**U.
      S. SECURITIES AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549


_________________________________





**FORM
      10 - Q**


(Mark
      One)


**xQUARTERLY
      REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF**


**THE
      SECURITIES EXCHANGE ACT OF 1934**





**For
      the Quarterly Period Ended June 30, 2007**





**OR**





**oTRANSITION
      REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF**


**THE
      SECURITIES EXCHANGE ACT OF 1934**





**Commission
      File Number 0-21743**





**NEOMEDIA
      TECHNOLOGIES, INC.**


(Exact
      Name of Issuer as Specified In Its Charter)




**Delaware**
            
            **36-3680347**(State
                or Other Jurisdiction of
            
            (I.R.S.
                EmployerIncorporation
                or Organization)
            
            Identification
                No.)




**2201
                    Second Street, Suite 600, Fort
                    Myers, Florida**
                
                **33901**(Address
                    of Principal Executive
                    Offices)
                
                (Zip
                    Code)




**239-337-3434**


Issuer's
      Telephone Number (Including Area Code)








Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes **x** No
      **o**





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):


Large
      Accelerated Filer **o** Accelerated
      Filer **x** Non-accelerated
      Filer **o**








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




As
      of
      August 7, 2007, there were 900,699,016 shares of common stock and 21,377 shares
      of Series C Convertible Preferred Stock outstanding .










**TABLE
      OF CONTENTS**


PART
                  I -- FINANCIAL INFORMATION
              1ITEM
                  1. FINANCIAL STATEMENTS
              1CONDENSED
                  CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2007 (UNAUDITED) AND
                  DECEMBER
                  31, 2006
              1CONDENSED
                  CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
                  (LOSS) FOR
                  THE THREE MONTHS ENDED JUNE 30, 2007 AND 2006 (UNAUDITED)
              2CONDENSED
                  CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
                  (LOSS) FOR
                  THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (UNAUDITED)
              3CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
                  JUNE 30,
                  2007 AND 2006 (UNAUDITED)
              4UNAUDITED
                  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              5ITEM
                  2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS
                  OF OPERATIONS
              41ITEM
                  3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK.
              68ITEM
                  4. CONTROLS AND PROCEDURES
              68PART
                  II -- OTHER INFORMATION
              70ITEM
                  1. LEGAL PROCEEDINGS
              70ITEM
                  1A. RISK FACTORS
              71ITEM
                  2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
                  PROCEEDS
              71ITEM
                  3. DEFAULT UPON SENIOR SECURITIES
              71ITEM
                  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
              71ITEM
                  5. OTHER INFORMATION
              71ITEM6.
                  EXHIBITS AND REPORTS ON FORM 8-K
              72SIGNATURES
              73









**PART
      I -- FINANCIAL INFORMATION**




**ITEM
      1. FINANCIAL STATEMENTS**





**NeoMedia
      Technologies, Inc. and Subsidiaries**


**Condensed
      Consolidated Balance Sheet** **s**


**(In
      Thousands, Except Share and Per Share Data)**





**June
                30,**
            
            **December
                31,****2007**
            
            **2006
                *****ASSETS**
            
            (unaudited)Current
                assets:Cash
                and cash equivalents
            
            $
            151
            
            $
            2,813Trade
                accounts receivable, net of allowance for doubtful accounts of $2
                and $68,
                respectively
            
            
            265
            
            
            187Other
                receivables
            
            
            732
            
            
            550Inventories,
                net of allowance for obsolete & slow-moving inventory of $59 and $53
                respectively
            
            
            280
            
            
            80Investment
                in marketable securities
            
            
            14
            
            
            57Prepaid
                expenses and other current assets
            
            
            186
            
            
            102Assets
                held for sale
            
            
            10,820
            
            
            19,420Total
                current assets
            
            
            12,448
            
            
            23,209Leasehold
                improvements & property and equipment, net
            
            
            150
            
            
            191Goodwill
            
            
            3,418
            
            
            3,418Capitalized
                patents, net
            
            
            2,689
            
            
            2,839Proprietary
                software, net
            
            
            3,770
            
            
            4,138Other
                Intangible assets, net
            
            
            44
            
            
            42Cash
                surrender value of life insurance policy
            
            
            925
            
            
            863Other
                long-term assets
            
            
            3,705
            
            
            3,425Total
                assets
            
            $
            27,149
            
            $
            38,125**LIABILITIES
                AND SHAREHOLDERS’ DEFICIT**Current
                liabilities:Accounts
                payable
            
            $
            2,976
            
            $
            2,442Liabilities
                held for sale
            
            
            3,446
            
            
            10,257Taxes
                payable
            
            
            5
            
            
            5Accrued
                expenses
            
            
            3,404
            
            
            4,016Deferred
                revenues and other
            
            
            347
            
            
            575Notes
                payable
            
            
            15
            
            
            15Accrued
                purchase price guarantee
            
            
            4,684
            
            
            19,667Derivative
                financial instruments
            
            
            24,112
            
            
            25,417Deferred
                tax liability
            
            
            587
            
            
            706Debentures
                payable
            
            
            18,801
            
            
            7,500Preferred
                stock, $0.01 par value, 25,000,000 shares authorized, 22,000
                issued,21,377
                shares outstanding, liquidation value of $21,377.
            
            
            21,377
            
            
            21,657Total
                liabilities
            
            
            79,754
            
            
            92,257Commitments
                and contingencies (Note 12)Shareholders’
                deficit:Common
                stock, $0.01 par value, 5,000,000,000 shares authorized, 901,823,027
                and639,233,173
                shares issued and 900,181,681 and 637,591,747 outstanding,
                respectively
            
            
            9,002
            
            
            6,376Additional
                paid-in capital
            
            
            114,846
            
            
            101,911Accumulated
                deficit
            
            
            (175,026
            )
            
            (160,930
            )Accumulated
                other comprehensive loss
            
            
            (648
            )
            
            (710
            )Treasury
                stock, at cost, 201,230 shares of common stock
            
            
            (779
            )
            
            (779
            )Total
                shareholders’ equity
            
            
            (52,605
            )
            
            (54,132
            )Total
                liabilities and shareholders’ deficit
            
            $
            27,149
            
            $
            38,125





The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.





*
      Amounts
      have been reclassified from the audited December 31, 2006 consolidated balance
      sheet to reflect assets and liabilities held for sale in relation to the
      Company’s discontinued operations. (see note 1)




1





**NeoMedia
      Technologies, Inc. and Subsidiaries**


**Condensed
      Consolidated Statements of Operations** ****


**and
      Comprehensive Income (Loss) (Unaudited)**


**(In
      Thousands, Except Share and per Share Data)**





**Three
                Months Ended June 30,****2007**
            
            **2006**Net
                sales
            
            $
            624
            
            $
            489Cost
                of sales
            
            
            374
            
            
            407Gross
                profit
            
            
            250
            
            
            82Sales
                and marketing expenses
            
            
            543
            
            
            1,512General
                and administrative expenses
            
            
            1,324
            
            
            1,971Research
                and development costs
            
            
            419
            
            
            497Income
                (loss) from operations
            
            
            (2,036
            )
            
            (3,898
            )Gain
                (loss) on extinguishment of debt
            
            
            253
            
            
            106Interest
                income (expense), net
            
            
            (957
            )
            
            (48
            )Gain
                (loss) on derivative financial instruments
            
            
            1,122
            
            
            11,026**INCOME
                (LOSS) FROM CONTINUING OPERATIONS**
            
            
            **(1,618**
            **)**
            
            **7,186****DISCONTINUED
                OPERATIONS (Note 4)**Income (loss)
                from operations of discontinuing operations
            
            
            (722
            )
            
            (2,053
            )Income (loss)
                from disposal of 12 Snap
            
            
            (257
            )
            
            ---**INCOME (LOSS)
                FROM DISCONTINUED OPERATIONS**
            
            
            (979
            )
            
            (2,053
            )**NET
                INCOME (LOSS)**
            
            
            (2,597
            )
            
            5,133Accretion
                of dividends on convertible preferred stock
            
            
            (428
            )
            
            (479
            )**NET
                INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS**
            
            
            **(3,025**
            **)**
            
            **4,654**Comprehensive
                Loss:Net
                income (loss)
            
            
            (2,597
            )
            
            5,133Other
                comprehensive income (loss):Unrealized
                gain/(loss) on marketable securities
            
            
            (17
            )
            
            114Foreign
                currency translation adjustment
            
            
            96
            
            
            (320
            )**COMPREHENSIVE
                INCOME (LOSS)**
            
            **$**
            **(2,518**
            **)**
            **$**
            **4,927****Income
                (loss) per share from continuing operations--basic and
                diluted**
            
            **$**
            **(0.00**
            **)**
            **$**
            **0.01****Income
                (loss) per share from discontinued operations--basic and
                diluted**
            
            **$**
            **(0.00**
            **)**
            **$**
            **(0.00**
            **)****Net
                income (loss) per share--basic and diluted**
            
            **$**
            **(0.00**
            **)**
            **$**
            **0.01****Weighted
                average number of common shares--basic**
            
            
            **892,526,955**
            
            
            **632,402,254****Weighted
                average number of common shares---diluted**
            
            
            **892,526,955**
            
            
            **799,536,925**




The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.




2





**NeoMedia
      Technologies, Inc. and Subsidiaries**


**Condensed
      Consolidated Statements of Operations**


**and
      Comprehensive Income (Loss) (Unaudited)**


**(In
      Thousands, Except Share and per Share Data)**





**Six
                Months Ended June 30,****2007**
            
            **2006**Net
                sales
            
            $
            1,023
            
            $
            687Cost
                of sales
            
            
            687
            
            
            537Gross
                profit
            
            
            336
            
            
            150Sales
                and marketing expenses
            
            
            1,402
            
            
            2,706General
                and administrative expenses
            
            
            3,764
            
            
            3,329Research
                and development costs
            
            
            925
            
            
            982Income
                (loss) from operations
            
            
            (5,755
            )
            
            (6,867
            )Gain
                (loss) on extinguishment of debt
            
            
            253
            
            
            (1,858
            )Interest
                income (expense), net
            
            
            (2,655
            )
            
            (31
            )Gain
                (loss) on derivative financial instruments
            
            
            (2,386
            )
            
            15,794**INCOME
                (LOSS) FROM CONTINUING OPERATIONS**
            
            
            **(10,543**
            **)**
            
            **7,038****DISCONTINUED
                OPERATIONS (Note 4)**Income
                (loss) from operations of discontinued operations
            
            
            (3,296
            )
            
            (3,223
            )Income
                (loss) from disposal of 12 Snap
            
            
            (257
            )
            
            ---**INCOME
                (LOSS) FROM DISCONTINUED OPERATIONS**
            
            
            (3,553
            )
            
            (3,223
            )**NET
                INCOME (LOSS)**
            
            
            **(14,096**
            **)**
            
            **3,815**Accretion
                of dividends on convertible preferred stock
            
            
            (861
            )
            
            (616
            )**NET
                INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS**
            
            
            **(14,957**
            **)**
            
            **3,199**Comprehensive
                Income (Loss):Net
                income (loss)
            
            
            (14,096
            )
            
            3,815Other
                comprehensive income (loss):Unrealized
                gain (loss) on marketable securities
            
            
            (43
            )
            
            263Foreign
                currency translation adjustment
            
            
            105
            
            
            (542
            )**COMPREHENSIVE
                INCOME (LOSS)**
            
            
            **($14,034**
            **)**
            **$**
            **3,536****Income
                (loss) per share from continuing operations--basic and
                diluted**
            
            **$**
            **(0.01**
            **)**
            **$**
            **0.01****Income
                (loss) per share from discontinued operations--basic and
                diluted**
            
            **$**
            **(0.00**
            **)**
            **$**
            **(0.00**
            **)****Net
                income (loss) per share--basic and diluted**
            
            **$**
            **(0.01**
            **)**
            **$**
            **0.01****Weighted
                average number of common shares--basic**
            
            
            **789,247,203**
            
            
            **580,485,463****Weighted
                average number of common shares--diluted**
            
            
            **789,247,203**
            
            
            **757,912,587**




The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.




3


**NeoMedia
      Technologies, Inc. and Subsidiaries**


**Condensed
      Consolidated Statements of Cash Flows (Unaudited)**


**(In
      Thousands)**




**Six
                Months****Ended
                June 30,****2007**
            
            **2006**CASH
                FLOWS FROM OPERATING ACTIVITIES:Gain
                (loss) from continuing operations
            
            
            ($10,543
            )
            $
            7,038Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            572
            
            
            487(Gain)
                loss on early extinguishment of debt
            
            
            (253
            )
            
            1,858Change
                in fair value from revaluation of warrants and embedded conversion
                features
            
            
            2,386
            
            
            (15,794
            )Stock-based
                compensation expense
            
            
            1,661
            
            
            1,770Interest
                expense related to convertible debt
            
            
            1,245
            
            
            —Increase
                in value of life insurance policies
            
            
            (62
            )
            
            (9
            )Changes
                in operating assets and liabilitiesTrade
                and other accounts receivable
            
            
            (110
            )
            
            (655
            )Inventories
            
            
            (200
            )
            
            3Prepaid
                expenses and other current assets
            
            
            (84
            )
            
            (511
            )Accounts
                payable and accrued liabilities
            
            
            471
            
            
            (381
            )Deferred
                revenue and other current liabilities
            
            
            (347
            )
            
            1,655Net
                cash used in operating activities
            
            
            (5,264
            )
            
            (4,539
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Cash
                received from sale of (paid to acquire) CSI International, Inc.,
                Mobot,
                Inc., Sponge Ltd., Gavitec AG, and 12SnapAG,
                net of cash acquired
            
            
            1,100
            
            
            (13,867
            )Acquisition
                of property and equipment
            
            
            (15
            )
            
            (272
            )Acquisition
                of patents and other intangible assets
            
            
            —
            
            
            (11
            )Advances
                to discontinued subsidiaries Micro Paint, 12Snap, Telecom Services,
                Mobot,
                and Sponge
            
            
            (2,219
            )
            
            (2,792
            )Acquisition
                related costs
            
            
            —
            
            
            (164
            )Payment
                of purchase price guarantee obligations
            
            
            (2,484
            )
            
            —Amounts
                received (issued) under notes receivable
            
            
            450
            
            
            (500
            )Net
                cash used in investing activities
            
            
            (3,168
            )
            
            (17,606
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Borrowing
                under convertible debt instrument, net of fees of $781 in
                2007
            
            
            6,678
            
            
            —Repayments
                on notes payable and convertible debt instrument
            
            
            (1,015
            )
            
            (387
            )Net
                proceeds from issuance of common stock, net of issuance costs of
                $24 in
                2006
            
            
            —
            
            
            210Net
                proceeds from issuance of Series C convertible preferred stock, net
                of
                issuance costs of $2,725 in 2006
            
            
            —
            
            
            14,066Net
                proceeds from exercise of stock options and warrants
            
            
            17
            
            
            8,316Net
                cash provided by financing activities
            
            
            5,680
            
            
            22,205EFFECT
                OF EXCHANGE RATE CHANGES ON CASH FOR CONTINUING OPERATIONS
            
            
            90
            
            
            (1,094
            )**NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM CONTINUING
                OPERATIONS**
            
            
            (2,662
            )
            
            (1,034
            )CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            2,813
            
            
            1,704**CASH
                AND CASH EQUIVALENTS, END OF PERIOD**
            
            **$**
            **151**
            
            **$**
            **670**SUPPLEMENTAL
                CASH FLOW INFORMATION:Interest
                paid during the period
            
            $
            401
            
            $
            48Supplemental
                disclosure of investing and financing activities:Unrealized
                gain (loss) on marketable securities
            
            
            (43
            )
            
            263Fair
                value of 258,620,948 shares issued to satisfy purchase price guarantee
                obligations
            
            
            12,721
            
            
            —Prepaid
                acquisition costs applied to purchase price
            
            
            —
            
            
            168Fair
                value of shares and notes receivable from Pickups Plus, Inc. acquired
                in
                exchange for Series C Convertible
              Preferred
                Stock
            
            
            —
            
            
            594Carrying
                value of promissory note and accrued interest paid in exchange for
                Series
                C Convertible Preferred Stock
            
            
            —
            
            
            (3,208
            )Fair
                value of shares issued to acquire CSI International, Inc., Mobot,
                Inc.,
                Sponge Ltd., Gavitec AG, 12Snap AG, andBSD
                Software, Inc.
            
            
            —
            
            
            46,964Change
                in net assets resulting from acquisitions of CSI International, Inc.,
                Mobot, Inc., Sponge Ltd., Gavitec AG,12Snap
                AG, and BSD Software, Inc.
            
            
            —
            
            
            62,656Accretion
                of dividends on Series C Convertible Preferred Stock
            
            
            433
            
            
            616Fair
                value of outstanding warrants reclassified to liabilities
            
            
            —
            
            
            13,884Portion
                of change in fair value of outstanding warrants converted to liabilities
                recorded to paid-in capital
            
            
            —
            
            
            3,790Initial
                fair value of Series C Convertible Preferred Stock (host instrument
                only)
            
            
            —
            
            
            4,908Deferred
                stock-based financing costs associated with Series C Convertible
                Preferred
                Stock
            
            
            —
            
            
            3,198Difference
                between net proceeds and recorded fair value of Series C Convertible
                Preferred Stock
            
            
            —
            
            
            4,041Advance
                receivable from Mobot, Inc. forgiven upon acquisition
            
            
            —
            
            
            1,500





The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.


4




**NEOMEDIA
      TECHNOLOGIES, INC. AND SUBSIDIARIES**


**UNAUDITED
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**








**1.**  **BASIS
      OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS**





**Basis
      of Presentation**





The
      condensed consolidated financial statements include the financial statements
      of
      NeoMedia Technologies, Inc. and its wholly-owned subsidiaries (“NeoMedia” or the
“Company”). The condensed balance sheet as of December 31, 2006, which has been
      derived from audited financial statements, and the unaudited condensed
      consolidated financial statements have been prepared in accordance with the
      instructions to Form 10-Q and do not include all of the information and
      footnotes required by accounting principles generally accepted in the United
      States of America for complete condensed consolidated financial statements.
      These condensed consolidated financial statements and related notes should
      be
      read in conjunction with the Company’s Form 10-K for the fiscal year ended
      December 31, 2006. In the opinion of management, these condensed consolidated
      financial statements reflect all adjustments which are of a normal recurring
      nature and which are necessary to present fairly the condensed consolidated
      financial position of NeoMedia as of June 30, 2007, the results of operations
      for the three and six month periods ended June 30, 2007 and 2006, and cash
      flows
      for the six month periods ended June 30, 2007 and 2006. The results of
      operations for the three and six month periods ended June 30, 2007 are not
      necessarily indicative of the results which may be expected for the entire
      fiscal year. All significant intercompany accounts and transactions have been
      eliminated in preparation of the condensed consolidated financial
      statements.





**Going
      Concern**





The
      accompanying condensed consolidated financial statements have been prepared
      in
      conformity with accounting principles generally accepted in the United States
      of
      America, which contemplate continuation of the Company as a going concern.
      Net
      loss for the three and six month periods ended June
      30 ,
      2007
      was $2,597,000, and $14,096,000, respectively. Net cash used in operations
      for
      the six months ended June 30, 2007 was $5,264,000, and net cash used for
      discontinued operations (including operating, investing, and financing
      activities, as well as effect of exchange rates on cash for discontinued
      subsidiaries) was $2,219,000. NeoMedia also has an accumulated deficit of
      $175,026,000, and a working capital deficit of $67,306,000 as of June
      30, 2007 ,
      of
      which $24,112,000 relates to the fair value of derivative financial
      instruments .





The
      items
      discussed above raise substantial doubts about the Company's ability to continue
      as a going concern. If the Company's financial resources are insufficient,
      the
      Company may require additional financing in order to execute its operating
      plan
      and continue as a going concern. The Company cannot predict whether this
      additional financing will be in the form of equity, debt, or another form.
      The
      Company may not be able to obtain the necessary additional capital on a timely
      basis, on acceptable terms, or at all. In any of these events, the Company
      may
      be unable to implement its current plans for expansion, repay its debt
      obligations as they become due or respond to competitive pressures, any of
      which
      circumstances would have a material adverse effect on its business, prospects,
      financial condition and results of operations. The financial statements do
      not
      include any adjustments relating to the recoverability and reclassification
      of
      recorded asset amounts or amounts and reclassification of liabilities that
      might
      be necessary, should the Company be unable to continue as a going
      concern.





Should
      financing sources fail to materialize, management would seek alternate funding
      sources such as the sale of common and/or preferred stock, the issuance of
      debt,
      or the sale of its marketable assets. Management's plan is to secure adequate
      funding to bridge the commercialization of its core code-reading
      business.




NeoMedia
      plans to attempt to address its working capital deficiency by completing the
      proposed sales of the Micro Paint Repair and NeoMedia Telecom business units,
      and continuing to reduce its workforce and overhead expenses in non-critical
      areas. In addition, NeoMedia will attempt to generate additional revenue and
      profit from the launch of its core code-reading products and the value
      optimization of its patent portfolio.




5




In
      the
      event that these financing sources do not materialize, or that NeoMedia is
      unsuccessful in increasing its revenues and profits, NeoMedia will be forced
      to
      further reduce its costs, may be unable to repay its debt obligations as they
      become due, or respond to competitive pressures, any of which circumstances
      would have a material adverse effect on its business, prospects, financial
      condition and results of operations. Additionally, if these funding sources
      or
      increased revenues and profits do not materialize, and NeoMedia is unable to
      secure additional financing, NeoMedia could be forced to reduce or curtail
      its
      business operations unless it is able to engage in a merger or other corporate
      finance transaction with a better capitalized entity.








**Nature
      of Business Operations**





NeoMedia
      is a pioneer in mobile enterprise and marketing technology, bridging the
      physical and electronic world with innovative direct-to-mobile-Web technology
      solutions. NeoMedia's flagship qode® service links users to the wireless,
      electronic world. NeoMedia is headquartered in Fort Myers, Florida, with an
      office in Aachen, Germany. The qode® suite of easy-to-use, market-driven
      products and applications is based on a strong foundation of patented
      technology, comprising the qode® ( www.qode.com )
      platform, qode® reader and qode® window, all of which provide One Click to
      ContentTM connectivity for products, print, packaging and other physical objects
      to link directly to specific desired content on the mobile
      Internet.





Prior
      to
      2006, NeoMedia was structured and evaluated by its Board of Directors and
      management as three distinct business units: NeoMedia Internet Switching
      Software (NISS), NeoMedia Micro Paint Repair (NMPR), and NeoMedia Consulting
      and
      Integration Services (NCIS).




During
      the first quarter of 2006, NeoMedia acquired 12Snap AG (“12Snap”) of Munich,
      Sponge Ltd. (“Sponge”) of London, Gavitec AG of Aachen, Germany (“Gavitec”),
      Mobot, Inc. (“Mobot”) of Lexington, Massachusetts, and BSD Software, Inc. of
      Calgary, Canada (“BSD”), and wound down its NCIS business unit. As a result,
      during the year ended December 31, 2006, NeoMedia operated under the following
      three business units:





·
            NeoMedia
                Mobile (NMM) - encompassing NeoMedia's physical-world-to-internet
                and
                mobile marketing technologies and
                products;





·
            NeoMedia
                Telecom Services (NTS) - encompassing the billing, clearinghouse
                and
                information management services of Triton Global Business Services,
                the
                operating subsidiary of BSD, acquired in March 2006;
                and





·
            NeoMedia
                Micro Paint Repair (NMPR) - encompassing the micro paint and auto
                aftermarket accessories manufactured and distributed by
                NeoMedia.





During
      August 2006, NeoMedia announced that it intended to sell its MicroPaint Repair
      business. During the fourth quarter of 2006, NeoMedia divested of its Mobot
      and
      Sponge subsidiaries. During January 2007, NeoMedia made the strategic decision
      with respect to its corporate structure in 2007 and beyond, deciding to shed
      its
      remaining non-core 12Snap and NTS business units to focus on the area that
      management believes will deliver the most value - the core code-reading
      business. During April 2007, NeoMedia sold the 12Snap business.





As
      a
      result of the divestitures of 12Snap, Mobot and Sponge, and the proposed
      divestitures of MicroPaint Repair and NeoMedia Telecom Services, beginning
      in
      the first quarter of 2007 NeoMedia evaluated its business as one consolidated
      business, focusing on its core code-reading business and related intellectual
      property.




6




For
      purposes of these financial statements, NeoMedia Micro Paint Repair, NeoMedia
      Telecom Services, 12Snap, Sponge, and Mobot are considered discontinued
      operations as of June 30, 2007 and for the three and six month periods ended
      June 30, 2007 and 2006. NeoMedia Micro Paint Repair, NeoMedia Telecom Services,
      12Snap, Sponge, and Mobot qualified as separate operating business units because
      they (i) engaged in business activities that earned revenues and incurred
      expenses, (ii) had operating results that were regularly reviewed by decision
      makers for the purposes of allocating resources to the segment, and (iii) had
      separate discreet financial information.





**Reclassifications
      and Other**





Certain
      amounts in the 2006 condensed consolidated financial statements have been
      reclassified to conform to the 2007 presentation, most notably, net sales were
      formerly reported as separate line items “ Technology
      license, service and products ,”
and
      “Micro Paint Repair Products and Services.” As a result of the winding down of
      the former NCIS business unit and the proposed sale of the MicroPaint Repair
      business unit, revenue from continuing operations now consists of license
      revenue and is being reported under the caption “Net sales.”





In
      addition, due to the Company’s decision to sell the Telecom Services and Micro
      Paint Repair business units, and the completed divestitures of 12Snap, Mobot
      and
      Sponge, results of operations from each of these units have been reclassified
      under the caption “Discontinued Operations” for all periods shown on the
      accompanying condensed consolidated statement of operations, and assets and
      liabilities relating to these units are combined into the captions “Assets held
      for sale” and “Liabilities held for sale,” respectively, on the accompanying
      condensed consolidated balance sheet. Additionally, the statements of cash
      flows
      for the six months ended June 30, 2006 have been reclassified to exclude the
      cash flows of the discontinued business units.




While
          preparing the Company’s quarterly report on form 10-Q for the second quarter of
          2007, the Company became aware of amounts that were incorrectly reported in
          it’s 2006 forms 10-Q and 10-K for the third quarter of 2006 and year end 2006,
          respectively. This issue has been reviewed by the Company pursuant to the
          SEC
          Staff Accounting Bulleting No. 99 and the FASB Statement
          of Financial Accounting Standards No. 154 ,
          and
          determined to be not material to the 2006 financial reports. The Company
          further
          determined that the correction of the prior year misstatement in the current
          year financial reports would be material to the current year financial
          statements. Pursuant to the SEC Staff Accounting Bulleting No. 108 (“SAB 108”),
          the Company has corrected its December 31, 2006 consolidated audited balance
          sheet presented in this second quarter 2007 10-Q filing to reflect the
          corrected
          amounts. Pursuant to SAB 108, correcting prior year financial statements
          for
          immaterial errors would not require previously filed reports to be amended.
          The
          year end December 31, 2006 amounts adjusted are a reduction of Derivative
          Liabilities of $402,000, an increase to Additional Paid-In Capital of
          $1,370,000, and an increase to Accumulated Deficit of $968,000.


**2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**





The
      following significant accounting policies were not applicable as of the filing
      of the Company’s last annual report for the year ended December 31, 2006. For a
      complete discussion of the Company’s significant accounting policies, please
      refer to the Company’s annual report on Form 10-K for the fiscal year ended
      December 31, 2006.





**Financial
      Accounting Standards Board Interpretation No. 48**





The
      Company adopted the provisions of Financial Accounting Standards Board ("FASB")
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an
      interpretation of FASB Statement No. 109” (“FIN 48”), on January 1, 2007. FIN 48
      clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise's financial statements in accordance with FASB Statement 109,
“Accounting for Income Taxes,” and prescribes a recognition threshold and
      measurement process for financial statement recognition and measurement of
      a tax
      position taken or expected to be taken in a tax return. FIN 48 also provides
      guidance on derecognition, classification, interest and penalties, accounting
      in
      interim periods, disclosure and transition.





Based
      on
      its evaluation, the Company has concluded that there are no significant
      uncertain tax positions requiring recognition in its financial statements.
      The
      Company’s evaluation was performed for the tax years ended December 31, 2003,
      2004, 2005 and 2006, the tax years which remain subject to examination by major
      tax jurisdictions as of June 30, 2007.





The
      Company may from time to time be assessed interest or penalties by major tax
      jurisdictions, although any such assessments historically have been minimal
      and
      immaterial to the Company’s financial results. In the event the Company has
      received an assessment for interest and/or penalties, it has been classified
      in
      the financial statements as interest expense.




7




**Revenue
      Recognition**





NeoMedia
      derives revenues from the following sources:  (1) license revenues
      relating to patents and internally-developed software, (2) hardware, software,
      and service revenues related to mobile marketing campaign design and
      implementation, and (3) sales from its proprietary Micro Paint Repair
      solution.




