UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.   20549





FORM
10 - Q





x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the quarterly period ended September 30, 2010





 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the transition period from __________ to ____________





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.)





Two
Concourse Parkway, Suite 500, Atlanta, GA 30328


(Address,
including zip code, of principal executive offices)





678-638-0460


(Registrants’
telephone number, including area code)





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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files. Yes  ̈   No ̈





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





Large
accelerated filer  ̈  Accelerated
filer  ̈   Non-accelerated
filer  ̈ Smaller Reporting
Company x





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





The
number of outstanding shares of the registrant’s Common Stock on November 9,
2010 was 24,551,867.













NeoMedia
Technologies, Inc.


Form
10-Q


For
the Quarterly Period Ended September 30, 2010


Index





PagePART
      I
              Financial
      Information
              2ITEM
      1.
              Financial
      Statements
              2ITEM
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              29ITEM
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              35ITEM
      4.
              Controls
      and Procedures
              35PART
      II
              Other
      Information
              37ITEM
      1.
              Legal
      Proceedings
              37ITEM
      1A.
              Risk
      Factors
              37ITEM
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              37ITEM
      3.
              Defaults
      Upon Senior Securities
              37ITEM
      4.
              (Removed
      and Reserved)
              37ITEM
      5.
              Other
      Information
              37ITEM
      6.
              Exhibits
              38Signatures
              47


1


PART
I — FINANCIAL INFORMATION


ITEM
1.  Financial Statements





NeoMedia
Technologies, Inc. and Subsidiaries


Condensed
Consolidated Balance Sheets


(in
thousands, except share and per share data)





September 30,
                              
                              
                              December 31,2010
                              
                              
                              2009(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                              
                              $
                              290
                              
                              
                              $
                              198Trade
      accounts receivable
                              
                              
                              645
                              
                              
                              
                              374Inventories,
      net of allowance of $127 and $136
                              
                              
                              112
                              
                              
                              
                              124Prepaid
      expenses and other current assets
                              
                              
                              224
                              
                              
                              
                              294Total
      current assets
                              
                              
                              1,271
                              
                              
                              
                              990Property
      and equipment, net
                              
                              
                              93
                              
                              
                              
                              129Goodwill
                              
                              
                              3,418
                              
                              
                              
                              3,418Proprietary
      software, net
                              
                              
                              1,580
                              
                              
                              
                              2,076Patents
      and other intangible assets, net
                              
                              
                              1,798
                              
                              
                              
                              1,996Cash
      surrender value of life insurance policies
                              
                              
                              698
                              
                              
                              
                              659Other
      long-term assets
                              
                              
                              186
                              
                              
                              
                              156Total
      assets
                              
                              $
                              9,044
                              
                              
                              $
                              9,424LIABILITIES
      AND SHAREHOLDERS’ DEFICITCurrent
      liabilities:Accounts
      payable
                              
                              $
                              346
                              
                              
                              $
                              558Taxes
      payable
                              
                              
                              2
                              
                              
                              
                              4Accrued
      expenses
                              
                              
                              8,689
                              
                              
                              
                              7,292Deferred
      revenues and customer prepayments
                              
                              
                              423
                              
                              
                              
                              791Note
      payable
                              
                              
                              109
                              
                              
                              
                              69Note
      payable - YA Global
                              
                              
                              -
                              
                              
                              
                              500Accrued
      purchase price guarantee
                              
                              
                              4,535
                              
                              
                              
                              4,535Deferred
      tax liability
                              
                              
                              706
                              
                              
                              
                              706Derivative
      financial instruments - warrants
                              
                              
                              3,904
                              
                              
                              
                              9,912Derivative
      financial instruments - Series C and D preferred stock and debentures
      payable
                              
                              
                              23,309
                              
                              
                              
                              50,985Debentures
      payable - carried at amortized cost
                              
                              
                              14,488
                              
                              
                              
                              12,523Debentures
      payable - carried at fair value
                              
                              
                              26,805
                              
                              
                              
                              37,678Total
      current liabilities
                              
                              
                              83,316
                              
                              
                              
                              125,553Commitments
      and contingencies (Note 7)Series
      C convertible preferred stock, $0.01 par value, 27,000shares
      authorized, 8,369 and 8,642 shares issued and
      outstanding,liquidation
      value of $8,369 and $8,642
                              
                              
                              8,369
                              
                              
                              
                              8,642Series
      D convertible preferred stock, $0.01 par value, 25,000shares
      authorized, 25,000 and 0 shares issued and outstanding,liquidation
      value of $2,500 and $0
                              
                              
                              2,500
                              
                              
                              
                              -Shareholders’
      deficit:Common
      stock, $0.001 par value, 5,000,000,000 shares authorized, 24,583,382
      and22,707,093
      shares issued and 24,551,867 and 22,675,678 sharesoutstanding
      as of September 30, 2010 and December 31, 2009,
    respectively
                              
                              
                              25
                              
                              
                              
                              23Additional
      paid-in capital
                              
                              
                              153,719
                              
                              
                              
                              153,059Accumulated
      deficit
                              
                              
                              (237,990
                              )
                              
                              
                              (276,985
                              )Accumulated
      other comprehensive loss
                              
                              
                              (116
                              )
                              
                              
                              (89
                              )Treasury
      stock, at cost, 2,012 shares of common stock
                              
                              
                              (779
                              )
                              
                              
                              (779
                              )Total
      shareholders’ deficit
                              
                              
                              (85,141
                              )
                              
                              
                              (124,771
                              )Total
      liabilities and shareholders’ deficit
                              
                              $
                              9,044
                              
                              
                              $
                              9,424





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


2


NeoMedia
Technologies, Inc. and Subsidiaries


Condensed
Consolidated Statements of Operations (Unaudited)


(in
thousands, except share and per share data)





Three Months EndedSeptember 30,
                
                
                September 30,2010
                
                
                2009Revenues
                
                $
                338
                
                
                $
                189Cost
      of revenues
                
                
                236
                
                
                
                238Gross
      profit (deficit)
                
                
                102
                
                
                
                (49
                )Sales
      and marketing expenses
                
                
                231
                
                
                
                149General
      and administrative expenses
                
                
                835
                
                
                
                984Research
      and development costs
                
                
                465
                
                
                
                330Impairment
      of investment
                
                
                -
                
                
                
                261Operating
      loss
                
                
                (1,429
                )
                
                
                (1,773
                )Loss
      from change in fair value of hybrid financial instruments
                
                
                (6,941
                )
                
                
                (7,802
                )Gain
      (loss) from change in fair value of derivative liability -
      warrants
                
                
                (1,105
                )
                
                
                5,800Loss
      from change in fair value of derivative liability - Series C and D
      preferred stock and debentures
                
                
                (15,561
                )
                
                
                (8,651
                )Interest
      expense related to convertible debt
                
                
                (595
                )
                
                
                (1,140
                )Net
      loss
                
                
                (25,631
                )
                
                
                (13,566
                )Dividends
      on convertible preferred stock
                
                
                -
                
                
                
                (234
                )Net
      loss attributable to common shareholders
                
                
                (25,631
                )
                
                
                (13,800
                )Comprehensive
      loss:Net
      loss
                
                
                (25,631
                )
                
                
                (13,566
                )Other
      comprehensive income (loss) - foreign currency translation
      adjustment
                
                
                23
                
                
                
                (7
                )Comprehensive
      loss
                
                $
                (25,608
                )
                
                $
                (13,573
                )Net
      loss per share, basic and diluted
                
                $
                (1.13
                )
                
                $
                (0.70
                )Weighted
      average number of common shares
                
                
                22,678,877
                
                
                
                19,578,409





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


3


NeoMedia
Technologies, Inc. and Subsidiaries


Condensed
Consolidated Statements of Operations (Unaudited)


(in
thousands, except share and per share data)





Nine Months EndedSeptember 30,
                
                
                September 30,2010
                
                
                2009Revenues
                
                $
                1,206
                
                
                $
                815Cost
      of revenues
                
                
                830
                
                
                
                1,046Gross
      profit (deficit)
                
                
                376
                
                
                
                (231
                )Sales
      and marketing expenses
                
                
                812
                
                
                
                613General
      and administrative expenses
                
                
                2,971
                
                
                
                2,770Research
      and development costs
                
                
                1,166
                
                
                
                1,004Impairment
      of investment
                
                
                -
                
                
                
                261Operating
      loss
                
                
                (4,573
                )
                
                
                (4,879
                )Loss
      on extinguishment of debt
                
                
                (6,006
                )
                
                
                -Gain
      (loss) from change in fair value of hybrid financial
      instruments
                
                
                12,611
                
                
                
                (7,490
                )Gain
      (loss) from change in fair value of derivative liability -
      warrants
                
                
                9,751
                
                
                
                (6,602
                )Gain
      (loss) from change in fair value of derivative liability - Series C and D
      preferred stock and debentures
                
                
                31,263
                
                
                
                (18,327
                )Interest
      expense related to convertible debt
                
                
                (1,551
                )
                
                
                (4,803
                )Net
      income (loss)
                
                
                41,495
                
                
                
                (42,101
                )Dividends
      on convertible preferred stock
                
                
                (2,500
                )
                
                
                (977
                )Net
      income (loss) attributable to common shareholders
                
                
                38,995
                
                
                
                (43,078
                )Comprehensive
      income (loss):Net
      income (loss)
                
                
                41,495
                
                
                
                (42,101
                )Other
      comprehensive income (loss) - foreign currency translation
      adjustment
                
                
                (27
                )
                
                
                (86
                )Comprehensive
      income (loss)
                
                $
                41,468
                
                
                $
                (42,187
                )Net
      income (loss) per share, basic and diluted:Basic
                
                $
                1.74
                
                
                $
                (2.51
                )Fully
      diluted
                
                $
                (0.02
                )
                
                $
                (2.51
                )Weighted
      average number of common shares:Basic
                
                
                22,470,014
                
                
                
                17,132,131Fully
      diluted
                
                
                301,266,858
                
                
                
                17,132,131





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


4





NeoMedia
Technologies, Inc. and Subsidiaries


Consolidated
Statement of Shareholders’ Deficit (Unaudited)


(in
thousands, except share data)





Accumulated OtherCommon Stock
                      
                      
                      Additional
                      
                      
                      Comprehensive Income
                      
                      
                      Accumulated
                      
                      
                      Treasury Stock
                      
                      
                      TotalShares
                      
                      
                      Amount
                      
                      
                      Paid-in Capital
                      
                      
                      (Loss)
                      
                      
                      Deficit
                      
                      
                      Shares
                      
                      
                      Amount
                      
                      
                      Shareholders' DeficitBalance,
      December 31, 2009, as previously reported
                      
                      
                      22,675,678
                      
                      
                      $
                      22,676
                      
                      
                      $
                      130,406
                      
                      
                      $
                      (89
                      )
                      
                      $
                      (276,985
                      )
                      
                      
                      2,012
                      
                      
                      $
                      (779
                      )
                      
                      $
                      (124,771
                      )Effect
      of 1 for 100 share reverse stock split and change in par
    value
                      
                      
                      -
                      
                      
                      
                      (22,653
                      )
                      
                      
                      22,653
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Balance,
      December 31, 2009, after retroactive adjustment
                      
                      
                      22,675,678
                      
                      
                      
                      23
                      
                      
                      
                      153,059
                      
                      
                      
                      (89
                      )
                      
                      
                      (276,985
                      )
                      
                      
                      2,012
                      
                      
                      
                      (779
                      )
                      
                      
                      (124,771
                      )Shares
      issued to YA Global on conversion of Series C convertible preferred
      stock
                      
                      
                      1,876,289
                      
                      
                      
                      2
                      
                      
                      
                      522
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      524Deemed
      dividend on Series D Preferred Stock issued to YA Global
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (2,500
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (2,500
                      )Stock-based
      compensation expense
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      138
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      138Comprehensive
      income - foreign currency translation adjustment
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (27
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (27
                      )Net
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      41,495
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      41,495Balance,
      September 30, 2010
                      
                      
                      24,551,967
                      
                      
                      $
                      25
                      
                      
                      $
                      153,719
                      
                      
                      $
                      (116
                      )
                      
                      $
                      (237,990
                      )
                      
                      
                      2,012
                      
                      
                      $
                      (779
                      )
                      
                      $
                      (85,141
                      )





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


5





NeoMedia
Technologies, Inc. and Subsidiaries


Condensed
Consolidated Statements of Cash Flows (Unaudited)


(in
thousands)




Nine
      Months EndedSeptember 30,2010
                    
                    
                    2009Cash
      Flows from Operating Activities:Net
      income (loss)
                    
                    $
                    41,495
                    
                    
                    $
                    (42,101
                    )Adjustments
      to reconcile net income (loss) to net cash used in operating
      activities:Depreciation
      and amortization
                    
                    
                    757
                    
                    
                    
                    760Impairment
      of investment
                    
                    
                    -
                    
                    
                    
                    261Loss
      on extinguishment of debt
                    
                    
                    6,006
                    
                    
                    
                    -(Gain)
      loss from change in fair value of hybrid financial
    instruments
                    
                    
                    (12,611
                    )
                    
                    
                    7,490(Gain)
      loss from change in fair value of derivative liability -
      warrants
                    
                    
                    (9,751
                    )
                    
                    
                    6,602(Gain)
      loss from change in fair value of derivative liability - Series C and D
      preferred stock and debentures
                    
                    
                    (31,263
                    )
                    
                    
                    18,327Interest
      expense related to convertible debt
                    
                    
                    1,551
                    
                    
                    
                    4,803Stock-based
      compensation expense
                    
                    
                    138
                    
                    
                    
                    280Increase
      in value of life insurance policies
                    
                    
                    (39
                    )
                    
                    
                    (151
                    )Changes
      in operating assets and liabilitiesTrade
      and other accounts receivable
                    
                    
                    (271
                    )
                    
                    
                    56Inventories
                    
                    
                    12
                    
                    
                    
                    (70
                    )Prepaid
      expenses and other assets
                    
                    
                    40
                    
                    
                    
                    136Accounts
      payable and accrued liabilities
                    
                    
                    (351
                    )
                    
                    
                    (55
                    )Deferred
      revenue and other current liabilities
                    
                    
                    (367
                    )
                    
                    
                    (178
                    )Net
      cash used in operating activities
                    
                    
                    (4,654
                    )
                    
                    
                    (3,840
                    )Cash
      Flows from Investing Activities:Acquisition
      of property and equipment
                    
                    
                    (13
                    )
                    
                    
                    (65
                    )Net
      cash used in investing activities
                    
                    
                    (13
                    )
                    
                    
                    (65
                    )Cash
      Flows from Financing Activities:Proceeds
      from issuance of Series D convertible preferred stock
                    
                    
                    2,500
                    
                    
                    
                    -Costs
      attributed to issuance of Series D convertible preferred
    stock
                    
                    
                    (100
                    )
                    
                    
                    -Repayment
      of note payable - YA Global
                    
                    
                    (500
                    )
                    
                    
                    -Borrowings
      under convertible debt instruments, net
                    
                    
                    2,865
                    
                    
                    
                    2,610Net
      proceeds from exercise of stock options
                    
                    
                    -
                    
                    
                    
                    116Net
      cash provided by financing activities
                    
                    
                    4,765
                    
                    
                    
                    2,726Effect
      of exchange rate changes on cash
                    
                    
                    (6
                    )
                    
                    
                    (6
                    )Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    92
                    
                    
                    
                    (1,185
                    )Cash
      and cash equivalents, beginning of period
                    
                    
                    198
                    
                    
                    
                    1,259Cash
      and cash equivalents, end of period
                    
                    $
                    290
                    
                    
                    $
                    74Supplemental
      cash flow information:Interest
      paid during the period
                    
                    $
                    1
                    
                    
                    $
                    3Accretion
      of dividends on Series C Convertible Preferred Stock
                    
                    $
                    -
                    
                    
                    $
                    977Series
      C Convertible Preferred Stock converted to common stock
                    
                    $
                    273
                    
                    
                    $
                    9,285Deemed
      dividend on Series D Convertible Preferred Stock issued
                    
                    $
                    2,500
                    
                    
                    $
                    -





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


6


NeoMedia
Technologies, Inc. and Subsidiaries


Notes
to Condensed Consolidated Financial Statements


(Unaudited)





Note 1 - General





Business- NeoMedia Technologies,
Inc., a Delaware corporation (“NeoMedia”, and also
referred to herein as “us”, “we” and “our”), is the
innovator and global market leader in 2D mobile barcode technology and
infrastructure solutions that enable the mobile barcode ecosystem
world-wide.  NeoMedia harnesses the power of the mobile phone with
state-of-the art mobile barcode technology. With this technology, mobile phones
with cameras become barcode scanners and this enables a range of practical
applications including consumer oriented advertising, mobile ticketing and
couponing, and business-to-business commercial track and trace solutions. We
believe that combining this technology with analytics and reporting capabilities
improves the way advertisers market to mobile consumers.





As a
technology pioneer in the global mobile barcode industry, our suite of products,
services and IP portfolio allows us to offer a comprehensive end-to-end mobile
barcode solution.  We offer barcode management and infrastructure
technology solutions, barcode reader solutions and IP licensing, as well as
mobile couponing and ticketing products and services. NeoMedia has been a
pioneer in the mobile barcode field, since the mid 1990s, and during that time
has spearheaded the development of a robust IP portfolio that encompasses many
preferred mobile barcode implementations.  We have an IP portfolio
currently consisting of over sixty (60) issued and pending patents.





Going
Concern – We have historically incurred net losses from operations and we
expect that we will continue to have negative cash flows as we implement our
business plan.  There can be no assurance that our continuing efforts to
execute our business plan will be successful and that we will be able to
continue as a going concern. The accompanying consolidated financial statements
have been prepared in conformity with United States Generally Accepted
Accounting Principles (“US GAAP”), which contemplate our continuation as a going
concern.  Net income (loss) for the nine months ended September 30, 2010
and 2009 was $41.5 million and ($42.1) million, respectively and net
cash used by operations during the same periods was $4.7
million and $3.8 million, respectively.  During 2010 and 2009,
$53.6 million of net income and $32.4 million of net loss was attributed to the
change in fair values of hybrid financial instruments and derivative
liabilities. At September 30, 2010, we have an accumulated deficit of $238.0
million. We also have a working capital deficit of $82.0 million, of which
$68.5 million is related to our financing instruments, including $30.7 million
related to the fair value of warrants and those debentures that are recorded as
hybrid financial instruments, and $37.8 million related to the amortized cost
carrying value of certain of our debentures and the fair value of the associated
derivative liabilities.




The items
discussed above raise substantial doubts about our ability to continue as a
going concern.




We
currently do not have sufficient cash to sustain us for the next twelve months.
We will require additional financing in order to execute our operating plan and
continue as a going concern. Our management’s plan is to attempt to secure
adequate funding to bridge the commercialization of our barcode ecosystem
business. We cannot attempt to predict whether this additional financing will be
in the form of equity, debt, or another form and we may not be able to obtain
the necessary additional capital on a timely basis, on acceptable terms, or at
all.  In the event that these financing sources do not materialize, or that
we are unsuccessful in increasing our revenues and profits, we may be unable to
implement our current plans for expansion, repay our debt obligations as they
become due or continue as a going concern, any of which circumstances would have
a material adverse effect on our business, prospects, financial condition and
results of operations. Should our lender, YA Global Investments, L.P. (“YA
Global”) choose not to provide us with capital financing, or if we do not find
alternative sources of financing to fund our operations, or if we are unable to
generate significant product revenues, we only have sufficient funds to sustain
our current operations through approximately November 30, 2010. We currently do
not have any commitments for additional financing.




The
financial statements do not include any adjustments relating to the
recoverability and reclassification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary, should we be unable to
continue as a going concern.


7




Note
2 - Summary of Significant Accounting Policies





The
accompanying unaudited financial statements have been prepared in accordance
with US GAAP for interim financial information and Rule 8.03 of Regulation S-X.
They do not include all of the information and footnotes required by US GAAP for
complete financial statements. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, considered necessary for a fair
presentation have been included. The results of operations for the periods
presented are not necessarily indicative of the results to be expected for the
full year. For further information, refer to our financial statements as of
December 31, 2009 and 2008, and for the years then ended, including notes
thereto in the Company’s Form 10-K.





Basis of
Presentation – The consolidated financial statements include the accounts
of NeoMedia Technologies, Inc. and our wholly-owned subsidiaries.  We
operate as one reportable segment.  All significant intercompany accounts
and transactions have been eliminated.





Use of
Estimates – The preparation of consolidated financial statements in
conformity with US GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.  Changes in facts and
circumstances may result in revised estimates, which are recorded in the period
in which they become known.





