Board of Directors) on the same terms and conditions as the investors of the 2012 Equity Financing. As a result of this funding we issued 616,000 shares of our common stock and A warrants totaling 400,400 of which 308,000 were issued to investors and 92,400 were issued to our investment banker.

All warrants listed below were issued with price protection provisions and were accounted for as derivative liabilities. The A Warrants were valued using the Black Scholes pricing model and the B Warrants were valued using the Geometric Brownian Motion methodology with a risk neutral Monte Carlo approach.

	Common Shares Issued		Number of A Warrants		Value of A Warrants		Value of B Warrants		Total  Warrant Value
Investors		24,816,000		12,408,000	$	1,488,960	$	98,263	$	1,587,223
Bridge Loan Conversion		1,600,000		800,000		96,000		6,335		102,335
Equipment Finance Conversion		2,000,000		1,000,000		120,000		7,919		127,919
Agency		--		4,262,400		511,488		33,756		545,244
Total		28,416,000		18,470,400	$	2,216,448	$	146,273	$	2,362,721

We recorded an aggregate derivative liability of $2,362,721 as of September 30, 2012, related to the reset feature of the A warrants and the B warrants mentioned above. A derivative valuation gain of $2,760,071 was recorded to reflect the change in value of the aggregate derivative liability from the time the warrants issued.  The aggregate derivative liability of $2,362,721 was calculated as follows: (1) $2,216,448 for the reset feature of the A warrants using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 0.73%, (ii) expected life (in years) of 5.5; (iii) expected volatility of 83.48%; (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.19 and (2) $146,273 for the B warrants using the Geometric Brownian Motion methodology with a risk neutral Monte Carlo approach.

Note 8 – 2010 Equity Financing and the Debt Restructuring

On December 24, 2010, we closed on an equity financing (the “Equity Financing”) as well as a restructuring of our then 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 had an exercise price of $1.00 per share which was reset to $0.78 pursuant to the 2012 Equity Financing.

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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 was 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.  The registration statement was declared effective June 16, 2011 satisfying the obligation contained in the Subscription Agreements.

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 were 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, was a senior, unsecured note that matured in three years from the closing and bore interest at an annual rate of 6.25%, payable semi-annually.  We paid the first year’s interest of $350,434 at the closing.  The Amended and Restated Note was convertible into shares of common stock at a conversion price of $1.35 per share, subject to adjustment.  The Amended and Restated Note was convertible in whole or in part at any time upon notice by Castlerigg to us.  The Amended and Restated Note also contained various restrictions, acceleration provisions and other standard and customary terms and conditions.  Two of our consolidated subsidiaries guaranteed our obligations under the Amended and Restated Note.

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

During the three months ended March 31, 2011, we issued Castlerigg 400,000 warrants pursuant to a waiver agreement dated March 10, 2011 allowing the issuance of shares and warrants for the conversion of the AR Note Payable without adjusting the conversion price of the Amended and Restated Senior 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 Scholes pricing model. During the three and six months ended June 30 ,2011 the warrant holder exercised these warrants using a cashless provision resulting in the company issuing 372,272 shares of our common stock. A valuation gain of $144,000 was recorded to reflect the change in value of the aggregate derivative from the time of issue to the date of conversion.

In connection with the Debt Restructuring, the Company amended the note with the holder of a $1.0 million unsecured convertible note, pursuant to which the maturity date of the note was extended to December 31, 2013. We also issued 150,000 shares and 75,000 warrants to acquire our common stock at $.90 per share to the holder of this note as consideration to extend the term of the note.

On March 26, 2012, we closed on an equity financing (the “2012 Equity Financing”) as well as a restructuring of our outstanding senior convertible indebtedness (the “2012 Debt Restructuring”) resulting in complete satisfaction our senior indebtedness.

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A portion of the net proceeds from the 2012 Equity Financing was used to close on the 2012 Debt Restructuring therewith. The Company paid $2,750,000 and issued 2,000,000 shares of common stock valued at $760,000 to Castlerigg in satisfaction of the $5,500,000 senior convertible note and $72,570 of accrued interest.  In addition, the remaining accrued interest value of $608,066 was satisfied.

Investor warrants totaling 12,499,980 issued under the Subscription  Agreements 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 Scholes pricing model. Pursuant to the 2012 Equity Financing the exercise price was reset to $0.78 per share.

We recorded an aggregate derivative liability of $500,000 and $2,500,000 as of September 30, 2012 and 2011, respectively, related to the reset feature of the warrants issued under the Placement agency Agreement. A derivative valuation gain of $2,375,000 and $8,250,000, respectively, were recorded to reflect the change in value of the aggregate derivative liability since December 31, 2011 and December 31, 2010, respectively.  The aggregate derivative liability of $500,000 for the conversion feature of the note was calculated using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 0.31%, (ii) expected life (in years) of 3.2; (iii) expected volatility of 76.71%; (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.19.

Note 9 – Fair Value Measurements

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

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

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

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

We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at September 30, 2012:

					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets
None	$	--	$	--	$	--	$	--
Total assets measured at fair value	$	--	$	--	$	--	$	--
Liabilities
Derivative valuation (1)	$	4,346,021	$	--	$	--	$	4,346,021
Total liabilities measured at fair value	$	4,346,021	$	--	$	--	$	4,346,021
(1) See Notes 6,7 and 8 for additional discussion.

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The table below presents our assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at September 30, 2012.  We classify financial instruments in Level 3 of the fair value hierarchy when there is reliance on at least one significant unobservable input to the valuation model.

	Derivative
	Valuation
	Liability
Balance at December 31, 2011	$	(3,760,200	)
Total gains or losses (realized and unrealized)
Included in net loss		5,639,996
Valuation adjustment		--
Purchases, issuances, and settlements, net		(6,225,817	)
Transfers to Level 3		--
Balance at September 30, 2012	$	(4,346,021	)

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 10 – Equipment Financing

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

We entered into a Master Lease Agreement dated as of July 28, 2009 with the financial institution pursuant to which we sold to the financing institution certain telecommunications equipment to be installed at 1,981 (subsequent additional locations have increased the customer’s network to an aggregate of approximately 2,100 locations) of our customer’s retail locations in exchange for a one time payment of $4,100,670 by the financial institution. We paid to the financial institution 36 monthly lease payments of approximately $144,000 plus applicable sales taxes. We had the right to terminate the lease after making 33 payments for a termination fee of the higher of approximately 10% of the original equipment value (approximately $410,000) or the then “in-place fair market value” after which payment we would own all of the equipment. We gave timely notice of exercise of this option. We are currently a party to a lawsuit to determine if the “in-place fair market value” exceeds the 10% of the original lease value and by what amount.  We contend that the three payments made subsequent to the notice exercising our right to purchase constitute full payment for the equipment. The equipment broker contends that we owe an additional amount of approximately $1,462,000.  Our accounting records reflect that the capital lease has been retired and the equipment has been fully depreciated.

We also entered into a security agreement with the financial institution pursuant to which we granted a first priority security interest in the equipment, whether now owned or hereafter acquired, and in our customer service agreement and service payments thereunder during the term of the equipment lease.

During the three and nine months ended September 30, 2012, we made lease payments totaling approximately $281,397 and $1,125,588 of which $276,454 and $1,067,649 was applied toward the outstanding lease with $4,943 and $57,939, respectively, included in interest expense. Additionally, we recognized amortization of the lease acquisition fee of $8,378 and $33,512 which was included in interest expense for the three and nine months ended September 30, 2012, respectively.

During the three and nine months ended September 30, 2011, we made lease payments totaling approximately $422,096 and $1,266,287 of which $361,966 and $1,048,491 was applied toward the outstanding lease with $60,130 and $217,796, 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 the three and nine months ended September 30, 2011, respectively.

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Note 11 – 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 agreed to satisfy the debts of the creditors and obtained certain licensing rights.  On May 18, 2004, the debtor-in-possession’s plan of reorganization for IDI was confirmed by the United States Bankruptcy Court. As a result of this confirmation, we issued to the creditors of IDI approximately 111,800 shares of our common stock, and cash of approximately $312,768 in exchange for approximately 50,127,218 shares of the common stock of IDI, which increased our aggregate common share equivalents in IDI to approximately 51,426,719 shares.

Since May 18, 2004, we have acquired an aggregate of 4,470,450 additional common share equivalents IDI. As of September 30, 2012, we owned approximately 55,897,169 IDI common share equivalents, representing approximately 94% of the total outstanding IDI share equivalents.

Since May 18, 2004, we have advanced additional cash to IDI for the payment of operating expenses, which continues development and marketing of the CodecSys technology. As of September 30, 2012 we have advanced an aggregate amount of $3,319,105 pursuant to a promissory note that is secured by assets and technology of IDI.

Note 12 – Recent Accounting Pronouncements

In October 2012, the FASB issued ASU No 2012-04, Technical Corrections and Improvements. This Update makes technical corrections, clarifications, and limited-scope improvements to various Topics throughout the Codification. The changes clarify the Codification or correct unintended application of guidance and are not expected to have a significant impact on current accounting practices. The majority of the amendments in this Update are effective immediately with a few limited scope amendments (mainly related to Plan Accounting) that will be effective for fiscal years beginning after December 15, 2012 for public companies and for the first annual period beginning after December 15, 2013 for private companies.  This guidance did not have a significant impact on the Company’s financials since it was primarily issued to provide corrections and/or clarifications of currently issued guidance an update of SEC referenced guidance and didn’t change existing guidance.

In August 2012, the FASB issued ASU No 2012-03, Technical Amendments and Corrections to SEC Sections. This Update makes changes to several of the SEC guidance literature sections within the Codification.  The main focus is to update the SEC guidance as per SAB 114 to reference the codification sections rather than the old standards prior to the codification.  The changes were mainly references and were not intended to change guidance. The amendments in this Update are effective immediately.  This guidance did not have a significant impact on the Company’s financials since it was an update of SEC referenced guidance and didn’t change existing guidance.

In July 2012, the FASB issued ASU 2012-02, Intangibles - Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment. The objective of this Update is to simplify how entities test indefinite-lived intangible assets for impairment and to have the testing be in-line with the updated guidance issued in 2011 related to impairment testing for goodwill. This Update allows entities to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative analysis. The more likely than not threshold is defined as having a likelihood of more than 50%.  The option to first assess qualitative factors can be bypassed and an entity can proceed directly to performing the quantitative impairment test and still be able to resume performing the qualitative assessment in subsequent years. Some examples of circumstances to consider are 1) cost factors that have a negative impact on earnings, 2) financial performance such as negative or declining cash flows, 3) legal, regulatory, contractual, political or business conditions, 4) other relevant entity specific events 5) industry and market conditions, and 6) macroeconomic conditions. The Update is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before July 27, 2012 if the financial statements have not been issued.  The Company does not expect this Update to impact the Company’s financials since it currently has no indefinite-lived intangibles other than goodwill, but the Company will plan on utilizing the qualitative assessment options if any are acquired.

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In September 2011, the FASB issued ASU 2011-08, Intangibles - Goodwill and Other  (Topic 350)- Testing Goodwill for Impairment. The objective of this Update is to simplify how entities test goodwill for impairment. This Update now allows entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step process of (1) comparing the fair value of the reporting unit to its carrying value and (2) test to measure the amount of the impairment loss if the fair value is less than the carrying value.  The more likely than not threshold is defined as having a likelihood of more than 50%.  The option to first assess qualitative factors can be bypassed and an entity can proceed directly to performing the first step of the two-step goodwill impairment test. Some examples of circumstances to consider are 1) macroeconomic conditions, 2) industry and market conditions, 3) cost factors that have a negative impact on earnings, 4) overall financial performance such as negative or declining cash flows 5) other relevant entity specific events and 6) sustained decrease in stock price. The Update is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011 if the financial statements have not been issued.  If necessary, the Company will evaluate whether or not it will utilize the qualitative assessment option prior to performing the first goodwill impairment test in 2012, typically done during the 4th quarter.

Note 13 – Supplemental Cash Flow Information

2012

During the nine months ended September 30, 2012, we issued 427,508 shares of our common stock valued at $167,494 to two consultants and one corporation of which (i) 250,000 shares was in consideration for cancellation of a warrant issued for consulting services rendered and (ii) 177,508 was for consulting services rendered.

For the nine months ended September 30, 2012 an aggregate non-cash expense of $593,297 was recorded for the accretion of notes payable as follows: (i) $250,002 for the Unsecured Convertible Note, (ii) $116,630 for the Bridge Loan and (iii) $226,665 for 2012 Convertible Notes.

For the nine months ended September 30, 2012, we recognized $918,206 in depreciation and amortization expense from the following: (i) $464,197 related to cost of sales for equipment used directly by or for customers, (ii) $446,396 related to other property and equipment, and (iii) $7,613 for patent amortization.

2011

During the nine months ended September 30, 2011, we granted options to acquire up to 600,000 shares of our common stock valued at $389,000 to two consultants in consideration of consulting services to be rendered by the consultants over a one year period pursuant to a written consulting agreement. The value of options is being recognized over the contract period and for the nine months ended September 30, 2011, $263,572 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 Financing. In consideration of converting the short- term loans on the basis of $1.20 for two shares of common stock plus one warrant at an exercise price of $1.00, the Company issued 1,307,153 shares of common stock and warrants to acquire up to 653,576 shares of common stock, which warrants have a five year term and are exercisable at $1.00 per share. The Company’s objective for converting the short-term debt into equity is to conserve cash for further market development.

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 had a 5 - year life from the date of grant, contained full-ratchet anti-dilution price protection provisions and were valued $404,000 using a Black Scholes pricing model on the date of grant. During the three and nine months ended September 30, 2011 the warrant holder exercised these warrants using a cashless provision resulting in the company issuing 372,272 shares of our common stock.

For the nine months ended September 30, 2011 an aggregate non-cash expense of $250,002 was recorded for the accretion of the unsecured convertible note.

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For the nine months ended September 30, 2011, we recognized $1,117,703 in depreciation and amortization expense from the following: (i) $599,952 related to cost of sales for equipment used directly by or for customers, (ii) $510,138 related to other property and equipment, and (iii) $7,613 for patent amortization.

Note 14 – Subsequent Events

In October 2012, we issued 46,611 and 20,789 shares of our common stock to one individual and one company, respectively, for consulting services rendered.

In November 2012, we issued 47,945 and 20,547 shares of our common stock to one individual and one company, respectively, for consulting services rendered.

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

Item 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder, that involve inherent risk and uncertainties.  Any statements about our expectations, beliefs, plans, objectives, strategies or future events or performance constitute forward-looking statements.  These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend” and similar words or phrases.  Accordingly, these statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed or implied therein.  All forward-looking statements are qualified in their entirety by reference to the factors discussed in this report and to the following risk factors discussed more fully in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011:

· dependence on commercialization of our CodecSys technology;

· our need and ability to raise sufficient additional capital;

· uncertainty about our ability to repay our outstanding convertible notes;

· our continued losses;

· delays in adoption of our CodecSys technology;

· concerns of OEMs and customers relating to our financial uncertainty;

· restrictions contained in our outstanding convertible notes;

· general economic and market conditions;

· ineffective internal operational and financial control systems;

· rapid technological change;

· intense competitive factors;

· our ability to hire and retain specialized and key personnel;

· dependence on the sales efforts of others;

· dependence on significant customers;

· uncertainty of intellectual property protection;

· potential infringement on the intellectual property rights of others;

· extreme price fluctuations in our common stock;

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· price decreases due to future sales of our common stock;

· future shareholder dilution; and

· absence of dividends.

Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed or implied in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statement.  Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of future events or developments.  New factors emerge from time to time, and it is not possible for us to predict which factors will arise.  In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Critical Accounting Policies

The preparation of financial statements in conformity with U.S. GAAP requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our assumptions and estimates, including those related to recognition of revenue, valuation of investments, valuation of inventory, valuation of intangible assets, valuation of derivatives, measurement of stock-based compensation expense and litigation. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We discuss our critical accounting policies in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2011. There have been no other significant changes in our critical accounting policies or estimates since those reported in our Annual Report.

Executive Overview

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

On July 1, 2010, we released CodecSys 2.0, which has been installed in various large telecoms and labs for evaluation by potential customers. In 2011 we continued development of additional sales channel partners by integrating CodecSys on hardware manufactured and sold by Fujitsu, which has adopted CodecSys as its compression technology for use in its NuVola cloud initiative and has commenced sales and marketing efforts including CodecSys as an integral part of the products.  We continue to make sales presentations and respond to requests for proposals at other large telecoms, cable companies and broadcasting companies.  These presentations have been made with our technology partners which are suppliers of hardware and software for video transmission applications in media room environments such as IBM, HP Fujitsu and Microsoft. In October 2011, we completed our first sale of CodecSys to a small cable operator in Mexico as part of its Over the Top (“OTT”) product offering operating on Fujitsu hardware.  It is currently in operation and demonstrates that the CodecSys product offering does operate to its operating specifications in a working environment, which we believe will help in our sales and marketing efforts.  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.  We have continued to market our products to the industry and have recently entered into sales agreements with four additional cable, satellite and broadcast companies for their OTT initiatives.  Revenues from these sales will be first recorded in the third and fourth quarters of 2012.

On July 31, 2009, we entered into a $10.1 million, three-year contract with Bank of America, a Fortune 10 financial institution, to provide technology and digital signage services to approximately 2,100 of its more than 6,000 retail and administrative locations throughout North America.  This contract has been extended to February 1, 2013.  BofA is in the process of expanding its network to additional locations and we now furnish services to approximately 33,000 screens at more than 2,500 locations.  In addition, BofA selected us to be its vendor for certain additional audio visual services.  A factor in securing this contract was the benefits of the CodecSys technology in delivering our services.  For the quarter ended September 30, 2012, we realized approximately $1,680,927 in revenue from this contract, which contributed approximately 82% of our revenues for the quarter.  BofA is in the process of soliciting requests for proposals from competing vendors, to which we have responded as well.

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Our revenues for the quarter ended September 30, 2012 decreased by approximately $231,796 or 10% compared to the quarter ended September 30, 2011. Although we experienced a decrease in our revenues our gross margin increased approximately $20,290 or 3% for the quarter ended September 30, 2012 compared to the same period in 2011.  However, we continue to deplete our available cash and need future equity and debt financing as we continue to spend more money than we generate from operations.

To fund operations through the remainder of the current year, we engaged our investment banker to raise funds through the issuance of convertible promissory notes.  We anticipate issuing promissory notes with a principal amount of up to $5,000,000 (“2012 Convertible Debt Offering”) due and payable on or before July 13, 2013.  As of September 30, 2012, we have issued notes with an aggregate principal value of $2,800,000 as explained below.  The notes bear interest at 12% per annum and may be convertible to common stock at a $.25 per share conversion price.  We also granted holders of the notes warrants with a five year life to acquire up to 200,000 shares of our common stock for each $100,000 of principal amount of the convertible notes.  The notes are secured by all of our assets with the exception of the equipment and receivables secured by the equipment lessor for equipment used in providing services for our largest customer’s digital signage network.  On July 13, 2012, we entered into a note and warrant purchase and security agreement with individual investors and broke escrow on the initial funding under the 2012 Convertible Debt Offering, the principal amount of which was $1,900,000, which included the conversion of $900,000 of previously issued short term debt (See Bridge Loan described below) to the 2012 Convertible Debt Offering, which extinguished the Bridge Loan.  We realized $923,175 of cash in the initial closing and issued warrants to acquire 3,800,000 shares of our common stock.  We paid $76,825 in investment banking fees and costs of the offering.  On August 15, 2012, we continued sales of convertible debt under the 2012 Convertible Debt Offering by issuing short term debt with a principal amount of $900,000, from which we realized cash of $851,624 after payment of investment banking fees of $48,376.

