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 March 31, 2010





o
            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   Noo





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 o   Noo





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 oAccelerated filer oNon-accelerated
filer oSmaller Reporting
Company x





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





The
number of outstanding shares of the registrant’s Common Stock on May 10, 2010
was 22,675,678.










NeoMedia
Technologies, Inc.


Form
10-Q


For
the Quarterly Period Ended March 31, 2010


Index





PagePART
      I
              Financial
      Information
              2ITEM
      1.
              Financial
      Statements
              2ITEM
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              23ITEM
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              28ITEM
      4.
              Controls
      and Procedures
              28PART
      II
              Other
      Information
              29ITEM
      1.
              Legal
      Proceedings
              29ITEM
      1A.
              Risk
      Factors
              29ITEM
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              29ITEM
      3.
              Defaults
      Upon Senior Securities
              30ITEM
      4.
              (Removed
      and Reserved)
              30ITEM
      5.
              Other
      Information
              30ITEM
      6.
              Exhibits
              31Signatures
              38


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)





March 31,
                      
                      
                      December 31,2010
                      
                      
                      2009(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                      
                      $
                      290
                      
                      
                      $
                      198Trade
      accounts receivable
                      
                      
                      269
                      
                      
                      
                      374Inventories,
      net of allowance of $124 and $136
                      
                      
                      103
                      
                      
                      
                      124Prepaid
      expenses and other current assets
                      
                      
                      94
                      
                      
                      
                      294Total
      current assets
                      
                      
                      756
                      
                      
                      
                      990Property
      and equipment, net
                      
                      
                      103
                      
                      
                      
                      129Goodwill
                      
                      
                      3,418
                      
                      
                      
                      3,418Proprietary
      software, net
                      
                      
                      1,910
                      
                      
                      
                      2,076Patents
      and other intangible assets, net
                      
                      
                      1,943
                      
                      
                      
                      1,996Cash
      surrender value of life insurance policies
                      
                      
                      659
                      
                      
                      
                      659Other
      long-term assets
                      
                      
                      156
                      
                      
                      
                      156Total
      assets
                      
                      $
                      8,945
                      
                      
                      $
                      9,424LIABILITIES
      AND SHAREHOLDERS’ DEFICITCurrent
      liabilities:Accounts
      payable
                      
                      $
                      427
                      
                      
                      $
                      558Taxes
      payable
                      
                      
                      8
                      
                      
                      
                      4Accrued
      expenses
                      
                      
                      7,449
                      
                      
                      
                      7,292Deferred
      revenues and customer prepayments
                      
                      
                      631
                      
                      
                      
                      791Note
      payable
                      
                      
                      29
                      
                      
                      
                      69Note
      payable - YA Global
                      
                      
                      -
                      
                      
                      
                      500Accrued
      purchase price guarantee
                      
                      
                      4,535
                      
                      
                      
                      4,535Deferred
      tax liability
                      
                      
                      706
                      
                      
                      
                      706Derivative
      financial instruments - warrants
                      
                      
                      5,792
                      
                      
                      
                      9,912Derivative
      financial instruments - Series C and D preferred stock and debentures
      payable
                      
                      
                      12,851
                      
                      
                      
                      50,985Debentures
      payable - carried at amortized cost
                      
                      
                      14,237
                      
                      
                      
                      12,523Debentures
      payable - carried at fair value
                      
                      
                      21,044
                      
                      
                      
                      37,678Total
      current liabilities
                      
                      
                      67,709
                      
                      
                      
                      125,553Commitments
      and contingencies (Note 7)Series
      C convertible preferred stock, $0.01 par value, 27,000 shares authorized,
      8,642 and 8,642 shares issued and outstanding, liquidation value of $8,642
      and $8,642
                      
                      
                      8,642
                      
                      
                      
                      8,642Series
      D convertible preferred stock, $0.01 par value, 25,000 shares 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, 22,707,093 and
      22,707,093 shares issued and 22,675,678 and 22,675,678 shares outstanding,
      respectively
                      
                      
                      22,676
                      
                      
                      
                      22,676Additional
      paid-in capital
                      
                      
                      130,464
                      
                      
                      
                      130,406Accumulated
      deficit
                      
                      
                      (222,153
                      )
                      
                      
                      (276,985
                      )Accumulated
      other comprehensive loss
                      
                      
                      (113
                      )
                      
                      
                      (89
                      )Treasury
      stock, at cost, 2,012 shares of common stock
                      
                      
                      (779
                      )
                      
                      
                      (779
                      )Total
      shareholders’ deficit
                      
                      
                      (69,905
                      )
                      
                      
                      (124,771
                      )Total
      liabilities and shareholders’ deficit
                      
                      $
                      8,946
                      
                      
                      $
                      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 EndedMarch
      31,
                    
                    
                    March
      31,2010
                    
                    
                    2009Revenues
                    
                    $
                    355
                    
                    
                    $
                    490Cost
      of revenues
                    
                    
                    339
                    
                    
                    
                    527Gross
      profit (deficit)
                    
                    
                    16
                    
                    
                    
                    (37
                    )Sales
      and marketing expenses
                    
                    
                    319
                    
                    
                    
                    286General
      and administrative expenses
                    
                    
                    1,095
                    
                    
                    
                    923Research
      and development costs
                    
                    
                    283
                    
                    
                    
                    324Operating
      loss
                    
                    
                    (1,681
                    )
                    
                    
                    (1,570
                    )Gain
      (loss) on extinguishment of debt
                    
                    
                    (5,643
                    )
                    
                    
                    -Gain
      (loss) from change in fair value of hybrid financial
      instruments
                    
                    
                    18,372
                    
                    
                    
                    (23,031
                    )Gain
      (loss) from change in fair value of derivative liability -
      warrants
                    
                    
                    6,551
                    
                    
                    
                    (33,281
                    )Gain
      (loss) from change in fair value of derivative liability - Series C and D
      preferred stock and debentures
                    
                    
                    40,179
                    
                    
                    
                    (47,654
                    )Interest
      expense related to convertible debt
                    
                    
                    (446
                    )
                    
                    
                    (1,063
                    )Net
      income (loss)
                    
                    
                    57,332
                    
                    
                    
                    (106,599
                    )Dividends
      on convertible preferred stock
                    
                    
                    (2,500
                    )
                    
                    
                    (375
                    )Net
      income (loss) attributable to common shareholders
                    
                    
                    54,832
                    
                    
                    
                    (106,974
                    )Comprehensive
      income (loss):Net
      income (loss)
                    
                    
                    57,332
                    
                    
                    
                    (106,599
                    )Other
      comprehensive income (loss):Foreign
      currency translation adjustment
                    
                    
                    (24
                    )
                    
                    
                    (57
                    )Comprehensive
      income (loss)
                    
                    $
                    57,308
                    
                    
                    $
                    (106,656
                    )Net
      income (loss) per share, basic and diluted:Basic
                    
                    $
                    2.42
                    
                    
                    $
                    (7.00
                    )Fully
      diluted
                    
                    $
                    (0.04
                    )
                    
                    $
                    (7.00
                    )Weighted
      average number of common shares:Basic
                    
                    
                    22,675,678
                    
                    
                    
                    15,030,827Fully
      diluted
                    
                    
                    112,316,492
                    
                    
                    