Basic and Diluted
Net Income (Loss) Per Share – Basic net income (loss) per share is
computed by dividing net income (loss) attributable to common shareholders by
the weighted average number of shares of common stock outstanding during the
period. During the nine months ended September 30, 2010, we reported net income
per share and included dilutive instruments in the fully diluted net income per
share calculation. During the three months ended September 30, 2010, and the
three and nine months ended September 30, 2009, we reported a net loss per
share, and as such, basic and diluted loss per share were equivalent. We
excluded all outstanding stock options, warrants, convertible debt and
convertible preferred stock from the calculation of diluted net loss per share
because these securities were anti-dilutive.


8


The
following is a reconciliation of the numerator and denominator of the basic and
diluted net income (loss) per share calculations for each period:





Three
      Months Ended September 30,
                  
                  
                  Nine
      Months Ended September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009(in
      thousands except share and per share data)Numerator:Net
      income (loss)
                  
                  $
                  (25,631
                  )
                  
                  $
                  (13,566
                  )
                  
                  $
                  41,495
                  
                  
                  $
                  (42,101
                  )Adjustments
      to reconcile net income (loss) to income (loss) applicable to common
      stockholders:Accretion
      of preferred stock dividends
                  
                  
                  -
                  
                  
                  
                  (234
                  )
                  
                  
                  (2,500
                  )
                  
                  
                  (977
                  )Numerator
      for basic earnings per share - income available to common
      stockholders
                  
                  $
                  (25,631
                  )
                  
                  $
                  (13,800
                  )
                  
                  $
                  38,995
                  
                  
                  $
                  (43,078
                  )Effect
      of dilutive securities:Adjustment
      for change in fair value of derivative liability-Series C and D preferred
      stock and debentures
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (31,263
                  )
                  
                  
                  -Adjustment
      for change in fair value of derivative liability- warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (9,751
                  )
                  
                  
                  -Adjustment
      for loss on extinguishment of debt (excluding non-dilutive
      instrument)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,643
                  
                  
                  
                  -Adjustment
      for change in fair value of hybrid financial instruments
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (12,611
                  )
                  
                  
                  -Adjustment
      for interest expense related to convertible debt (excluding non-dilutive
      instrument)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,515
                  
                  
                  
                  --
                  
                  
                  
                  -
                  
                  
                  
                  (46,467
                  )
                  
                  
                  -Numerator
      for diluted earnings per share-income available for  common
      stockholders after assumed conversions of debentures and exercise of
      warrants
                  
                  $
                  (25,631
                  )
                  
                  $
                  (13,800
                  )
                  
                  $
                  (7,472
                  )
                  
                  $
                  (43,078
                  )Denominator:Weighted
      average shares used to compute basic EPS
                  
                  
                  22,678,877
                  
                  
                  
                  19,578,409
                  
                  
                  
                  22,470,014
                  
                  
                  
                  17,132,131Effect
      of dilutive securities:Employee
      stock options
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  99,337
                  
                  
                  
                  -Convertible
      debentures
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  204,313,469
                  
                  
                  
                  -Convertible
      preferred stock
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  74,384,038
                  
                  
                  
                  -Dilutive
      potential common shares
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  278,796,844
                  
                  
                  
                  -Denominator
      for diluted earnings per share-adjusted weighted average shares and
      assumed conversions
                  
                  
                  22,678,877
                  
                  
                  
                  19,578,409
                  
                  
                  
                  301,266,858
                  
                  
                  
                  17,132,131Basic
      net income (loss) per share
                  
                  $
                  (1.13
                  )
                  
                  $
                  (0.70
                  )
                  
                  $
                  1.74
                  
                  
                  $
                  (2.51
                  )Fully
      diluted loss per share
                  
                  $
                  (1.13
                  )
                  
                  $
                  (0.70
                  )
                  
                  $
                  (0.02
                  )
                  
                  $
                  (2.51
                  )





As shown
on the accompanying condensed consolidated statements of operations, our loss on
extinguishment of debt for the nine months ended September 30, 2010 was
approximately $6.0 million; however, the table above does not reflect losses of
approximately $363,000 related to the extinguishment of the April 2010
promissory note since that note was not a dilutive instrument.





The above
table includes only dilutive instruments and their effects on earnings per
common share.





The
following outstanding stock options, warrants, convertible debt and convertible
preferred securities for the three and nine months ended September 30, 2010 and
2009, are anti-dilutive and therefore have been excluded from diluted net income
(loss) per share:





Three Months Ended September 30,
                
                
                Nine Months Ended September 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Stock
      options
                
                
                1,099,557
                
                
                
                952,635
                
                
                
                823,171
                
                
                
                945,612Warrants
                
                
                17,621,125
                
                
                
                10,061,958
                
                
                
                14,412,242
                
                
                
                10,061,958Convertible
      debt
                
                
                213,076,644
                
                
                
                64,929,363
                
                
                
                -
                
                
                
                62,155,934Convertible
      preferred stock
                
                
                74,698,729
                
                
                
                19,222,062
                
                
                
                -
                
                
                
                21,343,582306,496,055
                
                
                
                95,166,018
                
                
                
                15,235,413
                
                
                
                94,507,086


9





Inventories– Inventories are stated at the lower of cost or market and are comprised
of barcode-reading equipment at our NeoMedia Europe location.  Cost is
determined using the first-in, first-out method.





Recent Accounting
Pronouncements -The following Accounting
Standards Codification Updates have been issued, or will become effective, after
the end of the period covered by this discussion:





Pronouncement
                    
                    Issued
                    
                    TitleASU
      No. 2010-20
                    
                    July 
      2010
                    
                    Receivables
      (Topic 310): Disclosures about the Credit Quality of Financing Receivables
      and the Allowance for Credit LossesASU
      No. 2010-21
                    
                    August 
      2010
                    
                    Accounting
      for Technical Amendments to Various SEC Rules and Schedules Amendments to
      SEC Paragraphs Pursuant to Release No. 33-9026: Technical Amendments to
      Rules, Forms, Schedules and Codification of Financial Reporting Policies
      (SEC Update)ASU
      No. 2010-22
                    
                    August 
      2010
                    
                    Accounting
      for Various Topics—Technical Corrections to SEC Paragraphs (SEC
      Update)ASU
      No. 2010-23
                    
                    August 
      2010
                    
                    Health
      Care Entities (Topic 954): Measuring Charity Care for Disclosure—a
      consensus of the FASB Emerging Issues Task ForceASU
      No. 2010-24
                    
                    August 
      2010
                    
                    Health
      Care Entities (Topic 954): Presentation of Insurance Claims and Related
      Insurance Recoveries (a consensus of the FASB Emerging Issues Task
      Force)ASU
      No. 2010-25
                    
                    September 
      2010
                    
                    Plan
      Accounting—Defined Contribution Pension Plans (Topic 962): Reporting Loans
      to Participants by Defined Contribution Pension Plans (a consensus of the
      FASB Emerging Issues Task Force)ASU
      No. 2010-26
                    
                    October 
      2010
                    
                    Financial
      Services—Insurance (Topic 944): Accounting for Costs Associated with
      Acquiring or Renewing Insurance Contracts (a consensus of the FASB
      Emerging Issues Task
Force)





To the
extent appropriate, the guidance in the above Accounting Standards Codification
Updates is already reflected in our consolidated financial statements and
management does not anticipate that these accounting pronouncements will have
any future effect on our consolidated financial statements.





Note
3 – Capital Stock





Common
Stock– On March
30, 2010, we held a special meeting of our stockholders, at which our
stockholders approved amendments to our certificate of incorporation as
follows:





·
            To effect a 1 share for 100
      shares reverse stock split of our outstanding common stock;
      and





·
            To fix the amount of authorized
      shares of common stock at 5,000,000,000 shares;
  and





·
            To effect a change in our common
      stock par value from $0.01 to
$0.001.





In
accordance with FASB ASC 260, Earnings per Share, and SAB
Topic 4.C, Changes in Capital
Structure, all of the share and per share information related to our
common stock included in these financial statements has been retroactively
re-stated to reflect the above changes.





We filed
an amendment to our certificate of incorporation on April 1, 2010 to reflect the
above amendments. On April 19, 2010, we filed for, and were assigned a new CUSIP
number 640505-301 in connection with the issuance of new common stock securities
pursuant to the reverse stock split. On April 21, 2010 we filed a request for
regulatory approval from the Financial Industry Regulatory Authority (“FINRA”).
On May 7, 2010, final regulatory approval was granted and became effective on
May 10, 2010.


10





Holders
of common stock are entitled to one vote for each share held of record on each
matter submitted to a vote of shareholders. Holders of our common stock do not
have a cumulative voting right, which means that the holders of more than one
half of our outstanding shares of common stock, subject to the rights of the
holders of preferred stock, can elect all of our directors, if they choose to do
so. In this event, the holders of the remaining shares of common stock would not
be able to elect any directors. Subject to the prior rights of any class or
series of preferred stock which may from time to time be outstanding, if any,
holders of common stock are entitled to receive ratably, dividends when, as, and
if declared by our Board of Directors out of funds legally available for that
purpose. Upon our liquidation, dissolution, or winding up, the holders are
entitled to share ratably in all assets remaining after payment of liabilities
and payment of accrued dividends and liquidation preferences on the preferred
stock, if any. Holders of common stock have no preemptive rights, nor rights to
convert their common stock into any other securities. Except as otherwise
required by Delaware law, and subject to the rights of the holders of preferred
stock, all stockholder action is taken by the vote of a majority of the
outstanding shares of common stock present at a meeting of stockholders at which
a quorum consisting of a majority of the outstanding shares of common stock is
present in person or by proxy.  Shares repurchased are held as treasury
shares and used for general corporate purposes including, but not limited to,
satisfying obligations under our employee benefit plans. Treasury stock is
recorded at cost.





Note
4 – Financing





At
September 30, 2010, our financing transactions with YA Global, an accredited
investor, included shares of our Series C Convertible Preferred Stock issued in
February 2006, Series D Convertible Redeemable Preferred Stock issued in January
2010, a series of seventeen secured convertible debentures issued between August
2006 and September 2010 and various warrants to purchase shares of our common
stock.





2010 Financing
Transactions-
On January 5, 2010, we entered into an investment agreement with YA Global which
included (i) the issuance to YA Global of 25,000 shares of our $100 Series D
Convertible Redeemable Preferred Stock (ii) the modification of the conversion
terms of all of our outstanding secured convertible debentures and extension of
their maturity dates to July 29, 2012 (iii) issuance of additional warrants to
acquire 225,000 shares of our common stock and, (iv) modification of the terms
of three outstanding warrants to acquire a total of 350,000 shares of our common
stock. The gross amount of this transaction was $2.5 million and we received net
proceeds of $1.9 million after fees of $100,000 and the redemption of a $500,000
promissory note issued to YA Global on December 23, 2009.





In
addition, the January 5, 2010 investment agreement required us to seek
shareholder approval to enact the following changes relating to our common
stock, a 1 share for 100 shares reverse stock split, the fixing of our
authorized shares at 5,000,000,000, and the reduction in the par value from
$0.01 to $0.001. On March 30, 2010, we held a Special Meeting of our
shareholders at which the shareholders approved amending the Company’s
certificate of incorporation to reflect these changes. (See Note
3).





On May
27, 2010, we entered into a Securities Purchase Agreement to issue and sell a
secured convertible debenture to YA Global in the principal amount of $2.0
million and we also entered into an agreement which amended certain terms of all
previously issued and outstanding warrants between us and YA Global which
changed the ownership limitation provision from 4.99% to 9.99%. On August 13,
2010 and September 29, 2010, we entered into additional Securities Purchase
Agreements to issue and sell secured convertible debentures to YA Global in the
principal amounts of $550,000 and $475,000.  In conjunction with the
convertible debentures, we also issued warrants to YA Global to purchase
1,000,000 and 750,000 shares of common stock, respectively, for an exercise
price of $0.20 per share for a period of five years.  Additional details
related to these financings are disclosed below.





Subsequent
to September 30, 2010, we entered into a Securities Purchase Agreement to issue
and sell a secured convertible debenture to YA Global in the principal amount of
$400,000.  The debenture, dated October 28, 2010, is convertible, at the
option of the holder, at a conversion price equal to the lesser of (i) $0.20 or
(ii) 95% of the lowest closing bid price of our common stock for the 60 trading
days preceding the date of conversion. The stated maturity date of the debenture
is July 29, 2012. In conjunction with the convertible debenture, we also issued
a warrant to YA Global to purchase 600,000 shares of common stock for an
exercise price of $0.20 per share for a period of five years.


11





Series D
Convertible Redeemable Preferred Stock - The Series D Convertible
Redeemable Preferred Stock issued on January 5, 2010 has a stated value of $100
per share and provides for an 8% cumulative dividend, subject to Board
declaration. Each share of Series D Preferred is convertible, at the option of
the holder, at a conversion price equal to the lesser of (i) $2.00 or (ii) 97%
of the lowest closing bid price of our common stock for the 125 trading days
preceding the date of conversion, provided that no conversion will be at a price
less than the par value of the common stock. The conversion price is subject to
adjustment for down-round, anti-dilution protection. Accordingly, if we sell
common stock or common share indexed financial instruments below the conversion
price, the Series D Preferred conversion price adjusts to that lower amount. The
Series D Preferred conversion price is also subject to adjustment for
traditional equity restructuring and reorganizations. The Series D Preferred has
a liquidation amount equal to $100 per share plus all declared and unpaid
dividends and is redeemable by us, at our option, at an amount of $100 per share
plus a redemption premium of 10%. The instrument is also redeemable at the
holder’s option upon certain events of default, which include events and factors
that are not related to interest or credit risk.





The
Series D Preferred is a hybrid financial instrument that embodies the risks and
rewards typically associated with both equity and debt instruments. Accordingly,
we are required to evaluate the features of this contract to determine its
nature as either an equity-type contract or a debt-type contract. We determined
that the Preferred Stock is generally more akin to a debt-type contract,
principally due to its variable conversion price and redemption features. This
determination is subjective. However, in complying with the guidance provided in
FASB ASC 815, we concluded, based upon the preponderance and weight of all
terms, conditions and features of the host contracts, that the Series D
Preferred was more akin to a debt instrument for purposes of considering the
clear and close relationship of the embedded derivative features to the host
contract. The principal accounting concept requires bifurcation in these
instances when the embedded feature and the host contract have risks that are
not clearly and closely related. Certain exemptions to this rule, such as the
traditional conventional convertible exemption and the common-indexed exemption
were not available to us because the Preferred Stock is not indexed, as that
term is defined, only to our common stock. Accordingly, the conversion feature,
along with certain other features that have risks of equity, required
bifurcation and classification in liabilities as a compound embedded derivative
financial instrument. Derivative financial instruments are required to be
measured at fair value both at inception and on an ongoing basis.





As
discussed in further detail below, the initial allocation of the basis in the
Series D Preferred financing transaction resulted in no basis being ascribed to
the redeemable preferred stock. According to FASB ASC 480-10, Distinguishing Liabilities from
Equity, if the security is not currently redeemable and it is not
probable that the security will be become redeemable, accretion to face value is
not necessary.  The Series D Preferred is convertible upon inception and
there was no persuasive evidence that the Preferred Stock would not be
redeemed.  Based on this information, redemption could not be considered
“not probable” of occurring and accretion was necessary. Redeemable preferred
stock may be accreted to its redemption value through periodic charges to
retained earnings or over the period from the date of issuance to the earliest
redemption date. Because there was no term of redemption embodied in the
contract, the issuance date was considered the earliest possible redemption
date. As a result, a day-one deemed dividend of $2.5 million was recorded to
accrete the Series D Preferred to its redemption value.





In
conjunction with the Series D Preferred financing, we also issued warrants to
acquire 225,000 shares of our common stock.   We evaluated the
warrants for purposes of classification under FASB ASC 480 and determined the
warrants require liability classification because they embody down-round
anti-dilution that precludes the instrument from being considered indexed to the
Company’s own stock.





Our
accounting required the allocation of the proceeds to the individual financial
instruments comprising the Series D Preferred financing.  Current
accounting concepts generally provide that the allocation is made, first to the
instruments that are required to be recorded at fair value; that is, the
compound embedded derivative and the warrants, and the remainder to the host
instrument. The fair value of the embedded conversion feature and the warrants
exceeded the proceeds which resulted in a day-one derivative
loss.


12





The
allocation of the basis arising from the issuance of Series D Preferred and
warrants is summarized in the table below:





Proceeds
                      
                      
                      Deemed
                      
                      
                      TotalAllocation
                      
                      
                      Dividend
                      
                      
                      Allocation(in
      thousands)Gross
      proceeds
                      
                      $
                      2,500
                      
                      
                      
                      
                      
                      $
                      2,500Financing
      costs paid to investor
                      
                      
                      (100
                      )
                      
                      
                      
                      
                      
                      (100
                      )$
                      2,400
                      
                      
                      
                      
                      
                      $
                      2,400Derivative
      liabilities:Investor
      warrants
                      
                      $
                      (2,431
                      )
                      
                      
                      
                      
                      $
                      (2,431
                      )Compound
      derivative
                      
                      
                      (4,551
                      )
                      
                      
                      
                      
                      
                      (4,551
                      )Total
      derivative liabilities
                      
                      
                      (6,982
                      )
                      
                      
                      
                      
                      
                      (6,982
                      )Redeemable
      preferred stock:Series
      D Preferred Stock
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Deemed
      dividend
                      
                      
                      -
                      
                      
                      $
                      (2,500
                      )
                      
                      
                      (2,500
                      )Total
      redeemable preferred stock
                      
                      
                      -
                      
                      
                      
                      (2,500
                      )
                      
                      
                      (2,500
                      )Accumulated
      deficit (deemed dividend)
                      
                      
                      -
                      
                      
                      
                      2,500
                      
                      
                      
                      2,500Day-one
      derivative loss
                      
                      
                      4,582
                      
                      
                      
                      
                      
                      
                      
                      4,582$
                      (2,400
                      )
                      
                      $
                      -
                      
                      
                      $
                      (2,400
                      )





Series C
Convertible Preferred Stock - On February 17, 2006, we issued 22,000
shares of $1,000 Series C 8% Convertible Preferred Stock, with a face value of
$22.0 million, to YA Global. The Series C Preferred Stock was originally
convertible into shares of common stock at the lower of $2.00 per share and 97%
of the lowest closing bid price of the common stock for the 30 trading days
immediately preceding the conversion date. On January 5, 2010, we entered into
an amendment to the Series C Convertible Preferred Stock, which modified the
conversion provisions to increase the look-back period in the variable
conversion rate calculation to 125 days.





On
September 15, 2010, YA Global converted 273 shares of our Series C preferred
stock into 1,876,289 shares of our common stock. As of September 30, 2010, YA
Global has converted a total of 13,631 shares of the original 22,000 shares of
Series C Preferred stock into 12,240,428 share of our common stock, leaving
8,369 shares of Series C Preferred stock with a face value of $8.4 million
outstanding.





Secured
Convertible Debentures -The underlying agreements for each of the
seventeen debentures issued to YA Global are essentially the same, except in
regard to the interest rate, varying conversion prices per share, and the number
of warrants that were issued in conjunction with each of the debentures. The
debentures are convertible into our common stock, at the option of the holder,
at the lower of a fixed conversion price per share or a percentage of the lowest
volume-weighted average price (“VWAP”) for a specified number of days prior to
the conversion (the “look-back period”). The conversion is limited such that the
holder cannot exceed 9.99% ownership, unless the holder waives their right to
such limitation. All of the convertible debentures are secured according to the
terms of a Security Pledge Agreement dated August 23, 2006, which was entered
into in connection with the first convertible debenture issued to YA Global and
which provides YA Global with a security interest in substantially all of our
assets.  The debentures are also secured by a Patent Security Agreement
dated July 29, 2008. On August 13, 2010 our wholly owned subsidiary, NeoMedia
Europe AG, became a guarantor of all outstanding financing transactions between
us and YA Global, through pledges of their intellectual property and other
movable assets. As security for our obligations to YA Global, all of our Pledged
Property, Patent Collateral and other collateral is affirmed through the several
successive Ratification Agreements which have been executed in connection with
each of the 2010 financings.


13





As
discussed above, on January 5, 2010, the terms of all of the prior debentures
were modified to extend the stated maturity date to July 29, 2012.  The
January 5, 2010 amendments also increased the look-back period used to calculate
the variable conversion price per share for all debentures to a period of 125
days and increased the fixed portion of the conversion price for certain of the
debentures from $1.00 to $2.00 per share.





On May
27, 2010, we entered into a Securities Purchase Agreement to issue and sell a
secured convertible debenture to YA Global in the principal amount of $2.0
million. The debenture bears interest at 14% and matures on July 29, 2012. The
debenture provided net proceeds of $1.4 million after payment of $90,000 in fees
and the use of $506,137 to repay the outstanding principal and interest on a
promissory note dated April 1, 2010 owed to YA Global. In addition to the
debenture, we also issued a warrant to YA Global to purchase 5,000,000 shares of
common stock for an exercise price of $0.30 per share for a period of five
years.  We have the right to redeem a portion or all amounts outstanding
under the debenture at a redemption premium of 10%, plus accrued interest. YA
Global may require cash redemption of all or a portion of the debenture at
any time after August 26, 2010.





