b32514010k.htm

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Broadcast International, Inc.

Salt Lake City, Utah

We have audited the accompanying consolidated balance sheets of Broadcast International, Inc. and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of operations, stockholders' deficit, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Broadcast International, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has incurred losses and has not demonstrated the ability to generate sufficient cash flows from operations to satisfy their liabilities and sustain operations. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters also are described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ HJ & Associates, LLC

HJ & Associates, LLC

Salt Lake City, Utah

March 31, 2014

F-1

BROADCAST INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS


	DEC 31, 2012			DEC 31, 2013
ASSETS:
Current Assets
Cash and cash equivalents	$	394,342		$	215,371
Restricted cash		140,700			--
Trade accounts receivable, net		821,608			50,745
Inventory		306,296			19,457
Prepaid expenses		90,067			15,136
Total current assets		1,753,013			300,709
Property and equipment, net		572,107			64,282
Other Assets, non current
Debt offering costs		42,176			--
Patents, net		120,928			66,081
Deposits and other assets		196,292			111,022
Total other assets, non current		359,396			177,103

Total assets	$	2,684,516		$	542,094

LIABILITIES AND STOCKHOLDERS DEFICT
LIABILITIES:
Current Liabilities
Accounts payable	$	2,293,470		$	1,034,053
Payroll and related expenses		363,568			98,962
Other accrued expenses		299,728			802,364
Unearned revenue		51,335			5,280
Current portion of notes payable (net of discount of $947,994 and $0, respectively)		3,102,006			5,245,000
Derivative valuation		1,191,269			11,736
Total current liabilities		7,301,376			7,197,395
Total liabilities		7,301,376			7,197,395
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; 107,473,820 and 110,233,225 shares issued as of December 31, 2012 and December 31, 2013, respectively		5,373,691			5,511,661
Additional paid-in capital		99,594,490			99,706,469
Accumulated deficit		(109,585,041	)		(111,873,431	)
Total stockholders’ deficit		(4,616,860	)		(6,655,301	)

Total liabilities and stockholders’ deficit	$	2,684,516		$	542,094

See accompanying notes to consolidated financial statements

F-2

BROADCAST INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


	For the Year Ended Dec 31, 2012			For the Year Ended Dec 31, 2013

Net sales	$	7,523,624		$	3,041,357
Cost of sales		4,819,624			1,743,342
Gross profit		2,704,000			1,298,015

Operating expenses:
Administrative and general		4,546,612			2,576,992
Selling and marketing		1,908,763			268,021
Research and development		1,754,163			546,953
Impairment of assets		--			9,781
Depreciation and amortization		558,148			210,512
Total operating expenses		8,767,686			3,612,259
Total operating loss		(6,063,686	)		(2,314,244	)

Other income (expense):
Interest expense		(1,542,424	)		(1,634,347	)
Gain on derivative valuation		8,829,748			1,242,459
Note conversion offering expense		(47,348	)		--
Retirement of debt offering costs		(53,150	)		--
Debt conversion costs		(1,095,309	)		--
Gain on extinguishment of debt		1,578,914			--
Gain on extinguishment of liabilities		--			481,590
(Loss) gain on sale of assets		512			(68,214	)
Other income, net		(4,433	)		4,366
Total other income		7,666,510			25,854

Income (loss) before income taxes		1,602,824			(2,288,390	)
Provision for income taxes		--			--
Net income (loss)	$	1,602,824		$	(2,288,390	)

Income (loss) per share basic	$	0.02		$	(0.02	)
Income (loss) per share diluted	$	0.02		$	(0.02	)

Weighted average shares basic		100,798,223			109,107,238
Weighted average shares diluted		106,533,844			109,107,238

See accompanying notes to consolidated financial statements

F-3

BROADCAST INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

YEARS ENDED DECEMBER 31, 2013 AND 2012

					Additional		Retained
	Common Stock				Paid-in		Earnings			Equity
	Shares		Amount		Capital		(Deficit)			(Deficit)
Balance, December 31, 2011		75,975,656	$	3,798,783	$	96,859,058	$	(111,187,865	)	$	(10,530,024	)

Common stock issued for 2012 equity financing and debt restructuring, net of issuance costs		25,402,164		1,270,108		837,726		--			2,107,834

Common stock issued on debt conversion		5,600,000		280,000		1,380,000		--			1,660,000

Common stock issued for services rendered		496,000		24,800		152,513		--			177,313

Amended and restated 6.25% note conversion feature		--		--		81,500		--			81,500

Current year stock based compensation		--		--		2,262,540		--			2,262,540

Net Income		--		--		--		1,304,446			1,304,446

Balance, December 31, 2012		107,473,820		5,373,691		99,594,490		(109,585,041	)		(4,616,860	)


Common stock issued for extinguishment of liabilities	2,240,852		112,043		41,817			--			153,860

Common stock issued to a director for prior years services rendered	200,000		10,000		5,000			--			15,000

Common stock issued for services rendered	60,000		3,000		1,200			--			4,200

Common stock issued for restricted stock settlements	258,553		12,927		(12,927	)		--			--

Issuance of restricted stock options to board members for prior years service	--		--		51,500			--			51,500

Current year stock based compensation	--		--		25,389			--			25,389

Net Loss	--		--		--			(2,288,390	)		(2,288,390	)

Balance, December 31, 2013	110,233,225	$	5,511,661	$	99,706,469		$	(111,873,431	)	$	(6,655,301	)

See accompanying notes to consolidated financial statements

F-4

BROADCAST INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Year Ended Dec 31, 2012			For the Year Ended Dec 31, 2013
Cash flows from operating activities:
Net (loss) Income	$	1,602,824		$	(2,288,390	)
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization		1,024,754			211,721
Common stock issued for services		177,313			4,200
Accretion of discount on convertible notes payable		941,225			1,010,920
Stock based compensation		283,693			25,389
Warrants issued and expensed for issuance costs		1,095,309			--
Loss on extinguishment of debt		(1,578,914	)		--
Gain on extinguishment of liabilities		--			(481,590	)
Expensed note conversion costs		47,348			--
Gain on derivative liability valuation		(8,829,748	)		(1,242,459	)
Loss (gain) on sale of assets		(512	)		68,214
Retirement of debt offering costs		53,150			--
Loss on impairment of assets		--			9,781
Allowance for doubtful accounts		31,982			(35,396	)
Changes in assets
Decrease in accounts receivable		386,313			806,259
Increase (decrease) in inventories		(245,445	)		14,947
Decrease in debt offering costs		105,805			42,176
Decrease in prepaid and other assets		323,618			205,142
Changes in liabilities
Decrease in accounts payable		1,040,932			9,726
Increase in accrued expenses		136,682			238,030
Increase (decrease) in deferred revenues		40,886			(46,055	)
Net cash (used) provided in operating activities		(3,362,785	)		(1,447,385	)

Cash flows from investing activities:
Purchase of equipment		(172,825	)		--
Proceeds from sale of assets		3,761			139,014
Net cash (used) provided by investing activities		(169,064	)		139,014

Cash flows from financing activities:
Proceeds from equity financing		6,150,000			--
Payments on principal on debt		(4,017,649	)		--
Equity issuance costs		(776,483	)		--
Proceeds from equipment financing		--			--
Payments for debt extinguishment costs		(275,041	)		--
Payments for extinguishment of liabilities		--			(206,300	)
Increase (decrease) in restricted cash		(140,700	)		140,700
Proceeds from notes payable		2,024,799			1,195,000
Net cash provided by financing activities		2,964,926			1,129,400

Net decrease in cash and cash equivalents		(566,923	)		(178,971	)
Cash and cash equivalents, beginning of period		961,265			394,342

Cash and cash equivalents, end of period	$	394,342		$	215,371

Supplemental disclosure of cash flow information:
Interest paid	$	347,902		$	66,700
Income taxes paid	$	--		$	--

See accompanying notes to consolidated financial statements

F-5

BROADCAST INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2013 AND 2012

Note 1 – Organization and Basis of Presentation

Broadcast International, Inc. (the Company) is the consolidated parent company of BI Acquisitions, Inc. (BI), a wholly-owned subsidiary, and Interact Devices, Inc. (IDI), a 94% owned subsidiary.

