**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, 2008**





**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
              incorporation
                or organization)
            (I.R.S.
                Employer
              Identification
                No.)





**Two
      Concourse Parkway, Suite 500, Atlanta, GA 30328**


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





**678-638-0460**


(Registrants’
      telephone number, including area code)




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





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
      definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of
      the Exchange Act. (Check one):





Large
      accelerated filer oAccelerated filer
oNon-accelerated filer o Smaller
      Reporting Company x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act). Yes
oNo x





The
      number of outstanding shares of the registrant’s Common Stock on May 9, 2008 was
      1,068,376,229 .










**NeoMedia
      Technologies, Inc.**


**Form
      10-** **Q**


**For
      the Quarterly Period Ended March 31, 2008**


**Index**




PagePART
                I Financial Information
            1ITEM
                1. Financial Statements
            1Note
                1 - General
            4Note
                2 - Summary of Significant Accounting Policies
            4Note
                3 - Discontinued Operations
            7Note
                4 - Financing
            8Note
                5 - Investment in Marketable Securities and Other Long-term
                Assets
            15Note
                6 - Stock-Based Compensation
            15Note
                7 - Inventory
            17Note
                8 - Accrued Liabilities
            17Note
                9 - Income Taxes
            17Note
                10 - Contingencies
            18Note
                11 - Geographic Reporting
            18Note
                12 - Subsequent Events
            19ITEM
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            20ITEM
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            25ITEM
                4T. Controls and Procedures
            25PART
                II Other Information
            26ITEM
                1. Legal Proceedings
            26ITEM
                1A. Risk Factors
            26ITEM
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            35ITEM
                3. Default upon Senior Securities
            36ITEM
                4. Submission of Matters to a Vote of Security Holders
            36ITEM
                5. Other Information
            36ITEM
                6. Exhibits
            36Signatures
            37










**PART
      I — FINANCIAL INFORMATION**


**ITEM
      1. Financial Statements**





**NeoMedia
      Technologies, Inc. and Subsidiaries**


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


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





**March 31,**
            
            **December 31,******
            
            **2008**
            
            **2007**(unaudited)**ASSETS**Current
                assetsCash
                and cash equivalents
            
            $
            220
            
            $
            1,415Trade
                accounts receivable, net of allowance for doubtful accounts of $78
                and
                $78, respectively
            
            
            33
            
            
            58Other
                receivable
            
            
            4
            
            
            225Inventories,
                net of allowance for obsolete & slow-moving inventory of $100 and $80,
                respectively
            
            
            221
            
            
            198Investment
                in marketable securities
            
            
            -
            
            
            8Prepaid
                expenses and other current assets
            
            
            178
            
            
            188Assets
                held for sale
            
            
            -
            
            
            159Total
                current assets
            
            
            656
            
            
            2,251Property,
                equipment & leasehold improvements, net
            
            
            95
            
            
            85Goodwill
            
            
            3,418
            
            
            3,418Proprietary
                software
            
            
            3,250
            
            
            3,413Patents
                and other intangible assets
            
            
            2,555
            
            
            2,608Cash
                surrender value of life insurance policy
            
            
            747
            
            
            747Other
                long term assets
            
            
            605
            
            
            1,002**Total
                assets**
            
            **$**
            **11,326**
            
            **$**
            **13,524****LIABILITIES
                AND STOCKHOLDERS' DEFICIT**Current
                liabilitiesAccounts
                Payable
            
            $
            384
            
            $
            309Liabilities
                held for sale
            
            
            -
            
            
            13Accrued
                expenses
            
            
            6,002
            
            
            6,015Deferred
                revenues and customer prepayments
            
            
            685
            
            
            669Notes
                payable
            
            
            15
            
            
            44Accrued
                purchase price guarantee
            
            
            4,535
            
            
            4,549Deferred
                tax liability
            
            
            706
            
            
            706Derivative
                financial instruments
            
            
            19,199
            
            
            24,651Debentures
                payable
            
            
            29,355
            
            
            30,699Preferred
                stock, $0.01 par value, 25,000,000 shares authorized, 22,000 issued,
                19,939 shares outstanding
            
            
            19,939
            
            
            20,097Total
                liabilities
            
            
            80,820
            
            
            87,752Commitments
                and contingencies (note 10)Shareholders'
                deficitCommon
                stock, $0.01 par value, 5,000,000,000 shares authorized, 1,048,084,313
                and
                1,025,295,693 shares issued and 1,044,933,044 and 1,022,144,424 shares
                outstanding, respectively
            
            
            10,449
            
            
            10,221Additional
                paid in capital
            
            
            118,935
            
            
            118,427Accumulated
                deficit
            
            
            (197,993
            )
            
            (201,565
            )Accumulated
                other comprehensive loss
            
            
            (106
            )
            
            (532
            )Treasury
                stock, at cost, 201,230 shares
            
            
            (779
            )
            
            (779
            )Total
                shareholders' deficit
            
            
            (69,494
            )
            
            (74,228
            )**Total
                liabilities and shareholders’ deficit**
            
            **$**
            **11,326**
            
            **$**
            **13,524**




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




1


**NeoMedia
      Technologies, Inc. and Subsidiaries**


**Consolidated
      Statements of Operations** **and Comprehensive Loss**


**(Unaudited)**


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





**For the three months ended****March 31, 2008**
            
            **March 31, 2007**Revenues
            
            $
            264
            
            $
            399Cost
                of sales
            
            
            313
            
            
            313**Gross
                Profit (Loss)**
            
            
            (49
            )
            
            86Sales
                and marketing
            
            
            628
            
            
            858General
                and administrative
            
            
            1,206
            
            
            2,460Research
                and development
            
            
            562
            
            
            506Operating
                loss
            
            
            (2,445
            )
            
            (3,738
            )(Gain)
                loss on extinguishment of debt
            
            
            (4
            )
            
            -Interest
                (income)/expense, net
            
            
            (1,171
            )
            
            1,698(Gain)/loss
                on sale of assets
            
            
            84
            
            
            9(Gain)
                loss from change in fair value of derivative financial
                instruments
            
            
            (5,392
            )
            
            3,508Operating
                income (loss) from continuing operations before income
                taxes
            
            
            4,038
            
            
            (8,953
            )Income
                tax benefit (expense)
            
            
            -
            
            
            (29
            )Net
                income (loss) from continuing operations
            
            
            4,038
            
            
            (8,924
            )Income/(loss)
                from discontinued operations (Note 3)
            
            
            (445
            )
            
            (2,573
            )Net
                income (loss)
            
            
            3,593
            
            
            (11,497
            )Accretion
                of dividends on convertible preferred stock
            
            
            (399
            )
            
            (433
            )Net
                income (loss) attributable to common shareholders
            
            $
            3,194
            
            $
            (11,930
            )Comprehensive
                income (loss):Net
                income (loss)
            
            
            3,593
            
            
            (11,497
            )Other
                comprehensive lossUnrealized
                gain/(loss) on marketable securities
            
            
            -
            
            
            (26
            )Foreign
                currency translation adjustment
            
            
            -
            
            
            9Comprehensive
                income (loss)
            
            $
            3,593
            
            $
            (11,514
            )Net
                income/(loss) per share, basic:Continuing
                operations
            
            $
            0.004
            
            $
            (0.013
            )Discontinued
                operations
            
            $
            (0.000
            )
            $
            (0.004
            )$
            0.004
            
            $
            (0.017
            )Net
                income/(loss) per share, fully diluted:Continuing
                operations
            
            $
            0.000
            
            $
            (0.013
            )Discontinued
                operations
            
            $
            (0.000
            )
            $
            (0.004
            )$
            0.000
            
            $
            (0.017
            )Weighted
                average number of common shares used in per share
                calculation:Basic
            
            
            1,075,168,419
            
            
            684,819,898Fully
                diluted
            
            
            9,617,290,165
            
            
            684,819,898




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


2


**NeoMedia
      Technologies, Inc. and Subsidiaries**


**Consolidated
      Statements of Cash Flows**


**(Unaudited)**


**(In
      Thousands)**




****
            
            **For the three months ended****March 31, 2008**
            
            **March 31, 2007********CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                income (loss)
            
            $
            3,593
            
            $
            (11,497
            )Adjustments
                to reconcile net loss to net cash used in operating activities from
                continuing operations:Loss
                from discontinued operations
            
            
            445
            
            
            2,573Depreciation
                and amortization
            
            
            269
            
            
            279Loss
                (gain) on sale of assets
            
            
            84
            
            
            -Change
                in fair value from revaluation of warrants and embedded conversion
                features
            
            
            (5,392
            )
            
            3,508(Gain)
                loss on early extinguishment of debt
            
            
            (4
            )
            
            -Stock-based
                compensation
            
            
            359
            
            
            891Interest
                (income) expense related to convertible debt
            
            
            (1,157
            )
            
            781Change
                in value of life insurance policies
            
            
            -
            
            
            (4
            )Changes
                in operating assets and liabilities:Receivables
            
            
            246
            
            
            (6
            )Inventories
            
            
            (22
            )
            
            (43
            )Prepaid
                expenses and other current assets
            
            
            26
            
            
            (21
            )Accounts
                payable and accrued expenses
            
            
            (127
            )
            
            (234
            )Deferred
                revenue and other current liabilities
            
            
            16
            
            
            138Cash
                used in operating activities of continuing operations
            
            
            (1,664
            )
            
            (3,635
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES**Expenditures
                for property, plant, and equipment
            
            
            (66
            )
            
            -Loans
                repaid from subsidiaries
            
            
            289
            
            
            933Proceeds
                from sale of investments
            
            
            750
            
            
            -Payment
                of purchase price guarantee obligations
            
            
            (14
            )
            
            (2,372
            )Amounts
                received under notes receivable
            
            
            -
            
            
            450Cash
                provided by (used in) investing activities of continuing operations
            
            
            959
            
            
            (989
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES**Borrowing
                under convertible debt instrument
            
            
            (29
            )
            
            6,678Net
                proceeds from exercise of stock options and warrants
            
            
            -
            
            
            9Cash
                (used in) provided by financing activities of continuing operations
            
            
            (29
            )
            