On August
13, 2010 and September 29, 2010, we entered into Securities Purchase Agreements
to issue and sell secured convertible debentures to YA Global in the principal
amount of $550,000 and $475,000, respectively. The debentures bear interest at
14% and mature on July 29, 2012. The debentures provided net proceeds of
$980,000 after payment of $45,000 in fees. In addition to the August 13, 2010
and September 29, 2010 debentures, we also issued warrants to YA Global to
purchase 1,000,000 and 750,000 shares of common stock, respectively, for an
exercise price of $0.20 per share for a period of five years.  We have the
right to redeem a portion or all amounts outstanding under the debenture at a
redemption premium of 10%, plus accrued interest.





At
inception, a summary of the allocation of the components of the new debentures
and warrants issued this quarter was as follows:





August 13, 2010
                    Convertible Debenture
                  
                  
                  September 29, 2010
                    Convertible Debenture(in
      thousands)Gross
      proceeds
                  
                  $
                  (550
                  )
                  
                  $
                  (475
                  )Structuring
      and due diligence fee
                  
                  
                  20
                  
                  
                  
                  25$
                  (530
                  )
                  
                  $
                  (450
                  )Derivative
      liabilities:Investor
      warrants
                  
                  $
                  (233
                  )
                  
                  $
                  (167
                  )Compound
      derivative
                  
                  
                  (704
                  )
                  
                  
                  (493
                  )Total
      derivative liabilities
                  
                  
                  (937
                  )
                  
                  
                  (660
                  )Day
      one derivative loss
                  
                  
                  407
                  
                  
                  
                  210Convertible
      debenture-initial carrying value
                  
                  
                  -
                  
                  
                  
                  -$
                  (530
                  )
                  
                  $
                  (450
                  )


14





The
compound derivatives were valued using the Monte Carlo Simulation valuation
method. Significant assumptions used to value the compound derivatives as of
inception of the financings included exercise estimates/behaviors and the
following significant estimates:





August 13, 2010
                      EmbeddedConversionFeature
                    
                    
                    September 29, 2010
                      Embedded Conversion
                      FeatureConversion
      price
                    
                    $
                    0.1425
                    
                    
                    $
                    0.1520Equivalent
      volatility
                    
                    
                    181
                    %
                    
                    
                    166
                    %Equivalent
      interest risk
                    
                    
                    13.12
                    %
                    
                    
                    13.30
                    %Equivalent
      credit risk
                    
                    
                    8.13
                    %
                    
                    
                    7.79
                    %





The
warrants are valued using the Black-Scholes-Merton valuation methodology.
Significant assumptions used to value the warrants as of their inception
included the following significant estimates:





August 13, 2010
                    Warrants
                  
                  
                  September 29, 2010
                    WarrantsExercise
      price
                  
                  $
                  0.20
                  
                  
                  $
                  0.20Expected
      life
                  
                  5
      years
                  
                  
                  5
      yearsEstimated
      volatility
                  
                  
                  156
                  %
                  
                  
                  155
                  %Risk
      free rate of return
                  
                  
                  1.47
                  %
                  
                  
                  1.27
                  %Dividend
      yield
                  
                  
                  —
                  
                  
                  
                  —





For the
risk-free rates of return, we use the published yields on zero-coupon Treasury
Securities with maturities consistent with the term of the warrants and
volatility is based upon our expected stock price volatility over the term of
the warrants.





The table
below summarizes the significant terms of each of the debentures as of September
30, 2010:





Conversion
      Price – Lower of Fixed Price or Percentage ofDefault
                
                
                VWAP
      for Preceding PeriodFace
                
                
                
                Interest
                
                
                Interest
                
                
                Fixed
                
                
                
                
                
                Default
                
                PrecedingDebenture Issue Date
                
                Amount
                
                Maturity
                
                Rate
                
                
                Rate
                
                
                Price
                
                
                %
                
                
                %
                
                PeriodAugust
      24, 2006
                
                $
                5,000,000
                
                7/29/2012
                
                
                10
                %
                
                
                n/a
                
                
                $
                2.00
                
                
                
                90
                %
                
                
                n/a
                
                125
      DaysDecember
      29, 2006
                
                $
                2,500,000
                
                7/29/2012
                
                
                10
                %
                
                
                n/a
                
                
                $
                2.00
                
                
                
                90
                %
                
                
                n/a
                
                125
      DaysMarch
      27, 2007
                
                $
                7,458,651
                
                7/29/2012
                
                
                13
                %
                
                
                n/a
                
                
                $
                2.00
                
                
                
                90
                %
                
                
                n/a
                
                125
      DaysAugust
      24, 2007
                
                $
                1,775,000
                
                7/29/2012
                
                
                14
                %
                
                
                n/a
                
                
                $
                2.00
                
                
                
                80
                %
                
                
                n/a
                
                125
      DaysApril
      11, 2008
                
                $
                390,000
                
                7/29/2012
                
                
                15
                %
                
                
                24
                %
                
                $
                1.50
                
                
                
                80
                %
                
                
                75
                %
                125
      DaysMay
      16, 2008
                
                $
                500,000
                
                7/29/2012
                
                
                15
                %
                
                
                24
                %
                
                $
                1.50
                
                
                
                80
                %
                
                
                50
                %
                125
      DaysMay
      29, 2008
                
                $
                790,000
                
                7/29/2012
                
                
                15
                %
                
                
                24
                %
                
                $
                1.00
                
                
                
                80
                %
                
                
                50
                %
                125
      DaysJuly
      10, 2008
                
                $
                137,750
                
                7/29/2012
                
                
                15
                %
                
                
                24
                %
                
                $
                1.00
                
                
                
                80
                %
                
                
                50
                %
                125
      DaysJuly
      29, 2008
                
                $
                2,325,000
                
                7/29/2012
                
                
                14
                %
                
                
                24
                %
                
                $
                2.00
                
                
                
                95
                %
                
                
                50
                %
                125
      DaysOctober
      28, 2008
                
                $
                2,325,000
                
                7/29/2012
                
                
                14
                %
                
                
                20
                %
                
                $
                2.00
                
                
                
                95
                %
                
                
                50
                %
                125
      DaysMay
      1, 2009
                
                $
                294,000
                
                7/29/2012
                
                
                14
                %
                
                
                20
                %
                
                $
                2.00
                
                
                
                95
                %
                
                
                50
                %
                125
      DaysJune
      5, 2009
                
                $
                715,000
                
                7/29/2012
                
                
                14
                %
                
                
                20
                %
                
                $
                2.00
                
                
                
                95
                %
                
                
                50
                %
                125
      DaysJuly
      15, 2009
                
                $
                535,000
                
                7/29/2012
                
                
                14
                %
                
                
                20
                %
                
                $
                2.00
                
                
                
                95
                %
                
                
                50
                %
                125
      DaysAugust
      14, 2009
                
                $
                475,000
                
                7/29/2012
                
                
                14
                %
                
                
                20
                %
                
                $
                2.00
                
                
                
                95
                %
                
                
                50
                %
                125
      DaysMay
      27, 2010
                
                $
                2,006,137
                
                7/29/2012
                
                
                14
                %
                
                
                20
                %
                
                $
                0.30
                
                
                
                95
                %
                
                
                50
                %
                60
      DaysAugust
      13, 2010
                
                $
                550,000
                
                7/29/2012
                
                
                14
                %
                
                
                20
                %
                
                $
                0.20
                
                
                
                95
                %
                
                
                50
                %
                60
      DaysSeptember
      29, 2010
                
                $
                475,000
                
                7/29/2012
                
                
                14
                %
                
                
                20
                %
                
                $
                0.20
                
                
                
                95
                %
                
                
                50
                %
                60
      Days


15





All
debentures with YA Global contain provisions for acceleration of principal and
interest upon default. Certain debentures also contain default interest rates
and conversion prices, as reflected in the table above.




In our
evaluation of these financing transactions, we concluded that the conversion
features were not afforded the exemption as conventional convertible instruments
due to the variable conversion rate; and they did not otherwise meet the
conditions set forth in current accounting standards for equity classification.
Because equity classification was not available for the conversion features, we
elected to bifurcate the compound derivatives, and carry them as derivative
liabilities, at fair value. Each compound derivative consists of (i) the
embedded conversion feature, (ii) down-round anti-dilution protection features,
and (iii) default, non-delivery and buy-in puts which were combined into one
compound instrument that is carried as a component of derivative
liabilities.





Fair Value
Considerations -In accordance with FASB
ASC 815, Derivatives and
Hedging, we determined that the conversion features of the Series C and
Series D Convertible Preferred Stock, and the August 2006, December 2006, July
2008, October 2008, April 2009, May 2009, June 2009, July 2009, August 2009, May
2010, August 2010 and September 2010 Debentures met the criteria of embedded
derivatives and that the conversion features of these instruments required
bifurcation and accounting as derivative instrument liabilities. Changes in the
fair value of the derivative liability for the embedded conversion option are
charged or credited to income each period. As permitted by FASB ASC 815-15-25,
Recognition of Embedded
Derivatives, we elected not to bifurcate the embedded derivatives in the
March 2007, August 2007, April 2008 or May 2008 Debentures and accordingly,
these convertible instruments are being carried in their entirety at their fair
values, with the changes in the fair value of the Debentures charged or credited
to income each period.





Derivative
financial instruments arising from the issuance of convertible financial
instruments are initially recorded, and continuously carried, at fair value.
Upon conversion of any of the convertible financial instruments, the carrying
amount of the debt, including any unamortized premium or discount, and the
related derivative instrument liability are credited to the capital accounts
upon conversion to reflect the stock issued and no gain or loss is
recognized.





Embedded
Derivative Instruments – Series C and Series D Preferred Stock and August 2006,
December 2006, July 2008, October 2008, April 2009, May 2009, June 2009, July
2009, August 2009, May 2010, August 2010 and September 2010 Convertible
Debentures -Embedded derivative financial instruments arising from the
convertible instruments consist of multiple individual features that were
embedded in each instrument. For each convertible instrument, we evaluated all
significant features and, as required under current accounting standards,
aggregated the components into one compound derivative financial instrument for
financial reporting purposes. For financings recorded in accordance with FASB
ASC 815, the compound embedded derivative instruments are valued using the Monte
Carlo Simulation 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.





The
conversion price in each of the convertible debentures is subject to adjustment
for down-round, anti-dilution protection.  Accordingly, if we sell common
stock or common share indexed financial instruments below the stated or variable
conversion price in the agreement, the conversion price adjusts to that lower
amount.





As
discussed above, on January 5, 2010, we entered into amendments to the
convertible debentures, which extended the maturity dates to July 29, 2012, and
modified the terms of the conversion prices.


16





The
assumptions included in the calculations are highly subjective and subject to
interpretation.  Assumptions used as of September 30, 2010 included
exercise estimates/behaviors and the following other significant
estimates:





Remaining
                
                
                
                
                
                Equivalent
                
                
                EquivalentConversion
                
                
                Term
                
                
                Equivalent
                
                
                Interest-Risk
                
                
                Credit-RiskPrices
                
                
                (years)
                
                
                Volatility
                
                
                Adjusted Rate
                
                
                Adjusted RateSeries
      C Convertible Preferred Stock
                
                $
                0.15
                
                
                
                1.83
                
                
                
                166
                %
                
                
                7.60
                %
                
                
                7.79
                %Series
      D Convertible Preferred Stock
                
                $
                0.15
                
                
                
                1.83
                
                
                
                166
                %
                
                
                7.60
                %
                
                
                7.79
                %August
      24, 2006
                
                $
                0.14
                
                
                
                1.83
                
                
                
                166
                %
                
                
                9.50
                %
                
                
                7.79
                %December
      29, 2006
                
                $
                0.14
                
                
                
                1.83
                
                
                
                166
                %
                
                
                9.50
                %
                
                
                7.79
                %July
      10, 2008
                
                $
                0.12
                
                
                
                1.83
                
                
                
                166
                %
                
                
                13.03
                %
                
                
                7.79
                %July
      29, 2008
                
                $
                0.14
                
                
                
                1.83
                
                
                
                166
                %
                
                
                13.03
                %
                
                
                7.79
                %October
      28, 2008
                
                $
                0.14
                
                
                
                1.83
                
                
                
                166
                %
                
                
                13.03
                %
                
                
                7.79
                %May
      1, 2009
                
                $
                0.14
                
                
                
                1.83
                
                
                
                166
                %
                
                
                13.03
                %
                
                
                7.79
                %June
      5, 2009
                
                $
                0.14
                
                
                
                1.83
                
                
                
                166
                %
                
                
                13.03
                %
                
                
                7.79
                %July
      15, 2009
                
                $
                0.14
                
                
                
                1.83
                
                
                
                166
                %
                
                
                13.03
                %
                
                
                7.79
                %August
      14, 2009
                
                $
                0.14
                
                
                
                1.83
                
                
                
                166
                %
                
                
                13.03
                %
                
                
                7.79
                %May
      27, 2010
                
                $
                0.15
                
                
                
                1.83
                
                
                
                166
                %
                
                
                13.03
                %
                
                
                7.79
                %August
      13, 2010
                
                $
                0.15
                
                
                
                1.83
                
                
                
                166
                %
                
                
                13.03
                %
                
                
                7.79
                %September
      29, 2010
                
                $
                0.15
                
                
                
                1.83
                
                
                
                166
                %
                
                
                13.03
                %
                
                
                7.79
                %





Equivalent
amounts reflect the net results of multiple modeling simulations that the Monte
Carlo Simulation methodology applies to underlying assumptions.





Due to
the variable component of the conversion price, rapid fluctuations in the
trading market price may result in significant variations to the calculated
conversion price. For each debenture, we analyze the ratio of the conversion
price (as calculated based on the percentage of VWAP for the appropriate look
back period) to the trading market price for a period of time equal to the term
of the debenture to determine the average ratio for the term of the note. Each
quarter, the ratio in effect on the date of the valuation is compared with the
average ratio over the term of the debenture to determine if the calculated
conversion price is representative of past trends or if it is considered
unrepresentative due to a large fluctuation in the stock price over a short
period of time. If the calculated conversion price results in a ratio that
deviates significantly from the average ratio over the term of the agreement,
the average ratio of the conversion price to the trading market price is then
multiplied by the current trading market price to determine the variable portion
of the conversion price for use in the fair value calculations. This variable
conversion price is then compared with the fixed conversion price and, as
required by the terms of the debentures, the lower of the two amounts is used as
the conversion price in the Monte Carlo Simulation model used for valuation
purposes. On September 30, 2010, the fixed conversion price for each of the
debentures was equal to or higher than the calculated variable conversion price.
Accordingly, the variable conversion price was used in the Monte Carlo
Simulation model. This analysis is performed each quarter to determine if the
calculated conversion price is reasonable for purposes of determining the fair
value of the embedded conversion features (for instruments recorded under FASB
ASC 815) or the fair value of the hybrid instrument (for instruments recorded
under FASB ASC 815-15-25).





Hybrid Financial
Instruments Carried at Fair Value – 2007 and 2008 Convertible Debentures -The March 2007, August 2007, April 2008 and May 2008 convertible
debentures are recorded in accordance with FASB ASC 815-15-25 and the entire
hybrid instrument was initially recorded at fair value, with subsequent changes
in fair value charged or credited to income each period. These financial
instruments are valued using the common stock equivalent approach. The
common stock equivalent is calculated using the shares indexed to the debentures
valued at the market price of our stock and the present value of the
coupon.


17





Subsequent
to the January 5, 2010 amendment, the shares indexed to the debentures issued
prior to that date were calculated using the variable conversion price based on
the 125 day look-back period and the present value of the coupon from inception
of the debentures to the revised maturity date of July 29, 2012.





Current Period
Valuations -For the Series C Preferred Stock and the August 2006 and
December 2006 debentures, due to our previous default position with respect to
these instruments, the carrying value of each instrument in effect as of
December 31, 2006 was written up to its full face value during the fourth
quarter of 2006. For these instruments and the Series D Convertible Preferred
Stock and the July 2008, October 2008, April 2009, May 2009, June 2009, July
2009, August 2009, May 2010, August 2010 and September 2010 debentures, the
embedded derivative instrument, primarily the conversion feature, has been
separated and accounted for as a derivative instrument liability, as discussed
above. This derivative instrument liability is marked-to-market each reporting
period.





The March
2007, August 2007, April 2008 and May 2008 debentures were each initially
recorded at their full fair value pursuant to FASB ASC 815-15-25. That fair
value is marked-to-market each reporting period, with any changes in the fair
value charged or credited to income.





On
January 5, 2010, the terms of all of the debentures issued prior to that date
were modified to increase the look-back period used to calculate the variable
conversion price per share for all debentures to a period of 125 days and to
extend the stated maturity date to July 29, 2012, which increased our future
anticipated cash flows related to those instruments.  Because that increase
exceeded the threshold prescribed by FASB ASC 470-50, Debt Modifications and
Extinguishments, the modification of the amounts due under these
instruments was accounted for as an extinguishment. Accordingly, the
original convertible debentures were considered extinguished and the revised
convertible debentures were recorded at their fair value, resulting in an
extinguishment loss of approximately ($5.6) million.





For
instruments which were recorded under FASB ASC 815-15, the instruments were
first adjusted to fair value as of January 5, 2010 using the conversion rate and
maturity date prior to the amendment. The fair value of the instrument was then
calculated using the modified conversion rate and maturity date to determine the
fair value of the instrument subsequent to the amendment. The difference in the
fair value before and after the amendment was recorded as an extinguishment
loss.





For
instruments recorded under FASB ASC 815-10, the embedded conversion feature was
first adjusted to fair value as of the date of the amendment using the
conversion rate and maturity date prior to the amendment. The carrying value of
the host instrument and the embedded conversion feature, less any deferred
financing costs, was then compared with the fair value of the hybrid instrument
subsequent to the amendment and the difference was recorded as an extinguishment
loss.