                    15,030,827





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


3


NeoMedia
Technologies, Inc. and Subsidiaries


Consolidated
Statement of Shareholders’ Deficit (Unaudited)


(in
thousands, except share data)




Common
      Stock
              
              
              AdditionalPaid-in
                Capital
              
              
              Accumulated
      OtherComprehensive
      Income (Loss)
              
              
              Accumulated
      Deficit
              
              
              Treasury
      Stock
              
              
              Total
                Shareholders'
      Equity (Deficit)Shares
              
              
              Amount
              Shares
              
              
              AmountBalance,
      December 31, 2009
              
              
              22,675,678
              
              
              $
              22,676
              
              
              $
              130,406
              
              
              $
              (89
              )
              
              $
              (276,985
              )
              
              
              2,012
              
              
              $
              (779
              )
              
              $
              (124,771
              )Deemed
      dividend on Series D Preferred Stock
                issued to YA Global
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,500
              )
              
              
              -
              
              
              
              -
              
              
              
              (2,500
              )Stock-based
      compensation expense
              
              
              -
              
              
              
              -
              
              
              
              58
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              58Comprehensive
      income - foreign currency
                translation adjustment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (24
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (24
              )Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              57,332
              
              
              
              -
              
              
              
              -
              
              
              
              57,332Balance,
      March 31, 2010
              
              
              22,675,678
              
              
              $
              22,676
              
              
              $
              130,464
              
              
              $
              (113
              )
              
              $
              (222,153
              )
              
              
              2,012
              
              
              $
              (779
              )
              
              $
              (69,905
              )




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


4


NeoMedia
Technologies, Inc. and Subsidiaries


Condensed
Consolidated Statements of Cash Flows (Unaudited)


(in
thousands)


Three
      Months EndedMarch 31,2010
                
                
                2009Cash
      Flows from Operating Activities:Net
      income (loss)
                
                $
                57,332
                
                
                $
                (106,599
                )Adjustments
      to reconcile net income (loss) to net cash used in operating
      activities:Depreciation
      and amortization
                
                
                268
                
                
                
                261(Gain)
      loss on extinguishment of debt
                
                
                5,643
                
                
                
                -(Gain)
      loss from change in fair value of hybrid financial
    instruments
                
                
                (18,372
                )
                
                
                23,031(Gain)
      loss from change in fair value of derivative liability -
      warrants
                
                
                (6,551
                )
                
                
                33,281(Gain)
      loss from change in fair value of derivative liability - Series C and D
      preferred stock and debentures
                
                
                (40,179
                )
                
                
                47,654Interest
      expense related to convertible debt
                
                
                446
                
                
                
                1,063Stock-based
      compensation expense
                
                
                58
                
                
                
                80Decrease
      in value of life insurance policies
                
                
                -
                
                
                
                36Changes
      in operating assets and liabilitiesTrade
      and other accounts receivable
                
                
                105
                
                
                
                (51
                )Inventories
                
                
                21
                
                
                
                24Prepaid
      expenses and other assets
                
                
                200
                
                
                
                39Accounts
      payable and accrued liabilities
                
                
                (609
                )
                
                
                172Deferred
      revenue and other current liabilities
                
                
                (160
                )
                
                
                (111
                )Net
      cash used in operating activities
                
                
                (1,798
                )
                
                
                (1,120
                )Cash
      Flows from Investing Activities:Acquisition
      of property and equipment
                
                
                (5
                )
                
                
                (24
                )Net
      cash provided by (used in) investing activities
                
                
                (5
                )
                
                
                (24
                )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
                )
                
                
                -Net
      proceeds from exercise of stock options
                
                
                -
                
                
                
                116Net
      cash provided by financing activities
                
                
                1,900
                
                
                
                116Effect
      of exchange rate changes on cash
                
                
                (5
                )
                
                
                (1
                )Net
      increase (decrease) in cash and cash equivalents
                
                
                92
                
                
                
                (1,029
                )Cash
      and cash equivalents, beginning of period
                
                
                198
                
                
                
                1,259Cash
      and cash equivalents, end of period
                
                $
                290
                
                
                $
                230Supplemental
      cash flow information:Interest
      paid during the period
                
                $
                1
                
                
                $
                1Accretion
      of dividends on Series C Convertible Preferred Stock
                
                $
                -
                
                
                $
                375Series
      C Convertible Preferred Stock converted to common stock
                
                $
                -
                
                
                $
                408Deemed
      dividend on Series D Convertible Preferred Stock issued
                
                $
                2,500
                
                
                $
                1,776Derivative
      liability settled by preferred stock conversion
                
                $
                -
                
                
                $
                1,113





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


5


NeoMedia
Technologies, Inc. and Subsidiaries


Notes
to Condensed Consolidated Financial Statements


(Unaudited)


Note 1 - General





Business- NeoMedia utilizes the
mobile phone by leveraging barcodes (printed symbols) as a seamless mechanism to
link brands, advertisers, carriers, retailers and consumers using the power of
the mobile internet.





With our
barcode ecosystem technology, NeoMedia transforms mobile phones with cameras
into barcode scanners that provide instant access to mobile web content whenever
a barcode is scanned. A barcode makes any medium immediately interactive, and
the code links consumers to the multimedia capability of the mobile web. We
believe that combining this technology with analytics and reporting capabilities
improves the way advertisers market to mobile consumers.





NeoMedia
provides the infrastructure to facilitate mobile barcode scanning and its
associated commerce worldwide. Our mobile barcode ecosystem software reads and
transmits data from 2D barcodes to its intended destination. Our code management
and clearinghouse platforms create, connect, record, and transmit the
transactions embedded in the barcodes, like web-URLs, text messages (SMS), and
telephone calls, ubiquitously and reliably.





In order
to provide complete mobile marketing solutions, NeoMedia also offers barcode
scanning hardware that reads barcodes displayed on mobile phone screens or
printed media. NeoMedia provides infrastructure solutions to enable mobile
ticketing and couponing programs – including scanner hardware and system support
software for seamless implementation.





This
technology is supported by our patents. In addition, NeoMedia has an open
standards philosophy designed to make integration and use of the technology easy
for handset manufacturers, mobile operators and advertisers; and the consumer’s
experience safe, reliable and interoperable.





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 US GAAP, which contemplate our
continuation as a going concern.  Net income (loss) for the three
months ended March 31, 2010 and 2009 was $57.3 million and ($106.6) million,
respectively and net cash used by operations during the same period was $1.8
million and $1.1 million, respectively.  At March 31, 2010, we have an
accumulated deficit of $222.2 million. We also have a working capital deficit of
$67.0 million, of which $53.9 million is related to our financing instruments,
including $26.8 million related to the fair value of warrants and those
debentures that are recorded as hybrid financial instruments, and $27.1 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, as they have
in the past, 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 May 27, 2010.


6




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.




Note 2 - Summary of Significant Accounting
Policies









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.





Reverse Stock
Split – On March 30, 2010, at a special meeting of shareholders, the
following actions were approved, to amend our certificate of incorporation as
follows: 1) a 1 share for 100 shares reverse stock split, 2) our authorized
shares of common stock were fixed at 5,000,000,000 shares, and; 3) the par value
of our common stock was changed from $0.01 to $0.001. All of the share and per
share information related to our common stock presented herein have been
retroactively re-stated to give effect to these actions as required by FASB ASC
260, Earnings per Share and SAB Topic 4. C, Changes in Capital
Structure.