(1)
            Technology
                license fees, including intellectual property licenses, represent
                revenue
                from the licensing of NeoMedia’s proprietary software tools and
                applications products.  NeoMedia licenses its development tools
                and application products pursuant to non-exclusive
                and non-transferable license agreements.  The basis for
                license fee revenue recognition is substantially governed by the
                American  Institute  of  Certified  Public 
                Accountants  ("AICPA")  Statement of Position 97-2 "Software
                Revenue  Recognition" ("SOP 97-2"), as amended, and Statement of
                Position 98-9, Modification of SOP 97-2, “Software Revenue Recognition,
                With Respect to Certain Transactions.”.  License revenue is
                recognized if persuasive evidence of an agreement exists, delivery
                has
                occurred, pricing is fixed and determinable, and collectibility is
                probable.  The Company defers revenue related to license fees for
                which amounts have been collected but for which revenue has not been
                recognized in accordance with the above, and recognizes the revenue
                over
                the appropriate period.




(2)
                Technology
                    service and product revenue, which includes sales of software
                    and
                    technology equipment and service fee is recognized  based on
                    guidance  provided in  SEC Staff  Accounting 
                    Bulletin  (“SAB”) No. 104,  "Revenue  Recognition  in
                    Financial Statements,"  as amended (SAB 104).  Software
                    and technology equipment resale revenue is
                    recognized when persuasive evidence of an arrangement exists, the
                    price to the customer is fixed and determinable, delivery of
                    the service
                    has occurred and collectibility is reasonably assured.
                    Service revenues including maintenance fees for
                    providing system updates for software products, user documentation
                    and
                    technical support are recognized over the life of
                    the contract. The Company’s subsidiaries, Mobot (sold during 2006),
                    and Gavitec follow this policy. The Company defers revenue related
                    to
                    technology service and product revenue for which amounts have
                    been
                    invoiced and or collected but for which the requisite service
                    has not been
                    provided. Revenue is then recognized over the matching service
                    period.


(3)
            Technology
                service also includes mobile marketing services to its customers
                which
                mobile marketing projects are recognized after the completion of
                the
                project and accepted by the customer.  All response and messaging
                based revenues are recognized at the time such responses are received
                and
                processed and the Company recognizes its premium messaging revenues
                on a
                net basis based on guidance provided in Emerging Issues Task Force
                Issues
                No. 99-19 (EITF 99-19), “Reporting Revenue Gross as Principal or Net as an
                Agent” and No. 01-09 (EITF 01-09), “Accounting for Consideration Given by
                a Vendor to a Customer.”  Consulting and management revenues and
                revenues for periodic services are recognized as services are
                performed.  NeoMedia uses  stand-alone  pricing to
                determine an element's  vendor  specific  objective 
                evidence  (“VSOE”) in order to allocate an arrangement  fee
                amongst various pieces of a  multi-element  contract.  The
                Company’s subsidiaries Sponge (sold during 2006) and 12Snap (sold during
                2007) follow this policy. Telecom revenues from NeoMedia’s subsidiary BSD
                are recognized at the time that calls are accepted by the clearinghouse
                for billing to customers on a net basis, based on guidance in EITF
                99-19.
                The Company defers revenue related to mobile marketing service fees
                for
                which amounts have been invoiced and/or collected but for which revenue
                has not been recognized. Revenue is then recognized over the matching
                service period.





(4)
            Revenue
                for licensing and exclusivity on NeoMedia’s MicroPaint Repair systems is
                recognized equally over the term of the contract, which is currently
                one
                year.  A portion of the initial fee paid by the customer is allocated
                to licensing, training costs and initial products sold with the system.
                Revenue is recognized upon completion of training and shipment of
                the
                products, provided there is VSOE in a multiple element arrangement. 
                Ongoing product and service revenue is recognized as products are
                shipped
                and services performed.  The Company defers revenue related to micro
                paint repair licensing for which amounts have been invoiced and/or
                collected and revenue is then recognized over the estimated contract
                period, which is currently one year.




8




(5)
            Sales
                taxes represent amounts collected on behalf of specific regulatory
                agencies that require remittance on a specified date. These amounts
                are
                collected at the time of sales and are detailed on invoices provided
                to
                customers. In compliance with the Emerging Issues Task Force consensus
                on
                issue number 06-03 (EITF 06-03), NeoMedia accounts for sales taxes
                on a
                net basis.








In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments” (FAS 155). This Statement amends FASB Statements No. 133,
      Accounting for Derivative Instruments and Hedging Activities, and No. 140,
      Accounting for Transfers and Servicing of Financial Assets and Extinguishments
      of Liabilities. This Statement resolves issues addressed in Statement 133
      Implementation Issue No. D1, "Application of Statement 133 to Beneficial
      Interests in Securitized Financial Assets."


This
      Statement:





a.
      Permits fair value remeasurement for any hybrid financial instrument that
      contains an embedded derivative that otherwise would require
      bifurcation


b.
      Clarifies which interest-only strips and principal-only strips are not subject
      to the requirements of Statement 133


c.
      Establishes a requirement to evaluate interests in securitized financial assets
      to identify interests that are freestanding derivatives or that are hybrid
      financial instruments that contain an embedded derivative requiring
      bifurcation


d.
      Clarifies that concentrations of credit risk in the form of subordination are
      not embedded derivatives


e.
      Amends
      Statement 140 to eliminate the prohibition on a qualifying special-purpose
      entity from holding a derivative financial instrument that pertains to a
      beneficial interest other than another derivative financial
      instrument.





FAS
      155
      is effective for fiscal years beginning after September 15, 2006. The Company
      has adopted FAS 155 on an individual instrument basis and is currently applying
      FAS 155 to certain of its debt obligations. The Company will evaluate and
      determine on a case by case basis whether to apply FAS 155.







**Effect
      Of Recently Issued Accounting Pronouncements**




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This
      Statement defines fair value, establishes a framework for measuring fair value
      in generally accepted accounting principles (“GAAP”), and expands disclosures
      about fair value measurements. This Statement applies under other accounting
      pronouncements that require or permit fair value measurements, the Board having
      previously concluded in those accounting pronouncements that fair value is
      the
      relevant measurement attribute. Accordingly, this Statement does not require
      any
      new fair value measurements. However, for some entities, the application of
      this
      Statement will change current practice. This statement is effective for fiscal
      years beginning after November 15, 2007. The Company may adopt this statement
      for its 2007 fiscal year. The Company is currently evaluating the impact of
      adopting this statement; however, the Company does not expect the adoption
      of
      this provision to have a material effect on its financial position, results
      of
      operations or cash flows.





In
      September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
      Accounting Bulletin No. 108 (“SAB 108”), *Financial
      Statements - Considering the Effects of Prior Year Misstatements when
      Quantifying Misstatements in Current Year Financial
      Statements.”* SAB 108
      provides guidance on how prior year misstatements should be taken into
      consideration when quantifying misstatements in current year financial
      statements for purposes of determining whether the current year’s financial
      statements are materially misstated. SAB 108 provides that once a current year
      misstatement has been quantified, the guidance in SAB No. 99, *Financial
      Statements - Materiality* ,
      should
      be applied to determine whether the misstatement is material and should result
      in an adjustment to the financial statements. Under certain circumstances,
      prior
      year financial statements will not have to be restated and the effects of
      initially applying SAB 108 on prior years will be recorded as a cumulative
      effect adjustment to beginning Retained Earnings on January 1, 2006, with
      disclosure of the items included in the cumulative effect. NeoMedia applied
      the
      provisions of SAB 108 with the preparation of NeoMedia’s annual financial
      statements for the calendar year ending December 31, 2006. The application
      of the provisions of SAB 108 did not have a material impact on the Company’s
      financial statements for the three and six month periods ending June 30,
      2007.




9




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities”. The objective of this statement is
      to improve financial reporting by providing entities with the opportunity to
      mitigate volatility in reported earnings caused by measuring related assets
      and
      liabilities differently without having to apply complex hedge accounting
      provisions. This statement is expected by the Board to expand the use of fair
      value measurement, which is consistent with the Board’s long-term measurement
      objectives for accounting for financial instruments. This statement is effective
      for fiscal years beginning after November 15, 2007. The Company may adopt this
      statement for its 2007 fiscal year. The Company is currently evaluating the
      impact of adopting this statement; however, the Company does not expect the
      adoption of this provision to have a material effect on its financial position,
      results of operations or cash flows.





In
      December 2006, FASB Staff Position No. EITF 00-19-2 was issued. This FASB Staff
      Position (FSP) addresses an issuer’s accounting for registration payment
      arrangements. This FSP specifies that the contingent obligation to make future
      payments or otherwise transfer consideration under a registration payment
      arrangement, whether issued as a separate agreement or included as a provision
      of a financial instrument or other agreement, should be separately recognized
      and measured in accordance with FASB Statement No. 5, Accounting for
      Contingencies. The guidance in this FSP amends FASB Statements No. 133,
      Accounting for Derivative Instruments and Hedging Activities, and No. 150,
      Accounting for Certain Financial Instruments with Characteristics of both
      Liabilities and Equity, and FASB Interpretation No. 45, Guarantor’s Accounting
      and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
      Indebtedness of Others, to include scope exceptions for registration payment
      arrangements. This FSP further clarifies that a financial instrument subject
      to
      a registration payment arrangement should be accounted for in accordance with
      other applicable generally accepted accounting principles (GAAP) without regard
      to the contingent obligation to transfer consideration pursuant to the
      registration payment arrangement. The Company follows the guidance in FSP
      00-19-2 in assessing its liabilities related to the liquidated damages arising
      from the Company’s default position on the convertible financing
      arrangements.





In
      June
      2007, the FASB ratified the consensus on Emerging Issues Task Force (EITF)
      Issue
      No. 06−11, "Accounting for Income Tax Benefits of Dividends on Share−Based
      Payment Awards" ("EITF 06−11"). EITF 06−11 requires companies to recognize the
      income tax benefit realized from dividends or dividend equivalents
      that are charged to retained earnings and paid to employees for non−vested
      equity−classified employee share−based payment awards as an increase to
      additional paid−in capital. EITF 06−11 is effective for fiscal years beginning
      after September 15, 2007. While the Company is currently evaluating the
      provisions of EITF 06−11, the adoption is not expected to have any significant
      effect on the Company's consolidated financial position or results of
      operations.





In
      November 2006, the FASB ratified EITF Issue No. 06−7, “Issuer's Accounting for a
      Previously Bifurcated Conversion Option in a Convertible Debt Instrument When
      the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement
      No. 133, Accounting for Derivative Instruments and Hedging Activities” (“EITF
      No. 06−7”). At the time of issuance, an embedded conversion option in a
      convertible debt instrument may be required to be bifurcated from the debt
      instrument and accounted for separately by the issuer as a derivative under
      SFAS
      No. 133, based on the application of EITF No. 00−19. Subsequent to the issuance
      of the convertible debt, facts may change and cause the embedded conversion
      option to no longer meet the conditions for separate accounting as a derivative
      instrument, such as when the bifurcated instrument meets the conditions of
      EITF
      No. 00−19 to be classified in stockholders' equity. Under EITF No. 06−7, when an
      embedded conversion option previously accounted for as a derivative under
      Statement of Financial Accounting Standards (“SFAS”) No. 133 no longer meets the
      bifurcation criteria under that standard, an issuer shall disclose a description
      of the principal changes causing the embedded conversion option to no longer
      require bifurcation under SFAS No. 133 and the amount of the liability for
      the
      conversion option reclassified to stockholders' equity. EITF No. 06−7 should be
      applied to all previously bifurcated conversion options in convertible debt
      instruments that no longer meet the bifurcation criteria in SFAS No. 133 in
      interim or annual periods beginning after December 15, 2006, regardless of
      whether the debt instrument was entered into prior or subsequent to the
      effective date of EITF No. 06−7. The adoption of EITF 06−7 did not have a
      material impact on our financial position, results of operations or cash
      flows.




10




In
      November 2006, the FASB ratified EITF Issue No. 06−6, Application of EITF Issue
      No. 05−7, ‘Accounting for Modifications to Conversion Options Embedded in Debt
      Instruments and Related Issues ** ’
(“EITF
      06−6”). EITF 06−6 addresses the modification of a convertible debt instrument
      that changes the fair value of an embedded conversion option and the subsequent
      recognition of interest expense for the associated debt instrument when the
      modification does not result in a debt extinguishment pursuant to EITF 96−19.
      The Company does not expect the adoption of EITF 06−6 to have a material impact
      on its consolidated financial position, results of operations or cash
      flows .





On
      January 1, 2007, the Company adopted the consensus reached in Emerging Issues
      Task Force (“EITF”) Issue No. 06−2, “Accounting for Sabbatical Leave and Other
      Similar Benefits Pursuant to FASB Statement No. 43.” EITF Issue No. 06−2
      provides recognition guidance on the accrual of employees’ rights to compensated
      absences under a sabbatical or other similar benefit arrangement. The adoption
      of EITF Issue No. 06−2 did not have a material impact on our financial position,
      results of operations, or cash flows.





In
      September 2006, the Emerging Issues Task Force, or EITF, reached a consensus
      on
      Issue No. 06−1, Accounting for Consideration Given by a Service Provider to
      Manufacturers or Resellers of Equipment Necessary for an End−Customer to Receive
      Service from the Service Provider *.* EITF
      Issue No. 06−1 provides
      guidance regarding whether the consideration given by a service provider to
      a
      manufacturer or reseller of specialized equipment should be characterized as
      a
      reduction of revenue or an expense. This issue is effective for our annual
      reporting period ending December 31, 2007. Entities are required to recognize
      the effects of applying this issue as a change in accounting principle through
      retrospective application to all prior periods unless it is impracticable to
      do
      so. We are in the process of evaluating the impact of this issue on our
      consolidated financial statements . The
      Company does not expect the adoption of EITF 06−1 to have a material impact on
      its consolidated financial position, results of operations or cash
      flows .




11





**3.
      ACQUISITIONS**





On
      February 17, 2006, NeoMedia
      acquired all of the outstanding shares of Mobot in exchange for $3,500,000
      cash
      and $6,500,000 in stock, represented by 16,931,493 shares of NeoMedia common
      stock. On
      February 23, 2006, NeoMedia acquired all of the outstanding shares of Sponge
      in
      exchange for $6,141,000 cash and £6,550,000 in stock (approximately $13.1
      million at the time of the agreement), represented by 33,097,135 shares of
      NeoMedia common stock. On February 23, 2006, NeoMedia acquired all of the
      outstanding shares of Gavitec in exchange for $1,800,000 cash and $5,200,000
      in
      stock, represented by 13,660,511 shares of NeoMedia common stock. On February
      28, 2006, NeoMedia acquired all of the outstanding shares of 12Snap in exchange
      for $2,500,000 cash and $19,500,000 in stock, represented by 49,294,581 shares
      of NeoMedia common stock. On March 21, 2006, NeoMedia acquired BSD for 7,123,698
      shares of NeoMedia common stock.





On
      November 14, 2006, NeoMedia divested of 92.5% of its ownership interest in
      Mobot. On December 6, 2006, NeoMedia sold 82% of its ownership interest in
      Sponge. On April 4, 2007, NeoMedia divested of 90% of its ownership interest
      in
      12Snap.





The
      consolidated statements of operations presented herein reflect the results
      of
      these acquired subsidiaries as follows: Mobot results are included from February
      18, 2006 through December 6, 2006 under the caption “Loss from discontinued
      operations”; Sponge results are included from February 24, 2006 through November
      14, 2006 under the caption “Loss from discontinued operations”; 12Snap results
      are included from February 24, 2006 through April 4, 2007 under the caption
      “Loss from discontinued operations”; BSD results are included from March 22,
      2006 through June 30, 2007 under the caption “Loss from discontinued
      operations”; and Gavitec results are included in NeoMedia’s consolidated results
      from continuing operations from February 24, 2006 through June 30, 2007.
      Pro-forma results of operations are presented at the end of this Note
      3.





The
      following disclosures reflect activity related to acquisitions since the filing
      of NeoMedia’s last annual report for the year ended December 31, 2006. For a
      complete discussion of the Company’s acquisition activity, please refer to the
      Company’s annual report on Form 10-K for the fiscal year ended December 31,
      2006.





**Gavitec**





The
      acquisition agreement between NeoMedia and Gavitec stipulated that, in the
      event
      that NeoMedia’s stock price at the time the consideration shares became saleable
      (either upon effectiveness of a registration statement containing the shares,
      or
      under Rule 144) was less than $0.389, NeoMedia was obligated to compensate
      Gavitec shareholders in cash for the difference between the price at the time
      the shares became saleable and $0.389. On January 23, 2007, NeoMedia entered
      into an agreement with the former shareholders of Gavitec, whereby this purchase
      price obligation was to be satisfied through the payment by NeoMedia of (i)
      $1,800,000 in cash, payable no later than February 28, 2007 (subsequently
      extended to March 31, 2007), and (ii) 61,000,000 shares of NeoMedia common
      stock
      to be issued no later than February 28, 2007. NeoMedia also agreed to pay
      interest accrued on the purchase price in the amount of $481,000 and reimburse
      $100,000 of costs related to the acquisition to the primary former shareholder
      of Gavitec no later than February 28, 2007. NeoMedia issued the shares and
      made
      cash payments of $2,113,000 during March 2007. Accordingly, as of June 30,
      2007,
      the balance on the accrual was $268,000, representing the remaining interest
      payments which are past due and have not been paid.




**12Snap**





During
      the first quarter of 2007, NeoMedia initiated an action plan to sell its 12Snap
      business. During the three months ended March 31, 2007, and the year ended
      December 31, 2006, NeoMedia recorded impairment charges of $2,467,000 and
      $18,327,000, respectively, to adjust the carrying value of the 12Snap asset
      group to the expected net proceeds from the sale of the assets. Prior to the
      impairment charge, the asset group consisted primarily of goodwill and other
      intangible assets recorded upon purchase of 12Snap by NeoMedia during the first
      quarter of 2006. In connection with its decision to sell the 12Snap business
      in
      the first quarter of 2007, NeoMedia revised its expected cashflow to reflect
      the
      estimated net cash proceeds that the Company anticipated receiving in a sale
      transaction. The operations of 12Snap are classified as discontinued operations
      during the three and six months ended June 30, 2007 and 2006. The criteria
      for
      discontinued operations classification were met during the three and six months
      ended June 30, 2007. (See Note 4)




12




Pursuant
      to the terms of the original purchase agreement, in the event that NeoMedia’s
      stock price at the time the consideration shares became saleable (either upon
      effectiveness of a registration statement containing the shares, or under Rule
      144) was less than $0.3956, NeoMedia was obligated to compensate 12Snap
      shareholders in cash for the difference between the price at the time the shares
      became saleable and $0.3956. On February 22, 2007, the shares became eligible
      for resale under Rule 144. The actual calculated purchase price obligation
      to
      NeoMedia based on the volume weighted average closing price of NeoMedia common
      stock for the ten days up to and including February 22, 2007 was $16,233,000.
      Because the amount of the purchase price guarantee became measurable and highly
      probable of occurrence beyond a reasonable doubt, as of December 31, 2006,
      NeoMedia reduced the fair value of the initial stock consideration by the amount
      of the contingency. On March 19, 2007, NeoMedia issued 197,620,948 shares of
      its
      common stock in satisfaction of a portion of the purchase price obligation
      totaling $9,427,000. Additionally, NeoMedia has made cash payments against
      the
      liability totaling $372,000, and further reduced the balance through the
      forgiveness of $1,760,000 of the obligation in connection with the sale of
      12Snap. The balance on the purchase price obligation as of June 30, 2007 was
      $4,684,000, which includes $8,000 in accrued interest. The Company is currently
      negotiating payment terms for the balance of the obligation.




On
      April
      4, 2007, NeoMedia reached an agreement with Bernd Michael (the “Buyer”), a
      private investor and former shareholder of 12Snap prior to NeoMedia’s
      acquisition of 12Snap, pursuant to which the Buyer acquired from NeoMedia 90%
      of
      the shares of 12Snap, pursuant to the following material terms:




·
            $1,100,000
                was paid by the Buyer to the Company in cash at closing, of which
                $1,015,000 was applied toward amounts owed to silent partners of
                12Snap




·
            $500,000
                was placed into an escrow account for 90 days to secure warranty
                claims;




·
            Buyer
                waived his portion of the purchase price guarantee obligation in
                the
                amount of $880,000;




·
            Buyer
                returned to NeoMedia 2,525,818 NeoMedia shares previously issued
                to the
                Buyer;




·
            12Snap
                management waived their portion of the purchase price guarantee obligation
                in the amount of $880,000;




·
            12Snap
                management returned to NeoMedia 5,225,039 shares of NeoMedia common
                stock
                previously issued to 12Snap
                management;




·
            NeoMedia
                retained a 10% ownership in 12Snap, subject to an option agreement
                pursuant to which NeoMedia has the right to sell and Buyer has the
                right
                to acquire the remaining 10% stake held by NeoMedia for a purchase
                price
                of $750,000 after December 31, 2007;
                and




·
            12Snap
                and NeoMedia will execute a cooperation agreement pursuant to which
                12snap
                will remain a NeoMedia preferred partner and enjoy most favored prices,
                and 12snap will perform certain research and development functions
                for
                NeoMedia.




NeoMedia
      recorded impairment charges of $0 and $2,467,000 during the three and six months
      ended June 30, 2007, respectively, to adjust the carrying value of 12Snap’s
      assets to the final fair market value. As prescribed by Statement of Financial
      Accounting Standards No. 52, NeoMedia realized a loss on the disposal of 12
      Snap
      in the three and six months ended June 30, 2007, in the amount of
      $257,000.




13





**Pro
      Forma Financial Information (Unaudited)**





Pro-forma
      results of operations as if NeoMedia was combined with Gavitec as of January
      1,
      2006 are as follows:




**Loss**
            
            
            
            **Weighted****Loss**
            
            
            
            **per
                Share**
            
            
            
            **Average****Total**
            
            
            
            **from**
            
            
            
            **from**
            
            
            
            **Common****Net**
            
            
            
            **Continuing**
            
            
            
            **Continuing**
            
            
            
            **Shares****Sales**
            
            
            
            **Operations**
            
            
            
            **Operations**
            
            
            
            **Outstanding****Six
                Months Ended June 30, 2006**NeoMedia
            
            $
            687
            
            
            
            
            $
            7,038
            
            
            
            
            $
            0.01
            
            
            
            
            
            580,485,463Gavitec
            
            
            486
            
            
            
            
            
            (565
            )Pro
                forma adjustments
            
            
            (397
            )
            
            (A)
            
            
            422
            
            
            (A)
            
            $
            0.00
            
            
            (A)(B)
            
            
            20,224,490
            
            
            (B)Pro
                forma combined
            
            $
            776
            
            
            
            
            $
            6,895
            
            
            
            
            $
            0.00
            
            
            
            
            
            600,709,953


_________________





**Basis
      of Presentation** :
      NeoMedia
      acquired Mobot, Sponge, Gavitec, 12Snap, and BSD during the first quarter of
      2006. During November and December 2006, NeoMedia divested of Mobot and Sponge.
      During April 2007, NeoMedia divested of 12Snap. During the first quarter of
      2007, NeoMedia decided to sell its Telecom Services business, comprised of
      the
      operations of BSD. Because the results of BSD, 12Snap, Mobot, and Sponge have
      already been removed from NeoMedia's continuing operations and classified as
      discontinued operations for the six months ended June 30, 2006, these entities
      have not been included in the pro forma results shown above. However, the pro
      forma shares issued as consideration for the acquisitions of Gavitec, 12Snap,
      and BSD are reflected in the pro forma loss per share and weighted average
      common shares outstanding. The pro forma shares issued as consideration for
      the
      acquisitions of 12Snap, Mobot and Sponge, and NeoMedia shares returned in the
      sale of Sponge, are not reflected in the pro forma weighted average common
      shares outstanding, since for pro forma purposes the acquisition and disposal
      transactions are assumed to have occurred on January 1, 2006. Since the results
      of Gavitec were included in NeoMedia’s consolidated financial results for the
      entire three and six month periods ended June 30, 2007, and the entire three
      month period ended June 30, 2006, separate pro forma results are not presented
      for these periods.





(A)
      Adjustment is to reflect operations of Gavitec from February 23, 2006 (closing
      date of acquisition) through June 30, 2006, and to reflect amortization of
      Gavitec intangible assets for the period January 1, 2006 through February 23,
      2006. Results of operations for Gavitec from February 23, 2006 through June
      30,
      2006 are included in NeoMedia's operations for the six months ended June 30,
      2006.





(B)
      Adjustment for shares that would have been issued in connection with the
      acquisitions of Gavitec and BSD if they had occurred on January 1, 2006. The
      adjustment between the reported and the pro forma number of weighted average
      shares outstanding is caused by (i) the weighting of the pro forma shares for
      the six months ended June 30, 2006, whereas in the reported number the shares
      were only outstanding from the closing date of each acquisition through June
      30,
      2006, and (ii) the number of pro forma shares being higher than the actual
      shares issued due to a lower stock price on the pro forma date of issuance
      than
      the actual date of issuance. Using the stock price around January 1, 2006,
      the
      pro forma number of shares that would have been issued was:





**Gavitec**
            
            **BSD**
            
            **Total**Total
                stock consideration
            
            $
            5,400,000
            
            $
            2,279,263
            
            $
            7,679,263Stock
                price on pro forma acquisition date
            
            $
            0.290
            
            $
            0.290Pro
                forma number of consideration shares
            
            
            18,620,690
            
            
            7,859,527
            
            
            26,480,217





**Tax
      Implications of Acquisitions**





For
      income tax purposes, amounts assigned to particular assets acquired and
      liabilities assumed in the business combinations are different than amounts
      used
      for financial reporting. The differences in assigned values for financial
      reporting and tax purposes result in temporary differences. In applying SFAS
      109, “Accounting for Income Taxes”, the Company is required to recognize the tax
      effect of these temporary differences and, accordingly, a deferred tax liability
      has been recognized. The Company determined that it’s pre-existing and
      acquired deferred tax assets, and those acquired, including those subject to
      limitations, were more likely than not to be realized to offset the deferred
      tax
      liability. In most cases the reduction in the valuation allowance resulted
      in an
      asset and was used to offset the deferred tax liability arising from the
      business combinations, pursuant to SFAS 109. A deferred tax liability was
      recognized where a net liability remained.




14




In
      addition, the acquisitions of Sponge, Gavitec, 12Snap, and BSD involve a change
      of control of foreign entities, and as a result any net operating loss
      carryforward in existence prior to the acquisition may have limited or no use
      for NeoMedia.





**Intangible
      Assets**





As
      of
      June 30, 2007, NeoMedia had intangible assets used in its continuing operations with
      original historical cost as follows:




(US
                dollars in thousands)**Gavitec**
            
            **Other**
            
            **Total**Proprietary
                Software
            
            $
            4,600
            
            $
            763
            
            $
            5,363Copyrighted
                Materials
            
            
            64
            
            
            ---
            
            
            64Patents
            
            
            ---
            
            
            4,888
            
            
            4,888**Total**
            
            **$**
            **4,664**
            
            **$**
            **5,651**
            
            **$**
            **10,315**




As
      of
      June 30, 2007, a ccumulated
      amortization on NeoMedia's intangible assets used
      in its
      continuing operations was:




(US
                dollars in thousands)**Gavitec**
            
            **Other**
            
            **Total**Proprietary
                Software
            
            $
            886
            
            $
            707
            
            $
            1,593Copyrighted
                Materials
            
            
            20
            
            
            ---
            
            
            20Patents
            
            
            ---
            
            
            2,199
            
            
            2,199**Total**
            
            **$**
            **906**
            
            **$**
            **2,906**
            
            **$**
            **3,812**




As
      of
      June 30, 2007, t he
      carrying value of NeoMedia's intangible assets used
      in
      its continuing
      operations was:




(US
                dollars in thousands)**Gavitec**
            
            **Other**
            
            **Total**Proprietary
                Software
            
            $
            3,714
            
            $
            56
            
            $
            3,770Copyrighted
                Materials
            
            
            44
            
            
            ---
            
            
            44Patents
            
            
            ---
            
            
            2,689
            
            
            2,689**Total**
            
            **$**
            **3,758**
            
            **$**
            **2,745**
            
            **$**
            **6,503**





Estimated
      future amortization expense on NeoMedia’s intangible assets is expected to
      be:




(US
                dollars in thousands)**Proprietary
                Software**
            
            **Copyrighted
                Materials**
            
            **Patents**
            
            **Total**2007
                (remaining 6 months)
            
            $
            297
            
            $
            5
            
            $
            150
            
            $
            4522008
            
            
            635
            
            
            11
            
            
            295
            
            
            9412009
            
            
            604
            
            
            11
            
            
            284
            
            
            8992010
            
            
            602
            
            
            11
            
            
            264
            
            
            8772011
            
            
            602
            
            
            3
            
            
            245
            
            
            850Thereafter
            
            
            1,030
            
            
            3
            
            
            1,451
            
            
            2,484**Total**
            
            **$**
            **3,770**
            
            **$**
            **44**
            
            **$**
            **2,689**
            
            **$**
            **6,503**




15




It
      is
      important to note that actual amortization expense could differ materially
      from
      the table due to subjective factors such as changes in assumptions of useful
      lives or impairment charges. The weighted average remaining life for the
      intangible assets was approximately 7.2 years as of June 30, 2007.