18




For our
Series C and Series D Convertible Preferred Stock and convertible debentures,
the following table reflects the face value of the instruments and, as
appropriate, either their amortized cost carrying value and the fair value of
the separately-recognized compound embedded derivative or, for those debentures
recorded in their entirety at fair value, their fair value, as well as for each
of the instruments and the number of common shares (in thousands) into which the
instruments are convertible as of September 30, 2010 and December 31,
2009:


Embedded
                        
                        
                        
                        
                        
                        CommonSeptember
      30, 2010
                        
                        Face
                        
                        
                        Carrying
                        
                        
                        Conversion
                        
                        
                        
                        
                        
                        StockValue
                        
                        
                        Value
                        
                        
                        Feature
                        
                        
                        Fair Value
                        
                        
                        Shares(in
      thousands)Series C Convertible Preferred Stock
                        
                        $
                        8,369
                        
                        
                        $
                        8,369
                        
                        
                        $
                        5,435
                        
                        
                        $
                        -
                        
                        
                        
                        57,517Series
      D Convertible Preferred Stock
                        
                        $
                        2,500
                        
                        
                        $
                        2,500
                        
                        
                        
                        1,624
                        
                        
                        
                        -
                        
                        
                        
                        17,182August
      24, 2006
                        
                        $
                        5,000
                        
                        
                        $
                        5,000
                        
                        
                        
                        4,449
                        
                        
                        
                        -
                        
                        
                        
                        50,025December
      29, 2006
                        
                        
                        2,500
                        
                        
                        
                        2,500
                        
                        
                        
                        2,287
                        
                        
                        
                        -
                        
                        
                        
                        25,011March
      27, 2007
                        
                        
                        7,459
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        17,749
                        
                        
                        
                        55,249August
      24, 2007
                        
                        
                        1,775
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        4,612
                        
                        
                        
                        14,792April
      11, 2008
                        
                        
                        390
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,037
                        
                        
                        
                        3,250May
      16 ,2008
                        
                        
                        500
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,322
                        
                        
                        
                        4,167May
      29, 2008
                        
                        
                        790
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,085
                        
                        
                        
                        6,583July
      10, 2008
                        
                        
                        138
                        
                        
                        
                        138
                        
                        
                        
                        174
                        
                        
                        
                        -
                        
                        
                        
                        1,537July
      29, 2008
                        
                        
                        2,325
                        
                        
                        
                        2,325
                        
                        
                        
                        2,084
                        
                        
                        
                        -
                        
                        
                        
                        21,298October
      23, 2008
                        
                        
                        2,325
                        
                        
                        
                        2,325
                        
                        
                        
                        2,096
                        
                        
                        
                        -
                        
                        
                        
                        20,721May
      1, 2009
                        
                        
                        294
                        
                        
                        
                        294
                        
                        
                        
                        236
                        
                        
                        
                        -
                        
                        
                        
                        2,628June
      5, 2009
                        
                        
                        715
                        
                        
                        
                        660
                        
                        
                        
                        684
                        
                        
                        
                        -
                        
                        
                        
                        5,952July
      15, 2009
                        
                        
                        535
                        
                        
                        
                        535
                        
                        
                        
                        494
                        
                        
                        
                        -
                        
                        
                        
                        4,401August
      14, 2009
                        
                        
                        475
                        
                        
                        
                        475
                        
                        
                        
                        439
                        
                        
                        
                        -
                        
                        
                        
                        3,869May
      27, 2010
                        
                        
                        2,006
                        
                        
                        
                        223
                        
                        
                        
                        2,233
                        
                        
                        
                        -
                        
                        
                        
                        13,836August
      13, 2010
                        
                        
                        550
                        
                        
                        
                        8
                        
                        
                        
                        581
                        
                        
                        
                        -
                        
                        
                        
                        3,685September
      29, 2010
                        
                        
                        475
                        
                        
                        
                        5
                        
                        
                        
                        493
                        
                        
                        
                        -
                        
                        
                        
                        3,126Total
                        
                        $
                        28,252
                        
                        
                        $
                        14,488
                        
                        
                        $
                        23,309
                        
                        
                        $
                        26,805
                        
                        
                        
                        314,829





Embedded
                        
                        
                        
                        
                        
                        CommonDecember
      31, 2009
                        
                        Face
                        
                        
                        Carrying
                        
                        
                        Conversion
                        
                        
                        
                        
                        
                        StockValue
                        
                        
                        Value
                        
                        
                        Feature
                        
                        
                        Fair Value
                        
                        
                        Shares(in
      thousands)Series C Convertible Preferred Stock
                        
                        $
                        8,642
                        
                        
                        $
                        8,642
                        
                        
                        $
                        16,397
                        
                        
                        $
                        -
                        
                        
                        
                        22,158August
      24, 2006
                        
                        $
                        5,000
                        
                        
                        $
                        5,000
                        
                        
                        
                        14,131
                        
                        
                        
                        -
                        
                        
                        
                        13,889December
      29, 2006
                        
                        
                        2,500
                        
                        
                        
                        2,500
                        
                        
                        
                        6,926
                        
                        
                        
                        -
                        
                        
                        
                        9,260March
      27, 2007
                        
                        
                        7,459
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        25,046
                        
                        
                        
                        20,718August
      24, 2007
                        
                        
                        1,775
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        6,573
                        
                        
                        
                        5,547April
      11, 2008
                        
                        
                        390
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,412
                        
                        
                        
                        1,219May
      16 ,2008
                        
                        
                        500
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,803
                        
                        
                        
                        1,563May
      29, 2008
                        
                        
                        790
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,844
                        
                        
                        
                        2,469July
      10, 2008
                        
                        
                        137
                        
                        
                        
                        127
                        
                        
                        
                        337
                        
                        
                        
                        -
                        
                        
                        
                        430July
      29, 2008
                        
                        
                        2,325
                        
                        
                        
                        2,109
                        
                        
                        
                        4,618
                        
                        
                        
                        -
                        
                        
                        
                        6,118October
      28, 2008
                        
                        
                        2,325
                        
                        
                        
                        2,130
                        
                        
                        
                        4,594
                        
                        
                        
                        -
                        
                        
                        
                        6,118May
      1, 2009
                        
                        
                        294
                        
                        
                        
                        120
                        
                        
                        
                        580
                        
                        
                        
                        -
                        
                        
                        
                        774June
      5, 2009
                        
                        
                        715
                        
                        
                        
                        71
                        
                        
                        
                        1,410
                        
                        
                        
                        -
                        
                        
                        
                        1,882July
      15, 2009
                        
                        
                        535
                        
                        
                        
                        253
                        
                        
                        
                        1,056
                        
                        
                        
                        -
                        
                        
                        
                        1,408August
      14, 2009
                        
                        
                        475
                        
                        
                        
                        213
                        
                        
                        
                        936
                        
                        
                        
                        -
                        
                        
                        
                        1,250Total
                        
                        $
                        25,220
                        
                        
                        $
                        12,523
                        
                        
                        $
                        50,985
                        
                        
                        $
                        37,678
                        
                        
                        
                        94,803


19





The terms
of the embedded conversion features in the convertible instruments presented
above provide for variable conversion rates that are indexed to our 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 of the Series C and
Series D Preferred Stock was convertible as of September 30, 2010 was calculated
as face value plus assumed dividends (if declared), divided by the lesser of the
fixed rate or the calculated variable conversion price using the 125 day
look-back period. The number of shares of common stock into which the embedded
conversion feature in the convertible debentures was convertible as of September
30, 2010 was calculated as the face value of each instrument divided by the
variable conversion price using a 125 day look-back period.





The March
2007, August 2007, April 2008 and May 2008 debentures are carried in their
entirety at fair value in accordance with FASB ASC 815-15-25 and the value of
the embedded conversion feature is effectively embodied in those fair
values.





Changes
in the fair value of convertible instruments that are carried in their entirety
at fair value (the March 2007, August 2007, April 2008 and May 2008 debentures)
are reported as “Gain (loss) from change in fair value of hybrid financial
instruments” in the accompanying consolidated statements of
operations.





The
changes in fair value of these hybrid financial instruments were as
follows:





Three Months Ended September 30,
                    
                    
                    Nine Months Ended September 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009(in
      thousands)
                    
                    
                    (in
      thousands)March
      27, 2007
                    
                    $
                    (4,587
                    )
                    
                    $
                    (5,272
                    )
                    
                    $
                    8,218
                    
                    
                    $
                    (5,382
                    )August
      24, 2007
                    
                    
                    (1,223
                    )
                    
                    
                    (1,388
                    )
                    
                    
                    2,216
                    
                    
                    
                    (1,232
                    )April
      11, 2008
                    
                    
                    (263
                    )
                    
                    
                    (264
                    )
                    
                    
                    505
                    
                    
                    
                    (215
                    )May
      16, 2008
                    
                    
                    (336
                    )
                    
                    
                    (341
                    )
                    
                    
                    648
                    
                    
                    
                    (257
                    )May
      29, 2008
                    
                    
                    (532
                    )
                    
                    
                    (537
                    )
                    
                    
                    1,024
                    
                    
                    
                    (404
                    )Gain
      (loss) from changes in fair value of hybrid instruments
                    
                    $
                    (6,941
                    )
                    
                    $
                    (7,802
                    )
                    
                    $
                    12,611
                    
                    
                    $
                    (7,490
                    )





The
carrying value of our liability for convertible instruments carried at fair
value decreased $10.9 million during the nine month period from December 31,
2009 to September 30, 2010. However, the fair values of these liabilities
decreased $12.6 million. The difference between the change in carrying value and
change in fair value is an extinguishment loss of $1.7 million resulting from
the January 5, 2010 amendment.





Changes
in the fair value of derivative instrument liabilities related to the bifurcated
embedded derivative features of convertible instruments not carried at fair
value are reported as “Gain (loss) from change in fair value of derivative
liability – Series C and Series D preferred stock and debentures” in the
accompanying consolidated statement of operations.


20





The
changes in fair value of these derivative financial instruments were as
follows:





Three Months Ended Sept 30
                    
                    
                    Nine Months Ended Sept 302010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009(in
      thousands)
                    
                    
                    (in
      thousands)Series
      C Convertible Preferred Stock
                    
                    $
                    (4,827
                    )
                    
                    $
                    (1,837
                    )
                    
                    $
                    10,709
                    
                    
                    $
                    (13,226
                    )Series
      D Convertible Preferred Stock
                    
                    
                    (1,375
                    )
                    
                    
                    -
                    
                    
                    
                    2,927
                    
                    
                    
                    -August
      24, 2006
                    
                    
                    (2,922
                    )
                    
                    
                    (3,001
                    )
                    
                    
                    10,158
                    
                    
                    
                    (2,382
                    )December
      29, 2006
                    
                    
                    (1,525
                    )
                    
                    
                    (1,323
                    )
                    
                    
                    4,878
                    
                    
                    
                    (1,034
                    )July
      10, 2008
                    
                    
                    (92
                    )
                    
                    
                    (59
                    )
                    
                    
                    236
                    
                    
                    
                    (42
                    )July
      29, 2008
                    
                    
                    (1,285
                    )
                    
                    
                    (726
                    )
                    
                    
                    3,087
                    
                    
                    
                    (365
                    )October
      28, 2008
                    
                    
                    (1,282
                    )
                    
                    
                    (699
                    )
                    
                    
                    2,810
                    
                    
                    
                    (410
                    )April
      6, 2009
                    
                    
                    -
                    
                    
                    
                    (167
                    )
                    
                    
                    -
                    
                    
                    
                    (88
                    )May
      1, 2009
                    
                    
                    (149
                    )
                    
                    
                    (167
                    )
                    
                    
                    423
                    
                    
                    
                    (200
                    )June
      5, 2009
                    
                    
                    (357
                    )
                    
                    
                    (218
                    )
                    
                    
                    831
                    
                    
                    
                    (126
                    )July
      15, 2009
                    
                    
                    (295
                    )
                    
                    
                    (235
                    )
                    
                    
                    695
                    
                    
                    
                    (235
                    )August
      14, 2009
                    
                    
                    (261
                    )
                    
                    
                    (219
                    )
                    
                    
                    604
                    
                    
                    
                    (219
                    )May
      27, 2010
                    
                    
                    (696
                    )
                    
                    
                    -
                    
                    
                    
                    (271
                    )
                    
                    
                    -August
      13, 2010
                    
                    
                    122
                    
                    
                    
                    -
                    
                    
                    
                    122
                    
                    
                    
                    -September
      29, 2010
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -(14,944
                    )
                    
                    
                    (8,651
                    )
                    
                    
                    37,209
                    
                    
                    $
                    (18,327
                    )Less:  Day-one
      loss from Series D Convertible Preferred financing
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (4,582
                    )
                    
                    
                    -Less:  Day-one
      loss from May 27, 2010 financing
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (747
                    )
                    
                    
                    -Less:
      Day-one loss from August 13, 2010 financing
                    
                    
                    (407
                    )
                    
                    
                    -
                    
                    
                    
                    (407
                    )
                    
                    
                    -Less:
      Day-one loss from September 29, 2010 financing
                    
                    
                    (210
                    )
                    
                    
                    -
                    
                    
                    
                    (210
                    )
                    
                    
                    -Gain
      (loss) from change in fair value of derivative liability
                    
                    $
                    (15,561
                    )
                    
                    $
                    (8,651
                    )
                    
                    $
                    31,263
                    
                    
                    $
                    (18,327
                    )





The
carrying value of the derivative liabilities-Series C and Series D preferred
stock and debentures increased $15.8 million during the three months ended
September 30, 2010 resulting from (i) $14.9 million increase in the fair value
of the derivative liability, as shown in the table above, (ii) conversion of a
portion of the Series C Preferred Stock resulting in a reduction of $253,000 and
(iii) an increase of $703,000 and $493,000 due to the inception date fair value
of the derivative liabilities resulting from the August 13, 2010 and September
29, 2010 financings, respectively.





The
carrying value of the derivative liabilities-Series C and Series D preferred
stock and debentures decreased $27.7 million for the nine months ended September
30, 2010 due to (i) $ 37.2 million reduction in the derivative liability fair
value, as provided above, (ii) conversion of a portion of the Series C Preferred
Stock resulting in a reduction of $253,000 (iii) increases of $4.5 million, $2.0
million, $703,000 and $493,000 due to the inception date fair value of the
derivative liabilities resulting from the Series D Preferred Stock and the May
27, 2010, August 13, 2010 and September 29, 2010 financings, respectively and
iv) an increase of $2.1 resulting from a loss on extinguishment due to the
January 5, 2010 modification mentioned above.





Warrants -YA Global holds warrants to purchase shares of our common stock that were
issued in connection with the convertible debentures and the Series C and Series
D Preferred Stock. The warrants are exercisable at the lower of a fixed exercise
price or a specified percentage of the current market price. From time to time,
the fixed exercise prices of the warrants held by YA Global have been reduced as
an inducement for YA Global to enter into subsequent financing arrangements. In
addition to the warrants issued to YA Global, certain other warrants have been
issued to consultants and other service providers.





The
warrants issued to YA Global and others do not meet all of the established
criteria for equity classification in FASB ASC 815-40, Derivatives and Hedging – Contracts
in Entity’s Own Equity, and accordingly, are recorded as derivative
liabilities at fair value. Changes in the fair value of the warrants are charged
or credited to income each period.





The
January 5, 2010 investment agreement with YA Global amended the exercise price
of warrants indexed to 350,000 shares of common stock, which were issued in July
2008. Due to down-round anti-dilution provisions, the exercise price of the
warrants prior to the amendment was based on the lowest conversion price of
convertible debentures issued subsequent to July 2008; however, the amendment
fixed the exercise price at $1.00, subject to subsequent adjustment for
anti-dilution, resulting in an approximate decrease in fair value of
$3,500.


21





In
connection with the January 5, 2010 investment agreement, we also issued to YA
Global warrants to purchase 225,000 shares of our common stock at an exercise
price of $1.00, expiring after seven years. These warrants were accounted for as
a derivative liability and their fair value at inception was approximately $2.4
million.





The
following table summarizes the warrants outstanding (in thousands) and their
fair value:





September
      30,
                      
                      
                      December
      31,
                      
                      
                      
                      September
      30,
                      
                      
                      December
      31,2010
                      
                      
                      2009
                      
                      
                      
                      2010
                      
                      
                      2009Exercise
                      
                      
                      Exercise
                      
                      Expiration
                      
                      
                      
                      
                      Fair
                      
                      
                      
                      
                      
                      FairPrice
                      
                      
                      Price
                      
                      Date
                      
                      Warrants
                      
                      
                      Value
                      
                      
                      Warrants
                      
                      
                      Value(in
      thousands)
                      
                      
                      (in
      thousands)Series C Convertible Preferred Stock
                      
                      $
                      0.12
                      
                      
                      $
                      0.32
                      
                      2/17/2011
                      
                      
                      450
                      
                      
                      $
                      96
                      
                      
                      
                      750
                      
                      
                      $
                      712Series
      D Convertible Preferred Stock
                      
                      
                      0.43
                      
                      
                      
                      —
                      
                      1/5/2017
                      
                      
                      2,250
                      
                      
                      
                      499
                      
                      
                      
                      —
                      
                      
                      
                      —August
      24, 2006
                      
                      
                      0.12
                      
                      
                      
                      0.32
                      
                      8/24/2011
                      
                      
                      1,750
                      
                      
                      
                      285
                      
                      
                      
                      1,750
                      
                      
                      
                      1,697December
      29, 2006
                      
                      
                      0.12
                      
                      
                      
                      0.32
                      
                      12/29/2011
                      
                      
                      420
                      
                      
                      
                      76
                      
                      
                      
                      420
                      
                      
                      
                      412March
      27, 2007
                      
                      
                      0.12
                      
                      
                      
                      0.32
                      
                      3/27/2012
                      
                      
                      1,250
                      
                      
                      
                      226
                      
                      
                      
                      1,250
                      
                      
                      
                      1,238August
      24, 2007
                      
                      
                      0.12
                      
                      
                      
                      0.32
                      
                      8/24/2012
                      
                      
                      750
                      
                      
                      
                      155
                      
                      
                      
                      750
                      
                      
                      
                      750May
      16, 2008
                      
                      
                      0.12
                      
                      
                      
                      0.32
                      
                      5/16/2015
                      
                      
                      75
                      
                      
                      
                      17
                      
                      
                      
                      75
                      
                      
                      
                      77May
      29, 2008
                      
                      
                      0.12
                      
                      
                      
                      0.32
                      
                      5/29/2015
                      
                      
                      500
                      
                      
                      
                      112
                      
                      
                      
                      500
                      
                      
                      
                      515July
      29, 2008
                      
                      
                      0.14
                      
                      
                      
                      0.95
                      
                      7/29/2015
                      
                      
                      1,000
                      
                      
                      
                      223
                      
                      
                      
                      1,000
                      
                      
                      
                      1,000July
      29, 2008
                      
                      
                      0.43
                      
                      
                      
                      0.95
                      
                      7/29/2015
                      
                      
                      3,500
                      
                      
                      
                      735
                      
                      
                      
                      3,500
                      
                      
                      
                      3,500May
      27, 2010
                      
                      
                      0.28
                      
                      
                      
                      —
                      
                      5/27/2015
                      
                      
                      5,000
                      
                      
                      
                      1,091
                      
                      
                      
                      —
                      
                      
                      
                      —August
      13, 2010
                      
                      
                      0.20
                      
                      
                      
                      —
                      
                      8/13/2015
                      
                      
                      1,000
                      
                      
                      
                      222
                      
                      
                      
                      —
                      
                      
                      
                      —September
      29, 2010
                      
                      
                      0.20
                      
                      
                      
                      —
                      
                      9/29/2015
                      
                      
                      750
                      
                      
                      
                      167
                      
                      
                      
                      —
                      
                      
                      
                      —Other
      warrants
                      
                      
                      1.10
                      
                      
                      $
                      1.10-
      $3.50
                      
                      1/16/2011
                      
                      
                      1
                      
                      
                      
                      —
                      
                      
                      
                      67
                      
                      
                      
                      11Total
                      
                      
                      18,696
                      
                      
                      $
                      3,904
                      
                      
                      
                      10,062
                      
                      
                      $
                      9,912





The
warrants 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 used in this model as of
September 30, 2010 included an expected life equal to the remaining term of the
warrants, an expected dividend yield of zero, estimated volatility ranging from
102% to 185%, and risk-free rates of return of 0.16% to 1.91%. For the risk-free
rates of return, we use the published yields on zero-coupon Treasury Securities
with maturities consistent with the remaining term of the warrants and
volatility is based upon our expected stock price volatility over the remaining
term of the warrants.





Changes
in the fair value of the warrants are reported as "(Gain) loss from change in
fair value of derivative liability - warrants" in the accompanying consolidated
statement of operations.


22





The
changes in the fair value of the warrants were as follows:





Three
      Months Ended September 30,
                  
                  
                  Nine
      Months Ended September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009(in
      thousands)
                  
                  
                  (in
      thousands)Series
      C Convertible Preferred Stock
                  
                  $
                  (29
                  )
                  
                  $
                  389
                  
                  
                  $
                  616
                  
                  
                  $
                  (517
                  )Series
      D Convertible Preferred Stock
                  
                  
                  (157
                  )
                  
                  
                  -
                  
                  
                  
                  1,931
                  
                  
                  
                  -August
      24, 2006
                  
                  
                  (96
                  )
                  
                  
                  980
                  
                  
                  
                  1,412
                  
                  
                  
                  (1,120
                  )December
      29, 2006
                  
                  
                  (21
                  )
                  
                  
                  231
                  
                  
                  
                  336
                  
                  
                  
                  (273
                  )March
      27, 2007
                  
                  
                  (62
                  )
                  
                  
                  688
                  
                  
                  
                  1,012
                  
                  
                  
                  (813
                  )August
      24, 2007
                  
                  
                  (49
                  )
                  
                  
                  420
                  
                  
                  
                  595
                  
                  
                  
                  (487
                  )May
      16, 2008
                  
                  
                  (6
                  )
                  
                  
                  46
                  
                  
                  
                  60
                  
                  
                  
                  (50
                  )May
      28, 2008
                  
                  
                  (38
                  )
                  
                  
                  305
                  
                  
                  
                  403
                  
                  
                  
                  (330
                  )July
      29, 2008
                  
                  
                  (294
                  )
                  
                  
                  2,700
                  
                  
                  
                  3,542
                  
                  
                  
                  (2,998
                  )May
      27, 2010
                  
                  
                  (364
                  )
                  
                  
                  -
                  
                  
                  
                  (178
                  )
                  
                  
                  -August
      13, 2010
                  
                  
                  11
                  
                  
                  
                  -
                  
                  
                  
                  11
                  
                  
                  
                  -September
      29, 2010
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Other
      warrants
                  
                  
                  -
                  
                  
                  
                  41
                  
                  
                  
                  11
                  
                  
                  
                  (14
                  )Total
                  
                  $
                  (1,105
                  )
                  
                  $
                  5,800
                  
                  
                  $
                  9,751
                  
                  
                  $
                  (6,602
                  )





The
carrying value of warrants increased $1.5 million during the three month period
from June 30, 2010 to September 30, 2010 due to the issuance of warrants on
August 13, 2010 and September 29, 2010 with a fair value of $233,000 and
$167,000, respectively, in addition to warrant fair value adjustments of $1.1
million as shown in the table above.