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
Income (Loss) Per Share – Basic net income (loss) per share is computed
by dividing net income (loss) by the weighted average number of shares of common
stock outstanding during the period. During the three months ended March 31,
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.  During the three months ended March 31, 2010, we
reported net income per share and included dilutive instruments in the fully
diluted net income per share calculation.  The following is a
reconciliation of the numerator and denominator of the basic and diluted
earnings per share calculation for this period:





7




Three Months EndedMarch 31, 2010(in
      thousands, except share and per share data)Numerator:Net
      income
                          
                          $
                          57,332Accretion
      of Series D preferred stock to redemption value
                          
                          
                          (2,500
                          )Numerator
      for basic earnings per share-income available to common
      stockholders
                          
                          
                          54,832Effect
      of dilutive securities:Adjustment
      for change in fair value of embedded conversion feature
                          
                          
                          (40,179
                          )Adjustment
      for change in fair value of warrants
                          
                          
                          (6,551
                          )Adjustment
      for loss on extinguishment
                          
                          
                          5,643Adjustment
      for debentures recorded at fair value
                          
                          
                          (18,372
                          )Adjustment
      for interest expense
                          
                          
                          446(59,013
                          )Numerator
      for diluted earnings per share-income available for common stockholders
      after assumed conversion  of debentures, preferred stock and
      exercise of warrants
                          
                          $
                          (4,181
                          )Denominator:Weighted
      average shares used to compute basic EPS
                          
                          
                          22,675,678Effect
      of dilutive securities:Convertible
      debentures
                          
                          
                          65,227,939Convertible
      preferred stock
                          
                          
                          24,412,875Dilutive
      potential common shares
                          
                          
                          89,640,814Denominator
      for diluted earnings per share-adjusted weighted average shares after
      assumed conversion of debentures, preferred stock and exercise of
      warrants
                          
                          
                          112,316,492Basic
      earnings per share
                          
                          $
                          2.42Diluted
      earnings per share
                          
                          $
                          (0.04
                          )





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 are anti-dilutive and therefore have been excluded from
dilutive earnings per share:





As of March 31,2010
                  
                  
                  2009Stock
      options
                  
                  
                  927,909
                  
                  
                  
                  1,031,369Warrants
                  
                  
                  12,291,958
                  
                  
                  
                  10,103,708Convertible
      debt
                  
                  
                  -
                  
                  
                  
                  21,709,960Convertible
      preferred stock
                  
                  
                  -
                  
                  
                  
                  11,737,01013,219,867
                  
                  
                  
                  44,582,047





All share
and per share amounts in the tables above have been retroactively restated to
reflect the effect of the reverse stock split discussed in Note 3.





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.


8


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. 2010-01
                  
                  January 2010
                  
                  Equity
      (Topic 505):  Accounting for Distributions to Shareholders with
      Components of Stock and Cash – a consensus of the FASB Emerging Issues
      Task ForceASU
      No. 2010-02
                  
                  January 2010
                  
                  Consolidation
      (Topic 810):  Accounting and Reporting for Decreases in
      Ownership of a Subsidiary – a Scope ClarificationASU
      No. 2010-03
                  
                  January 2010
                  
                  Extractive
      Activities – Oil and Gas (Topic 932): Oil and Gas Reserve Estimation and
      DisclosuresASU
      No. 2010-04
                  
                  January 2010
                  
                  Accounting
      for Various Topics: Technical Corrections to SEC
  ParagraphsASU
      No. 2010-05
                  
                  January 2010
                  
                  Compensation  -
      Stock Compensation (Topic718): Escrowed Share Arrangements and the
      Presumption of CompensationASU
      No. 2010-06
                  
                  January 2010
                  
                  Fair
      Value Measurements and Disclosures (Topic 820): Improving Disclosures
      about Fair Value MeasurementsASU
      No. 2010-07
                  
                  January 2010
                  
                  Not-for-Profit
      Entities (Topic 958): Not-for-Profit Entities - Mergers and
      AcquisitionsASU
      No. 2010-08
                  
                  February 2010
                  
                  Technical
      Corrections to Various TopicsASU
      No. 2010-09
                  
                  February 2010
                  
                  Subsequent
      Events (Topic 855): Amendments to Certain Recognition and Disclosure
      RequirementsASU
      No. 2010-10
                  
                  February 2010
                  
                  Consolidation
      (Topic 810): Amendments for Certain Investment FundsASU
      No. 2010-11
                  
                  March 2010
                  
                  Derivatives
      and Hedging (Topic 815): Scope Exception Related to Embedded Credit
      DerivativesASU
      No. 2010-12
                  
                  April 2010
                  
                  Income
      Taxes (Topic 740): Accounting for Certain Tax Effects of the 2010 Health
      Care Reform ActsASU
      No. 2010-13
                  
                  April 2010
                  
                  Compensation—Stock
      Compensation (Topic 718): Effect of Denominating the Exercise Price of a
      Share-Based Payment Award in the Currency of the Market in Which the
      Underlying Equity Security Trades (A consensus of the FASB Emerging Issues
      Task Force)ASU
      No. 2010-14
                  
                  April 2010
                  
                  Accounting
      for Extractive Activities—Oil & Gas—Amendments to Paragraph
      932-10-S99-1 (SEC Update)ASU
      No. 2010-15
                  
                  April 2010
                  
                  Financial
      Services—Insurance (Topic 944): How Investments Held through Separate
      Accounts Affect an Insurer’s Consolidation Analysis of Those Investments—a
      consensus of the FASB Emerging Issues Task ForceASU
      No. 2010-16
                  
                  April 2010
                  
                  Entertainment—Casinos
      (Topic 924): Accruals for Casino Jackpot Liabilities—a consensus of the
      FASB Emerging Issues Task ForceASU
      No. 2010-17
                  
                  April 2010
                  
                  Revenue
      Recognition—Milestone Method (Topic 605): Milestone Method ofRevenue
      Recognition—a consensus of the FASB Emerging Issues Task
    ForceASU
      No. 2010-18
                  
                  April 2010
                  
                  Receivables
      (Topic 310): Effect of a Loan Modification When the Loan is Part of a Pool
      That is Accounted for as a Single Asset—a consensus of the FASB Emerging
      Issues Task ForceASU
      No. 2010-19
                  
                  May
      2010
                  
                  Foreign
      Currency (Topic 830): Foreign Currency Issues: Multiple Foreign Currency
      Exchange Rates





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.


9


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.





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.





Series D
Convertible Preferred Stock – On April 5, 2010 the initial voting
privileges of our Series D Convertible Preferred stock expired. Effective April
6, 2010 these shares may vote, along with our common shares, on an as-converted
basis only upon 65 days notice, of a waiver by YA Global, of their 9.99%
ownership limitation.





Note
4 – Financing





As of
March 31, 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 fifteen secured convertible debentures issued between August
2006 and August 2009 and various warrants to purchase shares of our common
stock.


10


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 amendments to the Company’s certificate of
incorporation to reflect these changes (See Note 3).