On March 26, 2012, we closed on an equity financing (the “2012 Equity Financing”) as well as a restructuring of our outstanding senior convertible indebtedness (the “2012 Debt Restructuring”), resulting in complete satisfaction of our senior indebtedness.

We entered into an Engagement Agreement, dated October 28, 2011, with MDB Capital Group, LLC (“MDB”), pursuant to which MDB agreed to act as the exclusive agent of the Company on a “best efforts” basis with respect to the sale of the Company’s securities of up to a maximum gross consideration of $6,000,000, subsequently verbally increased to $10,000,000, subject to a minimum gross consideration of $3,000,000.  The Company agreed to pay to MDB a commission of 10% of the gross offering proceeds received by the Company, to grant to MDB warrants to acquire up to 10% of the shares of our common stock issued in the financing, and to pay the reasonable costs and expenses of MDB related to the offering.

Pursuant to the Engagement Agreement, we entered into a Securities Purchase Agreement (“SPA”) dated March 23, 2012 with select institutional and other accredited investors for the private placement of 27,800,000 units of its securities.  The SPA included a purchase price of $.25 per unit, with each unit consisting of one share of common stock and two forms of Warrant: (1) The “A” Warrant grants the investors the right to purchase an additional share of common stock for each two shares of common stock purchased, for a term of six years and at an exercise price of $.35 per share; and (2) The “B” Warrant will not be exercisable unless and until the occurrence of a future issuance of stock at less than $0.25 per share, but, in the event of such issuance, grants the investors the right to acquire additional shares at a price of $0.05 to reduce the impact of the dilution caused by such issuance, but in no event shall the number of shares to be issued under the B Warrant cause us to exceed the number of authorized shares of common stock. The shares in excess of our authorized shares that would have been issuable under the B Warrant shall be “net settled” by payment of cash in an amount equal to the number of shares in excess of the authorized common shares multiplied by the closing price of our common stock as of the trading day immediately prior to the applicable date of the exercise of such B Warrant. The B Warrant shall be extinguished upon the earlier of: (a) a subsequent financing of at least $5 million on terms no more favorable than that received by the investors in the 2012 Equity Financing; (b) after the effective date of the registration statement registering securities issued in the Equity Financing if the volume-weighted average closing price of the Company’s common stock exceeds $.50 per share for a period of 30 trading days and no Volume Failure (as defined in the B Warrant) (measuring the daily average dollar volume of our Common Stock against a minimum volume of $500,000 per day) exists during such period, and the Company is then current in its public filings; or (c) 78 months.

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Net proceeds from the 2012 Equity Financing, after deducting the commissions and the estimated legal, printing and other costs and expenses related to the financing, were approximately $6.1 million.  Coincident to the closing of the 2012 Equity Financing, we also closed on the 2012 Debt Restructuring.  In connection therewith, the Company paid $2.75 million to Castlerigg Master Investment Ltd. (“Castlerigg”), and issued to Castlerigg 2,000,000 shares of common stock in full and complete satisfaction of the remaining principal balance and all accrued interest of the Amended and Restated Note.  In consideration of negotiating the 2012 Debt Restructuring, we issued to one of our placement agents 586,164 shares of our common stock and paid $275,041.

In December 2011, we entered into a loan with 7 accredited individuals and entities under the terms of which we borrowed $1,300,000 to be used as working capital (“Bridge Loan”).  The Bridge Loan bears an interest rate of 18% per annum and had a maturity date of February 28, 2012, which was subsequently extended to the earlier of the date nine months from the original maturity date or the date we close on an additional sale of our securities that results in gross proceeds to us of $12 million.  In consideration of the Bridge Loan we granted to the holders of the Bridge Loan warrants with a five year term to purchase 357,500 shares of our common stock at an exercise price of $0.65 per share.  In consideration of the extension of the maturity date of the Bridge Loan, we granted the holders of the Bridge Loan warrants with a six year term to purchase 247,500 shares of our common stock at an exercise price of $0.35 per share.

In connection with the 2012 Equity Financing and under the terms of the SPA, two of the above described bridge lenders converted the principal balance of their portion of the bridge loan in the amount of $400,000 to common stock and warrants as part of and on the same terms as the 2012 Equity Financing.  In addition, one other entity converted the amount owed by us for equipment purchases in the amount of $500,000 to common stock and warrants as part of and on the same terms as the 2012 Equity Financing. The proceeds from these conversions were treated as funds raised with respect to the financing.

In connection with the 2012 Equity Financing and under the terms of the SPA, 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.  The Company did file the registration statement on April 9, 2012 and it was declared effective on August 1, 2012.

In April 2012, an additional investment was accepted by us as part of the 2012 Equity Financing in the aggregate amount of $154,000, which included cash of $100,000 and the conversion of $54,000 of director fees owed to two of our directors to stock and warrants on the same terms as the offering.  This resulted in the issuance of 616,000 shares of common stock and the issuance of warrants to acquire up to 308,000 shares of our common stock.  In connection with this part of the transaction we paid a commission of $15,400 to our investment banker and issued to the broker warrants to acquire 92,400 shares of our common stock on the same terms as in the financing.

During 2010 we sold 1,601,666 shares of our common stock to 19 separate investors at a purchase price of $1.00 per share together with a warrant to purchase additional shares of our stock for $1.50 per share. The warrant expires at the end of three years. The net proceeds from the sale of these shares were used for general working capital purposes. Each of the investors was given the right to adjust their purchase in the event we sold additional equity at a price and on terms different from the terms on which their equity was purchased.  Upon completion of the 2010 Equity Financing described below, each of the investors converted their purchase to the terms contained in the 2010 Equity Financing.  This resulted in the issuance of an additional 2,083,374 shares of common stock and the cancellation of 2,495,075 warrants with an exercise price of $1.50 and the issuance of 2,079,222 warrants with an exercise price of $1.00 and an expiration date of five years from the conversion.

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

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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 had an exercise price of $1.00 per share, but are now exercisable at $0.78 per share pursuant to the 2012 Equity Financing.

Net proceeds from the 2010 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 was 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 2010 Equity Financing, the lenders converted the entire principal amount plus accrued interest into the same units offered in the 2010 Equity Financing and the proceeds from the bridge loan transaction were treated as funds raised with respect to the financing.

In connection with the 2010 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.  The registration statement continues to be effective.

On December 24, 2010, we also closed on the 2010 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 were 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, was a senior, unsecured note that matured in three years from the closing and bore 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 was fully satisfied as described above.

In connection with the 2010 Debt Restructuring, the Company amended the note with the holder of a $1.0 million unsecured convertible note, pursuant to which the maturity date of the note was extended to December 31, 2013.  We also issued 150,000 shares to the holder of this note and a warrant to acquire up to 75,000 shares of our common stock as consideration to extend the term of the note. The warrant is exercisable for $0.90 per share and has a five year life.

Results of Operations for the Nine Months ended September 30, 2012 and September 30, 2011

Revenues

We generated $5,790,363 in revenue during the nine months ended September 30, 2012.  During the same nine month period in 2011, we generated revenue of $6,321,495.  The decrease in revenue of $531,132 was due primarily to a decrease in revenue from sales of equipment and installation fees from our digital signage contract with our largest customer, a financial services company, which accounted for approximately 84% of our revenues for the nine months ending September 30, 2012. License fees increased by $337,851, but system sales and installation revenues decreased by $1,156,931 in the nine months ended September 30, 2012, almost all of which changes were due to fewer work orders from our major digital signage customer.  The increase in license fees and the decrease in system sales and installation revenues actually resulted in an increase in gross margin due to higher gross margins in the license fee category than for system sales and installation services.  In addition, revenue from studio and production services increased by $111,766 and revenue from web services and other services increased by $180,548 both of which partially offset the loss of revenue due to sales of equipment and installation activities.

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Sales revenues from our largest customer accounted for approximately 84% and 91% of total revenues for the nine months ended September 30, 2012 and 2011, respectively.  Revenues from all of our customers, except our largest customer, increased by $347,223 or 63% in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.  This increase resulted primarily from the addition of one new customer to which we provide web hosting and streaming services.

Cost of Revenues

Cost of revenues decreased by approximately $556,721 to $3,857,682 for the nine months ended September 30, 2012 from $4,414,402 for the nine months ended September 30, 2011.  Costs of equipment and installation services decreased by $339,771 primarily due to decreased installation of new equipment used in the continued expansion of our largest customer’s digital signage network.  In addition, depreciation decreased by $135,754 due to equipment used in our largest network being fully depreciated and costs of the production and maintenance department decreased by $79,482 due to cost reduction efforts by management.

Expenses

General and administrative expenses for the nine months ended September 30, 2012 were $3,589,602 compared to $5,124,883 for the nine months ended September 30, 2011.  The decrease of $1,535,281 resulted primarily from a decrease of approximately $1,757,022 in the amount charged for the issuance of options and warrants.  This decrease was partially offset by an increase of $128,557 in temporary help expenses, $60,845 in increased consulting fees, and $30,649 in increased employee and related expenses.

Research and development in process decreased by $447,056 for the nine months ended September 30, 2012 to $1,346,540 from $1,793,596 for the nine months ended September 30, 2011.  The decrease resulted primarily from a decrease of $228,110 in consulting expenses, $108,780 in conventions and travel expenses, $62,298 in temporary help expenses, and $60,970 in expenses related to grants of options and warrants.

Sales and marketing expenses increased $732,964 to $1,557,735 for the nine months ending September 30, 2012 from $824,771 for the nine months ended September 30, 2011.  The increase reflects an increase in employee and related costs of $423,792, an increase of $198,978 in general operating costs including travel and tradeshow expenses and an increase in other professional services and consulting fees of $ 93,504.  The increase in sales and marketing expenses primarily reflects increased staff and activity in marketing the CodecSys technology.

Interest Expense

For the nine months ended September 30, 2012, we incurred interest expense of $1,066,598 compared to interest expense for the nine months ended September 30, 2011 of $745,925.  The increase of $320,673 resulted primarily from the interest recorded to account for the issuance of our Bridge Loan and the issuance of our 2012 Convertible Debt, which was not outstanding during the nine months ended September 30, 2011 and resulted in the increase in interest expense.  Of the total interest expense recorded for the nine months ended September 30, 2012, $310,000 was the amount incurred on the $1,000,000 principal outstanding on our 8.0% unsecured convertible note, $290,216 was incurred on our 2012 Convertible Debt, $217,520 was incurred on our Bridge Note and $96,512 was incurred on our equipment lease financing.  Of the total amount of our interest expense, $353,451 was interest actually paid or accrued and $713,147 was non-cash interest expense related to the note accretion on our $1,000,000 unsecured convertible note and amortization of debt offering costs related to other indebtedness.

Net Income

We realized a net loss for the nine months ended September 30, 2012 of $49,357 compared with net income for the nine months ended September 30, 2010 of $3,729,513.  The change from realizing net income to a net loss aggregated $3,778,870 and was due primarily to a decrease in gain related to our derivative valuation calculation of warrants and convertible notes of $6,617,504, an increase of $619,075 in equity issuance costs related to warrants issued and the increase in interest expense of $320,674 discussed above.  The decrease was partially offset by a gain of $2,542,854 realized on the extinguishment of debt resulting from the payoff of our 6.25% senior convertible note.

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Results of Operations for the Three Months ended September 30, 2012 and September 30, 2011

Revenues

We generated $2,045,277 in revenue during the three months ended September 30, 2012.  During the same three-month period in 2011, we generated revenue of $2,277,074.  The decrease in revenue of $231,795 was due primarily to a decrease of $518,198 in system sales and installation and service work resulting from decreased work orders for the digital signage network of our largest customer.  The decrease was partially offset by an increase of $138,322 in license fees, $80,543 in studio and production fees and $67,898 in web hosting and other fees.

Our largest customer’s sales revenues accounted for approximately 82% and 92% of total revenues for the quarters ended September 30, 2012 and 2011, respectively.  Revenues from all customers other than our largest customer increased by $187,560 during the quarter ended September 30, 2012 compared to the quarter ended September 30, 2011 more than half of which were derived from a new web hosting customer.  Any material reduction in revenues generated from our largest customer could cause a substantial deterioration in our results of operations, financial condition and liquidity.  Although our sales declined, our gross margin actually increased slightly due to the fact that services that were performed were services with higher margins than our equipment sales and service work.

Cost of Revenues

Costs of revenues decreased by approximately $252,086 to $1,266,224 for the three months ended September 30, 2012 from $1,518,310 for the three months ended September 30, 2011.  The decrease was due primarily to a decrease of $115,471 in cost of equipment sales and services due to fewer work orders being issued for equipment and services on our largest customer’s digital signage network and a decrease in the amount of depreciation recorded of $131,123 related to equipment that is now fully depreciated.

Expenses

General and administrative expenses for the three months ended September 30, 2012 were $1,001,001 compared to $1,280,183 for the three months ended September 30, 2010.  The decrease of approximately $279,182 resulted primarily from a decrease of $195,466 in option and warrant expenses, $56,650 in employee and related costs and $48,500 in director fees.

Research and development in process decreased by $245,071 for the three months ended September 30, 2012 to $325,126 from $570,197 for the three months ended September 30, 2011.  This decrease resulted primarily from decreased consulting fees of $110,585 and a decrease of $111,377 in various operating expense categories including temporary help, travel, and tradeshows and conventions.

Sales and marketing expenses increased $40,669 for the three months ended September 30, 2012 to $442,495 from $401,826 for the three months September 30, 2011.  The increase was due primarily to increased consulting fees of $52,554 and increased employee and related expenses of $31,968, which were partially offset by a decrease in advertising and promotion of $19,854.

Interest Expense

For the three months ended September 30, 2012, we incurred interest expense of $460,388 compared to interest expense for the three months ended September 30, 2011 of $176,047.  The increase of $284,340 resulted primarily from interest expense of $313,647 attributable to our Bridge Loan and our 2012 Convertible Debt Offering, which were not outstanding during the three months ended September 30, 2011.  The increase in interest expense was partially offset by a decrease in interest expense related to equipment financing for our largest customer of $51,752.  The $460,388 of interest expense recorded consisted primarily of $355,092 of non-cash interest expense recorded to account for the accretion of note liability on our balance sheet and amortization of debt offering costs.

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Net Income

We realized a net loss for the three months ended September 30, 2012 of $711,072 compared to net income of $4,034,154 for the three months ended September 30, 2011.  The difference between our net loss in 2012 compared to our net income in 2011 of $4,745,226 was primarily the result of recording a decreased gain related to the derivative valuation of warrants and convertible notes for the three months ended September 30, 2012 of $4,799,784, increased interest expense recorded of $284,341 as explained above and $200,252 of expenses incurred relative to the extinguishment of debt and retirement of debt offering costs.  The decrease in our total net income was partially offset by a decrease in loss from operations of $546,132 resulting from decreased operating expenses and an increase in gross margin as explained above.

Liquidity and Capital Resources

At September 30, 2012, we had cash of $373,119, total current assets of $2,074,563, total current liabilities of $8,868,262 and total stockholders' deficit of $6,307,552.  Included in current liabilities is $4,346,021, which relates to the value of the embedded derivatives for our 8.0% unsecured convertible note and our 2012 Convertible Notes and related warrants and warrants issued pursuant to our 2012 Equity Financing.

We experienced negative cash flow used in operations during the nine months ending September 30, 2012 of $3,286,334 compared to negative cash flow used in operations for the nine months ended September 30, 2011 of $4,135,209.  In July 2012 we commenced expense reduction actions designed to decrease our negative cash flow.  We reduced salaries and general and administrative expenses.  Our expenditures for development and sales of CodecSys now total approximately $300,000 per month, which approximates our current monthly excess of cash expenses over income.  The negative cash flow was met by cash reserves from the completion of our 2012 Equity Financing and the issuance of our 2012 Convertible Debt in the total amount of $2,800,000, which included $900,000 of Bridge Loan indebtedness that was converted to the 2012 Convertible Debt.  We expect to continue to experience negative operating cash flow as long as we continue our current expenditures related primarily to bringing our CodecSys products to market, continue our development of CodecSys or until we begin to receive licensing revenue from sales of our CodecSys proprietary software or increase sales in our network division by adding new customers.

To fund operations through the remainder of the current year, we engaged Philadelphia Brokerage Corporation to raise funds through the issuance of convertible promissory notes.  We anticipate issuing promissory notes with an aggregate principal amount of up to $5,000,000 (“2012 Convertible Debt Offering”).  The notes will be due and payable on or before July 13, 2013.  The notes will bear interest at 12% per annum and be convertible to common stock at a $.25 per share conversion price.  We will also grant to holders of the notes warrants with a five year life to acquire up to 200,000 shares of our common stock for each $100,000 of principal amount of the convertible notes.  The notes will be secured by all of our assets with the exception of the equipment and receivables secured by the equipment lessor, which are related to our largest customer’s digital signage network.  On July 13, 2012, we entered into a note and warrant purchase and security agreement with individual investors and broke escrow on the initial funding under the 2012 Convertible Debt Offering.  The principal amount of the initial notes issued was $1,900,000, which included the conversion of $900,000 of previously issued short term debt (See Bridge Loan described below) to the 2012 Convertible Debt Offering.  At the initial escrow break, we realized $1,000,000 of cash and issued warrants to acquire 3,800,000 shares of our common stock.  We paid $76,825 in investment banking fees and costs of the offering.  On August 15, 2012, we continued sales of convertible debt under the 2012 Convertible Debt Offering by issuing short term debt with a principal amount of $900,000, from which we realized cash of $851,000 after payment of investment banking fees of $49,000.

On March 26, 2012, we closed on an equity financing (the “2012 Equity Financing”) as well as a restructuring of our outstanding senior convertible indebtedness (the “2012 Debt Restructuring”) resulting in complete satisfaction our senior indebtedness.

We entered into an Engagement Agreement, dated October 28, 2011, with MDB Capital Group, LLC (“MDB”), pursuant to which MDB 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 $6,000,000, subsequently verbally increased to $10,000,000, of the Company’s securities, subject to a minimum gross consideration of $3,000,000.  The Company agreed to pay to MDB a commission of 10% of the gross offering proceeds received by the Company, to grant to MDB warrants to acquire up to 10% of the shares of our common stock and warrants issued in the financing, and to pay the reasonable costs and expenses of MDB related to the offering.