As
      of
      June 30, 2007, the following intangible assets relating to discontinued
      operations were included in “Assets held for sale” on the accompanying
      consolidated balance sheet:




(US
                dollars in thousands)**Telecom
                Services**
            
            **Micro
                Paint Repair**
            
            **Total**Customer
                Contracts, net
            
            $
            1,084
            
            $
            54
            
            $
            1,138Proprietary
                Software, net
            
            
            ---
            
            
            7
            
            
            7Brand
                Name, net
            
            
            ---
            
            
            ---
            
            
            ---Copyrighted
                Materials, net
            
            
            108
            
            
            23
            
            
            131Patents,
                net
            
            
            ---
            
            
            1,318
            
            
            1,318Goodwill,
                net
            
            
            4,402
            
            
            1,068
            
            
            5,470**Total**
            
            **$**
            **5,594**
            
            **$**
            **2,470**
            
            **$**
            **8,064**








**Goodwill**





As
      of
      June 30, 2007, goodwill consisted of $3,418,000 associated with NeoMedia’s
      acquisition of Gavitec. As of June 30, 2007, NeoMedia also had recorded goodwill
      in the amount of $1,068,000 and $4,402,000 relating to its Micro Paint Repair
      and Telecom Services businesses, respectively, that are held for sale. These
      amounts are included in “Assets held for sale” on the accompanying consolidated
      balance sheet.




16





**4.
      DISCONTINUED OPERATIONS AND ASSETS AND LIABILITIES HELD FOR
      SALE**





**MicroPaint
      Repair Business Unit**





During
      August 2006, NeoMedia decided to sell its MicroPaint Repair business unit.
      The
      Company is currently in the process of negotiating with a potential buyer with
      respect to the sale.





NeoMedia
      has analyzed the pertinent facts of the proposed disposition with respect to
      the
      criteria outlined in SFAS 144, and has determined that all of the criteria
      have
      been met and continue to be met as of the date of this filing. Accordingly,
      NeoMedia is reporting the operating results of the MicroPaint Repair business
      unit as Discontinued Operations, and the assets and liabilities as Held for
      Sale
      for all periods presented in this filing. Assets Held for Sale are not
      depreciated or amortized.





**Sponge
      and Mobot Businesses**





In
      the
      fourth quarter of 2006, NeoMedia disposed of two subsidiaries, Sponge and Mobot.
      All assets and liabilities associated with these two subsidiaries were disposed
      of in their respective sales and removed from NeoMedia’s consolidated balance
      sheet. In accordance with SFAS 144, NeoMedia is reporting the operating results
      of these two subsidiaries as Discontinued Operations for all periods presented
      in this filing. NeoMedia has analyzed the applicable accounting literature
      found
      in the SEC Staff Accounting Bulletin (SAB) Topic 5E, Accounting Principles
      Board
      (“APB”) Opinion 29, APB 18, Statement of Financial Accounting Standards (SFAS)
      141, SFAS 144, and Emerging Issues Task Force (“EITF”) issue 01-2, and
      determined that the criteria for reporting the disposal of a business and
      reporting of discontinued operations have been met.





**12Snap
      Business**





In
      January 2007, NeoMedia management determined that it would focus on its core
      code-reading business in North America, the UK, mainland Europe, and China.
      In
      conjunction with this direction, the Company decided to sell its 12Snap business
      unit. On April 4, 2007, NeoMedia completed the sale of 12Snap. NeoMedia has
      analyzed the applicable accounting literature found in the SEC Staff Accounting
      Bulletin (SAB) Topic 5E, Accounting Principles Board (APB) Opinion 29, APB
      18,
      Statement of Financial Accounting Standards (SFAS) 141, SFAS 144, and Emerging
      Issues Task Force (EITF) issue 01-2, and determined that the criteria for
      reporting the disposal of a business and reporting of discontinued operations
      have been met.





**Telecom
      Services Business**





In
      connection with its January 2007 decision to focus on its core code-reading
      business, the Company also decided to sell the NeoMedia Telecom Services
      business unit. NeoMedia has analyzed the pertinent facts of the proposed
      transaction with respect to the criteria outlined in SFAS 144, and has
      determined that all of the criteria were met as of June 30, 2007 and continue
      to
      be met. Accordingly, NeoMedia is reporting the operating results of the NeoMedia
      Telecom Services business unit as Discontinued Operations, and the assets and
      liabilities as Held for Sale for all periods presented in this filing. Assets
      Held for Sale are not depreciated or amortized.





17




The
      operating results of the MicroPaint Repair, Sponge, Mobot, 12Snap, and Telecom
      Services businesses classified as discontinued operations for the three and
      six
      month periods ended June 30, 2007 and 2006 are shown in the following table.
      These results include a gain on extinguishment of debt realized by Telecom
      Services in the amount of $0 and $265,000 in the three and six months ended
      June
      30, 2007, respectively, and impairment charges to reduce 12Snap assets to their
      fair market value in the amount of $0
      and $2,467,000 in the three and six months ended June 30, 3007 respectively. As
      prescribed by Statement of Financial Accounting Standards No. 52, NeoMedia
      realized a loss on the disposal of 12 Snap in the three and six months ended
      June 30, 2007, in the amount of $257,000. There is no tax expense or benefit
      to
      report due to NeoMedia’s net operating loss carry forward tax position.





(US
                dollars in thousands)Three
                months ended June 30, 2007 (unaudited)Micro
                Paint Repair
            
            Telecom
            
            12
                Snap
            
            Mobot
            
            Sponge
            
            TotalNet
                Sales
            
            $
            390
            
            $
            512
            
            
            ---
            
            
            ---
            
            $
            ---
            
            $
            902Income
                (Loss) from discontinued operations
            
            $
            (618
            )
            $
            13
            
            $
            (348
            )
            $
            (12
            )
            $
            (14
            )
            $
            (979
            )




Six
                months ended June 30, 2007 (unaudited)Micro
                Paint Repair
            
            Telecom
            
            12
                Snap
            
            Mobot
            
            Sponge
            
            TotalNet
                Sales
            
            $
            716
            
            $
            814
            
            $
            2,621
            
            
            ---
            
            
            ---
            
            $
            4,151Income
                (Loss) from discontinued operations
            
            $
            (1,209
            )
            $
            10
            
            $
            (2,302)
            
            $
            (23
            )
            $
            (29
            )
            $
            (3,553
            )




Three
                months ended June 30, 2006 (unaudited)Micro
                Paint Repair
            
            Telecom
            
            12
                Snap
            
            Mobot
            
            Sponge
            
            TotalNet
                Sales
            
            $
            401
            
            $
            515
            
            $
            2,225
            
            $
            134
            
            $
            420
            
            $
            3,695Income
                (Loss) from discontinued operations
            
            $
            (756
            )
            $
            151
            
            $
            (770
            )
            $
            (412
            )
            $
            (266
            )
            $
            (2,053
            )




Six
                months ended June 30, 2006 (unaudited)Micro
                Paint Repair
            
            Telecom
            
            12
                Snap
            
            Mobot
            
            Sponge
            
            TotalNet
                Sales
            
            $
            778
            
            $
            542
            
            $
            3,121
            
            $
            191
            
            $
            711
            
            $
            5,343Income
                (Loss) from discontinued operations
            
            $
            (1,207
            )
            $
            (278
            )
            $
            (826
            )
            $
            (694
            )
            $
            (218
            )
            $
            (3,223
            )








The
      assets and liabilities of the MicroPaint Repair, 12Snap, and Telecom Services
      businesses classified as held for sale are shown in the following table. There
      are no assets or liabilities associated with the Sponge or Mobot subsidiaries
      as
      of the balance sheet dates of June 30, 2007 or December 31, 2006.





As
                of June 30, 2007 (unaudited)
            
            (US
                dollars in thousands)Micro
            
            TelecomPaint
                Repair
            
            Services
            
            12
                Snap
            
            TotalASSETSCurrent
                assets:Cash
                & Cash Equivalents
            
            $
            101
            
            $
            49
            
            $
            ---
            
            $
            150Trade
                Accounts Receivable, net
            
            
            173
            
            
            1,850
            
            
            ---
            
            
            2,023Inventory
            
            
            328
            
            
            ---
            
            
            ---
            
            
            328Prepaid
                expenses and other current assets
            
            
            47
            
            
            13
            
            
            ---
            
            
            60Total
                Current Assets
            
            
            649
            
            
            1,912
            
            
            ---
            
            
            2,561Leasehold
                improvements and property
              and
                equipment, net
            
            
            139
            
            
            56
            
            
            ---
            
            
            195Goodwill
                and other intangible assets, net
            
            
            2,470
            
            
            5,594
            
            
            ---
            
            
            8,064Total
                Assets Held for Sale
            
            $
            3,258
            
            $
            7,562
            
            $
            ---
            
            $
            10,820LIABILITIESCurrent
                Liabilities:Accounts
                Payable
            
            $
            66
            
            $
            1,821
            
            $
            ---
            
            $
            1,887Accrued
                expenses
            
            
            47
            
            
            12
            
            
            ---
            
            
            59Taxes
                Payable
            
            
            7
            
            
            1,143
            
            
            ---
            
            
            1,150Deferred
                revenue & Other
            
            
            271
            
            
            79
            
            
            ---
            
            
            350Total
                Liabilities Held for Sale
            
            $
            391
            
            $
            3,055
            
            $
            ---
            
            $
            3,446





18




As
                of December 31, 2006
            
            (US
                dollars in thousands)MicroPaint Repair
            
            Telecom
                Services
            
            12
                Snap
            
            TotalASSETSCurrent
                assets:Cash
                & Cash Equivalents
            
            $
            81
            
            $
            72
            
            $
            721
            
            $
            874Trade
                Accounts Receivable, net
            
            
            196
            
            
            1,577
            
            
            1,842
            
            
            3,615Inventory
            
            
            154
            
            
            ---
            
            
            ---
            
            
            154Prepaid
                expenses and other current assets
            
            
            36
            
            
            12
            
            
            407
            
            
            455Total
                Current Assets
            
            
            467
            
            
            1,661
            
            
            2,970
            
            
            5,098Leasehold
                improvements and property and
              equipment,
                net
            
            
            135
            
            
            48
            
            
            200
            
            
            383Goodwill
                and other intangible assets, net
            
            
            2,470
            
            
            5,593
            
            
            5,876
            
            
            13,939Total
                Assets Held for Sale
            
            $
            3,072
            
            $
            7,302
            
            $
            9,046
            
            $
            19,420LIABILITIESCurrent
                Liabilities:Accounts
                Payable
            
            $
            25
            
            $
            1,854
            
            $
            640
            
            $
            2,519Accrued
                expenses
            
            
            22
            
            
            6
            
            
            2,144
            
            
            2,172Taxes
                Payable
            
            
            8
            
            
            1,037
            
            
            ---
            
            
            1,045Deferred
                revenue & Other
            
            
            352
            
            
            73
            
            
            4,096
            
            
            4,521Total
                Liabilities Held for Sale
            
            $
            407
            
            $
            2,970
            
            $
            6,880
            
            $
            10,257







Inventory
      included in assets held for sale is as follows:




19





(US
                dollars in thousands)
            
            June
                30,
            
            December
                31,2007(unaudited)
            
            2006Raw
                materials
            
            $
            190
            
            $
            90Work-in-process
            
            
            -
            
            
            -Finished
                goods
            
            
            138
            
            
            64**Total**
            
            **$**
            **328**
            
            **$**
            **154**








Results
      of operations for all discontinued business units are included in the line
      item
      entitled “Loss from discontinued operations” on the accompanying consolidated
      statement of operations for all periods presented. Balance sheet items for
      all
      discontinued business units are included in the line items entitled “Assets held
      for sale” and “Liabilities held for sale” on the accompanying consolidated
      balance sheet for all periods presented. As a result, pro forma results of
      operations as if the sale of each entity had occurred at the beginning of the
      period reported, and pro forma balance sheets as if the sale of each entity
      had
      occurred at the balance sheet dates presented, are not shown separately in
      this
      footnote.





As
      of
      June 30, 2007, NeoMedia had recorded goodwill in the amount of $1,068,000 and
      $4,402,000 relating to its MicroPaint Repair and Telecom Services businesses,
      respectively, that are held for sale. These amounts are included in “Assets held
      for sale” on the accompanying consolidated balance sheet.




20





**5.
      FINANCING**





The
      following disclosures reflect a summary of the Company’s outstanding convertible
      securities, as well as activity related to financing transactions since the
      filing of NeoMedia’s last annual report for the year ended December 31, 2006.
      For a complete discussion of the Company’s financing activity, please refer to
      the Company’s annual report on Form 10-K for the fiscal year ended December 31,
      2006. NeoMedia currently has four outstanding convertible securities, each
      held
      by Cornell Capital Partners.





**Series
      C Convertible Preferred Stock**





NeoMedia
      has outstanding Series C convertible preferred stock in the aggregate amount
      of
      $22,000,000. The Series C convertible preferred stock is convertible into
      NeoMedia common stock at the then effective conversion price, which varies
      relative to NeoMedia’s trading stock price, at the lower of $0.50 per share, or
      97% of the lowest closing bid price (as reported by Bloomberg, L.P.) of the
      common stock for the 30 trading days immediately preceding the conversion date.
      The conversions are limited such that Cornell Capital Partners cannot exceed
      4.99% ownership of NeoMedia. The Series C convertible preferred stock has voting
      rights on an “as converted” basis, meaning the Purchaser is entitled to vote the
      number of shares of common stock into which the 8% cumulative Series C
      convertible preferred stock was convertible as of the record date for a meeting
      of shareholders.





On
      November 29, 2006, the Purchaser exercised the conversion of 378 shares of
      the
      Series C convertible preferred stock for 6,631,579 shares of NeoMedia’s common
      stock, leaving a balance of 21,622 shares of Series C convertible preferred
      stock outstanding. On June 19, 2007, the Purchaser exercised the conversion
      of
      245 shares of the Series C convertible preferred stock for 8,781,362 shares
      of
      NeoMedia’s common stock, leaving a balance of 21,377 shares of the Series C
      convertible preferred stock outstanding.





The Series C
      convertible preferred stock, at the option of the holder, affords the Purchaser
      anti-dilution protection should, at any time while the Series C preferred stock
      instruments are outstanding, the Company offer, sell or grant any option to
      purchase or offer, sell or grant any right to re-price its securities, or
      otherwise dispose of or issue any common stock or common stock equivalents,
      entitle any person to acquire shares of common stock at an effective price
      per
      share less than the then effective conversion price (excluding employee stock
      options), as calculated by the formula described above; then, in such instance,
      the conversion price for the convertible preferred stock shares shall be reduced
      to the lower price. In case of any such adjustment in the effective conversion
      price for the convertible preferred shares, this could significantly dilute
      existing investors.




Under
      the
      Series C Agreement, the Purchaser also received “A” warrants, “B” warrants and
“C” warrants to purchase 20,000,000, 25,000,000, and 30,000,000 shares of
      NeoMedia’s common stock, respectively, exercisable in three separate traunches
      at a price of $0.50, $0.40 and $0.35, respectively, per share, subject to
      adjustment, included under anti-dilution protection similar to that described
      above .
      As an
      inducement to enter into subsequent financing arrangements related to Cornell
      Debentures, the warrants were repriced on December 29, 2006 to $0.04 per share,
      subject to all the original terms and conditions of the respective warrant
      agreements. The Company recorded an additional warrant liability of $250,000
      related to the repricing. The warrants have a five-year contractual life.
      NeoMedia can force exercise of the warrants if the closing bid price of NeoMedia
      stock is more than $0.10 greater than the exercise price of any of the warrants
      for 15 consecutive trading days. It
      is
      important to note that the warrants held by Cornell Capital Partners contain
      a
      provision that, if at the time of exercise, NeoMedia is in default of the
      warrant agreement, the holder can perform a “cashless” exercise of the warrants
      and in lieu of making payment of the exercise price in cash, elect instead
      to
      withhold shares as consideration for the exercise price. In the event of such
      a
“cashless” exercise, NeoMedia would not receive any cash proceeds upon the
      exercise of such warrants. NeoMedia is currently in default of the Investor
      Registration Rights Agreement entered into on February 17, 2006, in connection
      with the Series C
      convertible preferred stock ,
      which
      called for a registration statement containing the shares underlying the
      Series C
      convertible preferred stock to be
      filed by June 1, 2006 and declared effective by December 1, 2006. Such a default
      of the Investor Registration Rights Agreement constitutes an event of default
      under the warrant agreements issued in connection with the Series C
      convertible preferred stock .
      As a
      result, Cornell Capital Partners currently has the right to exercise on a
      cashless basis 75,000,000 of the warrants they hold that were issued in
      connection with the Series C
      convertible preferred stock .




21




In
      connection with the Series C convertible preferred stock, NeoMedia also entered
      into a Registration Rights Agreement with Cornell Capital Partners that requires
      NeoMedia to, among other requirements, file a registration statement with the
      SEC registering the resale of the shares of common stock issuable upon
      conversion of the preferred stock and the exercise of the warrants, and achieve
      and maintain effectiveness of the registration statement. NeoMedia failed to
      meet the registration requirements, and accordingly is subject to liquidated
      damages amounting to 1% of the outstanding amount of Series C preferred stock
      per month, not to exceed $1,200,000. On March 27, 2007, NeoMedia paid $882,000
      of liquidated damages from the proceeds of a secured convertible debenture
      entered into on that date.





**$5
      Million Secured Convertible Debenture - August 2006**





NeoMedia
      has outstanding a 10% secured convertible debenture in the aggregate amount
      of
      $5,000,000, entered into on August 24, 2006 (the “August Debenture”). The August
      Debenture is convertible into NeoMedia common stock at the then effective
      conversion price, which varies relative to NeoMedia’s trading stock price, at
      the lower of $0.15 per share, or 90% of the lowest closing bid price (as
      reported by Bloomberg, L.P.) of the common stock for the 30 trading days
      immediately preceding the conversion date. The conversions are limited such
      that
      Cornell Capital Partners cannot exceed 4.99% ownership of NeoMedia. The August
      Debenture is secured by all of NeoMedia’s assets.





In
      connection with the August Debenture, NeoMedia also entered into a Registration
      Rights Agreement with Cornell Capital Partners that required NeoMedia to, among
      other requirements, file a registration statement with the SEC registering
      the
      resale of the shares of common stock issuable upon conversion of the preferred
      stock and the exercise of the warrants, and achieve and maintain effectiveness
      of the registration statement. NeoMedia failed to meet the registration
      requirements, and accordingly is subject to liquidated damages amounting to
      2%
      of the outstanding amount of the August Debenture per month, not to exceed
      $1,000,000. On March 27, 2007, NeoMedia paid $430,000 of liquidated damages
      from
      the proceeds of a secured convertible debenture entered into on that
      date.





**$2.5
      Million Secured Convertible Debenture - December 2006**





NeoMedia
      has outstanding a 10% secured convertible debenture in the aggregate amount
      of
      $2,500,000, entered into on December 29, 2006 (the “December Debenture”). The
      December Debenture is convertible into NeoMedia common stock at the then
      effective conversion price, which varies relative to NeoMedia’s trading stock
      price, at the lower of $0.06 per share, or 90% of the lowest closing bid price
      (as reported by Bloomberg, L.P.) of the common stock for the 30 trading days
      immediately preceding the conversion date. The conversions are limited such
      that
      Cornell Capital Partners cannot exceed 4.99% ownership of NeoMedia. The December
      Debenture is secured by all of NeoMedia’s assets.





In
      connection with the December Debenture, NeoMedia also entered into a
      Registration Rights Agreement with Cornell Capital Partners that required
      NeoMedia to, among other requirements, file a registration statement with the
      SEC registering the resale of the shares of common stock issuable upon
      conversion of the preferred stock and the exercise of the warrants, and achieve
      and maintain effectiveness of the registration statement. NeoMedia failed to
      meet the registration requirements, and accordingly is subject to liquidated
      damages amounting to 2% of the outstanding amount of the December Debenture
      per
      month, not to exceed $500,000.





**$7.5
      Million Secured Convertible Debenture - March 2007**





NeoMedia
      has outstanding a 13% secured convertible debenture in the aggregate amount
      of
      $7,459,000, entered into on March 27, 2007 (the “March Debenture”). The March
      Debenture is convertible into NeoMedia common stock at the then effective
      conversion price, which varies relative to NeoMedia’s trading stock price, at
      the lower of $0.05 per share, or 90% of the lowest closing bid price (as
      reported by Bloomberg, L.P.) of the common stock for the 30 trading days
      immediately preceding the conversion date. The conversions are limited such
      that
      Cornell Capital Partners cannot exceed 4.99% ownership of NeoMedia. The March
      Debenture is secured by all of NeoMedia’s assets.




22




In
      connection with the March Debenture, NeoMedia also entered into a Registration
      Rights Agreement with Cornell Capital Partners that requires NeoMedia to, among
      other requirements, file a registration statement with the SEC registering
      the
      resale of the shares of common stock issuable upon conversion of the preferred
      stock and the exercise of the warrants, and achieve and maintain effectiveness
      of the registration statement. The registration statement must be filed within
      120 days of receipt of notice from Cornell Capital Partners. No such notice
      has
      been issued as of the date of this filing.





The
      March
      Debenture, at the option of the holder, affords the purchaser anti-dilution
      protection should, at any time while the March Debenture is outstanding, the
      Company offer, sell or grant any option to purchase or offer, sell or grant
      any
      right to re-price its securities, or otherwise dispose of or issue any common
      stock or common stock equivalents, entitle any person to acquire shares of
      common stock at an effective price per share less than the then effective
      conversion price (excluding employee stock options), as calculated by the
      formula described above; then, in such instance, the conversion price for the
      convertible debenture shall be reduced to the lower price.




Under
      the
      terms of the purchase agreement entered into in connection with the March
      Debenture, the purchaser also received warrants to purchase an aggregate of
      up
      to 125,000,000 shares of common stock. The warrants are exercisable at a price
      of $0.04 per share, subject to adjustment, including under anti-dilution
      protection similar to that described above .
      The
      warrants have a five-year contractual life. The warrants do not contain a forced
      exercise attribute similar to previously issued warrants. The
      warrants contain a provision that, if at the time of exercise, NeoMedia is
      in default of the warrant agreement, the holder can perform a “cashless”
exercise of the warrants and in lieu of making payment of the exercise price
      in
      cash, elect instead to withhold shares as consideration for the exercise price.
      In the event of such a “cashless” exercise, NeoMedia would not receive any cash
      proceeds upon the exercise of such warrants. NeoMedia is currently in default
      of
      the Registration Rights Agreement entered into on March 27, 2007, due to a
      pre-existing default on its previous financing arrangements with the Cornell
      Capital Partners. Such a default of the Registration Rights Agreement
      constitutes an event of default under the warrant agreement issued in connection
      with the March Debenture. As a result, Cornell Capital Partners currently has
      the right to exercise on a cashless basis the 125,000,000 of warrants they
      hold
      that were issued in connection with the March Debenture.





At
      the
      inception date of March 27, 2007, the components of the March Debenture were
      allocated as follows:




**Instrument:**Convertible
                debenture
            
            $
            10,836,000Common
                stock warrants(1)
            
            
            5,638,000Payment
                of liquidating damages(2)
            
            
            (1,312,000
            )Payment
                of interest due(3)
            
            
            (366,000
            )Derivative
                loss
            
            
            (9,015,000
            )Interest
                expense(4)
            
            
            (781,000
            )Total
                gross proceeds
            
            $
            5,000,000





(1)
            The
                Company issued warrants to purchase aggregate 125,000,000 shares
                of common
                stock in connection with the March Debenture, as described above.


(2)
            Liquidating
                damages arising from the February 2006 preferred financing arrangement
                and
                the August Debenture were paid from the proceeds in the amount of
                $1,312,000.


(3)
            Interest
                payments of $366,000 toward the August Debenture and the December
                Debenture were made from the proceeds of the March
                Debenture..


(4)
            Due
                to the default status, the financing costs of $781,000 were expensed
                to
                interest expense.




23




**Warrants**





In
      addition, Cornell Capital Partners also hold warrants to purchase shares of
      NeoMedia stock at various prices, as follows:


**Shares**
            
            **Original**
            
            **Restated****Underlying**
            
            **Exercise**
            
            **Exercise****Original
                Issue Date**
            
            **Warrant**
            
            **Price**
            
            **Price****(1)**March
                30, 2005
            
            
            10,000,000
            
            $
            0.20
            
            $
            0.04February
                17, 2006(2)
            
            
            20,000,000
            
            $
            0.50
            
            $
            0.04February
                17, 2006(2)
            
            
            25,000,000
            
            $
            0.40
            
            $
            0.04February
                17, 2006(2)
            
            
            30,000,000
            
            $
            0.35
            
            $
            0.04August
                24, 2006(2)
            
            
            25,000,000
            
            $
            0.15
            
            $
            0.04August
                24, 2006(2)
            
            
            50,000,000
            
            $
            0.25
            
            $
            0.04August
                24, 2006(2)
            
            
            50,000,000
            
            $
            0.20
            
            $
            0.04August
                24, 2006(2)
            
            
            50,000,000
            
            $
            0.05
            
            
            n/aDecember
                29, 2006(2)
            
            
            42,000,000
            
            $
            0.06
            
            
            n/aMarch
                27, 2007
            
            
            125,000,000
            
            $
            0.04
            
            
            n/a**Total**
            
            
            **427,000,000**


____________________





(1)
            The
                exercise price of certain of the warrants were repriced in connection
                with
                subsequent financing arrangements.





(2)
            NeoMedia
                can force exercise of the warrants if the closing bid price of NeoMedia
                stock is more than $0.10 greater than the exercise price of any of
                the
                warrants for 15 consecutive trading days.








**Default
      and Other Considerations**





Each
      of
      the convertible securities described above contains consequences in case of
      default. Events of default which could subject the Company to penalties,
      damages, and liabilities as specified in the financing agreements
      include:




·
            Any
                case or action of bankruptcy or insolvency commenced by the Company
                or any
                subsidiary, against the Company or adjudicated by a court against
                the
                Company for the benefit of
                creditors;




·
            Any
                default in its obligations under a mortgage or debt in excess of
                $100,000;




·
            Any
                cessation in the eligibility of the Company’s stock to be quoted on a
                trading market;




·
            Failure
                to timely file the registration statement covering the shares related
                to
                the conversion option, or failure to make the registration statement
                effective timely (NeoMedia is in default of this provision with respect
                to
                the Series C convertible preferred stock , the August Debenture,
                and the
                December Debenture);




·
            Any
                lapse in the effectiveness of the registration statement covering
                the
                shares related to the conversion option, the warrants as described
                and
                transacted in the securities purchase agreement and accompanying
                documents;




24




·
            Any
                failure to deliver certificates within the specified time;
                and




·
            Any
                failure, by the Company, to pay in full the amount of cash due pursuant
                to
                a buy-in or failure to pay any amounts owed on account on account
                of an
                event of default within 10 days of the date
                due.




Other
      material provisions of the convertible securities include the
      following:




·
            The
                8 convertible securities are convertible into common stock, at the
                option
                of Cornell Capital Partners, at any time after the effective
                date;




·
            Conversions
                can be made in increments and from time to
                time;




·
            As
                promptly as practicable after any conversion date and subject to
                an
                effective registration statement or an exemption from registration,
                the
                Company shall cause its transfer agent to deliver a certificate
                representing the converted shares, free of any legends and trading
                restrictions for the number of shares
                converted;




·
            The
                Company will reserve and keep available authorized and unissued registered
                shares available to be issued upon
                conversion;




·
            Cornell
                Capital Partners will not be responsible for any transfer taxes relative
                to issuance of shares;




·
            If
                the Company offers, sells or grants stock at an effective per share
                price
                less than the then-effective conversion price, then the conversion
                price
                shall be reduced to equal the effective conversion, exchange or purchase
                price for such common stock or common stock
                equivalents;




·
            Without
                Cornell Capital Partners’ consent NeoMedia
                cannot:




-­
            issue
                or sell any shares of common stock or preferred stock without
                consideration or for consideration per share less than the closing
                bid
                price immediately prior to its issuance,




-­
            issue
                or sell any preferred stock, warrant, option, right, contract, call,
                or
                other security or instrument granting the holder thereof the right
                to
                acquire common stock for consideration per share less than the closing
                bid
                price immediately prior to its issuance,




-­
            enter
                into any security instrument granting the holder a security interest
                in
                any of its assets of,or




-­
            file
                any registration statements on Form S-8.




·
            Pursuant
                to security agreements between NeoMedia and Cornell Capital Partners
                signed in connection with the convertible debentures, the Purchaser
                has a
                security interest in all of NeoMedia’s assets.