            6,687Net
                cash (used in) provided by continuing operations
            
            
            (734
            )
            
            2,063Effect
                of exchange rate changes on cash for continuing operations
            
            
            (16
            )
            
            (8
            )Net
                cash used in discontinued operationsOperating
                cash flows
            
            
            (445
            )
            
            (2,573
            )Investing
                cash flows
            
            
            -
            
            
            -Financing
                cash flows
            
            
            -
            
            
            -Total
                cash flows used in discontinued operations
            
            
            (445
            )
            
            (2,573
            )Net
                decrease in cash and cash equivalents
            
            
            (1,195
            )
            
            (518
            )Cash
                and cash equivalents at beginning of period
            
            
            1,415
            
            
            2,813Cash
                and cash equivalents at end of period
            
            $
            220
            
            $
            2,295


Supplemental
                cash flow information:Interest
                paid during the period
            
            $
            14
            
            $
            401Unrealized
                gain (loss) on marketable securities
            
            
            -
            
            
            (26
            )Fair
                value of shares issued to satisfy purchase price guarantee obligations
            
            
            -
            
            
            12,721Accretion
                of dividends on Series C Convertible Preferred Stock
            
            
            399
            
            
            433Series
                C Convertible Preferred Stock converted to common stock
            
            
            225
            
            
            -Deemed
                dividend on preferred stock conversions
            
            
            21
            
            
            -





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


3


**NeoMedia
      Technologies, Inc. and Subsidiaries**


**Notes
      to Consolidated Financial Statements**


***(Unaudited)***





**Note
      1 -****General**




***Business*** -
      NeoMedia Technologies together with our subsidiaries (collectively the
“Company”)  provides
      internet advertising solutions using wireless technologies to connect
      traditional print and broadcast media companies to active mobile content. Using
      camera-enabled mobile phones, barcode-reading software (NeoReader TM ),
      and an
      interoperable billing, clearing and settlement infrastructure
      (NeoServer-OMS/OMI), we embrace open standards, full interoperability, and
      are
      barcode symbology agnostic.




Our
      mobile phone technology, NeoReader TM ,
      reads
      and transmits data from 1-D, and 2-D barcodes to its intended destination.
      Our
      Optical Messaging and Interchange platforms (OMS and OMI) create, connect,
      record, and transmit the transactions embedded in the 1-D and 2-D barcodes,
      like
      web-URLs, text messages (SMS), and telephone calls, ubiquitously and reliably.
      We provide the industrial and carrier-grade infrastructure to enable reliable,
      scalable, and billable commerce. To provide a robust high-performance
      infrastructure for the processing of optical codes, we extend our offering
      with
      the award winning Gavitec technology. Gavitec’s Mobile Ticketing and Couponing
      solutions allow users to enter information and opt-in to initiate mobile
      transactions.




***Going
      Concern*** **-** Our
      code-reading business has historically incurred net losses and losses from
      operations. We have reduced cash outlays for payments associated with prior
      integration and discontinued operation liabilities. We will continue to have
      negative cash flows as we continue to execute on our business plan. There can
      be
      no assurance that our continuing efforts to execute our business plan will
      be
      successful and if we will be able to continue as a going concern. We will
      require additional capital, which may not be available on suitable terms to
      continue operations. The accompanying consolidated financial statements have
      been prepared in conformity with accounting principles generally accepted in
      the
      United States of America, which contemplate our continuation as a going concern.
      Net income (loss) from continuing operations for the three months ended March
      31, 2008 and 2007 was $4.0 million and ($8.9) million, respectively. Net cash
      used for operations during the same periods was $1.6 million and $3.6 million.
      We also have an accumulated deficit of $197.9 million  and
      a
      working capital deficit of $80.0 million  as
      of
      March 31, 2008 .




We
      have
      an obligation as of March 31, 2008 of $4.5 million relating to purchase price
      guarantee associated with our acquisition of 12Snap.




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




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




Should
      financing sources fail to materialize, our management would seek alternate
      funding sources such as the sale of common and/or preferred stock, the issuance
      of debt, or the sale of our marketable assets. Our management’s plan is to
      attempt to secure adequate funding to bridge the commercialization of our
      NeoReader TM business.




In
      the
      event that these financing sources do not materialize, or that we are
      unsuccessful in increasing our revenues and profits, we will be forced to
      further reduce our costs, may be unable to repay our debt obligations as they
      become due, or respond to competitive pressures, any of which circumstances
      would have a material adverse effect on our business, prospects, financial
      condition and results of operations. Additionally, if these funding sources
      or
      increased revenues and profits do not materialize, and we are unable to secure
      additional financing, we could be forced to reduce or cease our business
      operations.




**Note
      2 -****Summary
      of Significant Accounting Policies**




For
      a
      complete discussion of our significant accounting policies, please refer to
      our
      Annual Report on Form 10-K for the fiscal year ended December 31,
      2007.


4




***Interim
      Unaudited Financial Information*** **-** The **** accompanying
      unaudited consolidated financial statements include our results of operations
      for the three months ended March 31, 2008 and 2007. These financial statements
      were prepared in conformity with accounting principles generally accepted in
      the
      United States of America (“U.S. GAAP”) for interim financial information. In
      management’s opinion, these statements include all adjustments necessary for a
      fair statement of the results of the interim periods shown. All adjustments
      are
      of a normal recurring nature unless otherwise disclosed. The net effect of
      discontinued operations is reported separately from the results of our
      continuing operations. Operating results for the three month periods ended
      March
      31, 2008 and 2007 are not necessarily indicative of the results that may be
      expected for the full fiscal year.




***Basis
      of Presentation*** **-** This
      report on Form 10-Q for the three months ended March 31, 2008 should be read
      in
      conjunction with our Annual Report on Form 10-K for the twelve months ended
      December 31, 2007. The financial statements include the accounts of NeoMedia
      Technologies, Inc. and its wholly owned subsidiaries. All significant
      inter-company balances and transactions have been eliminated. We operate as
      one
      reportable segment.




During
      the year ended December 31, 2006, we completed acquisitions of Mobot, Sponge,
      Gavitec, 12Snap, and BSD. During 2006, we also divested of a substantial portion
      of our ownership in both Mobot and Sponge. During 2007, we made the strategic
      decision to sell 12Snap and Telecom Services (consisting of the business
      acquired from BSD) and these divestitures were completed on April 4, 2007 and
      October 30, 2007, respectively.




The
      consolidated statements of operations presented herein reflect the results
      of
      these acquired subsidiaries as follows: 12Snap results are included from January
      1, 2007 through March 31, 2007 under the caption “Loss from discontinued
      operations”; BSD results are included from January 1, 2007 through March 31,
      2007 under the caption “Loss from discontinued operations”; and Gavitec results
      are included in NeoMedia’s consolidated results from continuing operations for
      all periods presented.




***Use
      of Estimates*** - The
      preparation of financial statement in conformity with U.S. GAAP requires
      management to make estimates and assumptions that affect amounts reported
      therein. Due to the inherent uncertainty involved in making estimates, actual
      results reported in future periods may differ from those estimates.




***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, 2007, we reported net loss per share,
      and as such basic and diluted loss per share were equivalent. We have excluded
      all outstanding stock options, warrants, convertible debt and convertible
      preferred stock from the calculation of diluted net loss per share because
      these
      securities are anti-dilutive for all years presented. During the three months
      ended March 31, 2008, we reported net income per share and included all
      convertible shares in the fully diluted net income per share calculation. The
      shares included and excluded from the calculation of net income (loss) per
      share
      for the three months ended March 31, 2008 and 2007 are detailed in the table
      below:







**March 31, 2008**
            
            **March 31, 2007**Outstanding
                Stock Options
            
            
            116,096,867
            
            
            106,978,761Outstanding
                Warrants
            
            
            504,775,000
            
            
            441,325,000Convertible
                debt
            
            
            4,429,763,074
            
            
            415,001,413Convertible
                preferred stock
            
            
            3,491,486,805
            
            
            607,422,1658,542,121,746
            
            
            1,570,727,339





(1) 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 in the Series C
      convertible stock was convertible as of March 31, 2008 was calculated as the
      face value plus assumed dividends (if declared), divided by 97% of the lowest
      closing bid price for the 30 trading days preceding March 31, 2008. The number
      of shares of common stock into which the embedded conversion feature in the
      convertible debentures was convertible as of March 31, 2008 was calculated
      as
      the face value of each instrument divided by the lower of $0.01 or 50% of the
      average closing market price of our common stock for the 10 days prior to March
      31, 2008.





In
      addition to net income (loss) per share, we have also reported per share amounts
      on the separate income statement components required by APB 30, “ *Reporting
      the Results of Operations - Reporting the Effects of Disposal of a Segment
      of a
      Business, and Extraordinary, Unusual and Infrequently Occurring Events and
      Transactions* ,”
as
      the
      disposal activities of our discontinued operations were initiated prior to
      our
      adoption of FAS 144. Because we have reported a loss from continuing operations
      for the three months ended March 31, 2007, the effect of potentially dilutive
      securities has been excluded from the calculation of per share amounts for
      that
      period.


5




**R** **ecently
      Adopted Accounting Pronouncements**




On
      January 1, 2007, we adopted the provisions of Financial Accounting Standards
      Board (“FASB”) Interpretation No. 48 (“FIN 48”), *Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement
      No. 109,* which
      provides a financial statement recognition threshold and measurement attribute
      for a tax position taken or expected to be taken in a tax return. Under FIN
      48,
      we may recognize the tax benefit from an uncertain tax position only if it
      is
      more likely than not that the tax position will be sustained on examination
      by
      the taxing authorities, based on the technical merits of the position. The
      tax
      benefits recognized in the financial statements from such a position should
      be
      measured based on the largest benefit that has a greater than 50% likelihood
      of
      being realized upon ultimate settlement. FIN 48 also provides guidance on
      derecognition of income tax assets and liabilities, classification of current
      and deferred income tax assets and liabilities, accounting for interest and
      penalties associated with tax positions, and income tax disclosures. The
      implementation of FIN 48 did not result in any adjustments to our financial
      statements. For further information regarding our adoption of FIN 48, see Note
      11 - Income Taxes.