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Pursuant to the Engagement Agreement, we entered into a Securities Purchase Agreement (“SPA”) dated March 23, 2012 with select institutional and other accredited investors for the private placement of 27,800,000 units of its securities.  The SPA included a purchase price of $.25 per unit, with each unit consisting of one share of common stock and two forms of Warrant: (1) The “A” Warrant grants the investors the right to purchase an additional share of common stock for each two shares of common stock purchased, for a term of six years and at an exercise price of $.35 per share; and (2) The “B” Warrant will not be exercisable unless and until the occurrence of a future issuance of stock at less than $0.25 per share, but, in the event of such issuance, grants the investors the right to acquire additional shares at a price of $0.05 to reduce the impact of the dilution caused by such issuance, but in no event shall the number of shares to be issued under the B Warrant cause us to exceed the number of authorized shares of common stock.  The shares in excess of our authorized shares that would have been issuable under the B Warrant shall be “net settled” by payment of cash in an amount equal to the number of shares in excess of the authorized common shares multiplied by the closing price of our common stock as of the trading day immediately prior to the applicable date of the exercise of such B Warrant. The B Warrant shall be extinguished upon the earlier of: (a) a subsequent financing of at least $5 million on terms no more favorable than that received by the investors in the 2012 Equity Financing; (b) after the effective date of the registration statement registering securities issued in the Equity Financing if the volume-weighted average closing price of the Company’s common stock exceeds $.50 per share for a period of 30 trading days and no Volume Failure (as defined in the B Warrant) (measuring the daily average dollar volume of our Common Stock against a minimum volume of $500,000 per day) exists during such period, and the Company is then current in its public filings; or (c) 78 months.

Net proceeds from the 2012 Equity Financing, after deducting the commissions and the estimated legal, printing and other costs and expenses related to the financing, were approximately $6.1 million.  Coincident to the closing of the 2012 Equity Financing, we also closed on the 2012 Debt Restructuring.  In connection therewith, the Company paid $2.75 million to Castlerigg Master Investment Ltd. (“Castlerigg”), and issued to Castlerigg 2,000,000 shares of common stock in full and complete satisfaction of the senior convertible note and all accrued interest then owing. In consideration of negotiating the 2012 Debt Restructuring, we issued to one of our placement agents 586,164 shares of our common stock and paid cash of $275,041.

In December 2011, we entered into a loan with 7 accredited individuals and entities under the terms of which we borrowed $1,300,000 to be used as working capital (“Bridge Loan”).  The Bridge Loan bears interest at the rate of 18% per annum and had a maturity date of February 28, 2012, which was subsequently extended to the earlier of the date nine months from the original maturity date or the date we close on an additional sale of our securities that results in gross proceeds to us of $12 million.  In consideration of the Bridge Loan we granted to the holders of the Bridge Loan warrants with a five year term to purchase 357,500 shares of our common stock at an exercise price of $0.65 per share.  In consideration of the extension of the maturity date of the Bridge Loan, we granted the holders of the Bridge Loan warrants with a six year term to purchase 247,500 shares of our common stock at an exercise price of $0.35 per share.

In connection with the 2012 Equity Financing and under the terms of the Subscription Agreements, two of the above described bridge lenders converted the principal balance of their portion of the bridge loan in the amount of $400,000 to common stock and warrants as part of and on the same terms as the 2012 Equity Financing. The proceeds from this conversion were treated as funds raised with respect to the financing.  In July, the remaining $900,000 of the bridge loan principal was converted to debt as part of the 2012 Convertible Debt Offering.

In connection with the 2012 Equity Financing and under the terms of the SPA, 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.  The registration statement was declared effective August 1, 2012.

In October 2011, we secured favorable terms with a single company on purchases of certain equipment installed and sold to our customers in the amount of $700,000, which was outstanding at the end of the year.  The payment for the equipment was deferred for a 90 day period for a 10% premium to the amounts advanced.  This company converted $500,000 of the amount owed by us to common stock and warrants as part of and on the same terms as the 2012 Equity Financing. The proceeds from this conversion were treated as funds raised with respect to the financing.

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 2010 Equity Financing and simultaneous 2010 Debt Restructuring.

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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 had an exercise price of $1.00 per share when issued, but are now exercisable at $0.78 per share due to adjustments in price incident to the 2012 Equity Financing.

Net proceeds from the 2010 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 2010 Equity Financing to pay down our senior debt, brought our accounts payable current,  and the remainder was used for working capital.

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

The Amended and Restated Note, dated December 23, 2010, was a senior, unsecured note that matured in three years from the closing and bore 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 was fully satisfied as described above.

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

In connection with the 2010 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 and issued to the holder a warrant to acquire up to 75,000 shares of our common stock.  The warrant is exercisable at $.90 per share and the term of the warrant is for five years.

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 2010 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 2010 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.  During March 2010 through October 2010, we raised approximately $2.485 million through the sale of common stock and the issuance of convertible notes to purchasers at an investment or conversion price of $1.00 per share. The financing included the sale of 1,535,000 shares of our common stock and the issuance of convertible notes in the aggregate principal amount of $950,000. We also issued to these purchasers warrants to acquire shares of our common stock at an exercise price of $1.50 per share, which are exercisable anytime during a three year period.  At the time of these sales, we agreed to certain price protection provisions whereby if we were to sell equity at a price lower than $1.00 per share before December 31, 2010, the purchasers would be able to elect to exchange and receive equity on the same financial terms and conditions as the new investors.

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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 at any time for a period of three years.

Upon completion of the 2010 Equity Financing, each of the investors in these sales elected to treat their purchases according to the terms contained in the 2010 Equity Financing.  This resulted in the issuance of an additional 2,083,374 shares of common stock and the cancellation of 2,495,075 warrants with an exercise price of $1.50 and the issuance of 2,079,222 warrants with an exercise price of $1.00 and an expiration date of five years from the conversion.

During 2010, we entered into two Accounts Receivable Purchase Agreements with one individual for an aggregate amount of $775,000. In these agreements, we pledged certain outstanding accounts receivable in exchange for an advance payment and a commitment to remit to the purchaser the amount advanced upon collection from our customer.  Terms of the first agreement under which we were advanced $275,000 include a 3% discount with a 3% interest fee for every 30 days the advances remain outstanding.  Terms of the second agreement under which we were advanced $500,000 include a 10% discount with a 0.5% interest fee for every 30 days the advances remain outstanding.

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

In August 2009, we entered into a sale and leaseback agreement which financed the purchase and installation of equipment to retrofit our new customer’s approximately 2,100 retail sites with our digital signage product offering.  We received approximately $4,100,000 from the sale of the equipment in exchange for making lease payments over a 36 month period of approximately $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 used the proceeds from this financing to support our CodecSys commercialization and development and for general working capital purposes.  The senior secured convertible note has been retired as described above.  During 2010, we capitalized interest of $1,491,161 related to the senior secured convertible note.

On November 2, 2006, we closed on a convertible note securities agreement dated October 28, 2006 with an individual that provided we issue to the convertible note holder (i) an unsecured convertible note in the principal amount of $1,000,000 representing the funding received by us from an affiliate of the convertible note holder on September 29, 2006, and (ii) four classes of warrants (A warrants, B warrants, C warrants and D warrants) which gave the convertible note holder the right to purchase a total of 5,500,000 shares of our common stock.  The holder of the note no longer has any warrants to purchase any of our stock.  The unsecured convertible note was due October 16, 2009 and was extended to December 22, 2010 and the annual interest rate was increased to 8%, payable semi-annually in cash or in shares of our common stock if certain conditions are satisfied  The unsecured convertible note was convertible into shares of our common stock originally 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, pursuant to which the note is now convertible at a conversion price of $.25 per share.  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 and a five year warrant to acquire up to 75,000 shares of our common stock and an exercise price of $.90 per share 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.

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The conversion feature and the prepayment provision of our $5.5 million Amended and Restated Note and our $1.0 million unsecured convertible note have been accounted for as embedded derivatives and valued on the respective transaction dates using a Black-Scholes pricing model.  The warrants related to the $1.0 million unsecured convertible notes have been accounted for as derivatives and were valued on the respective transaction dates using a Black-Scholes pricing model as well.  At the end of each quarterly reporting date, the values of the embedded derivatives and the warrants are evaluated and adjusted to current market value.  The conversion features of the convertible notes and the warrants may be exercised at any time and, therefore, have been reported as current liabilities.  Prepayment provisions contained in the convertible notes limit our ability to prepay the notes in certain circumstances.  For all periods since the issuance of the senior secured convertible note and the unsecured convertible note, the derivative values of the respective prepayment provisions have been nominal and have not had any offsetting effect on the valuation of the conversion features of the notes.  For a description of the accounting treatment of the senior secured convertible note financing, see Note 7 to the Notes to Condensed Consolidated Financial Statements (Unaudited) included elsewhere herein.

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

Our monthly operating expenses, including our CodecSys technology research and development expenses, exceeded our monthly net sales by approximately $475,000 per month during the six months ended June 30, 2012.  We did not have sufficient capital resources at June 30, 2012 to fund our negative cash flow for the remainder of the year without raising additional capital and therefore commenced the 2012 Convertible Debt Offering.  The foregoing estimates, expectations and forward-looking statements are subject to change as we make strategic operating decisions from time to time and as our expenses and sales fluctuate from period to period.

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

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

To date, we have met our working capital needs primarily through funds received from sales of our common stock and from convertible debt financings.  Until our operations become profitable, we will continue to rely on proceeds received from external funding.  We expect additional investment capital 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 securities with institutional investors similar to those institutions that have provided funding in the past.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

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

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

35

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 30, 2012, 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, 2012, were effective in ensuring that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and in ensuring that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control Over Financial Reporting

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

Our management, including the chief executive officer and the chief financial officer, assessed the effectiveness of our system of internal control over financial reporting as of September 30, 2012.  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, 2012, our system of internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting for the quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, such control.

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, 2012.

Part II – Other Information

Item 1.  Legal Proceedings

The Company is a defendant in a lawsuit, the total amount in dispute in which is approximately $125,000.  In addition, we are currently a party to a lawsuit to determine if the “in-place fair market value” exceeds the 10% of the original lease value and by what amount.  We contend that the three lease payments made subsequent to the notice exercising our right to purchase constitute full payment for the equipment. The equipment broker contends that we owe an additional amount of approximately $1,462,000.

36

Item 1A. Risk Factors

Except as indicated below, there have been no material changes in risk factors from those described in our Annual Report on Form 10-K for the year ended December 31, 2011. 

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

In August 2012, we issued 108,108 shares of our common stock to one individual and a licensed broker in consideration of management services provided to us pursuant to a written agreement. The consultants are accredited investors and were fully informed regarding their investment.  In the transaction, we relied on the exemptions from registration under the Securities Act set forth in Section 4(2) thereof.

In September 2012, we granted 20,000 options pursuant to our 2004 Long Term Incentive Plan to two of our employees.  The options have a ten year life and an exercise price of $.17 per share.  In the transaction, we relied on the exemption from registration under the Securities Act set forth in Section 4(2) thereof.

In October 2012, we issued 69,400 shares of our common stock to one individual and a licensed broker in consideration of management services provided to us pursuant to a written agreement. The consultants are accredited investors and were fully informed regarding their investment.  In the transaction, we relied on the exemptions from registration under the Securities Act set forth in Section 4(2) thereof.

In November 2012, we issued 68,492 shares of our common stock to one individual and a licensed broker in consideration of management services provided to us pursuant to a written agreement. The consultants are accredited investors and were fully informed regarding their investment.  In the transaction, we relied on the exemptions from registration under the Securities Act set forth in Section 4(2) thereof.

Item 3.    Defaults Upon Senior Securities

None.

Item 4.    Submission of Matters to Vote of Security Holders.

None.

Item 5.    Other Information

(a) None.

(b) None.

Item 6.    Exhibits

Exhibit Index

(a)           Exhibits

Exhibit Number	Description of Document
3.1	Amended and Restated Articles of Incorporation of Broadcast International.   (Incorporated by reference to Exhibit No. 3.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed with the SEC on November 14, 2006.)
3.2	Amended and Restated Bylaws of Broadcast International.  (Incorporated by reference to Exhibit No. 3.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed with the SEC on November 14, 2006.)

37

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

38

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.)
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.)
10.20	Form of Securities Purchase Agreement dated March 13, 2012.  (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on March 13, 2012.)
10.21	Form of A Warrant.  (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on March 13, 2012.)
10.22	Form of B Warrant.  (Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the SEC on March 13, 2012.)
10.23	Loan Satisfaction Agreement between the Company and Castlerigg Master Investments Ltd. dated March 13, 2012.  (Incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the SEC on March 13, 2012.)
10.24	Registration Rights Agreement dated March 13, 2012.  (Incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K filed with the SEC on March 13, 2012.)
10.25	Form of Placement Agent Warrant.  (Incorporated by reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K filed with the SEC on March 13, 2012.)
10.26	Form of Note and Warrant Purchase and Security Agreement dated July 16, 2012.  (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on July 18, 2012.)
10.27	Form of Promissory Note dated July 16, 2012.  (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on July 18, 2012.)
10.28	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 July 18, 2012.)
14.1	Code of Ethics. (Incorporated by reference to Exhibit No. 14 of the Company’s Annual Report on Form 10-KSB filed with the SEC on March 30, 2004.)
21.1	Subsidiaries.  (Incorporated by reference to Exhibit No. 21.1 of the Company’s Annual Report on Form 10-KSB filed with the SEC on April 1, 2005.)
23.1	Consent of HJ & Associates, LLC, independent registered public accountant.

39

24.1	Power of Attorney. (Included on page II-15).
31.1	Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1	Principal Executive Officer Certification Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Chief Financial Officer Certification Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	Taxonomy Extension Calculation Linkbase Document.
101.DEF	Taxonomy Extension Definition Linkbase Document.
101.LAB	Extension Labels Linkbase Document.
101.PRE	Taxonomy Extension Presentation Linkbase Document.

* Management contract or compensatory plan or arrangement.

40

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 13, 2012	/s/ Rodney M. Tiede
	By:  Rodney M. Tiede
	Its:  President and Principal Executive Officer

Date: November 13, 2012	/s/ James E. Solomon
	By:  James E. Solomon
	Its: Chief Financial Officer (Principal Financial and Accounting Officer)

 41

EX-31.1

Exhibit 31.1

Broadcast International, Inc. & Subsidiaries

Certification of Principal 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

I, Rodney M. Tiede, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Broadcast International, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which thisreport is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepting accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 13, 2012

/s/ Rodney M. Tiede

Rodney M. Tiede

Principal Executive Officer

EX-31.2

Exhibit 31.2

Broadcast International, Inc. & Subsidiaries

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

I, James E. Solomon, certify that:

1.  I have reviewed this quarterly report on Form 10-Q of Broadcast International, Inc.;

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.  The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepting accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 13, 2012

/s/ James E. Solomon

James E. Solomon Chief Financial Officer

EX-32.1

Exhibit 32.1

Broadcast International, Inc. & Subsidiaries

Certification of Principal Executive Officer

Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To

Section 906 of The Sarbanes-Oxley Act Of 2002

In connection with the quarterly report of Broadcast International, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2012, as filed with the Securities and Exchange Commission on the date hereof, Rodney M. Tiede, Principal Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 13, 2012

/s/ Rodney M. Tiede                                        

Rodney M. Tiede

Principal Executive Officer

 

EX-32.2

Exhibit 32.2

Broadcast International, Inc. & Subsidiaries

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

In connection with the quarterly report of Broadcast International, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2012, as filed with the Securities and Exchange Commission on the date hereof, James E. Solomon, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 13, 2012

/s/ James E. Solomon                                        

James E. Solomon

Chief Financial Officer

XML

Notes Payable (Unsecured Convertible Note) (Details) (USD $)	3 Months Ended		9 Months Ended			9 Months Ended		9 Months Ended	0 Months Ended		1 Months Ended	3 Months Ended		9 Months Ended			1 Months Ended	0 Months Ended	3 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011	Sep. 30, 2012 Class A Warrant [Member]	Sep. 30, 2012 Class B Warrant [Member]	Sep. 30, 2012 Letter of Understanding [Member]	Dec. 23, 2010 Letter of Understanding [Member] Common Stock [Member]	Dec. 23, 2009 Unsecured Convertible Note [Member]	Mar. 31, 2011 Unsecured Convertible Note [Member]	Sep. 30, 2012 Unsecured Convertible Note [Member]	Sep. 30, 2011 Unsecured Convertible Note [Member]	Sep. 30, 2012 Unsecured Convertible Note [Member]	Sep. 30, 2011 Unsecured Convertible Note [Member]	Nov. 02, 2006 Unsecured Convertible Note [Member]	Mar. 31, 2011 Unsecured Convertible Note [Member] Common Stock [Member]	Dec. 23, 2010 Unsecured Convertible Note [Member] Warrant Issued for Interest on Convertible Note [Member]	Mar. 31, 2011 Unsecured Convertible Note [Member] Warrant Issued for Interest on Convertible Note [Member]	Dec. 31, 2011 Unsecured Convertible Note [Member] Warrant Issued for Interest on Convertible Note [Member]
Convertible notes
Amount of credit facility								$ 1,000,000				$ 1,000,000		$ 1,000,000
Credit facility initiation date								Sept. 25, 2006
Credit facility expiration date								Oct. 30, 2006
Debt interest rate										8.00%		8.00%		8.00%		5.00%
Debt maturity date										Dec. 22, 2010				Dec. 31, 2013
Conversion price												$ 0.25		$ 0.25
Number of shares of common stock warrants can be exercised for																5,500,000		75,000	221,758
Warrant term length																		5 years	5 years
Exercise price of warrants																		0.9	0.96
Warrants exercised
Warrants expired			140,169
Shares of common stock issued									150,000
Number of shares issued for interest																	135,369
Common stock issued for interest				19,634							81,221
Fair value of warrants																				157,400
Derivative valuation	4,346,021		4,346,021		3,760,200	2,216,448	146,273					224,700	256,700	224,700	256,700
Gain (loss) on derivative valuation	1,051,516	5,851,300	5,639,996	12,257,500										75,300	1,145,200
Risk free interest rate						0.73%								0.19%
Expected life (in years)						5.5								1.3
Expected volatility						83.48%								86.42%
Expected dividend yield						0.00%								0.00%
Stock trading price						$ 0.19						$ 0.19		$ 0.19
Accretion of discount on convertible notes payable			593,297	250,002								83,334	83,334	250,002	250,002
Interest expense of convertible debt												$ 20,000	$ 20,000	$ 60,000	$ 60,000

XML

Equipment Financing (Details) (Telecommunications Equipment [Member], USD $)	0 Months Ended	3 Months Ended		9 Months Ended
	Dec. 28, 2011	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Capital Leased Assets [Line Items]
Number of customers locations where equipment is installed	1,981	2,100		2,100
Proceeds from sale of equipment to financing institution	$ 4,100,670
Number of payments				36
Monthly rental payment				144,000
Number of payments until lease can be cancelled				33
One time fee for cancellation				410,000
Cancellation fee as a percentage of equipment value				10.00%
Maximum amount of additional payment		1,462,000		1,462,000
Lease payments		281,397	422,096	1,125,588	1,266,287
Interest portion of lease payments		4,943	60,130	57,939	217,796
Amortization of the lease acquisition fee		8,378	12,567	33,512	37,701
Capital Lease Obligations [Member]
Capital Leased Assets [Line Items]
Lease payments applied to principal		$ 276,454	$ 361,966	$ 1,067,649	$ 1,048,491