25




Due
      to
      the current default status, Cornell Capital Partners has certain material rights
      that did not exist prior to default. Specifically, the full face value of each
      convertible instrument is callable, and NeoMedia is responsible for liquidated
      damages until the default is cured, as follows:





**Series
                C****Convertible**
            
            **August**
            
            **December**
            
            **March****Preferred**
            
            **2006**
            
            **2006**
            
            **2007****Stock**
            
            **Debenture**
            
            **Debenture**
            
            **Debenture**
            
            **Total**Amount
                callable (face value)
            
            $
            21,377,000
            
            $
            5,000,000
            
            $
            2,500,000
            
            $
            11,300,000
            
            $
            40,177,000Liquidated
                damages paid March 27, 2007
            
            $
            821,000
            
            $
            491,000
            
            
            ---
            
            
            ---
            
            $
            1,312,000Liquidated
                damages accrued at June 30, 2007
            
            $
            379,000
            
            $
            509,000
            
            $
            500,000
            
            
            ---
            
            $
            1,388,000





In
      addition, the accounting for the convertible securities reflects certain
      specific accounting rules and regulations that are applicable under the default
      provision:





·
            Prior
                to the default, NeoMedia was accreting dividends on the Series C
                convertible preferred stock, using the effective interest method,
                through
                periodic charges to additional paid in capital. Due to the default
                status,
                NeoMedia accreted dividends to the full fair value of the Series
                C
                convertible preferred stock during the fourth quarter of
                2006.




·
            Prior
                to the default, NeoMedia was accreting the debt discount on the August
                Debenture and the December Debenture, using the effective interest
                method,
                through periodic charges to interest expense. Due to the default
                status,
                during the fourth quarter of 2006, NeoMedia accreted debt discount
                to the
                full fair value of these secured convertible
                debentures.




·
            The
                Series C convertible preferred stock is now reported as demand debt
                in the
                current liabilities section of the balance sheet, pursuant to the
                guidance
                outlined in SFAS 150.




·
            The
                secured convertible debentures are reported as debt in the current
                liabilities section of the balance sheet rather than long term because
                the
                debenture is callable as demand debt due to the
                default.







**Fair
      Value Considerations**





In
      accordance with Statement of Financial Accounting Standards No. 133,
‘Accounting for Derivative Instruments and Hedging Activities’
(“FASB 133”), the Company determined that the conversion features of the
      Series C convertible preferred stock, the August Debenture, and the December
      Debenture met the criteria of embedded derivatives and therefore the conversion
      features of these instruments needed to be bifurcated and accounted for as
      derivatives. These instruments do not meet the definition of “conventional
      convertible debt” because the number of shares which may be issued upon their
      conversion is not fixed, and there is no cap on the number of shares that could
      be issued upon conversion. Therefore, the conversion feature fails to qualify
      for equity classification under EITF 00-19, and must be accounted for as a
      derivative liability.





Each
      new
      financing arrangement is evaluated, on an instrument basis, for the
      applicability of Statement of Financial Accounting Standards 155, ‘Accounting
      for Certain Hybrid Financial Instruments an amendment of FASB Statements No.
      133
      and 140’ (“FASB 155”), which permits fair value re-measurement for any hybrid
      financial instrument that contains an embedded derivative that otherwise would
      require bifurcation. During the evaluation of the March Debenture, the Company
      determined (i) the hybrid debt instrument embodied certain derivative features
      that were not clearly and closely related to the host debt instrument and,
      (ii)
      warrants issued in connection with the March Debenture did not meet all of
      the
      established criteria for equity classification. Additionally, the March
      Debenture extended a right to the holder to accelerate repayment of the debt
      (default put) and contains cash penalties upon the occurrence of certain
      contingent events. In order for contingently exercisable call and puts to be
      considered clearly and closely related, they can be indexed only to interest
      rates or credit risk, not another factor that does not possess the same risk
      as
      debt. Since the default put is indexed to other than interest rates or credit
      risk and it may be triggered upon events that are not within the Company’s
      control, it is not deemed to be clearly and closely related to the host debt
      instrument. The warrants did not meet all of the established criteria for equity
      classification provided in EITF 00-19. The Company applied the provisions of
      FAS
      155 to the March Debenture, accordingly, the convertible instruments are being
      carried at their respective fair values with the changes in the fair value
      of
      the secured convertible debenture and related derivatives recorded in the
      statement of operations.




26




Freestanding
      derivative instruments, consisting of warrants that arose from the financings,
      are valued using the Black-Scholes-Merton valuation methodology because that
      model embodies all of the relevant assumptions that address the features
      underlying these instruments. Significant assumptions included in this model
      as
      of June 30, 2007 are as follows:





**Series
                C****Convertible**
            
            **August**
            
            **December**
            
            **March****Preferred**
            
            **2006**
            
            **2006**
            
            **2007**
            
            **Other****Stock**
            
            **Debenture**
            
            **Debenture**
            
            **Debenture**
            
            **Warrants**Holder
            
            
            Cornell
            
            
            Cornell
            
            
            Cornell
            
            
            Cornell
            
            
            OtherInstrument
            
            
            Warrants
            
            
            Warrants
            
            
            Warrants
            
            
            Warrants
            
            
            WarrantsExercise
                price
            
            $
            0.04
            
            $
            0.04
                - $0.05
            
            $
            0.06
            
            $
            0.04
            
            $
            0.01-$3.45Term
                (years)
            
            
            3.63
            
            
            4.17
            
            
            4.50
            
            
            4.75
            
            
            0.53-3.63Volatility
            
            
            95.15
            %
            
            97.58
            %
            
            160.61
            %
            
            160.61
            %
            
            95.46%-160.61
            %Risk-free
                rate
            
            
            4.89
            %
            
            4.92
            %
            
            4.92
            %
            
            4.92
            %
            
            4.82
                - 4.91
            %





Embedded
      derivative financial instruments arising from the convertible instruments
      consist of multiple individual features that were embedded in each instrument.
      For each convertible instrument, the Company evaluated all significant features
      as required under current accounting standards, and aggregated the components
      into one compound derivative financial instrument for financial reporting
      purposes. For financings recorded in accordance with FAS 133, the compound
      embedded derivative instruments are valued using the Flexible Monte Carlo
      methodology because that model embodies certain relevant assumptions (including,
      but not limited to, interest rate risk, credit risk, and conversion/redemption
      privileges) that are necessary to value these complex derivatives. For
      financings recorded in accordance with FAS 155, the entire hybrid instrument
      is
      initially recorded at fair value and subsequent changes in fair value are
      recognized in earnings.




27




Assumptions
      used as of June 30, 2007 included exercise estimates/behaviors and the following
      other significant estimates:





**Series
                C****Convertible**
            
            **August**
            
            **December**
            
            **March****Preferred**
            
            **2006**
            
            **2006**
            
            **2007****Stock**
            
            **Debenture**
            
            **Debenture**
            
            **Debenture**Conversion
                prices
            
            $
            0.028
            
            $
            0.032
            
            $
            0.026
            
            
            *Remaining
                terms (years)
            
            
            1.6
            
            
            1.2
            
            
            1.5
            
            
            *Equivalent
                volatility
            
            
            105.90
            %
            
            110.20
            %
            
            106.00
            %
            
            *Equivalent
                interest-risk adjusted rate
            
            
            14.70
            %
            
            9.17
            %
            
            13.60
            %
            
            *Equivalent
                credit-risk adjusted yield rate
            
            
            64.63
            %
            
            36.01
            %
            
            33.70
            %
            
            **
                The Monte Carlo calculation is not performed under FAS155.





Equivalent
      amounts reflect the net results of multiple modeling simulations that the Monte
      Carlo Simulation methodology applies to underlying assumptions. The assumptions
      included in the Monte Carlo Simulation calculation are highly subjective and
      subject to interpretation.








**Current
      Period Accounting Considerations**





Due
      to
      the Company’s default position with respect to the convertible financial
      instruments, the carrying value of each instrument in effect as of December
      31,
      2006 was written up to the respective full fair value during the fourth quarter
      of 2006. In addition, the March Debenture was recorded at its full fair value
      pursuant to FASB 155. The carrying value and fair value of each instrument
      as of
      June 30, 2007 was:





**Series
                C****Convertible**
            
            **August**
            
            **December**
            
            **March****Preferred**
            
            **2006**
            
            **2006**
            
            **2007****Stock**
            
            **Debenture**
            
            **Debenture**
            
            **Debenture**Carrying
                value
            
            $
            21,377,000
            
            $
            5,000,000
            
            $
            2,500,000
            
            $
            11,300,000





Derivative
      financial instruments arising from the issuance of convertible financial
      instruments are initially recorded, and continuously carried, at fair value.
      Upon conversion of any derivative financial instrument, the change in fair
      value
      from the previous reporting date to the date of conversion is recorded to income
      (loss), and then the carrying value is recorded to paid-in capital, provided
      all
      other criteria for equity classification are met.




28




The
      following tabular presentation reflects the components of derivative financial
      instruments related to convertible financial instruments on the Company’s
      balance sheet at June 30, 2007:





**Series
                C****Convertible**
            
            **August**
            
            **December**
            
            **March****Preferred**
            
            **2006**
            
            **2006**
            
            **2007****Stock**
            
            **Debenture**
            
            **Debenture**
            
            **Debenture****(Assets)
                Liabilities:**Common
                stock warrants
            
            $
            1,703,000
            
            $
            4,706,000
            
            $
            1,844,000
            
            $
            4,050,000Embedded
                conversion feature
            
            
            7,424,000
            
            
            1,439,000
            
            
            1,912,000
            
            
            ---Other
                warrants(1)
            
            
            137,000
            
            
            ---
            
            
            ---
            
            
            ---$
            9,264,000
            
            $
            6,145,000
            
            $
            3,756,000
            
            $
            4,050,000





(1)
      The
      fair values of certain other derivative financial instruments (warrants) that
      existed at the time of the issuance of Series C convertible preferred stock
      were
      reclassified from stockholders’ equity to liabilities when, in connection with
      the issuance of Series C convertible preferred stock, the Company no longer
      controlled its ability to share-settle these instruments. These derivative
      financial instruments had fair values of $14,331,000, $977,000 and $388,000
      on
      February 17, 2006, December 31, 2006, and June 30, 2007, respectively. The
      decrease in fair value of these other derivative financial instruments resulted
      from a decrease in NeoMedia’s share price between February 17, 2006, December
      31, 2006, and June 30, 2007. The change in fair value is reported as “Gain on
      derivative financial instruments” on the condensed consolidated statement of
      operations during each period. These warrants will be reclassified to
      stockholders’ equity when the Company reacquires the ability to share-settle the
      instruments.





The
      following table reflects the number of common shares into which the
      aforementioned derivative financial instruments are convertible or exercisable
      at June 30, 2007:





**Series
                C****Convertible**
            
            **August**
            
            **December**
            
            **March****Preferred**
            
            **2006**
            
            **2006**
            
            **2007**
            
            **Other****Stock**
            
            **Debenture**
            
            **Debenture**
            
            **Debenture**
            
            **Warrants**Common
                stock warrants
            
            
            75,000,000
            
            
            175,000,000
            
            
            42,000,000
            
            
            125,000,000
            
            
            16,325,000Embedded
                conversion feature(1)
            
            
            852,238,535
            
            
            158,730,159
            
            
            95,785,441
            
            
            285,772,069
            
            
            ---Total
            
            
            927,238,535
            
            
            333,730,159
            
            
            137,785,441
            
            
            410,772,069
            
            
            16,325,000








(1)  The
      terms
      of the embedded conversion features in the convertible instruments presented
      above provide for variable conversion rates that are indexed to the Company’s
      trading common stock price. As a result, the number of indexed shares is subject
      to continuous fluctuation. For presentation purposes, the number of shares
      of
      common stock into which the embedded conversion feature was convertible as
      of
      June 30, 2007 was calculated as the face value of each instrument, plus assumed
      dividends (on preferred stock only, if declared), divided by the applicable
      conversion price for each instrument, which ranges from 90%-97% of the lowest
      closing bid price for the 30 trading days preceding June 30, 2007.





29




Derivative
      income (expense) associated with adjustments recorded to reflect the
      aforementioned derivatives at fair value are reported as “Gain (loss) on
      derivative financial instruments” in the accompanying condensed consolidated
      statement of operations. Derivative income (expense) for the periods presented
      herein were:




**Series
                C****Convertible**
            
            **August**
            
            **December**
            
            **March**
            
            **Other**
            
            **Total****Preferred**
            
            **2006**
            
            **2006**
            
            **2007**
            
            **Derivative**
            
            **Derivative****Period**
            
            **Stock**
            
            **Debenture**
            
            **Debenture**
            
            **Debenture**
            
            **Instruments**
            
            **Gain
                (loss)**Three
                months ended June 30, 2007
            
            
            ($3,439,000
            )
            $
            3,590,000
            
            
            ($119,000
            )
            $
            1,213,000
            
            
            ($123,000
            )
            $
            1,122,000Three
                months ended June 30, 2006
            
            $
            11,005,000
            
            
            ---
            
            
            ---
            
            
            ---
            
            $
            21,000
            
            $
            11,026,000Six
                months ended June 30, 2007
            
            
            ($610,000
            )
            $
            5,796,000
            
            
            ($18,000
            )
            
            ($7,428,000
            )
            
            ($126,000
            )
            
            ($2,386,000
            )Six
                months ended June 30, 2006
            
            $
            15,773,000
            
            
            ---
            
            
            ---
            
            
            ---
            
            $
            21,000
            
            $
            15,794,000




The
      fair
      value of derivative financial instruments recorded as of June 30, 2007
      (unaudited) and December 31, 2006 was:





**(US
                dollars in thousands)**
            
            **June
                30,**
            
            **December
                31,****2007**
            
            **2006****Unaudited**Warrants
                and embedded conversion features in preferred stock
            
            $
            9,264
            
            $
            8,815Warrants
                and embedded conversion features in debentures
            
            
            13,951
            
            
            15,679Fair
                value of future payment obligation
            
            
            660
            
            
            564Special
                preference stock of Mobot
            
            
            237
            
            
            359Total
                derivative financial instruments
            
            $
            24,112
            
            $
            25,417







As
      of
      June 30, 2007 cumulative dividends earned but not declared in excess of the
      carrying value for the Series C convertible preferred stock were
      $861,000.




30




**6.** **INVESTMENT
      IN MARKETABLE SECURITIES AND OTHER LONG-TERM ASSETS**





On
      February 25, 2005, NeoMedia invested $250,000 in exchange for 8,333,333 shares
      of Pickups Plus, Inc. (“PUPS”) restricted common stock. On February 17, 2006, as
      a component of net proceeds from the issuance of 8% Series C convertible
      preferred stock, NeoMedia received marketable securities with a fair value
      of
      $579,000, of which, $200,000 represented 20,000,000 shares of PUPS common stock
      and $379,000 in notes designated as held to maturity. PUPS, a
      franchiser of retail automotive parts and accessories stores catering to the
      light truck market, and also provides new vehicle preparation, environmental
      protection packages, detailing and reconditioning products and services. In
      accordance with Statements
      of Financial Accounting Standards No. 115, “Accounting for Certain Investments
      in Debt and Equity Securities,” the investment in PUPS is being recorded as
      available-for-sale securities and reported at fair value. Accordingly,
      unrealized gains and losses on the equity securities are reflected in the
      condensed consolidated statement of operations and comprehensive income (loss).
      Investment in marketable securities consist of the fair market value of the
      PUPS
      common stock of $14,000 as of June 30, 2007.





Other
      long term assets and investments consisted of the following as of June 30,
      2007:





**Unrealized****Holding**
            
            **Impairment****Gains**
            
            **Amount**
            
            **Carrying****Cost**
            
            **(Losses)**
            
            **Realized**
            
            **Value**Held
                to maturity, notes receivable PUPS1
            
            $
            379,000
            
            $
            ---
            
            
            ($379,000
            )
            $
            ---Investment
                in Mobot2
            
            
            1,926,000
            
            
            ---
            
            
            ---
            
            
            1,926,000Investment
                in Sponge3
            
            
            1,399,000
            
            
            ---
            
            
            ---
            
            
            1,399,000Investment
                in 12Snap4
            
            
            380,000
            
            
            ---
            
            
            ---
            
            
            380,000**Total**
            
            **$**
            **4,084,000**
            
            **$**
            **---**
            
            
            **($379,000**
            **)**
            **$**
            **3,705,000**





(1)Held
      to maturity securities consist of four notes receivable from PUPS with a face
      value of $1,611,000 and a fair value of $0. NeoMedia incurred an impairment
      charge of $379,000 in the fourth quarter of 2006 to reduce the carrying value
      of
      the notes receivable to their expected realizable value of zero. The notes
      are
      delinquent and accrue interest at rates between 12 - 24%. NeoMedia has not
      recorded any interest since the Company is using the cost recovery method.


(2)Investment
      in Mobot consists of shares of FMS Group, representing NeoMedia’s 18% ownership
      of FMS Group, which currently operates the Mobot business.


(3)Investment
      in Sponge consists of shares of Sponge, representing NeoMedia’s 7.5% ownership
      of Sponge.


(4)Investment
      in 12Snap consists of shares of 12Snap, representing NeoMedia’s 10% ownership of
      12Snap retained by NeoMedia after the April 2007 divestiture.




31





**7.** **COMPUTATION
      OF NET INCOME (LOSS) PER SHARE**





Basic
      net
      income (loss) per share is computed by dividing net income (loss) by the
      weighted average number of shares of common stock outstanding during the period.
      Diluted earnings per share is computed on the basis of the weighted average
      number of shares of common stock plus the effect of dilutive potential common
      shares outstanding during the period using the treasury stock method. Dilutive
      potential common shares include in-the-money stock options and warrants, and
      convertible preferred stock and debenture instruments. During the three and
      six
      months ended June 30, 2007, the Company reported net loss per share, and as
      such
      basic and diluted loss per share were equivalent. For the three and six months
      ended June 30, 2007, the Company has excluded all outstanding stock options
      and
      warrants, as well as convertible securities on an “as-converted” basis, from the
      calculation of diluted net loss per share because these securities are
      anti-dilutive. The shares excluded from the calculation of diluted net loss
      per
      share are detailed in the table below:





**Six
                Months Ended****June
                30, 2007**Outstanding
                stock options
            
            
            114,083,016Outstanding
                warrants
            
            
            439,825,000Series
                C Convertible Preferred Stock(1)
            
            
            843,528,973Convertible
                debt(1)
            
            
            540,287,6691,937,724,658








(1) The
      terms
      of the embedded conversion features (“ECF”) in the Series C convertible
      preferred stock and the convertible debentures provide for variable conversion
      rates that are indexed to the Company’s trading common stock price. As a result,
      the number of indexed shares is subject to continuous fluctuation. For
      presentation purposes, the number of shares of common stock into which the
      ECF
      in the Series C convertible stock was convertible as of June 30, 2007 was
      calculated as the face value of $21,622,000 plus assumed dividends of $2,351,000
      if declared, divided by 97% of the lowest closing bid price for the 30 trading
      days preceding June 30, 2007. For presentation purposes, the number of shares
      of
      common stock into which the ECF’s in the convertible debentures was convertible
      as of June 30, 2007 was calculated as the face value of the instruments divided
      by 90% of the lowest closing bid price for the 30 trading days preceding June
      30, 2007.


.





For
      the
      three and six month periods ended June 30, 2006, the Company reported net
      income, and as such, reported diluted earnings per share. The effect on weighted
      average shares outstanding of dilutive potential shares during the three and
      six
      months ended June 30, 2006 are detailed in the table below:





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30, 2006**
            
            **June
                30, 2006**In-the-money
                options and warrants
            
            
            66,695,100
            
            
            75,508,850Convertible
                Preferred Stock (on an as converted basis - June 30, 2006)
                (1)
            
            
            116,579,361
            
            
            116,579,361183,274,461
            
            
            192,088,211





(1)
      The
      terms of the embedded conversion features (ECF) in the Series C convertible
      preferred stock provide for variable conversion rates that are indexed to the
      Company’s trading common stock price. As a result, the number of indexed shares
      is subject to continuous fluctuation. For presentation purposes, the number
      of
      shares of common stock into which the ECF was convertible as of June 30, 2006
      was calculated as the face value of $22,000,000 plus assumed dividends of
      $660,000 if declared, divided by 97% of the lowest closing bid price for the
      30
      trading days preceding June 30, 2006.




32




**8.
      STOCK BASED COMPENSATION**





**Equity-based
      Compensation Plans**





Effective
      March 27, 1998, NeoMedia adopted the 1998 Stock Option Plan making available
      for
      grant to employees of NeoMedia options to purchase up to 8,000,000 shares of
      NeoMedia's common stock. The stock option committee of the Board of Directors
      has the authority to determine to whom options will be granted, the number
      of
      options, the related term, and exercise price. The option exercise price may
      be
      less than the fair market value per share of NeoMedia's common stock on the
      date
      of grant. Options generally vest 20% upon grant and 20% per year thereafter.
      The
      options expire ten years from the date of grant. As of June 30, 2007, no options
      were outstanding under the 1998 Stock Option Plan.





Effective
      June 6, 2002, NeoMedia adopted its 2002 Stock Option Plan. The 2002 Stock Option
      Plan provides for authority for the stock option committee of the Board of
      Directors to grant non-qualified stock options with respect to a maximum of
      10,000,000 shares of common stock. The option exercise price may be less than
      the fair market value per share of NeoMedia's common stock on the date of grant,
      and may be granted with any vesting schedule as approved by the stock option
      committee. As of June 30, 2007, no options were outstanding under the 2002
      Stock
      Option Plan.





Effective
      September 24, 2003, NeoMedia adopted its 2003 Stock Option Plan. The 2003 Stock
      Option Plan provides for authority for the Board of Directors to the grant
      non-qualified stock options with respect to a maximum of 150,000,000 shares
      of
      common stock. The option exercise price may be less than the fair market value
      per share of NeoMedia's common stock on the date of grant, and may be granted
      with any vesting schedule as approved by the stock option committee. As of
      June
      30, 2007, options to purchase 114,083,016 shares of common stock were
      outstanding under the 2003 Stock Option Plan.





Effective
      December 16, 2005, NeoMedia adopted its 2005 Stock Option Plan. The 2005 Stock
      Option Plan provides for authority for the Board of Directors to the grant
      non-qualified stock options with respect to a maximum of 60,000,000 shares
      of
      common stock. The option exercise price may be less than the fair market value
      per share of NeoMedia's common stock on the date of grant, and may be granted
      with any vesting schedule as approved by the stock option committee. As of
      June
      30, 2007, options to purchase all 60,000,000 shares of common stock remained
      available for issuance under the 2005 Stock Option Plan.





Effective
      October 31, 2003, NeoMedia adopted the 2003 Stock Incentive Plan. Under the
      terms of the 2003 Stock Incentive Plan, NeoMedia has set aside up to 30 million
      shares of common stock to be issued to pay compensation and other expenses
      related to employees, former employees, consultants, and non-employee directors.
      As of June 30, 2007, 426,451 shares of common stock remained available for
      issuance under the 2003 Stock Incentive Plan.








**Stock
      Option Repricing - February 2007**





On
      February 1, 2007, NeoMedia instituted a stock option repricing plan as a
      retention tool to align its employees with the new vision of NeoMedia. Under
      the
      plan, NeoMedia repriced 50,148,750 stock options held by current employees,
      contractors, and directors.





Options
      for employees of NeoMedia’s ongoing operations were repriced as follows: (i)
      options that were vested as of February 1, 2007, were repriced to $0.045 per
      share, which was the last sale price on February 1, 2007, (ii) options that
      are
      scheduled to vest during the remainder of 2007 were repriced to $0.075, (iii)
      options that vest during 2008 were repriced to $0.125, and (iv) options that
      vest during 2009 were repriced to $0.175. Options will continue to vest on
      their
      regular schedule, which generally is 25% upon grant and 25% on each subsequent
      anniversary date.




33




The
      Company also repriced options for outside directors as follows: options with
      an
      exercise price below $0.24 were repriced to $0.045, and options with an exercise
      price $0.24 or higher were repriced to $0.075.





In
      addition, the Company repriced options held by employees of its held for sale
      Micro Paint repair and Telecom Services businesses, such that all vested options
      were repriced to $0.045 per share, and all unvested options will vest upon
      sale
      of the respective business unit at an exercise price of $0.075 per share, with
      a
      12-month period to exercise.





NeoMedia
      accounted for the repricing of stock options in accordance with FASB Statement
      No. 123, Accounting for Stock-Based Compensation (“Statement 123(R)”). NeoMedia
      calculated the fair value of the modified and the repriced options using the
      original terms and the modified terms as of the repricing date, and recorded
      the
      incremental cost of the modified option over the original option as additional
      compensation cost. Costs related to fully vested options including accelerated
      vesting were expensed immediately and the costs related to unvested stock
      options will be recognized over the remaining vesting period of the option. Unrecognized
      compensation expense relating to the original option grant will continue to
      be
      recognized as if the repricing had not occurred.





In
      connection with the option repricing, NeoMedia recognized additional stock
      based
      compensation expense as outlined in the following table. No expense was
      recognized during the three and six months ended June 30, 2006 in connection
      with the repricing.


**Three**
            
            **Six****Months**
            
            **Months****Ended**
            
            **Ended****June
                30,**
            
            **June
                30,****2007**
            
            **2007**Stock
                option repricing expense allocated to:
            
            (in
                thousands)Sales
                and marketing expense
            
            $
            5
            
            $
            115General
                and administrative expense
            
            
            3
            
            
            118Research
                and development expense
            
            
            2
            
            
            66Total
                stock option repricing expense included in continuing
                operations
            
            
            10
            
            
            299Plus:
                stock option repricing expense included in discontinued
                operations
            
            
            394
            
            
            749Total
                stock option repricing expense reflected in net loss
            
            **$**
            **404**
            
            **$**
            **1,048**





The
      weighted-average grant-date fair value of options repriced on February 1, 2007,
      using the options’ modified terms, was $0.03. As of June 30, 2007, there was
      $70,000 of total unrecognized compensation cost related to nonvested options
      repriced on February 1, 2007. That cost is expected to be recognized over a
      weighted-average period of 0.7 years.





**Stock
      Incentive Plan**





Under
      the
      shareholder-approved 2003 Stock Incentive Plan, NeoMedia has set aside up to
      30,000,000 shares of common stock to be issued to pay compensation and other
      expenses related to employees, former employees, consultants, and non-employee
      directors. During the three and six months ended June 30, 2007 and 2006,
      NeoMedia issued shares from the 2003 Stock Incentive Plan as
      follows:





**Three
                Months**
              **Ended
                June 30,**
            
            **Six
                Months**
              **Ended
                June 30,**(US
                dollars in thousands, except share amounts)
            
            **2007**
            
            **2006**
            
            **2007**
            
            **2006**Shares
                issued under 2003 Stock Incentive Plan
            
            
            1,206,364
            
            
            129,215
            
            
            1,298,957
            
            
            181,847Aggregate
                grant date fair value of shares issued
            
            $
            68
            
            $
            48
            
            $
            73
            
            $
            64Expense
                recognized
            
            $
            68
            
            $
            48
            
            $
            73
            
            $
            64





34




**Adoption
      of FASB Statement No. 123**





Prior
      to
      January 1, 2006, NeoMedia accounted for its stock option plans under the
      recognition and measurement provisions of APB Opinion No. 25, Accounting for
      Stock Issued to Employees, and related Interpretations, as permitted by
      Statement 123(R). No stock-based employee compensation cost was recognized
      in
      the statement of operations for the fiscal years or interim periods ended prior
      to December 31, 2005, as all options granted under those plans had an exercise
      price equal to the market value of the underlying common stock on the date
      of
      grant. Effective January 1, 2006, NeoMedia adopted the fair value recognition
      provisions of Statement 123(R), using the modified-prospective-transition
      method. Under that transition method, compensation cost recognized in 2006
      includes: (a) compensation cost for all share-based payments granted prior
      to,
      but not yet vested as of January 1, 2006, based on the grant date fair value
      estimated in accordance with the original provisions of Statement 123, and
      (b)
      compensation cost for all share-based payments granted subsequent to January
      1,
      2006, based on the grant-date fair value estimated in accordance with the
      provisions of Statement 123(R). Results for prior periods were not
      restated.





Total
      stock based compensation recognized during three and six month periods ended
      June 30, 2007 and 2006, inclusive of expense associated with the option
      repricing and stock incentive plan described above, was:





**Three
                months ended**
            
            **Six
                months ended****June
                30,**
            
            **June
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Stock
                based compensation allocated to:
            
            (in
                thousands)
            
            (in
                thousands)Sales
                and marketing expense
            
            $
            205
            
            $
            380
            
            $
            550
            
            $
            809General
                and administrative expense
            
            
            454
            
            
            351
            
            
            843
            
            
            701Research
                and development expense
            
            
            85
            
            
            130
            
            
            242
            
            
            260Total
                stock based compensation
              included
                in continuing operations
            
            
            744
            
            
            861
            
            
            1,635
            
            
            1,770Plus:
                stock based compensation
              included
                in discontinued operations
            
            
            544
            
            
            333
            
            
            1,081
            
            
            953Total
                stock based compensation
              expense
                reflected in net income (loss)
            
            **$**
            **1,288**
            
            **$**
            **1,194**
            
            **$**
            **2,716**
            
            **$**
            **2,723**





During
      the three and six months ended June 30, 2007, NeoMedia issued stock options
      as
      follows:




**Three
                Months**
            
            **Six
                Months**·
            Employees
            123,500
            
            5,523,500·
            Officers
            20,000,000
            
            20,000,000·
            Directors
            ---
            
            ---·
            Contractors
            2,250,000
            
            3,250,000·
            Total
            22,373,500
            
            28,773,500






Estimated
      income tax benefits recognized during the three and six months ended June 30,
      3007 and 2006 were offset by a valuation allowance since realization was not
      reasonably assured. Prior to the adoption of Statement 123(R), it was NeoMedia’s
      policy to present all tax benefits of deductions resulting from the exercise
      of
      stock options as operating cash flows in its statement of cash flows, however,
      due to NeoMedia’s tax loss carryforward, any such benefits were always fully
      offset by a valuation allowance. Statement 123(R) requires the cash flows
      resulting from the tax benefits resulting from tax deductions in excess of
      the
      compensation cost recognized for those options (excess tax benefits) to be
      classified as financing cash flows. NeoMedia will use this presentation if
      and
      when it has exhausted its tax loss carryforward.