The
carrying value of warrants decreased approximately $6.0 million during the nine
month period from December 31, 2009 to September 30, 2010 as described in the
table above. This decrease was due to (i) a reduction in the warrant fair value
of $9.7 million as described in the table below and (ii) the issuance of
warrants on January 5, 2010, May 27, 2010, August 13, 2010 and September 29,
2010 with a fair value of $2.4 million, $912,000, $233,000 and $167,000,
respectively, totaling $3.7 million. Accordingly, the difference between the
change in the carrying value of the warrants and the gain from the change in
fair value of the warrant derivative liability is $3.7 million.





Fair Value
Considerations –As required by FASB ASC
820, assets and liabilities measured at fair value are classified in their
entirety based on the lowest level of input that is significant to their fair
value measurement. Our derivative financial instruments that are measured at
fair value on a recurring basis under FASB ASC 815-15-25 or FASB ASC 815 are all
measured at fair value using Level 3 inputs. Level 3 inputs are unobservable
inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.


23





The
following represents a reconciliation of the changes in fair value of financial
instruments measured at fair value using Level 3 inputs during the three and
nine months ended September 30, 2010:





CompoundEmbedded
                  
                  
                  WarrantDerivatives
                  
                  
                  Derivatives
                  
                  
                  TotalBeginning
      balance, December 31, 2009:
                  
                  $
                  50,985
                  
                  
                  $
                  9,912
                  
                  
                  $
                  60,897Issuances:January
      5, 2010
                  
                  
                  4,551
                  
                  
                  
                  2,431
                  
                  
                  
                  6,982Extinguished:
                  
                  
                  2,076
                  
                  
                  
                  -
                  
                  
                  
                  2,076Fair
      value adjustments:Compound
      embedded derivatives
                  
                  
                  (44,761
                  )
                  
                  
                  -
                  
                  
                  
                  (44,761
                  )Warrant
      derivatives
                  
                  
                  -
                  
                  
                  
                  (6,551
                  )
                  
                  
                  (6,551
                  )Ending
      balance, March 31, 2010
                  
                  $
                  12,851
                  
                  
                  $
                  5,792
                  
                  
                  $
                  18,643Issuances:May
      27, 2010
                  
                  
                  1,964
                  
                  
                  
                  912
                  
                  
                  
                  2,876Fair
      value adjustments:Compound
      embedded derivatives
                  
                  
                  (7,393
                  )
                  
                  
                  -
                  
                  
                  
                  (7,393
                  )Warrant
      derivatives
                  
                  
                  -
                  
                  
                  
                  (4,305
                  )
                  
                  
                  (4,305
                  )Ending
      balance, June 30, 2010
                  
                  $
                  7,422
                  
                  
                  $
                  2,399
                  
                  
                  $
                  9,821Issuances:August
      13, 2010
                  
                  
                  704
                  
                  
                  
                  233
                  
                  
                  
                  937September
      29, 2010
                  
                  
                  493
                  
                  
                  
                  167
                  
                  
                  
                  660Conversions:Series
      C Convertible Preferred Stock
                  
                  
                  (255
                  )
                  
                  
                  -
                  
                  
                  
                  (255
                  )Fair
      value adjustments:Compound
      embedded derivatives
                  
                  
                  14,945
                  
                  
                  
                  -
                  
                  
                  
                  14,945Warrant
      derivatives
                  
                  
                  -
                  
                  
                  
                  1,105
                  
                  
                  
                  1,105Ending
      balance, September 30, 2010
                  
                  $
                  23,309
                  
                  
                  $
                  3,904
                  
                  
                  $
                  27,213





Estimating
fair values of derivative financial instruments requires the development of
significant and subjective estimates that may, and are likely to, change over
the duration of the instrument with related changes in internal and external
market factors. In addition, valuation techniques are sensitive to changes in
the trading market price of our common stock, which has a high estimated
historical volatility. Because derivative financial instruments are initially
and subsequently carried at fair values, our income will reflect the volatility
in these estimate and assumption changes.




Note 5 – Stock-Based
Compensation




A total
of 220,000 stock options were issued to employees during the nine months ended
September 30, 2010, exercisable at strike prices ranging from $0.199 to $0.205
per share. A total of 282,860 stock options were issued to employees during the
nine months ended September 30, 2009 exercising at strike prices ranging from
$1.00 to $2.00 per share.


24




The grant
date fair values of the options issued during the nine months ended September
30, 2010 and 2009 were $21,100 and $184,000, respectively, which amount is being
recognized over the vesting period of the options. Total stock-based
compensation expense recorded in the statement of operations was $40,200 and
$103,000, for the three months ended September 30, 2010 and 2009, and $137,700
and $280,000 for the nine months ended September 30, 2010 and 2009,
respectively.





We used
the following assumptions to value the stock options granted during the nine
months ended September 30, 2010 and 2009:





Nine months ended September 30,2010
                      
                      2009Volatility
                      
                      145%
      - 210%
                      
                      138%
      - 282%Expected
      dividends
                      
                      -
                      
                      -Expected
      term (in years)
                      
                      6.5
                      
                      5.6Risk-free
      rate
                      
                      1.85%
      - 2.68%
                      
                      0.50%





A summary
of the transactions during the nine months ended September 30, 2010 with respect
to our stock option plans follows:





Weighted-AverageWeighted-
                          
                          
                          
                          
                          
                          ContractualAverage
                          
                          
                          Aggregate
                          
                          
                          LifeExercise
                          
                          
                          Intrinsic
                          
                          
                          RemainingShares
                          
                          
                          Price
                          
                          
                          Value
                          
                          
                          in Years(in
      thousands)
                          
                          
                          
                          
                          
                          (in
      thousands)Outstanding
      at December 31, 2009
                          
                          
                          946
                          
                          
                          $
                          2.00Granted
                          
                          
                          220
                          
                          
                          $
                          0.20Exercised
                          
                          
                          -
                          
                          
                          $
                          -Forfeited
                          
                          
                          (106
                          )
                          
                          $
                          2.29Outstanding
      at September 30, 2010
                          
                          
                          1,060
                          
                          
                          $
                          1.79
                          
                          
                          $
                          8
                          
                          
                          
                          6.0Exercisable
      at September 30, 2010
                          
                          
                          787
                          
                          
                          $
                          2.25
                          
                          
                          $
                          1
                          
                          
                          
                          7.1





A summary
of the status of our non-vested options as of September 30, 2010 and changes
during the three and nine months ended is presented below:





WeightedAverageGrant
      DateNonvested
      Shares
                    
                    Shares
                    
                    
                    Fair
      Value(in
      thousands)Nonvested
      at December 31, 2009
                    
                    
                    249
                    
                    
                    $
                    1.00Granted
                    
                    
                    220
                    
                    
                    $
                    0.20Vested
                    
                    
                    (154
                    )
                    
                    $
                    1.02Forfeited
                    
                    
                    (42
                    )
                    
                    $
                    0.49Nonvested
      at September 30, 2010
                    
                    
                    273
                    
                    
                    $
                    1.81


25





The
following table summarizes information about our stock options outstanding at
September 30, 2010:





Options Outstanding
                            
                            
                            Options ExercisableExercise Prices
                            
                            Number of
                              Shares
                            
                            
                            Weighted-
                              Average
                              Remaining
                              Life
                            
                            
                            Weighted-
                              Average
                              ExercisePrice
                            
                            
                            Number of
                              Shares
                            
                            
                            Weighted-
                              Average
                              Exercise
                              Price(in
      thousands)
                            
                            
                            (in
      years)
                            
                            
                            
                            
                            
                            (in
      thousands)$0.20
      to $4.70
                            
                            
                            993
                            
                            
                            
                            8.0
                            
                            
                            $
                            1.27
                            
                            
                            
                            720
                            
                            
                            $
                            1.57$5.00
      to $10.00
                            
                            
                            44
                            
                            
                            
                            4.6
                            
                            
                            $
                            7.61
                            
                            
                            
                            44
                            
                            
                            $
                            7.61$12.50
                            
                            
                            20
                            
                            
                            
                            4.8
                            
                            
                            $
                            12.50
                            
                            
                            
                            20
                            
                            
                            $
                            12.50$17.50
                            
                            
                            3
                            
                            
                            
                            5.4
                            
                            
                            $
                            17.50
                            
                            
                            
                            3
                            
                            
                            $
                            17.501,060
                            
                            
                            
                            6.0
                            
                            
                            $
                            1.79
                            
                            
                            
                            787
                            
                            
                            $
                            2.25





There
were no stock options exercised during the nine months ended September 30, 2010.
During the nine months ended September 30, 2009 options to purchase 116,000
shares of our common stock were exercised. The exercise price of these options
was $1.00 per share, providing us with proceeds of $116,000.




Note 6 – Accrued Liabilities




Accrued
liabilities consist of the following as of September 30, 2010 and December 31,
2009:





September
      30,
                    
                    
                    December
      31,2010
                    
                    
                    2009(in
      thousands)Accruals
      for disputed services
                    
                    $
                    2,318
                    
                    
                    $
                    2,318Accrued
      operating expenses
                    
                    
                    1,671
                    
                    
                    
                    1,702Accrued
      payroll related expenses
                    
                    
                    198
                    
                    
                    
                    158Accrued
      interest
                    
                    
                    4,502
                    
                    
                    
                    3,114Total
                    
                    $
                    8,689
                    
                    
                    $
                    7,292




Note 7 –Contingencies




We are
involved in various legal actions arising in the normal course of business, both
as claimant and defendant. Although 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 is unlikely to have a
material adverse effect on our financial position or operating
results.





Ephrian Saguy,
iPoint – media, plc. and iPoint – media, Ltd. – On or around March 5,
2008, we received a summons and notice that the plaintiffs had commenced a third
party action in the Magistrate Court in Tel-Aviv-Jaffa, Israel seeking damages
from us and YA Global for breach of contract and unjust enrichment related to
services provided by iPoint, and investment in us by YA Global. We have entered
into an assignment agreement with YA Global and have retained legal counsel in
Israel to represent us. The Company plans to vigorously defend this
lawsuit.


26





Rothschild Trust
Holdings, LLC– On September 19, 2008, we received a complaint filed in
the Circuit Court of the Eleventh Judicial Circuit, in and for Miami-Dade
County, Florida, by Rothschild Trust Holding, LLC alleging we owed royalty
payments for the use of certain patents. On February 25, 2009, we filed an
answer to the complaint. On July 20, 2009 we entered into non-binding mediation
and an interim agreement which required us to provide documentation for review
by Rothschild Trust Holding, LLC. The non-binding mediation and interim
agreement did not settle the matter. On January 4, 2010, we filed a motion for
summary judgment seeking to terminate the litigation, but this motion was denied
in a hearing held on April 28, 2010. We believe the complaint is without merit
and we intend to vigorously defend against it.





William Klawonn
v. Y.A. Global Investments, L.P. and NeoMedia Technologies, Inc. – On
April 28, 2010, William Klawonn, a shareholder of NeoMedia, filed a derivative
action, in the United States District Court for the District of New Jersey,
against YA Global and us claiming trading activities that violated section 15
U.S.C. § 78p(b).  On July 8, 2010, an order was granted in the case
stipulating that the plaintiff had agreed that we have no liability in the
action.  The order also stipulated that we will be considered a nominal
party to the action, and as such we remain subject to the discovery rights and
obligations of the action.  At this time, we are unable to predict with any
certainty the outcome of this litigation including the merits or value of the
complaint.





The Webb Law
firm– On August
25, 2010, we were notified by The Webb Law Firm that they had filed a request
for ex parte reexamination with the United States Patent and Trademark Office
(USPTO), of our U.S. Patent No. 6,199,048; System and Method for Automatic
Access of a Remote Computer over a Network (“the ‘048 patent”). The
request for reexamination asserted that certain claims in our patent are invalid
over prior art references not previously before the USPTO. Although the 048
patent is an important NeoMedia patent, we have a broad portfolio consisting of
U.S. and foreign patents and pending applications relating to various inventions
surrounding the processing of machine readable codes over wireless networks. At
this time the USPTO has not granted the request for reexamination.




Note 8 – Geographic Reporting





We are
structured and evaluated by our Board of Directors and management as one
business unit.




Consolidated
net revenues and net income (loss) for the three and nine months ended September
30, 2010 and 2009, and the identifiable assets as of September 30, 2010 and
December 31, 2009 by geographic area were as follows:





Three Months Ended September
      30,
                        
                        
                        Nine Months Ended September
    30,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009(in
      thousands)
                        
                        
                        (in
      thousands)Revenue:United
      States
                        
                        $
                        297
                        
                        
                        $
                        73
                        
                        
                        $
                        922
                        
                        
                        $
                        228Germany
                        
                        
                        41
                        
                        
                        
                        116
                        
                        
                        
                        284
                        
                        
                        
                        587Total
                        
                        $
                        338
                        
                        
                        $
                        189
                        
                        
                        $
                        1,206
                        
                        
                        $
                        815Net
      income (loss):United
      States
                        
                        $
                        (25,160
                        )
                        
                        $
                        (13,246
                        )
                        
                        $
                        42,673
                        
                        
                        $
                        (40,998
                        )Germany
                        
                        
                        (471
                        )
                        
                        
                        (320
                        )
                        
                        
                        (1,178
                        )
                        
                        
                        (1,103
                        )Total
                        
                        $
                        (25,631
                        )
                        
                        $
                        (13,566
                        )
                        
                        $
                        41,495
                        
                        
                        $
                        (42,101
                        )September
      30,
                        
                        
                        December
      31,2010
                        
                        
                        2009Identifiable
      assets:United
      States
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        8,574
                        
                        
                        $
                        8,738Germany
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        470
                        
                        
                        
                        686Total
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        9,044
                        
                        
                        $
                        9,424


27




Note
9 – Changes in Management Team and Transactions with Related
Parties





On
October 19, 2010, Ms. Laura A. Marriott was appointed as our acting Chairperson
of the Board of Directors and Acting Chief Executive Officer, both effective on
October 8, 2010. Ms. Marriot was also appointed as a member of the
Compensation Committee and Stock Option Committee of the Board of Directors. Ms.
Marriott previously served as a member of our Board of Directors.





Ms.
Marriott agreed to forego the compensation offered to a non-employee Chairperson
of the Board of Directors and has instead agreed to be compensated in the same
manner as a member of the Board including, without limitation, a retainer amount
equal to $16,000 per annum plus $4,000 per quarterly and annual meeting. For her
services as a member of the Compensation Committee and Stock Option Committee
she is eligible to earn, without limitation, $5,000 per annum. During 2010, Ms.
Marriott has provided marketing and business development consulting services to
us on a per-diem basis. Through September 30, 2010 she has been paid
approximately $75,000 for those services. Ms. Marriott’s fees for her services
as Acting Chief Executive Officer will total approximately $63,000 for the
period from October 8, 2010 through December 31, 2010. If a Chief Executive
Officer has not been hired by January 1, 2011, Ms. Marriott’s consulting fees
will continue at a rate of $24,000 per month.





On
October 19, 2011, we also named a member of the Board of Directors, Mr. George
G. O’Leary, as acting Chief Operating Officer. Mr. O’Leary’s compensation as a
member of the Board was unchanged. In addition to his compensation as a
member of our Board of Directors, we have paid to him $10,300 through September
30, 2010 as compensation in the form of consulting fees for other services.
We anticipate that we will pay additional consulting fees to Mr. O’Leary for his
services as our Chief Operating Officer, approximately $17,000 for the
period from October 19, 2010 through December 31, 2010.


28


ITEM
2.Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





Overview





NeoMedia
Technologies, Inc., a Delaware corporation (“NeoMedia”, and also
referred to herein as “us”, “we” and “our”), is the
innovator and global market leader in 2D mobile barcode technology and
infrastructure solutions that enable the mobile barcode ecosystem
world-wide.  NeoMedia harnesses the power of the mobile phone in a whole
new way with state-of-the art mobile barcode technology. With this technology,
mobile phones with cameras become barcode scanners and this enables a range of
practical applications including consumer oriented advertising, mobile ticketing
and couponing, and business-to-business commercial track and trace solutions. As
the leading technology pioneer in the global mobile barcode industry, our suite
of products, services and IP portfolio makes us the only provider able to offer
a comprehensive end-to-end mobile barcode solution.  We offer barcode
management and infrastructure, reader solutions and IP licensing, as well as
mobile couponing and ticketing products and services.  Our current
customers include handset manufacturers, platform providers, brands and agencies
looking to offer innovative mobile barcode solutions to their customer
base.  NeoMedia offers ‘one stop’ for all of our customers’ mobile barcode
needs.





NeoMedia
provides a full end-to-end solution for global mobile 2D barcode
implementations.  NeoMedia is able to provide comprehensive solutions for
mobile barcode creation, management, resolution, and data reporting as well as
mobile coupon, ticketing and hardware scanning solutions.  This
comprehensive offering is unlike any other provider in the marketplace. NeoMedia
has been a pioneer in the mobile barcode field since the mid-1990s, and during
that time has spearheaded the development of a robust IP portfolio that
encompasses many preferred mobile barcode implementations.  We have an IP
portfolio currently consisting of over sixty (60) issued and pending
patents.  We are willing and able to license our IP and platforms to the
entire ecosystem, including competitors, to facilitate the growth of the mobile
barcode ecosystem world-wide.  We have also worked closely with the
standards bodies to help overcome the hurdles to full market development and
will continue to do so.  Brands are interested in scale and are not
interested in proprietary solutions.  We promote an open and interoperable
approach to the market to empower the mobile ecosystem.





The
market for barcode services is rapidly developing in several regions around the
world.  Brands of all sizes are recognizing the enormous potential for
mobile barcodes and we continue to position ourselves to take part in this
growing marketplace.  We are focusing our efforts primarily in the United
States and Europe and continue to maximize our five key solution
portfolios.  We are expanding our sales and business development activities
both directly to brands and to advertising agencies in these key markets, and we
are working with our customers to help drive consumer awareness and adoption of
mobile barcodes.





Two of
our strategic approaches continue to show success. The first is the maximization
of our patent portfolio through IP licensing, and the second is to partner with
key mobile agency/platform resellers to maximize the reach for our barcode
management, infrastructure solutions and our barcode reader products. 
These strategies continue to be successful. However, we anticipate that by
broadening our outreach and approaching brands directly, we can accelerate our
sales activities beginning in the fourth quarter of 2010. Our NeoMedia Europe
business continues to focus on building the opportunities for mobile couponing,
ticketing and hardware scanning solutions in Europe.  NeoMedia Europe has
had success in markets in Europe and Asia and we will build on these successes,
with heavy emphasis in Europe, which will continue to contribute to our overall
revenue mix.





Since
2009, we have been building strong IP licensing programs around our robust
patent portfolio.  A summary of our key IP licensing agreements is as
follows:





·
            Mobile
      Tag:  On July 28, 2009, we entered into a three year
      non-exclusive patent licensing agreement with Mobile Tag, Inc. (“Mobile
      Tag”). Under the terms of that agreement, we will receive annual minimum
      royalties and then a percentage of revenue generated by Mobile Tag through
      the use of our barcode ecosystem patent portfolio within a defined field
      of use in the United States.


29





·
            Neustar:  On
      October 2, 2009, we entered into a four year agreement with Neustar,
      Inc. (“Neustar”) in which we granted to Neustar a right to
      sub-license our barcode ecosystem patent portfolio to their customers
      primarily for the purpose of establishing and providing registry and
      clearinghouse services within a defined field of use in the territory of
      the United States and Mexico. Neustar’s sub-license rights were originally
      exclusive within their territory. However, this right has recently changed
      to a non-exclusive right. On February 12, 2010 we entered into an
      agreement with Neustar to participate in and to facilitate a leadership
      role in the 2010 Neustar Mobile Codes Pilot
  Program.





·
            Scanbuy:
      On October 16, 2009, we entered into a ten year settlement and license
      agreement with Scanbuy, Inc. (“Scanbuy”), in which we and Scanbuy settled
      all of our pending litigation against each other and we granted
      non-exclusive licenses and a sublicense to each other. Under the terms of
      that agreement, we will receive annual minimum royalties and then a
      percentage of revenue generated by Scanbuy through the use of our barcode
      ecosystem patent portfolio within a defined field of use in the United
      States.





During
2009 and 2010, we have also entered into strategic agreements with mobile
marketing agencies and platform resellers for our services.  These
resellers typically represent brands and mobile technology solutions in Europe
and the United States.  To date, we have signed eight (8) of these
agreements and have begun to conduct trial initiatives in markets in the US and
Europe.  We anticipate that these partnerships will begin to drive revenue
for the company in late 2010 and early 2011.





Given the
need to drive consumer adoption of barcode scanning, it is also a necessity to
have the barcode reader scanning software pre-installed on the mobile phones in
order to make it easy for the consumer to access the barcode reader
application.  Thus far, we have entered a strategic relationship with Sony
Ericsson and Samsung Electronics Italy. Discussions with other leading handset
manufacturers are also underway.  In parallel, we also have our NeoReader
scanning product available for download in the key ‘app stores’ including
Android, Nokia Ovi, Apple and Blackberry.