Effective
      January 1, 2008, we adopted the provisions of FAS 157, *Fair
      Value Measurements,* except
      as it applies to those nonfinancial assets and nonfinancial liabilities as
      noted
      in proposed FSP FAS 157-b. The partial adoption of FAS 157 did not have a
      material impact on our consolidated financial position, results of operations
      or
      cash flows. SFAS No. 157 defines fair value, establishes a framework for
      measuring fair value in generally accepted accounting principles, and expands
      disclosures about fair value measurements. This statement does not require
      any
      new fair value measurements, but provides guidance on how to measure fair value
      by providing a fair value hierarchy used to classify the source of the
      information. In February 2008, the FASB issued FASB Staff Position (“FSP”)
      157-2, *Effective Date of FASB Statement No. 157,* which
      delays the effective date of SFAS No. 157 for all nonfinancial assets and
      nonfinancial liabilities, except for items that are recognized or disclosed
      at
      fair value in the financial statements on a recurring basis (at least
      annually).




Effective
      January 1, 2008, we adopted the provisions of SFAS 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* .
      The
      adoption did not have a material impact on our consolidated financial position,
      results of operations or cash flows. SFAS No. 159 gives us the irrevocable
      option to carry many financial assets and liabilities at fair values, with
      changes in fair value recognized in earnings.




**Recent
      Accounting Pronouncements Not Yet Adopted**




In
      March
      2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”)
      No. 161, *Disclosures about Derivative Instruments and Hedging Activities, an amendment
      of
      FASB Statement No. 133,* which
      requires additional disclosures about the objectives of the derivative
      instruments and hedging activities, the method of accounting for such
      instruments under SFAS No. 133 and its related interpretations, and a
      tabular disclosure of the effects of such instruments and related hedged items
      on our financial position, financial performance, and cash flows. SFAS
      No. 161 is effective for us beginning January 1, 2009. We are
      currently assessing the potential impact that adoption of SFAS No. 161 may
      have on our financial statements.




In
      December 2007, the FASB issued SFAS No. 141R, *Business Combinations* ,
      which
      replaces SFAS No. 141. The statement retains the purchase method of
      accounting for acquisitions, but requires a number of changes, including changes
      in the way assets and liabilities are recognized in the purchase accounting.
      It
      also changes the recognition of assets acquired and liabilities assumed arising
      from contingencies, requires the capitalization of in-process research and
      development at fair value, and requires the expensing of acquisition-related
      costs as incurred. SFAS No. 141R is effective for us beginning
      January 1, 2009 and will apply prospectively to business combinations
      completed on or after that date.




In
      December 2007, the FASB issued SFAS No. 160, *Noncontrolling Interests in Consolidated Financial Statements, an amendment
      of
      ARB No. 51,* which
      changes the accounting and reporting for minority interests. Minority interests
      will be recharacterized as noncontrolling interests and will be reported as
      a
      component of equity separate from the parent’s equity, and purchases or sales of
      equity interests that do not result in a change in control will be accounted
      for
      as equity transactions. In addition, net income attributable to the
      noncontrolling interest will be included in consolidated net income on the
      face
      of the income statement and, upon a loss of control, the interest sold, as
      well
      as any interest retained, will be recorded at fair value with any gain or loss
      recognized in earnings. SFAS No. 160 is effective for us beginning January
      1, 2009 and will apply prospectively, except for the presentation and disclosure
      requirements, which will apply retrospectively. We are currently assessing
      the
      potential impact that adoption of SFAS No. 160 may have on our financial
      statements.


6




**Note
      3 - Discontinued Operations**




***MPR,
      12Snap & Telecom Services*** - During
      August 2006, we decided to sell our Micro Paint Repair business unit; this
      sale
      was completed on November 15, 2007. During the first quarter of 2007, we also
      decided to sell our remaining non-core business units, consisting of 12Snap
      and
      Telecom Services. Our sale of 12Snap was completed in April 2007, and our sale
      of Telecom Services was completed in October 2007.




***Sponge
      and Mobot Businesses*** - In the
      fourth quarter of 2006, we disposed of two subsidiaries, Sponge and Mobot.
      All
      assets and liabilities associated with these two subsidiaries were disposed
      of
      in the sale.




All
      costs
      related to the operations of Micro Paint Repair, Mobot, Sponge, 12Snap and
      Telecom Services are classified as discontinued operations for all periods
      presented on this Form 10-Q. We continue to recognize deferred compensation
      expense related to these former subsidiaries, the total of which is included
      in
      loss from operations of discontinued operations. Loss from the discontinued
      business units for the three months ended March 31, 2007 reflects direct
      operations of the Micro Paint Repair, 12Snap, and Telecom Services units, and
      allocated stock compensation expense for these units as well as for Mobot and
      Sponge. For the three months ended March 31, 2008, we incurred wind-down
      expenses for Micro Paint Repair - US in addition to stock compensation expense
      for Mobot, Sponge, 12Snap, Telecom Service and MPR. For the three months ended
      March 31, 2008, we also set up a reserve for the remaining $0.3 million due
      from
      the sale of Micro Paint Repair, since the funds have not been received as of
      this filing, and legal efforts to secure the remaining payment due have been
      unsuccessful.




There
      is
      no tax expense or benefit to report due to our net operating loss carry forward
      tax position.




The
      following table presents a summary of results of our discontinued operations
      for
      the three months ended March 31, 2008 and 2007:




(in
                thousands)
            
            Micro Paint
                Repair
            
            12Snap
            
            Other
            
            TotalThree
                Months Ended March 31, 2008Net
                sales
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Cost
                of sales
            
            
            5.7
            
            
            -
            
            
            -
            
            
            5.7Gross
                profit
            
            
            (5.7
            )
            
            -
            
            
            -
            
            
            (5.7
            )Sales
                and marketing expenses
            
            
            7.1
            
            
            44.8
            
            
            23.7
            
            
            75.6General
                and administrative expenses
            
            
            311.3
            
            
            22.7
            
            
            1.4
            
            
            335.4Research
                and development costs
            
            
            -
            
            
            24.4
            
            
            3.9
            
            
            28.3Loss
                from discontinued operations
            
            $
            (324.1
            )
            $
            (91.9
            )
            $
            (29.0
            )
            $
            (445.0
            )Three
                Months Ended March 31, 2007Net
                sales
            
            $
            326.0
            
            $
            2,620.7
            
            $
            302.4
            
            $
            3,249.1Cost
                of sales
            
            
            399.9
            
            
            361.6
            
            
            145.4
            
            
            906.9Gross
                profit
            
            
            (73.9
            )
            
            2,259.1
            
            
            157.0
            
            
            2,342.2Sales
                and marketing expenses
            
            
            315.4
            
            
            1,046.2
            
            
            156.6
            
            
            1,518.2General
                and administrative expenses
            
            
            164.7
            
            
            365.7
            
            
            281.9
            
            
            812.3Research
                and development costs
            
            
            38.0
            
            
            333.7
            
            
            3.9
            
            
            375.6Loss
                from operations of discontinued business
            
            
            ($592.0
            )
            
            513.5
            
            
            ($285.4
            )
            
            ($363.9
            )Loss
                on disposal of business
            
            
            -
            
            
            (2,467.0
            )
            
            257.1
            
            
            (2,209.9
            )Loss
                from discontinued operations
            
            
            ($592.0
            )
            
            ($1,953.5
            )
            
            ($28.3
            )
            
            ($2,573.8
            )







7




**Note
      4 - Financing**




The
      following disclosures reflect a summary of our outstanding convertible
      securities, as well as activity related to financing transactions since the
      filing of our last Annual Report on Form 10-K for the year ended December 31,
      2007. For a complete discussion of our financing activity, please refer to
      our
      Annual Report on Form 10-K for the fiscal year ended December 31, 2007. We
      currently have four outstanding convertible debentures as well as convertible
      preferred stock, all held by YA Global Investments, LP (“Yorkville”), an
      accredited investor. The following table summarizes the financing with
      Yorkville:







August
                24,
            
            December
                29,
            
            March
                27,
            
            August
                24,2006
            
            2006
            
            2007
            
            2007
            
            TotalAggregate
                amount
            
            $
            5,000,000
            
            $
            2,500,000
            
            $
            7,458,651
            
            $
            1,775,000
            
            $
            16,733,651Fees
                paid
            
            
            -
            
            
            (270,000
            )
            
            (780,865
            )
            
            (200,000
            )
            
            (1,250,865
            )Accrued
                interest on prior obligations paid
            
            
            -
            
            
            -
            
            
            (365,972
            )
            
            -
            
            
            (365,972
            )Liquidated
                damages on prior obligations paid
            
            
            -
            
            
            -
            
            
            (1,311,814
            )
            
            -
            
            
            (1,311,814
            )Net
                proceeds to us
            
            $
            5,000,000
            
            $
            2,230,000
            
            $
            5,000,000
            
            $
            1,575,000
            
            $
            13,805,000Interest
                rate
            
            
            10
            %
            
            10
            %
            
            13
            %
            
            14
            %Maturity
                date (2 years)
            
            
            8/24/2008
            
            
            12/29/2008
            
            
            3/27/2009
            
            
            8/24/2009Number
                of warrants issued
            
            
            175,000,000
            
            
            42,000,000
            
            
            125,000,000
            
            
            75,000,000
            
            
            417,000,000Exercise
                price of warrants
            
            
            .05
                - .25
            *
            
            0.06
            *
            
            0.04
            *
            
            0.02Warrant
                exercisable expiration date (5 years)
            
            
            8/24/2011
            
            
            12/29/2011
            
            
            3/24/2012
            
            
            8/24/2012Convertible
                into our common stock:conversion
                price per share
            
            $
            0.15
            
            $
            0.06
            
            $
            0.05
            
            $
            0.02or
                percent of lowest closing bid price
            
            
            90
            %
            
            90
            %
            
            90
            %
            
            80
            %of
                lowest volume weighted average price preceding conversion
            
            
            30
                days
            
            
            30
                days
            
            
            30
                days
            
            
            10
                daysRegistration
                rights agreement:file
                registration with SEC
            
            
            within 30 days
            
            
            within 150 days
            
            
            before 4/12/07
            
            
            30 days of
              demandachieve
                effectiveness of registration statement with SEC
            
            
            within 90 days
            
            
            within 90 days
            
            
            5/10/2007
            
            
            90 days of
              demandLiquidated
                damages for failure to meet filing or effectiveness
                requirements
            
            
            2% of principal,
                per month
            
            
            2% of principal,
                per month
            
            
            2% of principal,
                per month
            
            
            2% of principal,
                per monthSecurity
                pledged as collateral
            
            
            substantially
                all of our assets
            
            
            substantially all
                of our assets
            
            
            substantially all
                of our assets
            
            
            substantially all
              of our assets





*
            all
                warrants issued to Yorkville under these Agreements have been subsequently
                repriced to $0.02 per share.