XML

2010 Equity Financing and the Debt Restructuring (Details) (USD $)	3 Months Ended		9 Months Ended				0 Months Ended	3 Months Ended	9 Months Ended			9 Months Ended				0 Months Ended	9 Months Ended			0 Months Ended		0 Months Ended				9 Months Ended			9 Months Ended	0 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011	Mar. 31, 2011 Warrants Issued for Convertible Note Restructuring [Member]	Dec. 23, 2010 Amended and Restated Senior 6.25% Convertible Note [Member]	Mar. 31, 2011 Amended and Restated Senior 6.25% Convertible Note [Member]	Sep. 30, 2012 Amended and Restated Senior 6.25% Convertible Note [Member]	Dec. 31, 2011 Amended and Restated Senior 6.25% Convertible Note [Member]	Dec. 23, 2009 Amended and Restated Senior 6.25% Convertible Note [Member]	Sep. 30, 2012 Unsecured Convertible Note [Member]	Sep. 30, 2011 Unsecured Convertible Note [Member]	Dec. 23, 2009 Unsecured Convertible Note [Member]	Nov. 02, 2006 Unsecured Convertible Note [Member]	Dec. 23, 2010 2010 Plan [Member]	Sep. 30, 2012 2010 Plan [Member] Warrants Issued Pursuant to Waiver Agreement [Member]	Sep. 30, 2011 2010 Plan [Member] Warrants Issued Pursuant to Waiver Agreement [Member]	Sep. 30, 2012 2010 Plan [Member] Placement Agency Agreement Warrants [Member]	Dec. 23, 2010 2010 Plan [Member] Unsecured Convertible Note [Member]	Nov. 29, 2010 2010 Plan [Member] 2010 Bridge Loan [Member]	Dec. 23, 2010 2010 Plan [Member] Senior Notes [Member] Common Stock [Member]	Dec. 23, 2009 2010 Plan [Member] Minimum [Member]	Apr. 05, 2012 2012 Plan [Member]	Mar. 26, 2012 2012 Plan [Member]	Sep. 30, 2012 2012 Plan [Member]	Sep. 30, 2011 2012 Plan [Member]	Sep. 30, 2012 2012 Plan [Member] Placement Agency Agreement Warrants [Member]	Sep. 30, 2012 2012 Plan [Member] Amended and Restated Senior 6.25% Convertible Note [Member]	Mar. 26, 2012 2012 Plan [Member] Minimum [Member]	Mar. 26, 2012 2012 Plan [Member] Maximum [Member]
Equity Financing and Debt Restructuring [Line Items]
Gross consideration in equity financing transaction																$ 15,000,000							$ 10,000,000		$ 6,000,000					$ 3,000,000	$ 10,000,000
Shares of stock issued per warrant exercised																0.5									0.5
Commission fee percentage																8.00%									10.00%
Shares of common stock issued									2,000,000							40,000								616,000
Value of shares issued for agent fees, denominator																1,000,000
Payments for placement fees																180,000
Equity units subscribed but unissued																12,500,000
Per share subscription price of equity units																$ 1.2
Warrant term length																5 years									6 years
Exercise price of warrants																1.0			0.78	0.9								0.78
Proceeds from equity financing			6,150,000													13,500,000								154,000
Number of warrants issued																								400,400
Principal issued											15,000,000										1,000,000
Cash paid to settle debt									2,750,000							2,750,000
Number of warrants cancelled																5,208,333
Number of shares issued for debt restructuring																800,000						800,000
Value of shares issued for debt restructuring																				150,000
Shares of stock issuable, but forgone in lieu of cash payment																3,500,000
Debt forgiveness																7,200,000
Debt interest rate											6.25%	8.00%		8.00%	5.00%
Cash paid for interest			307,102	244,966			350,434																						72,570
Accrued interest payable																													(608,066)
Conversion price											$ 1.35	$ 0.25
Warrants issued						400,000													12,499,980	75,000
Stock issued upon exercise of warrants																											372,272
Derivative valuation	4,346,021		4,346,021		3,760,200			1,711,100		81,500		224,700	256,700					2,500,000	500,000							2,362,721
Gain (loss) on derivative valuation	$ 1,051,516	$ 5,851,300	$ 5,639,996	$ 12,257,500				$ 896,300	$ 203,700			$ 75,300	$ 1,145,200				$ 144,000	$ 8,250,000	$ 2,375,000							$ 2,760,071
Risk free interest rate												0.19%							0.31%
Expected life (in years)												1.3							3.2
Expected volatility												86.42%							76.71%
Expected dividend yield												0.00%							0.00%
Stock trading price												$ 0.19							$ 0.19

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Stock-based Compensation (Schedule of Option and Warrant Activity) (Details) (USD $)	9 Months Ended
	Sep. 30, 2012
Options and Warrants Outstanding
Outstanding at December 31, 2011	20,440,551
Expired	(140,169)
Forfeited	(1,464,419)
Exercised
Outstanding at September 30, 2012	43,203,863
Weighted Average Exercise Price
Outstanding at December 31, 2011	$ 1.1
Expired	$ 1.31
Forfeited	$ 1.35
Exercised
Outstanding at September 30, 2012	$ 0.52
Stock Options [Member]
Options and Warrants Outstanding
Granted/Issued	50,000
Weighted Average Exercise Price
Granted/Issued	$ 0.37
Warrant [Member]
Options and Warrants Outstanding
Granted/Issued	24,317,900
Weighted Average Exercise Price
Granted/Issued	$ 0.33

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2012 Equity Financing and the Debt Restructuring (Tables)

9 Months Ended

Sep. 30, 2012

Equity Financing and the Debt Restructuring 2012 [Abstract]

Schedule of Debt Conversion

	Common Shares Issued		Number of A Warrants		Value of A Warrants		Value of B Warrants		Total Warrant Value
Investors		24,816,000		12,408,000	$	1,488,960	$	98,263	$	1,587,223
Bridge Loan Conversion		1,600,000		800,000		96,000		6,335		102,335
Equipment Finance Conversion		2,000,000		1,000,000		120,000		7,919		127,919
Agency		--		4,262,400		511,488		33,756		545,244
Total		28,416,000		18,470,400	$	2,216,448	$	146,273	$	2,362,721

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Supplemental Cash Flow Information (Details) (USD $)	3 Months Ended	9 Months Ended		3 Months Ended		9 Months Ended			3 Months Ended	9 Months Ended	0 Months Ended	9 Months Ended				0 Months Ended	1 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012 Unsecured Convertible Note [Member]	Sep. 30, 2011 Unsecured Convertible Note [Member]	Sep. 30, 2012 Unsecured Convertible Note [Member]	Sep. 30, 2011 Unsecured Convertible Note [Member]	Nov. 02, 2006 Unsecured Convertible Note [Member]	Sep. 30, 2012 Bridge Loan Note Payable [Member]	Sep. 30, 2012 Bridge Loan Note Payable [Member]	Jul. 13, 2012 Twenty Twelve Convertible Notes [Member]	Sep. 30, 2012 Twenty Twelve Convertible Notes [Member]	Sep. 30, 2012 Shares Issued to Consultant for Services [Member]	Sep. 30, 2011 Shares Issued to Consultant for Services [Member]	Sep. 30, 2012 Shares Issued to Consultant for Cancellation of Warrant [Member]	Mar. 21, 2011 Conversion of Short Term Debt [Member]	Mar. 31, 2011 Modification of Senior Unsecured Convertible Note [Member]	Jan. 31, 2011 Options Granted for Consulting Services [Member]	Sep. 30, 2011 Options Granted for Consulting Services [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options granted																		500,000	600,000
Fair value of options granted																			$ 389,000
Service period for options granted																		P1Y
Exercise price of options granted																		$ 1.11
Contractual life of options granted																		3 years
Stock based compensation		255,001	2,072,993															50,000	263,572
Debt Conversion [Line Items]
Amount of debt converted											900,000					784,292
Number of warrants issued																	400,000
Conversion price				$ 0.25		$ 0.25						$ 0.25				$ 1.2	$ 0.05
Exercise price of warrants																1.0
Common stock issued in conversion																1,307,153
Number of shares of common stock warrants can be exercised for								5,500,000								653,576
Warrant term length												5 years				5 years	5 years
Fair value of warrants																	404,000
Other Significant Noncash Transactions [Line Items]
Shares issued to consultant		427,508											250,000	600,000	177,508
Value of shares issued to consultant		167,494												263,572
Issuance of shares as a result of cashless conversion of warrants			372,272
Accretion of discount on convertible notes payable		593,297	250,002	83,334	83,334	250,002	250,002		17,662	116,630		226,665
Total depreciation and amortization expense		918,206	1,117,703
Depreciation and amortization included in cost of sales		464,197	599,952
Depreciation related to equipment other property and equipment, and (iii) $2,538 for patent amortization.		446,396	510,138
Patent amortization	$ 2,538	$ 7,613	$ 7,613

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Notes Payable (Equipment Purchase and Sale Agreement) (Details) (USD $)	3 Months Ended		9 Months Ended			1 Months Ended	3 Months Ended	12 Months Ended	0 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012 2012 Plan [Member]	Oct. 31, 2011 Equipment Purchase and Sale Agreement [Member]	Mar. 31, 2012 Equipment Purchase and Sale Agreement [Member]	Dec. 31, 2011 Equipment Purchase and Sale Agreement [Member]	Mar. 26, 2012 Equipment Purchase and Sale Agreement [Member] 2012 Plan [Member]	Mar. 26, 2012 Equipment Purchase and Sale Agreement [Member] Conversion of Equipment Purchase and Sale Agreement to Common Stock and Warrants [Member] 2012 Plan [Member]
Debt Instrument [Line Items]
Fee percent						3.00%
Amount of debt converted										$ 500,000
Repayment of debt			4,017,649	1,151,439					200,000
Cash paid for interest			307,102	244,966					105,000
Interest expense							63,000	42,000
Fair value of warrants					2,362,721		278,032
Gain (loss) on extinguishment of debt	$ (83,754)	$ 16,000	$ 1,588,821	$ (954,033)			$ (278,032)

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Notes Payable (Schedule of Notes Payable) (Details) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Debt Instrument [Line Items]
Total	$ 2,529,171	$ 8,417,461
Less Current Portion	(1,938,665)	(2,068,016)
Total Long-term	590,506	6,349,445
Amended and Restated Senior 6.25% Convertible Note [Member]
Debt Instrument [Line Items]
Total		6,180,816
Unsecured Convertible Note [Member]
Debt Instrument [Line Items]
Total	590,506	340,504
Bridge Loan Note Payable [Member]
Debt Instrument [Line Items]
Total		1,196,141
Equipment Purchase and Sale Agreement [Member]
Debt Instrument [Line Items]
Total		700,000
2012 Convertible Notes [Member]
Debt Instrument [Line Items]
Total	$ 1,938,665

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Fair Value Measurements (Details) (USD $)	9 Months Ended
	Sep. 30, 2012
Derivative Valuation Liability [Member]
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Balance at December 31, 2011	$ (3,760,200)
Included in net loss	5,639,996
Valuation adjustment
Purchases, issuances, and settlements, net	(6,225,817)
Transfers to Level 3
Balance at September 30, 2012	(4,346,021)
Fair Value, Measurements, Recurring [Member] | Total [Member]
Assets
Total assets measured at fair value
Liabilities
Derivative valuation	4,346,021	[1]
Total liabilities measured at fair value	4,346,021
Fair Value, Measurements, Recurring [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Assets
Total assets measured at fair value
Liabilities
Derivative valuation		[1]
Total liabilities measured at fair value
Fair Value, Measurements, Recurring [Member] | Significant Other Observable Inputs (Level 2) [Member]
Assets
Total assets measured at fair value
Liabilities
Derivative valuation		[1]
Total liabilities measured at fair value
Fair Value, Measurements, Recurring [Member] | Significant Unobservable Inputs (Level 3) [Member]
Assets
Total assets measured at fair value
Liabilities
Derivative valuation	4,346,021	[1]
Total liabilities measured at fair value	$ 4,346,021

[1] See Notes 6,7 and 8 for additional discussion.

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Stock-based Compensation

9 Months Ended

Sep. 30, 2012

Stock-based Compensation [Abstract]

Stock-based Compensation

Note 4 - Stock-based Compensation

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

Stock Incentive Plans

Under the Broadcast International, Inc. 2004 Long-Term Incentive Plan (the "2004 Plan"), the board of directors may issue incentive stock options to employees and directors and non-qualified stock options to consultants of the company. Options generally may not be exercised until twelve months after the date granted and expire ten years after being granted. Options granted vest in accordance with the vesting schedule determined by the board of directors, usually ratably over a three-year vesting schedule upon the anniversary date of the grant. Should an employee terminate before the vesting period is completed, the unvested portion of each grant is forfeited. We have used the Black-Scholes valuation model to estimate fair value of our stock-based awards, which requires various judgmental assumptions including estimated stock price volatility, forfeiture rates, and expected life. Our computation of expected volatility is based on a combination of historical and market-based implied volatility. The number of unissued stock options authorized under the 2004 Plan at September 30, 2012 was 3,585,008.

The Broadcast International, Inc. 2008 Equity Incentive Plan (the "2008 Plan") has become our primary plan for providing stock-based incentive compensation to our eligible employees and non-employee directors and consultants of the company. The provisions of the 2008 Plan are similar to the 2004 Plan except that the 2008 Plan allows for the grant of share equivalents such as restricted stock awards, stock bonus awards, performance shares and restricted stock units in addition to non-qualified and incentive stock options. We continue to maintain and grant awards under our 2004 Plan which will remain in effect until it expires by its terms. The number of unissued shares of common stock reserved for issuance under the 2008 Plan was 962,367 at September 30, 2012.

Stock Options

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

The fair values for the options granted for the nine months ended September 30, 2011 and 2012 were estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	Nine Months Ended September 30, 2011			Nine Months Ended September 30, 2012
Risk free interest rate		1.96	%		1.65	%
Expected life (in years)		6.28			10.0
Expected volatility		81.03	%		78.97	%
Expected dividend yield		0.00	%		0.00	%

The weighted average fair value of options granted during the nine months ended September 30, 2011 and 2012 was $0.63 and $0.27, respectively.

Warrants

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

The fair values for the warrants issued for the nine months ended September 30, 2011 and 2012 estimated at the date of issuance using the Black-Scholes option-pricing model with the following weighted average assumptions:

	Nine Months Ended September 30, 2011			Nine Months Ended September 30, 2012
Risk free interest rate		2.04	%		1.17	%
Expected life (in years)		5.00			5.76
Expected volatility		85.82	%		82.78	%
Expected dividend yield		0.00	%		0.00	%

The weighted average fair value of warrants issued during the nine months ended September 30, 2011 and 2012 was $0.79 and $0.23, respectively.

Results of operations for the nine months ended September 30, 2011 and 2012 includes $2,072,993 and $255,001, respectively, of non-cash stock-based compensation expense. Restricted stock units and options issued to directors vest immediately. All other restricted stock units, options and warrants are subject to applicable vesting schedules. Expense is recognized proportionally as each award or grant vests.

Included in the $2,072,993 non-cash stock-based compensation expense for the nine months ended September 30, 2011 are (i) $1,544,000 for 1,400,000 restricted stock units issued to 5 members of the board of directors, (ii) $124,000 for 200,000 restricted stock units issued to one employee, (iii) $263,572 for 600,000 options issued to one individual and one corporation for consulting services, (iv) $51,207 for 874,200 options granted to 38 employees, (v) $4,263 for 8,700 options granted to 15 of our non-employee installation technicians and (vi) $85,951 resulting from the vesting of unexpired options and warrants issued prior to January 1, 2011.

Included in the $255,001 non-cash stock-based compensation expense for the nine months ended September 30, 2012 are (i) $50,500 for 202,633 restricted stock units issued to 5 members of the board of directors, (ii) $484 for 50,000 options granted to 4 employees and (iii) $204,017 resulting from the vesting of unexpired options and warrants issued prior to January 1, 2012.

The impact on our results of operations for recording stock-based compensation for the three and nine months ended September 30, 2011 and 2012 is as follows:

	For the three months ended September 30,				For the nine months ended September 30,
	2011		2012		2011		2012
General and administrative	$	234,185	$	38,719	$	1,915,969	$	158,947
Research and development		51,934		22,696		157,024		96,054
Total	$	286,119	$	61,415	$	2,072,993	$	255,001

Due to unexercised options and warrants outstanding at September 30, 2012, we will recognize an additional aggregate total of $286,733 of compensation expense over the next four years based upon option and warrant award vesting parameters as shown below:

2012	$	42,572
2013		164,085
2014		79,224
2015		892
Total	$	286,733

The following unaudited tables summarize option and warrant activity during the nine months ended September 30, 2012.

	Options and Warrants Outstanding			Weighted Average Exercise Price
Outstanding at December 31, 2011		20,440,551		$	1.10
Options granted		50,000			0.37
Warrants issued		24,317,900			0.33
Expired		(140,169	)		1.31
Forfeited		(1,464,419	)		1.35
Exercised		--			--
Outstanding at September 30, 2012		43,203,863		$	0.52

The following table summarizes information about stock options and warrants outstanding at September 30, 2012.

		Outstanding						Exercisable
				Weighted Average Remaining		Weighted Average				Weighted Average
Range of Exercise Prices		Number Outstanding		Contractual Life (years)		Exercise Price		Number Exercisable		Exercise Price
$	0.17-0.95		39,173,684		4.62	$	0.43		38,728,684	$	0.43
	1.00-1.65		3,411,179		3.60		1.04		3,207,646		1.04
	2.25-5.00		619,000		2.98		3.05		619,000		3.05
$	0.17-5.00		43,203,863		4.52	$	0.52		42,555,330	$	0.51

Restricted Stock Units

The value of restricted stock units is determined using the fair value of our common stock on the date of the award and compensation expense is recognized in accordance with the vesting schedule. During the nine months ended September 30, 2011 and 2012, we awarded 1,600,000 and 202,633 restricted stock units, respectively.

The following is a summary of restricted stock unit activity for the nine months ended September 30, 2012.