·
            Sony
      Ericsson: On November 27, 2009, we entered into an agreement with Sony
      Ericsson Mobile Communications, AB, through which they have selected
      NeoMedia as their strategic 2D barcode partner and NeoReader will be
      pre-installed across all Sony Ericsson
  platforms.





·
            Samsung
      Electronics Italy: On September 13, 2010, we entered into an agreement
      with Samsung Electronics Italy, Italian subsidiary of Samsung Electronics,
      to pre-load NeoReader onto Samsung’s Omnia II
  devices.





We will
continue to take this diversified sales approach to ensure that we maximize all
revenue opportunities for our business in this time of tremendous market growth
and opportunity.




Comparison
of the Three and Nine Months Ended September 30, 2010 and 2009





Results
of Operations





Beginning
in 2009 and continuing into 2010, we continued to focus on the development of
our patent licensing and barcode ecosystem technology. During the three months
ended September 2010 and 2009, our operating losses were $1.4 million and $1.8
million, and our net loss was $25.6 million and $13.6, respectively. During the
nine months ended September 2010 and 2009, our operating losses were $4.6
million and $4.9, respectively, and our net income in 2010 was $41.5 million,
compared with a net loss of $42.1 million in 2009. Our operating results include
non-cash gains and losses from the change in fair value of our hybrid financial
instruments, warrants and debentures. We incur these non-cash gains and losses
principally as a result of changes in the market value of our common stock.
During the three months ended September 2010, we reported non-cash losses on our
hybrid financial instruments, warrants and debentures, totaling $23.6 million,
and during the nine months ended September 2010, we reported non-cash gains on
our hybrid financial instruments, warrants and debentures, totaling $53.6
million, respectively.


30





The
following table sets forth certain data derived from our consolidated statements
of operations:





Three months ended September 30,
                
                
                Increase (decrease)2010
                
                
                2009
                
                
                $
                
                
                %(in
      thousands)Revenues:Hardware
                
                $
                13
                
                
                $
                21
                
                
                $
                (8
                )
                
                
                -38
                %Lavasphere
                
                
                22
                
                
                
                93
                
                
                
                (71
                )
                
                
                -76
                %Barcode
      ecosystem
                
                
                5
                
                
                
                1
                
                
                
                4
                
                
                
                400
                %Patent
      licensing
                
                
                277
                
                
                
                6
                
                
                
                271
                
                
                
                4517
                %Legacy
      products
                
                
                -
                
                
                
                67
                
                
                
                (67
                )
                
                
                -100
                %Other
                
                
                21
                
                
                
                1
                
                
                
                20
                
                
                2000
                %Total
      revenues
                
                $
                338
                
                
                $
                189
                
                
                $
                149
                
                
                
                79
                %





Nine months ended September 30,
                
                
                Increase (decrease)2010
                
                
                2009
                
                
                $
                
                
                %(in
      thousands)Revenues:Hardware
                
                $
                175
                
                
                $
                449
                
                
                $
                (274
                )
                
                
                -61
                %Lavasphere
                
                
                89
                
                
                
                123
                
                
                
                (34
                )
                
                
                -28
                %Barcode
      ecosystem
                
                
                16
                
                
                
                6
                
                
                
                10
                
                
                
                167
                %Patent
      licensing
                
                
                899
                
                
                
                16
                
                
                
                883
                
                
                
                5519
                %Legacy
      products
                
                
                2
                
                
                
                212
                
                
                
                (210
                )
                
                
                -99
                %Other
                
                
                25
                
                
                
                9
                
                
                
                16
                
                
                
                173
                %Total
      revenues
                
                $
                1,206
                
                
                $
                815
                
                
                $
                391
                
                
                
                48
                %




Revenues.Revenues for the three months ended September 2010 and 2009,
respectively, were $338,000 and $189,000, an increase of $149,000, or
79%. Revenues for the nine months ended September 2010 and 2009,
respectively, were $1.2 million and $815,000, an increase of $391,000, or 48%.
Our revenues and product mix have changed as a result of changes in our
operations and business strategy. For the three months ended September 2010 and
2009, respectively, our hardware product sales were $13,000 and $21,000, a
decrease of 38%. For the nine months ended September 2010 and 2009,
respectively, our hardware product sales were $175,000 and $449,000, a
decrease of 61%. During 2009, we introduced our newest barcode scanners and
sold most remaining quantities of our older models. Our hardware products tend
to be sold in large transactions and revenues can fluctuate significantly from
period to period. For the three months ended September 2010 and 2009,
respectively, our Lavasphere product sales were $22,000 and $93,000,
a decrease of $71,000, or 76%. For the nine months ended September 2010 and
2009, respectively, our Lavasphere product sales were $89,000 and $123,000,
a decrease of $34,000, or 28%, as a result of slightly slower demand for these
products and services. For the three months ended September 2010 and 2009,
respectively, our Barcode ecosystem revenue was $5,000 and $1,000. For the
nine months ended September 2010 and 2009, respectively, our Barcode ecosystem
revenue was $16,000 and $6,000. We are focusing additional sales resources
in this category in response to important opportunities with agencies and brands
in the U.S. and Europe. Revenues related to patent licensing agreements were
$277,000 and $6,000 during the three months ended September 2010 and 2009,
respectively, and for the nine months ended September 2010 and 2009,
respectively, were $899,000 and $16,000, as a result of licensing agreements we
entered into in late 2009 and 2010 as a result of revenue recognized under our
current licenses. In succeeding quarters, we expect our revenues to continue to
change as we shift the focus of our efforts toward patent licensing, and the
barcode ecosystem. We believe this focus will deliver the most value in the
future.


31




Cost of
Revenues. Cost of revenues was $236,000 for the three months ended
September 2010 compared with $238,000 for the three months ended September 2009,
a decrease of $2,000, or 1%. Cost of revenues was $830,000 for the
nine months ended September 2010 compared with $1.0 million for the nine months
ended September 2009, a decrease of $216,000, or 21%. Cost of revenues for
NeoMedia Europe, related to our hardware products, was $4,700 and $2,300
for the three months ended September 2010 and 2009, respectively, and was
$133,000 and $336,000 for the nine months ended September 2010 and
2009, respectively. Amortization costs related to our patents, and the
proprietary software of NeoMedia Europe was $231,000 and $236,000 for the
three months ended September 2010 and 2009, respectively, and was
$697,000 and $710,000 for the nine months ended September 2010 and
2009, respectively.




Sales and
Marketing.Sales and marketing expenses were $231,000 and $149,000 for
the three months ended September 2010 and 2009, respectively, an
increase of $82,000 or 55%, and $812,000 and $613,000 for the nine months
ended September 2010 and 2009, respectively, an increase of $199,000 or 32%. The
increase in sales and marketing expense resulted from additional efforts in late
2009 and 2010 to promote our business strategy and core technology.




General and
Administrative. General and administrative expenses were $835,000 and
$984,000 for the three months ended September 2010 and 2009, respectively, a
decrease of $149,000, or 15%, and $3.0 million and $2.8 million for the nine
months ended September 2010 and 2009, respectively, an increase of $201,000, or
7%. Expenses increased as a result of increased professional services fees
related to legal and accounting, as well as business travel related to increased
business development.




Research and
Development.Research and development expenses were $465,000 and
$330,000 for the three months ended September 2010 and 2009, respectively, an
increase of $135,000, or 41%, and $1.2 million and $1.0 million for the nine
months ended September 2010 and 2009, respectively, an increase of $162,000, or
16%. Research and development increased as we continued the development of our
barcode ecosystem products.




Loss from
Operations.For the three months ended September 2010 and 2009, respectively, our
loss from operations decreased to $1.4 million, from $1.8 million. This
improvement was primarily the result of increases in our sales and decreased
general and administrative expenses partially offset by increases in selling and
research and development cost and decreased impairment of investment expense.
For the nine months ended September 2010, our loss from operations was $4.6
million, compared with $4.9 million for 2009, a decrease of $306,000, or 6.3%.
This improvement was primarily the result of increased sales and decreased cost
of operations.





Gain (Loss) from
Change in Fair Value of Hybrid Financial Instruments. We carry
certain of our convertible debentures at fair value, in accordance with FASB ASC
815-15-25, and do not separately account for the embedded conversion
feature.  The change in the fair value of these liabilities includes
changes in the value of the accrued interest due under these instruments, as
well as changes in the fair value of the common stock underlying the
instruments. For the three months ended September 2010, liability related
to these hybrid instruments increased resulting in a loss of $6.9 million,
a decrease from the $7.8 million loss in 2009. For the nine months ended
September 2010, liability related to these hybrid instruments decreased,
resulting in a gain of $12.6 million compared with a loss of $7.5 million in
2009. These fair value changes were primarily the result of fluctuations in the
value of our common stock during the periods. Because our stock price has been
volatile and because many of our hybrid financial instruments include relatively
low fixed conversion prices, it is possible that further fluctuations in the
market price of our stock could cause the fair value of our hybrid financial
instruments to change significantly in future periods.





Gain (Loss) from
Change in Fair Value of Derivative Liabilities - Warrants. We account for our
outstanding common stock warrants that were issued in connection with the
preferred stock and our debentures, at fair value. For the three months ended
September 2010 and 2009, respectively, the liability related to warrants
fluctuated resulting in a loss of $1.1 million in 2010 and a gain of $5.8
million in 2009. For the nine months ended September 2010, the change in the
liability related to warrants resulted in a gain of $9.8 million, compared with
a loss of $6.6 million in 2009. These fair value changes were primarily the
result of fluctuations in the value of our common stock during the period.
Because our stock price has been volatile and because many of our warrants
include relatively low fixed exercise prices it is possible that further
fluctuations in the market price of our common stock could cause the fair value
of our warrants to change significantly in future periods.


32





Gain (Loss) from
Change in Fair Value of Derivative Liabilities - Series C and D Preferred Stock
and Debentures.For our Series C and D convertible preferred stocks, and
certain of our convertible debentures, we account for the embedded conversion
feature separately as a derivative financial instrument.  We carry these
derivative financial instruments at fair value. For the three months ended
September 2010 and 2009, respectively, the liability related to the derivative
instruments embedded in the Series C and D preferred stocks and these debentures
increased, resulting in a loss of $15.6 million and a loss of $8.7 million,
respectively. For the nine months ended September 2010, the liability related to
the derivative instruments embedded in the Series C and D preferred stocks and
these debentures decreased, resulting in a gain of $31.3 million compared with a
loss of $18.3 million in 2009. These fair value changes were primarily the
result fluctuations in the value of our common stock during the period. Because
our stock price has been volatile and because many of our derivative financial
instruments include relatively low fixed conversion prices, it is possible that
further fluctuations in the market price of our common stock could cause the
fair value of our derivative financial instruments to change significantly in
future periods.





Interest Expense
Related to Convertible Debt.Interest expense related to convertible
debentures that are carried at amortized cost and which are not carried as
hybrid financial instruments at fair value was $595,000 and $1.1 million for the
three months ended September 2010 and 2009, respectively, and $1.6 million and
$4.8 million for the nine months ended September 2010 and 2009, respectively.
These fluctuations in interest expense in 2010 were primarily the result of
reductions in amortization of deferred financing cost and debt discounts not
applicable during 2009, and other interest adjustments accounted for under ASC
815-15-25.




Net Income
(Loss).As
a result of the above, during the three months ended September 2010 and 2009,
respectively, we experienced net losses of $25.6 million and $13.6
million. During the nine months ended September 2010 and 2009,
respectively, we experienced net income of $41.5 million, and a net loss of
$42.1 million, resulting in an overall increase of $83.6 million. This positive
change primarily resulted from gains associated with our derivative instruments
of $86.0 million and a decrease in interest expense related to convertible debt
of $3.3 million, and offset by a loss on extinguishment of debt of $6.0 million,
and a decrease in our loss from operations of $306,000.




Liquidity
and Capital Resources




As of
September 30, 2010, we had $290,000 in cash and cash equivalents, an increase of
$92,000, or 46%, compared with a total of $198,000 on December 31,
2009.




Cash used
in operating activities increased to $4.7 million for the nine months ended
September 2010 compared with $3.8 million for the period ended September
2009, representing increased operational expenses in connection with furthering
our sales and business development, and the continued development of our barcode
ecosystem.




Cash used
in investing activities was $13,000 and $65,000 for the nine months ended
September 2010 and 2009, respectively, representing the purchase of
equipment.




Cash
provided by financing activities during the nine months ended September 2010 was
$4.8 million, which included the following:




·
            Gross
      proceeds of $2,500,000 of our Series D Preferred Stock, offset by fees
      paid of $100,000 and the repayment of a $500,000 promissory note issued
      December 23, 2009 and due to YA Global, resulting in net proceeds of
      $1,900,000; and




·
            Gross
      proceeds of $500,000 in connection with a promissory note issued to YA
      Global on April 1, 2010, accruing interest at 8% per annum, less
      structuring fees of $10,000 and monitoring fees of $15,000, resulting in
      net proceeds of $475,000; and




·
            Gross
      proceeds of $2,006,137 in connection with a Secured Convertible Debenture
      entered into with YA Global on May 27, 2010, accruing interest at 14% per
      annum and payable on the maturity date of July 29, 2012, less repayment of
      the April 1, 2010 promissory note of $500,000, less accrued interest on
      the promissory note of $6,137, less structuring and due diligence fees of
      $90,000, resulting in net proceeds of $1,410,000;
  and




·
            Gross
      proceeds of $550,000 in connection with a Secured Convertible Debenture
      entered into with YA Global on August 13, 2010, accruing interest at 14%
      per annum and payable on the maturity date of July 29, 2012, less
      structuring and due diligence fee of $20,000, resulting in net proceeds of
      $530,000; and


33




·
            Gross
      proceeds of $475,000 in connection with a Secured Convertible Debenture
      entered into with YA Global on September 28, 2010, accruing interest at
      14% per annum and payable on the maturity date of July 29, 2012, less
      structuring and due diligence fee of $25,000, resulting in net proceeds of
      $450,000.




Cash
provided by financing activities during the nine months ended September 2009 was
$2.7 million, which resulted from $2.6 million in convertible debt instruments,
net of fees, from Y.A. Global, and proceeds received upon exercise of stock
options by two former employees totaling $116,000.





Subsequent Event -Subsequent
to September 30, 2010, we entered into a Securities Purchase Agreement to issue
and sell secured convertible debentures to YA Global in the principal amount of
$400,000.  The debenture, dated October 28, 2010, is convertible, at the
option of the holder, at a conversion price equal to the lesser of (i) $0.20 or
(ii) 95% of the lowest closing bid price of our common stock for the 60 trading
days preceding the date of conversion. The stated maturity date of the debenture
is July 29, 2012. In conjunction with the convertible debenture, we also issued
warrants to YA Global to purchase 600,000 shares of common stock for an exercise
price of $0.20 per share for a period of five years.





Going
Concern – We have historically incurred net losses from operations and we
expect that we will continue to have negative cash flows as we implement our
business plan.  There can be no assurance that our continuing efforts to
execute our business plan will be successful and that we will be able to
continue as a going concern. The accompanying consolidated financial statements
have been prepared in conformity with United States Generally Accepted
Accounting Principles (“US GAAP”), which contemplate our continuation as a going
concern.  Net income (loss) for the nine months ended September 30, 2010
and 2009 was $41.5 million and ($42.1) million, respectively and net
cash used by operations during the same periods was $4.7
million and $3.8 million, respectively.  During 2010 and 2009,
$53.6 million of net income and $32.4 million of net loss was attributed to the
change in fair values of hybrid financial instruments and derivative
liabilities. At September 30, 2010, we have an accumulated deficit of $238.0
million. We also have a working capital deficit of $82.0 million, of which
$68.5 million is related to our financing instruments, including $30.7 million
related to the fair value of warrants and those debentures that are recorded as
hybrid financial instruments, and $37.8 million related to the amortized cost
carrying value of certain of our debentures and the fair value of the associated
derivative liabilities.





The items
discussed above raise substantial doubts about our ability to continue as a
going concern.




We
currently do not have sufficient cash to sustain us for the next twelve months.
We will require additional financing in order to execute our operating plan and
continue as a going concern.  Our management’s plan is to attempt to secure
adequate funding to bridge the commercialization of our barcode ecosystem
business. We cannot predict whether this additional financing will be in the
form of equity, debt, or another form and we may not be able to obtain the
necessary additional capital on a timely basis, on acceptable terms, or at
all.  In the event that these financing sources do not materialize, or that
we are unsuccessful in increasing our revenues and profits, we may be unable to
implement our current plans for expansion, repay our debt obligations as they
become due or continue as a going concern, any of which circumstances would have
a material adverse effect on our business, prospects, financial condition and
results of operations. Should our lender YA Global Investments, L.P. (“YA
Global”) choose not to provide us with capital financing, or if we do not find
alternative sources of financing to fund our operations, or if we are unable to
generate significant product revenues, we only have sufficient funds to sustain
our current operations through approximately November 30, 2010. We do not have a
commitment for any additional financing.




The
financial statements do not include any adjustments relating to the
recoverability and reclassification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary, should we be unable to
continue as a going concern.





Sources of Cash
and Projected Cash Requirements-As of
September 30, 2010, our cash balance was $290,000. NeoMedia’s reliance on YA
Global as our 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 us and YA Global,
without YA Global’s consent we cannot (i) issue or sell any shares of our
common stock or our 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 our 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 our assets or (iv)
file any registration statements on Form S-8.  In addition, pursuant to
security agreements between us and YA Global, YA Global has a security interest
in all of our assets.  Such covenants could severely harm our ability to
raise additional funds from sources other than YA Global, and would likely
result in a higher cost of capital in the event we secured
funding.


34




Additionally,
pursuant to the terms of the Investment Agreement between us and YA Global in
connection with our Series C convertible preferred stock, we cannot (i) enter
into any debt arrangements in which we are the borrower, (ii) grant any security
interest in any of our assets or (iii) grant any security below market
price.




Critical
Accounting Policies and Estimates




There
have been no material changes to our critical accounting policies and estimates
from the information provided in Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” included in our
Annual Report on Form 10-K for the fiscal year ended December 31,
2009.




ITEM 3. Quantitative and Qualitative
Disclosures About Market Risk




We are a
“smaller reporting company” as defined by Rule 12b-2 of the Exchange Act and are
not required to provide information under this item.




ITEM 4. Controls and
Procedures




Disclosure
Controls and Procedures-Our management, with the participation of our CEO and our CFO, have
evaluated the effectiveness of our disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
the end of the period covered by this report.




These
controls are designed to ensure that information required to be disclosed in the
reports we file or submit pursuant to the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the SEC, and that such information is accumulated and communicated to our
management, including our CEO and CFO, as appropriate, to allow timely decisions
regarding required disclosure.




Based on
this evaluation, our CEO and CFO concluded that our disclosure controls and
procedures were not effective as of September 30, 2010 at a reasonable assurance
level, because of material weaknesses with respect to entity level controls over
financial reporting, identified as of December 31, 2009, which we are in the
process of remediating.  Such weaknesses were:





·
            Our
      senior management did not establish and maintain a proper tone as to
      internal control over financial reporting as of December 31, 2009. 
      Specifically, our senior management was unable, due to time constraints,
      to promptly address the control weaknesses brought to their attention
      throughout the 2009 and 2008 audits;
and




·
            We,
      through our senior management, failed to maintain formalized accounting
      policies and procedures as of December 31, 2009. Once implemented, the
      polices and procedures should provide guidance to accounting personnel in
      the proper treatment and recording of financial transactions, as well as
      proper internal controls over financial
  reporting.




As noted,
we have commenced efforts to address the material weaknesses in our internal
control over financial reporting and the ineffectiveness of our disclosure
controls and procedures and, although remediation efforts are underway, the
above material weaknesses will not be considered remediated until new controls
over financial reporting are fully designed and operating effectively for an
adequate period of time.




Notwithstanding
the material weaknesses described above, we believe that our consolidated
financial statements presented in this Quarterly Report on Form 10−Q fairly
present, in all material respects, our financial position, results of
operations, and cash flows as of the end of the period covered
herein.


35





Inherent
Limitations-Our
management, including our CEO and CFO, do not expect that our disclosure
controls and procedures will prevent all error and all fraud. A control system,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. The
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within our company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdown can occur because of simple
error or mistake. In particular, many of our current processes rely upon manual
reviews and processes to ensure that neither human error nor system weakness has
resulted in erroneous reporting of financial data.





Changes in
Internal Control over Financial Reporting-There were no changes in
the Company’s internal control over financial reporting during the period ended
September 30, 2010, which were identified in conjunction with management’s
evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the
Exchange Act, that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting.


36





PART II - OTHER INFORMATION




ITEM
1.  Legal Proceedings




There
have been no material developments relating to certain pending legal
proceedings.  For a description of certain non-material pending legal
proceedings, see Note 7 – Contingencies, to the Consolidated Financial
Statements set forth in this Form 10-Q.