8




**Convertible
      Debentures**




As
      of
      March 31, 2008, we have four outstanding convertible debentures as identified
      in
      the above table. The underlying agreements for each of the debentures are
      essentially the same, except in regard to the escalating interest rates, varying
      conversion prices per share, and the number of warrants issued in conjunction
      with the debentures.




The
      debentures are convertible into our common stock at the then effective
      conversion price, which varies relative to our trading stock price, relative
      to
      the terms outlined in the table above. The conversions are limited such that
      Yorkville cannot exceed 4.99% ownership of NeoMedia. The debentures are secured
      by substantially all of our assets. The
      convertible debenture, at the option of the holder, affords Yorkville
      anti-dilution protection should, at any time while the convertible debenture
      is
      outstanding, we offer, sell or grant any option to purchase or offer, sell
      or
      grant any right to re-price our securities, or otherwise dispose of or issue
      any
      common stock or common stock equivalents, entitle any person to acquire shares
      of common stock at an effective price per share less than the then effective
      conversion price (excluding employee stock options), as calculated by the
      formula described above; then, in such instance, the conversion price for the
      convertible debenture shall be reduced to the lower price.




Under
      the
      debenture agreements, Yorkville also received warrants to purchase shares of
      our
      common stock. The warrants have been subsequently repriced to an exercise price
      of $0.02 per share, subject to adjustment, including anti-dilution
      protection .
      The
      warrants have a five-year contractual life. We can force exercise of the
      warrants if the closing bid price of our stock is more than $0.10 greater than
      the exercise price of any of the warrants for 15 consecutive trading
      days.




In
      connection with the debentures, we also entered into Registration Rights
      Agreements with Yorkville that required us to, among other requirements, file
      registration statements with the SEC registering the resale of the shares of
      common stock issuable upon conversion of the debentures and the exercise of
      the
      warrants, and achieve and maintain effectiveness of the registration statements.
      We failed to meet the registration requirements for the August 2006 and December
      2006 debentures, and accordingly were subject to liquidated damages. On March
      27, 2007, we paid $0.5 million of liquidated damages from the proceeds of a
      subsequent debenture entered into on that date. The remaining $0.8 million
      is
      accrued in our financial statements. On November 5, 2007, the SEC declared
      our
      S-3 Registration Statement effective.




**Series
      C Convertible Preferred Stock**




We
      previously issued 22,000 shares of $1,000 Series C 8% convertible preferred
      stock to Yorkville. The Series C convertible preferred stock is convertible
      into
      our common stock at the then effective conversion price, which varies relative
      to our trading stock price, at the lower of $0.02 per share, or 97% of the
      lowest closing bid price (as reported by Bloomberg, L.P.) of the common stock
      for the 30 trading days immediately preceding the conversion date. The fixed
      conversion price was reset from $0.50 to $0.02 on August 24, 2007, as an
      inducement for Yorkville to enter into an additional financing arrangement
      with
      us at that time. The conversions are limited such that Yorkville cannot exceed
      4.99% ownership of NeoMedia. The Series C convertible preferred stock has voting
      rights on an “as converted” basis, meaning Yorkville is entitled to vote the
      number of shares of common stock into which the 8% cumulative Series C
      convertible preferred stock was convertible as of the record date for a meeting
      of shareholders.




Yorkville
      has converted the preferred stock, as follows:







Series C Shares
            
            Common Shares
            
            Series C SharesDate
                issued
            
            
            Converted
            
            
            Issued
            
            
            Outstanding11/29/06
            
            
            378
            
            
            6,631,579
            
            
            21,62206/19/07
            
            
            245
            
            
            8,781,362
            
            
            21,37708/16/07
            
            
            500
            
            
            25,773,196
            
            
            20,87710/24/07
            
            
            600
            
            
            45,801,527
            
            
            20,27710/31/07
            
            
            180
            
            
            13,740,458
            
            
            20,09702/19/08
            
            
            78
            
            
            10,000,000
            
            
            20,01903/10/08
            
            
            16
            
            
            2,500,000
            
            
            20,00303/17/08
            
            
            32
            
            
            10,000,000
            
            
            19,97103/25/08
            
            
            32
            
            
            10,000,000
            
            
            19,9392,061
            
            
            133,228,122
            
            
            19,939




9




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




In
      connection with the Series C convertible preferred stock, we also entered into
      a
      Registration Rights Agreement with Yorkville that requires us to, among other
      requirements, file a registration statement with the SEC registering the resale
      of the shares of common stock issuable upon conversion of the preferred stock
      and the exercise of the warrants, and achieve and maintain effectiveness of
      the
      registration statement. We failed to meet the registration requirements, and
      accordingly were subject to liquidated damages amounting to 1% of the
      outstanding amount of Series C preferred stock per month, not to exceed $1.2
      million. On March 27, 2007, we paid $0.8 million of liquidated damages from
      the
      proceeds of a secured convertible debenture entered into on that date. The
      remaining $0.4 million of liquidated damages has been accrued by us. On November
      5, 2007, the SEC declared our S-3 Registration Statement effective.




Under
      the
      Series C Agreement, Yorkville also received “A” warrants, “B” warrants and “C”
warrants to purchase 20 million, 25 million, and 30 million shares of our common
      stock, respectively, exercisable in three separate tranches at a price of $0.50,
      $0.40 and $0.35, respectively, per share, subject to adjustment, including
      anti-dilution protection similar to that described above .
      As an
      inducement to Yorkville to enter
      into subsequent financing arrangements with us, the warrants were repriced
      on
      August 24, 2007 to $0.02 per share, subject to all the original terms and
      conditions of the respective warrant agreements. The warrants have a five-year
      contractual life. We can force exercise of the warrants if the closing bid
      price
      of NeoMedia stock is more than $0.10 greater than the exercise price of any
      of
      the warrants for 15 consecutive trading days.




**Warrants**




As
      described herein, Yorkville holds warrants to purchase shares of our stock
      that
      were issued in connection with the convertible securities described above.
      The
      exercise prices of warrants held by Yorkville have been adjusted from time
      to
      time as inducement for Yorkville to enter into subsequent financing
      arrangements. Yorkville’s warrant holdings are outlined in the following
      table:





**Restated**
            
            **Restated****Exercise**
            
            **Exercise****Shares**
            
            **Original**
            
            **Price**
            
            **Price****Underlying**
            
            **Exercise**
            
            **December
                29,**
            
            **August
                24,****Original
                Issue Date**
            
            **Warrant**
            
            **Price**
            
            **2006****(1)**
            
            **2007****(2)**February
                17, 2006(3)
            
            
            20,000,000
            
            $
            0.50
            
            $
            0.04
            
            $
            0.02February
                17, 2006(3)
            
            
            25,000,000
            
            $
            0.40
            
            $
            0.04
            
            $
            0.02February
                17, 2006(3)
            
            
            30,000,000
            
            $
            0.35
            
            $
            0.04
            
            $
            0.02August
                24, 2006(3)
            
            
            25,000,000
            
            $
            0.15
            
            $
            0.04
            
            $
            0.02August
                24, 2006(3)
            
            
            50,000,000
            
            $
            0.25
            
            $
            0.04
            
            $
            0.02August
                24, 2006(3)
            
            
            50,000,000
            
            $
            0.20
            
            $
            0.04
            
            $
            0.02August
                24, 2006(3)
            
            
            50,000,000
            
            $
            0.05
            
            
            n/a
            
            $
            0.02December
                29, 2006(4)
            
            
            42,000,000
            
            $
            0.06
            
            
            n/a
            
            $
            0.02March
                27, 2007
            
            
            125,000,000
            
            $
            0.04
            
            
            n/a
            
            $
            0.02August
                24, 2007
            
            
            75,000,000
            
            $
            0.02
            
            
            n/a
            
            
            n/a**Total**
            
            
            **492,000,000**





(1)
            The
                exercise price of certain warrants outstanding as of December 29,
                2006 was
                repriced as an inducement for Yorkville to enter into a financing
                arrangement with us on that date.





(2)
            The
                exercise price of all warrants outstanding as of August 24, 2007
                was
                repriced as an inducement for Yorkville to enter into a financing
                arrangement with us on that date.





(3)
            We
                can exercise of the warrants if the closing bid price of our stock
                is more
                than $0.10 greater than the exercise price of any of the warrants
                for 15
                consecutive trading days.





(4)
            We
                can force exercise of the warrants if the closing bid price of our
                stock
                is more than $0.16 for 10 consecutive trading
                days.




**Default
      and Other Considerations**




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




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




·
            Any
                default in our obligations under a mortgage or debt in excess of
                $0.1
                million;




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




·
            Failure
                to timely file the registration statement covering the shares related
                to
                the conversion option, or failure to make the registration statement
                effective timely (we were in default of this provision as of December
                31,
                2006, with respect to the Series C convertible preferred stock, the
                August
                2006 Debenture, and the December 2006
                Debenture);




·
            Any
                lapse in the effectiveness of the registration statement covering
                the
                shares related to the conversion option and the
                warrants;




·
            Any
                failure to deliver certificates within the specified
                time;




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




Other
      material provisions of the convertible securities include the
      following:




·
            The
                convertible securities are convertible into common stock, at the
                option of
                Yorkville, at any time after the effective
                date;




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




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




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




·
            Yorkville
                will not be responsible for any transfer taxes relative to issuance
                of
                shares;




·
            If
                we offer, sell or grant stock at an effective per share price less
                than
                the then-effective conversion price, then the conversion price shall
                be
                reduced to equal the effective conversion, exchange or purchase price
                for
                such common stock or common stock
                equivalents;




·
            Without
                Yorkville’s consent we cannot:




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


10






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




­–­
            enter
                into any security instrument granting the holder a security interest
                in
                any of our assets,or




­­–
            file
                any registration statements on Form
                S-8.