	Restricted Stock Units		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2011		2,550,000	$	1.25
Awarded at fair value		202,633		0.25
Canceled/Forfeited		--		--
Settled by issuance of stock		--		--
Outstanding at September 30, 2012		2,752,633	$	1.18
Vested at September 30, 2012		2,752,633	$	1.18

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Notes Payable (2012 Convertible Notes) (Details) (USD $)	3 Months Ended		9 Months Ended			0 Months Ended		9 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011	Aug. 15, 2012 2012 Convertible Notes [Member]	Jul. 13, 2012 2012 Convertible Notes [Member]	Sep. 30, 2012 2012 Convertible Notes [Member]	Sep. 30, 2012 2012 Convertible Notes [Member] Maximum [Member]	Sep. 30, 2012 2012 Convertible Notes [Member] Conversion Feature of Debt [Member]	Sep. 30, 2012 2012 Convertible Notes [Member] Warrant Reset Provision [Member]	Sep. 30, 2012 2012 Convertible Notes [Member] Tranche One of Warrants Issued with 2012 Convertible Notes [Member]	Sep. 30, 2012 2012 Convertible Notes [Member] Tranche Two of Warrants Issued with 2012 Convertible Notes [Member]	Sep. 30, 2012 2012 Convertible Notes [Member] Tranche Three of Warrants Issued with 2012 Convertible Notes [Member]	Sep. 30, 2012 Newly Issued Debt [Member]
Debt Instrument [Line Items]
Principal issued								$ 2,800,000	$ 5,000,000						$ 1,000,000
Debt maturity date								Jul. 13, 2013
Debt interest rate								12.00%
Conversion price								$ 0.25
Warrant term length								5 years
Number of shares of common stock warrants can be exercised for												200,000	3,800,000	1,800,000
Amount of debt converted							900,000
Continued sales of convertible debt						900,000	1,900,000
Proceeds from issuance of convertible note and warrants			1,774,799			851,624	923,175
Payment of investment banking fees						48,376	76,825
Derivative valuation	4,346,021		4,346,021		3,760,200					560,000	616,000
Gain (loss) on derivative valuation	$ 1,051,516	$ 5,851,300	$ 5,639,996	$ 12,257,500						$ (72,000)	$ (16,000)
Risk free interest rate										0.17%	0.62%
Expected life (in years)										0.8	4.8
Expected volatility										95.97%	81.51%
Expected dividend yield										0.00%	0.00%
Stock trading price										$ 0.19	$ 0.19

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Stock-based Compensation (Schedule of Assumptions Used to Value Options) (Details) (Stock Options [Member])	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Risk free interest rate	1.65%	1.96%
Expected life (in years)	10	6.28
Expected volatility	78.97%	81.03%
Expected dividend yield	0.00%	0.00%

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Stock-based Compensation (Narrative) (Details) (USD $)	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock based compensation	$ 255,001	$ 2,072,993
Unrecognized compensation expense	286,733
Period over which compensation expense will be recognized	4
Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of unissued stock options authorized	3,585,008
Number of unissued shares of common stock reserved for issuance	962,367
Maximum contractual term	10 years
Award vesting period	3 years
Weighted average fair value of options granted	$ 0.27	$ 0.63
Stock Options [Member] | Employees [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock based compensation	484	51,207
Options granted	50,000	874,200
Number of individuals	4	38
Stock Options [Member] | Consulting Services Providers [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock based compensation		263,572
Options granted		600,000
Number of individuals		1
Stock Options [Member] | Nonemployee Installation Technicians [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock based compensation		4,263
Options granted		8,700
Number of individuals		15
Warrant [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Weighted average fair value of options granted	$ 0.23	$ 0.79
Restricted Stock Units [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Restricted stock units awarded	202,633	1,600,000
Restricted Stock Units [Member] | Directors [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock based compensation	50,500	1,544,000
Number of individuals	5	5
Restricted stock units awarded	202,633	1,400,000
Restricted Stock Units [Member] | Employee One [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock based compensation		124,000
Number of individuals		1
Restricted stock units awarded		200,000
Stock Options and Warrants [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock based compensation	$ 204,017	$ 85,951

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2012 Equity Financing and the Debt Restructuring (Narrative) (Details) (USD $)	3 Months Ended		9 Months Ended			9 Months Ended	0 Months Ended	3 Months Ended	9 Months Ended		0 Months Ended			0 Months Ended	9 Months Ended	0 Months Ended	9 Months Ended			0 Months Ended		9 Months Ended			0 Months Ended			0 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011	Sep. 30, 2012 Warrants Issued to Reset Provision and Extend Maturity Date of Bridge Loan Warrants [Member]	Dec. 23, 2009 Amended and Restated Senior Convertible Note [Member]	Mar. 31, 2011 Amended and Restated Senior Convertible Note [Member]	Sep. 30, 2012 Amended and Restated Senior Convertible Note [Member]	Dec. 31, 2011 Amended and Restated Senior Convertible Note [Member]	Dec. 28, 2011 Bridge Loan Note Payable [Member]	Sep. 30, 2012 Bridge Loan Note Payable [Member]	Mar. 26, 2012 Bridge Loan Note Payable [Member]	Dec. 28, 2011 Bridge Loan Note Payable [Member] Warrants Issued to Reset Provision and Extend Maturity Date of Bridge Loan Warrants [Member]	Sep. 30, 2012 Bridge Loan Note Payable [Member] Warrants Issued to Reset Provision and Extend Maturity Date of Bridge Loan Warrants [Member]	Dec. 28, 2011 Bridge Loan Note Payable [Member] Original Warrants Issued for Bridge Loan [Member]	Sep. 30, 2012 Bridge Loan Note Payable [Member] Original Warrants Issued for Bridge Loan [Member]	Sep. 30, 2012 Class A Warrant [Member]	Sep. 30, 2012 Class B Warrant [Member]	Apr. 05, 2012 2012 Plan [Member]	Mar. 26, 2012 2012 Plan [Member]	Sep. 30, 2012 2012 Plan [Member]	Sep. 30, 2012 2012 Plan [Member] Equipment Purchase Agreement Conversion [Member]	Dec. 28, 2011 2012 Plan [Member] Bridge Loan Note Payable [Member]	Mar. 26, 2012 2012 Plan [Member] Bridge Loan Note Payable [Member] Bridge Loan Conversion [Member]	Mar. 26, 2012 2012 Plan [Member] Class A Warrant [Member]	Mar. 26, 2012 2012 Plan [Member] Class B Warrant [Member]	Mar. 26, 2012 2012 Plan [Member] Maximum [Member]	Mar. 26, 2012 2012 Plan [Member] Minimum [Member]
Equity Financing and Debt Restructuring [Line Items]
Gross consideration in equity financing transaction																					$ 6,000,000							$ 10,000,000	$ 3,000,000
Commission fee percentage																					10.00%
Percent of issued common stock covered by warrants issued in transaction																					10.00%
Number of units to be issued in financing transaction																					27,800,000
Price per unit																					$ 0.25
Shares of stock issued per warrant exercised																					0.5
Warrant term length						6 years								6 years		5 years					6 years
Exercise price of warrants						0.35									0.35	0.65										0.35	0.05
Maximum share price triggering exercisability of warrant																					$ 0.25
Amount of financing proceeds triggering expiration of warrants																12,000,000					5,000,000
Maximum share price triggering expiration of warrants																					$ 0.5
Minimum trading volume																					500,000
Number of shares of common stock warrants can be exercised for						247,500									247,500	357,500
Proceeds from equity financing			6,150,000																	154,000
Shares of common stock issued									2,000,000											616,000
Cash paid to settle debt									2,750,000
Amount of debt converted																							500,000		400,000
Number of shares issued for agent fees									586,164
Payments for debt extinguishment costs			275,041						275,041
Number of warrants issued																				400,400
Number of warrants issued to investors																				308,000
Principal issued							15,000,000				1,300,000		900,000
Warrants issued to investment banker																				92,400
Debt interest rate							6.25%					18.00%
Debt maturity date							Dec. 21, 2010		Dec. 21, 2013		Feb. 28, 2012
Derivative valuation	4,346,021		4,346,021		3,760,200	2,362,721		1,711,100		81,500					24,700		29,800	2,216,448	146,273			2,362,721		134,335
Gain (loss) on derivative valuation	$ 1,051,516	$ 5,851,300	$ 5,639,996	$ 12,257,500		$ 2,362,721		$ 896,300	$ 203,700						$ 71,825		$ 113,900					$ 2,760,071
Risk free interest rate															0.47%		0.47%	0.73%
Expected life (in years)															4.2		4.2	5.5
Expected volatility															80.85%		80.82%	83.48%
Expected dividend yield															0.00%		0.00%	0.00%
Stock trading price															$ 0.19		$ 0.19	$ 0.19

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Stock-based Compensation (Schedule of Assumptions Used to Value Warrants) (Details) (Warrant [Member])	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Warrant [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Risk free interest rate	1.17%	2.04%
Expected life (in years)	5.76	5
Expected volatility	82.78%	85.82%
Expected dividend yield	0.00%	0.00%

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Stock-based Compensation (Schedule of Allocated Stock-Based Compensation) (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Stock-based compensation
Total	$ 61,415	$ 286,119	$ 255,001	$ 2,072,993
General and Administrative Expense [Member]
Stock-based compensation
Total	38,719	234,185	158,947	1,915,969
Research and Development Expense [Member]
Stock-based compensation
Total	$ 22,696	$ 51,934	$ 96,054	$ 157,024

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Weighted Average Shares

9 Months Ended

Sep. 30, 2012

Weighted Average Shares [Abstract]

Weighted Average Shares

Note 3 - Weighted Average Shares

Basic earnings per common share is computed by dividing net income or loss applicable to common shareholders by the weighted average number of shares outstanding during each period. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the year, plus the dilutive common stock equivalents that would rise from the exercise of stock options, warrants and restricted stock units outstanding during the period, using the treasury stock method and the average market price per share during the period, plus the effect of assuming conversion of the convertible debt. The computation of diluted earnings per share does not assume conversion or exercise of securities that would have an anti-dilutive effect on earnings.

The following table sets forth the computation of basic and diluted earnings per common share for the three and nine month periods ended September 30, 2011 and 2012:

	For the three months ended					For the nine months ended
	September 30,					September 30,
	2011		2012			2011		2012
Numerator
Net income (loss)	$	4,034,154	$	(711,072	)	$	3,729,513	$	(49,357	)
Denominator
Basic weighted average shares outstanding		75,844,526		107,263,073			75,240,313		98,564,531
Effect of dilutive securities:
Stock options and warrants		19,927		--			179,903		--
Restricted stock units		2,550,000		--			2,550,000		--
Diluted weighted average shares outstanding		78,414,453		107,263,073			77,970,216		98,564,531
Net income (loss) per common share
Basic	$	0.05	$	(0.01	)	$	0.05	$	(0.00	)
Diluted	$	0.05	$	(0.01	)	$	0.05	$	(0.00	)

Potentially dilutive securities representing 25,193,934 and 24,723,934 shares of common stock were excluded from the computation of diluted earnings per common share for the three and nine months ended September 30, 2011, respectively, because their effect would have been anti-dilutive.

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Stock-based Compensation (Schedule of Unrecognized Compensation Expense) (Details) (USD $)	Sep. 30, 2012
Stock-based Compensation [Abstract]
2012	$ 42,572
2013	164,085
2014	79,224
2015	892
Total	$ 286,733

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Notes Payable (Accounts Receivable Purchase Agreements) (Details) (USD $)	3 Months Ended		9 Months Ended			9 Months Ended			9 Months Ended		3 Months Ended	12 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011	Sep. 30, 2012 Warrant [Member]	Sep. 30, 2011 Warrant [Member]	Dec. 31, 2010 Accounts Receivable [Member]	Sep. 30, 2012 Accounts Receivable [Member] Warrant [Member]	Sep. 30, 2011 Accounts Receivable [Member] Warrant [Member]	Mar. 31, 2011 Accounts Receivable [Member] Conversion of Accounts Receivable Purchase Agreements [Member]	Dec. 31, 2010 Agreement One [Member]	Dec. 31, 2010 Agreement Two [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Value of accounts receivable purchase agreements								$ 775,000
Proceeds from sale of receivables												275,000	500,000
Discount rate												3.00%	10.00%
Interest fee for every 30 days the advances remain outstanding												3.00%	0.50%
Repayment of advances											100,000
Cash paid for interest			307,102	244,966							8,360
Amount of debt converted											675,000
Common stock issued for interest				19,634							109,292
Common stock issued in conversion											1,307,153
Number of warrants issued in conversion											653,576
Anti-dilution price protection provisions, stock price threshold											$ 1.0
Derivative valuation	4,346,021		4,346,021		3,760,200				28,100	135,500
Gain (loss) on derivative valuation	$ 1,051,516	$ 5,851,300	$ 5,639,996	$ 12,257,500					$ 128,200	$ 314,600
Risk free interest rate						1.17%	2.04%		0.39%
Expected life (in years)						5.76	5		3.5
Expected volatility						82.78%	85.82%		77.42%
Expected dividend yield						0.00%	0.00%		0.00%
Stock trading price									$ 0.19

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)	Sep. 30, 2012	Dec. 31, 2011
Current Assets
Cash	$ 373,119	$ 961,265
Trade accounts receivable, net	1,161,101	1,239,903
Inventory	362,335	60,851
Prepaid expenses	178,008	203,973
Total current assets	2,074,563	2,465,992
Property and equipment, net	664,750	1,417,134
Other Assets, non current
Debt offering costs	61,643	123,278
Patents, net	123,466	131,079
Deposits and other assets	226,794	406,004
Total other assets, non current	411,903	660,361
Total assets	3,151,216	4,543,487
Current Liabilities
Accounts payable	2,002,821	1,252,538
Payroll and related expenses	329,203	390,206
Other accrued expenses	221,031	175,008
Unearned revenue	30,521	10,449
Current portion of notes payable (net of discount of $103,859 and $861,335, respectively)	1,938,665	2,068,016
Other current obligations		1,067,649
Derivative valuation	4,346,021	3,760,200
Total current liabilities	8,868,262	8,724,066
Long-term Liabilities
Long-term portion of notes payable (net of discount of $659,496 and $409,494, respectively	590,506	6,349,445
Total long-term liabilities	590,506	6,349,445
Total liabilities	9,458,768	15,073,511
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; 75,975,656 and 107,405,328 shares issued as of December 31, 2011 and September 30, 2012, respectively	5,370,266	3,798,783
Additional paid-in capital	99,559,404	96,859,058
Accumulated deficit	(111,237,222)	(111,187,865)
Total stockholders' deficit	(6,307,552)	(10,530,024)
Total liabilities and stockholders' deficit	$ 3,151,216	$ 4,543,487

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2012 Equity Financing and the Debt Restructuring (Schedule of Debt Conversion) (Details) (2012 Plan [Member], USD $)	9 Months Ended
	Sep. 30, 2012
Equity Financing and Debt Restructuring [Line Items]
Value of Warrants	2,362,721
Class A Warrant [Member]
Equity Financing and Debt Restructuring [Line Items]
Number of A Warrants	18,470,400
Value of Warrants	2,216,448
Class B Warrant [Member]
Equity Financing and Debt Restructuring [Line Items]
Value of Warrants	146,273
Common Stock [Member]
Equity Financing and Debt Restructuring [Line Items]
Common Shares Issued	28,416,000
Bridge Loan Conversion [Member]
Equity Financing and Debt Restructuring [Line Items]
Value of Warrants	102,335
Bridge Loan Conversion [Member] | Class A Warrant [Member]
Equity Financing and Debt Restructuring [Line Items]
Number of A Warrants	800,000
Value of Warrants	96,000
Bridge Loan Conversion [Member] | Class B Warrant [Member]
Equity Financing and Debt Restructuring [Line Items]
Value of Warrants	6,335
Bridge Loan Conversion [Member] | Common Stock [Member]
Equity Financing and Debt Restructuring [Line Items]
Common Shares Issued	1,600,000
Equipment Finance Conversion [Member]
Equity Financing and Debt Restructuring [Line Items]
Value of Warrants	127,919
Equipment Finance Conversion [Member] | Class A Warrant [Member]
Equity Financing and Debt Restructuring [Line Items]
Number of A Warrants	1,000,000
Value of Warrants	120,000
Equipment Finance Conversion [Member] | Class B Warrant [Member]
Equity Financing and Debt Restructuring [Line Items]
Value of Warrants	7,919
Equipment Finance Conversion [Member] | Common Stock [Member]
Equity Financing and Debt Restructuring [Line Items]
Common Shares Issued	2,000,000
Investors [Member]
Equity Financing and Debt Restructuring [Line Items]
Value of Warrants	1,587,223
Investors [Member] | Class A Warrant [Member]
Equity Financing and Debt Restructuring [Line Items]
Number of A Warrants	12,408,000
Value of Warrants	1,488,960
Investors [Member] | Class B Warrant [Member]
Equity Financing and Debt Restructuring [Line Items]
Value of Warrants	98,263
Investors [Member] | Common Stock [Member]
Equity Financing and Debt Restructuring [Line Items]
Common Shares Issued	24,816,000
Agency [Member]
Equity Financing and Debt Restructuring [Line Items]
Value of Warrants	545,244
Agency [Member] | Class A Warrant [Member]
Equity Financing and Debt Restructuring [Line Items]
Number of A Warrants	4,262,400
Value of Warrants	511,488
Agency [Member] | Class B Warrant [Member]
Equity Financing and Debt Restructuring [Line Items]
Value of Warrants	33,756
Agency [Member] | Common Stock [Member]
Equity Financing and Debt Restructuring [Line Items]
Common Shares Issued

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Basis of Presentation

9 Months Ended

Sep. 30, 2012

Basis of Presentation [Abstract]

Basis of Presentation

Note 1 - Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of Broadcast International, Inc. ("we" or the "Company") contain the adjustments, all of which are of a normal recurring nature, necessary to present fairly our financial position at December 31, 2011 and September 30, 2012 and the results of operations for the three and nine months ended September 30, 2011 and 2012, respectively, with the cash flows for each of the nine months ended September 30, 2011 and 2012, in conformity with U.S. generally accepted accounting principles.

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2011. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012.