BI was incorporated in Utah in December 1999 and began operations in January 2000. It is a communications services and technology company headquartered in Salt Lake City, Utah. The Company operates two divisions – BI Networks and CodecSys.

On October 1, 2003, the Company (formerly known as Laser Corporation) acquired BI by issuing shares of its common stock representing 98% of the total equity ownership in exchange for all of the issued and outstanding BI common stock. The transaction was accounted for as a reverse acquisition, or recapitalization of BI, with BI being treated as the accounting acquirer. Effective January 13, 2004, the company changed its name from Laser Corporation to Broadcast International, Inc.

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 and subsequent share acquisitions, for the years ended December 31, 2013 and 2012, the Company owned, on a fully diluted basis, approximately 55,897,169 common share equivalents of IDI, representing approximately 94% of the equity of IDI.

The audited consolidated financial statements herein include operations from January 1, 2012 to December 31, 2013. IDI produced losses from operations during the period; therefore, 100% of the results from operations have been included in the Company’s consolidated statements.

Note 2 - Significant Accounting Policies

Management Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

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 December 31, 2013 and 2012, we had no bank balances in excess of amounts insured by the Federal Deposit Insurance Corporation.

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

Account Receivables

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

F-6

A trade receivable is considered to be past due if any portion of the receivable balance is outstanding for more than 90 days. After the receivable becomes past due, it is on non-accrual status and accrual of interest is suspended.

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. We review the value of our inventory, whenever events or changes in circumstances indicate. With our review at December 31, 2013, we recorded a $9,781 impairment for obsolete or overvalued items.

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 December 31, 2013, 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 issued patents totaled $9,906 and $10,151 for the years ended December 31, 2013 and 2012, respectively.

Our estimated future annual amortization expense, if all patents were issued at the beginning of 2013, would be $10,121 for each of the next five years.

Long-Lived Assets

We review our long-lived assets, including patents, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset to future un-discounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, then the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Fair value is determined by using cash flow analyses and other market valuations. After our review at December 31, 2013 it was determined that no adjustment was required.

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.

F-7

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, and 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 $546,953 and $1,754,163 of research and development costs for the years ended December 31, 2013 and 2012, 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 years ended December 31, 2013 and 2012, we had the same customer that individually constituted 83% and 85%, of our total revenues, respectively. The contract with this customer expired in May 2013. Unless we can replace that customer with another similarly large customer or customers, revenues will be declined substantially from comparative periods, which will harm our business.

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.

F-8

The following table sets forth the computation of basic and diluted earnings per common share for the years ended December 31, 2012 and 2013:

	For the Year Ended 2012		For the year Ended 2013
Numerator
Net income (loss)	$	1,602,824	$	(2,288,390	)
Denominator
Basic weighted average shares outstanding		100,798,223		109,107,238
Effect of dilutive securities:
Stock options and warrants		2,510,488		--
Restricted stock units		3,225,133		--
Diluted weighted average shares outstanding		106,533,844		109,107,238

Net income (loss) per common share
Basic	$	0.02	$	(0.02	)
Diluted	$	0.02	$	(0.02	)

Potentially dilutive securities representing 18,568,963 shares of common stock were excluded from the computation of diluted earnings per common share for the year ended December 31, 2012, because their effect would have been anti-dilutive.

As we experienced a net loss during the year ended December 31, 2013, potentially dilutive securities representing; (i) 43,068,136 options and warrants to purchase shares of common stock, (ii) 3,093,247 unsettled restricted stock units and (iii) 20,900,000 shares for the conversion feature of our $5,225,000 convertible notes, were not included in the diluted earnings per common share calculation as the effect of such common stock equivalents would be anti-dilutive.

Advertising Expenses

We follow the policy of charging the costs of advertising to expense as incurred. Advertising expense for the years ended December 31, 2013 and 2012 were $0 and $35,168, respectively.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Recent Accounting Pronouncements

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740) – Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This Update indicates that an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset except in circumstances where a net operating loss carryforward or tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction. This Update is effective for years beginning after December 15, 2013 for public companies and after December 15, 2014 for private companies. This Update didn’t have a significant impact on its financials.

In July 2013, the FASB issued ASU 2013-10, Derivatives and Hedging (Topic 815) – Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. This Update permits the use of the Fed Funds Effective Swap Rate (OIS) to be used as a US benchmark interest rate for hedge accounting purposes. Furthermore, the Update eliminates the restriction on using different benchmark rate for similar hedges. This Update is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The Company doesn’t expect this Update to have a significant impact on its financials. However, if any new hedges are entered into, the update will be considered when determining which benchmark rate to use.

F-9

In July 2013, the FASB issued ASU 2013-09, Fair Value Measurement (Topic 820) – Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No. 2011-04. This Update defers indefinitely required disclosures about significant unobservable inputs used in Level 3 measurements for investments held by a nonpublic employee benefit plan in its plan sponsor’s own nonpublic entity equity securities. This Update is effective upon issuance. The Company doesn’t expect this Update to impact its financials since it does not issue a financial statement for nonpublic employee benefit plans.

In April 2013, the FASB issued ASU 2013-07, Presentation of Financial Statements (Topic 205) – Liquidation Basis of Accounting. This Update requires an entity to use the liquidation basis of accounting when liquidation is imminent. Liquidation is considered imminent if the likelihood is remote that the entity will return from liquidation and either (a) a plan for liquidation is approved or (b) a plan for liquidation is being imposed by other forces. The Update also indicates that asset should be measured and presented at the expected amount of cash proceeds to be received upon liquidation. The entity should also present any assets not previously recognized but expects to sell in liquidation or use in settling liabilities (i.e. trademarks, etc.). This Update is effective for periods beginning after December 15, 2013. This Update did not impact our financials since it does not expect liquidation to be imminent in the near future.

In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210) – Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The main purpose of this Update is to clarify that the disclosures regarding offsetting assets and liabilities per ASU 2011-11 apply to derivatives including embedded derivatives, repurchase agreements and reverse repurchase agreements and securities borrowing and lending transactions that are offset or subject to a master netting agreement. Other types of transactions are not impacted. This Update is effective for fiscal years beginning on or after January 1, 2013 and for all interim periods within that fiscal year. The Company doesn’t expect this Update to impact the Company’s financials since it does not have instruments noted in the Update that are offset.

Note 3- Going Concern

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have incurred losses and have not demonstrated the ability to generate sufficient cash flows from operations to satisfy our liabilities and sustain operations. These factors raise substantial doubt about our ability to continue as a going concern.

Our continuation as a going concern is dependent on our ability to generate sufficient income and cash flow to meet our obligations on a timely basis and to obtain additional financing as may be required. There is no assurance we will be successful in efforts to raise additional funds. The accompanying statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Note 4 – Accounts Receivable

Included in our $50,745 and $821,608 net accounts receivable for the years ending December 2013 and 2012, respectively, were (i) $57,655 and $856,462 for billed trade receivables, respectively; (ii) $1,380 and $44,478 of unbilled trade receivables, respectively; (iii) $0 and $1,808 for employee travel advances and other receivables, respectively; less (iv) $8,290 and $81,140 for allowance for uncollectible accounts, respectively.