·
            Pursuant
                to security agreements between us and Yorkville signed in connection
                with
                the convertible debentures, Yorkville has a security interest in
                substantially all of our assets.




As
      of
      December 31, 2006, we were in default of the August 2006, December 2006 and
      Series C preferred stock instruments, due primarily to our failure to register
      the shares underlying the instruments by the prescribed deadline, and for
      failure to sell our Micro Paint Repair and
      Telecom Services businesses by September 30, 2007, as required by the August
      2007 Debenture. Due to the then default status, Yorkville had
      certain material rights that did not exist prior to default. Specifically,
      the
      full face value of the instruments were callable, and we were responsible for
      liquidated damages until the default was cured with our S-3 Registration
      Statement becoming effective on November
      5, 2007, and the sale of Telecom Services and MPR completed on
      October 30, 2007 and November 15, 2007, respectively.




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




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




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




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




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




**Fair
      Value Considerations**




In
      accordance with Statement of FAS 133, ‘ *Accounting
      for Derivative Instruments and Hedging Activities* ’,
      we
      determined that the conversion features of the Series C convertible preferred
      stock, the August 2006 Debenture, and the December 2006 Debenture met the
      criteria of embedded derivatives and that the conversion features of these
      instruments needed to be bifurcated and accounted for as derivative instrument
      liabilities. These instruments do not meet the definition of “conventional
      convertible debt” because the number of shares which may be issued upon their
      conversion is not fixed, and there is no cap on the number of shares that could
      be issued upon conversion. Therefore, the conversion feature fails to qualify
      for equity classification under EITF 00-19, and must be accounted for as a
      derivative liability.




Beginning
      in 2007, each new financing arrangement is evaluated, on an
      instrument-by-instrument basis, under FAS 155, ‘ *Accounting
      for Certain Hybrid Financial Instruments an amendment of FASB Statements No.
      133
      and 140* ’,
      which
      permits fair value re-measurement for any hybrid financial instrument that
      contains an embedded derivative that otherwise would require bifurcation. During
      the evaluation of the March 2007 Debenture and the August 2007 Debenture, we
      determined that (i) the hybrid debt instrument embodied certain derivative
      features whose risks and rewards were not clearly and closely related to the
      risks and rewards of the host debt instrument and (ii) warrants issued in
      connection with the March 2007 Debenture and the August 2007 Debenture did
      not
      meet all of the established criteria for equity classification. Additionally,
      the March 2007 Debenture and the August 2007 Debenture extended a right to
      the
      holder to accelerate repayment of the debt (default put) and each contains
      cash
      penalties upon the occurrence of certain contingent events. The default put
      may
      be triggered by certain events that are not related to the debt characteristics
      of the debentures and those events are not within our control. The warrants
      do
      not meet all of the established criteria for equity classification provided
      in
      EITF 00-19 and were recorded as derivative liabilities. As permitted by FAS
      155,
      we have elected not to bifurcate the embedded derivatives in the March 2007
      Debenture and the August 2007 Debenture and accordingly these convertible
      instruments are being carried at their fair values, with the changes in the
      fair
      value of the secured convertible debenture, together with the changes in the
      fair values of the warrants, recorded in the statement of
      operations.


11




Freestanding
      derivative instruments, consisting of warrants that arose from the financings,
      are valued using the Black-Scholes-Merton valuation methodology because that
      model embodies all of the relevant assumptions that address the features
      underlying these instruments. Significant assumptions used in this model as
      of
      March 31, 2008 are as follows:




Series
                CConvertible
            
            August
            
            December
            
            March
            
            AugustPreferred
            
            2006
            
            2006
            
            2007
            
            2007Stock
            
            Debenture
            
            Debenture
            
            Debenture
            
            Debenture
            
            Other
            
            TotalHolder
            
            
            Yorkville
            
            
            Yorkville
            
            
            Yorkville
            
            
            Yorkville
            
            
            Yorkville
            
            
            OtherInstrument
            
            
            Warrants
            
            
            Warrants
            
            
            Warrants
            
            
            Warrants
            
            
            Warrants
            
            
            WarrantsExercise
                price
            
            $
            0.02
            
            $
            0.0038
            
            $
            0.0038
            
            $
            0.0038
            
            $
            0.0038
            
            $
            0.01 - $3.45Remaining
                term (years)
            
            
            2.88
            
            
            3.40
            
            
            3.75
            
            
            3.99
            
            
            4.40
            
            
            .27
                - 2.88Volatility
            
            
            88
            %
            
            93
            %
            
            93
            %
            
            97
            %
            
            97
            %
            
            139%-163%Risk-free
                rate
            
            
            1.79
            %
            
            1.79
            %
            
            2.46
            %
            
            1.79
            %
            
            2.46
            %
            
            1.38% - 2.46%Number
                of warrants
            
            
            75,000,000
            
            
            175,000,000
            
            
            42,000,000
            
            
            125,000,000
            
            
            75,000,000
            
            
            12,775,000
            
            
            504,775,000





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 FAS 133, the compound embedded derivative
      instruments are valued using the Flexible Monte Carlo methodology because that
      model embodies certain relevant assumptions (including, but not limited to,
      interest rate risk, credit risk, and conversion/redemption privileges) that
      are
      necessary to value these complex derivatives. For financings recorded in
      accordance with FAS 155, the entire hybrid instrument is initially recorded
      at
      fair value and subsequent changes in fair value are recognized in
      earnings.





Assumptions
      used as of March 31, 2008 included exercise estimates/behaviors and the
      following other significant estimates:





Series
                CConvertible
            
            August
            
            DecemberPreferred
            
            2006
            
            2006Stock
            
            Debenture
            
            DebentureConversion
                prices
            
            $
            0.0067
            
            $
            0.0038
            
            $
            0.0038Remaining
                terms (years)
            
            
            0.88
            
            
            0.42
            
            
            0.75Equivalent
                volatility
            
            
            166.40
            %
            
            164.95
            %
            
            161.13
            %Equivalent
                interest-risk adjusted rate
            
            
            10.62
            %
            
            12.86
            %
            
            13.27
            %Equivalent
                credit-risk adjusted yield rate
            
            
            74.60
            %
            
            40.67
            %
            
            39.39
            %





*
      Financial instruments recorded at fair value under SFAS155 were valued using
      the
      common stock equivalent approach.  The common stock equivalent was
      calculated using the shares indexed to the financial instruments valued at
      the
      market rate of our stock and the present value of the coupon.




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




**Current
      Period Accounting Considerations**




Due
      to
      our previous default position with respect to the convertible financial
      instruments, the carrying value of each instrument in effect as of December
      31,
      2006 was written up to the respective full face value during the fourth quarter
      of 2006. In addition, the March 2007 Debenture and the August 2007 Debenture
      were each initially recorded at their full fair value pursuant to FAS 155.
      That
      fair value is marked-to-market each reporting period, with any changes in the
      fair value charged or credited to income. For the Series C Convertible Preferred
      Stock and the August 2006 and December 2006 debentures, the embedded derivative
      instrument, primarily the conversion feature, has been separated and accounted
      for as a derivative instrument liability (see below). This derivative instrument
      liability is also marked to market each reporting period. The face value or
      fair
      value, as appropriate, of each instrument as of March 31, 2008 and December
      31,
      2007 was:


12




March
                31, 2008
            
            Face value
            
            Fair value
            
            Total(in
                thousands)Series
                C Convertible Preferred Stock
            
            $
            19,939
            
            
            
            
            $
            19,939August
                2006 debenture
            
            $
            5,000
            
            
            
            
            $
            5,000December
                2006 debenture
            
            
            2,500
            
            
            
            
            
            2,500March
                2007 debenture
            
            
            
            
            
            17,719
            
            
            17,719August
                2007 debenture
            
            
            
            
            
            4,136
            
            
            4,136$
            7,500
            
            $
            21,855
            
            $
            29,355








December
                31, 2007
            
            Face value
            
            Fair value
            
            Total(in
                thousands)Series
                C Convertible Preferred Stock
            
            $
            20,097
            
            
            
            
            $
            20,097August
                2006 debenture
            
            $
            5,000
            
            
            
            
            $
            5,000December
                2006 debenture
            
            
            2,500
            
            
            
            
            
            2,500March
                2007 debenture
            
            
            
            
            
            18,798
            
            
            18,798August
                2007 debenture
            
            
            
            
            
            4,401
            
            
            4,401$
            7,500
            
            $
            23,199
            
            $
            30,699




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




The
      following tabular presentation reflects the components of derivative financial
      instruments related to convertible financial instruments in the liability
      section on our balance sheet at March 31, 2008:





Series C
              Convertible
              Preferred
              Stock
            
            August
              2006
              Debenture
            
            December
              2006
              Debenture
            
            March
              2007
              Debenture
            
            August
              2007
              Debenture
            
            Other
              Warrants(1)
            
            Other
              Preferred
              Stock(1)
            
            Total(in
                thousands)Common
                stock warrants
            
            $
            210
            
            $
            1,050
            
            $
            260
            
            $
            788
            
            $
            427
            
            
            13
            
            
            -
            
            $
            2,748Embedded
                conversion feature(2)
            
            
            6,923
            
            
            6,316
            
            
            3,158
            
            
            n/a
            
            
            n/a
            
            
            -
            
            
            54
            
            
            16,451$
            7,133
            
            $
            7,366
            
            $
            3,418
            
            $
            788
            
            $
            427
            
            $
            13
            
            $
            54
            
            $
            19,199





(1)
            The
                fair values of certain other derivative financial instruments (warrants)
                that existed at the time of the issuance of Series C convertible
                preferred
                stock were reclassified from stockholders’ equity to liabilities when, in
                connection with the issuance of Series C convertible preferred stock,
                we
                no longer controlled our ability to share-settle these instruments.
                These
                derivative financial instruments had fair values of $14.3 million,
                $0.782
                million and $0.013 million on February 17, 2006, March 31, 2007,
                and March
                31, 2008, respectively. The decrease in fair value of these other
                derivative financial instruments resulted primarily from a decrease
                in our
                share price between February 17, 2006, March 31, 2007, and March
                31, 2008.
                The change in fair value is reported as “Gain on derivative financial
                instruments” on the condensed consolidated statement of operations during
                each period. These warrants will be reclassified to stockholders’ equity
                when we reacquire the ability to share-settle the
                instruments.(2)
            For
                the March 2007 and August 2007 debentures, the embedded conversion
                feature
                is effectively embodied in the fair value of those
                instruments.