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 and, for 90 days after issuance, entitled the investor to vote on an
as-converted basis with the holders of the Company’s common stock, resulting in
100,000 votes for each share of the Series D Preferred. 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 standard anti-dilution adjustments for stock splits and
similar equity reorganizations. The Series D Preferred has a liquidation
preference 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, Derivatives and
Hedging, we concluded, based upon the preponderance and weight of all
terms, conditions and features of the host contract, that the Series D Preferred
was more akin to a debt instrument for purposes of considering the clear and
close relationship of the embedded conversion feature to the host contract. FASB
ASC 815 requires bifurcation when the embedded feature and the host contracts
have risks that are not clearly and closely related. Certain exemptions to this
rule, such as that provided for instruments convertible into a fixed number of
shares or instruments that are indexed only to the issuer’s own stock were not
available to us because the Preferred Stock conversion price is subject to
down-round, anti-dilution protection. Accordingly, the conversion feature, along
with certain other features that have equity-related risks, required bifurcation
and liability classification as a compound embedded derivative financial
instrument. Derivative financial instruments are 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 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 $2,500,000 was recorded to
accrete the Series D Preferred to its redemption value.


11


In
conjunction with the Series D Preferred Stock, we also issued warrants to
acquire 225,000 shares of our common stock.   We evaluated the
warrants for purposes of classification under FASB ASC 815 and determined the
warrants require liability classification because they embody down-round
anti-dilution protection that precludes the instrument from being considered
indexed only to the Company’s own stock.





Our
accounting required the allocation of the proceeds to the individual financial
instruments comprising the Series D Preferred Stock
financing.  Current accounting concepts generally provide that
proceeds are allocated 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.





The
allocation of the basis arising from the issuance of Series D Preferred Stock
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 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.





As of
March 31, 2010, 13,358 shares of the original 22,000 shares of Series C
Preferred have been converted into 1,240,037 of our common shares, leaving 8,642
shares of Series C Preferred with a face value of $8.6 million
outstanding.





Secured
Convertible Debentures -The underlying agreements for each of the
fifteen 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 any time, 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 as of January 5, 2010, 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.


12


As
discussed above, on January 5, 2010, the terms of all of the 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.





The table
below summarizes the significant terms of each of the debentures as of March 31,
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
      Days





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 and August 2009
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.


13


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 and August 2009 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.  The modification changed
the remaining term for the debentures from 0.52 - 0.58 years to 2.56
years.





The
assumptions included in the calculations are highly subjective and subject to
interpretation.  Assumptions used as of March 31, 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
                
                $
                0.44
                
                
                
                2.36
                
                
                
                222%
                
                
                
                7.43%
                
                
                
                8.47%Series
      D Convertible Preferred Stock
                
                $
                0.44
                
                
                
                2.36
                
                
                
                222%
                
                
                
                7.43%
                
                
                
                8.47%August
      24, 2006
                
                $
                0.41
                
                
                
                2.36
                
                
                
                222%
                
                
                
                9.28%
                
                
                
                8.47%December
      29, 2006
                
                $
                0.41
                
                
                
                2.36
                
                
                
                222%
                
                
                
                9.28%
                
                
                
                8.47%July
      10, 2008
                
                $
                0.36
                
                
                
                2.36
                
                
                
                222%
                
                
                
                14.00%
                
                
                
                8.47%July
      29, 2008
                
                $
                0.43
                
                
                
                2.36
                
                
                
                222%
                
                
                
                14.00%
                
                
                
                8.47%October
      28, 2008
                
                $
                0.43
                
                
                
                2.36
                
                
                
                222%
                
                
                
                14.00%
                
                
                
                8.47%April
      6, 2009
                
                $
                0.43
                
                
                
                2.36
                
                
                
                222%
                
                
                
                14.00%
                
                
                
                8.47%May
      1, 2009
                
                $
                0.43
                
                
                
                2.36
                
                
                
                222%
                
                
                
                14.00%
                
                
                
                8.47%June
      5, 2009
                
                $
                0.43
                
                
                
                2.36
                
                
                
                222%
                
                
                
                14.00%
                
                
                
                8.47%July
      15, 2009
                
                $
                0.43
                
                
                
                2.36
                
                
                
                222%
                
                
                
                14.00%
                
                
                
                8.47%August
      14, 2009
                
                $
                0.43
                
                
                
                2.36
                
                
                
                222%
                
                
                
                14.00%
                
                
                
                8.47%





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 March 31, 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).


14


Hybrid Financial
Instruments Carried at Fair Value – 2007 and 2008 Convertible Debentures -The March 2007, August 2007, April 11, 2008, May 16, 2008 and May 29,
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.





Subsequent
to the January 5, 2010 amendment, the shares indexed to the debentures 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 and August 2009 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 were modified to extend the
stated maturity date to July 29, 2012 and increase the look-back period used to
calculate the variable conversion price per share for all debentures to a period
of 125 days which increased our future anticipated cash flows related to those
instruments.  Because that increase exceeded the threshold prescribed
by FASB ASC 470-50, DebtModifications 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.





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 March 31, 2010 and December 31,
2009.


15





Embedded
                
                
                
                
                
                CommonFace
                
                
                Carrying
                
                
                Conversion
                
                
                Fair
                
                
                StockMarch 31, 2010
                
                Value
                
                
                Value
                
                
                Feature
                
                
                Value
                
                
                Shares(in
      thousands)Series C Convertible Preferred Stock
                
                $
                8,642
                
                
                $
                8,642
                
                
                $
                1,768
                
                
                $
                -
                
                
                
                19,640Series
      D Convertible Preferred Stock
                
                $
                2,500
                
                
                $
                2,500
                
                
                
                511
                
                
                
                -
                
                
                
                5,682August
      24, 2006
                
                $
                5,000
                
                
                $
                5,000
                
                
                
                3,645
                
                
                
                -
                
                
                
                12,195December
      29, 2006
                
                
                2,500
                
                
                
                2,500
                
                
                
                1,823
                
                
                
                -
                
                
                
                9,352March
      27, 2007
                
                
                7,459
                
                
                
                -
                
                
                
                -
                
                
                
                13,879
                
                
                
                18,192August
      24, 2007
                
                
                1,775
                
                
                
                -
                
                
                
                -
                
                
                
                3,616
                
                
                
                4,930April
      11, 2008
                
                
                390
                
                
                
                -
                
                
                
                -
                
                
                
                829
                
                
                
                1,083May
      16 ,2008
                
                
                500
                
                
                
                -
                
                
                
                -
                
                
                
                1,055
                
                
                
                1,389May
      29, 2008
                
                
                790
                
                
                
                -
                
                
                
                -
                
                
                
                1,665
                
                
                
                2,194July
      10, 2008
                
                
                137
                
                
                
                137
                
                
                
                143
                
                
                
                -
                
                
                
                383July
      29, 2008
                
                
                2,325
                
                
                
                2,325
                
                
                
                1,672
                
                
                
                -
                
                
                
                5,407October
      23, 2008
                
                
                2,325
                
                
                
                2,325
                
                
                
                1,606
                
                
                
                -
                
                
                
                5,407May
      1, 2009
                
                
                294
                
                
                
                294
                
                
                
                189
                
                
                
                -
                
                
                
                684June
      5, 2009
                
                
                715
                
                
                
                646
                
                
                
                519
                
                
                