Included in the numbers above was our single largest customer for each year ended December 31, 2013 and, 2012, which provided 83% and 85% of total revenue and represented 18% and 71% of our trade receivables on December 31, 2013 and 2012, respectively.

F-10

Our largest customer initially signed a three-year agreement which has now expired. Unless we can replace that customer with another similarly large customer or customers, revenues will continue to decline substantially from comparative periods, which has harmed our business.

Note 5 – Equity Financing and the Debt Restructuring

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 holders of the B Warrants agreed in December 2013 to amend the terms of the B Warrant to reduce the amount of subsequent financing required to extinguish the B Warrants with the result that the B Warrants have now been extinguished.

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.

F-11

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 Warrants were valued using the Black Scholes pricing model.


	Common Shares Issued		Number of Warrants		Value of Warrants
Investors		24,816,000		12,408,000	$	5,677
Bridge Loan Conversion		1,600,000		800,000		366
Equipment Finance Conversion		2,000,000		1,000,000		458
Agency		--		4,262,400		1,951
Total		28,416,000		18,470,400	$	8,452

We recorded an aggregate derivative liability of $8,452 and $757,469 as of December 31, 2013 and 2012, respectively related to the reset feature of the warrants mentioned above. A derivative valuation gain of $749,017 and $4,365,323 was recorded to reflect the change in value of the aggregate derivative liability from December 31, 2012 and the time the warrants issued, respectively. The aggregate derivative liability of $8,452 was calculated using a Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 1.27%, (ii) expected life (in years) of 4.2; (iii) expected volatility of 96.77%; (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.005.

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.

F-12

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.

F-13

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.

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 $680,816 of accrued interest.

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. The exercise price has been reset to $0.7312 per share due to subsequent financings.

We recorded an aggregate derivative liability of $499 and $109,400 as of December 31, 2013 and 2012 respectively, related to the reset feature of the warrants issued under the Placement agency Agreement. A derivative valuation gain of $108,901 and $2,765,600, respectively, were recorded to reflect the change in value of the aggregate derivative liability since December 31, 2012 and December 31, 2011, respectively. The aggregate derivative liability of $499 for the conversion feature of the note was calculated using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 0.38%, (ii) expected life (in years) of 2.0; (iii) expected volatility of 120.96%; (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.005.

Note 6 – Notes Payable

The recorded value of our notes payable (net of debt discount) for the years ending December 31, 2013 and 2012 was as follows:

	December 31, 2012			December 31, 2013
2012 Secured Convertible Notes	$	2,428,166		$	4,225,000
Unsecured Convertible Note		673,840			1,000,000
Unsecured Interest Note		--			20,000
Total		3,102,006			5,245,000
Less Current Portion		(3,102,006	)		(5,245,000	)
Total Long-term	$	--		$	--

F-14

2012 Secured Convertible Notes

We engaged Philadelphia Brokerage Corporation to raise funds through the issuance of convertible promissory notes. We anticipated issuing promissory notes with an aggregate principal amount of up to $5,000,000 (“2012 Convertible Debt Offering”). As of December 31, 2013 we have issued notes having an aggregate principal value of $4,225,000 as explained below. The notes are due and payable on or before December 31, 2013 and remain unsatisfied at the current date. 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.

In July 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.

In August 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.

In December 2012, we continued sales of convertible debt under the 2012 Convertible Debt Offering by issuing short term debt with a principal amount of $250,000, issued warrants to acquire 500,000 shares of our common stock to one member of our Board of Directors.

In January 2013, we continued sales of convertible debt under the 2012 Convertible Debt Offering by issuing short term debt with a principal amount of $425,000, issued warrants to acquire 850,000 shares of our common stock to; (i) one member of our Board of Directors, (ii) three individuals and (iii) two companies.

In August 2013, we converted the $750,000 principal balance of 2013 Accounts Receivable Purchase Agreement into our 2012 Convertible Debt Offering through the issuance of short term debt. No warrants were issued with respect to this transaction.

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 $74,500 as of December 31, 2012, related to the conversion feature of the note. A derivative valuation gain of $423,500 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 $74,500 was calculated as follows using a Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 0.11%, (ii) expected life (in years) of 0.50; (iii) expected volatility of 129.08%, (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.08.

Additionally, we recorded an aggregate derivative liability of $2,654 and $183,000 as of December 31, 2013 and 2012, respectively related to the warrant reset provision. A derivative valuation gain of $180,346 and $442,000 was recorded to reflect the change in value of the aggregate derivative liability from December 31, 2012 and the time the warrants were issued, respectively. The aggregate derivative liability of $2,654 was calculated as follows using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 1.02%, (ii) expected life (in years) of 3.60; (iii) expected volatility of 101.48%, (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.005.

F-15

The principal value of $4,225,000 of the secured convertible note is being accreted over the amended term of the obligation, for which $684,760 and $501,166 was included in interest expense for each the years ended December 31, 2013 and 2012, respectively. The note bears a 12% annual interest rate and for the years ended December 31, 2013 and 2012, $448,792 and $149,227, respectively were included in interest expense.

Unsecured Convertible Note

On September 29, 2006, we entered into a letter of understanding with Triage Capital Management, or Triage, dated September 25, 2006. The letter of understanding provided that Triage loan $1,000,000 to us in exchange for us entering into, on or prior to October 30, 2006, a convertible note securities agreement. It was intended that the funding provided by Triage be replaced by a convertible note and accompanying warrants, as described below. Effective November 2, 2006, we entered into securities purchase agreement, a 5% convertible note, a registration rights agreement, and four classes of warrants to purchase our common stock, all of which were with an individual note holder, the controlling owner of Triage, who caused our agreement with Triage to be assigned to him, which satisfied our agreement with Triage.

Pursuant to the securities purchase agreement, (i) we sold to the convertible note holder a three-year convertible note in the principal amount of $1,000,000 representing the funding received by us on September 29, 2006; (ii) the convertible note bears an annual interest rate of 5%, payable semi-annually in cash or shares of our common stock; (iii) the convertible note is convertible into shares of our common stock at a conversion price of $1.50 per share subject to full-ratchet anti-dilution price protection provisions ; and (iv) we issued to the convertible note holder four classes of warrants (A Warrants, B Warrants, C Warrants and D Warrants), which give the convertible note holder the right to purchase a total of 5,500,000 shares of our common stock as described below. The A and B Warrants originally expired one year after the effective date of a registration statement filed under the Securities Act of 1933, as amended (the “Securities Act”), to register the subsequent sale of shares received from exercise of the A and B Warrants. The C Warrants and D Warrants originally expired eighteen months and twenty four months, respectively, after the effective date of a registration statement to be filed under the Securities Act. The A Warrants grant the convertible note holder the right to purchase up to 750,000 shares of common stock at an exercise price of $1.60 per share, the B Warrants grant the convertible note holder the right to purchase up to 750,000 shares of common stock at an exercise price of $1.75 per share, the C Warrants grant the convertible note holder the right to purchase up to 2,000,000 shares of common stock at an exercise price of $2.10 per share, and the D Warrants grant the convertible note holder the right to purchase up to 2,000,000 shares of common stock at an exercise price of $3.00 per share.