35




The
      weighted-average grant-date fair value of options granted during the six months
      ended June 30, 2007 and 2006 was $0.02 and $0.11, respectively. The total
      intrinsic value of options exercised during the six months ended June 30, 2007
      and 2006 was $77,000 and $411,000, respectively. Total cash received from
      options exercised was $16,000 and $316,000, respectively, for the six months
      ended June 30, 2007 and 2006. As of June 30, 2007, there was $4,048,000 of
      total
      unrecognized compensation cost related to nonvested share-based compensation
      arrangements granted under the Plans. That cost is expected to be recognized
      over a weighted-average period of 1.5 years.




NeoMedia
      used the following assumptions for grants during the six months ended June
      30,
      2007 and 2006:





**Six
                Months ended June 30,****2007**
            
            **2006**Volatility
            
            
            96.15%
                - 115.05
            %
            
            56.47
            %Expected
                dividends
            
            
            ---
            
            
            ---Expected
                term (in years)
            
            
            3
            
            
            3Risk-free
                rate
            
            
            4.35
            %
            
            4.35
            %




**Warrant
      Repricing**






On
      April
      12, 2007, NeoMedia entered into an agreement with Thornhill Capital LLC
      (“Thornhill”), an independent consultant, pursuant to which NeoMedia agreed to
      reprice up to 10,000,000 warrants held by Thornhill upon achievement of certain
      performance conditions. Upon signing of the agreement, which calls for the
      termination of any obligations due from NeoMedia to Thornhill under the terms
      of
      a previous consulting agreement between the parties and Thornhill’s commitment
      to assist with the development
      of the China market for NeoMedia’s technology products , 2,000,000
      warrants were repriced from $0.227 to $0.048, 1,000,000 warrants were repriced
      from $0.11 to $0.048, and 500,000 warrants were repriced from $0.11 to $0.048.
      In addition, the following warrants could be subject to future repricing if
      certain milestones are met: (i) 2,000,000 warrants will be repriced from $0.227
      to $0.048 upon
      execution of a contract outlining mutually agreed payment terms for amounts
      owed
      to NeoMedia by Automart Inc., a customer of NeoMedia’s Micro Paint Repair
      business unit, (ii) 2 ,000,000
      warrants will be repriced from $0.328 to $0.048 and 1,500,000 warrants will
      be
      repriced from $0.11 to $0.048 upon receipt of payment by NeoMedia from Automart,
      Inc. (iii) 500,000
      warrants will be repriced from
      $0.11 to $0.048 o n
      October
      12, 2007 if Thornhill is still assisting with the development of the China
      market, and (iv) 500,000 warrants will be repriced from
      $0.11 to $0.048 on
      April
      12, 2008 if Thornhill is still assisting with the development of the China
      market.






The
      change in fair value resulting from the modified terms of the warrants are
      reflected under the caption “General and administrative expenses” on the
      accompanying consolidated statement of operations. During the three and six
      months ended June 30, 2007, NeoMedia recognized stock based compensation expense
      of $5,000 relating to this repricing. As a part of the repricing, NeoMedia
      reclassified $248,000 from “Derivative liabilities” to “Additional paid in
      capital” on the accompanying balance sheet.




36




**9.** **SEGMENT
      REPORTING**




As
      of
      June 30, 2007, NeoMedia was structured and evaluated by its Board of Directors
      and management as one operating unit, comprised of the Company’s core
      code-reading technology and related intellectual property. NeoMedia is
      headquartered in Ft. Myers, Florida, and operates principally in the United
      States, and in Europe through its office in Aachen, Germany. Segment reporting
      excludes MicroPaint Repair, Mobot, Sponge, 12Snap and Telecom Services business
      units which are classified as discontinued operations during the three and
      six
      months ended June 30, 2007 and 2006, and the related assets and liabilities
      held
      for sale.








Consolidated
      net sales and net loss from continuing operations for the three and six month
      periods ended June 30, 2007 and 2006, and identifiable assets as of June 30,
      2007 by geographic area were as follows:





(US
                dollars in thousands)
            
            (US
                dollars in thousands)**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006****Net
                Sales:**United
                States
            
            $
            125
            
            $
            141
            
            $
            303
            
            $
            307Germany
            
            
            499
            
            
            348
            
            
            720
            
            
            381Total
            
            $
            624
            
            $
            489
            
            $
            1,023
            
            $
            688**Income
                (Loss) from Continuing Operations:**United
                States
            
            $
            (1,824
            )
            $
            7,324
            
            $
            (10,604
            )
            $
            7,295Germany
            
            
            237
            
            
            (138
            )
            
            92
            
            
            (257
            )Total
            
            $
            ($1,587
            )
            $
            7,186
            
            
            ($10,512
            )
            $
            7,038






**Identifiable
                Assets**United
                States
            
            $
            8,547Germany
            
            
            7,782Total
            
            $
            16,329








Operating
      costs included in one segment may benefit other segments, and therefore these
      segments are not designed to measure operating income or loss directly related
      to the products included in each segment.





As
      a
      result of the divestitures of 12Snap, Mobot and Sponge, and the proposed
      divestitures of MicroPaint Repair and NeoMedia Telecom Services, beginning
      in
      the first quarter of 2007 NeoMedia evaluated its business as one consolidated
      business, focusing on its core code-reading business and related intellectual
      property. Results of these operations are included in discontinued operations
      in
      the financial statements presented herein. Since all results from continuing
      operations are included in one business segment, NeoMedia is not presenting
      continuing operations by segment for the periods presented herein.




37




**10.** **INVENTORY**





Inventories
      for continuing operations, consisting of material, material overhead, labor
      and
      processing costs, are stated at the lower of cost (first-in, first-out) or
      market and consist of the following at June 30, 2007 (unaudited) and December
      31, 2006:





(US
                dollars in thousands)
            
            June
                30, 2007
            
            December
                31, 2006Raw
                materials
            
            $
            35
            
            $
            ---Work-in-process
            
            
            ---
            
            
            ---Finished
                goods
            
            
            245
            
            
            80**Total**
            
            **$**
            **280**
            
            **$**
            **80**




**11.** **ACCRUED
      LIABILITIES**





Accrued
      liabilities for continuing operations consist of the following as of June 30,
      2007 (unaudited) and December 31, 2006:





(US
                dollars in thousands)
            
            June
                30, 2007
            
            December
                31, 2006Accruals
                related to silent partner agreements
            
            $
            268
            
            $
            213Accrued
                legal and accounting costs
            
            
            104
            
            
            179Accruals
                for disputed services
            
            
            794
            
            
            794Accrued
                operating expenses
            
            
            845
            
            
            728Payroll
                related accruals
            
            
            5
            
            
            9Accrued
                liquidated damages
            
            
            1,388
            
            
            2,093Total
            
            $
            3,404
            
            $
            4,016




Additionally,
      NeoMedia has accrued the amount of $4,684,000 relating to a purchase price
      guarantee obligation in connection with its acquisition of 12Snap noted in
      the
      next section.






**12.** **COMMITMENTS
      AND CONTINGENCIES**





NeoMedia
      is party to various commitments and contingencies, such as:





·
            NeoMedia
                leases its office facilities and certain office and computer equipment
                under various operating leases which provide for minimum rents and
                generally include options to renew for additional
                periods;


·
            NeoMedia
                is party to various payment arrangements with its vendors that call
                for
                fixed payments on past due
                liabilities;


·
            NeoMedia
                is party to various consulting agreements that carry payment obligations
                into future years;


·
            NeoMedia
                has outstanding Series C convertible preferred shares with face value
                of
                $21,377,000 and convertible debentures with a face value of $14,959,000
                that are subject to conversion at future dates, plus the accrued
                expected
                value of liquidated damages of $1,388,000 relating to these convertible
                instruments; and


·
            NeoMedia
                has accrued the amount of $4,684,000 relating to a purchase price
                guarantee obligation in connection with its acquisition of
                12Snap.




38




The
      following table sets forth NeoMedia’s future minimum payments due under
      operating leases, vendor and consulting agreements, convertible stock
      agreements, and debt agreements from the Company’s continuing
      operations:





(US
                dollars in thousands)**Series
                C****Vendor
                &**
            
            **Subsidiary**
            
            
            
            **Convertible****Operating**
            
            **Consulting**
            
            **Acquisition**
            
            **Convertible**
            
            **Preferred****Leases**
            
            **Agreements**
            
            **Commitments**
            
            **Debentures**
            
            **Stock**
            
            **Total**2007
                (remaining six months)
            
            $
            153
            
            $
            11
            
            $
            4,684
            
            $
            16,346
            
            
            21,657
            
            $
            42,8512008
            
            
            172
            
            
            17
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            1892009
            
            
            ---
            
            
            11
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            112010
            
            
            ---
            
            
            3
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            32011
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---Thereafter
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---**Total**
            
            **$**
            **325**
            
            **$**
            **42**
            
            **$**
            **4,684**
            
            **$**
            **16,346**
            
            **$**
            **21,657**
            
            **$**
            **43,054**





In
      addition, as of June 30, 2007, NeoMedia had future obligations relating to
      its
      discontinued Micro Paint Repair and Telecom Services businesses totaling
      $1,270,000, most of which is expected to be assumed by the buyers upon the
      anticipated sale of each business unit.





**Legal
      Proceedings**





The
      Company is involved in various legal actions arising in the normal course of
      business, both as claimant and defendant. While it is not possible to determine
      with certainty the outcome of these matters, it is possible that the eventual
      resolution of the following legal actions could have a material adverse effect
      on the Company’s financial position or operating results.




**Scanbuy,
      Inc.**




On
      January 23, 2004, NeoMedia filed suit against Scanbuy, Inc. (“Scanbuy”) in the
      Northern District of Illinois, claiming that Scanbuy has manufactured, or has
      manufactured for it, and has used, or actively induced others to use, technology
      which allows customers to use a built-in UPC bar code scanner to scan individual
      items and access information, thereby infringing NeoMedia’s patents.  The
      complaint stated that on information and belief, Scanbuy had actual and
      constructive notice of the existence of the patents-in-suit, and, despite such
      notice, failed to cease and desist their acts of infringement, and continue
      to
      engage in acts of infringement of the patents-in-suit.  On April 15, 2004,
      the court dismissed the suits against Scanbuy for lack of personal
      jurisdiction.





On
      April
      20, 2004, NeoMedia re-filed its suit against Scanbuy in the Southern District
      of
      New York alleging patent infringement. Scanbuy filed its answer on June 2,
      2004.
      NeoMedia filed its answer and affirmative defenses on July 23, 2004. On January
      20, 2007, the court dismissed Scanbuy's request for a summary judgment.
      Discovery is ongoing.




39




**13.** **SUBSEQUENT
      EVENTS**





Effective
      June 30, 2007, David A. Dodge resigned his position as Vice President and CFO,
      being replaced by J. Scott Womble, the Company's Corporate Controller, on an
      interim basis.





Effective
      June 18, 2007, NeoMedia named William J. Hoffman as its new Chief Executive
      Officer, replacing Charles W. Fritz, NeoMedia’s Chairman and founder, who has
      served as the Company’s interim CEO since December 2006.





On
      July
      27, 2007, NeoMedia entered into an agreement with HipCricket for the early
      payment of a note receivable due to NeoMedia from HipCricket. Payment was
      received by NeoMedia on that date. Refer to Exhibit 10.1 for details of the
      agreement.





40




**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF
      OPERATIONS**





**Leadership
      Changes**





Effective
      June 18, 2007, NeoMedia named William J. Hoffman as its new Chief Executive
      Officer, replacing Charles W. Fritz, NeoMedia’s Chairman and founder, who has
      served as the Company’s interim CEO since December 2006. Prior to joining
      NeoMedia, Mr. Hoffman served as CEO of Uniqua Technologies, Inc. in Atlanta,
      a
      company he co-founded in 2003 with the acquisition of the assets of TIC
      Enterprises, LLC, and the merger of Vectorlink Communications Corporation.
      TIC
      was a $100 million subsidiary of NUI Corporation (NYSE: NUI), and TIC (now
      Technology Solutions Corp) is a national leader in sales and marketing of
      wireless telecom products and services. There, he was responsible for driving
      revenue growth of 1,140% in 18 months.





Previously,
      as the CEO and a director of mBlox, Inc, the world’s largest mobile transaction
      network, Mr. Hoffman served in London, Atlanta and Sunnyvale, CA. There he
      focused on reorganizing, restructuring, and rapidly growing the business to
      over
      180 countries. His responsibilities included capital structure, Board,
      organization, strategy, and execution of the firm’s business plan. He was
      instrumental in developing partnerships with more than 500 wireless operators
      around the globe including Vodafone®, T-Mobile®, Verizon® and Cingular®, and
      achieving a $75 million annual run-rate in 18 months time for the world’s
      largest provider of messaging infrastructure.





Mr.
      Hoffman, who has served as president, CEO and COO for several other
      telecommunications companies, also spent 8 years with Sprint managing Sprint’s
      business services throughout the State of Florida. He earned a B.S. in
      Electrical Engineering at Auburn University, which he attended on a special
      U.S.
      Army scholarship. Mr. Hoffman served in the U.S. Army from 1983-87, attaining
      the rank of Captain. During July 2007, Mr. Hoffman replaced A. Hayes Barclay
      as
      a member of the Company’s Board of Directors.





During
      April 2007, Jay A. Bonk was named Interim Executive Vice President of Sales
      and
      Marketing. Mr. Bonk brings 22 year experience with Motorola, Inc., most recently
      as Vice President of Business Development and Vice President of Sales and
      Marketing.





Effective
      June 30, 2007, David A. Dodge resigned his position as Vice President and CFO,
      being replaced by J. Scott Womble, the Company's Corporate Controller, on an
      interim basis.





**Corporate
      Structure**





During
      2006, with its acquisitions of Gavitec,
      Mobot, 12Snap, and Sponge ,
      NeoMedia implemented an aggressive growth strategy aimed at penetrating the
      rapidly evolving mobile marketing industry, and capturing a significant portion
      of early adopting marketers to drive high volumes of
      physical-world-to-mobile-internet traffic through the NeoMedia engine.





The
      majority of the consideration issued to acquire Gavitec, Mobot, 12Snap, and
      Sponge consisted of shares of NeoMedia common stock, the value of which was
      guaranteed, in cash, to the recipients by NeoMedia from the time of issuance
      through the time the shares were registered for resale (either upon
      effectiveness of a registration statement containing the shares, or under Rule
      144). As a result of NeoMedia’s declining share price from the first quarter of
      2006 through the end of 2006, the purchase price guarantee obligations relating
      to these acquisitions became far greater than NeoMedia could reasonably satisfy
      with cash. Primarily as a result of the pending purchase price guarantee
      obligations, during the fourth quarter of 2006 NeoMedia divested of the majority
      of Sponge and Mobot back to their original owners, with the respective purchase
      price guarantee obligations being terminated as part of each transaction.
      Additionally, during the first half of 2007, NeoMedia satisfied its purchase
      price guarantee obligation to the former shareholders of Gavitec, and satisfied
      approximately 71% of the 12Snap purchase price guarantee obligation.




41




During
      August 2006, NeoMedia announced that it intended to sell its Micro Paint Repair
      business. During January 2007, the Company decided to attempt to sell its
      remaining 12Snap and Telecom Services non-core business units in the most
      profitable, timely and viable manner possible. 12Snap was sold during April
      2007. NeoMedia plans to use the strategic equity earned through the sale of
      these assets in 2007 to reduce its current burn rate, help the Company move
      closer to profitability, and provide financial stability by the end of 2007
      and
      become profitable by the third quarter of 2008. Most importantly, the shedding
      of NeoMedia’s non-core assets affords the Company the ability to focus all its
      resources on its core business initiatives. Management realizes the challenges
      that the Company faces in the global application of its technology, and can
      now
      present qode® to the wireless industry and the public using a more systematic
      and focused approach.





The
      Company continues to focus on becoming the worldwide leader in camera initiated
      transactions for mobile devices. Management believes that the decision to sell
      the non-core assets has led to a more focused vision for moving the Company
      forward and creating shareholder value, focusing on the core code-reading
      business and related intellectual property in North America, the UK, mainland
      Europe and China.





**The
      Core Business**





NeoMedia
      has made significant inroads into the burgeoning mobile marketing industry
      and
      run many successful physical-world-to-mobile-web campaigns over the past several
      months.





In
      North
      America, qode® technology has been trialed and implemented across a wide variety
      of products and industries, including:





·
            In
                August, NeoMedia announced the launch of its NeoReader Universal
                client
                which allows the myriad of handsets to read and translate the most
                common
                forms of 2D barcodes, and 1D UPC codes. This capability radically
                expands
                the addressable market for the Company’s network
                services.





·
            During
                July 2007, NeoMedia expanded its relationship with Mexico-based marketing
                agency Mobalis to include the promotion of qode® at REVENTOUR, a traveling
                music festival which visits 20 cities throughout Mexico from June
                through
                November. Attendance at REVENTOUR is estimated to be in excess of
                200,000
                participants.


·
              qode®
                    was featured in an interactive textbook published by Prentice
                    Hall, in
                    which students can link to mobile online content through the
                    qode® reader
                    on their mobile phones.


·
            ONE
                water, the ethical water brand, featured codes on 5 million of its
                water
                bottles that link to the mobile internet via qode® starting in December,
                when the first shipments of more than 5 million bottles bearing qode®. The
                bottles were sold at more than 4,000 retail outlets throughout the
                United
                Kingdom.





·
            During
                July and August 2007, Case Western Reserve University in Cleveland,
                Ohio
                employed the use of qode technology with Sprint handsets to run the
                annual
                scavenger hunt used in new student orientation. Orientation leaders
                were
                equipped with Sprint handsets with qode preinstalled and used to
                lead
                small orientation groups on a campus tour. Strategically placed Aztec
                codes were “clicked” on in order to retrieve clues to their next location
                in the University campus.





In
      Europe, Gavitec also designed, implemented, and ran multiple mobile marketing
      solutions:




·
            Gavitec
                was contracted by AWK Aussenwerbung GmbH, Germany’s second-largest outdoor
                advertising company, to develop a mobile order-management and control
                system using Gavitec technology.




42




·
            Gavitecpartnered
                with solution provider TopSolutions to equip Lusomundo, Portugal's
                leading
                cinema chain, with admission terminals for mobile tickets that allow
                movie-goers to obtain tickets through a cash-free Web-based transaction,
                and receive an electronic ticket as an SMS on their mobile
                phones.





·
            Gavitec
                ran or participated in other campaigns during 2006 with customers
                such as
                McDonald’s Portugal, Amnesty International, World Soccer Games
                2006, EMT (Empresa Malagueña de Transportes, a Spanish public
                transport provider), Ströer, and Bitburger
                beer.





·
            In
                June 2007, Gavitec secured a field trial with McDonalds’s of Germany for
                use of its EXIO platform for monetization of mobile coupons at 22
                stores
                across the country. This trial, if successful, will lead to the
                installation of EXIO’s at over 2,000
                stores.





NeoMedia
      also made significant inroads into Asia during the past year, as
      follows:





·
            Gavitec
                signed an exclusive license agreement with mobile marketing specialist
                Omniprime, pursuant to which Omniprime will sell mobile couponing
                and
                ticketing applications in the Philippines using Gavitec’s technology. In
                conjunction with this agreement Gavitec secured an order in July,
                2007,
                for approximately €1,020,000 (approximately $1,367,000 US Dollars) for
                mobile code reader technology for use in the public transportation
                system
                in the Philippians, to be filled over 30
                months.





·
            NeoMedia
                contracted with five large Chinese insurance companies to adapt qode® to
                enable millions of policy holders in China to use their cell phones
                to
                link directly to their insurance company's Mobile Internet
                site





·
            During
                January 2007, NeoMedia signed a performance-based agency agreement
                with
                NexMobil LLC, pursuant to which NexMobil will sell qode® products and
                services in the Middle East, India, Korea, and Pakistan.





Building
      on the deals already completed, NeoMedia will focus on targeting manufacturers
      within the media and enterprise space, including newspapers, publishers, real
      estate, physical world advertisers, and beverage producers to design their
      products to become more interactive. NeoMedia envisions a future in which
      consumers routinely “qode® it” when they want more information on a product or
      service. NeoMedia’s goals include hiring a new sales force, while penetrating
      three verticals with at least six major customers. Another major goal is to
      partner with at least three major carriers or manufacturers (North American,
      UK
      and mainland European) who will embed, adopt and commit to utilize every feature
      qode® has to offer.





NeoMedia
      is also making strides to create a global standard for the wireless Web.
      NeoMedia co-hosted a high-level meeting in London during February 2007 with
      some
      of the world’s leading technology firms to begin to define and document this
      important standards-based initiative. NeoMedia believes the outcome of the
      meeting was extremely positive and expects, along with its numerous innovative
      partners, to continue to play an active role in the standardization of the
      physical-world-to-web initiative. One of NeoMedia’s key initiatives is to
      evaluate and optimize the value of its and its partners’ collective intellectual
      property relating to this space.





NeoMedia
      has numerous issued patents with others in process and is continuing to seek
      to
      optimize the value of its intellectual property portfolio around in the world.
      On January 20, 2007, Judge John E. Sprizzo dismissed Scanbuy's request for
      a
      summary judgment in the Company’s patent infringement case against Scanbuy.
      While the case is not over yet, NeoMedia continues to remain confident in the
      final outcome. Refer to Part II, Item I for additional information. Also on
      the
      patent front, during July 2007 the US Patent and Trademark Office rejected
      an
      application by the Electronic Frontier Foundation to invalidate the Company’s
      patents and intellectual property on how camera phones read, translate, and
      process images and codes. The Electronic Frontier Foundation refiled their
      application in August 2007.




43




**Effect
      of Discontinued Operations on Net Loss and Financial
      Position**





Assets
      and liabilities of the MicroPaint Repair, 12Snap, and Telecom Services
      businesses classified as held for sale are shown in the following table. There
      are no assets or liabilities associated with the Sponge or Mobot subsidiaries
      as
      of the balance sheet dates of June 30, 2007 or December 31, 2006.





(US
                dollars in thousands)
            
            Micro
            
            TelecomPaint
                Repair
            
            Services
            
            12Snap
            
            TotalAs
                of June 30, 2007Total
                Assets Held for Sale
            
            $
            3,258
            
            $
            7,562
            
            $
            ---
            
            $
            10,820Total
                Liabilities Held for Sale
            
            
            391
            
            
            3,055
            
            
            ---
            
            
            3,446As
                of December 31, 2006Total
                Assets Held for Sale
            
            $
            3,072
            
            $
            7,302
            
            $
            9,046
            
            $
            19,420Total
                Liabilities Held for Sale
            
            $
            407
            
            $
            2,970
            
            $
            6,880
            
            $
            10,257








The
      operating results of the Micro Paint Repair, Sponge, Mobot, 12Snap, and Telecom
      Services businesses classified as discontinued operations are shown in the
      following table. There is no tax expense or benefit to report due to NeoMedia’s
      net operating loss carry forward tax position.





(US
                dollars in thousands)Three
                months ended June 30, 2007Micro
                PaintRepair
            
            Telecom
                Services
            
            12Snap
            
            Mobot
            
            Sponge
            
            TotalNet
                Sales
            
            $
            390
            
            $
            512
            
            
            ---
            
            
            ---
            
            
            ----
            
            $
            902Cost
                of sales
            
            
            458
            
            
            140
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            598Gross
                Profit
            
            
            (68
            )
            
            372
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            304Sales
                & Marketing
            
            
            321
            
            
            94
            
            
            45
            
            
            8
            
            
            14
            
            
            482General
                and administrative expense
            
            
            168
            
            
            274
            
            
            22
            
            
            ---
            
            
            ---
            
            
            464Research
                and development costs
            
            
            61
            
            
            ---
            
            
            24
            
            
            4
            
            
            ---
            
            
            89Gain
                (loss)on extinguishment of debt
            
            
            ---
            
            
            (9
            )
            
            ---
            
            
            ---
            
            
            ---
            
            
            (9
            )Gain
                (loss) on disposal of Snap
            
            
            ---
            
            
            ---
            
            
            257
            
            
            ---
            
            
            ---
            
            
            257Income
                (Loss) from discontinued operations
            
            $
            (618
            )
            $
            13
            
            $
            (348
            )
            $
            (12
            )
            $
            (14
            )
            $
            (979
            )




Six
                months ended June 30, 2007Micro
                  PaintRepair
            
            
            Telecom
                Services
            
            
            12Snap
            
            
            Mobot
            
            
            Sponge
            
            
            TotalNet
                Sales
            
            $
            716
            
            $
            814
            
            $
            2,621
            
            
            ---
            
            
            ---
            
            $
            4,151Cost
                of sales
            
            
            858
            
            
            285
            
            
            362
            
            
            ---
            
            
            ---
            
            
            1,505Gross
                Profit
            
            
            (142
            )
            
            529
            
            
            2,259
            
            
            ---
            
            
            ---
            
            
            2,646Sales
                & Marketing
            
            
            636
            
            
            229
            
            
            1,091
            
            
            15
            
            
            29
            
            
            2,000General
                and administrative expense
            
            
            332
            
            
            556
            
            
            388
            
            
            ---
            
            
            ---
            
            
            1,276Research
                and development costs
            
            
            99
            
            
            -
            
            
            358
            
            
            8
            
            
            ---
            
            
            465Gain
                (loss) on extinguishment of debt
            
            
            ---
            
            
            (266
            )
            
            ---
            
            
            ---
            
            
            ---
            
            
            (266
            )Gain
                (loss)Loss on disposal of Snap
            
            
            ---
            
            
            ---
            
            
            257
            
            
            ---
            
            
            ---
            
            
            257Income
                (Loss) from discontinued operations
            
            $
            (1,209
            )
            $
            10
            
            $
            165
            
            $
            (23
            )
            $
            (29
            )
            $
            (1,086
            )




44




Depreciation
      and amortization costs suspended on assets held for sale for the three and
      six
      months ended June 30, 2007 are:




(US
                dollars in thousands)**MicroPaint
                Repair**
            
            **Telecom
                Services**
            
            **12Snap**
            
            **Total**Three
                months ended June 30, 2007
            
            $
            73
            
            $
            87
            
            $
            0
            
            $
            160Six
                months ended June 30, 2007
            
            
            142
            
            
            159
            
            
            220
            
            
            521




45


Stock
      Option Repricing




On
      February 1, 2007, NeoMedia instituted a stock option repricing plan as a
      retention tool to align its employees with the new vision of NeoMedia. Under
      the
      plan, NeoMedia repriced 50,148,750 stock options held by current employees,
      contractors, and directors.





Options
      for employees of NeoMedia’s ongoing operations were repriced as follows: (i)
      options that were vested as of February 1, 2007, were repriced to $0.045 per
      share, which was the last sale price on February 1, 2007, (ii) options that
      are
      scheduled to vest during the remainder of 2007 were repriced to $0.075, (iii)
      options that vest during 2008 were repriced to $0.125, and (iv) options that
      vest during 2009 were repriced to $0.175. Options will continue to vest on
      their
      regular schedule, which generally is 25% upon grant and 25% on each subsequent
      anniversary date. The Company also repriced options for outside directors as
      follows: options with an exercise price below $0.24 were repriced to $0.045,
      and
      options with an exercise price $0.24 or higher were repriced to $0.075.





In
      addition, the Company repriced options held by employees of its held for sale
      MicroPaint Repair and Telecom Services businesses, such that all vested options
      were repriced to $0.045 per share, and all unvested options will vest upon
      sale
      of the respective business unit at an exercise price of $0.075 per share, with
      a
      12-month period to exercise.





The
      weighted-average grant-date fair value of options repriced on February 1, 2007,
      using the options’ modified terms, was $0.03. As of June 30, 2007, there was
      $70,000 of total unrecognized compensation cost related to nonvested options
      repriced on February 1, 2007. That cost is expected to be recognized over a
      weighted-average period of 0.7 years.





**Stock-Based
      Compensation**




NeoMedia
      adopted Statement of Financial Accounting Standards No. 123 (“SFAS 123R”)
      on January 1, 2006, using the modified-prospective transition method for
      stock option grants and restricted stock issued after January 1, 2006. As a
      result, the unamortized compensation expense from stock options granted prior
      to
      January 1, 2006 is not included in the statement of operations. SFAS 123R
      requires all share-based payments to employees to be recognized in the income
      statement based on their fair values. Under the modified-prospective transition
      method, compensation cost recognized for the year ended December 31, 2006
      includes: (a) vesting of compensation cost for all share-based payments
      granted, but not yet vested as of January 1, 2006 based on the grant-date
      fair value estimated in accordance with the original provisions of SFAS 123R,
      and (b) compensation cost for all share-based payments granted subsequent
      to January 1, 2006, based on the grant-date fair value estimated in
      accordance with the provisions of SFAS 123R. Such amounts are reduced
      by NeoMedia’s estimate of forfeitures of all unvested awards.