                -
                
                
                
                1,663July
      15, 2009
                
                
                535
                
                
                
                535
                
                
                
                685
                
                
                
                -
                
                
                
                1,244August
      14, 2009
                
                
                475
                
                
                
                475
                
                
                
                290
                
                
                
                -
                
                
                
                1,105Total
                
                $
                25,220
                
                
                $
                14,237
                
                
                $
                12,851
                
                
                $
                21,044
                
                
                
                90,550





Embedded
                
                
                
                
                
                CommonFace
                
                
                Carrying
                
                
                Conversion
                
                
                
                
                
                StockDecember 31,
      2009
                
                Value
                
                
                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


16


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 March 31, 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 March 31,
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 March 31,2010
                    
                    
                    2009(in
      thousands)March
      27, 2007
                    
                    $
                    12,088
                    
                    
                    $
                    (16,025
                    )August
      24, 2007
                    
                    
                    3,212
                    
                    
                    
                    (3,641
                    )April
      11, 2008
                    
                    
                    713
                    
                    
                    
                    (795
                    )May
      16, 2008
                    
                    
                    915
                    
                    
                    
                    (997
                    )May
      29, 2008
                    
                    
                    1,444
                    
                    
                    
                    (1,573
                    )Gain
      (loss) from changes in fair value of hybrid instruments
                    
                    $
                    18,372
                    
                    
                    $
                    (23,031
                    )





17




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


Three Months Ended March 31,2010
                  
                  
                  2009(in
      thousands)Series
      C Convertible Preferred Stock
                  
                  $
                  14,628
                  
                  
                  $
                  (27,240
                  )Series
      D Convertible Preferred Stock
                  
                  
                  4,041
                  
                  
                  
                  -August
      24, 2006
                  
                  
                  10,962
                  
                  
                  
                  (12,075
                  )December
      29, 2006
                  
                  
                  5,342
                  
                  
                  
                  (6,165
                  )July
      10, 2008
                  
                  
                  267
                  
                  
                  
                  (256
                  )July
      29, 2008
                  
                  
                  3,497
                  
                  
                  
                  (914
                  )October
      28, 2008
                  
                  
                  3,300
                  
                  
                  
                  (1,004
                  )May
      1, 2009
                  
                  
                  470
                  
                  
                  
                  -June
      5, 2009
                  
                  
                  996
                  
                  
                  
                  -July
      15, 2009
                  
                  
                  505
                  
                  
                  
                  -August
      14, 2009
                  
                  
                  753
                  
                  
                  
                  -44,761
                  
                  
                  
                  (47,654
                  )Less:  Day-one
      loss from Series D Convertible Preferred financing(4,582
                  )
                  
                  
                  -Gain
      (loss) from change in fair value of derivative liability
                  
                  $
                  40,179
                  
                  
                  $
                  (47,654
                  )





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. The amendment reduced the exercise price of the July 2008
warrants resulting in an approximate decrease in fair value of
$3,500.





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.


18


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





March 31,
                
                
                December 31,
                
                
                
                March 31,
                
                
                December 31,2010
                
                
                2009
                
                
                
                2010
                
                
                2009Exercise
                
                
                Exercise
                
                Expiration
                
                
                
                
                Fair
                
                
                
                
                
                FairPrice
                
                
                Price
                
                Date
                
                Warrants
                
                
                Value
                
                
                Warrants
                
                
                ValueSeries C Convertible Preferred Stock
                
                $
                0.36
                
                
                $
                0.39
                
                2/17/2011
                
                
                750
                
                
                $
                238
                
                
                
                750
                
                
                $
                712Series
      D Convertible Preferred Stock
                
                $
                1.00
                
                
                
                —
                
                1/5/2017
                
                
                2,250
                
                
                
                1,148
                
                
                
                —
                
                
                
                —August
      24, 2006
                
                $
                0.36
                
                
                $
                0.39
                
                8/24/2011
                
                
                1,750
                
                
                
                770
                
                
                
                1,750
                
                
                
                1,697December
      29, 2006
                
                $
                0.36
                
                
                $
                0.39
                
                12/29/2011
                
                
                420
                
                
                
                193
                
                
                
                420
                
                
                
                412March
      27, 2007
                
                $
                0.36
                
                
                $
                0.39
                
                3/27/2012
                
                
                1,250
                
                
                
                588
                
                
                
                1,250
                
                
                
                1,238August
      24, 2007
                
                $
                0.36
                
                
                $
                0.39
                
                8/24/2012
                
                
                750
                
                
                
                353
                
                
                
                750
                
                
                
                750May
      16, 2008
                
                $
                0.36
                
                
                $
                0.39
                
                5/16/2015
                
                
                75
                
                
                
                37
                
                
                
                75
                
                
                
                77May
      29, 2008
                
                $
                0.36
                
                
                $
                0.39
                
                5/29/2015
                
                
                500
                
                
                
                250
                
                
                
                500
                
                
                
                515July
      29, 2008
                
                $
                0.43
                
                
                $
                0.47
                
                7/29/2015
                
                
                1,000
                
                
                
                500
                
                
                
                1,000
                
                
                
                1,000July
      29, 2008
                
                $
                1.00
                
                
                $
                0.47
                
                7/29/2015
                
                
                3,500
                
                
                
                1,715
                
                
                
                3,500
                
                
                
                3,500Other
      warrants
                
                $
                1.10-
      $3.50
                
                
                $
                1.10-
      $3.50
                
                Various
                
                
                47
                
                
                
                —
                
                
                
                67
                
                
                
                11Total
                
                
                12,292
                
                
                $
                5,792
                
                
                
                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
March 31, 2010 included an expected life equal to the remaining term of the
warrants, an expected dividend yield of zero, estimated volatility ranging from
145% to 217%, and risk-free rates of return of 0.16% to 3.28%. 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. The changes in the fair value of the warrants were as
follows:





Three Months Ended March 31,2010
                  
                  
                  2009(in
      thousands)Series
      C Convertible Preferred Stock
                  
                  $
                  474
                  
                  
                  $
                  (2,415
                  )Series
      D Convertible Preferred Stock
                  
                  
                  1,283
                  
                  
                  
                  -August
      24, 2006
                  
                  
                  928
                  
                  
                  
                  (5,670
                  )December
      29, 2006
                  
                  
                  218
                  
                  
                  
                  (1,369
                  )March
      27, 2007
                  
                  
                  650
                  
                  
                  
                  (4,063
                  )August
      24, 2007
                  
                  
                  398
                  
                  
                  
                  (2,445
                  )May
      16, 2008
                  
                  
                  40
                  
                  
                  
                  (257
                  )May
      28, 2008
                  
                  
                  265
                  
                  
                  
                  (1,705
                  )July
      29, 2008
                  
                  
                  2,285
                  
                  
                  
                  (15,224
                  )Other
      warrants
                  
                  
                  10
                  
                  
                  
                  (133
                  )Total
                  
                  $
                  6,551
                  
                  
                  $
                  (33,281
                  )





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.