During the year ended December 31, 2007, the convertible note holder exercised 454,000 A Warrants. We entered into an exchange agreement dated October 31, 2007 in which the convertible note holder received 650,000 shares of our common stock in exchange for cancellation of the C and the D Warrants. The expiration date of the A Warrants and the B Warrants was extended from January 11, 2008 to December 3, 2008. During the year ended December 31, 2008, the convertible note holder exercised 64,400 A Warrants. On December 3, 2008, the remaining 231,600 A Warrants and 750,000 B Warrants were unexercised and expired.

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

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

F-16

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 $46,400 of December 31, 2012 related to the conversion feature of the note. A derivative valuation gain of $253,600 was recorded to reflect the change in value of the aggregate derivative liability since December 31, 2011. The aggregate derivative liability of $46,400 for the conversion feature of the note was calculated using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 0.16%, (ii) expected life (in years) of 1.0; (iii) expected volatility of 112.04%; (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.08.

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 $326,160 and $333,336 was included in interest expense for each the years ended December 31, 2013 and 2012, respectively.

The note bears an 8% annual interest rate payable semi-annually, and for each the years ended December 31, 2013 and 2012, $80,000, was included in interest expense.

Unsecured Interest Note

On April 17, 2013, we entered into a promissory note with the holder of our Unsecured Convertible Note in the amount of $20,000. The note was to satisfy unremitted interest due the holder on the Unsecured Convertible Note at that time. The note bears a 12 % per annum interest rate and was due on December 31, 2013. The principal and accrued interest due remain unsatisfied at the current date.

Senior Unsecured 6.25% Convertible Note

On December 24, 2007, we entered into a securities purchase agreement in which we raised $15,000,000 (less $937,000 of prepaid interest). We used the proceeds from this financing to support our CodecSys commercialization and development and for general working capital purposes. Pursuant to the financing, we issued a senior secured convertible note in the principal amount of $15,000,000 (which principal amount has been increased as discussed below).The senior secured convertible note was originally due December 21, 2010, but was extended to December 21, 2013 and has been subsequently retired. The senior secured convertible note bore interest at 6.25% per annum (which rate has been changed as discussed below) if paid in cash. Interest for the first year was prepaid at closing. Interest-only payments thereafter in the amount of $234,375 are due quarterly and commenced in April 2009. Interest payments may be made through issuance of common stock in certain circumstances or may be capitalized and added to the principal. The original principal of the note was convertible into 2,752,294 shares of our common stock at a conversion price of $5.45 per share, convertible any time during the term of the note. We granted a first priority security interest in all of our property and assets and of our subsidiaries to secure our obligations under the note and related transaction agreements. In August 2009 we received a waiver from the note holder releasing their security interest for the equipment purchased under our sale lease back financing.

In connection with the 2007 financing, the senior secured convertible note holder received warrants to acquire 1,875,000 shares of our common stock exercisable at $5.00 per share. We also issued to the convertible note holder 1,000,000 shares of our common stock valued at $3,750,000 and incurred an additional $1,377,000 for commissions, finder’s fees and other transaction expenses, including the grant of a three-year warrant to purchase 112,500 shares of our common stock to a third party at an exercise price of $3.75 per share, valued at $252,000. A total of $1,377,000 was included in debt offering costs and is being amortized over the term of the note.

F-17

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

On March 26, 2010, we entered into an amendment and extension agreement with the holder of the senior secured convertible note. The agreement conditionally amended the maturity date of the note to December 21, 2011. If we are unsuccessful in raising at least $6.0 million in equity financing before September 30, 2010, the maturity date of the note will automatically be restored to its original date of December 21, 2010. In consideration of entering into the agreement, the note holder was issued 1,000,000 shares of our restricted common stock valued at $990,000. In addition, we agreed to the inclusion of three additional terms and conditions in the note: (i) from and after the additional funding, we will be required to maintain a cash balance of at least $1,250,000 and provide monthly certifications of the cash balance to the note holder; (ii) we will not make principal payments on our outstanding $1.0 million unsecured convertible note without the written consent of the holder of the senior secured convertible note; and (iii) we will grant board observation rights to the note holder. Given these additional terms, unless the senior secured convertible note holder provides consent, of which there can be no assurance, we will be precluded from repaying the $1.0 million unsecured convertible note when it becomes due on December 22, 2010.

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

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

On October 29, 2010, we entered into a fourth amendment agreement with the holder of the senior secured convertible note regarding the note and warrant provisions. The fourth amendment (i) increased the amount of the required equity raise to $8.0 million, approximately $2.5 million of which had been raised or committed by investors at the time of the amendment; (ii) extended the time in which we can complete the equity financing to December 3, 2010; (iii) deleted the provision of the senior secured convertible note that granted the Company the option to redeem the note prior to its maturity date; (iv) changed the conversion price of the note upon successful completion of the required capital raise to an amount equal to 150% of the lowest price at which Company common stock is sold during calendar year 2010; (v) changed the exercised price of the warrants to an amount equal to 150% of the lowest price at which Company common stock is sold during calendar year 2010; (vi) provides that if we are successful in completing the required capital raise the number of warrants will be increased as currently provided in the 6.25% senior secured convertible promissory note; and (vii) extended the expiration date of the warrants to December 31, 2013.

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

F-18

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

The Amended and Restated Note, dated December 23, 2010, is a senior, unsecured note that matures in three years from the closing and 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 is convertible into shares of common stock at a conversion price of $1.35 per share, subject to adjustment. The Amended and Restated Note is convertible in whole or in part at any time upon notice by Castlerigg to us. The Amended and Restated Note also contains various restrictions, acceleration provisions and other standard and customary terms and conditions. Two of our consolidated subsidiaries guaranteed our obligations under the Amended and Restated Note.

The Investor Rights Agreement provides Castlerigg with certain registration rights with respect to the Company’s securities held by Castlerigg. These registration rights include an obligation of the Company to issue additional warrants to Castlerigg if certain registration deadlines or conditions were 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.

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 December 31, 2013 or 3012. However for the year ended December 31, 2012, (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.

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. During the year ended December 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. The current exercise price has been reset to $0.725 per share due to subsequent financings.

F-19

We recorded an aggregate derivative liability of $28 and $5,900 as of December 31, 2013 and 2012, respectively, related to the warrant reset provision of the warrants. A derivative valuation gain of $5,872 and $253,600, respectively, was recorded to reflect the change in value of the aggregate derivative liability since December 31, 2012 and December 31, 2011, respectively. The aggregate derivative liability of $28 for the warrant reset provision of the warrants was calculated using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 0.48%, (ii) expected life (in years) of 2.20; (iii) expected volatility of 119.11%; (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.005.

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. 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.

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) $93,661 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 December 31, 2013 and 2012 we recorded an aggregate derivative liability of $44 and $7,400, respectively related to the reset provision for the original and placement warrants issued. A derivative valuation gain of $7,356 and $136,300 was recorded to reflect the change in value of the aggregate derivative liability from December 31, 2012 and 2011, respectively. The aggregate derivative liability of $44 for the reset provision of the warrants was calculated using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 0.78%, (ii) expected life (in years) of 3.0; (iii) expected volatility of 103.27%; (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.005.

F-20

At December 31, 2013 and 2012 we recorded an aggregate derivative liability of $59 and $7,200, respectively related to the reset provision for the warrants issued for an extension of the maturity date. A derivative valuation gain of $7,141 and $89,325 was recorded to reflect the change in value of the aggregate derivative liability from December 31, 2012 and the time the warrants were issued, respectively. The aggregate derivative liability of $59 for the reset provision of the warrants was calculated using the Black-Scholes pricing model with the following assumptions: (i) risk free interest rate 0.78%, (ii) expected life (in years) of 3.0; (iii) expected volatility of 103.27%; (iv) expected dividend yield of 0.00%; and (v) stock trading price of $0.005.