ITEM 1A.  Risk Factors





We are a
smaller reporting company as defined by Rule 12b-2 of the Securities Exchange
Act of 1934 and are not required to provide information under this
item.





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





None





ITEM
3.  Defaults Upon Senior Securities





None





ITEM
4.  (Removed and Reserved)





Not
Applicable





ITEM
5.  Other Information





None


37




ITEM 6.  Exhibits





(a)
Exhibits:




Exhibit
                          Number
                        
                        Description
                        
                        Filed
                          Herewith
                        
                        Form
                        
                        Exhibit
                        
                        Filing Date3.1
                        
                        Articles
      of Incorporation of Dev-Tech Associates, Inc. and amendment
      thereto
                        
                        
                        
                        SB-2
                        
                        3.1
                        
                        11/25/19963.2
                        
                        Bylaws
      of DevSys, Inc.
                        
                        
                        
                        SB-2
                        
                        3.2
                        
                        11/25/19963.3
                        
                        Restated
      Certificate of Incorporation of DevSys, Inc.
                        
                        
                        
                        SB-2
                        
                        3.3
                        
                        11/25/19963.4
                        
                        By-laws
      of DevSys, Inc.
                        
                        
                        
                        SB-2
                        
                        3.4
                        
                        11/25/19963.5
                        
                        Articles
      of Merger and Agreement and Plan of Merger of DevSys, Inc and Dev-Tech
      Associates, Inc.
                        
                        
                        
                        SB-2
                        
                        3.5
                        
                        11/25/19963.6
                        
                        Certificate
      of Merger of Dev-Tech Associates, Inc. into DevSys, Inc.
                        
                        
                        
                        SB-2
                        
                        3.6
                        
                        11/25/19963.7
                        
                        Articles
      of Incorporation of Dev-Tech Migration, Inc. and amendment
      thereto
                        
                        
                        
                        SB-2
                        
                        3.7
                        
                        11/25/19963.8
                        
                        By-laws
      of Dev-Tech Migration, Inc.
                        
                        
                        
                        SB-2
                        
                        3.8
                        
                        11/25/19963.9
                        
                        Restated
      Certificate of Incorporation of DevSys Migration, Inc.
                        
                        
                        
                        SB-2
                        
                        3.9
                        
                        11/25/19963.10
                        
                        Form
      of By-laws of DevSys Migration, Inc.
                        
                        
                        
                        SB-2
                        
                        3.1
                        
                        11/25/19963.11
                        
                        Form
      of Agreement and Plan of Merger of Dev-Tech Migration, Inc. into DevSys
      Migration, Inc.
                        
                        
                        
                        SB-2
                        
                        3.11
                        
                        11/25/19963.12
                        
                        Form
      of Certificate of Merger of Dev-Tech Migration, Inc. into DevSys
      Migration, Inc.
                        
                        
                        
                        SB-2
                        
                        3.12
                        
                        11/25/19963.13
                        
                        Certificate
      of Amendment to Certificate of Incorporation of DevSys, Inc. changing our
      name to NeoMedia Technologies, Inc.
                        
                        
                        
                        SB-2
                        
                        3.13
                        
                        11/25/19963.14
                        
                        Form
      of Certificate of Amendment to Certificate of Incorporation of NeoMedia
      Technologies, Inc. authorizing a reverse stock split
                        
                        
                        
                        SB-2
                        
                        3.14
                        
                        11/25/19963.15
                        
                        Form
      of Certificate of Amendment to Restated Certificate of Incorporation of
      NeoMedia Technologies, Inc. increasing authorized capital and creating
      preferred stock
                        
                        
                        
                        SB-2
                        
                        3.15
                        
                        11/25/19963.16
                        
                        Certificate
      of Amendment to the Certificate of Designation of the Series "C"
      Convertible Preferred Stock date January 5, 2010.
                        
                        
                        
                        8-K
                        
                        3.1
                        
                        1/11/20103.17
                        
                        Certificate
      of Designation of the Series "D" Convertible Preferred Stock date January
      5, 2010.
                        
                        
                        
                        8-K
                        
                        3.2
                        
                        1/11/20103.18
                        
                        Certificate
      of Amendment to the Certificate of Designation of the Series "D"
      Convertible Preferred Stock dated January 7, 2010
                        
                        
                        
                        8-K
                        
                        3.3
                        
                        1/11/20103.19
                        
                        Certificate
      of amendment to the certificate of designation of the series D convertible
      preferred stock issued by the Company to YA Global dated January 5,
      2010.
                        
                        
                        
                        8-K
                        
                        3.1
                        
                        3/11/201010.1
                        
                        Warrant
      dated March 30, 2005, granted by NeoMedia to Thornhill Capital
      LLC
                        
                        
                        
                        S-3/A
                        
                        10.12
                        
                        7/18/200510.2
                        
                        Warrant
      dated March 30, 2005, granted by NeoMedia to Cornell Capital Partners
      LP
                        
                        
                        
                        S-3/A
                        
                        10.13
                        
                        7/18/2005


38




Exhibit
                          Number
                        
                        Description
                        
                        Filed
                          Herewith
                        
                        Form
                        
                        Exhibit
                        
                        Filing Date10.3
                        
                        Definitive
      Sale and Purchase Agreement between NeoMedia and Gavitec
                        
                        
                        
                        8-K
                        
                        16.1
                        
                        2/21/200610.4
                        
                        Definitive
      Sale and Purchase Agreement between NeoMedia and Sponge
                        
                        
                        
                        8-K
                        
                        16.1
                        
                        2/22/200610.5
                        
                        Investment
      Agreement, dated February 17, 2006 between NeoMedia and Cornell Capital
      Partners
                        
                        
                        
                        8-K
                        
                        10.1
                        
                        2/21/200610.6
                        
                        Investor
      Registration Rights Agreement, dated February 17, 2006 between NeoMedia
      and Cornell Capital Partners
                        
                        
                        
                        8-K
                        
                        10.2
                        
                        2/21/200610.7
                        
                        Irrevocable
      Transfer Agent Instruction, dated February 17, 2006, by and among
      NeoMedia, Cornell Capital Partners and American Stock Transfer & Trust
      Co.
                        
                        
                        
                        8-K
                        
                        10.3
                        
                        2/21/200610.8
                        
                        Warrant,
      dated February 17, 2006
                        
                        
                        
                        8-K
                        
                        10.4
                        
                        2/21/200610.9
                        
                        Warrant,
      dated February 17, 2006
                        
                        
                        
                        8-K
                        
                        10.5
                        
                        2/21/200610.10
                        
                        Warrant,
      dated February 17, 2006
                        
                        
                        
                        8-K
                        
                        10.6
                        
                        2/21/200610.11
                        
                        Assignment
      Agreement, dated February 17, 2006 by NeoMedia and Cornell Capital
      Partners
                        
                        
                        
                        8-K
                        
                        10.7
                        
                        2/21/200610.12
                        
                        Assignment
      of Common Stock, dated February 17, 2006 between NeoMedia and Cornell
      Capital Partners
                        
                        
                        
                        8-K
                        
                        10.8
                        
                        2/21/200610.13
                        
                        Securities
      Purchase Agreement, dated August 24, 2006, between the Company and Cornell
      Capital Partners, LP
                        
                        
                        
                        8-K
                        
                        10.1
                        
                        8/30/200610.14
                        
                        Investor
      Registration Rights Agreement, dated August 24, 2006, between the Company
      and Cornell Capital Partners, LP
                        
                        
                        
                        8-K
                        
                        10.2
                        
                        8/30/200610.15
                        
                        Pledge
      and Security Agreement, dated August 24, 2006, between the Company and
      Cornell Capital Partners, LP
                        
                        
                        
                        8-K
                        
                        10.3
                        
                        8/30/200610.16
                        
                        Secured
      Convertible Debenture, dated August 24, 2006, issued by the Company to
      Cornell Capital Partners, LP
                        
                        
                        
                        8-K
                        
                        10.4
                        
                        8/30/200610.17
                        
                        Irrevocable
      Transfer Agent Instructions, dated August 24, 2006, by and among the
      Company, Cornell Capital Partners, LP and American Stock Transfer &
      Trust Co.
                        
                        
                        
                        8-K
                        
                        10.5
                        
                        8/30/200610.18
                        
                        A
      Warrant, dated August 24, 2006
                        
                        
                        
                        8-K
                        
                        10.6
                        
                        8/30/200610.19
                        
                        B
      Warrant, dated August 24, 2006
                        
                        
                        
                        8-K
                        
                        10.7
                        
                        8/30/200610.20
                        
                        C
      Warrant, dated August 24, 2006
                        
                        
                        
                        8-K
                        
                        10.8
                        
                        8/30/200610.21
                        
                        D
      Warrant, dated August 24, 2006
                        
                        
                        
                        8-K
                        
                        10.9
                        
                        8/30/200610.22
                        
                        Amendment
      to Warrant No. CCP-002, dated August 24, 2006,  between the
      Company and Cornell Capital Partners, LP
                        
                        
                        
                        8-K
                        
                        10.1
                        
                        8/30/200610.23
                        
                        Amendment
      to “A” Warrant No. CCP-001,  dated August 24, 2006, between the
      Company and Cornell Capital Partners, LP
                        
                        
                        
                        8-K
                        
                        10.11
                        
                        8/30/200610.24
                        
                        Amendment
      to “B” Warrant No. CCP-002, dated August 24, 2006, between the Company and
      Cornell Capital Partners, LP
                        
                        
                        
                        8-K
                        
                        10.12
                        
                        8/30/200610.25
                        
                        Amendment
      to “C” Warrant No. CCP-003,  dated August 24, 2006, between the
      Company and Cornell Capital Partners, LP
                        
                        
                        
                        8-K
                        
                        10.13
                        
                        8/30/200610.26
                        
                        Definitive
      share purchase and settlement agreement between NeoMedia and Sponge, dated
      November 14, 2006
                        
                        
                        
                        8-K
                        
                        16.1
                        
                        11/20/200610.27
                        
                        Securities
      Purchase Agreement, dated December 29, 2006, between the Company and
      Cornell Capital Partners, LP
                        
                        
                        
                        8-K
                        
                        10.1
                        
                        1/8/200710.28
                        
                        Investor
      Registration Rights Agreement, dated December 29, 2006, between the
      Company and Cornell Capital Partners, LP
                        
                        
                        
                        8-K
                        
                        10.2
                        
                        1/8/200710.29
                        
                        Secured
      Convertible Debenture, dated December 29, 2006, issued by the Company to
      Cornell Capital Partners, LP
                        
                        
                        
                        8-K
                        
                        10.3
                        
                        1/8/200710.30
                        
                        Irrevocable
      Transfer Agent Instructions, dated December 29, 2006, by and among the
      Company, Cornell Capital Partners, LP and American Stock Transfer &
      Trust Co.
                        
                        
                        
                        8-K
                        
                        10.4
                        
                        1/8/2007


39




Exhibit
                          Number
                        
                        Description
                        
                        Filed
                          Herewith
                        
                        Form
                        
                        Exhibit
                        
                        Filing Date10.31
                        
                        A
      Warrant, dated December 29, 2006
                        
                        
                        
                        8-K
                        
                        10.5
                        
                        1/8/200710.32
                        
                        Amendment
      to Warrant No. CCP-002, dated December 29, 2006,  between the
      Company and Cornell Capital Partners, LP
                        
                        
                        
                        8-K
                        
                        10.6
                        
                        1/8/200710.33
                        
                        Amendment
      to “A” Warrant No. CCP-001,  dated December 29, 2006, between
      the Company and Cornell Capital Partners, LP
                        
                        
                        
                        8-K
                        
                        10.7
                        
                        1/8/200710.34
                        
                        Amendment
      to “B” Warrant No. CCP-002, dated December 29, 2006, between the Company
      and Cornell Capital Partners, LP
                        
                        
                        
                        8-K
                        
                        10.8
                        
                        1/8/200710.35
                        
                        Amendment
      to “C” Warrant No. CCP-003,  dated December 29, 2006, between
      the Company and Cornell Capital Partners, LP
                        
                        
                        
                        8-K
                        
                        10.9
                        
                        1/8/200710.36
                        
                        Amendment
      to “A” Warrant No. CCP-001,  dated December 29, 2006, between
      the Company and Cornell Capital Partners, LP
                        
                        
                        
                        8-K
                        
                        10.1
                        
                        1/8/200710.37
                        
                        Amendment
      to “B” Warrant No. CCP-001,  dated December 29, 2006, between
      the Company and Cornell Capital Partners, LP
                        
                        
                        
                        8-K
                        
                        10.11
                        
                        1/8/200710.38
                        
                        Amendment
      to “C” Warrant No. CCP-001,  dated December 29, 2006, between
      the Company and Cornell Capital Partners, LP
                        
                        
                        
                        8-K
                        
                        10.12
                        
                        1/8/200710.39
                        
                        Securities
      Purchase Agreement, dated December 29, 2006, between the Company and
      Cornell Capital Partners, LP
                        
                        
                        
                        8-K
                        
                        10.13
                        
                        1/8/200710.40
                        
                        Amendment
      Agreement I to the Sale and Purchase Agreement between NeoMedia and
      certain former shareholders of Gavitec AG, dated January 23,
      2007
                        
                        
                        
                        8-K
                        
                        10.1
                        
                        1/29/200710.41
                        
                        Consulting
      Agreement between the Company and SKS Consulting of South Florida
      Corp.
                        
                        
                        
                        8-K
                        
                        10.1
                        
                        2/6/200710.42
                        
                        Securities
      Purchase Agreement between NeoMedia and Cornell Capital Partners LP, dated
      March 27, 2007
                        
                        
                        
                        8-K
                        
                        10.1
                        
                        3/27/200710.43
                        
                        Investor
      Registration Rights Agreement between NeoMedia and Cornell Capital
      Partners LP, dated March 27, 2007
                        
                        
                        
                        8-K
                        
                        10.2
                        
                        3/27/200710.44
                        
                        Secured
      Convertible Debenture, issued by NeoMedia to Cornell Capital Partners, LP,
      dated March 27, 2007
                        
                        
                        
                        8-K
                        
                        10.3
                        
                        3/27/200710.45
                        
                        Irrevocable
      Transfer Agent Instructions, by and among NeoMedia, Cornell Capital
      Partners, LP and Worldwide Stock Transfer, dated March 27,
      2007
                        
                        
                        
                        8-K
                        
                        10.4
                        
                        3/27/200710.46
                        
                        Warrant,
      issued by NeoMedia to Cornell Capital Partners, LP, dated March 27,
      2007
                        
                        
                        
                        8-K
                        
                        10.5
                        
                        3/27/200710.47
                        
                        Master
      Amendment Agreement, by and between NeoMedia and Cornell Capital Partners,
      LP, dated March 27, 2007
                        
                        
                        
                        8-K
                        
                        10.6
                        
                        3/27/200710.48
                        
                        Security
      Agreement, by and between NeoMedia and Cornell Capital Partners, LP, dated
      on or about August 24, 2006
                        
                        
                        
                        8-K
                        
                        10.7
                        
                        3/27/200710.49
                        
                        Security
      Agreement, by and between NeoMedia and Cornell Capital Partners, LP, dated
      March 27,2007
                        
                        
                        
                        8-K
                        
                        10.8
                        
                        3/27/200710.50
                        
                        Security
      Agreement (Patent), by and between NeoMedia and Cornell Capital Partners,
      LP, dated March 27, 2007
                        
                        
                        
                        8-K
                        
                        10.9
                        
                        3/27/200710.51
                        
                        Pledge
      Shares Escrow Agreement, by and between NeoMedia and Cornell Capital
      Partners, dated March 27, 2007
                        
                        
                        
                        8-K
                        
                        10.1
                        
                        3/27/200710.52
                        
                        Completion
      of Acquisition of Disposition of Assets of BSD Software
    Inc.
                        
                        
                        
                        8-K/A
                        
                        10.1
                        
                        6/8/200710.53
                        
                        Registration
      Rights Agreement, by and between NeoMedia and YA Global Investments, L.P.,
      dated August 24, 2007
                        
                        
                        
                        8-K
                        
                        10.1
                        
                        8/30/200710.54
                        
                        Secured
      Convertible Debenture, issued by NeoMedia to YA Global Investments, dated
      August 24, 2007
                        
                        
                        
                        8-K
                        
                        10.2
                        
                        8/30/2007


40




Exhibit
                          Number
                        
                        Description
                        
                        Filed
                          Herewith
                        
                        Form
                        
                        Exhibit
                        
                        Filing Date10.55
                        
                        Irrevocable
      Transfer Agent Instructions, by and among NeoMedia, YA Global Investments,
      L.P. and Worldwide Stock Transfer, LLC, dated August 24,
    2007
                        
                        
                        
                        8-K
                        
                        10.3
                        
                        8/30/200710.56
                        
                        Warrant
      issued by NeoMedia to YA Global Investments, L.P., dated August 24,
      2007
                        
                        
                        
                        8-K
                        
                        10.4
                        
                        8/30/200710.57
                        
                        Repricing
      Agreement, by and between NeoMedia and YA Global Investments, L.P., dated
      August 24, 2007
                        
                        
                        
                        8-K
                        
                        10.5
                        
                        8/30/200710.58
                        
                        Security
      Agreement, by and between NeoMedia and YA Global Investments, L.P., dated
      August 24, 2007
                        
                        
                        
                        8-K
                        
                        10.6
                        
                        8/30/200710.59
                        
                        Security Agreement (Patent),
      by and between NeoMedia and YA Global Investments, L.P., dated August 24,
      2007
                        
                        
                        
                        8-K
                        
                        10.7
                        
                        8/30/200710.60
                        
                        Secured
      Convertible Debenture, dated April 11, 2008, issued by the Company to YA
      Global Investments, L.P.
                        
                        
                        
                        8-K
                        
                        10.1
                        
                        4/17/200810.61
                        
                        Secured
      Convertible Debenture, dated May 16, 2008, issued by the Company to YA
      Global Investments, L.P.
                        
                        
                        
                        8-K
                        
                        10.1
                        
                        5/22/200810.62
                        
                        Warrant,
      dated May 16, 2008, issued by the Company to YA Global Investments,
      L.P.
                        
                        
                        
                        8-K
                        
                        10.2
                        
                        5/22/200810.63
                        
                        Secured
      Convertible Debenture, dated May 30, 2008, issued by the Company to YA
      Global Investments, L.P.
                        
                        
                        
                        8-K
                        
                        10.1
                        
                        6/5/200810.64
                        
                        Warrant,
      dated May 30, 2008, issued by the Company to YA Global Investments,
      L.P.
                        
                        
                        
                        8-K
                        
                        10.2
                        
                        6/5/200810.65
                        
                        Settlement
      Agreement and Release, dated June 3, 2008, by and between the Company and
      William Hoffman
                        
                        
                        
                        8-K
                        
                        10.5
                        
                        6/5/200810.66
                        
                        Employment
      Agreement, dated June 10, 2008, by and between NeoMedia Technologies, Inc.
      and Iain McCready
                        
                        
                        
                        8-K
                        
                        10.1
                        
                        6/16/200810.67
                        
                        Secured
      Convertible Debenture, dated July 10, 2008, issued by the Company to YA
      Global Investments, L.P.
                        
                        
                        
                        8-K
                        
                        10.1
                        
                        7/16/200810.68
                        
                        Securities
      Purchase Agreement, dated July 29, 2008, by and between the Company and YA
      Global Investments, L.P.
                        
                        
                        
                        8-K
                        
                        10.1
                        
                        8/4/200810.69
                        
                        Secured
      Convertible Debenture, dated July 29, 2008, issued by the Company to YA
      Global Investments, L.P.
                        
                        
                        
                        8-K
                        
                        10.2
                        
                        8/4/200810.70
                        
                        Security
      Agreement, dated July 29, 2008, by and among the Company, each of the
      Company’s subsidiaries made a party thereto and YA Global Investments,
      L.P.
                        
                        
                        
                        8-K
                        
                        10.3
                        
                        8/4/200810.71
                        
                        Patent
      Security Agreement, dated July 29, 2008, by and among the Company, each of
      the Company’s subsidiaries made a party thereto and YA Global Investments,
      L.P.
                        
                        
                        
                        8-K
                        
                        10.4
                        
                        8/4/200810.72
                        
                        Warrant
      9-1A, dated July 29, 2008, issued by the Company to YA Global Investments,
      L.P.
                        
                        
                        
                        8-K
                        
                        10.5
                        
                        8/4/200810.73
                        
                        Warrant
      9-1B, dated July 29, 2008, issued by the Company to YA Global Investments,
      L.P.
                        
                        
                        
                        8-K
                        
                        10.6
                        
                        8/4/200810.74
                        
                        Warrant
      9-1C, dated July 29, 2008, issued by the Company to YA Global Investments,
      L.P.
                        