13




The
      following table reflects the number of common shares into which the convertible
      instruments and warrants are convertible or exercisable at March 31,
      2008:







Series C
              Convertible
              Preferred
              Stock
            
            August
              2006
              Debenture
            
            December
              2006
              Debenture
            
            March
              2007
              Debenture
            
            August
              2007
              Debenture
            
            Other
              Warrants(in
                thousands)Common
                stock warrants
            
            
            75,000
            
            
            175,000
            
            
            42,000
            
            
            125,000
            
            
            75,000
            
            
            12,775Embedded
                conversion feature(1)
            
            
            3,491,487
            
            
            1,315,789
            
            
            657,895
            
            
            1,988,974
            
            
            467,105
            
            
            -Total
            
            
            3,566,487
            
            
            1,490,789
            
            
            699,895
            
            
            2,113,974
            
            
            542,105
            
            
            12,775







(1)
            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 in the Series C convertible stock was convertible as of March
                31,
                2008 was calculated as the face value plus assumed dividends (if
                declared), divided by 97% of the lowest closing bid price for the
                30
                trading days preceding March 31, 2008. The number of shares of common
                stock into which the embedded conversion feature in the convertible
                debentures was convertible as of March 31, 2008 was calculated as
                the face
                value of each instrument divided by the lower of $0.01 or 50% of
                the
                average closing market price of our common stock for the 10 days
                prior to
                March 31, 2008.




Changes
      in the fair value of convertible instruments that are carried at fair value
      (the
      March 2007 Debenture and the August 2007 Debenture) and changes in the fair
      values of derivative instrument liabilities (including warrants and the
      bifurcated embedded derivative features of convertible instruments not carried
      at fair value) are reported as “Gain (loss) on derivative financial instruments”
in the accompanying consolidated statement of operations, as
      follows:




Three months ended March 31,2008
            
            2007(in
                thousands)Series
                C Convertible Preferred Stock
            
            $
            1,240
            
            $
            2,828August
                2006 debenture
            
            
            2,291
            
            
            2,206December
                2006 debenture
            
            
            964
            
            
            101March
                2007 debenture
            
            
            475
            
            
            (8,640
            )August
                2007 debenture
            
            
            405
            
            
            -Other
                derivative instruments
            
            
            17
            
            
            (3
            )$
            5,392
            
            
            ($
                3,508
            )





The
      fair
      value of derivative financial instrument liabilities recorded as of March 31,
      2008 and December 31, 2007 was:




March 31, 2008
            
            December 31, 2007(in
                thousands)Warrants
                and embedded conversion features in preferred stock
            
            $
            7,133
            
            $
            8,410Warrants
                and embedded conversion features in certain debentures
            
            
            11,999
            
            
            16,136Other
                warrants
            
            
            13
            
            
            26Fair
                value of future payment obligation
            
            
            -
            
            
            -Special
                preference stock of Mobot
            
            
            54
            
            
            79Total
                derivative financial instruments
            
            $
            19,199
            
            $
            24,651


14




**Note
      5 -** **Investment
      in Marketable Securities and Other Long-Term Assets**




In
      2005,
      we invested $0.3 million in exchange for 8.3 million shares of Pickups Plus,
      Inc
      (“PUPS”) restricted common stock. On February 17, 2006, as a component of net
      proceeds from the issuance of 8% Series C convertible preferred stock, we
      received marketable securities with a fair value of $0.6 million, of which
      $0.2
      million represented 20 million shares of PUPS common stock and $0.4 million
      in
      notes designated as held to maturity. In
      accordance with FAS 115 ,
      “ *Accounting
      for Certain Investments in Debt and Equity Securities* ,”
the
      investment in PUPS was previously recorded as available-for-sale securities
      and
      reported at fair value. As of March 31, 2008, the fair value of our PUPS shares
      was determined to be $0, as reflected by PUPS failure to maintain current
      filings with the SEC and not maintaining active trading on a SEC-recognized
      exchange or trading board. Accordingly, prior unrealized losses related to
      our
      PUPS investment is considered realized as of March 31, 2008 and has been charged
      as an operating loss in the current period, and is no longer included in Other
      Comprehensive Income (Loss). Previously, our management had announced their
      intention to distribute the PUPS shares as a dividend to our shareholders,
      but
      due to PUPS’ inactive standing with the SEC, we are not able to legally
      distribute the shares until such time that PUPS regains their active status
      with
      the SEC and obtain an effective registration statement relating to said shares,
      both of which are events that management considers remote.




We
      retained small percentages of ownership in some of the subsidiaries that we
      sold, including Mobot, represented by 18% ownership of FMS Group, which has
      operated the Mobot business subsequent to our sale of Mobot, Sponge, of which
      we
      retained a 7.5% ownership after the sale, 12Snap, of which we retained a 10%
      ownership after the sale (sold on January 28, 2008), and Micro Paint Repair,
      represented by 5% ownership of Micro Paint Holdings Limited, which has operated
      the MPR business subsequent to our sale of MPR.




We
      have a
      long-term facility lease deposit of $0.2 million included in other long-term
      assets, which represents the deposit required on our Atlanta corporate
      office.




**Note
      6 - Stock-Based Compensation**




**Equity-Based
      Compensation Plans**




We
      have
      four stock option plans, the 2005 Stock Option Plan (the “2005 Plan”), the 2003
      Stock Option Plan (the “2003 Plan”), the 2002 Stock Option Plan (the “2002
      Plan”), and the 1998 Stock Option Plan (the “1998 Plan”), collectively referred
      to as the “Option Plans”. Options issued under these Option Plans have an option
      term of 10 years. Exercise prices of options issued under the Option Plans
      may
      be less than the fair market value per share of our common stock on the date
      of
      grant. Options may be granted with any vesting schedule as approved by the
      stock
      option committee, but generally the vesting periods range from 0 to 5 years.
      Common shares required to be issued upon the exercise of stock options and
      warrants would be issued from our authorized and unissued shares.




In
      December 2005, the stock option committee of our Board of Directors approved
      the
      2005 Plan. We reserved 60 million shares of common stock in December 2005 for
      issuance under the 2005 Plan. As of March 31, 2008, we have not registered
      the
      shares underlying the options in the 2005 Plan, and as a result all 60 million
      options remain available for issuance under the 2005 Plan.




In
      September 2003, we adopted our 2003 Plan. The 2003 Plan provides authority
      to
      our stock option committee to grant up to 150 million non-qualified stock
      options. As of March 31, 2008, options to purchase 5.7 million shares of common
      stock remained available for issuance under the 2003 Plan.




In
      June
      2002, we adopted our 2002 Plan. The 2002 Plan provides for authority for the
      stock option committee of our Board of Directors to grant 10 million
      non-qualified stock options. As of March 31, 2008, options to purchase 20,000
      shares of common stock remained available for issuance under the 2002
      Plan.




In
      March
      1998, we adopted the 1998 Plan, providing for authority of the stock option
      committee of our Board of Directors to grant options to purchase up to 8 million
      shares of our common stock. Effective March 27, 2008, the 1998 Plan
      expired.




We
      also
      have one stock incentive plan, the 2003 Stock Incentive Plan (the “2003
      Incentive Plan”). In October 2003, the stock option committee approved the 2003
      Incentive Plan. Under the terms of the 2003 Incentive Plan, we reserved 30
      million shares of common stock to be issued to pay compensation and other
      expenses related to employees, former employees, consultants, and non-employee
      directors. As of March 31, 2008, we have 426,451 shares of common stock
      available for issuance under the 2003 Stock Incentive Plan.


15




In
      February 2007, we instituted a stock option repricing plan (the “Repricing”) as
      a retention tool to align our employees with our new business strategy. Under
      the Repricing, we repriced 50,178,750 stock options held by current employees,
      contractors, and directors as follows: (i) options that were vested as of
      February 1, 2007, were repriced to $0.045 per share, which was the last sale
      price on February 1, 2007, (ii) options that were scheduled to vest during
      the
      remainder of 2007 were repriced to $0.075, (iii) options that vest during 2008
      were repriced to $0.125, and (iv) options that vest during 2009 were repriced
      to
      $0.175. Options will continue to vest on their regular schedule, which generally
      is 25% upon the one-year anniversary of grant date and 25% on each subsequent
      anniversary date.




The
      weighted-average grant-date fair value of options repriced on February 1, 2007,
      using the options’ modified terms, was $0.03. All compensation cost related to
      nonvested options repriced on February 1, 2007 was recognized during
      2007.




We
      accounted for the repricing of stock options in accordance with FAS 123,
‘ *Accounting
      for Stock-Based Compensation’* .
      We
      calculated the fair value of the modified and the repriced options using the
      original terms and the modified terms as of the repricing date, and recorded
      the
      incremental cost of the modified option over the original option as additional
      compensation cost. Costs related to fully vested options including accelerated
      vesting were expensed immediately and the costs related to unvested stock
      options will be recognized over the remaining vesting period of the option. Unrecognized
      compensation expense relating to the original option grant will continue to
      be
      recognized as if the repricing had not occurred.