The principal value of the note was being accreted over the amended term of the obligation, for which $106,723 was included in interest expense for the year ended December 31, 2012. The note bore an 18% annual interest rate, and for the year ended December 31, 2012, $100,899 was included in interest expense.

Equipment Purchase and Sale Agreement

In October 2011, we entered into an Equipment Purchase and Sale Agreement with a Utah corporation whereby we used 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. At December 31, 2011 we had an outstanding funded amount of $700,000.

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. 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.

The 3% fee mention above totaling $63,000 was recorded as interest expense for year ended December 31, 2012.

Note 7 – Investment in Interact Devices, Inc (IDI)

We began investing in and advancing monies to IDI in 2001. IDI was developing technology which became an initial part of the CodecSys technology.

On October 23, 2003, IDI filed for Chapter 11 Federal Bankruptcy protection. We desired that the underlying patent process proceed and that the development of CodecSys technology continue. Therefore, we participated in IDI’s plan of reorganization, whereby we would satisfy the debts of the creditors and obtained certain licensing rights. On May 18, 2004, the debtor-in-possession’s plan of reorganization for IDI was confirmed by the United States Bankruptcy Court. As a result of this confirmation, we issued to the creditors of IDI shares of our common stock and cash in exchange for approximately 50,127,218 shares of the common stock of IDI. Since May 18, 2004, we have acquired additional common share equivalents IDI. As of December 31, 2013, we owned 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 December 31, 2013 and 2012, we have advanced an aggregate amount of $3,393,149 and $3,347,255 respectively, pursuant to a promissory note that is secured by assets and technology of IDI.

Note 8 – Operating Leases

We currently lease our executive office and warehouse space located at 6952 South 185 West, Unit C, Salt Lake City, Utah 84047, which consists of approximately 2,500 square feet on a month to month basis, at the rate of $3,955 per month plus utilities. We have no other properties. We recognized rent expense of approximately $234,392 and $352,789, in 2013 and 2012, respectively.

F-21

We also lease copy machines on multi-year leases that expire in March 2014 at a minimum rate of $655 per month.

The total future minimum payments under non-cancelable operating leases at December 31, 2013 are $1,965 related to the copy machines mentioned above.

Note 9 – Income Taxes

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Net deferred tax liabilities consist of the following components as of December 31, 2012 and 2013:

	2012			2013

Deferred tax assets
NOL carry-forward	$	25,881,900		$	27,003,600
General business credit carry-forwards		1,158,900			1,118,400
Deferred compensation		78,500			22,700
Allowance for doubtful accounts		31,600			3,200
Deferred tax liabilities
Depreciation		61,700			(13,300	)

Valuation allowance		(27,212,600	)		(28,134,600	)
Net deferred tax asset	$	-		$	-

The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income from continuing operations for the years ended December 31, 2012 and 2013 due to the following:

	2012			2013

Federal income tax (expense) benefit at statutory rates	$	1,831,600		$	958,300
State income tax (expense) benefit at statutory rates		269,300			140,900
Change in valuation allowance		(2,100,900	)		(1,099,200	)
	$	-		$	-

At December 31, 2013, the Company had net operating loss carry-forwards of approximately $69,240,000 that may be offset against future taxable income from the year 2014 through 2033. No tax benefit has been reported in the December 31, 2012 and 2013 consolidated financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.

Due to change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry-forwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carry-forwards may be limited as to use in future years.

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Note 10 – Preferred and Common Stock

We have authorized two classes of stock, 20,000,000 shares of preferred stock with no par value and 180,000,000 shares of common stock with a $0.05 par value. No preferred stock has been issued, while 110,233,225 shares of common stock were issued and outstanding at December 31, 2013. Holders of shares of common stock are entitled to receive dividends if and when declared and are entitled to one vote for each share on all matters submitted to a vote of the shareholders.

During the year ended December 31, 2013, we issued 2,759,405 shares of our common stock as follows: (i) 2,240,852 for extinguishment of company liabilities, (ii) 258,553 for settlement of restricted stock options, (iii) 200,000 for common stock issued to a former director for prior years services rendered, (iv) 60,000 to six non-employees for services rendered.

During the year ended December 31, 2012, we issued 31,498,164 shares of our common stock as follows: (i) 24,816,000 related to our 2012 Equity Financing and Debt Restructuring, (ii) 5,600,000 for debt conversions and (iii) 1,082,164 for services rendered by consultants.

Note 11 – Stock-based Compensation

Stock Incentive Plans

Under the Broadcast International, Inc. 2004 Long-term Incentive Plan (the “2004 Plan”), the board of directors may issue incentive stock options to employees and directors and non-qualified stock options to consultants of the company. Options generally may not be exercised until twelve months after the date granted and expire ten years after being granted. Options granted vest in accordance with the vesting schedule determined by the board of directors, usually ratably over a three-year vesting schedule upon anniversary date of the grant. Should an employee terminate before the vesting period is completed, the unvested portion of each grant is forfeited. We have used the Black-Scholes valuation model to estimate fair value of our stock-based awards, which requires various judgmental assumptions including estimated stock price volatility, forfeiture rates, and expected life. Our computation of expected volatility is based on a combination of historical and market-based implied volatility. The number of unissued stock options authorized under the 2004 Plan at December 31, 2013 was 4,319,411.

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 363,200 at December 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.

F-23

There were no options issued during the year ending December 31, 2013. The fair values for the options granted in 2012 were estimated at the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions:

	Year Ended December 31,2012
Risk free interest rate	1.65%
Expected life (in years)	10.0
Expected volatility	78.97%
Expected dividend yield	0.00%

The weighted average fair value of options granted during the year ended December 31, 2012 was $0.27.

Warrants

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

The fair values for the warrants granted in 2013 and 2012 were estimated at the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions:

	Year Ended December 31,
	2013	2012
Risk free interest rate	0.65%	1.16%
Expected life (in years)	4.42	5.7
Expected volatility	90.68%	82.79%
Expected dividend yield	0.00%	0.00%

The weighted average fair value of warrants granted during the years ended December 31, 2013 and 2012, was $0.05 and $0.23, respectively.

Results of operations for the years ended December 31, 2013 and 2012 includes $25,388 and $283,693, 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 $25,388 non-cash stock-based compensation expense for the year ended December 31, 2013 was a result of the vesting of unexpired options and warrants issued prior to January 1, 2013.

For the year ended December 31, 2012 we recognized $283,692 of stock based compensation as follows: (i) $65,500 for 390,133 restricted stock units issued to 5 members of the board of directors, (ii) $833 for 50,000 options granted to 4 employees and (iii) $217,359 resulting from the vesting of unexpired options and warrants issued prior to January 1, 2012.

F-24

The following table summarizes option and warrant activity during the years ended December 31, 2013 and 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		24,817,900			0.33
Expired		(252,669	)		1.31
Forfeited		(1,658,919	)		1.31
Exercised		--			--

Outstanding at December 31, 2012		43,396,863		$	0.54
Options granted		--			--
Warrants issued		850,000			0.25
Expired		(643,094	)		0.55
Forfeited		(535,633	)		1.42
Exercised		--			--

Outstanding at December 31, 2013		43,068,136		$	0.47

The following table summarizes information about stock options and warrants outstanding at December 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
$	0.17-0.95		40,024,414		3.34	$	0.42		39,941,081	$	0.42
	1.00-1.59		2,709,222		2.69		1.04		2,694,555		1.04
	2.25-4.00		334,500		1.94		2.52		334,500		2.52
$	0.17-4.00		43,068,136		3.29	$	0.48		42,970,136	$	0.47

There were no options exercised for the years ended December 31, 2013 and 2012. There was no intrinsic value of options and warrants available and exercisable for the years ended December 31, 2013 or 2012.