SFAS
      123R
      requires share-based payments to employees to be measured at fair value.
      However, the valuation of employee stock options is an inherently subjective
      process, since market values are generally not available for long-term,
      non-transferable employee stock options. Accordingly, an option pricing model
      is
      utilized to derive an estimated fair value. NeoMedia uses the
      Black-Scholes-Merton pricing model in order to calculate the estimated fair
      value for its stock options.





46




Total
      stock based compensation recognized during the three and six month periods
      ended
      June 30, 2007 and 2006 was:




**Three
                months ended**
            
            **Six
                months ended****June
                30,**
            
            **June
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Stock
                based compensation allocated to:
            
            (in
                thousands)
            
            (in
                thousands)Sales
                and marketing expense
            
            $
            205
            
            $
            380
            
            $
            550
            
            $
            809General
                and administrative expense
            
            
            454
            
            
            351
            
            
            843
            
            
            701Research
                and development expense
            
            
            85
            
            
            130
            
            
            242
            
            
            260Total
                stock based compensationincluded
                in continuing operations
            
            
            744
            
            
            861
            
            
            1,635
            
            
            1,770Plus:
                stock based compensationincluded
                in discontinued operations
            
            
            544
            
            
            333
            
            
            1,081
            
            
            953Total
                stock based compensationexpense
                reflected in net income (loss)
            
            **$**
            **1,288**
            
            **$**
            **1,194**
            
            **$**
            **2,716**
            
            **$**
            **2,723**





Approximately
      41% and 74% of the stock-based compensation expense recorded during the six
      months ended June 30, 2007 and 2006, respectively, relates to the continued
      vesting of stock options that were granted prior to January 1, 2006. As of
      June
      30, 2007, there was $4,048,000 of total unrecognized compensation cost related
      to nonvested share-based compensation arrangements granted under the Plans.
      That
      cost is expected to be recognized over a weighted-average period of 1.5
      years.





**Accounting
      Treatment of Series C Convertible Preferred Stock and Convertible
      Debentures**





NeoMedia
      recognized a gain on derivative financial instruments of $1,122,000 and
      $11,026,000 during the three months ended June 30, 2007 and 2006, respectively.
      During the six months ended June 30, 2007, NeoMedia recognized a loss of
      $2,368,000 as compared to a gain of $15,794,000 for the six months ended June
      30, 2006. The gains and losses are due to the change in fair value of derivative
      financial instruments resulting from the changes in NeoMedia's stock price
      during the reporting period. The fair value of the derivative financial
      instruments at each measurement date correlates to NeoMedia's stock price at
      the
      same date. As a result, NeoMedia's net loss varies significantly from its cash
      flow from operations during the six months ended June 30, 2007 and 2006. In
      future periods, NeoMedia's loss could fluctuate dramatically from quarter to
      quarter if its stock price is significantly different from the stock price
      at
      the end of the previous measurement period. Because NeoMedia cannot guarantee
      that it has enough authorized shares to net share settle the convertible
      instruments, the change in fair value of derivative instruments will be recorded
      to NeoMedia's statement of operations each reporting period until the
      convertible instruments are fully converted.





**Related
      Party Transaction**





During
      the fourth quarter of 2005 and first quarter of 2006, NeoMedia shipped and
      invoiced $759,000 of MicroPaint Repair products to Automart, Inc. In the third
      quarter of 2006, NeoMedia established a reserve for bad debt against the open
      accounts receivable, and wrote off the deferred revenue and deferred costs,
      incurring a net charge to its statement of operations of $653,000. NeoMedia
      will
      recognize revenue on these shipments if and when collectibility is reasonably
      assured. David A. Dodge, NeoMedia’s former Chief Financial Officer, and Kevin
      Hunter, NeoMedia’s Chief Scientist, are each members of the board of directors
      of Automart Inc.,.





**Critical
      Accounting Policies**





The
      United States Securities and Exchange Commission (the “SEC”) issued Financial
      Reporting Release No. 60, “ *Cautionary
      Advice Regarding Disclosure About Critical Accounting Policies* ”
(“FRR
      60”), suggesting companies provide additional disclosure and commentary on their
      most critical accounting policies. In FRR 60, the SEC defined the most critical
      accounting policies as the ones that are most important to the portrayal of
      a
      company’s financial condition and operating results, and require management to
      make its most difficult and subjective judgments, often as a result of the
      need
      to make estimates of matters that are inherently uncertain. Based on this
      definition, NeoMedia’s most critical accounting policies include: intangible
      asset valuation, which affects amortization and impairment of goodwill and
      other
      intangibles; financial instruments and concentrations of credit risk, which
      affects gains and losses from derivative financial instruments; allowance for
      doubtful accounts; inventory valuation, which affects cost of sales and gross
      margin; stock based compensation; estimate of litigation-based liability; and
      revenue recognition. NeoMedia also has other key accounting policies, such
      as
      policies for revenue recognition, including the deferral of a portion of
      revenues on sales to distributors, allowance for doubtful accounts, and
      stock-based compensation. The methods, estimates and judgments NeoMedia uses
      in
      applying these most critical accounting policies have a significant impact
      on
      the results it reports in its consolidated financial statements.




47




*Intangible
      Asset Valuation.* The
      determination of the fair value of certain acquired assets and liabilities
      is
      subjective in nature and often involves the use of significant estimates and
      assumptions. Determining the fair values and useful lives of intangible assets
      especially requires the exercise of judgment. While there are a number of
      different generally accepted valuation methods to estimate the value of
      intangible assets acquired, NeoMedia primarily uses the weighted-average
      probability method outlined in SFAS 144. This method requires significant
      management judgment to forecast the future operating results used in the
      analysis. In addition, other significant estimates are required such as residual
      growth rates and discount factors. The estimates NeoMedia has used are
      consistent with the plans and estimates that NeoMedia uses to manage its
      business, based on available historical information and industry averages.
      The
      judgments made in determining the estimated useful lives assigned to each class
      of assets acquired can also significantly affect NeoMedia’s net operating
      results.





According
      to SFAS 144, a long-lived asset should be tested for recoverability whenever
      events or changes in circumstances indicate that its carrying amount may not
      be
      recoverable. The following are examples of such events or changes in
      circumstances:




-
            A
                significant decrease in the market price of the
                asset


-­
            A
                significant adverse change in the extent or manner in which the asset
                is
                being used, or in its physical
                condition


-­
            A
                significant adverse change in legal factors or in the business climate
                that could affect the value of the asset, including an adverse action
                or
                assessment by a regulator


-­
            An
                accumulation of costs significantly in excess of the amount originally
                expected


-­
            A
                current-period operating or cash flow loss combined with a history
                of
                operating or cash flow losses or a projection or forecast that
                demonstrates continuing losses associated with the use of the
                asset


-­
            A
                current expectation that, more likely than not,****the
                asset will be sold or otherwise disposed of significantly before
                the end
                of its previously estimated useful life




NeoMedia
      follows the two-step process outlined in SFAS 142 and SFAS 144 for determining
      if an impairment charge should be taken: (1) the expected undiscounted cashflows
      from a particular asset or asset group are compared to the carrying value;
      if
      the expected undiscounted cashflows are greater than the carrying value, no
      impairment is taken, but if the expected undiscounted cashflows are less than
      the carrying value, then (2) an impairment charge is taken for the difference
      between the carrying value and the expected discounted cashflows. The
      assumptions used in developing expected cashflow estimates are similar to those
      used in developing other information used by NeoMedia for budgeting and other
      forecasting purposes. In instances where a range of potential future cashflows
      is possible, NeoMedia uses a probability-weighted approach to weigh the
      likelihood of those possible outcomes. In such instances, NeoMedia uses a
      discount rate equal to the yield on 0-coupon treasury instrument with a life
      equal to expected life of the assets being tested.





*Financial
      Instruments and Concentrations of Credit Risk.* The
      Company’s financial instruments consist of cash and cash equivalents, accounts
      receivable, accounts payable, accrued expenses, notes payable, derivative
      financial instruments, other current liabilities, convertible preferred stock,
      and convertible debenture financing. Management believes the carrying values
      of
      cash and cash equivalents, accounts receivable, accounts payable, accrued
      expenses, notes payable, and other current liabilities approximate their fair
      values due to their short-term nature. The fair value of convertible preferred
      stock and convertible debentures is estimated on June 30, 2007 to be
      approximately $21,377,000 and $18,801,000, respectively.




48




The
      Company generally does not use derivative financial instruments to hedge
      exposures to cash-flow risks or market-risks that may affect the fair values
      of
      its financial instruments. However, certain other financial instruments, such
      as
      warrants and embedded conversion features that are indexed to the Company’s
      common stock, are classified as liabilities when either (a) the holder possesses
      rights to net-cash settlement or (b) physical or net-share settlement is not
      within the control of the Company. In such instances, net-cash settlement is
      assumed for financial accounting and reporting, even when the terms of the
      underlying contracts do not provide for net-cash settlement. Such financial
      instruments are initially recorded at fair value and subsequently adjusted
      to
      fair value at the close of each reporting period.





The
      caption “Derivative Financial Instruments” consists of (i) the fair values
      associated with derivative features embedded in the Series C convertible
      preferred stock and convertible debentures, (ii) the fair values of the
      detachable warrants that were issued in connection with the Series C convertible
      preferred stock and convertible debentures financing arrangements, (iii) the
      fair value of detachable warrants that were outstanding prior to the issuance
      of
      the Series C Preferred Shares, (iv) special preference shares held in Mobot,
      Inc., a private company, and (v) a special payment obligation with a make whole
      provision payable in shares of the Company’s common stock.





The
      Company utilizes various types of financing to fund its business needs,
      including convertible preferred stock, convertible debentures, and other
      instruments indexed to the Company’s own stock. The embedded conversion features
      utilized in these instruments require periodic measurement of the fair value
      of
      the derivative components. Pursuant to FAS 133, FAS 155, and EITF 00-19 NeoMedia
      updates the fair value of these derivative components at each reporting
      period.





*Allowance
      for Doubtful Accounts.* NeoMedia
      maintains an allowance for doubtful accounts for estimated losses resulting
      from
      the inability of its customers to make required payments. Allowance for doubtful
      accounts is based on NeoMedia’s assessment of the collectibility of specific
      customer accounts, the aging of accounts receivable, NeoMedia’s history of bad
      debts, and the general condition of the industry. If a major customer’s credit
      worthiness deteriorates, or NeoMedia’s customers’ actual defaults exceed
      historical experience, NeoMedia’s estimates could change and impact its reported
      results.





*Inventory.* Inventories are stated at lower of cost (using the first-in, first-out method)
      or market. NeoMedia continually evaluates the composition of its inventories
      assessing slow-moving and ongoing products and maintains a reserve for
      slow-moving and obsolete inventory as well as related disposal
      costs.





*Stock-based
      Compensation* .
      Beginning January 1, 2006, NeoMedia began to account for stock-based
      compensation in accordance with SFAS No. 123(R), *Share-Based
      Payment* .
      Under
      the fair value recognition provisions of this statement, share-based
      compensation cost is measured at the grant date based on the value of the award
      and is recognized as expense over the vesting period. Determining the fair
      value
      of share-based awards at the grant date requires judgment, including estimating
      expected dividends. In addition, judgment is also required in estimating the
      amount of share-based awards that are expected to be forfeited. If actual
      results differ significantly from these estimates, stock-based compensation
      expense and NeoMedia’s results of operations could be materially impacted.
      Stock-based compensation expense is calculated using the Black Scholes option
      pricing model on the date of grant. This option valuation model requires input
      of highly subjective assumptions. Because NeoMedia’s employee stock options have
      characteristics significantly different from those of traded options, and
      because changes in the subjective input assumptions can materially affect the
      fair value estimate, in management's opinion, the existing model does not
      necessarily provide a reliable single measure of fair value of its employee
      stock options.





*Estimate
      of Litigation-based Liability* .
      From
      time to time, NeoMedia is defendant in certain litigation in the ordinary course
      of business (see the section entitled “Legal Proceedings”). NeoMedia accrues
      liabilities relating to these lawsuits on a case-by-case basis. NeoMedia
      generally accrues attorney fees and interest in addition to the liability being
      sought. Liabilities are adjusted on a regular basis as new information becomes
      available. NeoMedia consults with its attorneys to determine the viability
      of an
      expected outcome. The actual amount paid to settle a case could differ
      materially from the amount accrued.




49




*Revenue
      Recognition.* NeoMedia derives revenues from the following  sources:  (1)
      license revenues relating to patents and internally-developed software, (2)
      hardware, software, and service revenues related to mobile marketing campaign
      design and implementation, and (3) sale of its proprietary MicroPaint Repair
      solution.


(1)
              Technology
                  license fees, including Intellectual Property licenses, represent
                  revenue
                  from the licensing of NeoMedia’s proprietary software tools and
                  applications products.  NeoMedia licenses its development tools
                  and application products pursuant to non-exclusive
                  and non-transferable license agreements.  The basis for
                  license fee revenue recognition is substantially governed by
                  American  Institute  of  Certified  Public 
                  Accountants  ("AICPA")  Statement of Position 97-2 "Software
                  Revenue  Recognition" ("SOP 97-2"), as amended, and Statement of
                  Position 98-9, Modification of SOP 97-2, “Software Revenue Recognition,
                  With Respect to Certain Transactions.”.  License revenue is
                  recognized if persuasive evidence of an agreement exists, delivery
                  has
                  occurred, pricing is fixed and determinable, and collectibility
                  is
                  probable.  The Company defers revenue related to license fees for
                  which amounts have been collected but for which revenue has not
                  been
                  recognized in accordance with the above, and recognizes the revenue
                  over
                  the appropriate period.





(2)
            Technology
                service and product revenue, which includes sales of software and
                technology equipment and service fee is recognized  based on
                guidance  provided in  SEC Staff  Accounting 
                Bulletin  (“SAB”) No. 104,  "Revenue  Recognition  in
                Financial Statements,"  as amended (SAB 104).  Software
                and technology equipment resale revenue is
                recognized when persuasive evidence of an arrangement exists, the
                price to the customer is fixed and determinable, delivery of the
                service
                has occurred and collectibility is reasonably assured.
                Service revenues including maintenance fees for
                providing system updates for software products, user documentation
                and
                technical support are recognized over the life of
                the contract. The Company’s subsidiaries, Mobot (sold during 2006),
                and Gavitec follow this policy. The Company defers revenue related
                to
                technology service and product revenue for which amounts have been
                invoiced and or collected but for which the requisite service has
                not been
                provided. Revenue is then recognized over the matching service period.





(3)
            Technology
                service also includes mobile marketing services to its customers
                which
                mobile marketing projects are recognized after the completion of
                the
                project and accepted by the customer.  All response and messaging
                based revenues are recognized at the time such responses are received
                and
                processed and the Company recognizes its premium messaging revenues
                on a
                net basis based on guidance provided in Emerging Issues Task Force
                Issues
                No. 99-19 (EITF 99-19), “Reporting Revenue Gross as Principal or Net as an
                Agent” and No. 01-09 (EITF 01-09), “Accounting for Consideration Given by
                a Vendor to a Customer.”  Consulting and management revenues and
                revenues for periodic services are recognized as services are
                performed.  NeoMedia uses  stand-alone  pricing to
                determine an element's  vendor  specific  objective 
                evidence  (“VSOE”) in order to allocate an arrangement  fee
                amongst various pieces of a  multi-element  contract.  The
                Company’s subsidiaries Sponge (sold during 2006) and 12Snap (sold in
                2007)follow this policy. Telecom revenues from NeoMedia’s subsidiary BSD
                are recognized at the time that calls are accepted by the clearinghouse
                for billing to customers on a net basis, based on guidance in EITF
                99-19.
                The Company defers revenue related to mobile marketing service fees
                for
                which amounts have been invoiced and/or collected but for which revenue
                has not been recognized. Revenue is then recognized over the matching
                service period.





(4)
            Revenue
                for licensing and exclusivity on NeoMedia’s MicroPaint Repair systems is
                recognized equally over the term of the contract, which is currently
                one
                year.  A portion of the initial fee paid by the customer is allocated
                to licensing, training costs and initial products sold with the system.
                Revenue is recognized upon completion of training and shipment of
                the
                products, provided there is VSOE in a multiple element arrangement. 
                Ongoing product and service revenue is recognized as products are
                shipped
                and services performed.  The Company defers revenue related to micro
                paint repair licensing for which amounts have been invoiced and/or
                collected and revenue is then recognized over the estimated contract
                period, which is currently one year.




50




(5)
            Sales
                taxes represent amounts collected on behalf of specific regulatory
                agencies that require remittance on a specified date. These amounts
                are
                collected at the time of sales and are detailed on invoices provided
                to
                customers. In compliance with the Emerging Issues Task Force consensus
                on
                issue number 06-03 (EITF 06-03), NeoMedia accounts for sales taxes
                on a
                net basis.




*Income
      Tax Valuation Allowance.* 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 recognized. The Company has recorded a 100% valuation
      allowance as of June 30, 2007 and December 31, 2006.





*Foreign
      Currency Translation.* **** The
      local
      currency has been primarily used as the functional currency throughout the
      world. Translation gains and losses of those operations that use local currency
      as the functional currency are included in the consolidated balance sheets
      as
“Accumulated other comprehensive income (loss).” Where the U.S. dollar is used
      as the functional currency, foreign currency gains and losses are reflected
      in
      income.





*Financial
      Accounting Standards Board Interpretation No. 48.* The
      Company adopted the provisions of Financial Accounting Standards Board ("FASB")
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an
      interpretation of FASB Statement No. 109” (“FIN 48”), on January 1, 2007. FIN 48
      clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise's financial statements in accordance with FASB Statement 109,
“Accounting for Income Taxes,” and prescribes a recognition threshold and
      measurement process for financial statement recognition and measurement of
      a tax
      position taken or expected to be taken in a tax return. FIN 48 also provides
      guidance on derecognition, classification, interest and penalties, accounting
      in
      interim periods, disclosure and transition.





Based
      on
      its evaluation, the Company has concluded that there are no significant
      uncertain tax positions requiring recognition in its financial statements.
      The
      Company’s evaluation was performed for the tax years ended December 31, 2003,
      2004, 2005 and 2006, the tax years which remain subject to examination by major
      tax jurisdictions as of June 30, 2007.





The
      Company may from time to time be assessed interest or penalties by major tax
      jurisdictions, although any such assessments historically have been minimal
      and
      immaterial to the Company’s financial results. In the event the Company has
      received an assessment for interest and/or penalties, it has been classified
      in
      the financial statements as interest expense.





In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments” (FAS 155). This Statement amends FASB Statements No. 133,
      Accounting for Derivative Instruments and Hedging Activities, and No. 140,
      Accounting for Transfers and Servicing of Financial Assets and Extinguishments
      of Liabilities. This Statement resolves issues addressed in Statement 133
      Implementation Issue No. D1, "Application of Statement 133 to Beneficial
      Interests in Securitized Financial Assets."


This
      Statement:





a.
            Permits
                fair value remeasurement for any hybrid financial instrument that
                contains
                an embedded derivative that otherwise would require
                bifurcation




51


b.
              Clarifies
                  which interest-only strips and principal-only strips are not subject
                  to
                  the requirements of Statement 133
 c.
                Establishes
                    a requirement to evaluate interests in securitized financial
                    assets to
                    identify interests that are freestanding derivatives or that
                    are hybrid
                    financial instruments that contain an embedded derivative requiring
                    bifurcation
 d.
                  Clarifies
                      that concentrations of credit risk in the form of subordination
                      are not
                      embedded derivatives
 e.
                    Amends
                        Statement 140 to eliminate the prohibition on a qualifying
                        special-purpose
                        entity from holding a derivative financial instrument that
                        pertains to a
                        beneficial interest other than another derivative financial
                        instrument.





FAS
      155
      is effective for fiscal years beginning after September 15, 2006. The Company
      has adopted FAS 155 on an individual instrument basis and is currently applying
      FAS 155 to certain of its debt obligations. The Company will evaluate and
      determine on a case by case basis whether to apply FAS 155.







**Effect
      Of Recently Issued Accounting Pronouncements**




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This
      Statement defines fair value, establishes a framework for measuring fair value
      in generally accepted accounting principles (“GAAP”), and expands disclosures
      about fair value measurements. This Statement applies under other accounting
      pronouncements that require or permit fair value measurements, the Board having
      previously concluded in those accounting pronouncements that fair value is
      the
      relevant measurement attribute. Accordingly, this Statement does not require
      any
      new fair value measurements. However, for some entities, the application of
      this
      Statement will change current practice. This statement is effective for fiscal
      years beginning after November 15, 2007. The Company may adopt this statement
      for its 2007 fiscal year. The Company is currently evaluating the impact of
      adopting this statement; however, the Company does not expect the adoption
      of
      this provision to have a material effect on its financial position, results
      of
      operations or cash flows.





In
      September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
      Accounting Bulletin No. 108 (“SAB 108”), *Financial
      Statements - Considering the Effects of Prior Year Misstatements when
      Quantifying Misstatements in Current Year Financial
      Statements.”* SAB 108
      provides guidance on how prior year misstatements should be taken into
      consideration when quantifying misstatements in current year financial
      statements for purposes of determining whether the current year’s financial
      statements are materially misstated. SAB 108 provides that once a current year
      misstatement has been quantified, the guidance in SAB No. 99, *Financial
      Statements - Materiality* ,
      should
      be applied to determine whether the misstatement is material and should result
      in an adjustment to the financial statements. Under certain circumstances,
      prior
      year financial statements will not have to be restated and the effects of
      initially applying SAB 108 on prior years will be recorded as a cumulative
      effect adjustment to beginning Retained Earnings on January 1, 2006, with
      disclosure of the items included in the cumulative effect. NeoMedia applied
      the
      provisions of SAB 108 with the preparation of NeoMedia’s annual financial
      statements for the calendar year ending December 31, 2006. The application
      of the provisions of SAB 108 did not have a material impact on the Company’s
      financial statements for the three and six month periods ending June 30,
      2007.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities”. The objective of this statement is
      to improve financial reporting by providing entities with the opportunity to
      mitigate volatility in reported earnings caused by measuring related assets
      and
      liabilities differently without having to apply complex hedge accounting
      provisions. This statement is expected by the Board to expand the use of fair
      value measurement, which is consistent with the Board’s long-term measurement
      objectives for accounting for financial instruments. This statement is effective
      for fiscal years beginning after November 15, 2007. The Company may adopt this
      statement for its 2007 fiscal year. The Company is currently evaluating the
      impact of adopting this statement; however, the Company does not expect the
      adoption of this provision to have a material effect on its financial position,
      results of operations or cash flows.




52




In
      December 2006, FASB Staff Position No. EITF 00-19-2 was issued. This FASB Staff
      Position (FSP) addresses an issuer’s accounting for registration payment
      arrangements. This FSP specifies that the contingent obligation to make future
      payments or otherwise transfer consideration under a registration payment
      arrangement, whether issued as a separate agreement or included as a provision
      of a financial instrument or other agreement, should be separately recognized
      and measured in accordance with FASB Statement No. 5, Accounting for
      Contingencies. The guidance in this FSP amends FASB Statements No. 133,
      Accounting for Derivative Instruments and Hedging Activities, and No. 150,
      Accounting for Certain Financial Instruments with Characteristics of both
      Liabilities and Equity, and FASB Interpretation No. 45, Guarantor’s Accounting
      and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
      Indebtedness of Others, to include scope exceptions for registration payment
      arrangements. This FSP further clarifies that a financial instrument subject
      to
      a registration payment arrangement should be accounted for in accordance with
      other applicable generally accepted accounting principles (GAAP) without regard
      to the contingent obligation to transfer consideration pursuant to the
      registration payment arrangement. The Company follows the guidance in FSP
      00-19-2 in assessing its liabilities related to the liquidated damages arising
      from the Company’s default position on the convertible financing
      arrangements.





In
      June
      2007, the FASB ratified the consensus on Emerging Issues Task Force (EITF)
      Issue
      No. 06−11, "Accounting for Income Tax Benefits of Dividends on Share−Based
      Payment Awards" ("EITF 06−11"). EITF 06−11 requires companies to recognize the
      income tax benefit realized from dividends or dividend equivalents
      that are charged to retained earnings and paid to employees for non−vested
      equity−classified employee share−based payment awards as an increase to
      additional paid−in capital. EITF 06−11 is effective for fiscal years beginning
      after September 15, 2007. While the Company is currently evaluating the
      provisions of EITF 06−11, the adoption is not expected to have any significant
      effect on the Company's consolidated financial position or results of
      operations.





In
      November 2006, the FASB ratified EITF Issue No. 06−7, “Issuer's Accounting for a
      Previously Bifurcated Conversion Option in a Convertible Debt Instrument When
      the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement
      No. 133, Accounting for Derivative Instruments and Hedging Activities” (“EITF
      No. 06−7”). At the time of issuance, an embedded conversion option in a
      convertible debt instrument may be required to be bifurcated from the debt
      instrument and accounted for separately by the issuer as a derivative under
      SFAS
      No. 133, based on the application of EITF No. 00−19. Subsequent to the issuance
      of the convertible debt, facts may change and cause the embedded conversion
      option to no longer meet the conditions for separate accounting as a derivative
      instrument, such as when the bifurcated instrument meets the conditions of
      EITF
      No. 00−19 to be classified in stockholders' equity. Under EITF No. 06−7, when an
      embedded conversion option previously accounted for as a derivative under
      Statement of Financial Accounting Standards (“SFAS”) No. 133 no longer meets the
      bifurcation criteria under that standard, an issuer shall disclose a description
      of the principal changes causing the embedded conversion option to no longer
      require bifurcation under SFAS No. 133 and the amount of the liability for
      the
      conversion option reclassified to stockholders' equity. EITF No. 06−7 should be
      applied to all previously bifurcated conversion options in convertible debt
      instruments that no longer meet the bifurcation criteria in SFAS No. 133 in
      interim or annual periods beginning after December 15, 2006, regardless of
      whether the debt instrument was entered into prior or subsequent to the
      effective date of EITF No. 06−7. The adoption of EITF 06−7 did not have a
      material impact on our financial position, results of operations or cash
      flows.





In
      November 2006, the FASB ratified EITF Issue No. 06−6, Application of EITF Issue
      No. 05−7, ‘Accounting for Modifications to Conversion Options Embedded in Debt
      Instruments and Related Issues ** ’
(“EITF
      06−6”). EITF 06−6 addresses the modification of a convertible debt instrument
      that changes the fair value of an embedded conversion option and the subsequent
      recognition of interest expense for the associated debt instrument when the
      modification does not result in a debt extinguishment pursuant to EITF 96−19.
      The Company does not expect the adoption of EITF 06−6 to have a material impact
      on its consolidated financial position, results of operations or cash
      flows .





On
      January 1, 2007, the Company adopted the consensus reached in Emerging Issues
      Task Force (“EITF”) Issue No. 06−2, “Accounting for Sabbatical Leave and Other
      Similar Benefits Pursuant to FASB Statement No. 43.” EITF Issue No. 06−2
      provides recognition guidance on the accrual of employees’ rights to compensated
      absences under a sabbatical or other similar benefit arrangement. The adoption
      of EITF Issue No. 06−2 did not have a material impact on our financial position,
      results of operations, or cash flows.




53




In
      September 2006, the Emerging Issues Task Force, or EITF, reached a consensus
      on
      Issue No. 06−1, Accounting for Consideration Given by a Service Provider to
      Manufacturers or Resellers of Equipment Necessary for an End−Customer to Receive
      Service from the Service Provider *.* EITF
      Issue No. 06−1 provides
      guidance regarding whether the consideration given by a service provider to
      a
      manufacturer or reseller of specialized equipment should be characterized as
      a
      reduction of revenue or an expense. This issue is effective for our annual
      reporting period ending December 31, 2007. Entities are required to recognize
      the effects of applying this issue as a change in accounting principle through
      retrospective application to all prior periods unless it is impracticable to
      do
      so. We are in the process of evaluating the impact of this issue on our
      consolidated financial statements . The
      Company does not expect the adoption of EITF 06−1 to have a material impact on
      its consolidated financial position, results of operations or cash
      flows .





54




**Results
      of Operations for the Three Months Ended June 30, 2007 As Compared to the Three
      Months Ended June 30, 2006**





*Net
      sales.* Total
      net
      sales for the three months ended June 30, 2007 were $624,000, which represented
      a $135,000, or 28%, increase from $489,000 for the three months ended June
      30,
      2006.  This increase resulted from $135,000 increased net sales in 2007
      from Gavitec provided through new program development.





*Cost
      of sales.* Cost
      of
      sales was $374,000 for the three months ended June 30, 2007 compared to $407,000
      for the three months ended June 30, 2006, a decrease of $33,000, or 8%. 
This decrease resulted from (i) $8,000 decreased product and service related
      cost of sales from Gavitec due to a favorable product mix, and (ii) lower cost
      of sales of $35,000 from the Company’s underlying business represented by qode®
and NeoMedia’s legacy software products and the Company’s wound down Consulting
      and Integration Services business, partially offset by (iii) higher amortization
      of $14,000 of intangible assets relating to the acquisition of Gavitec.