The
      following table presents the stock-based compensation recorded in the statement
      of operations for the three months ending March 31, 2008 and 2007:





Three months endedMarch 31,2008
            
            2007Stock
                based compensation allocated to:
            
            (in
                thousands)Sales
                and marketing expense
            
            $
            104
            
            $
            345General
                and administrative expense
            
            
            195
            
            
            388Research
                and development expense
            
            
            60
            
            
            157Stock
                based compensation included in continuing operations
            
            
            359
            
            
            891Stock
                based compensation included in discontinued operations
            
            
            142
            
            
            537Total
                stock based compensation expense included in net loss
            
            $
            501
            
            $
            1,428





During
      the three months ended March 31, 2008 and 2007, we issued stock options as
      follows:





Three months ended March 31,2008
            
            2007Employees
            
            
            300,000
            
            
            1,280,000Officers
            
            
            3,262,500
            
            
            620,000Directors
            
            
            216,465
            
            
            -Contractors
            
            
            3,072,155
            
            
            -Total
            
            
            6,851,120
            
            
            1,900,000




Estimated
      income tax benefits recognized during the three months ended March 31, 2008
      and
      2007 were offset by a valuation allowance since realization was not reasonably
      assured. FAS 123(R) requires the cash flows resulting from the tax benefits
      resulting from tax deductions in excess of the compensation cost recognized
      for
      those options (excess tax benefits) to be classified as financing cash flows.
      We
      will use this presentation if and when we have exhausted our tax loss
      carryforward.




The
      weighted-average grant-date fair value of options granted during the three
      months ended March 31, 2008 and 2007 was $0.012 and $0.047, respectively. The
      total intrinsic value of options exercised during the three months ended March
      31, 2008 and 2007 was $0 and $0.03 million, respectively. Total cash received
      from options exercised was $0 and $9,000, respectively, for the three months
      ended March 31, 2008 and 2007. As of March 31, 2008, there was $2.3 million
      of
      total unrecognized compensation cost related to nonvested share-based
      compensation arrangements granted under the Plans. That cost is expected to
      be
      recognized over a weighted-average period of 1.6 years.


16




We
      used
      the following assumptions for grants during the three months ended March 31,
      2008 and 2007:





Three months ended March 31,2008
            
            2007Volatility
            
            
            88.06
            %
            
            115.05
            %Expected
                dividends
            
            
            0
            
            
            0Expected
                term (in years)
            
            
            6.56
            
            
            5.59Risk-free
                rate
            
            
            4.35
            %
            
            4.35
            %




**Note
      7 – Inventory**




Inventories
      for continuing operations, consisting of material, material overhead, labor
      and
      processing costs, are stated at the lower of cost (first-in, first-out) or
      market and consist of the following at March 31, 2008 and December 31,
      2007:





(in
                thousands)
            
            March 31, 2008
            
            December 31, 2007Raw
                materials
            
            $
            68
            
            $
            59Finished
                goods
            
            
            251
            
            
            218Work
                in process
            
            
            2
            
            
            1subtotal
            
            $
            321
            
            $
            278Allowance
                for obsolete or slow-moving inventory
            
            
            (100
            )
            
            (80
            )Total
                inventory, net
            
            $
            221
            
            $
            198




**Note
      8 – Accrued Liabilities**




Accrued
      liabilities for continuing operations consist of the following as of March
      31,
      2008 and December 31, 2007:





(in
                thousands)
            
            March 31, 2008
            
            December 31, 2007Accrued
                legal and accounting costs
            
            
            97
            
            
            358Accruals
                for disputed services
            
            
            1,336
            
            
            1,336Accrued
                operating expenses
            
            
            2,193
            
            
            2,184Payroll
                related accruals
            
            
            171
            
            
            121Accrued
                interest & liquidated damages
            
            
            2,204
            
            
            2,016Total
            
            $
            6,002
            
            $
            6,015




Additionally,
      we have accrued $4.5 million relating to a purchase price guarantee obligation
      in connection with our acquisition of 12Snap which is not included in the totals
      above.




**Note
      9 – Income Taxes**




We
      adopted the provisions of FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes - an interpretation of FASB Statement
      No. 109 - Accounting for Income Taxes (“FIN 48”)* on
      January 1, 2007. As a result of the implementation of FIN 48, we did not
      recognize any material adjustment in the liability for unrecognized income
      tax
      benefits. At January 1, 2007, the total amount of unrecognized income tax
      benefits was $0.




We
      are
      subject to U.S. federal income tax as well as income tax of multiple states
      and
      foreign jurisdictions. With few exceptions, we are no longer subject to U.S,
      federal, state and local, or foreign income tax examinations by tax authorities
      for years prior to 1999. As of March 31, 2008, there are no notifications
      of any pending audits from any jurisdiction.


17




Our
      continuing practice is to recognize interest and penalties related to uncertain
      tax positions in other expense (income). As of January 1, 2008 and for the
      three
      months ended March 31, 2008, we did not have any interest or penalty
      expense or accruals related to uncertain tax positions.




The
      tax
      years 1999 - 2007 remain open to examination by the major taxing jurisdictions
      in which we are subject to taxation, including federal, state and foreign
      jurisdictions. All tax years in which we generated a net operating loss are
      subject to examination, including federal, state and foreign
      jurisdictions.




We
      do not
      expect a material change in the amount of unrecognized tax benefits in the
      next
      twelve months.




Tax
      expense or benefit from continuing operations for interim periods is based
      on
      our estimated annualized tax rate.




**Note
      10 –****Contingencies**




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




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




On
      April
      20, 2004, we re-filed our suit against Scanbuy in the Southern District of
      New
      York alleging patent infringement. Scanbuy filed their answer on June 2, 2004.
      We filed our answer and affirmative defenses on July 23, 2004. On
      February 13, 2006, Scanbuy filed an amended answer to the complaint. We filed
      our reply to Scanbuy’s amended answer on March 6, 2006. On
      January 20, 2007, the court dismissed Scanbuy's request for a summary judgment.
      The case has been stayed due to the reexamination of “the ‘048 patent” (see
      below).




**Electronic
      Frontier Foundation -** In
      October 2007, we received a communication from the United States Patent and
      Trademark Office (USPTO) stating that a request by the Electronic Frontier
      Foundation for Ex-Parte Reexamination of U.S. Patent No. 6,199,048 (“the ‘048
      patent”) has been granted. Although the ’048 patent is an important NeoMedia
      patent, it is not alone. We have a portfolio consisting of U.S. and foreign
      patents and pending applications relating to various inventions surrounding
      the
      processing of machine readable codes over wireless networks. We believe some
      or
      all of the claims of the ’048 patent will be confirmed by the USPTO in the
      course of the re-examination.




**Note
      11 – Geographic Reporting**




As
      of
      March 31, 2008, we were structured and evaluated by our Board of Directors
      and
      management as one business unit encompassing NeoReader TM ,
      legacy
      licensing, and hardware product lines; in prior years, these product lines
      were
      reported as part of the NeoMedia Mobile business unit. Our operations are
      managed as one global unit out of Atlanta, Georgia and Aachen,
      Germany.




Consolidated
      net sales and net loss from continuing operations for the three months ended
      March 31, 2008 and 2007, and the identifiable assets as of March 31, 2008 and
      December 31, 2007 by geographic area were as follows:





Three Months Ended March 31,Net
                Sales(1):
            
            2008
            
            2007(in
                thousands)United
                States
            
            $
            116
            
            $
            178Germany
            
            
            148
            
            
            221$
            264
            
            $
            399Net
                Loss from Continuing Operations(1):United
                States
            
            $
            4,492
            
            
            ($8,779
            )Germany
            
            
            (454
            )
            
            (145
            )$
            4,038
            
            
            ($
                8,924
            )




18




Identifiable
                Assets(1)
            
            
            March 31, 2008
            
            
            December 31, 2007United States
            
            $
            10,861
            
            $
            12,875Germany
            
            
            465
            
            
            649$
            11,326
            
            $
            13,524




(1)
            Geographic
                reporting excludes the Micro Paint Repair, Mobot, Sponge, 12Snap
                and
                Telecom Service business units that are reported as discontinued
                operations and the corresponding assets and liabilities that are
                reported
                as Held For Sale.




**Note
      12 – Sub** **sequent
      Events**




**Preferred
      Stock conversions**




On
      April
      1, 2008, Yorkville converted 64 shares of Series C preferred stock. In exchange
      for the Series C preferred stock, we issued 10 million shares of common
      stock.




On
      May 6,
      2008, Yorkville converted 15.5 shares of Series C preferred stock. In exchange
      for the Series C preferred stock, we issued 5 million shares of common
      stock.




On
      May 9,
      2008, Yorkville converted 15 shares of Series C preferred stock. In exchange
      for
      the Series C preferred stock, we issued 5 million shares of common
      stock.




**Convertible
      Debenture**




**$390,000
      Secured Convertible Debenture -** On
      April
      11, 2008, we issued and sold a secured convertible debenture (the “April
      debenture”) with YA Global Investments, LP (“Yorkville”), an accredited investor
      in the principal amount of $390,000. The April debenture shall mature, unless
      extended by the holder in accordance with the terms of the debenture, on April
      11, 2010, and accrues interest at the rate of 15%, which is payable quarterly
      beginning July 1, 2008. The debenture is secured by substantially all of our
      assets.  At
      any
      time after the transaction date, Yorkville has the right to convert any portion
      of the outstanding and unpaid principal and accrued interest thereon into
      fully-paid and nonassessable shares of our common stock at a price equal to
      the
      lessor of $0.015 and 80% of the lowest volume weighted average price of our
      common stock during the 10 trading days immediately preceding each conversion
      date. The conversion is limited such that Yorkville cannot exceed 4.99%
      ownership, unless the holders waive their right to such limitation. The
      limitation will terminate under any event of default. In connection with the
      April debenture, Yorkville retained fees of $54,000, resulting in net proceeds
      to us of $336,000.




19




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




**Special
      Note About Forward-Looking Statements**





Certain
      statements in Management’s Discussion and Analysis (“MD&A”), other than
      purely historical information, including estimates, projections, statements
      relating to our business plans, objectives, and expected operating results,
      and
      the assumptions upon which those statements are based, are “forward-looking
      statements” within the meaning of the Private Securities Litigation Reform Act
      of 1995, Section 27A of the Securities Act of 1933 and Section 21E of
      the Securities Exchange Act of 1934. These forward-looking statements generally
      are identified by the words “believe,” “project,” “expect,” “anticipate,”
“estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,”
“will be,” “will continue,” “will likely result,” and similar expressions.
      Forward-looking statements are based on current expectations and assumptions
      that are subject to risks and uncertainties, which may cause actual results
      to
      differ materially from the forward-looking statements. A detailed discussion
      of
      risks and uncertainties that could cause actual results and events to differ
      materially from such forward-looking statements is included in the section
      titled “Risk Factors” (refer to Part II, Item 1A). We undertake no
      obligation to update or revise publicly any forward-looking statements, whether
      as a result of new information, future events, or otherwise.