19


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 months
ended March 31, 2010:


CompoundEmbedded
                  
                  
                  WarrantDerivative
                  
                  
                  Derivative
                  
                  
                  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
                  
                  
                  $
                  18,643





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. Since 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




There
were no stock options issued to employees and directors during the three months
ended March 31, 2010. A total of 150,000 stock options were issued to employees
during the three months ended March 31, 2009.  The grant date fair
values of the options issued during the three months ended March 31, 2009 was
$93,000, which amount is being recognized over the vesting period of the
options. For the three months ended March 31, 2010 and 2009, total stock-based
compensation expense recorded in the statement of operations was $58,000 and
$80,000 respectively.





On
January 14, 2010, we entered into a first amendment to employment agreement with
Iain A. McCready our Chairman and Chief Executive Officer. Pursuant to the terms
of the amendment, we agreed to issue to Mr. McCready an option to acquire
180,000 shares of the Common Stock.  The exercise price of the option
will be determined on the date of the grant.





Assumptions
used to value the stock options granted during the three months ended March 31,
2009 included an expected term of 5.62 years, volatility ranging
from 138%-282% and a risk free rate of 0.5%.




20




A summary
of the transactions during the year ended December 31, 2009 and the three months
ended March 31, 2010 with respect to our stock option plans
follows:




Weighted-AverageWeighted-
                
                
                
                
                
                ContractualAverage
                
                
                Aggregate
                
                
                LifeExercice
                
                
                Intrinsic
                
                
                RemainingShares
                
                
                Price
                
                
                Value
                
                
                in Years(in
      thousands)
                
                
                
                
                
                (in
      thousands)Outstanding
      at January 1, 2009
                
                
                997
                
                
                $
                2.00Granted
                
                
                283
                
                
                $
                1.00Excercised
                
                
                (116
                )
                
                $
                1.00Forfeited
                
                
                (218
                )
                
                $
                6.00Outstanding
      at December 31, 2009
                
                
                946
                
                
                $
                2.00
                
                
                $
                34
                
                
                
                8.1Exercisable
      at December 31, 2009
                
                
                697
                
                
                $
                3.00
                
                
                $
                25
                
                
                
                7.8Outstanding
      at December 31, 2009
                
                
                946
                
                
                $
                2.00Granted
                
                
                -
                
                
                $
                0.00Excercised
                
                
                -
                
                
                $
                0.00Forfeited
                
                
                (18
                )
                
                $
                1.00Outstanding
      at March 31, 2010
                
                
                928
                
                
                $
                2.00
                
                
                $
                -
                
                
                
                7.8Exercisable
      at March 31, 2010
                
                
                754
                
                
                $
                3.00
                
                
                $
                -
                
                
                
                7.6




A summary
of the status of our non-vested options as of March 31, 2010 and changes during
the three months then ended is presented below:




WeightedAverageGrant DateNonvested Shares
                  
                  Shares
                  
                  
                  Fair Value(in
      thousands)Nonvested
      at December 31, 2009
                  
                  
                  249
                  
                  
                  $
                  1.00Granted
                  
                  
                  -
                  
                  
                  $
                  0.00Vested
                  
                  
                  (57
                  )
                  
                  $
                  1.00Forfeited
                  
                  
                  (18
                  )
                  
                  $
                  0.00Nonvested
      at March 31, 2010
                  
                  
                  174
                  
                  
                  $
                  1.00







The
following table summarizes information about our stock options outstanding at
March 31, 2010:




Options Outstanding
                  
                  
                  Options ExercisableRange of ExercisePrices
                  
                  Number of
                    Shares
                  
                  
                  Weighted-Average
                    Remaining
                    Life
                  
                  
                  Weighted-Average
                    ExercisePrice
                  
                  
                  Number of
                    Shares
                  
                  
                  Weighted-Average
                    Exercise
                    Price(in thousands)
                  
                  
                  (in
      years)
                  
                  
                  
                  
                  
                  (in thousands)$1.00
      to $5.00
                  
                  
                  851
                  
                  
                  
                  8.1
                  
                  
                  $
                  2.00
                  
                  
                  
                  677
                  
                  
                  $
                  2.00$6.00
      to $10.00
                  
                  
                  52
                  
                  
                  
                  5.2
                  
                  
                  $
                  8.00
                  
                  
                  
                  52
                  
                  
                  $
                  8.00$10.00
      to $15.00
                  
                  
                  21
                  
                  
                  
                  5.3
                  
                  
                  $
                  13.00
                  
                  
                  
                  21
                  
                  
                  $
                  13.00$15.00
      to $20.00
                  
                  
                  4
                  
                  
                  
                  5.9
                  
                  
                  $
                  18.00
                  
                  
                  
                  4
                  
                  
                  $
                  18.00928
                  
                  
                  
                  7.8
                  
                  
                  $
                  2.00
                  
                  
                  
                  754
                  
                  
                  $
                  3.00


21




There
were no stock options exercised during the three months ended March 31, 2010.
During the three months ended March 31, 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 March 31, 2010 and December 31,
2009:





March 31,
                  
                  
                  December 31,2010
                  
                  
                  2009(in
      thousands)Accruals
      for disputed services
                  
                  $
                  2,318
                  
                  
                  $
                  2,412Accrued
      operating expenses
                  
                  
                  1,519
                  
                  
                  
                  1,608Accrued
      payroll related expenses
                  
                  
                  76
                  
                  
                  
                  158Accrued
      interest
                  
                  
                  3,536
                  
                  
                  
                  3,114Total
                  
                  $
                  7,449
                  
                  
                  $
                  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 an investment by us and 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.





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.





The Hudson
Consulting Group, LLC.– On June 30, 2009, we received from the Superior
Court of Fulton County, Georgia, a Notice of Filing of Foreign Judgment in favor
of The Hudson Consulting Group, LLC, related to the judgment granted against us
by the Superior Court, Judicial District of Middlesex, in the State of
Connecticut, granted on August 22, 2008.  In this judgment, Hudson
sought to collect disputed fees related to their recruiting services. The Notice
of Filing seeks to collect on the judgment of approximately $61,000, which was
granted in Connecticut. We are seeking to settle this matter.




William Klawonn
v. Y.A. Global Investments, L.P. and NeoMedia Technologies, Inc. – On
April 28, 2010, William Klawonn, a purported shareholder of NeoMedia, filed a
derivative action, in the United States District Court for the District of New
Jersey, against Y.A. Global and NeoMedia claiming trading activities that
violated section 15 U.S.C. § 78p(b).  Plaintiffs seek an unspecified
amount of damages plus attorney’s fees, interest and court
costs.  NeoMedia has not yet filed a response to the
complaint.  At this time, we are unable to predict with any certainty
the outcome of this litigation including the merits or value of the
complaint.


22




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 months ended March 31, 2010 and
2009, and the identifiable assets as of March 31, 2010 and December 31, 2009 by
geographic area were as follows:





Three Months Ended March 31,2010
                    
                    
                    2009(in
      thousands)Revenue:United
      States
                    
                    $
                    167
                    
                    
                    $
                    67Germany
                    
                    
                    188
                    
                    
                    
                    423$
                    355
                    
                    
                    $
                    490Net
      Income (loss):United
      States
                    
                    $
                    57,669
                    
                    
                    $
                    (106,276
                    )Germany
                    
                    
                    (337
                    )
                    
                    
                    (323
                    )$
                    57,332
                    
                    
                    $
                    (106,599
                    )March
      31,
                    
                    
                    December
      31,2010
                    
                    
                    2009Identifiable
      Assets:United
      States
                    
                    $
                    8,407
                    
                    
                    $
                    8,738Germany
                    
                    
                    538
                    
                    
                    
                    686$
                    8,945
                    
                    
                    $
                    9,424


Note 9
– Transactions With Related Parties
  On April 12, 2010 we
entered into a consulting agreement with Laura A. Marriott, a member of our
Board of Directors. Under the terms of the agreement Ms. Marriott will serve as
our interim Chief Marketing Officer and provide services on a per-diem basis
plus expenses.