*Gross
      profit.* Gross profit was $250,000 for the three months ended June 30, 2007, an increase
      of $168,000, or 204%, compared with gross profit of $82,000 for the three months
      ended June 30, 2006.  This increase resulted from (i) $143,000 increased
      operational gross profit from Gavitec through increased sales and favorable
      product mix, and (ii) increased gross profit of $39,000 from the Company’s
      underlying business represented by qode®, NeoMedia’s legacy software products,
      partially offset by (iii) increased amortization of $14,000 of intangible assets
      relating to the acquisition of Gavitec.





*Sales
      and marketing.* Sales
      and
      marketing expenses were $543,000 for the three months ended June 30, 2007,
      compared to $1,512,000 for the three months ended June 30, 2006, a decrease
      of
      $969,000 or 64%.  This decrease resulted from (i) lower sales and marketing
      expense in the Company’s underlying business represented by qode® and NeoMedia’s
      legacy software products of $709,000 in 2007 relative to 2006, (ii) lower stock
      based compensation expense allocated to sales and marketing in 2007 of $224,000,
      partially offset by (iii) higher sales and marketing expenses of $36,000 from
      Gavitec, to foster the increased sales.





*General
      and administrative.* General
      and administrative expenses decreased by $647,000, or 33%, to $1,324,000 for
      the
      three months ended June 30, 2007, compared to $1,971,000 for the three months
      ended June 30, 2006. The increase resulted from (i) higher accounting,
      professional, and legal services of $374,000 due to Company’s implementation of
      Sarbanes Oxley and a more complex reporting structure in 2006, along with
      reduced costs associated with actual and threatened lawsuits, and registration
      statements, (ii) general and administrative expenses of $57,000 from Gavitec,
      associated with the 2006 acquisition integration, and (iii) lower costs of
      $305,000 for corporate and qode® general and administration stemming from the
      Company’s cost controls, partially offset by increased stock based compensation
      expense of $89,000.





*Research
      and development.* During
      the three months ended June 30, 2007, NeoMedia charged to expense $419,000
      of
      research and development costs, a decrease of $78,000 or 16% compared to
      $497,000 for the three months ended June 30, 2006.  The decrease resulted
      from (i) lower research and development expense related to qode® products of
      $91,000, and (ii) lower stock based compensation expense allocated to research
      and development of $44,000, partially offset by (iii) higher research and
      development expenses of $57,000 from Gavitec.





*Gain
      (loss) on extinguishment of debt.* During
      the three months ended June 30, 2007, NeoMedia recorded a gain on extinguishment
      of debt in the amount of $253,000, an increase of $147,000 or 139% compared
      to
      $106,000 from the three months ended June 30, 2006. The 2007 gain resulted
      from
      the termination of a liability at Gavitec. In the three months ended June 30,
      2006 NeoMedia recorded a gain on extinguishment of debt of $106,000 resulting
      from the difference between the cash or market value of stock issued to settle
      a
      debt and the carrying value of the debt at the time of settlement.





*Interest
      income (expense).* Interest
      income (expense) consists primarily of interest charges related to convertible
      debentures, interest accrued for creditors as part of financed purchases, past
      due balances, and notes payable, net of interest earned on cash equivalent
      investments.  Interest expense increased by $908,000, or 1,892%, to
      $957,000 for the three months ended June 30, 2007, from interest expense of
      $48,000 for the three months ended June 30, 2006. The increase resulted from
      (i)
      $649,000 of interest on the Company’s convertible debenture financing
      arrangements, (ii) $313,000 of liquidated damages related to the Company’s
      convertible financing arrangements, and (iii) a favorable $54,000 of other
      interest expense.




55




*Gain
      (loss) on embedded conversion features of derivative financial
      instruments.* Gain
      (loss) from embedded conversion features of derivative financial instruments
      was
      $1,122,000 for the three months ended June 30, 2007, compared with $11,026,000
      for the three months ended June 30, 2006, a decrease of $9,904,000 or 90%. 
The gains and losses are associated with the preferred stock sale on February
      17, 2006, and the convertible debenture financings dated August 24, 2006,
      December 29, 2006 and March 27, 2007.  Certain derivatives and embedded
      conversion features were created at the time of each offering and are recorded
      at fair value on the accompanying balance sheet *.* The
      gains
      (losses) represent the reduction (appreciation) in value of the derivatives
      and
      embedded conversion features from the beginning of each reporting period
      presented to the end of the period, and are due almost entirely to a reduction
      (appreciation) in NeoMedia’s stock price during each period.





*Loss
      from discontinued business units* . 
      During 2006, NeoMedia sold its Mobot and Sponge businesses. During the first
      quarter of 2007, NeoMedia made the strategic business decision to sell its
      12Snap and Telecom Services businesses. Accordingly, NeoMedia has classified
      the
      operations of MicroPaint Repair, Mobot, Sponge, 12Snap and Telecom Services
      as
      discontinued operations. Loss from the discontinued business units in 2007
      represents direct operations of the MicroPaint Repair, 12Snap, and Telecom
      Services units for the three months ended June 30, 2007. Loss from the
      discontinued business units in 2006 represents direct operations of MicroPaint
      Repair for the three months ended June 30, 2006, and direct operations of Mobot,
      Sponge, 12Snap and Telecom Services from their respective acquisition dates
      (February 17, 2006 for Mobot, February 23, 2006 for Sponge, February 28, 2006
      for 12Snap, and March 21, 2006 for Telecom Services) through June 30,
      2006.





The
      net
      loss from the MicroPaint Repair business unit for the three months ended June
      30, 2007 was $617,000, a decrease of $138,000 or 18% from the loss of $755,000
      for the three months ended June 30, 2006. The decreased loss is due to $73,000
      of suspended depreciation and amortization, and $283,000 of cost containment
      efforts to lower the fixed overhead costs, partially offset by increased stock
      based compensation of $218,000 in 2007 associated primarily with the stock
      option repricing program. The net loss from the 12Snap business for the three
      months ended June 30, 2007 was $92,000, a decrease of $679,000 or 88% from
      the
      loss of $770,000 for the three months ended June 30, 2006. The decreased loss
      is
      due to the disposal of the operations of 12Snap on April 4, 2007. Additionally,
      NeoMedia recorded a charge of $257,000 to record the loss on the disposal of
      12
      Snap in the three months ended June 30, 2007. The net income from the Telecom
      Services business for the three months ended June 30, 2007 was $13,000, a
      decrease of $138,000 or 91% from the income of $151,000 for the three months
      ended June 30, 2006. The decrease primarily results from suspended depreciation
      and amortization of $87,000, partially offset by an increase in stock based
      compensation expense of $31,000 in 2007 relative to 2006 and other operating
      expenses of $20,000 in the three months ended June 30, 2007 over the same period
      in 2006. NeoMedia’s operating results are $401,000 favorable in the three months
      ended June 30, 2007 to the same period in 2006 due to the disposal of Mobot.
      NeoMedia’s operating results are $252,000 favorable in the three months ended
      June 30, 2007 to the same period in 2006 due to the disposal of Sponge.





*Net
      income (loss)* . 
      The net loss for the three months ended June 30, 2007 was $2,597,000, which
      represented a reduction of $7,730,000, or 142% from the $5,133,000 net income
      for the three months ended June 30, 2006.  The net loss resulted from (i) a
      smaller gain from the change in fair value of embedded conversion features
      associated with the Series C preferred stock, warrants, and convertible
      debentures in the amount of $1,122,000 in the three months ended June 30, 2007
      compared with a gain of $11,026,000 in the same period in 2006, (ii) $908,000
      of
      additional interest expense during the three months ended June 30, 2007
      consisting of $649,000 of interest on the debenture financing arrangements
      and
      $313,000 of accrued liquidating damages due to the Company’s default position on
      its financing arrangements, (iii) a loss on the disposal of 12Snap of $257,000
      from the sale on April 4, 2007, partially offset by (iv) reduced losses of
      $1,798,000 in the three months ended June 30,2007 compared with the same period
      in 2006 from the underlying business represented by Gavitec and qode®,
      NeoMedia’s legacy software products, and corporate administration including
      audit and legal fees, (v) decreased losses from the operations of the
      discontinued business units of 12Snap, Mobot, and Sponge of $1,074,000 during
      the three months ended June 30, 2007, and (vi) an increase in the gain on the
      extinguishment of debt of $147,000 during the three months ended June 30, 2007.




56


*Known
      trends, demands, commitments, or uncertainties.* During
      August 2006, NeoMedia announced that it intended to sell its MicroPaint Repair
      business unit. During the fourth quarter of 2006, NeoMedia divested of Mobot
      and
      Sponge, wholly owned subsidiaries acquired during the first quarter of 2006.
      Also, during the first quarter of 2007, NeoMedia announced its intent to sell
      additional subsidiaries NeoMedia Telecom and 12Snap. NeoMedia sold 12Snap on
      April 4, 2007. As a result, NeoMedia expects its sales, cost of sales, gross
      profit, operating expenses, and net loss over the next 12 months to more closely
      resemble the result presented herein, than results presented in the Company’s
      Forms 10-Q filed during 2006.




57





**Results
      of Operations for the Six Months Ended June 30, 2007 As Compared to the Six
      Months Ended June 30, 2006**





*Net
      sales.* Total
      net
      sales for the six months ended June 30, 2007 were $1,023,000, which represented
      a $336,000, or 49%, increase from $687,000 for the six months ended June 30,
      2006.  This increase resulted from $323,000 increased net sales in 2007
      from Gavitec which was acquired during the first quarter of 2006 and only
      reflected in NeoMedia’s results for a portion of that operating period, and an
      increase of $13,000 in net sales from the Company’s underlying business
      represented by qode® and intellectual property licensing.





*Cost
      of sales.* Cost
      of
      sales were $687,000 for the six months ended June 30, 2007 compared to $537,000
      for the six months ended June 30, 2006, an increase of $150,000, or 28%. 
This increase resulted from (i) $11,000 increased product and service related
      cost of sales from Gavitec which was acquired during the first quarter of 2006
      and only reflected in NeoMedia’s results for a portion of that operating period,
      and (ii) amortization of $100,000 of intangible assets relating to the
      acquisition of Gavitec, and (iii) higher cost of sales of $39,000 from the
      Company’s underlying business represented by qode® and NeoMedia’s legacy
      software products and the Company’s wound down Consulting and Integration
      Services business.





*Gross
      profit.* Gross profit was $336,000 for the six months ended June 30, 2007, an increase
      of
      $186,000, or 124%, compared with gross profit of $150,000 for the six months
      ended June 30, 2006.  This increase resulted from (i) $312,000 increased
      operational gross profit from Gavitec do to increased sales and favorable
      product mix, offset by (ii) decreased gross profit of $26,000 from the Company’s
      underlying business represented by qode®, NeoMedia’s legacy software products,
      and (iii) amortization of $100,000 of intangible assets relating to the
      acquisition of Gavitec.





*Sales
      and marketing.* Sales
      and
      marketing expenses were $1,402,000 for the six months ended June 30, 2007,
      compared to $2,706,000 for the six months ended June 30, 2006, a decrease of
      $1,304,000 or 48%.  This decrease resulted from (i) lower sales and
      marketing expense in the Company’s underlying business represented by qode® and
      NeoMedia’s legacy software products of $1,023,000 in 2007 relative to 2006, (ii)
      lower stock based compensation expense allocated to sales and marketing in
      2007
      of $256,000, and (iii) lower sales and marketing expenses of $25,000 from
      Gavitec, which was acquired during the first quarter of 2006.





*General
      and administrative.* General
      and administrative expenses increased by $435,000, or 13%, to $3,764,000 for
      the
      six months ended June 30, 2007, compared to $3,329,000 for the six months ended
      June 30, 2006. The increase resulted from (i) higher accounting, professional,
      and legal services of $703,000 due to Company’s implementation of Sarbanes
      Oxley, higher audit fees resulting from a more complex reporting structure
      and
      transactions, actual and threatened lawsuits, and registration statements,
      and
      (ii) increased stock based compensation expense of $139,000, partially offset
      by
      (iii) lower general and administrative expenses of $407,000 through the
      Company’s cost reduction efforts.





*Research
      and development.* During
      the six months ended June 30, 2007, NeoMedia charged to expense $925,000 of
      research and development costs, a decrease of $57,000 or 6% compared to $982,000
      for the six months ended June 30, 2006.  The decrease resulted from (i)
      lower research and development expense related to qode® products of $253,000,
      and (ii) lower stock based compensation expense allocated to research and
      development of $18,000, partially offset by (iii) higher research and
      development expenses of $214,000 from Gavitec, which was acquired during the
      first quarter of 2006





*Gain
      (loss) on extinguishment of debt.* Gain
      on
      the extinguishment of debt in the six months ended June 30, 2007 was $253,000,
      which was $2,111,000 or 1,136% favorable to the loss on the extinguishment
      of
      debt in the same period of 2006. During the six months ended June 30, 2006,
      NeoMedia recorded a loss on extinguishment of debt in the amount of $1,858,000,
      primarily resulting from debt retired in connection with the Series C preferred
      stock issued and sold to Cornell Capital Partners, L.P. on February 17,
      2007. ** A
      loss
      was incurred on the surrender  of a certain promissory note to Cornell
      Capital Partners, L.P. (“Cornell”) dated March 30, 2005 in connection with the
      preferred stock sale. During the six months ended June 30, 2007 NeoMedia
      recorded gains of $198,000 on the extinguishment of a liability at Gavitec
      and
      $55,000 related to the conversion of a derivative instrument.




58




*Interest
      income (expense).* Interest
      income (expense) consists primarily of interest charges related to convertible
      debentures, interest accrued for creditors as part of financed purchases, past
      due balances, and notes payable, net of interest earned on cash equivalent
      investments.  Interest expense increased by $2,623,000, or 8,462%, to
      $2,655,000 for the six months ended June 30, 2007, from $31,000 for the six
      months ended June 30, 2006. The increase resulted from (i) a charge to expense
      the costs of obtaining the debenture financing in March 2007 of $781,000, (ii)
      $607,000 of liquidated damages related to the Company’s default on its
      convertible financing arrangements, (iii) $836,000 of interest expense related
      to convertible debentures, and (iv) $399,000 of other interest expense.





*Gain
      (loss) on embedded conversion features of derivative financial
      instruments.* Gain
      (loss) from embedded conversion features of derivative financial instruments
      was
      $(2,386,000) for the six months ended June 30, 2007, compared with $15,794,000
      for the six months ended June 30, 2006, a decrease of $18,180,000 or 115%. 
The gains and losses are associated with the preferred stock sale on February
      17, 2006, and the convertible debenture financings dated August 24, 2006,
      December 29, 2006 and March 27, 2007.  Certain derivatives and embedded
      conversion features were created at the time of each offering and are recorded
      at fair value on the accompanying balance sheet *.* The
      gains
      (losses) represent the reduction (appreciation) in value of the derivatives
      and
      embedded conversion features from the beginning of each reporting period
      presented to the end of the period, and are due almost entirely to a reduction
      (appreciation) in NeoMedia’s stock price during each period.





*Loss
      from discontinued business units* . 
      During 2006, NeoMedia entered into a letter of intent to sell its MicroPaint
      Repair business, and sold its Mobot and Sponge businesses. During the first
      quarter of 2007, NeoMedia made the strategic decision to sell its 12Snap and
      Telecom Services businesses. Accordingly, NeoMedia has classified the operations
      of MicroPaint Repair, Mobot, Sponge, 12Snap and Telecom Services as discontinued
      operations. Loss from the discontinued business units in 2007 represents direct
      operations of the MicroPaint Repair and Telecom Services units for the full
      six
      months ended June 30, 2007, and for 12Snap for the period January 1, 2007
      through April 4, 2007 (disposal date). Loss from the discontinued business
      units
      in 2006 represents direct operations of MicroPaint Repair for the full six
      months ended June 30, 2006, and direct operations of Mobot, Sponge, 12Snap
      and
      Telecom Services from their respective acquisition dates (February 17, 2006
      for
      Mobot, February 23, 2006 for Sponge, February 28, 2006 for 12Snap, and March
      21,
      2006 for Telecom Services) through June 30, 2006.





The
      net
      loss from the MicroPaint Repair business unit for the six months ended June
      30,
      2007 was $1,209,000, an increase of $2,000 or 0% from the loss of $1,207,000
      for
      the six months ended June 30, 2006. The increased loss is due to increased
      stock
      based compensation of $24,000 in 2007 associated primarily with the stock option
      repricing program, and $120,000 of reduced operational profits, offset by
      $142,000 of suspended depreciation. The net loss from the 12Snap business for
      the six months ended June 30, 2007 was $2,302,000, a change of $1,476,000 or
      179% from the loss of $826,000 for the period from February 28, 2006 through
      June 30, 2006. The increase loss results primarily from an impairment charge
      in
      the amount of $2,467,000 during the six months ended June 30, 2007 to adjust
      the
      carrying value of 12Snap assets to the fair value of assets received in the
      sale
      on April 4, 2007, coupled with a loss on the disposal of the 12Snap business
      of
      $257,000 from the recognition of its previously unrealized cumulative currency
      translation, offset by an increase to the operational income of 12Snap of
      $1,248,000 in 2007 as compared with 2006. Net income from the Telecom Services
      business for the six months ended June 30, 2007 was $11,000, a change of
      $289,000 or 104% from the loss of $278,000 for the period from March 21, 2006
      through June 30, 2006. The decrease results primarily from a decrease in stock
      based compensation expense of $303,000 in 2007 relative to 2006 and suspended
      depreciation of $159,000, partially offset by increased operating costs of
      $173,000. NeoMedia’s operating results are $671,000 favorable in the six months
      ended June 30, 2007 to the same period in 2006 due to the disposal of Mobot.
      NeoMedia’s operating results are $188,000 favorable in the six months ended June
      30, 2007 to the same period in 2006 due to the disposal of Sponge.




59





*Net
      loss* . 
      The net loss for the six months ended June 30, 2007 was $14,096,000, which
      represented a $17,911,000, or 469% increase from the $3,815,000 net income
      for
      the six months ended June 30, 2006.  This increased net loss resulted from
      (i) a loss resulting from the change in fair value of embedded conversion
      features associated with the Series C preferred stock, warrants, and convertible
      debenture in the amount of $2,386,000 in the six months ended June 30, 2007
      compared with a gain of $15,794,000 in the same period in 2006, (ii) an increase
      of $2,624,000 in interest expense during the six months ended June 30, 2007
      to
      adjust the carrying value of the March 2007 convertible debenture financing
      to
      its face value due to the Company’s default position, liquidating damages on
      convertible financing arrangements in default, and interest expense on
      convertible debentures (iii) an impairment charge of $2,467,000 to adjust the
      carrying value of 12Snap assets to the fair value of assets received in the
      sale
      on April 4, 2007, and a loss on that business disposal of $257,000, (iv)
      increased losses of $1,492,000 in the six months ended June 30,2007 compared
      with the same period in 2006 from the underlying business represented by qode®,
      NeoMedia’s legacy software products, and corporate administration including
      audit and legal fees, partially offset by (v) decreased losses from the disposed
      of operations of 12Snap, Mobot, and Sponge of $2,108,000, (vi) a loss on the
      extinguishment of debt of $1,858,000 during the six months ended June 30, 2006
      and gains on the extinguishment of debt of $253,000 in the six months ended
      June
      30, 2007, and (vii) reduced losses from the to be discontinued operations of
      MicroPaint Repair and Telecom Services of $286,000





*Known
      trends, demands, commitments, or uncertainties.* During
      August 2006, NeoMedia announced that it intended to sell its MicroPaint Repair
      business unit. During the fourth quarter of 2006, NeoMedia divested of Mobot
      and
      Sponge, wholly owned subsidiaries acquired during the first quarter of 2006.
      Also, during the first quarter of 2007, NeoMedia announced its intent to sell
      additional subsidiaries NeoMedia Telecom and 12Snap. NeoMedia sold 12Snap on
      April 4, 2007. As a result, NeoMedia expects its sales, cost of sales, gross
      profit, operating expenses, and net loss over the next 12 months to more closely
      resemble the result presented herein, than results presented in the Company’s
      Forms 10-Q filed during 2006.








**Liquidity
      and Capital Resources**





**Current
      Period Activity**





*Net
      cash from operations.* Net cash
      used in continuing operating activities (net of cash used from operations of
      discontinued business unit) was $5,264,000 and $4,539,000 for the six months
      ended June 30, 2007 and 2006, respectively, an increase of $725,000, or 16%.
      The
      increase resulted from payment of accrued liquidated damages and interest of
      $1,678,000 from the proceeds of the March 2007 convertible debenture, offset
      by
      lower cash used in ongoing operations of $953,000.





*Net
      cash used in investing.* NeoMedia’s net cash flow used in investing activities (net of cash used in
      investing of discontinued business units) for the six months ended June 30,
      2007
      and 2006, was $3,168,000 and $17,606,000, respectively, a decrease of
      $14,438,000 or 82%. The decrease resulted from (i) the investment of $13,867,000
      in the acquisitions of Mobot, Sponge, Gavitec and 12Snap during the six months
      ended June 30, 2006, (ii) proceeds from the sale of 12Snap received in the
      six
      months ended June 30, 2007, (iii) reduced advances to discontinued subsidiaries
      of $573,000 in the six months ended June 30, 2007 as compared with the same
      period in 2006, (iv) collection of notes receivable of $450,000 in the six
      months ended June 30, 2007, as compared to amounts advanced in the same period
      in 2006 of $500,000, and (v) reduced acquisition related costs and lower
      acquisitions of fixed assets and software of $543,000, offset by (vi) payments
      of purchase price obligations relating to Gavitec and 12Snap of $2,447,000.





*Net
      cash provided by financing activities* .
      Net
      cash provided by financing activities was $5,680,000 and $22,205,000 for the
      six
      months ended June 30, 2007 and 2006, respectively, a decrease of $16,525,000
      or
      74%. NeoMedia received $6,678,000 proceeds from the sale of convertible
      debentures in the six months ended June 30, 2007, and $14,066,000 from the
      sale
      of Series C convertible stock during the six months ended June 30, 2006.
      NeoMedia received $17,000 and $8,316,000 from the exercise of stock options
      and
      warrants during the six months ended June 30, 2007 and 2006, respectively.
      NeoMedia satisfied repayments on notes payable and convertible debt in the
      six
      months ended June 30, 2007 and 2006, of $1,029,000 and $387,000, respectively.




60





*Net
      cash used in discontinued operations* .
      Net
      cash used in the Company’s discontinued MicroPaint Repair operations for the six
      months ended June 30, 2007 was $645,000, of which $656,000 was used in
      operations, $4,000 was used in investing activities, and $15,000 was generated
      as a result of the effect of exchange rates on cash. Net cash used in the
      Company’s discontinued MicroPaint Repair operations for the six months ended
      June 30, 2006 was $1,370,000, of which $1,358,000 was used in operations,
      $22,000 was used in investing activities, and $10,000 was generated as a result
      of the effect of exchange rates on cash.





Net
      cash
      used in the Company’s discontinued 12Snap operations for the six months ended
      June 30, 2007 was $1,195,000, of which $62,000 was used in operations,
      $1,125,000 was used in financing activities to repay silent partner debt, and
      $8,000 was generated as a result of the effect of exchange rates on cash. Net
      cash used in the Company’s discontinued 12Snap operations for the six months
      ended June 30, 2006 was $1,269,000, of which $134,000 was generated from
      operations, $60,000 was used in investing activities, $2,036,000 was used in
      financing activities to repay silent partner debt, and $693,000 was used as
      a
      result of the effect of exchange rates on cash.





Net
      cash
      used in the Company’s discontinued Telecom Services operations for the six
      months ended June 30, 2007 was $279,000, of which $70,000 was used in
      operations, $8,000 was used in investing activities, $6,000 was generated from
      investing activities, and $207,000 was used as a result of the effect of
      exchange rates on cash. Net cash used in the Company’s discontinued Telecom
      Services operations for the six months ended June 30, 2006 was $241,000, of
      which $118,000 was used in operations, $5,000 was used in financing activities
      to repay notes payable, and $118,000 was used as a result of the effect of
      exchange rates on cash.





Net
      cash
      used in the Company’s discontinued Mobot operations for the six months ended
      June 30, 2006 was $465,000, of which $436,000 was used in operations, and
      $29,000 was used in investing activities. Since this business was sold during
      2006, there was no effect on cash during the six months ended June 30, 2007.





Net
      cash
      used in the Company’s discontinued Sponge operations for the six months ended
      June 30, 2006 was $130,000, of which $112,000 was generated from operating
      activities, and $18,000 was used as a result of the effect of exchange rates
      on
      cash. Since this business was sold during 2006, there was no effect on cash
      during the six months ended June 30, 2007.








As
      of
      June 30, 2007, NeoMedia has a working capital deficiency of $67,570,000, of
      which $24,420,000 relates to the fair value of derivative financial instruments,
      and $40,178,000 relates to the carrying value of debentures and convertible
      preferred stock that are convertible into shares of NeoMedia common stock.
      NeoMedia intends to fund its working capital deficiency as described in “Sources
      of Cash and Projected Cash Requirements”.








**Significant
      Liquidity Events**




**Sale
      of 12Snap - March 2007**




On
      April
      4, 2007, NeoMedia entered into a material definitive agreement with Bernd M.
      Michael (the “Buyer”), a private investor and former shareholder of 12Snap prior
      to NeoMedia’s acquisition of 12Snap, pursuant to which the Buyer purchased from
      NeoMedia 90% of the shares of 12Snap, pursuant to the following material
      terms:





·
            $1,100,000
                was paid by the Buyer to NeoMedia in cash at closing, of which $1,015,000
                was applied toward amounts owed to silent partners of
                12Snap;




61




·
            $500,000
                was placed into an escrow account for 90 days to secure warranty
                claims,
                and was paid during July 2007;




·
            Buyer
                waived his portion of the purchase price guarantee obligation in
                the
                amount of $880,000;




·
            Buyer
                returned to NeoMedia 2,525,818 NeoMedia shares previously issued
                to
                Buyer;




·
            12Snap
                management waived their portion of the purchase price guarantee obligation
                in the amount of $880,000;




·
            12Snap
                management returned to NeoMedia 5,225,039 shares of NeoMedia common
                stock
                previously issued to 12Snap
                management;




·
            NeoMedia
                will retain a 10% ownership in 12Snap, subject to an option agreement
                pursuant to which NeoMedia has the right to sell and Buyer has the
                right
                to acquire the remaining 10% stake held by NeoMedia for a purchase
                price
                of $750,000 after December 31, 2007;
                and




·
            12Snap
                and NeoMedia will execute a cooperation agreement pursuant to which
                12Snap
                will remain NeoMedia preferred partner and enjoy most favored prices,
                and
                12Snap will perform certain research and development functions for
                NeoMedia.






**$7.5
      Million Convertible Debenture - March 2007**




NeoMedia
      entered into a Securities Purchase Agreement, dated March 27, 2007, with Cornell
      Capital Partners (the “March Debenture Agreement”). Pursuant to the March
      Debenture Agreement, Cornell Capital Partners agreed to purchase 13% secured
      convertible debentures maturing two years from the date of issuance in the
      aggregate amount of $7,459,000. The March Debenture Agreement also provided
      for
      the issuance to the purchasers, at no additional cost to the purchaser, warrants
      to purchase 125,000,000 shares of NeoMedia common stock at an exercise price
      of
      $0.04 per share. In connection with the March Debenture Agreement, NeoMedia
      also
      entered into a Registration Rights Agreement with the purchasers that requires
      the Company to (i) file a registration statement with the SEC registering the
      resale of the shares of common stock issuable upon conversion of the convertible
      debenture and the exercise of the warrants within 30 days of receiving a written
      notice from the purchasers requesting filing, (ii) achieve effectiveness of
      the
      registration statement within 120 days of receiving a notice to file the
      registration statement and (iii) maintain effectiveness of the registration
      statement for the life of the agreement. Failure to meet these requirements
      will
      require the Company to incur liquidating damages amounting to 2% of the
      principal per month. The debentures are secured by substantially all of the
      Company’s assets.





At
      any
      time from the closing date until December 29, 2008, the purchaser has the right
      to convert the convertible debenture into NeoMedia common stock at the then
      effective conversion price, which varies relative to NeoMedia’s trading stock
      price, as follows: The lower of $0.05 per share, or 90% of the lowest closing
      bid price (as reported by Bloomberg, L.P.) of the common stock for the 30
      trading days immediately preceding the conversion date.





In
      connection with the March Debenture Agreement, NeoMedia applied $1,312,000
      of
      the gross proceeds toward payment of liquidated damages accrued on previous
      convertible instruments payable to the purchaser, and $366,000 toward accrued
      interest on previous convertible debentures. Cornell Capital Partners also
      retained fees of $781,000, resulting in net proceeds to the Company of
      $5,000,000.





**Obligations
      Relating to Gavitec and 12Snap**





As
      of
      December 31, 2006, NeoMedia had recorded liabilities of $16,233,000 and
      $5,194,000 relating to purchase price guarantee obligations associated with
      its
      acquisitions of 12Snap and Gavitec, respectively. Pursuant to the terms of
      each
      acquisition, in the event that NeoMedia’s stock price at the time the
      consideration shares issued in connection with the acquisitions of Mobot,
      Sponge, Gavitec, and 12Snap became saleable (either upon effectiveness of a
      registration statement containing the shares, or under Rule 144) was less than
      the contractual price (between $0.3839 and $0.3956), NeoMedia is obligated
      to
      compensate the sellers in cash for the difference between the price at the
      time
      the shares became saleable and the relevant contractual price. The shares became
      saleable during the first quarter of 2007.




