There's good reason for the somber mood at Pixelon, the well-financed Internet startup whose founder was exposed last month as a convicted con artist and fugitive. Over the past two weeks, the company has been forced into bankruptcy court and has fired its remaining 55 employees. Now an executive has confirmed it misrepresented the technology it uses to send broadcast-quality video over the Internet.

Russell Reeder, Pixelon's VP of product development, admits that on several occasions Pixelon misrepresented its technology's capabilities. Specifically, Reeder says, the company faked a key demonstration during last August's Iowa Straw Poll while raising $28 million from investors. A press release preceding the event had promised that highlights of the poll would be broadcast over the Internet "using newly developed 'streaming' technology by the Pixelon Corp."

In fact, Reeder confirms, Pixelon's broadcast relied on software made by Microsoft (MSFT). The startup's own platform - consisting of an encoder for digitizing the event and playback software called the Pixelon Player - was not capable of live broadcast.

"The [Pixelon] Player was an adaptation of Windows Media Player because [the live video] was streamed using Windows Media as a streaming format," Reeder told The Standard recently. In other words, because the video was made in the Microsoft format, it had to be played back using Microsoft software. He stressed, however, that Pixelon has since spent $1.5 million revamping its technology and has added a number of proprietary steps to produce more compact, higher-quality video files.

Pixelon's latest trouble comes a month after fugitive David Kim Stanley - who passed himself off as Michael Adam Fenne to found Pixelon - surrendered to Virginia authorities closing in on him in Southern California. He was wanted in Virginia and Tennessee for failing to repay victims he had swindled out of more than $1.25 million.

Founded in 1998, Pixelon's problems began shortly after it threw a lavish launch party in October 1999 that cost more than $16 million, according to documents released to investors. Advanced Equities - the Chicago investment bank that arranged Pixelon's funding and others' - balked at the price; two weeks later, Stanley was ousted as Pixelon's chairman.

Reeder's admission about the Pixelon technology is in contrast to claims the company made on its Web site around the time of the Iowa Straw Poll. One white paper, which Reeder said was written by Stanley, claimed the technology used "seven proprietary sampling procedures that were developed primarily from inductive research." Stanley even told employees each Pixelon encoder was protected from reverse engineering by an "acid pill" that would explode if the casing from the hardware was removed, according to three former employees.

They further elaborated on Reeder's admission, saying the company's method for encoding video around August relied solely on technology built by Sunnyvale, Calif.-based FutureTel. "Every piece of video that was encoded [at Pixelon] was encoded with an ... encoder from FutureTel," says Gary Devore, a Pixelon employee from May through August 1999, who trained coworkers in encoding video. During the Iowa Straw Poll, Devore adds, Pixelon took great pains to conceal that it used Microsoft's technology. "David Stanley personally altered the appearance of the video frame [and] covered anything that had Microsoft branding," notes Devore, now executive producer of a television show called Angling Adventures. Devore's account was confirmed by Phillip Bruce, who worked at Pixelon in summer 1999, and by a third former employee who spoke on condition of anonymity.

Pixelon's next hurdle is to file a response due this week to demands by creditors that its assets be sold to pay off debts. Michael Kinney, the attorney representing companies owed money by Pixelon, expects the troubled startup to dissolve.

"My understanding is the company is not bringing in any revenue," Kinney says. "There doesn't appear to be any reason for them to fight what appears to be inevitable."