Restricted Stock Units

For the years ended December 31, 2013 and 2012, 686,667 and 390,133 restricted stock units were awarded, respectively. The cost of restricted stock units is determined using the fair value of our common stock on the date of the grant and compensation expense is recognized in accordance with the vesting schedule. All of the restricted stock units vested during the year they were awarded.

F-25

The following is a summary of restricted stock unit activity for the years ended December 31, 2013 and 2012:

	Restricted Stock Units			Weighted Average Grant Date Fair Value

Outstanding at December 31, 2011		2,550,000			1.25
Awarded at fair value		390,133			0.17
Canceled/Forfeited		--			--
Settled by issuance of stock		--			--
Outstanding at December 31, 2012		2,940,133		$	1.11
Awarded at fair value		686,667			0.08
Canceled/Forfeited		(275,000	)		1.36
Settled by issuance of stock		(258,553	)		0.82
Outstanding at December 31, 2013		3,093,247		$	0.88
Vested at December 31, 2013		3,093,247		$	0.88

The 686,667 restricted stock units valued at $51,500 awarded in the year ended December 31, 2013, were issued to 5 members of the board of directors for services rendered prior to 2013 and had been included as director fee expenses in the year ended December 31, 2012.

The impact on our results of operations for recording stock-based compensation for the years ended December 31, 2013 and 2012 is as follows:

	For the years ended
	December 31,
	2013		2012

General and administrative	$	25,388	$	185,478
Research and development		--		98,214

Total	$	25,388	$	283,692

Total unrecognized stock-based compensation was $29,294 at December 31, 2013, which we expect to recognize during the year ended December 31, 2014, in accordance with vesting provisions.

Note 12 – 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 were a party to a lawsuit to determine if the “in-place fair market value” exceeded 10% of the original lease value and by what amount. We contended that the three payments made subsequent to the notice exercising our right to purchase constitute full payment for the equipment. The equipment broker contended that we owed an additional amount. Our accounting records reflected that the capital lease had been retired and the equipment was fully depreciated.

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During the year ended December 31, 2012 we included in our lease payments approximately $422,100 toward the in place fair market value. Additionally during the year ended December 31, 2012 and the five months ended May 31, 2013 we made payments of $140,700 and $284,400, respectively, into an escrow account held by the court pending resolution of our dispute.

During 2012 we had made lease payments totaling approximately $1,125,588 of which $1,067,649 was applied toward the outstanding lease and $57,939 was included in interest expense. Included in the $1,125,588 is approximately $422,100 paid toward the in place fair market value. Additionally during the year ended December 31, 2012 we made payments of $140,700 into an escrow account held by the court pending resolution of our dispute. For the year ending December 31, 2012, we expensed the final $33,512 of our lease acquisition fee of $150,792 which was being recognized over the life of the lease included in interest expense.

During the five months ended May 31, 2013 we made additional payments totaling $284,400 into the escrow account. On June 13, 2013 this matter was settled resulting in a $370,000 payment to the plaintiff, which had previously been deposited in escrow with the Court. The $55,100 balance remaining in the escrow account was paid towards accrued litigation fees. For the year ended December 31, 2013 we recorded the $370,000 expense as part of our cost of sales as it was related to the equipment used by one of our customers.

Note 13 – Fair Value Measurements

We adopted ASC Topic 820 as of January 1, 2008 for financial instruments measured at fair value on a recurring basis. ASC Topic 820 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:

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

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

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

We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at December 31, 2013:

					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)	$	11,736	$	--	$	--	$	11,736
Total liabilities measured at fair value	$	11,736	$	--	$	--	$	11,736

(1) See Notes 4 & 5 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 December 31, 2013. 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, 2012	$	(1,191,269	)
Total gains or losses (realized and unrealized)
Included in net income		1,242,459
Valuation adjustment		--
Purchases, issuances, and settlements, net		(62,926	)
Transfers to Level 3		--
Balance at December 31, 2013	$	(11,736	)

Money Market Funds and Treasury Securities

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

Fair Value of Other Financial Instruments

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

Note 14 – Retirement Plan

We had implemented a 401(k) employee retirement plan. Under the terms of the plan, participants may elect to contribute a portion of their compensation, generally up to 60%, to the plan, subject to IRS Code Section 415 limitations. We match contributions up to 100% of the first 3% of a participant’s compensation contributed to the plan and 50% of the next 2%. Employees are eligible to participate in the plan after three months of service as defined by the plan. For the years ended December 31, 2013 and 2012, we made matching contributions totaling $47,691 and $99,761, respectively. On October 31, 2013 plan participation was discontinued with all plan assets distributed to the participants by our plan fiduciary on or before January 31, 2014.

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Note 15 – Legal Proceedings

We are a defendant in a lawsuit filed in Los Angeles Superior court seeking payment for services rendered by the Plaintiff, Audio Visual Plus, Inc. The total amount in dispute is $29,235. We have paid the plaintiff approximately one half of the amount claimed and the action is not proceeding at the present time.

In May 2013, we were named as defendant in a lawsuit filed in the Small Claims Court in the Third Judicial District, State of Utah, seeking payment for services rendered by the plaintiff, Performance Audio. The total amount in dispute is approximately $9,663. We have paid approximately one half of the amount claimed and the action is not proceeding at the present time.

In September 2013, we were named as defendant in a lawsuit filed in the Third Judicial District court, Salt Lake County, State of Utah, seeking judgment for damages related to a breach of a termination agreement we entered into with our former landlord when we vacated our former offices. A default judgment was entered in the matter in the amount of $91,666.66 plus attorneys fees.

On November 4, 2013, we notified AllDigital that we terminated the Merger Agreement pursuant to Section 8.1(b), which permits termination of the Agreement by either party if the Merger is not consummated by October 31, 2013, provided that such failure is not attributable to the terminating party’s failure to perform its obligations under the Merger Agreement. Following delivery of our notice of termination, AllDigital responded by asserting that the Merger did not close because we failed to perform our obligations and that we were not entitled to terminate under Section 8.1(b). AllDigital further notified us that it was terminating the Merger Agreement for cause based on our alleged breach of the non-solicitation covenants in the Merger Agreement, which AllDigital asserts triggers a termination fee of $100,000 and 4% of our equity on a non-diluted basis, and for various other alleged misrepresentations and breaches. We disputes AllDigital’s allegations and assertions, deny that AllDigital is entitled to any termination fee and reserve the right to pursue damages from AllDigital arising from AllDigital’s actions in relation to the Merger Agreement. No litigation has been filed in this matter.

Note 16 – Liquidity

At December 31, 2013, we had cash of $215,371, total current assets of $300,709, total current liabilities of $7,197,395 and total stockholders' deficit of $6,655,301. Included in current liabilities is $5,245,000 related to the current portion of notes payable and other debt obligations.

Broadcast experienced negative cash flow used in operations during the year of $1,447,385 compared to negative cash flow used in operations for the year ended December 31, 2012 of $3,362,785. Although that represents a decrease in cash used for operations of $1,915,400, the cash used decreased only because we had lost approximately 90% of our business. During 2013 the decrease in negative cash flow was realized primarily through a reduction in the number of employees from 24 to 8, as well as additional expense reduction actions including reducing sales and general and administrative expenses incident to losing our largest customer and curtailing all sales and marketing and development expenditures for our CodecSys product.