                        
                        
                        8-K
                        
                        10.7
                        
                        8/4/200810.75
                        
                        Warrant
      9-1D, dated July 29, 2008, issued by the Company to YA Global Investments,
      L.P.
                        
                        
                        
                        8-K
                        
                        10.8
                        
                        8/4/200810.76
                        
                        Escrow
      Agreement, dated July 29, 2008, by and among the Company, YA Global
      Investments, L.P., Yorkville Advisors, LLC and David Gonzalez,
      Esq.
                        
                        
                        
                        8-K
                        
                        10.9
                        
                        8/4/200810.77
                        
                        Irrevocable
      Transfer Agent Instructions, dated July 29, 2008, by and among the
      Company, the Investor, David Gonzalez, Esq. and WorldWide Stock Transfer,
      LLC
                        
                        
                        
                        8-K
                        
                        10.1
                        
                        8/4/200810.78
                        
                        Letter
      Agreement, dated September 24, 2008, by and among NeoMedia Technologies,
      Inc. and YA Global Investments, L.P.
                        
                        
                        
                        8-K
                        
                        10.1
                        
                        10/1/2008


41




Exhibit
                          Number
                        
                        Description
                        
                        Filed
                          Herewith
                        
                        Form
                        
                        Exhibit
                        
                        Filing Date10.79
                        
                        Second
      Secured Convertible Debenture, dated October 28, 2008, issued by the
      Company to YA Global Investments, L.P.
                        
                        
                        
                        8-K
                        
                        10.3
                        
                        11/3/200810.80
                        
                        Revised
      Exhibit A to Escrow Agreement, dated October 28, 2008
                        
                        
                        
                        8-K
                        
                        10.12
                        
                        11/3/200810.81
                        
                        Letter
      Agreement, dated March 27, 2009, by and between the Company and YA Global
      Investments, L.P.
                        
                        
                        
                        8-K
                        
                        10.13
                        
                        4/13/200910.82
                        
                        Amendment
      Agreement, dated April 6, 2009, by and between the Company and YA Global
      Investments, L.P.
                        
                        
                        
                        8-K
                        
                        10.14
                        
                        4/13/200910.83
                        
                        Third
      Secured Convertible Debenture (first closing), dated April 6, 2009, issued
      by the Company to YA Global Investments, L.P.
                        
                        
                        
                        8-K
                        
                        10.15
                        
                        4/13/200910.84
                        
                        Waiver,
      effective as of December 31, 2008, by and between the Company and YA
      Global Investments, L.P.
                        
                        
                        
                        8-K
                        
                        10.16
                        
                        4/13/200910.85
                        
                        Fourth
      Secured Convertible Debenture (second amended third closing), dated May 1,
      2009, issued by the Company to YA Global Investments, L.P.
                        
                        
                        
                        8-K
                        
                        10.15
                        
                        5/7/200910.86
                        
                        Agreement,
      dated June 5, 2009 (Additional Agreement), by and between the Company and
      YA Global Investments, L.P.
                        
                        
                        
                        8-K
                        
                        10.16
                        
                        6/5/200910.87
                        
                        Fifth
      Convertible Debenture (Additional Agreement closing), dated June 5, 2009,
      issued by the Company to YA Global Investments, L.P.
                        
                        
                        
                        8-K
                        
                        10.17
                        
                        6/5/200910.88
                        
                        Agreement,
      dated July 15, 2009 (Second Additional Agreement), by and between the
      Company and YA Global Investments, L.P.
                        
                        
                        
                        8-K
                        
                        10.18
                        
                        7/21/200910.89
                        
                        Sixth
      Convertible Debenture dated July 15, 2009, (Second Additional Debenture),
      issued by the Company to YA Global Investments, L.P.
                        
                        
                        
                        8-K
                        
                        10.19
                        
                        7/21/200910.90
                        
                        Agreement,
      dated July 17, 2009, by and between the Company and Silver Bay Software,
      LLC.
                        
                        
                        
                        8-K
                        
                        10.20
                        
                        7/21/200910.91
                        
                        Agreement,
      dated July 17, 2009, by and between the Company and Mr. Greg
      Lindholm.
                        
                        
                        
                        8-K
                        
                        10.21
                        
                        7/21/200910.92
                        
                        Non-Exclusive
      License Agreement between the Company and Mobile Tag, Inc. dated July 28,
      2009
                        
                        
                        
                        8-K
                        
                        10.1
                        
                        7/30/200910.93
                        
                        Agreement
      dated August 14, 2009 (Third Additional Agreement) by and between the
      Company and Y.A. Global Investments, L.P.
                        
                        
                        
                        10-Q
                        
                        10.124
                        
                        8/14/200910.94
                        
                        Seventh
      Convertible Debenture dated August 14, 2009 (Fifth Additional Debenture)
      issued by the Company to Y.A. Global Investments, L.P.
                        
                        
                        
                        10-Q
                        
                        10.125
                        
                        8/14/200910.95
                        
                        Non-exclusive
      License Agreement with exclusive right to sub-license provision between
      Company and Neustar, Inc. dated October 2, 2009.
                        
                        
                        
                        8-K
                        
                        10.1
                        
                        10/6/200910.96
                        
                        Non-Exclusive
      License Agreement to use the Licenced Platform between the Company and
      Brand Extension Mobile Solutions, S.A., a Madrid (Spain) corporation
      (“BEMS"), dated October 7, 2009.
                        
                        
                        
                        8-K
                        
                        10.1
                        
                        10/13/200910.97
                        
                        Settlement
      Agreement and non-exclusive license and a sublicense between the Company
      and Scanbuy, Inc., dated October 16, 2009.
                        
                        
                        
                        8-K
                        
                        10.1
                        
                        10/20/200910.98
                        
                        Investment
      Agreement between Company and YA Global dated January 5,
    2010.
                        
                        
                        
                        8-K
                        
                        10.1
                        
                        1/11/2010


42




Exhibit
                            Number
                          
                          Description
                          
                          Filed
                            Herewith
                          
                          Form
                          
                          Exhibit
                          
                          Filing Date10.99
                          
                          Irrevocable
      Transfer Agent Instructions letter issued by Company to WorldWide Stock
      Transfer, LLC dated January 5, 2010.
                          
                          
                          
                          8-K
                          
                          10.2
                          
                          1/11/201010.100
                          
                          Monitoring
      Fee Escrow Agreement between Company and YA Global dated January 5,
      2010.
                          
                          
                          
                          8-K
                          
                          10.3
                          
                          1/11/201010.101
                          
                          Investor
      Registration Rights Agreement between Company and YA Global dated January
      5, 2010.
                          
                          
                          
                          8-K
                          
                          10.4
                          
                          1/11/201010.102
                          
                          Issuance
      of Warrants by Company to YA Global dated January 5, 2010.
                          
                          
                          
                          8-K
                          
                          10.5
                          
                          1/11/201010.103
                          
                          Amendment
      to the August 24, 2006 Secured Convertible Debenture No. CCP-1 between the
      Company and YA Global dated January 5, 2010.
                          
                          
                          
                          8-K
                          
                          10.6
                          
                          1/11/201010.104
                          
                          Amendment
      to the December 29, 2006 Secured Convertible Debenture No. CCP-2 between
      the Company and YA Global dated January 5, 2010.
                          
                          
                          
                          8-K
                          
                          10.7
                          
                          1/11/201010.105
                          
                          Amendment
      to the March 27, 2007 Secured Convertible Debenture No. NEOM-4-1 between
      the Company and YA Global dated January 5, 2010.
                          
                          
                          
                          8-K
                          
                          10.8
                          
                          1/11/201010.106
                          
                          Amendment
      to the August 24, 2007 Secured Convertible Debenture No. NEOM-1-1 between
      the Company and YA Global dated January 5, 2010.
                          
                          
                          
                          8-K
                          
                          10.9
                          
                          1/11/201010.107
                          
                          Amendment
      to the April 11, 2008 Secured Convertible Debenture No. NEO-2008-1 between
      the Company and YA Global dated January 5, 2010.
                          
                          
                          
                          8-K
                          
                          10.10
                          
                          1/11/201010.108
                          
                          Amendment
      to the May 16, 2008 Secured Convertible Debenture No. NEO-2008-2 between
      the Company and YA Global dated January 5, 2010.
                          
                          
                          
                          8-K
                          
                          10.11
                          
                          1/11/201010.109
                          
                          Amendment
      to the May 29, 2008 Secured Convertible Debenture No. NEO-2008-3 between
      the Company and YA Global dated January 5, 2010.
                          
                          
                          
                          8-K
                          
                          10.12
                          
                          1/11/201010.110
                          
                          Amendment
      to the July 10, 2008 Secured Convertible Debenture No. NEO-2008-4 between
      the Company and YA Global dated January 5, 2010.
                          
                          
                          
                          8-K
                          
                          10.13
                          
                          1/11/201010.111
                          
                          Amendment
      to the July 29, 2008 Secured Convertible Debenture No. NEOM-9-1 between
      the Company and YA Global dated January 5, 2010.
                          
                          
                          
                          8-K
                          
                          10.14
                          
                          1/11/201010.112
                          
                          Amendment
      to the October 28, 2008 Secured Convertible Debenture No. NEOM-9-2 between
      the Company and YA Global dated January 5, 2010.
                          
                          
                          
                          8-K
                          
                          10.15
                          
                          1/11/201010.113
                          
                          Amendment
      to the May 1, 2009 Secured Convertible Debenture No. NEOM-9-4 between the
      Company and YA Global dated January 5, 2010.
                          
                          
                          
                          8-K
                          
                          10.16
                          
                          1/11/201010.114
                          
                          Amendment
      to the June 5, 2009 Secured Convertible Debenture No. NEOM-9-5 between the
      Company and YA Global dated January 5, 2010.
                          
                          
                          
                          8-K
                          
                          10.17
                          
                          1/11/201010.115
                          
                          Amendment
      to the July 15, 2009 Secured Convertible Debenture No. NEOM-9-6 between
      the Company and YA Global dated January 5, 2010.
                          
                          
                          
                          8-K
                          
                          10.18
                          
                          1/11/201010.116
                          
                          Amendment
      to the August 14, 2009 Secured Convertible Debenture No. NEOM-9-7 between
      the Company and YA Global dated January 5, 2010.
                          
                          
                          
                          8-K
                          
                          10.19
                          
                          1/11/201010.117
                          
                          Amendment
      to the July 29, 2008 Secured Convertible Debenture No. NEOM-9-1B between
      the Company and YA Global dated January 5, 2010.
                          
                          
                          
                          8-K
                          
                          10.20
                          
                          1/11/2010


43




Exhibit
                      Number
                    
                    Description
                    
                    Filed
                      Herewith
                    
                    Form
                    
                    Exhibit
                    
                    Filing Date10.118
                    
                    Amendment
      to the July 29, 2008 Secured Convertible Debenture No. NEOM-9-1C between
      the Company and YA Global dated January 5, 2010.
                    
                    
                    
                    8-K
                    
                    10.21
                    
                    1/11/201010.119
                    
                    Amendment
      to the July 29, 2008 Secured Convertible Debenture No. NEOM-9-1D between
      the Company and YA Global dated January 5, 2010.
                    
                    
                    
                    8-K
                    
                    10.22
                    
                    1/11/201010.120
                    
                    Amendment
      of employment agreement entered into on June 10, 2008 between the company
      and Iain A. McCready.
                    
                    
                    
                    8-K
                    
                    10.2
                    
                    1/20/201010.121
                    
                    Amended
      and restated licensing agreement dated October 2, 2009 with NeuStar,
      Inc.
                    
                    
                    
                    8-K
                    
                    10.1
                    
                    1/28/201010.122
                    
                    Agreement
      with Neu Star, Inc., dated February 12, 2010 (the Neu Star Mobile Codes
      Pilot Program Agreement).
                    
                    
                    
                    8-K
                    
                    10.1
                    
                    2/16/201010.123
                    
                    First
      amendment to the investment agreement between Company and  YA
      Global dated January 5, 2010.
                    
                    
                    
                    8-K
                    
                    10.1
                    
                    3/11/201010.124
                    
                    Special
      meeting of shareholders held March 30, 2010.
                    
                    
                    
                    8-K
                    
                    10.1
                    
                    4/2/201010.125
                    
                    Notification
      of new trading symbol "NEOMD" beginning May 10, 2010.
                    
                    
                    
                    8-K
                    
                    
                    
                    5/11/201010.126
                    
                    Securities
      Purchase Agreement, dated May 27, 2010, by and between the Company and YA
      Global Investments, L.P.
                    
                    
                    
                    8-K
                    
                    10.1
                    
                    6/3/201010.127
                    
                    Secured
      Convertible Debenture, dated May 27, 2010,  issued by the
      Company to YA Global Investments, L.P.
                    
                    
                    
                    8-K
                    
                    10.2
                    
                    6/3/201010.128
                    
                    Warrant
      No. 0510, dated May 27, 2010, issued by the Company to YA Global
      Investments, L.P.
                    
                    
                    
                    8-K
                    
                    10.3
                    
                    6/3/201010.129
                    
                    Global
      Warrant Amendment, dated May 27, 2010, issued by the Company to YA Global
      Investments, L.P.
                    
                    
                    
                    8-K
                    
                    10.4
                    
                    6/3/201010.130
                    
                    Security
      Agreement, dated July 29, 2008, by and among the Company, each of the
      Company’s subsidiaries made a party thereto and YA Global Investments,
      L.P.
                    
                    
                    
                    8-K
                    
                    10.5
                    
                    6/3/201010.131
                    
                    Patent
      Security Agreement, dated July 29, 2008, by and among the Company, each of
      the Company’s subsidiaries made a party thereto and YA Global Investments,
      L.P.
                    
                    
                    
                    8-K
                    
                    10.6
                    
                    6/3/201010.132
                    
                    Ratification
      Agreement, dated May 27, 2010, by and among the Company, each of the
      Company’s subsidiaries made a party thereto and YA Global Investments,
      L.P.
                    
                    
                    
                    8-K
                    
                    10.7
                    
                    6/3/201010.133
                    
                    Irrevocable
      Transfer Agent Instructions, dated May 27, 2010, by and among the Company,
      the Investor, David Gonzalez, Esq. and WorldWide Stock Transfer,
      LLC
                    
                    
                    
                    8-K
                    
                    10.1
                    
                    6/3/201010.134
                    
                    Agreement,
      dated August 13, 2010, by and between the Company and YA Global
      Investments, L.P.
                    
                    
                    
                    8-K
                    
                    10.1
                    
                    8/19/201010.135
                    
                    Secured
      Convertible Debenture, No. NEOM-10-2, dated August 13,
      2010,  issued by the Company to YA Global Investments,
      L.P.
                    
                    
                    
                    8-K
                    
                    10.2
                    
                    8/19/201010.136
                    
                    Warrant,
      No. NEOM-0810, dated August 13, 2010, issued by the Company to YA Global
      Investments, L.P.
                    
                    
                    
                    8-K
                    
                    10.3
                    
                    8/19/201010.137
                    
                    Security
      Agreement, dated July 29, 2008, by and among the Company, each of the
      Company’s subsidiaries made a party thereto and YA Global Investments,
      L.P.
                    
                    
                    
                    8-K
                    
                    10.4
                    
                    8/19/201010.138
                    
                    Patent
      Security Agreement, dated July 29, 2008, by and among the Company, each of
      the Company’s subsidiaries made a party thereto and YA Global Investments,
      L.P.
                    
                    
                    
                    8-K
                    
                    10.5
                    
                    8/19/201010.139
                    
                    Agreement
      on the Pledge of Intellectual Property Rights as Collateral, dated August
      13, 2010, by and between the Company’s wholly-owned subsidiary NeoMedia
      Europe AG, and YA Global Investments, L.P.
                    
                    
                    
                    8-K
                    
                    10.6
                    
                    8/19/2010


44




Exhibit
                            Number
                          
                          Description
                          
                          Filed
                            Herewith
                          
                          Form
                          
                          Exhibit
                          
                          Filing Date10.140
                          
                          Second
      Ratification Agreement, dated August 13, 2010, by and among the Company,
      each of the Company’s subsidiaries made a party thereto, and YA Global
      Investments, L.P.
                          
                          
                          
                          8-K
                          
                          10.7
                          
                          8/19/201010.141
                          
                          Irrevocable
      Transfer Agent Instructions, dated August 13, 2010, by and among the
      Company, the Buyer, David Gonzalez, Esq. and WorldWide Stock Transfer,
      LLC
                          
                          
                          
                          8-K
                          
                          10.8
                          
                          8/19/201010.142
                          
                          Security
      Transfer of Moveable Assets, dated August 13, 2010, by and between the
      Company’s wholly-owned subsidiary NeoMedia Europe AG, and YA Global
      Investments, L.P.
                          
                          
                          
                          8-K
                          
                          10.9
                          
                          8/19/201010.143
                          
                          Agreement,
      dated September 29, 2010, by and between the Company and YA Global
      Investments, L.P.
                          
                          
                          
                          8-K
                          
                          10.1
                          
                          10/1/201010.144
                          
                          Secured
      Convertible Debenture, No. NEOM-10-3, dated September 29,
      2010,  issued by the Company to YA Global Investments,
      L.P.
                          
                          
                          
                          8-K
                          
                          10.2
                          
                          10/1/201010.145
                          
                          Warrant,
      No. NEOM-0910, dated September 29, 2010, issued by the Company to YA
      Global Investments, L.P.
                          
                          
                          
                          8-K
                          
                          10.3
                          
                          10/1/201010.146
                          
                          Security
      Agreement, dated July 29, 2008, by and among the Company, each of the
      Company’s subsidiaries made a party thereto and YA Global Investments,
      L.P.
                          
                          
                          
                          8-K
                          
                          10.4
                          
                          10/1/201010.147
                          
                          Patent
      Security Agreement, dated July 29, 2008, by and among the Company, each of
      the Company’s subsidiaries made a party thereto and YA Global Investments,
      L.P.
                          
                          
                          
                          8-K
                          
                          10.5
                          
                          10/1/201010.148
                          
                          Third
      Ratification Agreement, dated September 29, 2010, by and among the
      Company, each of the Company’s subsidiaries made a party thereto, and YA
      Global Investments, L.P.
                          
                          
                          
                          8-K
                          
                          10.6
                          
                          10/1/201010.149
                          
                          Irrevocable
      Transfer Agent Instructions, dated September 29, 2010, by and among the
      Company, the Buyer, David Gonzalez, Esq. and WorldWide Stock Transfer,
      LLC
                          
                          
                          
                          8-K
                          
                          10.7
                          
                          10/1/201010.150
                          
                          Compromise
      Agreement dated October 19, 2010, executed by Iain A.
    McCready
                          
                          
                          
                          8-K
                          
                          10.1
                          
                          10/20/201010.151
                          
                          Resignation
      Letter dated October 19, 2010, executed by Iain A.
McCready
                          
                          
                          
                          8-K
                          
                          10.2
                          
                          10/20/201010.152
                          
                          Agreement,
      dated October 28, 2010, by and between the Company and YA Global
      Investments, L.P.
                          
                          
                          
                          8-K
                          
                          10.1
                          
                          11/3/201010.153
                          
                          Secured
      Convertible Debenture, No. NEOM-10-4, dated October 28,
      2010,  issued by the Company to YA Global Investments,
      L.P.
                          
                          
                          
                          8-K
                          
                          10.2
                          
                          11/3/201010.154
                          
                          Warrant,
      No. NEOM-1010, dated October 28, 2010, issued by the Company to YA Global
      Investments, L.P.
                          
                          
                          
                          8-K
                          
                          10.3
                          
                          11/3/201010.155
                          
                          Fourth
      Ratification Agreement, dated October 28, 2010, by and among the Company,
      each of the Company’s subsidiaries made a party thereto, and YA Global
      Investments, L.P.
                          
                          
                          
                          8-K
                          
                          10.6
                          
                          11/3/201010.156
                          
                          Irrevocable
      Transfer Agent Instructions, dated October 28, 2010, by and among the
      Company, the Buyer, David Gonzalez, Esq. and WorldWide Stock Transfer,
      LLC
                          
                          
                          
                          8-K
                          
                          10.7
                          
                          11/3/2010




45




Exhibit
                          Number
                        
                        Description
                        
                        Filed
                          Herewith
                        
                        Form
                        
                        Exhibit
                        
                        Filing Date14
                        
                        Code
      of Professional Ethics
                        
                        
                        
                        10-K
                        
                        14.1
                        
                        4/3/200731.1
                        
                        Certification
      of Chief Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002
                        
                        X31.2
                        
                        Certification
      of Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002
                        
                        X32.1
                        
                        Certification
      of Chief Executive Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
                        
                        X32.2
                        
                        Certification
      of Chief Financial Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
                        
                        X


46


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.(Registrant)Dated:    November 12,
2010
              /s/
      Michael W.  ZimaMichael
      W. ZimaChief
      Financial Officer & Principal Accounting
  Officer


47