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





Overview





NeoMedia
Technologies, Inc., a Delaware corporation (“NeoMedia”, and also
refereed to herein as “us”, “we” and “our”) provides the
infrastructure to make mobile barcode scanning and its associated commerce easy,
universal, and reliable – worldwide. Our barcode ecosystem products, including
NeoReader, our mobile barcode reading software, read and transmit data from 2D
barcodes to its intended destination. Our Code Management (NeoSphere) and Code
Clearinghouse (NeoRouter) platforms create, connect, record, and transmit the
transactions embedded in the barcodes, like web-URLs, text messages (SMS), and
telephone calls, ubiquitously and reliably.





In order
to provide complete mobile marketing solutions, we also offer barcode scanning
hardware that reads barcodes displayed on mobile phone screens or printed media.
We also provide infrastructure solutions to enable mobile ticketing and
couponing programs – including scanner hardware and system support software for
seamless implementation.





Our technology
is supported by our patents. In addition, we have an open standards philosophy
designed to make integration and use of the technology easy for handset
manufacturers, mobile operators and advertisers; and the user experience safe,
reliable and interoperable for consumers.


23




During
2009 and early 2010, we have taken steps to build on the developing barcode
ecosystem based on the strengths of our patent portfolio. To accomplish this, we
have entered into several licensing programs and resolved a significant
outstanding legal matter.





On July
28, 2009, we entered into a non-exclusive patent licensing agreement with Mobile
Tag, Inc. for machine readable mobile codes under our patent portfolio. Under
the terms of that agreement, we will receive a percentage of revenue generated
by Mobile Tag through the use and licensing of our patent
portfolio.





On
October 2, 2009, we entered into a four year agreement with Neustar,
Inc. in which we granted to Neustar a non-exclusive license to a portion of
our patent portfolio primarily for the purpose of establishing and providing
registry and clearinghouse services within a defined field of use and geographic
territory. The terms of the license also granted to Neustar an exclusive right
to grant royalty bearing sub-licenses for the use of the same portion of our
patent portfolio within the defined field of use and geographic territory, to
resolution authorities for a period of not less than one year, and up to a
maximum of four years depending on the achievement of certain milestones as set
forth in the license agreement. In addition, Neustar will perform certain
reservations, administration, billing and collection and other additional
services for our benefit as well as for the benefit of Neustar and the
sub-licensees. On January 22, 2010 we amended this agreement to further expand
our opportunities by including several of our Mexican patents and expanding the
geographical territory covered by this agreement to include Mexico.





On
October 7, 2009, we entered into a four year agreement with Brand Extension
Mobile Solutions, S.A., a Madrid (Spain) corporation (“BEMS”), in which
we granted to BEMS a royalty-bearing, and non-exclusive license to use the
licensed platform in an approved field of use within a certain geographical
territory. The licensed platform will support BEMS’s performance of exclusive
commercial operations under a particular cooperation agreement between BEMS and
Telefónica Internacional, S.A.U., a subsidiary of Spain’s Telefonica S.A., one
of the world’s largest telecommunication companies. BEMS intends to use us as
their prime vendor in connection with their agreement with Telefónica. The
license agreement grants to BEMS the right to distribute our barcode reading
software via download or through its inclusion in mobile devices. The license
agreement also requires BEMS to purchase twenty-five of our barcode scanning
hardware products to support testing and marketing of barcode and mobile barcode
based ticketing and couponing activities.





On
October 16, 2009, we entered into a ten year settlement and license agreement
with Scanbuy, Inc., in which we and Scanbuy settled all of our pending
litigation against each other and granted non-exclusive licenses and a
sublicense to each other. Pursuant to the terms of the agreement, we granted to
Scanbuy a royalty-bearing, non-exclusive license to use a portion of the
Company’s patent portfolio within a defined field of use and geographic
territory.





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. Sony Ericsson will begin shipping phones pre-loaded with our
NeoReader barcode scanning application globally in the 1st half of 2010. The
NeoReader will be pre-installed across all Sony Ericsson platforms.





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. The Program will combine all of the elements required to fulfill our
goal of a seamless and interoperable barcode ecosystem and will allow
advertisers to test the market and technology.





During
2010, we have entered into three platform reseller agreements with resellers of
our services. These resellers are typically advertising agencies representing
brands in the United States and Europe. Through these agreements we will provide
barcode ecosystem advertising campaign management and support services to the
resellers’ customers. Revenue derived from these services will be shared between
us and the resellers. These agreements are expected to begin generating revenue
during the second half of 2010.


24




Comparison
of the Three Months Ended March 31, 2010 and 2009





Results
of Operations





Beginning
in 2009 and continuing into 2010, we continued to focus on the
development of our barcode ecosystem technology. During the three months ended
March 2010 and 2009, respectively, operating losses were $1.7 million compared
to $1.6 million. However our net income was $57.3 million for the three months
ended March 2010 compared to a loss of $106.6 million during the three months
ended March 2009. The loss incurred in the three months ended March 2009 was the
result of non-cash losses from the change in fair value of our hybrid financial
instruments, warrants and debentures, totaling $104.0 million. We incurred these
non-cash losses principally as a result of increases in the market value of our
common stock during 2009. During the three months ended March 2010, we reported
non-cash gains on our hybrid financial instruments, warrants and debentures,
totaling $65.1 million. These non-cash gains were principally the result of
declines in the market value of our common stock during 2010.





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





Three months ended March 31,
                  
                  
                  Increase (decrease)2010
                  
                  
                  2009
                  
                  
                  $
                  
                  
                  %(in
      thousands)Hardware
                  
                  $
                  135
                  
                  
                  $
                  397
                  
                  
                  $
                  (262
                  )
                  
                  
                  -66
                  %Lavasphere
                  
                  
                  46
                  
                  
                  
                  21
                  
                  
                  
                  25
                  
                  
                  
                  117
                  %Barcode
      ecosystem
                  
                  
                  6
                  
                  
                  
                  -
                  
                  
                  
                  6
                  
                  
                  
                  0
                  %Patent
      licensing
                  
                  
                  165
                  
                  
                  
                  10
                  
                  
                  
                  155
                  
                  
                  
                  1549
                  %Legacy
      products
                  
                  
                  2
                  
                  
                  
                  57
                  
                  
                  
                  (55
                  )
                  
                  
                  -96
                  %Other
                  
                  
                  1
                  
                  
                  
                  5
                  
                  
                  
                  (4
                  )
                  
                  
                  -81
                  %Total
      revenues
                  
                  $
                  355
                  
                  
                  $
                  490
                  
                  
                  $
                  (135
                  )
                  
                  
                  -28
                  %




Revenues.Revenues for the three months ended March 2010 and 2009, respectively,
were $355,000 and $490,000, a decrease of $135,000, or 28%. Our revenues and
product mix have changed as a result of changes in our operations and business
strategy. For the three months ended March 2010 and 2009, respectively, our
hardware product sales were $135,000 and $397,000, a decrease of 66%. During
2009, we introduced our newest barcode scanners and sold 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
March 2010 and 2009, respectively, our Lavasphere product sales were $46,000 and
$21,000, an increase of $25,000, or 119%, as a result of modest increased demand
for these products and services. For the three months ended March 2010, our
Barcode ecosystem revenue was $6,000, as a result of increased marketing
campaigns by advertising agencies who represent brands in the United States and
Europe. Revenues related to platform licensing and patent licensing agreements
for the three months ended March 2010 and 2009, respectively, were $165,000 and
$10,000. In succeeding quarters, we expect these revenues to increase as we
shift the focus of our efforts toward the barcode ecosystem. We believe this
focus will deliver the most value in the future.




