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 March 31, 2013 was 3,981,278.

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 88,200 at March 31, 2013.

Stock Options

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

The fair values for the options granted for the three months ended March 31, 2012 were estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

		Three Months Ended March 31, 2012
Risk free interest rate		1.82%
Expected life (in years)		10.0
Expected volatility		77.78%
Expected dividend yield		0.00%

The weighted average fair value of options granted during the three months ended March 31, 2012 was $0.37. There were no options granted during the three months ended March 31, 2013.

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 three months ended March 31, 2013 and 2012 estimated at the date of issuance using the Black-Scholes option-pricing model with the following weighted average assumptions:

	Three Months Ended March 31, 2013	Three Months Ended March 31, 2012
Risk free interest rate	0.65%	1.32%
Expected life (in years)	4.42	5.99
Expected volatility	90.68%	82.67%
Expected dividend yield	0.00%	0.00%

The weighted average fair value of warrants issued during the three months ended March 31, 2013 and 2012 was $0.05 and $0.27, respectively.

Results of operations for the three months ended March 31, 2013 and 2012 includes $2,824 and $96,165, 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.

The $2,824 non-cash stock-based compensation expense for the three months ended March 31, 2013 was from the vesting of unexpired options and warrants issued prior to January 1, 2013.

Included in the $96,165 non-cash stock-based compensation expense for the three months ended March 31, 2012 are $683 for 30,000 options granted to 2 employees and $95,482 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 months ended March 31, 2012 and 2011 is as follows:

	For the Three Months Ended March 31, 2013		For the Three Months Ended March 31, 2012
General and administrative	$	2,824	$	59,130
Research and development		--		37,035

Total	$	2,824	$	96,165

Due to unexercised options and warrants outstanding at March 31, 2013, we will recognize an aggregate total of $107,081 of compensation expense over the next two years based upon option and warrant award vesting parameters as shown below:

2013	$	64,325
2014		42,756
Total	$	107,081

The following unaudited tables summarize option and warrant activity during the three months ended March 31, 2013.

	Options and Warrants Outstanding			Weighted Average Exercise Price

Outstanding at December 31, 2012		43,396,863		$	0.54
Options granted		--			--
Warrants issued		850,000			0.25
Expired		(338,094	)		0.55
Forfeited		(197,500	)		0.72
Exercised		--			--

Outstanding at March 31, 2013		43,711,269		$	0.49

The following table summarizes information about stock options and warrants outstanding at March 31, 2013.

		Outstanding						Exercisable
				Weighted Average Remaining		Weighted Average				Weighted Average
	Range of Exercise Prices	Number Outstanding		Contractual Life (years)		Exercise Price		Number Exercisable		Exercise Price
$	0.25-0.95		40,231,914		4.10	$	0.42		39,993,581	$	0.42
	1.00-1.59		2,972,855		3.29		1.04		2,914,322		1.04
	2.25-4.00		506,500		3.10		2.62		506,500		2.62
$	0.25-4.00		43,711,269		4.03	$	0.49		43,414,402	$	0.49

Restricted Stock Units

The value of restricted stock units is determined using the fair value of our common stock on the date of the award and compensation expense is recognized in accordance with the vesting schedule. During the three months ended March 31, 2013, 686,667 restricted stock units valued at $51,500 were awarded to five members of our board of directors for services rendered during the year ended 2012. One member of our board of directors settled 258,553 restricted stock units at the conclusion of his board participation during the three months ended March 31, 2013. The value of the units awarded had been expensed as directors fees in the year ended December 31, 2012. For the three months ended March 31, 2012 no restricted stock units were awarded.

The following is a summary of restricted stock unit activity for the three months ended March 31, 2013.

	Restricted Stock Units			Weighted Average Grant Date Fair Value

Outstanding at December 31, 2012		2,940,133		$	1.11
Awarded at fair value		686,667			0.08
Canceled/Forfeited		--			--
Settled by issuance of stock		(258,553	)		0.82
Outstanding at March 31, 2013		3,368,247		$	0.92
Vested at March 31, 2013		3,368,247		$	0.92