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Stock-based Compensation (Schedule of Restricted Stock Unit Activity) (Details) (Restricted Stock Units [Member], USD $)	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Restricted Stock Units [Member]
Restricted Stock Units
Outstanding at December 31, 2011	2,550,000
Awarded at fair value	202,633	1,600,000
Canceled/Forfeited
Settled by issuance of stock
Outstanding at September 30, 2012	2,752,633
Vested at September 30, 2012	2,752,633
Weighted Average Grant Date Fair Value
Outstanding at December 31, 2011	$ 1.25
Awarded at fair value	$ 0.25
Canceled/Forfeited
Settled by issuance of stock
Outstanding at September 30, 2012	$ 1.18
Vested at September 30, 2012	$ 1.18

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Stock-based Compensation (Tables)

9 Months Ended

Sep. 30, 2012

Share-based Compensation Arrangement by Share-based Payment Award [Line Items]

Schedule of Allocated Stock-based Compensation

	For the three months ended September 30,				For the nine months ended September 30,
	2011		2012		2011		2012
General and administrative	$	234,185	$	38,719	$	1,915,969	$	158,947
Research and development		51,934		22,696		157,024		96,054
Total	$	286,119	$	61,415	$	2,072,993	$	255,001

Schedule of Unrecognized Compensation Expense

2012	$	42,572
2013		164,085
2014		79,224
2015		892
Total	$	286,733

Schedule of Option and Warrant Activity

	Options and Warrants Outstanding			Weighted Average Exercise Price
Outstanding at December 31, 2011		20,440,551		$	1.10
Options granted		50,000			0.37
Warrants issued		24,317,900			0.33
Expired		(140,169	)		1.31
Forfeited		(1,464,419	)		1.35
Exercised		--			--
Outstanding at September 30, 2012		43,203,863		$	0.52

Schedule of Information About Stock Options and Warrants

		Outstanding						Exercisable
				Weighted Average Remaining		Weighted Average				Weighted Average
Range of Exercise Prices		Number Outstanding		Contractual Life (years)		Exercise Price		Number Exercisable		Exercise Price
$	0.17-0.95		39,173,684		4.62	$	0.43		38,728,684	$	0.43
	1.00-1.65		3,411,179		3.60		1.04		3,207,646		1.04
	2.25-5.00		619,000		2.98		3.05		619,000		3.05
$	0.17-5.00		43,203,863		4.52	$	0.52		42,555,330	$	0.51

Schedule of Restricted Stock Unit Activity

	Restricted Stock Units		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2011		2,550,000	$	1.25
Awarded at fair value		202,633		0.25
Canceled/Forfeited		--		--
Settled by issuance of stock		--		--
Outstanding at September 30, 2012		2,752,633	$	1.18
Vested at September 30, 2012		2,752,633	$	1.18

Stock Options [Member]

Share-based Compensation Arrangement by Share-based Payment Award [Line Items]

Schedule of Assumptions Used to Value Awards

	Nine Months Ended September 30, 2011			Nine Months Ended September 30, 2012
Risk free interest rate		1.96	%		1.65	%
Expected life (in years)		6.28			10.0
Expected volatility		81.03	%		78.97	%
Expected dividend yield		0.00	%		0.00	%

Warrant [Member]

Share-based Compensation Arrangement by Share-based Payment Award [Line Items]

Schedule of Assumptions Used to Value Awards

	Nine Months Ended September 30, 2011			Nine Months Ended September 30, 2012
Risk free interest rate		2.04	%		1.17	%
Expected life (in years)		5.00			5.76
Expected volatility		85.82	%		82.78	%
Expected dividend yield		0.00	%		0.00	%

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Significant Accounting Policies (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
Significant Accounting Policies [Abstract]
Total cash balance not insured by the FDIC	$ 0		$ 0		$ 909,182
Accounts Receivable
Net accounts receivable	1,161,101		1,161,101		1,239,903
Billed trade receivables	1,122,643		1,122,643		1,269,579
Unbilled trade receivables	96,418		96,418		23,814
Allowance for uncollectible accounts	(57,960)		(57,960)		(53,490)
Property and Equipment
Estimated useful life, minimum			3
Estimated useful life, maximum			5
Patents and Intangibles
Useful life of intangibles			20
Patent amortization	2,538		7,613	7,613
Estimated amortization expense
2012			11,588
2013			11,343
2014			10,121
2015			10,121
2016			10,121
Research and Development
Research and development	$ 325,126	$ 570,197	$ 1,346,540	$ 1,793,596
Sales Revenue, Services, Net [Member] | Customer Concentration Risk [Member]
Concentration of Credit Risk
Concentration risk	85.00%	91.00%	85.00%	91.00%

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Notes Payable (Tables)

9 Months Ended

Sep. 30, 2012

Notes Payable [Abstract]

Schedule of Notes Payable

	December 31, 2011			September 30, 2012
Amended and Restated Senior 6.25% Convertible Note	$	6,180,816		$	--
Unsecured Convertible Note		340,504			590,506
Bridge Loan Note Payable		1,196,141			--
Equipment Purchase and Sale Agreement		700,000			--
2012 Convertible Notes		--			1,938,665
Total		8,417,461			2,529,171
Less Current Portion		(2,068,016	)		(1,938,665	)
Total Long-term	$	6,349,445		$	590,506

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Reclassifications

9 Months Ended

Sep. 30, 2012

Reclassifications [Abstract]

Reclassifications

Note 2 - Reclassifications

Certain 2011 financial statement amounts have been reclassified to conform to 2012 presentations.

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Sep. 30, 2012	Dec. 31, 2011
CONDENSED CONSOLIDATED BALANCE SHEETS [Abstract]
Current portion of notes payable, discount	$ 861,335	$ 103,859
Long-term portion of notes payable, discount	$ 409,494	$ 659,496
Preferred stock, no par value
Preferred Stock, shares authorized	20,000,000	20,000,000
Preferred Stock, shares issued	0	0
Common stock, par value per share	$ 0.05	$ 0.05
Common stock, shares authorized	180,000,000	180,000,000
Common stock, shares issued	107,405,328	75,975,656

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Recent Accounting Pronouncements

9 Months Ended

Sep. 30, 2012

Recent Accounting Pronouncements [Abstract]

Recent Accounting Pronouncements

Note 12 - Recent Accounting Pronouncements

In October 2012, the FASB issued ASU No 2012-04, Technical Corrections and Improvements. This Update makes technical corrections, clarifications, and limited-scope improvements to various Topics throughout the Codification. The changes clarify the Codification or correct unintended application of guidance and are not expected to have a significant impact on current accounting practices. The majority of the amendments in this Update are effective immediately with a few limited scope amendments (mainly related to Plan Accounting) that will be effective for fiscal years beginning after December 15, 2012 for public companies and for the first annual period beginning after December 15, 2013 for private companies. This guidance did not have a significant impact on the Company's financials since it was primarily issued to provide corrections and/or clarifications of currently issued guidance an update of SEC referenced guidance and didn't change existing guidance.

In August 2012, the FASB issued ASU No 2012-03, Technical Amendments and Corrections to SEC Sections. This Update makes changes to several of the SEC guidance literature sections within the Codification. The main focus is to update the SEC guidance as per SAB 114 to reference the codification sections rather than the old standards prior to the codification. The changes were mainly references and were not intended to change guidance. The amendments in this Update are effective immediately. This guidance did not have a significant impact on the Company's financials since it was an update of SEC referenced guidance and didn't change existing guidance.

In July 2012, the FASB issued ASU 2012-02, Intangibles - Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment. The objective of this Update is to simplify how entities test indefinite-lived intangible assets for impairment and to have the testing be in-line with the updated guidance issued in 2011 related to impairment testing for goodwill. This Update allows entities to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative analysis. The more likely than not threshold is defined as having a likelihood of more than 50%. The option to first assess qualitative factors can be bypassed and an entity can proceed directly to performing the quantitative impairment test and still be able to resume performing the qualitative assessment in subsequent years. Some examples of circumstances to consider are 1) cost factors that have a negative impact on earnings, 2) financial performance such as negative or declining cash flows, 3) legal, regulatory, contractual, political or business conditions, 4) other relevant entity specific events 5) industry and market conditions, and 6) macroeconomic conditions. The Update is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before July 27, 2012 if the financial statements have not been issued. The Company does not expect this Update to impact the Company's financials since it currently has no indefinite-lived intangibles other than goodwill, but the Company will plan on utilizing the qualitative assessment options if any are acquired.

In September 2011, the FASB issued ASU 2011-08, Intangibles - Goodwill and Other (Topic 350)- Testing Goodwill for Impairment. The objective of this Update is to simplify how entities test goodwill for impairment. This Update now allows entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step process of (1) comparing the fair value of the reporting unit to its carrying value and (2) test to measure the amount of the impairment loss if the fair value is less than the carrying value. The more likely than not threshold is defined as having a likelihood of more than 50%. The option to first assess qualitative factors can be bypassed and an entity can proceed directly to performing the first step of the two-step goodwill impairment test. Some examples of circumstances to consider are 1) macroeconomic conditions, 2) industry and market conditions, 3) cost factors that have a negative impact on earnings, 4) overall financial performance such as negative or declining cash flows 5) other relevant entity specific events and 6) sustained decrease in stock price. The Update is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011 if the financial statements have not been issued. If necessary, the Company will evaluate whether or not it will utilize the qualitative assessment option prior to performing the first goodwill impairment test in 2012, typically done during the 4th quarter.

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Document and Entity Information	9 Months Ended
	Sep. 30, 2012	Nov. 05, 2012
Document and Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2012
Entity Registrant Name	BROADCAST INTERNATIONAL INC
Entity Central Index Key	0000740726
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q3
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		107,543,220

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Supplemental Cash Flow Information

9 Months Ended

Sep. 30, 2012

Supplemental Cash Flow Information [Abstract]

Supplemental Cash Flow Information

Note 13 - Supplemental Cash Flow Information

2012

During the nine months ended September 30, 2012, we issued 427,508 shares of our common stock valued at $167,494 to two consultants and one corporation of which (i) 250,000 shares was in consideration for cancellation of a warrant issued for consulting services rendered and (ii) 177,508 was for consulting services rendered.

For the nine months ended September 30, 2012 an aggregate non-cash expense of $593,297 was recorded for the accretion of notes payable as follows: (i) $250,002 for the Unsecured Convertible Note, (ii) $116,630 for the Bridge Loan and (iii) $226,665 for 2012 Convertible Notes.

For the nine months ended September 30, 2012, we recognized $918,206 in depreciation and amortization expense from the following: (i) $464,197 related to cost of sales for equipment used directly by or for customers, (ii) $446,396 related to other property and equipment, and (iii) $7,613 for patent amortization.

2011

During the nine months ended September 30, 2011, we granted options to acquire up to 600,000 shares of our common stock valued at $389,000 to two consultants in consideration of consulting services to be rendered by the consultants over a one year period pursuant to a written consulting agreement. The value of options is being recognized over the contract period and for the nine months ended September 30, 2011, $263,572 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 Financing. In consideration of converting the short- term loans on the basis of $1.20 for two shares of common stock plus one warrant at an exercise price of $1.00, the Company issued 1,307,153 shares of common stock and warrants to acquire up to 653,576 shares of common stock, which warrants have a five year term and are exercisable at $1.00 per share. The Company's objective for converting the short-term debt into equity is to conserve cash for further market development.

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 had a 5 - year life from the date of grant, contained full-ratchet anti-dilution price protection provisions and were valued $404,000 using a Black Scholes pricing model on the date of grant. During the three and nine months ended September 30, 2011 the warrant holder exercised these warrants using a cashless provision resulting in the company issuing 372,272 shares of our common stock.

For the nine months ended September 30, 2011 an aggregate non-cash expense of $250,002 was recorded for the accretion of the unsecured convertible note.

For the nine months ended September 30, 2011, we recognized $1,117,703 in depreciation and amortization expense from the following: (i) $599,952 related to cost of sales for equipment used directly by or for customers, (ii) $510,138 related to other property and equipment, and (iii) $7,613 for patent amortization.

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS [Abstract]
Net sales	$ 2,045,278	$ 2,277,074	$ 5,790,363	$ 6,321,495
Cost of sales	1,266,224	1,518,310	3,857,682	4,414,402
Gross profit	779,054	758,764	1,932,681	1,907,093
Operating expenses:
Administrative and general	1,001,001	1,280,183	3,589,602	5,124,883
Selling and marketing	442,495	401,826	1,557,735	824,771
Research and development	325,126	570,197	1,346,540	1,793,596
Depreciation and amortization	127,334	169,592	454,009	517,751
Total operating expenses	1,895,956	2,421,798	6,947,886	8,261,001
Total operating loss	(1,116,902)	(1,663,034)	(5,015,205)	(6,353,908)
Other income :
Interest income		338	1	2,324
Interest expense	(460,388)	(176,047)	(1,066,599)	(745,925)
Gain (loss) on derivative valuation	1,051,516	5,851,300	5,639,996	12,257,500
Equity issuance costs related to warrants			(1,095,309)	(476,234)
Loss on note conversion offering expense	(47,348)		(47,348)
Gain (loss) on extinguishment of debt	(83,754)	16,000	1,588,821	(954,033)
Loss on retirement of debt offering costs	(53,150)		(53,150)
Gain (loss) on sale of assets	2,421		781	(362)
Other income (expense), net	(3,467)	5,597	(1,345)	151
Total other income	405,830	5,697,188	4,965,848	10,083,421
Profit (loss) before income taxes	(711,072)	4,034,154	(49,357)	3,729,513
Provision for income taxes
Net profit (loss)	$ (711,072)	$ 4,034,154	$ (49,357)	$ 3,729,513
Net profit (loss) per share - basic	$ (0.01)	$ 0.05	$ 0.0	$ 0.05
Net profit (loss) per share - diluted	$ (0.01)	$ 0.05	$ 0.0	$ 0.05
Weighted average shares - basic	107,263,073	75,844,526	98,564,531	75,240,313
Weighted average shares - diluted	107,263,073	78,414,453	98,564,531	77,970,216

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2012 Equity Financing and the Debt Restructuring

9 Months Ended

Sep. 30, 2012

Equity Financing and the Debt Restructuring 2012 [Abstract]

2012 Equity Financing and the Debt Restructuring

Note 7 - 2012 Equity Financing and the Debt Restructuring

On March 26, 2012, we closed on an equity financing (the "2012 Equity Financing") as well as a restructuring of our outstanding senior convertible indebtedness (the "2012 Debt Restructuring") resulting in complete satisfaction of our senior indebtedness.

We entered into an Engagement Agreement, dated October 28, 2011, with MDB Capital Group, LLC ("MDB"), pursuant to which MDB 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 $6,000,000, subsequently verbally increased to $10,000,000, of the Company's securities, subject to a minimum gross consideration of $3,000,000. The Company agreed to pay to MDB a commission of 10% of the gross offering proceeds received by the Company, to grant to MDB warrants to acquire up to 10% of the shares of our common stock and warrants issued in the financing, and to pay the reasonable costs and expenses of MDB related to the offering.

Pursuant to the Engagement Agreement, we entered into a Securities Purchase Agreement ("SPA") dated March 23, 2012 with select institutional and other accredited investors for the private placement of 27,800,000 units of our securities. The SPA included a purchase price of $0.25 per unit, with each unit consisting of one share of common stock and two forms of Warrant: (1) The "A" Warrant grants the investors the right to purchase an additional share of common stock for each two shares of common stock purchased, for a term of six years and at an exercise price of $0.35 per share; and (2) The "B" Warrant will not be exercisable unless and until the occurrence of a future issuance of stock at less than $0.25 per share, but, in the event of such issuance, grants the investors the right to acquire additional shares at a price of $0.05 to reduce the impact of the dilution caused by such issuance, but in no event shall the number of shares to be issued under the B Warrant cause us to exceed the number of authorized shares of common stock. The shares in excess of our authorized shares that would have been issuable under the B Warrant shall be "net settled" by payment of cash in an amount equal to the number of shares in excess of the authorized common shares multiplied by the closing price of our common stock as of the trading day immediately prior to the applicable date of the exercise of such B Warrant. The B Warrant shall be extinguished upon the earlier of: (a) a subsequent financing of at least $5 million on terms no more favorable than that received by the investors in the 2012 Equity Financing; (b) after the effective date of the registration statement registering securities issued in the Equity Financing if the volume-weighted average closing price of the Company's common stock exceeds $.50 per share for a period of 30 trading days and no Volume Failure (as defined in the B Warrant) (measuring the daily average dollar volume of our Common Stock against a minimum volume of $500,000 per day) exists during such period, and the Company is then current in its public filings; or (c) 78 months.

Net proceeds from the 2012 Equity Financing, after deducting the commissions and the estimated legal, printing and other costs and expenses related to the financing, were approximately $6.1 million. Coincident to the closing of the 2012 Equity Financing, we also closed on the 2012 Debt Restructuring. In connection therewith, the Company paid $2,750,000 to Castlerigg Master Investment Ltd. ("Castlerigg"), and issued to Castlerigg 2,000,000 shares of common stock in full and complete satisfaction of the senior convertible note and all accrued interest. In consideration of negotiating the 2012 Debt Restructuring, we issued to one of our placement agents 586,164 shares of our common stock and paid them $275,041.

In December 2011, we entered into a loan with 7 accredited individuals and entities under the terms of which we borrowed $1,300,000 to be used as working capital ("Bridge Loan"). The Bridge Loan bears an interest rate of 18% per annum and had a maturity date of February 28, 2012, which was subsequently extended to the earlier of the date nine months from the original maturity date or the date we close on an additional sale of our securities that results in gross proceeds to us of $12 million. In consideration of the Bridge Loan we granted to the holders of the Bridge Loan warrants with a five year term to purchase 357,500 shares of our common stock at an exercise price of $0.65 per share. In consideration of the extension of the maturity date of the Bridge Loan, we granted the holders of the Bridge Loan warrants with a six year term to purchase 247,500 shares of our common stock at an exercise price of $0.35 per share.

In connection with the 2012 Equity Financing and under the terms of the SPA, two of the above described bridge lenders converted the principal balance of their portion of the bridge loan in the amount of $400,000 to common stock and warrants as part of and on the same terms as the 2012 Equity Financing. In addition, one other entity converted the amount owed by us for equipment purchases in the amount of $500,000 to common stock and warrants as part of and on the same terms as the 2012 Equity Financing. The proceeds from these conversions were treated as funds raised with respect to the financing.

In connection with the 2012 Equity Financing and under the terms of the SPA, the Company agreed to prepare and 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. The Company filed the registration statement on April 9, 2012 and it was declared effective on August 1, 2012.

On April 5, 2012 we secured an additional $154,000 from 1 company and 4 individuals (three of which are members of our Board of Directors) on the same terms and conditions as the investors of the 2012 Equity Financing. As a result of this funding we issued 616,000 shares of our common stock and A warrants totaling 400,400 of which 308,000 were issued to investors and 92,400 were issued to our investment banker.

All warrants listed below were issued with price protection provisions and were accounted for as derivative liabilities. The A Warrants were valued using the Black Scholes pricing model and the B Warrants were valued using the Geometric Brownian Motion methodology with a risk neutral Monte Carlo approach.

	Common Shares Issued		Number of A Warrants		Value of A Warrants		Value of B Warrants		Total Warrant Value
Investors		24,816,000		12,408,000	$	1,488,960	$	98,263	$	1,587,223
Bridge Loan Conversion		1,600,000		800,000		96,000		6,335		102,335
Equipment Finance Conversion		2,000,000		1,000,000		120,000		7,919		127,919
Agency		--		4,262,400		511,488		33,756		545,244
Total		28,416,000		18,470,400	$	2,216,448	$	146,273	$	2,362,721

We recorded an aggregate derivative liability of $2,362,721 as of September 30, 2012, related to the reset feature of the A warrants and the B warrants mentioned above. A derivative valuation gain of $2,760,071 was recorded to reflect the change in value of the aggregate derivative liability from the time the warrants issued. The aggregate derivative liability of $2,362,721 was calculated as follows: (1) $2,216,448 for the reset feature of the A warrants using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 0.73%, (ii) expected life (in years) of 5.5; (iii) expected volatility of 83.48%; (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.19 and (2) $146,273 for the B warrants using the Geometric Brownian Motion methodology with a risk neutral Monte Carlo approach.

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Notes Payable

9 Months Ended

Sep. 30, 2012

Notes Payable [Abstract]

Notes Payable

Note 6 - Notes Payable

The recorded value of our notes payable (net of debt discount) for the nine months ended September 30, 2012 and year ended December 31, 2011 was as follows:

	December 31, 2011			September 30, 2012
Amended and Restated Senior 6.25% Convertible Note	$	6,180,816		$	--
Unsecured Convertible Note		340,504			590,506
Bridge Loan Note Payable		1,196,141			--
Equipment Purchase and Sale Agreement		700,000			--
2012 Convertible Notes		--			1,938,665
Total		8,417,461			2,529,171
Less Current Portion		(2,068,016	)		(1,938,665	)
Total Long-term	$	6,349,445		$	590,506

Amended and Restated Senior 6.25% Convertible Note

On December 24, 2007, we entered into a securities purchase agreement in which we raised $15,000,000. We used the proceeds from this financing to support our CodecSys commercialization and development and for general working capital purposes. Pursuant to the financing, we issued a senior secured convertible note in the principal amount of $15,000,000. The senior secured convertible note was originally due December 21, 2010, but was extended to December 21, 2013 and has been subsequently retired as discussed below.