Our audited consolidated financial statements for the year ended December 31, 2013 contain a “going concern” qualification. As discussed in Note 3 of the Notes to Consolidated Financial Statements, we have incurred losses and have not demonstrated the ability to generate sufficient cash flows from operations to satisfy our liabilities and sustain operations. Because of these conditions, our independent auditors have raised substantial doubt about our ability to continue as a going concern.

The negative cash flow was met by cash reserves from additional proceeds of the issuance of the 2012 Convertible Debt in the total amount of $1,175,000, which included $750,000 of accounts receivable financing that was converted to the 2012 Convertible Debt. Because we expect to continue to experience negative operating cash flow as long as we continue our current limited operations, we need to secure additional funding or complete the proposed merger with Wireless Ronin. We are actively only pursuing one potential digital signage customer to replace lost revenues.

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Note 17 – Supplemental Cash Flow Information

2013

During the year ended December 31, 2013 we issued 458,553 shares of our common stock to one former member of our board of directors for services rendered of which (i) 258,553 was for the settlement of previously awarded restricted stock units and (ii) 200,000 valued at $15,000 for unpaid services rendered in 2012, which had been expensed as director fees during the year ended December 31, 2012

For the year ended December 31, 2013 we issued an aggregate of 60,000 shares of our common stock valued at $4,200 to six individuals for services rendered.

For the nine months ended September 30, 2013 we awarded 686,667 restricted stock units issued valued at $51,500 to four members of our board of directors for services rendered in 2012. The value of these awards had been expensed as directors fee during the year ended December 31, 2012.

For the year ended December 31, 2013 we recorded a $68,214 loss on disposal of assets of which (i) $40,824 was for the abandonment of lease hold improvements related to our move from our 7050 Union Park location, (ii) $25,685 related to the retirement of furniture & fixtures, (iii) $1,705 (net of $139,014 of proceeds) related to equipment sold or no longer in use.

For the year ended December 31, 2013 we reduced our accounts payable by $841,750 and recorded a $481,590 gain on extinguishment of liabilities resulting from the issuance of 2,240,852 shares of our common stock valued at $153,860 and cash payments totaling $206,300 to 21 of our accounts payable vendors. As of December 31, 2013 we owe 6 of these vendors an additional aggregate amount of $55,317. Additionally we reduced our accounts payable by $335,701 by returning equipment to two vendors who accepted the returns for full credit against our payable.

For year ended December 31, 2013 an aggregate non-cash expense of $1,010,920 was recorded for the accretion of notes payable as follows: (i) $326,100 for our unsecured convertible note and (ii) $684,760 for our 2012 secured convertible notes.

During the year ended December 31, 2013, we recognized $211,721 in depreciation and amortization expense from the following: (i) $1,209 related to cost of sales for equipment used directly by or for customers, (ii) $200,606 related to equipment other property and equipment, and (iii) $9,906 for patent amortization.

2012

During the year ended December 31, 2012 we issued 586,164 shares our common stock, valued at $222,742 to a placement agency for services rendered related to our 2012 Equity Financing and Debt Restructuring agreement

During the year ended December 31, 2012, we issued 496,000 shares of our common stock valued at $177,313 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) 246,000 was for consulting services rendered.

During the year ended December 31, 2012, we recognized $1,024,754 in depreciation and amortization expense from the following: (i) $466,606 related to cost of sales for equipment used directly by or for customers, (ii) $547,997 related to equipment other property and equipment, and (iii) $10,151 for patent amortization.

F-30

For the year ended December 31, 2012, an aggregate non-cash expense of $941,225 was recorded for the accretion of our convertible notes of which (i) $501,166 was for the accretion of our 2012 Secured Convertible Note (ii) $333,336 was related to our unsecured convertible note and (iii) $106,723 was for our bridge loan.

We paid no cash for income taxes during the years ended December 31 2013 and 2012.

Note 18 – Subsequent Events

On March 6, 2014, we issued 729,100 shares of our common stock to one of our former managers in consideration of termination of his employment agreement and compensation.

On March 6, 2014, we issued 408,553 shares of our common stock to one of our former directors in settlement of restricted stock units he had been granted during his tenure as a member of our Board of Directors.

On March 6, 2014, we entered into a Merger Agreement and Plan of Reorganization with Wireless Ronin Technologies, Inc., a Minnesota corporation, (“Ronin”) pursuant to which we would become a wholly owned subsidiary of Ronin. The merger is subject to contingencies normal in this type of transaction, including, our shareholders’ consent, satisfaction or conversion of our indebtedness, and the effectiveness of a registration statement to be filed with the SEC.

F-31

Exhibit Index

(a) Exhibits

Exhibit Number	Description of Document

2.1	Agreement and Plan of Merger and Reorganization, dated as of January 6, 2012, by and among Broadcast International, Inc., AllDigital, Inc., and Alta Acquisition Corporation. (Incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the SEC on January 7, 2013.

2.2	First Amendment to Agreement and Plan of Merger, dated as of April 10, 2013, by and among Broadcast International, Inc., AllDigital Holdings, Inc. and Alta Acquisition Corporation. (Incorporated by reference to Exhibit 2.2 of the Company’s Current Report on Form 8-K filed with the SEC on April 10, 2013.

2.3	Second Amendment to Agreement and Plan of Merger, dated as of June 30, 2013, by and among Broadcast International, Inc., AllDigital Holdings, Inc. and Alta Acquisition Corporation. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on June 30, 2013.

2.4	First Amendment to Agreement and Plan of Merger, dated as of August 26, 2013, by and among Broadcast International, Inc., AllDigital Holdings, Inc. and Alta Acquisition Corporation. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on August 28, 2013.

2.5	Agreement and Plan of Merger and Reorganization, dated as of March 6, 2013, by and among Broadcast International, Inc., Wireless Ronin Technologies, Inc, and Broadcast Acquisition Co. (Incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the SEC on March 7, 2013.

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

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

4.1	Specimen Stock Certificate of Common Stock of Broadcast International. (Incorporated by reference to Exhibit No. 4.1 of the Company's Registration Statement on Form SB-2, filed under cover of Form S-3, pre-effective Amendment No. 3 filed with the SEC on October 11, 2005.)

10.1*	Employment Agreement of Rodney M. Tiede dated April 28, 2004. (Incorporated by reference to Exhibit No. 10.1 of the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004 filed with the SEC on May 12, 2004.)

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

10.3*	Broadcast International 2004 Long-Term Incentive Plan. (Incorporated by reference to Exhibit No. 10.4 of the Company's Annual Report on Form 10-KSB for the year ended December 31, 2003 filed with the SEC on March 30, 2004.)

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

10.5	Securities Purchase Agreement dated October 28, 2006 between Broadcast International and Leon Frenkel. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on November 6, 2006.)

10.6	5% Convertible Note dated October 16, 2006 issued by Broadcast International to Leon Frenkel. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on November 6, 2006.)

10.7	Registration Rights Agreement dated October 28, 2006 between Broadcast International and Leon Frenkel. (Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the SEC on November 6, 2006.)

10.8	Securities Purchase Agreement dated as of December 21, 2007, by and among Broadcast International and the investors listed on the Schedule of Buyers attached thereto. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on December 26, 2007.)

10.9	Registration Rights Agreement dated as of December 21, 2007, by and among Broadcast International and the buyers listed therein. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on December 26, 2007.)

10.10	6.25% Senior Secured Convertible Promissory Note dated December 21, 2007 issued to the holder listed therein. (Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the SEC on December 26, 2007.)

10.11	Warrant to Purchase Common Stock dated December 21, 2007 issued to the holder listed therein. (Incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the SEC on December 26, 2007.)

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

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

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

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

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

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

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

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.)