Cost of Revenues.Cost of revenues for the three months ended March 2010 and 2009,
respectively, were $339,000 and $527,000, a decrease of $188,000, or 36%. Cost
of revenues for NeoMedia Europe, related to our hardware products for the same
period were $94,000 and $289,000. Amortization costs related to our patents and
the proprietary software of NeoMedia Europe for the three months ended March
2010 and 2009, respectively, were $233,000 and $238,000.




Sales and
Marketing.Sales and marketing expenses were $319,000 and $286,000 for the period
ended March 2010 and 2009, respectively, an increase of $33,000 or 12%. The
increase in sales and marketing expense resulted from additional efforts in late
2009 and early 2010 to promote our business strategy and core
technology.


25




General and
Administrative.General and administrative expenses were $1.09
million and $923,000 for the period ended March 2010 and 2009, respectively an
increase of $172,000 or 19%. Expenses increased as a result of increased
professional services fees related to legal and accounting.




Research and
Development.Expenses for research and development were $283,000 and $324,000 for the
period ended March 2010 and 2009, respectively, a decrease of $41,000 or 13%.
Research and development decreased as we completed the development of our
upgraded hardware products and our barcode ecosystem products.




Loss from
Operations.For the period ended March 2010 and 2009, respectively, our loss from
operations was increased slightly to $1.7 million, from $1.6 million. This
increased loss of $111,000 was primarily the result of minimal increases in our
sales and marketing expenses of $33,000, increased general and administrative
expenses of $172,000, research and development expense reductions of $41,000,
and an increase in our gross profit margin of $53,000.





Loss on
Extinguishment of Debt.On January 5, 2010, we
modified the terms of our debentures with YA Global which extended the stated
maturity dates to July 29, 2012, and increased to 125 days the look-back period
used to calculate the variable conversion price per share for all
debentures.  This modification increased our future anticipated cash flows
related to those instruments.  Because the 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 extinguishment of debt and we recognized a loss
in the first quarter of 2010 of approximately $5.6 million.





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 interest due under these instruments, as well as
changes in the fair value of the common stock underlying the instruments. For
the period ended March 2010, liability related to these hybrid instruments
decreased resulting in a gain of $18.4 million. For the period ended March 2009,
liability related to these hybrid instruments increased resulting in a loss of
$23.0 million. 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 hybrid financial
instruments include relatively low fixed conversion prices, it is possible that
further increases in the market price of our stock could cause the fair value of
our hybrid financial instruments to increase 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 period ended March
2010, the liability related to warrants decreased resulting in a gain of
$6.6 million. For the period ended March 2009, the liability related to warrants
increased resulting in a loss of $33.3 million. 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 increases in the market price of our common stock could cause the fair
value of our warrants to increase significantly in future periods.





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 stock, 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 period ended March
2010, the liability related to the derivative instruments embedded in the Series
C and D preferred stock and these debentures decreased resulting in a gain of
$40.2 million. For the period ended March 2009, the liability related to the
derivative instruments embedded in the Series C preferred stock and these
debentures increased resulting in a loss of $47.7 million. 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 increases in the market price of our common
stock could cause the fair value of our derivative financial instruments to
increase significantly in future periods.


26




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 $446,000 and $1.1 million for the
period ended March 2010 and 2009, respectively.




Net Income
(Loss).As
a result of the above, during the periods ended March 2010 and 2009,
respectively, we experienced net income of $57.3 million, and a loss of $106.6
million, resulting in an overall increase of $163.9 million. This positive
change primarily resulted from gains associated with our derivative instruments
of $169.1 million, offset by a loss on extinguishment of debt of $5.6 million,
and a slight increase in our loss from operations of $111,000.




Liquidity
and Capital Resources




As of
March 31, 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 $1.8 million for the three months
ended March 31, 2010 compared with $1.1 million for the period ended March
31, 2009, representing increased operational expenses in connection with the
development of our barcode ecosystem.




Cash used
in investing activities was $5,000 and $24,000 for the three months ended March
31, 2010 and 2009, representing the purchase of equipment.




Cash
provided by financing activities during the three months ended March 31, 2010
was $1,900,000, reflecting the 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 due to YA Global. Cash provided by financing activities was
$116,000 for the three months ended March 31, 2009 which resulted from the
proceeds received upon exercise of stock options by two former
employees.




On April
1, 2010, we issued a promissory note to YA Global for a principal amount of
$500,000, less structuring fees of $10,000 and monitoring fees of $15,000. The
promissory note matures on March 31, 2011, accrues interest at 8% per annum and
is payable on the maturity date in cash.




As of
March 31, 2010, we had a working capital deficiency of $67.0 million, of which
$26.8 million relates to the fair value of hybrid and derivative financial
instruments, and $27.1 million relates to the carrying value of debentures.
These values are significantly greater than the face amount of our debt that
would be otherwise due in cash, and if the conversion features of these
instruments and the associated warrants did not exist.





Significant
Liquidity Events





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 US GAAP, which contemplate our
continuation as a going concern.  Net income (loss) for the three
months ended March 31, 2010 and 2009 was $57.3 million and ($106.6) million,
respectively and net cash used by operations during the same period was $1.8
million and $1.1 million, respectively.  At March 31, 2010, we have an
accumulated deficit of $222.2 million. We also have a working capital deficit of
$67.0 million, of which $53.9 million is related to our financing instruments,
including $26.8 million related to the fair value of warrants and those
debentures that are recorded as hybrid financial instruments, and $27.1 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.


27




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 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, as they have
in the past, 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 May 27, 2010.




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 March
31, 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.




Additionally,
pursuant to the terms of the Investment Agreement between us and YA Global in
connection with our Series C convertible preferred stock sale, 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 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 March 31, 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:


28





·
            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;




·
            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.




Inherent
Limitations-Our
management, including our Chief Executive Officer and Chief Financial Officer,
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
March 31, 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.





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 yet 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


29





ITEM
3.  Defaults Upon Senior Securities





None





ITEM
4.  (Removed and Reserved)





Not
Applicable





ITEM
5.  Other Information





None


30




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




31




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




32




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




33




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




34




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




35




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




36




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
                                            
                                            4/2/201014
                                            
                                            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




37


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:        May 17,
      2010
                    /s/ Michael
      W.  ZimaMichael W. ZimaChief Financial Officer & Principal Accounting
  Officer




38