On March 26, 2012, we closed on an equity financing (the "2012 Equity Financing"), as well as a restructuring of our outstanding senior convertible indebtedness (the "2012 Debt Restructuring"), resulting in complete satisfaction of our senior indebtedness under the Amended and Restated Note.

A portion of the net proceeds from the 2012 Equity Financing was used to close on the 2012 Debt Restructuring. The Company paid $2,750,000 and issued 2,000,000 shares of common stock valued at $760,000 in satisfaction of the Amended and Restated Note and remaining interest value of $680,816. In consideration of negotiating the 2012 Debt Restructuring and amending our agreement with our placement agent, we paid $275,041 and issued 586,164 shares of our common stock valued at $222,742 to our placement agent, and recognized a $2,173,033 gain on extinguishment of debt as a result of this retirement.

With the retirement of the Amended and Restated Note we recorded no aggregate derivative liability at March 31, 2012, however at the date of retirement we recorded a derivative valuation gain of $203,700, related to the conversion feature of the Amended and Restated Note to reflect the change in value of the aggregate derivative from December 31, 2011 to the date of retirement. The derivative value of $81,500 at the date of retirement was recorded as additional paid in capital.

As of March 31, 2011 we recorded an aggregate derivative liability of $1,711,100, related to the conversion features of the Amended and Restated Note and the conversion feature and warrants related to the note. A derivative valuation gain of $896,300 was recorded during the three months ended March 31, 2011, to reflect the change in value of the aggregate derivative liability from December 31, 2010 to March 31, 2011.

Unsecured Convertible Note

On September 29, 2006, we entered into a letter of understanding with Triage Capital Management, or Triage, dated as of 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, 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 November 2, 2006.

On December 23, 2009 we entered into an amendment with the holder of our unsecured convertible note which increased the annual rate of interest from 5% to 8% commencing as of October 16, 2009.

On December 24, 2010 we closed on a Debt Restructuring. In connection with that Debt Restructuring the maturity date of an amended note was extended to December 31, 2013.

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 year ended December 31, 2011, the $157,400 value of the warrant was included in interest expense.

We recorded an aggregate derivative liability of $224,700 and $256,700 as of September 30, 2012 and 2011, respectively, related to the conversion feature of the note. Derivative valuation gains of $75,300 and $1,145,200, respectively, were recorded to reflect the change in value of the aggregate derivative liability since December 31, 2011 and December 31, 2010, respectively. The aggregate derivative liability of $224,700 for the conversion feature of the note was calculated using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate .19%, (ii) expected life (in years) of 1.3; (iii) expected volatility of 86.42%; (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.19.

In connection with the amendment mentioned above, the principal value of the note is being accreted due to the difference in the value of the conversion feature before and after the amendment. The principal value of $1,000,000 of the unsecured convertible note was accreted over the amended term of the obligation, for which $83,334 and $250,002 was included in interest expense for both the three and nine months ended September 30, 2012 and 2011, respectively. The note bears an 8% annual interest rate payable semi-annually, and for both the three and nine months ended September 30, 2012 and 2011, $20,000 and $60,000, respectively was included in interest expense, and the note is currently convertible into common stock at a conversion price of $.25 per share.

Accounts Receivable Purchase Agreements

During the year ended December 31, 2010 we entered into two Accounts Receivable Purchase Agreements with one individual for an aggregate amount of $775,000. In these agreements, we pledged certain outstanding accounts receivable in exchange for advanced payment and a commitment to remit to the purchaser the amount advanced upon collection from our customer. Terms of the first agreement under which we were advanced $275,000 included a 3% discount with a 3% interest fee for every 30 days the advances remained outstanding. Terms of the second agreement under which we were advanced $500,000 included a 10% discount with a 0.5% interest fee for every 30 days the advances remained outstanding.

During the three months ended March 31, 2011 we remitted $100,000 of the principal balance plus accrued interest of $8,360 and converted the remaining $675,000 of principal balance plus $109,292 of accrued and unpaid interest into 1,307,153 shares of our common stock and warrants to purchase an additional 653,576 shares of our common stock. The warrants contain anti-dilution price protection provisions in the event the Company issues stock or convertible debt with a purchase price or conversion price less than $1.00 per share.

At September 30, 2012 and 2011 we recorded aggregate derivative liabilities of $28,100 and $135,500 related to the warrant reset provision. Derivative valuation gains of $128,200 and $314,600 were recorded to reflect the change in value of the aggregate derivative liability since December 31, 2010 and 2011, respectively. The aggregate derivative liability of $28,100 for the reset provision of the warrants was calculated using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 0.39%, (ii) expected life (in years) of 3.5; (iii) expected volatility of 77.42%; (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.19.

Bridge Loan

On December 28, 2011 we entered into a Note and Warrant Purchase and Security Agreement with seven individuals for an aggregate of $1,300,000 ("Bridge Loan") to be used as working capital. The note bears an annual interest rate of 18%, payable monthly in cash. Additionally, we granted to the holders of the Bridge Loan warrants with a five year term to purchase an aggregate of 357,500 shares of our common stock at an exercise price of $0.65 and subsequently reset to $0.53, per share. The note was due on February 28, 2012, but the term was subsequently extended to the earlier of the date nine months from the original maturity date or the date we closed on an additional sale of our securities that resulted in gross proceeds to us of $12 million. In consideration of the extension of the maturity date of the Bridge Loan, we granted the holders of the Bridge Loan warrants with a six year term to purchase 247,500 shares of our common stock at an exercise price of $0.35 per share. This note is collateralized by a security interest in all of our accounts receivable

In connection with the Bridge Loan, we paid an $84,500 placement fee and issued warrants to purchase 65,000 shares of our common stock at an exercise price of $0.65 per share and subsequently reset to $0.53, to our investment banker for services in completing the above transaction and paid a $3,000 escrow fee to the Escrow Agent in exchange for holding the funds prior to their disbursement to us.

On March 26, 2012, we closed on the 2012 Equity Financing and under the terms of the associated securities purchase agreement, two of the above described bridge lenders converted the principal balance of their portion of the bridge loan in the amount of $400,000 to common stock and warrants as part of and on the same terms as the 2012 Equity Financing, reducing the outstanding principal balance to $900,000. The warrants issued had a total value of $222,426 which resulted in a loss on extinguishment of debt of $222,426. The aggregate derivative liability and valuation gain or loss for the warrants issued for the converted portion of the principal balance are included in the aggregate of 2012 Equity Financing information. See Note 7.

All warrants mentioned above were issued with price protection provisions and were accounted for as derivative liabilities and valued using a Black Scholes pricing model.

On July 13, 2012 the $900,000 principal balance was retired and was included as part of the 2012 Convertible Note (as described below) and recorded a (i) $83,754 loss on extinguishment of debt related to the remaining un-accreted portion of the note and (ii) $53,160 expense related to unrecognized offering costs, at the time of retirement.

At September 30, 2012 we recorded an aggregate derivative liability of $29,800 related to the reset provision for the original and placement warrants issued. A derivative valuation gain of $113,900 was recorded to reflect the change in value of the aggregate derivative liability from December 31, 2011. The aggregate derivative liability of $29,800 for the reset provision of the warrants was calculated using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 0.47%, (ii) expected life (in years) of 4.2; (iii) expected volatility of 80.82%; (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.19.

At September 30, 2012 we recorded an aggregate derivative liability of $24,700 related to the reset provision for the warrants issued for an extension of the maturity date. A derivative valuation gain of $71,825 was recorded to reflect the change in value of the aggregate derivative liability from the time the warrants were issued. The aggregate derivative liability of $24,700 for the reset provision of the warrants was calculated using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 0.47%, (ii) expected life (in years) of 4.2; (iii) expected volatility of 80.85%; (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.19.

The principal value of the note was being accreted over the amended term of the obligation, for which $17,662 and $116,630 were included in interest expense for the three and nine months ended September 30, 2012, respectively. The note bore an 18% annual interest rate, and for the three and nine months ended September 30, 2012, $5,769 and $100,899, respectively were included in interest expense.

Equipment Purchase and Sale Agreement

In October 2011, we entered into an Equipment Purchase and Sale Agreement with a lender whereby we use the funds advanced to purchase certain electronic receiving and digital signage equipment along with installation costs. A 3% fee was due each month the amount remained outstanding.

On March 26, 2012, we closed on the 2012 Equity Financing and under the terms of the associated securities purchase agreement the above described lender converted the principal balance of its portion of the loan in the amount of $500,000 to common stock and warrants as part of and on the same terms as the 2012 Equity Financing, the remaining $200,000 principal balance plus $105,000 of interest due was paid in cash. Of the $105,000 paid, $42,000 was accrued from 2011 and $63,000 was included in interest expense for the three months ended March 31, 2012. The warrants issued had a total value of $278,032 which resulted in a loss on extinguishment of debt of $278,032. The aggregate derivative liability and valuation gain or loss for the warrants issued for the converted portion of the principal balance are included in the aggregate of 2012 Equity Financing information. See Note 7.

2012 Convertible Notes

We engaged Philadelphia Brokerage Corporation to raise funds through the issuance of convertible promissory notes. We anticipate issuing promissory notes with an aggregate principal amount of up to $5,000,000 ("2012 Convertible Debt Offering").As of September 30, 2012 we have issued notes having an aggregate principal value of $2,800,000 as explained below. The notes are due and payable on or before July 13, 2013. The notes bear interest at 12% per annum and may convertible to common stock at a $.25 per share conversion price. We also granted holders of the notes warrants with a five year life to acquire up to 200,000 shares of our common stock for each $100,000 of principal amount of the convertible notes. The notes are secured by all of our assets with the exception of the equipment and receivables secured by the equipment lessor for equipment used in providing services for our largest customer's digital signage network. On July 13, 2012, we entered into a note and warrant purchase and security agreement with individual investors and broke escrow on the initial funding under the 2012 Convertible Debt Offering, the principal amount of which was $1,900,000, which included the conversion of $900,000 of previously issued short term debt (See Bridge Loan described above) to the 2012 convertible Debt Offering, which extinguished the Bridge Loan. Of the $1,000,000 non-converted principal amount, we realized $923,175 of cash in the initial closing and issued warrants to acquire 3,800,000 shares of our common stock. We paid $76,825 in investment banking fees and costs of the offering. On August 15, 2012, we continued sales of convertible debt under the 2012 Convertible Debt Offering by issuing short term debt with a principal amount of $900,000, issued warrants to acquire 1,800,000 shares of our common stock, from which we realized cash of $851,624 after payment of investment banking fees of $48,376.

The notes and warrants mentioned above were issued with price protection provisions and were accounted for as derivative liabilities and valued on the dates issued using a Black Scholes pricing model.

We recorded an aggregate derivative liability of $560,000 as of September 30, 2012, related to the conversion feature of the note. A derivative valuation loss of $72,000 was recorded to reflect the change in value of the aggregate derivative liability from the time the notes were issued. The aggregate derivative liability of $560,000 was calculated as follows using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 0.17%, (ii) expected life (in years) of 0.80; (iii) expected volatility of 95.97%, (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.19.

Additionally, we recorded an aggregate derivative liability of $616,000 as of September 30, 2012, related to the warrant reset provision. A derivative valuation loss of $16,000 was recorded to reflect the change in value of the aggregate derivative liability from the time the warrants were issued. The aggregate derivative liability of $616,000 was calculated as follows using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 0.62%, (ii) expected life (in years) of 4.80; (iii) expected volatility of 81.51%, (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.19.

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Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2012

Significant Accounting Policies [Abstract]

Schedule of Future Patent Amortization

Year ending December 31:
2012	$	11,588
2013		11,343
2014		10,121
2015		10,121
2016		10,121

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Subsequent Events

9 Months Ended

Sep. 30, 2012

Subsequent Events [Abstract]

Subsequent Events

Note 14 - Subsequent Events

In October 2012, we issued 46,611 and 20,789 shares of our common stock to one individual and one company, respectively, for consulting services rendered.

In November 2012, we issued 47,945 and 20,547 shares of our common stock to one individual and one company, respectively, for consulting services rendered.

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

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Equipment Financing

9 Months Ended

Sep. 30, 2012

Equipment Financing [Abstract]

Equipment Financing

Note 10 - Equipment Financing

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

We entered into a Master Lease Agreement dated as of July 28, 2009 with the financial institution pursuant to which we sold to the financing institution certain telecommunications equipment to be installed at 1,981 (subsequent additional locations have increased the customer's network to an aggregate of approximately 2,100 locations) of our customer's retail locations in exchange for a one time payment of $4,100,670 by the financial institution. We paid to the financial institution 36 monthly lease payments of approximately $144,000 plus applicable sales taxes. We had the right to terminate the lease after making 33 payments for a termination fee of the higher of approximately 10% of the original equipment value (approximately $410,000) or the then "in-place fair market value" after which payment we would own all of the equipment. We gave timely notice of exercise of this option. We are currently a party to a lawsuit to determine if the "in-place fair market value" exceeds the 10% of the original lease value and by what amount. We contend that the three payments made subsequent to the notice exercising our right to purchase constitute full payment for the equipment. The equipment broker contends that we owe an additional amount of approximately $1,462,000. Our accounting records reflect that the capital lease has been retired and the equipment has been fully depreciated.

We also entered into a security agreement with the financial institution pursuant to which we granted a first priority security interest in the equipment, whether now owned or hereafter acquired, and in our customer service agreement and service payments thereunder during the term of the equipment lease.

During the three and nine months ended September 30, 2012, we made lease payments totaling approximately $281,397 and $1,125,588 of which $276,454 and $1,067,649 was applied toward the outstanding lease with $4,943 and $57,939, respectively, included in interest expense. Additionally, we recognized amortization of the lease acquisition fee of $8,378 and $33,512 which was included in interest expense for the three and nine months ended September 30, 2012, respectively.

During the three and nine months ended September 30, 2011, we made lease payments totaling approximately $422,096 and $1,266,287 of which $361,966 and $1,048,491 was applied toward the outstanding lease with $60,130 and $217,796, 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 the three and nine months ended September 30, 2011, respectively.

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2010 Equity Financing and the Debt Restructuing

9 Months Ended

Sep. 30, 2012

Equity Financing and the Debt Restructuring 2010 [Abstract]

2010 Equity Financing and the Debt Restructuring

Note 8 - 2010 Equity Financing and the Debt Restructuring

On December 24, 2010, we closed on an equity financing (the "Equity Financing") as well as a restructuring of our then 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 had an exercise price of $1.00 per share which was reset to $0.78 pursuant to the 2012 Equity Financing.

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 was 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. The registration statement was declared effective June 16, 2011 satisfying the obligation contained in the Subscription Agreements.

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 were 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, was a senior, unsecured note that matured in three years from the closing and bore interest at an annual rate of 6.25%, payable semi-annually. We paid the first year's interest of $350,434 at the closing. The Amended and Restated Note was convertible into shares of common stock at a conversion price of $1.35 per share, subject to adjustment. The Amended and Restated Note was convertible in whole or in part at any time upon notice by Castlerigg to us. The Amended and Restated Note also contained various restrictions, acceleration provisions and other standard and customary terms and conditions. Two of our consolidated subsidiaries guaranteed our obligations under the Amended and Restated Note.

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

During the three months ended March 31, 2011, we issued Castlerigg 400,000 warrants pursuant to a waiver agreement dated March 10, 2011 allowing the issuance of shares and warrants for the conversion of the AR Note Payable without adjusting the conversion price of the Amended and Restated Senior 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 Scholes pricing model. During the three and six months ended June 30 ,2011 the warrant holder exercised these warrants using a cashless provision resulting in the company issuing 372,272 shares of our common stock. A valuation gain of $144,000 was recorded to reflect the change in value of the aggregate derivative from the time of issue to the date of conversion.

In connection with the Debt Restructuring, the Company amended the note with the holder of a $1.0 million unsecured convertible note, pursuant to which the maturity date of the note was extended to December 31, 2013. We also issued 150,000 shares and 75,000 warrants to acquire our common stock at $.90 per share to the holder of this note as consideration to extend the term of the note.

On March 26, 2012, we closed on an equity financing (the "2012 Equity Financing") as well as a restructuring of our outstanding senior convertible indebtedness (the "2012 Debt Restructuring") resulting in complete satisfaction our senior indebtedness.

A portion of the net proceeds from the 2012 Equity Financing was used to close on the 2012 Debt Restructuring therewith. The Company paid $2,750,000 and issued 2,000,000 shares of common stock valued at $760,000 to Castlerigg in satisfaction of the $5,500,000 senior convertible note and $72,570 of accrued interest. In addition, the remaining accrued interest value of $608,066 was satisfied.

Investor warrants totaling 12,499,980 issued under the Subscription Agreements 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 Scholes pricing model. Pursuant to the 2012 Equity Financing the exercise price was reset to $0.78 per share.

We recorded an aggregate derivative liability of $500,000 and $2,500,000 as of September 30, 2012 and 2011, respectively, related to the reset feature of the warrants issued under the Placement agency Agreement. A derivative valuation gain of $2,375,000 and $8,250,000, respectively, were recorded to reflect the change in value of the aggregate derivative liability since December 31, 2011 and December 31, 2010, respectively. The aggregate derivative liability of $500,000 for the conversion feature of the note was calculated using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 0.31%, (ii) expected life (in years) of 3.2; (iii) expected volatility of 76.71%; (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.19.

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Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 9 - Fair Value Measurements

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

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

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

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

We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at September 30, 2012:

					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets
None	$	--	$	--	$	--	$	--
Total assets measured at fair value	$	--	$	--	$	--	$	--
Liabilities
Derivative valuation (1)	$	4,346,021	$	--	$	--	$	4,346,021
Total liabilities measured at fair value	$	4,346,021	$	--	$	--	$	4,346,021
(1) See Notes 6,7 and 8 for additional discussion.

The table below presents our assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at September 30, 2012. We classify financial instruments in Level 3 of the fair value hierarchy when there is reliance on at least one significant unobservable input to the valuation model.

	Derivative
	Valuation
	Liability
Balance at December 31, 2011	$	(3,760,200	)
Total gains or losses (realized and unrealized)
Included in net loss		5,639,996
Valuation adjustment		--
Purchases, issuances, and settlements, net		(6,225,817	)
Transfers to Level 3		--
Balance at September 30, 2012	$	(4,346,021	)

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.

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Interact Devices Inc. (IDI)

9 Months Ended

Sep. 30, 2012

Interact Devices Inc. (IDI) [Abstract]

Interact Devices Inc. (IDI)

Note 11 - 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 agreed to satisfy the debts of the creditors and obtained certain licensing rights. On May 18, 2004, the debtor-in-possession's plan of reorganization for IDI was confirmed by the United States Bankruptcy Court. As a result of this confirmation, we issued to the creditors of IDI approximately 111,800 shares of our common stock, and cash of approximately $312,768 in exchange for approximately 50,127,218 shares of the common stock of IDI, which increased our aggregate common share equivalents in IDI to approximately 51,426,719 shares.