10.29	Form of Voting Agreement, dated January 6, 2013, by and among AllDigital, Inc. and certain stockholders of Broadcast International, Inc. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on January 7, 2013).

10.30	Form of Voting Agreement, dated January 6, 2013, by and among Broadcast International, Inc. and certain stockholders of AllDigital, Inc. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on January 7, 2013).

10.31	Professional Services Agreement, dated January 6, 2013, by and between AllDigital, Inc. and Broadcast International, Inc. (Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the SEC on January 7, 2013).

10.32*	Amendment and Settlement Agreement, dated January 6, 2013, by and between Broadcast International, Inc. and Rodney Tiede. (Incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the SEC on January 7, 2013).

10.33*	Amendment and Settlement Agreement, dated January 6, 2013, by and between Broadcast International, Inc. and James E. Solomon. (Incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K filed with the SEC on January 7, 2013).

10.34*	Amendment and Settlement Agreement, dated January 6, 2013, by and between Broadcast International, Inc. and Steve Jones. (Incorporated by reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K filed with the SEC on January 7, 2013).

10.35	Amendment to Note and Warrant Purchase and Security Agreement and Senior Secured Convertible Promissory Notes, effective as of July 13, 2013, by and among Broadcast International, Inc., Interact Devices, Inc., Amir L. Ecker and the Purchasers indicated on the signature pages thereto. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on August 8, 2013)

10.36	Consent to Convert Accounts Receivable Agreement dated August 8, 2013, by and between Broadcast International, Inc. and Don Harris. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on August 8, 2013)

10.37	Senior Secured Convertible Promissory Note, dated August 8, 2013. (Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the SEC on August 8, 2013)

10.38	Form of Convertible Promissory Note issued by AllDigital Holdings, Inc. and countersigned by Broadcast International, Inc. (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on August 28, 2013)

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.)

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.

Utah		87-0395567
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

£ Large accelerated filer	£ Accelerated filer
£ Non-accelerated filer (Do not check if a smaller reporting company)	R Smaller reporting company

PART I			3
	ITEM 1.	BUSINESS	4
	ITEM 1A.	RISK FACTORS	11
	ITEM 1B.	UNRESOLVED STAFF COMMENTS	17
	ITEM 2.	PROPERTIES	17
	ITEM 3.	LEGAL PROCEEDINGS	17
	ITEM 4.	MINE SAFETY DISCLOUSRES	17
PART II			18
	ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	18
	ITEM 6.	SELECTED FINANCIAL DATA	19
	ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	19
	ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	33
	ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	33
	ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	34
	ITEM 9A(T).	CONTROLS AND PROCEDURES	34
	ITEM 9B.	OTHER INFORMATION	35
PART III			35
	ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	35
	ITEM 11.	EXECUTIVE COMPENSATION	38
	ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	45
	ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	47
	ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	50
PART IV			50
	ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	50
SIGNATURES			55

	High Bid		Low Bid
2013
First Quarter	$	.15	$	.07
Second Quarter		.12		.04
Third Quarter		.09		.05
Fourth Quarter		.07		.01

2012
First Quarter	$	.67	$	.31
Second Quarter		.50		.18
Third Quarter		.25		.10
Fourth Quarter		.20		.05

(a)	(b)	(c)	(d)	(e)	(f)	(g)	(h)
Name and Principal Position	Year	Salary ($)	Bonus ($)	Option Awards ($)	Restricted Stock Unit Awards ($)	All Other Compensation ($)(1)	Total ($)

Rodney M. Tiede President & Chief Executive Officer*	2013 2012 2011	$141,539 225,690 250,690	-- -- --	-- -- --	-- -- $555,000	$5,231 4,841 7,333	$146,770 230,531 813,023

James E. Solomon Chief Financial Officer and Secretary	2013 2012 2011	$103,385 256,980 256,980	-- -- --	-- -- --	-- -- $333,000	$3,951 9,494 10,200	$107,336 266,474 600,180

R	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the fiscal year ended December 31, 2013.
£	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from __________ to __________.

	Payments Due
	Within One Year		One Year to Three Years		Three Years to Five Years		After Five Years		Total

Long-term debt obligations	$	--	$	--	$	--	$	--	$	--
Capital lease obligations		--		--		--		--		--
Operating lease obligations		1,965		--		--		--		1,965
Purchase obligations		--		--		--		--		--
Other obligations		5,245,000		--		--		--		5,245,000
Total contractual obligations	$	5,246,965	$	--	$	--	$	--	$	5,246,965

Report of Independent Registered Public Accounting Firm for the years ended December 31, 2013 and 2012	F-1

Consolidated Balance Sheets as of December 31, 2013 and December 31, 2012	F-2

Consolidated Statements of Operations for the years ended December 31, 2013 and 2012	F-3

Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2013 and 2012	F-4

Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012	F-5

Notes to Consolidated Financial Statements	F-6

Name	Age	Position
William Boyd	73	Chairman of the Board
Rodney M. Tiede	54	President and Director
James E. Solomon	64	Chief Financial Officer and Secretary
Donald Harris	62	Director
Steven Ledger	55	Director

	Option Awards				Stock Awards
Name	Number of Securities Underlying Unexercised Options (#) Exercisable	Number of Securities Underlying Unexercised Options (#) Unexercisable	Option Exercise Price ($)	Option Expiration Date	Number of Shares or Units of Stock that have not Vested (#)	Market Value of shares or Units of Stock that have not Vested ($)	Number of Unearned shares, units or other rights that have not vested (#)	Market or payout value of unearned shares, units or other rights that have not vested ($)
(a)	(b)	(c)	(d)	(e)	(f)	(g)	(h)	(i)
Rodney M. Tiede	50,000	--	2.25	04/28/2014	--	--	--	--
James E. Solomon	75,000 25,000	-- --	2.25 1.17	09/15/2015 12/27/2016	--	--	--	--

(a)	(b)	(c)	(d)	(e)
Name	Fees Earned or Paid in Cash ($) (1)	Options/Awards ($)	Restricted Stock Units ($) (2)	Total ($)
William Boyd		--	200,000	$15,000
Rodney M. Tiede (3)		--	--	--
R. Phil Zobrist		--	200,000	15,000
Steven Ledger			200,000	15,000
Donald A. Harris (4)		--	86,667	6,500

Beneficial Owner	Beneficial Ownership	Percent of Class

Gem Asset Management LC (1) 100 State Str. #2b Teaneck, New Jersey 07666	11,199,999	9.7%

Rodney M. Tiede (2) c/o Broadcast International, Inc. 7050 Union Park Avenue, Suite 600 Salt Lake City, UT 84047	3,518,541	3.1%

Leon Frenkel (3) 401 City Avenue, Suite 802 Bala Cynwyd, PA 19004	6,982,276	6.0%

Donald Harris (4)	1,955,921	1.7%
James E. Solomon (5)	662,500	*
William Boyd (6)	641,553	*
Steven Ledger (7)	374,553	*
All directors and executive officers as a group (5 persons) (8)	7,153,068	8.5%

	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding outstanding securities)
Equity compensation plans approved by security holders(1)	3,093,247	$.88	363,200
Equity compensation plans not approved by security holders (2)	1,393,200	$1.34	4,319,411
Total	4,486,447	$1.05	4,682,611

	2013		2012
Audit fees	$	67,000	$	86,500
Audit-related fees		--		--
Tax fees		4,400		6,800
All other fees		12,000		8,800
Total	$	83,400	$	102,100

	Broadcast International, Inc.

Date: March 31, 2014	/s/ Rodney M. Tiede

	By: Rodney M. Tiede
	Its: President