62




On
      January 23, 2007, NeoMedia entered into an agreement with the former
      shareholders of Gavitec, whereby this purchase price obligation is to be
      satisfied through the payment by NeoMedia of (i) $1,800,000 in cash, payable
      no
      later than February 28, 2007 (subsequently extended to March 31, 2007), and
      (ii)
      61,000,000 shares of NeoMedia common stock to be issued no later than February
      28, 2007. NeoMedia also agreed to pay interest accrued on the purchase price
      in
      the amount of $481,000 and reimburse $100,000 of costs related to the
      acquisition to the primary former shareholder of Gavitec no later than February
      28, 2007. NeoMedia issued the shares and made cash payments of $2,113,000 during
      March 2007. As of June 30, 2007, the balance on the accrual was $268,000,
      representing the remaining interest payments.





During
      the three months ended March 31, 2007, NeoMedia issued 197,620,948 shares of
      its
      common stock in satisfaction of a portion of the 12Snap purchase price
      obligation totaling $9,427,000, and made cash payments against the liability
      totaling $259,000. The balance on the purchase price obligation as of June
      30,
      2007 was $4,684,000.





Prior
      to
      the acquisition of 12Snap by NeoMedia, 12Snap entered into silent partnership
      debt arrangements with principal and interest totaling $4.8 million. The
      partnership agreements were scheduled to terminate on December 31, 2008 and
      2009. However, due to the acquisition of all shares of 12Snap by NeoMedia,
      an
      early termination was agreed on for the silent partnership agreements. Those
      silent partnerships terminated as of February 28, 2006 with the acquisition
      of
      12Snap by NeoMedia. NeoMedia made payments toward the outstanding principal
      of
      $2.1 million and $0.6 million during March 2006 and December 2006, respectively.
      The balance as of December 31, 2006 relating to silent partners was $2.1
      million. NeoMedia made additional payments of $1.0 million during February
      2007,
      and the remaining balance of $1.1 million was paid from the proceeds of the
      sale
      of 12Snap in April 2007.





**HipCricket
      Note Receivable**





On
      July
      27, 2007, NeoMedia entered into a settlement agreement with HipCricket for
      the
      early payment of a note receivable due to NeoMedia from HipCricket, for which
      payment was received by NeoMedia on that date. Refer to Exhibit 10.1 for details
      of the agreement.








**China
      Order**





During
      the fourth quarter of 2005 and first quarter of 2006, NeoMedia shipped and
      invoiced $757,000 of Micro Paint Repair products to Automart, Inc. for which
      payment has not been received. The accounts receivable related to this
      transaction have been fully reserved. Recognition of revenue on this transaction
      has been deferred since this is a new customer in a new territory. If and when
      payment is made, NeoMedia expects to recognize revenue for these shipments,
      and
      would also receive a material cash infusion. In the absence of payment, NeoMedia
      would not recognize revenue related to these products and would not recoup
      its
      cost of goods sold which have already been paid. If not collected, these assets
      could be sold in connection with the proposed sale of the MicroPaint Repair
      business unit. The accounts receivable due from this sale were fully reserved
      in
      2006, and the inventory value was also expensed at that time.








**Sources
      of Cash and Projected Cash Requirements**





As
      of
      June 30, 2007, NeoMedia’s cash balances were $151,000. NeoMedia intends to
      attempt to fund its growth and working capital deficiencies from the following
      sources during the remainder of 2007 and beyond:





*Sale
      of non-core business units.* During
      August 2006, NeoMedia announced its intent to sell its MicroPaint Repair
      business unit. Additionally, during January 2007, the Company decided to sell
      wholly-owned subsidiaries 12Snap and NeoMedia Telecom Services. During April
      2007, NeoMedia completed the sale of 12Snap. The cash portion of the sale price
      was $1.6 million, of which $1.1 million was used to pay balances owed to silent
      partners of 12Snap, and $0.5 million was paid to NeoMedia during July 2007.
      Any
      cash proceeds realized from the sale of these non-core business units will
      be
      used to fund the operations of NeoMedia’s core code reading business, consisting
      of qode®, Gavitec, and the related intellectual property.




63




*Exercise
      of options and warrants.* One of
      the Company’s shareholders, Cornell Capital Partners, currently holds warrants
      to purchase up to 427,000,000 shares of Company common stock at exercise prices
      between $0.04 and $0.06 per share. NeoMedia
      can force exercise of the warrants if the closing bid price of NeoMedia stock
      is
      more than $0.10 greater than the exercise price of any of the warrants for
      15
      consecutive trading days. It
      is
      important to note that the warrants held by Cornell Capital Partners contain
      a
      provision that, if NeoMedia is in default of the warrant agreement, the
      holder can perform a “cashless” exercise of the warrants and in lieu of making
      payment of the exercise price in cash, elect instead to withhold shares as
      consideration for the exercise price. In the event of such a “cashless”
exercise, NeoMedia would not receive any cash proceeds upon the exercise of
      such
      warrants. NeoMedia is currently in default under the warrant agreements due
      to
      its default position under the Investor Registration Rights Agreements
      associated with certain of the convertible financings. As a result, Cornell
      Capital Partners currently has the right to exercise on a cashless basis
      250,000,000 of the warrants they hold, and NeoMedia may not receive any cash
      proceeds from such exercises.





In
      addition, certain outstanding employee stock options are in-the-money and could
      be exercised at the holders’ discretion from time to time. As of June 30, 2007,
      NeoMedia had 114,083,016 outstanding employee stock options, of which 44,850,000
      were in-the-money based on the closing price on June 30, 2007 of $0.035 per
      share. Total potential proceeds to the Company from exercise of all in-the-money
      options are $631,000. On February 1, 2007, NeoMedia instituted a stock option
      repricing plan as a retention tool to align its employees with the new vision
      of
      NeoMedia. Under the Plan, NeoMedia repriced 50,148,750 stock options held by
      current employees, contractors, and directors. Options for employees of
      NeoMedia’s ongoing operations were repriced as follows: (i) options that were
      vested as of February 1, 2007, were repriced to $0.045 per share, which was
      the
      last sale price on February 1, 2007, (ii) options that are scheduled to vest
      during the remainder of 2007 were repriced to $0.075, (iii) options that vest
      during 2008 were repriced to $0.125, and (iv) options that vest during 2009
      were
      repriced to $0.175. Options will continue to vest on their regular schedule,
      which generally is 25% upon grant and 25% on each subsequent anniversary date.
      The Company also repriced options for outside directors as follows: options
      with
      an exercise price below $0.24 were repriced to $0.045, and options with an
      exercise price $0.24 or higher were repriced to $0.075. In addition, the Company
      repriced options held by employees of its held for sale Micro Paint Repair
      and
      Telecom Services businesses, such that all vested options were repriced to
      $0.045 per share, and all unvested options will vest upon sale of the respective
      business unit at an exercise price of $0.075 per share, with a 12-month period
      to exercise. NeoMedia expects that additional funds could be realized upon
      exercise of such repriced options.





*Strategic
      Investment* .
      NeoMedia is currently in the process seeking a significant strategic investment
      from a long term capital investor to secure sources of cash to fund the
      Company’s growth.





*$100
      Million SEDA.* On March
      30, 2005, NeoMedia and Cornell Capital Partners entered into a Standby Equity
      Distribution Agreement (the “2005 SEDA”) under which Cornell Capital Partners
      agreed to purchase up to $100 million of NeoMedia’s common stock over a two-year
      period, with the timing and amount of the purchase at NeoMedia’s discretion. The
      maximum amount of each purchase would be $2,000,000 with a minimum of five
      business days between advances. Based on NeoMedia’s current market
      capitalization and other outstanding securities, NeoMedia does not believe
      that
      the 2005 SEDA is currently a viable source of financing.





NeoMedia’s
      reliance on Cornell Capital Partners as its primary financing source has certain
      ramifications that could affect future liquidity and business operations. For
      example, pursuant to the terms of the convertible debenture agreements between
      NeoMedia and Cornell Capital Partners signed in connection with the convertible
      debenture sales, without Cornell Capital Partners’s consent NeoMedia cannot
      (i ) issue
      or sell any shares of common stock or preferred stock without consideration
      or
      for consideration per share less than the closing bid price immediately prior
      to
      its issuance, (ii) issue or sell any preferred stock, warrant, option,
      right, contract, call, or other security or instrument granting the holder
      thereof the right to acquire common stock for consideration per share less
      than
      the closing bid price immediately prior to its issuance, (iii)
      enter into any security instrument granting the holder a security interest
      in
      any of its assets of, or
      (iv) file any
      registration statements on Form S-8. In addition, pursuant to security
      agreements between NeoMedia and Cornell Capital Partners signed in connection
      with the convertible debentures, Cornell Capital Partners has a security
      interest in all of NeoMedia’s assets. Such covenants could severely harm
      NeoMedia’s ability to raise additional funds from sources other than Cornell
      Capital Partners, and would likely result in a higher cost of capital in the
      event funding were secured.




64




Additionally,
      pursuant to the terms of the investment agreement between NeoMedia and Cornell
      Capital Partners signed in connection with the Series C convertible preferred
      stock sale, NeoMedia cannot (i) enter into any debt arrangements in which it
      is
      the borrower, (ii) grant any security interest in any of its assets, or (iii)
      grant any security below market price.





NeoMedia
      has incurred both cash and non-cash costs associated with the financing
      arrangements with Cornell Capital Partners, as follows:





·
            In
                connection with the $7.5 million convertible debenture in March 2007,
                NeoMedia issued 125,000,000 warrants to Cornell Capital Partners
                with an
                exercise price of $0.04 per share. NeoMedia also paid cash fees of
                $781,000 from the proceeds.





·
            In
                connection with the $2.5 million convertible debenture in December
                2006,
                NeoMedia issued 42,000,000 warrants to Cornell Capital Partners with
                an
                exercise price of $0.04 per share, and repriced an additional 210,000,000
                warrants held by Cornell Capital Partners that had been issued in
                connection with previous financings. NeoMedia also paid cash fees
                of
                $270,000 from the proceeds.





·
            In
                connection with the $5 million convertible debenture in August 2006,
                NeoMedia issued 175,000,000 warrants to Cornell Capital Partners
                with
                exercise prices between $0.05 and $0.25 (which were subsequently
                repriced
                in December 2006), and repriced 85,000,000 warrants that had been
                issued
                in connection with a previous financing (which were subsequently
                further
                repriced in December 2006).





·
            In
                connection with the $27 million Series C convertible preferred stock
                sale
                in February 2006, NeoMedia incurred the following costs: (i) Cornell
                Capital Partners held back a $2,700,000 cash fee from the proceeds
                of the
                sale, (ii) NeoMedia issued 75 million warrants to Cornell Capital
                Partners
                with exercise prices between $0.35 and $0.50, which were subsequently
                repriced, and (iii) NeoMedia issued 2,000,000 warrants with an exercise
                price of $0.328 to another party for structuring and consulting fees
                associated with the sale.





·
            In
                connection with the 2005 SEDA entered into during March 2005, NeoMedia
                incurred the following costs: (i) NeoMedia issued 75,000,000 warrants
                to
                Cornell Capital Partners with an exercise price of $0.20, 10,000,000
                of
                which were subsequently repriced to $0.04 in connection with the
                convertible debenture financings in August 2006 and December 2006,
                and
                (ii) NeoMedia issued 4,000,000 warrants with an exercise price of
                $0.227
                to another party for structuring and consulting fees associated with
                the
                2005 SEDA. The fair value of these warrants in the amount of $13,256,000
                was written off during the year ended December 31, 2006.








NeoMedia’s
      cash flow used in operations was $5,264,000 (excluding cash used in operations
      of discontinued Telecom Services and Micro Paint Repair business units of
      $726,000) for the six months ended June 30, 2007. In the event that (i) NeoMedia
      is unsuccessful in divesting of its remaining Micro Paint Repair and Telecom
      Services business units in a timely fashion, (ii) NeoMedia’s stock price does
      not increase to levels where it can force exercise of enough of its outstanding
      warrants to generate material operating capital, (iii) the market for NeoMedia’s
      stock will not support the sale of shares underlying such warrants or other
      funding sources, or (iv) NeoMedia does not realize a material increase in
      revenue during the next 12 months, NeoMedia will have to seek additional cash
      sources. There can be no assurances that such funding sources will be available.
      If necessary funds are not available, NeoMedia’s business and operations would
      be materially adversely affected and in such event, NeoMedia would attempt
      to
      reduce costs and adjust its business plan, and could be forced to sell certain
      of its assets, including its subsidiaries.




65





**Contractual
      Obligations**





NeoMedia
      is party to various commitments and contingencies, such as:





·
            NeoMedia
                leases its office facilities and certain office and computer equipment
                under various operating leases which provide for minimum rents and
                generally include options to renew for additional
                periods;


·
            NeoMedia
                is party to various payment arrangements with its vendors that call
                for
                fixed payments on past due
                liabilities;


·
            NeoMedia
                is party to various consulting agreements that carry payment obligations
                into future years;


·
            NeoMedia
                issued Series C convertible preferred shares with face value of
                $21,567,000 and convertible debentures with a face value of $14,958,000
                that are subject to conversion at future dates, plus the expected
                value of
                liquidated damages accrued in the amount of $1,388,000 relating to
                these
                convertible instruments; and


·
            NeoMedia
                has accrued the amount of $4,684,000 relating to a purchase price
                guarantee obligation in connection with its acquisition of
                12Snap.





The
      following table sets forth NeoMedia’s future minimum payments due under
      operating leases, vendor and consulting agreements, convertible stock
      agreements, and debt agreements:





(US
                dollars in thousands)Series
                CVendor
                &
            
            Subsidiary
            
            
            
            ConvertibleOperating
            
            Consulting
            
            Acquisition
            
            Convertible
            
            PreferredLeases
            
            Agreements
            
            Commitments
            
            Debentures
            
            Stock
            
            Total2007
                (remaining six months)
            
            $
            153
            
            $
            11
            
            
            4,684
            
            $
            16,346
            
            
            21,657
            
            $
            42,8512008
            
            
            172
            
            
            17
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            1892009
            
            
            ---
            
            
            11
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            112010
            
            
            ---
            
            
            3
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            32011
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---Thereafter
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---Total
            
            $
            325
            
            $
            42
            
            $
            4,684
            
            $
            16,346
            
            $
            21,657
            
            $
            43,054





In
      addition, as of June 30, 2007, NeoMedia had future obligations relating to
      its
      discontinued Micro Paint Repair and Telecom Services businesses totaling
      $1,270,000, most of which is expected to be assumed by the buyers upon the
      anticipated sale of each business unit.




**Going
      Concern**




The
      accompanying consolidated financial statements have been prepared in conformity
      with accounting principles generally accepted in the United States of America,
      which contemplate continuation of the Company as a going concern. Net loss
      for
      the six months ended June 30, 2007 was $14,096,000 compared to net income of
      $3,815,000, for the six months ended June 30, 2006. Net cash used for operations
      was $5,264,000 and $4,539,000, for the six months ended June 30, 2007 and 2006,
      respectively. NeoMedia also has an accumulated deficit of $175,025,000 and
      a
      working capital deficit of $67,306,000 as of June 30, 2007. Additionally, as
      of
      June 30, 2007, NeoMedia had recorded a liability of $4,684,000 relating to
      purchase price guarantee obligations associated with its acquisition of 12Snap.





The
      items
      discussed above raise substantial doubts about the Company’s ability to continue
      as a going concern. If the Company’s financial resources are insufficient, the
      Company may require additional financing in order to execute its operating
      plan
      and continue as a going concern. The Company cannot predict whether this
      additional financing will be in the form of equity, debt, or another form.
      The
      Company may not be able to obtain the necessary additional capital on a timely
      basis, on acceptable terms, or at all. In any of these events, the Company
      may
      be unable to implement its current plans for expansion, repay its debt
      obligations as they become due or respond to competitive pressures, any of
      which
      circumstances would have a material adverse effect on its business, prospects,
      financial condition and results of operations. The financial statements do
      not
      include any adjustments relating to the recoverability and reclassification
      of
      recorded asset amounts or amounts and reclassification of liabilities that
      might
      be necessary, should the Company be unable to continue as a going
      concern.




66




Should
      financing sources fail to materialize, management would seek alternate funding
      sources such as the sale of common and/or preferred stock, the issuance of
      debt,
      or the sale of its marketable assets. Management’s plan is to secure adequate
      funding to bridge the commercialization of its core code-reading business.





NeoMedia
      plans to attempt to address its working capital deficiency through the proposed
      sales of the Micro Paint Repair and Telecom Services business units, and
      continuing to reduce its workforce and overhead expenses in non-critical areas.
      In addition, NeoMedia will attempt to generate additional revenue and profit
      from the launch of its core code-reading products and the value optimization
      of
      its patent portfolio.





In
      the
      event that these financing sources do not materialize, or that NeoMedia is
      unsuccessful in increasing its revenues and profits, NeoMedia will be forced
      to
      further reduce its costs, may be unable to repay its debt obligations as they
      become due, or respond to competitive pressures, any of which circumstances
      would have a material adverse effect on its business, prospects, financial
      condition and results of operations. Additionally, if these funding sources
      or
      increased revenues and profits do not materialize, and NeoMedia is unable to
      secure additional financing, NeoMedia could be forced to reduce or curtail
      its
      business operations unless it is able to engage in a merger or other corporate
      finance transaction with a better capitalized entity.





67





**ITEM
      3.** **QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK** **.**





The
      Company is exposed to market risks associated with interest rates, investments,
      and currency movements on non-U.S. dollar denominated assets and liabilities.
      The Company assesses these risks on a regular basis. There have been no
      significant changes in the Company’s market risk since it filed its Annual
      Report on Form 10-K on April 3, 2007.





**ITEM
      4. CONTROLS AND PROCEDURES**





**Evaluation
      of Disclosure Controls and Procedures**





NeoMedia
      maintains disclosure controls and procedures, as defined in rules 13a-15(e)
      and
      15d-15(e) under the Securities and Exchange Act of 1934, as amended. These
      controls are designed to ensure that information required to be disclosed in
      the
      reports NeoMedia files or submits pursuant to the Securities and Exchange Act
      of
      1934 is recorded, processed, summarized and reported within the time periods
      specified in the rules and forms of the Securities and Exchange Commission,
      and
      that such information is accumulated and communicated to our management,
      including our Chief Executive Officer (“CEO”) and Chief Financial Officer
      (“CFO”), as appropriate, to allow timely decisions regarding required
      disclosure. In designing and evaluating NeoMedia’s disclosure controls and
      procedures, management recognizes disclosure controls and procedures, no matter
      how well designed and operated, can only provide reasonable assurance of
      achieving the desired control objectives, and in reaching a reasonable level
      of
      assurance, management necessarily is required to apply judgment in evaluating
      the cost-benefit relationship of possible controls and procedures.





NeoMedia
      carried out an evaluation, under the supervision and with the participation
      of
      its management, including the CEO and CFO, of the effectiveness of the design
      and operation of our disclosure controls and procedures as of the end of the
      period covered by this Quarterly Report on Form 10−Q. Based on this evaluation,
      the CEO and CFO concluded that NeoMedia’s disclosure controls and procedures
      were not effective as of June 30, 2007, at the reasonable assurance level,
      because of the material weaknesses described in Item 9A of NeoMedia’s Annual
      Report on Form 10−K for the fiscal year ended December 31, 2006, which NeoMedia
      is still in the process of remediating. Please see “Management’s Report on
      Internal Control over Financial Reporting” in Item 9A of the 2006 Form 10−K for
      a full description of these weaknesses.





Notwithstanding
      the material weaknesses described in Item 9A of the Form 10−K for the fiscal
      year ended December 31, 2006, NeoMedia believes that its condensed consolidated
      financial statements presented in this Quarterly Report on Form 10−Q fairly
      present, in all material respects, NeoMedia’s financial position, results of
      operations, and cash flows for all periods presented herein.





**Changes
      in Internal Control Over Financial Reporting**





There
      have been no changes to NeoMedia’s internal control over financial reporting
      during the quarter ended June 30, 2007 that have materially affected, or are
      reasonably likely to materially affect, NeoMedia’s internal control over
      financial reporting.





**Management’s
      Remediation Efforts**





As
      of the
      date of this filing, NeoMedia has taken or is currently taking the following
      steps to strengthen its internal control over financial reporting.
      Notwithstanding such efforts, the material weaknesses described in Item 9A
      of
      NeoMedia’s Form 10−K for the fiscal year ended December 31, 2006, will not be
      considered remediated until the new controls operate for a sufficient period
      of
      time and are tested (in accordance with the requirements of Section 404 of
      the
      Sarbanes-Oxley Act) to enable management to conclude that the controls are
      operating effectively.





1.
            Control
                environment over bank accounts. As disclosed in NeoMedia’s December 31,
                2006 Form 10-K, on January 9, 2007, management strengthened these
                controls
                by updating all appropriate bank signature cards, and by requiring
                two
                authorized signatures to maintenance employees who are authorized
                to input
                and verify wire transfers.




68




2.
            Review
                and approval of general ledger journal entries. As disclosed in our
                December 31, 2006 Form 10-K, on January 31, 2007, all journal entries
                are
                being reviewed and approved by the appropriate level of management
                prior
                to being input into the general
                ledger.





Management
      is currently addressing each of the material weaknesses in internal control
      over
      financial reporting cited in NeoMedia’s 2006 Form 10−K and is committed to
      remediating them as expeditiously as possible. Management will devote
      significant time and resources to the remediation effort.





69





**PART
      II -- OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**





The
      Company is involved in various legal actions arising in the normal course of
      business, both as claimant and defendant. While it is not possible to determine
      with certainty the outcome of these matters, it is the opinion of management
      that the eventual resolution of the following legal actions could have a
      material adverse effect on the Company’s financial position or operating
      results. The following outlined legal proceedings for which the potential
      outcome could be in excess of $50,000.




**Scanbuy,
      Inc.**




On
      January 23, 2004, NeoMedia filed suit against Scanbuy, Inc. in the Northern
      District of Illinois, claiming that Scanbuy has manufactured, or has
      manufactured for it, and has used, or actively induced others to use, technology
      which allows customers to use a built-in UPC bar code scanner to scan individual
      items and access information, thereby infringing NeoMedia’s patents.  The
      complaint stated that on information and belief, Scanbuy had actual and
      constructive notice of the existence of the patents-in-suit, and, despite such
      notice, failed to cease and desist their acts of infringement, and continue
      to
      engage in acts of infringement of the patents-in-suit.  On April 15, 2004,
      the court dismissed the suits against Scanbuy for lack of personal
      jurisdiction.





On
      April
      20, 2004, NeoMedia re-filed its suit against Scanbuy in the Southern District
      of
      New York alleging patent infringement. Scanbuy filed its answer on June 2,
      2004.
      NeoMedia filed its answer and affirmative defenses on July 23, 2004. On January
      20, 2007, the court dismissed Scanbuy's request for a summary judgment.
      Discovery is ongoing.





70





**ITEM
      1A. RISK FACTORS**





In
      addition to the other information set forth in this report, you should carefully
      consider the factors discussed in Part I, “Item 1A. Risk Factors” in
      our Annual Report on Form 10-K for the year ended December 31, 2006, which
      could
      materially affect NeoMedia’s business, financial condition or future results.
      The risks described in NeoMedia’s Annual Report on Form 10-K are not the only
      risks facing the Company. Additional risks and uncertainties not currently
      known
      to NeoMedia or that are currently deemed to be immaterial also may materially
      adversely affect NeoMedia’s business, financial condition and/or operating
      results.  There were no material changes in the Company's risk factors from
      the risks disclosed in the Company's Form 10-K for the year ended
      December 31, 2006.







**ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS (A), (B), (C)
      AND
      (D)**




On
      July
      20, 2007, NeoMedia issued 517,415 shares of unregistered common stock to two
      separate parties as payment toward a consulting contract.





The
      Company relied upon the exemption provided in Section 4(2) of the Securities
      Act
      and/or Rule 506, which cover “transactions by an issuer not involving any public
      offering,” to issue securities discussed above without registration under the
      Securities Act of 1933. The certificates representing the securities issued
      displayed a restrictive legend to prevent transfer except in compliance with
      applicable laws, and the Company's transfer agent was instructed not to permit
      transfers unless directed to do so by us, after approval by the Company's legal
      counsel. The Company believes that the investors to whom securities were issued
      had such knowledge and experience in financial and business matters as to be
      capable of evaluating the merits and risks of the prospective investment. The
      Company also believes that the investors had access to the same type of
      information as would be contained in a registration statement.




**ITEM
      3. DEFAULT UPON SENIOR SECURITIES**




NeoMedia
      is currently in default of (i) the
      Investor Registration Rights Agreement entered into on February 17, 2006, in
      connection with the $22 million Series C Convertible preferred Stock Sale,
      (ii)
      the Investor Registration Rights Agreement entered into on August 24, 2006,
      in
      connection with the $5 million secured convertible debenture, and (iii) the
      Investor Registration Rights Agreement entered into on December 29, 2006, in
      connection with the $2.5 million secured convertible debenture. As a result,
      the
      Purchaser has certain rights with respect to the financing arrangements,
      specifically, (i) the full face value of each instrument is callable in the
      aggregate amount of $36,616,000, (ii) up to 325,000,000 warrants held by
      Purchaser with an exercise price of $0.04 can be exercised on a cashless basis,
      and (iii) NeoMedia is responsible for liquidated damages as required by each
      financing arrangement.






**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**




None.






**ITEM
      5. OTHER INFORMATION**




Based
      upon the required market capitalization test as of the last day of the second
      quarter for the year ended December 31, 2007, the Company has determined that
      it
      will not have an accelerated filer status as of the end of the current fiscal
      year. The company will be required to perform this test on an annual basis
      as of
      the last day of the second quarter to determine its filing status.




71




**Item** **6.
      exhibits and reports on form 8-k**




**** **(a)**  **Exhibits** **:**




**Exhibit
                  No.**
              
              **Description**
              
              **Location**31.1
              
              Certification
                  by Chief Executive Officer pursuant to 15 U.S.C. Section 7241,
                  as adopted
                  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
              
              Provided
                  herewith31.2
              
              Certification
                  by Chief Financial Officer pursuant to 15 U.S.C. Section 7241,
                  as adopted
                  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
              
              Provided
                  herewith32.1
              
              Certification
                  by Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
              
              Provided
                  herewith32.2
              
              Certification
                  by Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
              
              Provided
                  herewith10.1
              
              Agreement
                  for early settlement of debt due to NeoMedia from
                  HipCricket
              
              Provided
                  herewith


**(b)**
            **Reports
                on Form 8-K****:**







On
      June
      22, 2007, NeoMedia filed a report on Form 8-K with respect to Item 5.02,
      disclosing that (i) David A. Dodge resigned his position as Vice President
      and
      Chief Financial Officer, effective June 30, 2007, (ii) Mr. Dodge would be
      replaced on an interim basis by J. Scott Womble, NeoMedia’s Controller, (iii) A.
      Hayes Barclay resigned his position as a member of the Company’s board of
      directors, effective July 11, 2007, and (iv) Mr. Barclay would be replaced
      on
      the board by William J. Hoffman, the Company’s CEO.





On
      June
      8, 2007, NeoMedia filed a report on Form 8-K with respect to Item 2.01 and
      9.01,
      to amend and restate financial statements of BSD Software, Inc., a material
      subsidiary acquired in March 2006.





On
      June
      6, 2007, NeoMedia filed a report on Form 8-K with respect to Item 5.02,
      disclosing that it had named William Hoffman as its Chief Executive Officer,
      replacing Charles W. Fritz.





On
      April
      10, 2007, NeoMedia filed a report on Form 8-K with respect to Items 1.01, and
      2.01, disclosing that it had sold its subsidiary 12Snap.





On
      April
      6, 2007, NeoMedia filed a report on Form 8-K with respect to Item 4.02,
      disclosing that financial statements issued in the Company’s Forms 10-Q for the
      three month period ended March 31, 2006, the three and six month periods ended
      June 30, 2006, and the three and nine month periods ended September 30, 2006,
      should no longer be relied upon because of an error in such financial
      statements.





On
      April
      3, 2007, NeoMedia filed a report on Form 8-K with respect to Items 1.01 and
      3.02, disclosing that it had entered into a convertible debenture financing
      arrangement with Cornell Capital Partners with a face value of $7,459,000.




72





**SIGNATURES**





In
      accordance with the requirements of the Securities Exchange Act of 1934, the
      Registrant has caused this report to be signed on its behalf by the undersigned,
      thereunto duly authorized.





**NEOMEDIA
                TECHNOLOGIES, INC.**
              RegistrantDate:August 
                9 , 2007
            By:
            /s/ *William J. Hoffman*William
                J. Hoffman, Chief Executive Officer




Date:August 
                  9 , 2007
              By:
              /s/ *J.
                Scott Womble*J.
                      Scott Womble
                  Interim
                    CFO and Principal Accounting
                    Officer
  73