Since May 18, 2004, we have acquired an aggregate of 4,470,450 additional common share equivalents IDI. As of September 30, 2012, we owned approximately 55,897,169 IDI common share equivalents, representing approximately 94% of the total outstanding IDI share equivalents.

Since May 18, 2004, we have advanced additional cash to IDI for the payment of operating expenses, which continues development and marketing of the CodecSys technology. As of September 30, 2012 we have advanced an aggregate amount of $3,319,105 pursuant to a promissory note that is secured by assets and technology of IDI.

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Stock-based Compensation (Schedule of Information About Options and Warrants) (Details) (USD $)	9 Months Ended
	Sep. 30, 2012
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Range of Exercise Prices, minimum	$ 0.17
Range of Exercise Prices, maximum	$ 5.0
Number Outstanding	43,203,863
Outstanding Weighted Average Remaining Contractual Life (years)	4.52
Weighted Average Exercise Price	$ 0.52
Number Exercisable	42,555,330
Exercisable Weighted Average Exercise Price	0.51
$ 0.17-0.95 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Range of Exercise Prices, minimum	$ 0.17
Range of Exercise Prices, maximum	$ 0.95
Number Outstanding	39,173,684
Outstanding Weighted Average Remaining Contractual Life (years)	4.62
Weighted Average Exercise Price	$ 0.43
Number Exercisable	38,728,684
Exercisable Weighted Average Exercise Price	0.43
$ 1.00-1.65 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Range of Exercise Prices, minimum	$ 1.0
Range of Exercise Prices, maximum	$ 1.65
Number Outstanding	3,411,179
Outstanding Weighted Average Remaining Contractual Life (years)	3.6
Weighted Average Exercise Price	$ 1.04
Number Exercisable	3,207,646
Exercisable Weighted Average Exercise Price	1.04
$ 2.25-5.00 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Range of Exercise Prices, minimum	$ 2.25
Range of Exercise Prices, maximum	$ 5.0
Number Outstanding	619,000
Outstanding Weighted Average Remaining Contractual Life (years)	2.98
Weighted Average Exercise Price	$ 3.05
Number Exercisable	619,000
Exercisable Weighted Average Exercise Price	3.05

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Subsequent Events (Details) (Financing [Member])	0 Months Ended	1 Months Ended
	Nov. 05, 2012	Oct. 31, 2012
Consultant One [Member]
Subsequent Event [Line Items]
Common stock issued for consulting services	47,945	46,611
Consultant Two [Member]
Subsequent Event [Line Items]
Common stock issued for consulting services	20,547	20,789

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Weighted Average Shares (Tables)

9 Months Ended

Sep. 30, 2012

Weighted Average Shares [Abstract]

Schedule of Computation of Basic and Diluted Earnings per Common Share

	For the three months ended					For the nine months ended
	September 30,					September 30,
	2011		2012			2011		2012
Numerator
Net income (loss)	$	4,034,154	$	(711,072	)	$	3,729,513	$	(49,357	)
Denominator
Basic weighted average shares outstanding		75,844,526		107,263,073			75,240,313		98,564,531
Effect of dilutive securities:
Stock options and warrants		19,927		--			179,903		--
Restricted stock units		2,550,000		--			2,550,000		--
Diluted weighted average shares outstanding		78,414,453		107,263,073			77,970,216		98,564,531
Net income (loss) per common share
Basic	$	0.05	$	(0.01	)	$	0.05	$	(0.00	)
Diluted	$	0.05	$	(0.01	)	$	0.05	$	(0.00	)

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Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2012

Fair Value Measurements [Abstract]

Schedule of Fair Value of Financial Instruments

					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets
None	$	--	$	--	$	--	$	--
Total assets measured at fair value	$	--	$	--	$	--	$	--
Liabilities
Derivative valuation (1)	$	4,346,021	$	--	$	--	$	4,346,021
Total liabilities measured at fair value	$	4,346,021	$	--	$	--	$	4,346,021
(1) See Notes 6,7 and 8 for additional discussion.

Schedule of Liabilities Measured at Fair Value on a Recurring Basis using Significant Unobservable Inputs

	Derivative
	Valuation
	Liability
Balance at December 31, 2011	$	(3,760,200	)
Total gains or losses (realized and unrealized)
Included in net loss		5,639,996
Valuation adjustment		--
Purchases, issuances, and settlements, net		(6,225,817	)
Transfers to Level 3		--
Balance at September 30, 2012	$	(4,346,021	)

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Interact Devices Inc. (IDI) (Details) (Interact Devices Inc. [Member], USD $)	1 Months Ended	100 Months Ended
	May 31, 2004	Sep. 30, 2012
Interact Devices Inc. [Member]
Subsidiary or Equity Method Investee [Line Items]
Shares issued to acquire shares of subsidiary	111,800
Payments to acquire additional interest in subsidiary	$ 312,768
Number of shares of subsidiary acquired	50,127,218	4,470,450
Number of shares owned	51,426,719	55,897,169
Percent ownership		94.00%
Advances to subsidiary		$ 3,319,105

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Notes Payable (Bridge Loan) (Details) (USD $)	3 Months Ended		9 Months Ended			0 Months Ended		9 Months Ended		9 Months Ended	0 Months Ended	3 Months Ended	9 Months Ended			0 Months Ended		9 Months Ended	0 Months Ended	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011	Apr. 05, 2012 2012 Plan [Member]	Mar. 26, 2012 2012 Plan [Member]	Sep. 30, 2012 2012 Plan [Member]	Sep. 30, 2012 Bridge Loan Conversion [Member] 2012 Plan [Member]	Sep. 30, 2012 Warrants Issued to Reset Provision and Extend Maturity Date of Bridge Loan Warrants [Member]	Dec. 28, 2011 Bridge Loan Note Payable [Member]	Sep. 30, 2012 Bridge Loan Note Payable [Member]	Sep. 30, 2012 Bridge Loan Note Payable [Member]	Mar. 26, 2012 Bridge Loan Note Payable [Member]	Dec. 28, 2011 Bridge Loan Note Payable [Member] 2012 Plan [Member]	Mar. 26, 2012 Bridge Loan Note Payable [Member] Bridge Loan Conversion [Member] 2012 Plan [Member]	Dec. 28, 2011 Bridge Loan Note Payable [Member] Original Warrants Issued for Bridge Loan [Member]	Sep. 30, 2012 Bridge Loan Note Payable [Member] Original Warrants Issued for Bridge Loan [Member]	Dec. 28, 2011 Bridge Loan Note Payable [Member] Warrants Issued to Reset Provision and Extend Maturity Date of Bridge Loan Warrants [Member]	Sep. 30, 2012 Bridge Loan Note Payable [Member] Warrants Issued to Reset Provision and Extend Maturity Date of Bridge Loan Warrants [Member]	Sep. 30, 2012 Bridge Loan Note Payable [Member] Warrants Issued to Investment Banker for Payment [Member]	Dec. 28, 2011 Bridge Loan Note Payable [Member] Warrants Issued to Investment Banker for Payment [Member]
Debt
Principal issued											$ 1,300,000			$ 900,000
Number of warrants issued						400,400
Debt interest rate												18.00%	18.00%
Warrant term length							6 years			6 years							5 years		6 years
Number of shares of common stock warrants can be exercised for										247,500							357,500			247,500		65,000
Exercise price of warrants										0.35							0.65			0.35	0.53	0.65
Debt maturity date											Feb. 28, 2012
Amount of financing proceeds triggering expiration of warrants							5,000,000										12,000,000
Payments for placement fees											84,500
Payments of escrow fees											3,000
Amount of debt converted																400,000
Fair value of warrants								2,362,721	102,335							222,426
Principale amount retired											900,000
Gain (loss) on extinguishment of debt	(83,754)	16,000	1,588,821	(954,033)							(83,754)					222,426
Loss on retirement of debt offering costs	53,150		53,150								53,160
Derivative valuation	4,346,021		4,346,021		3,760,200			2,362,721		2,362,721					134,335			29,800		24,700
Gain (loss) on derivative valuation	1,051,516	5,851,300	5,639,996	12,257,500				2,760,071		2,362,721								113,900		71,825
Risk free interest rate																		0.47%		0.47%
Expected life (in years)																		4.2		4.2
Expected volatility																		80.82%		80.85%
Expected dividend yield																		0.00%		0.00%
Stock trading price																		$ 0.19		$ 0.19
Accretion of discount on convertible notes payable			593,297	250,002								17,662	116,630
Interest expense												$ 5,769	$ 100,899

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Cash flows from operating activities:
Net income (loss)	$ (49,357)	$ 3,729,513
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	918,206	1,117,703
Common stock issued for research and development		903
Common stock issued for services	167,494
Common stock issued for interest		19,634
Accretion of discount on convertible notes payable	593,297	250,002
Stock based compensation	255,001	2,072,993
Loss (gain) on sale of assets	(781)	362
Loss (gain) on extinguishment of debt	(1,588,821)	954,033
Gain on derivative liability valuation	(5,639,996)	(12,257,500)
Warrants issued for interest		157,400
Warrants issued for debt extinguishment costs		404,000
Warrants issued and expensed for issuance costs	1,095,309
Expensed offering costs	47,348
Retirement of debt offering costs	53,150
Allowance for doubtful accounts	4,493	1,414
Changes in assets and liabilities:
Increase (decrease) in accounts receivable	74,309	(68,607)
Increase in inventories	(301,484)	(54,399)
Decrease in debt offering costs	86,338
Decrease in prepaid and other assets	205,175	126,704
Increase (decrease) in accounts payable and accrued expenses	773,903	(485,735)
Increase (decrease) in deferred revenues	20,072	(103,629)
Net cash used by investing activities	(3,286,344)	(4,135,209)
Cash flows from investing activities:
Purchase of equipment	(160,599)	(422,978)
Proceeds from the sale of assets	3,171	240
Net cash provided by investing activities	(157,428)	(422,738)
Cash flows from financing activities:
Proceeds from equity financing	6,150,000
Proceeds from issuance of convertible note and warrants	1,774,799
Principal payments on debt	(4,017,649)	(1,151,439)
Equity issuance costs	(776,483)	(24,078)
Proceeds from the exercise of options and warrants		18,304
Payments for debt extinguishment costs	(275,041)
Net cash provided (used) by financing activities	2,855,626	(1,157,213)
Net decrease in cash	(588,146)	(5,715,160)
Cash beginning of period	961,265	6,129,632
Cash end of period	373,119	414,472
Supplemental disclosure of cash flow information:
Cash paid for interest	307,102	244,966
Income taxes paid

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Significant Accounting Policies

9 Months Ended

Sep. 30, 2012

Significant Accounting Policies [Abstract]

Significant Accounting Policies

Note 5 - Significant Accounting Policies

Cash and Cash Equivalents

We consider all cash on hand and in banks, and highly liquid investments with maturities of three months or less, to be cash equivalents. At September 30, 2012 and December 31, 2011, we had bank balances of $0 and $909,182, respectively, in excess of amounts insured by the Federal Deposit Insurance Corporation. We have not experienced any losses in such accounts, and believe we are not exposed to any significant credit risk on cash and cash equivalents.

Current financial market conditions have had the effect of restricting liquidity of cash management investments and have increased the risk of even the most liquid investments and the viability of some financial institutions. We do not believe, however, that these conditions will materially affect our business or our ability to meet our obligations or pursue our business plans.

Accounts Receivable

Trade accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when collected.

Included in our $1,161,101 and $1,239,903 net accounts receivable for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively, were (i) $1,122,643 and $1,269,579 for billed trade receivables, respectively; and (ii) $96,418 and $23,814 of unbilled trade receivables; less (iii) ($57,960) and ($53,490) for allowance for uncollectible accounts, respectively.

Inventories

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

Property and Equipment

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

Patents and Intangibles

Patents represent initial legal costs incurred to apply for United States and international patents on the CodecSys technology, and are amortized on a straight-line basis over their useful life of approximately 20 years. We have filed several patents in the United States and foreign countries. As of September 30, 2012, the United States Patent and Trademark Office had approved four patents. Additionally, eleven foreign countries had approved patent rights. While we are unsure whether we can develop the technology in order to obtain the full benefits, the patents themselves hold value and could be sold to companies with more resources to complete the development. On-going legal expenses incurred for patent follow-up have been expensed from July 2005 forward.

Amortization expense recognized on all patents totaled $2,538 and $7,613 for both the three and nine months ended September 30, 2012 and 2011, respectively. Estimated amortization expense, if all patents were issued at the beginning of 2012, for each of the next five years is as follows:

Year ending December 31:
2012	$	11,588
2013		11,343
2014		10,121
2015		10,121
2016		10,121

Long-Lived Assets

We review our long-lived assets, including patents, annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, then the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Fair value is determined by using cash flow analyses and other market valuations.

Income Taxes

We account for income taxes in accordance with the asset and liability method of accounting for income taxes prescribed by ASC Topic 740. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the taxable income in the years in which those temporary differences are expected to be recovered or settled.

Revenue Recognition

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

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

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

Research and Development

Research and development costs are expensed when incurred. We expensed $325,126 and $1,346,540 of research and development costs for the three and nine months ended September 30, 2012, respectively. We expensed $570,197 and $1,793,596 of research and development costs for the three and nine months ended September 30, 2011, respectively.

Concentration of Credit Risk

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

For the nine months ended September 30, 2012 and 2011, we had the same customer that individually constituted 85% and 91%, of our total revenues, respectively. Although the initial contract for this customer has expired, we received a contract extension through January 2013 continue to provide services. During that time period the customer is soliciting requests for proposals ("RFP") from competing vendors. We are participating in the RFP process and have submitted our response to the customer.

XML

Weighted Average Shares (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Numerator
Net income (loss)	$ (711,072)	$ 4,034,154	$ (49,357)	$ 3,729,513
Denominator
Basic weighted average shares outstanding	107,263,073	75,844,526	98,564,531	75,240,313
Stock options and warrants		19,927		179,903
Restricted stock units		2,550,000		2,550,000
Diluted weighted average shares outstanding	107,263,073	78,414,453	98,564,531	77,970,216
Basic	$ (0.01)	$ 0.05	$ 0.0	$ 0.05
Diluted	$ (0.01)	$ 0.05	$ 0.0	$ 0.05
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Anti-dilutive securities		25,193,934		24,723,934

XML

Notes Payable (Amended and Restated Senior 6.25% Convertible Note) (Details) (USD $)	3 Months Ended		9 Months Ended			9 Months Ended	0 Months Ended		3 Months Ended	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011	Sep. 30, 2012 Conversion of Senior Notes to Common Stock [Member]	Dec. 23, 2010 Amended and Restated Senior 6.25% Convertible Note [Member]	Dec. 23, 2009 Amended and Restated Senior 6.25% Convertible Note [Member]	Mar. 31, 2011 Amended and Restated Senior 6.25% Convertible Note [Member]	Sep. 30, 2012 Amended and Restated Senior 6.25% Convertible Note [Member]	Dec. 31, 2011 Amended and Restated Senior 6.25% Convertible Note [Member]
Convertible notes
Principal issued								$ 15,000,000
Debt maturity date								Dec. 21, 2010		Dec. 21, 2013
Debt interest rate								6.25%
Conversion price								$ 1.35
Shares of common stock issued										2,000,000
Payments for debt extinguishment costs			275,041							275,041
Cash paid to settle debt										2,750,000
Gain on troubled debt restructuring										2,173,033
Cash paid for interest			307,102	244,966			350,434
Common stock issued in conversion						2,000,000
Common stock issued for interest				19,634		680,816
Amount of debt converted						760,000
Gain (loss) on extinguishment of debt	(83,754)	16,000	1,588,821	(954,033)
Number of shares issued for agent fees										586,164
Value of shares issued for agent fees										222,742
Gain (loss) on derivative valuation	1,051,516	5,851,300	5,639,996	12,257,500					896,300	203,700
Derivative valuation	$ 4,346,021		$ 4,346,021		$ 3,760,200				$ 1,711,100		$ 81,500

XML

Significant Accounting Policies (Policy)

9 Months Ended

Sep. 30, 2012

Significant Accounting Policies [Abstract]

Cash and Cash Equivalents

Cash and Cash Equivalents

We consider all cash on hand and in banks, and highly liquid investments with maturities of three months or less, to be cash equivalents. At September 30, 2012 and December 31, 2011, we had bank balances of $0 and $909,182, respectively, in excess of amounts insured by the Federal Deposit Insurance Corporation. We have not experienced any losses in such accounts, and believe we are not exposed to any significant credit risk on cash and cash equivalents.

Current financial market conditions have had the effect of restricting liquidity of cash management investments and have increased the risk of even the most liquid investments and the viability of some financial institutions. We do not believe, however, that these conditions will materially affect our business or our ability to meet our obligations or pursue our business plans.

Accounts Receivable

Accounts Receivable

Trade accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when collected.

Included in our $1,161,101 and $1,239,903 net accounts receivable for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively, were (i) $1,122,643 and $1,269,579 for billed trade receivables, respectively; and (ii) $96,418 and $23,814 of unbilled trade receivables; less (iii) ($57,960) and ($53,490) for allowance for uncollectible accounts, respectively.

Inventories

Inventories

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

Property and Equipment

Property and Equipment

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

Patents and Intangibles

Patents and Intangibles

Patents represent initial legal costs incurred to apply for United States and international patents on the CodecSys technology, and are amortized on a straight-line basis over their useful life of approximately 20 years. We have filed several patents in the United States and foreign countries. As of September 30, 2012, the United States Patent and Trademark Office had approved four patents. Additionally, eleven foreign countries had approved patent rights. While we are unsure whether we can develop the technology in order to obtain the full benefits, the patents themselves hold value and could be sold to companies with more resources to complete the development. On-going legal expenses incurred for patent follow-up have been expensed from July 2005 forward.

Amortization expense recognized on all patents totaled $2,538 and $7,613 for both the three and nine months ended September 30, 2012 and 2011, respectively. Estimated amortization expense, if all patents were issued at the beginning of 2012, for each of the next five years is as follows:

Year ending December 31:
2012	$	11,588
2013		11,343
2014		10,121
2015		10,121
2016		10,121

Long-Lived Assets

Long-Lived Assets

We review our long-lived assets, including patents, annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, then the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Fair value is determined by using cash flow analyses and other market valuations.

Income Taxes

Income Taxes

We account for income taxes in accordance with the asset and liability method of accounting for income taxes prescribed by ASC Topic 740. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the taxable income in the years in which those temporary differences are expected to be recovered or settled.

Revenue Recognition

Revenue Recognition

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

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

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

Research and Development

Research and Development

Research and development costs are expensed when incurred. We expensed $325,126 and $1,346,540 of research and development costs for the three and nine months ended September 30, 2012, respectively. We expensed $570,197 and $1,793,596 of research and development costs for the three and nine months ended September 30, 2011, respectively.

Concentration of Credit Risk

Concentration of Credit Risk

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

For the nine months ended September 30, 2012 and 2011, we had the same customer that individually constituted 85% and 91%, of our total revenues, respectively. Although the initial contract for this customer has expired, we received a contract extension through January 2013 continue to provide services. During that time period the customer is soliciting requests for proposals ("RFP") from competing vendors. We are participating in the RFP process and have submitted our response to the customer.