**Overview**




The
      following MD&A
      is intended to help the reader understand the results of operations and
      financial condition of NeoMedia Technologies, Inc. MD&A is provided as a
      supplement to, and should be read in conjunction with, our financial statements
      and the accompanying notes to the financial statements (“Notes”).




NeoMedia
      provides internet advertising solutions using wireless technologies to connect
      traditional print and broadcast media companies to active mobile content. Using
      camera-enabled mobile phones, barcode-reading software (NeoReader TM ),
      and an
      interoperable billing, clearing and settlement infrastructure
      (NeoServer-OMS/OMI), we embrace open standards, full interoperability, and
      are
      barcode symbology agnostic.




Our
      mobile phone technology, NeoReader TM ,
      reads
      and transmits data from 1-D, and 2-D barcodes to its intended destination.
      Our
      Optical Messaging and Interchange platforms (OMS and OMI) create, connect,
      record, and transmit the transactions embedded in the 1-D and 2-D barcodes,
      like
      web-URLs, text messages (SMS), and telephone calls, ubiquitously and reliably.
      We provide the industrial and carrier-grade infrastructure to enable reliable,
      scalable, and billable commerce. To provide a robust high-performance
      infrastructure for the processing of optical codes, we extend our offering
      with
      the award winning Gavitec technology. Gavitec’s Mobile Ticketing and Couponing
      solutions allow users to enter information and opt-in to initiate mobile
      transactions.




The
      Board
      of Directors recruited William J. Hoffman to join us as Chief Executive Officer
      and Chairman of the Board in June 2007. In addition to Mr. Hoffman, we added
      George O’Leary to our Board of Directors in February 2007. In late 2006, our
      senior management team began implementing a new strategic direction that focuses
      our resources on our code reading business and related intellectual property.
      One of the first steps of implementing this strategy was our decision to divest
      all non-core business units. Consequently, we sold our Sponge and Mobot business
      units during the fourth quarter of 2006, and we sold the 12Snap business unit
      in
      April 2007, we sold our Telecom Services business unit in October 2007, and
      sold
      our Micro Paint Repair business unit in November 2007.




By
      shifting to a business model that focuses on our NeoReader TM business
      and related intellectual property, we are able to concentrate our management
      and
      financial resources on the area that our management believes will deliver the
      most value. Our primary business strategy is to provide the industrial and
      carrier-grade infrastructure to enable reliable, scalable and billable commerce
      that is customer-focused and drives revenue growth.




The
      proceeds received from the sale of our non-core business units and from the
      sale
      of convertible debentures have been used to fund our operations while we
      continue to develop the NeoReader TM business
      to commercialization.





**Results
      of Continuing Operations**




**Comparison
      of the Three Months Ended March 31, 2008 and March 31,
      2007**




The
      loss
      from continuing operations increased $12.9 million, or 145.1% to
      $4.0 million for the three months ended March 31, 2008 from negative
      $8.9 million for the three months ended March 31, 2007. This increase
      is primarily due to a gain from change in fair value of our derivative financial
      instruments, decreased interest expense related to our convertible debt,
      decreased stock-based compensation and decreased general and administrative
      costs during the current period compared to the prior period.


20




**Revenues.** Total
      revenues decreased $0.1 million, or 34.0%, to $0.3 million for the
      three months ended March 31, 2008 from $0.4 million for the three
      months ended March 31, 2007. The revenue decrease was primarily due to
      management’s focus on developing new opportunities for NeoReader TM technology, which we believe will deliver the most value in the
      future.




**Increase(decrease)****For the Three Months Ended March 31,**
            
            **2008 to 2007****2008**
            
            **2007**
            
            $
            
            %(in
                thousands)Hardware
                sales - Gavitec
            
            $
            67
            
            $
            149
            
            
            (82
            )
            
            -54.9
            %Lavasphere
                revenue - Gavitec
            
            
            24
            
            
            11
            
            
            13
            
            
            115.0
            %Legacy
                product revenue
            
            
            77
            
            
            133
            
            
            (56
            )
            
            -42.0
            %Patent
                licensing
            
            
            39
            
            
            41
            
            
            (2
            )
            
            -6.6
            %Other
                revenue
            
            
            57
            
            
            65
            
            
            (8
            )
            
            -12.7
            %**Total
                revenue**
            
            $
            264
            
            $
            399
            
            
            (135
            )
            
            -34.0
            %




Hardware
      sales at Gavitec were $67,000 and $149,000 for the three months ended March
      31,
      2008 and 2007, respectively. Lavasphere revenue, which tends to be
      project-oriented, was $24,000 for the current period and $11,000 in the prior
      period. Legacy product revenue declined in the current period to $77,000 from
      $133,000 in the prior period due to our focus on our new business strategy
      to
      develop NeoReader TM business
      applications. Patent licensing revenue remained constant at approximately
      $40,000 for both periods.




Other
      revenues were $56,000 and $65,000 for the three months ended March 31, 2008
      and 2007, respectively. Other revenues are primarily comprised of custom
      programming services at Gavitec.




**Operating
      Costs and Expenses**




A
      summary
      of the total operating costs and expenses is presented below:


**For the Three Months Ended March 31,****2008**
              
              **2007**(in
                  thousands)Sales
                  and marketing
              
              $
              628
              
              $
              858General
                  and administrative
              
              
              1,206
              
              
              2,460Research
                  and development
              
              
              562
              
              
              506Gain
                  (loss) on extinguishment of debt
              
              
              (4
              )
              
              -Interest
                  expense/(income), net
              
              
              (1,171
              )
              
              1,698Gain/(loss)
                  on sale of assets
              
              
              84
              
              
              9Gain
                  from change in fair value of derivative financial
                  instruments
              
              
              (5,392
              )
              
              3,508Total
                  operating costs and expenses
              
              
              ($4,087
              )
              $
              9,039




**Sales
      and Marketing.** Sales
      and marketing expenses were $0.6 million and $0.9 million for the
      three months ended March 31, 2008 and 2007, respectively. This decrease of
      approximately $0.3 million, or 26.9%, is primarily due to decreased stock
      based compensation expense of $0.1 million in the current period, compared
      to
      $0.3 million in the prior period, and lower sales and marketing costs
      attributable to our legacy products of $0.2 million in the current period
      compared to $0.4 million in the prior period, offset by higher sales and
      marketing expenses at Gavitec of $0.1 million.




**General
      and Administrative.** General
      and administrative expenses were $1.2 million and $2.5 million for the
      three months ended March 31, 2008 and 2007, respectively. The decrease of
      $1.3 million, or 51.0%, is primarily attributable to a reduction of
      $1.2 million in audit and legal fees and a reduction of $0.2 million of
      stock compensation expense, offset by increased Gavitec expenditures of $0.1
      million for general and administrative expenses driven by higher costs in 2008
      associated with the integration of the Gavitec business unit into our
      consolidated operations.




Included
      within general and administrative are expenses related to our executives, human
      resources, finance and accounting, business development, and research &
development teams.


21




**Research
      and Development.** Research
      and development expenses were $0.6 million and $0.5 million for the three month
      periods ended March 31, 2008 and 2007, respectively. Increased costs of
      NeoReader TM development in the current quarter of $0.2 million was offset by lower stock
      based compensation expense of $0.1 million.




**Interest
      (Income)/Expense** *.* Interest
      (income)/expense consists primarily of interest charges or gains related to
      convertible debentures, combined with other interest accrued for creditors
      as
      part of financed purchases, past due balances, and notes payable, net of
      interest earned on cash equivalent investments. Net interest income was $1.2
      million for the first quarter of 2008 compared to net interest expense of $1.7
      million for the first quarter of 2007. The increase resulted from favorable
      fair
      value adjustments of our March 2007 and August 2007 convertible debt in
      accordance with the FAS 155 provisions that we use to account for these two
      financial instruments.




**(Gain)/Loss
      on Sale of Assets** *.* We
      recognized a net loss on sale of assets of $0.01 million during the three months
      ended March 31, 2008, which was comprised of offsetting items. We wrote down
      our
      investment in PUPS stock to reflect the current net realizable value of zero,
      which resulted in a charge of $450,000. Offsetting this charge during the
      current quarter was a gain of $370,000 resulting from the sale of our remaining
      10% ownership of 12Snap.




**(Gain)/Loss
      on Derivative Financial Instruments** *.* Gain
      on
      derivative financial instruments was $5.4 million for the three months ended
      March 31, 2008, compared with a loss of $3.5 million for the three months ended
      March 31, 2007, a change of $8.9 million or 253.7%.  The derivative gains
      and losses are associated with our convertible preferred stock and convertible
      debenture financing.  Certain derivatives and embedded conversion features
      were created at the time of each offering and are recorded at fair value on
      the
      accompanying balance sheet *.* The
      gains
      (losses) represent the reduction (appreciation) in value of the derivatives
      and
      embedded conversion features from the beginning of each reporting period
      presented to the end of the period, resulting primarily from the changes in
      our
      stock price during the reporting period. The fair value of the derivative
      financial instruments at each measurement date correlates to our stock price
      at
      the same date. As a result, our net loss varies significantly from our cash
      flow
      from operations during the three months ended March 31, 2008 and 2007. In future
      periods, our loss could fluctuate dramatically from quarter to quarter if our
      stock price is significantly different from the stock price at the end of the
      previous measurement period. Because we cannot guarantee that we have enough
      authorized shares to net share settle the convertible instruments, the change
      in
      fair value of derivative instruments will be recorded to our statement of
      operations each reporting period until the convertible instruments are fully
      converted.




**Results
      of Discontinued Operations**




In
      fiscal
      2006 and 2007 we discontinued the operations of our Mobot, Sponge, 12Snap,
      Telecom Services and Micro Paint Repair businesses, which were accounted for
      as
      discontinued operations in accordance with SEC Staff Accounting Topic 5E,
      Accounting Principles Board (APB) Opinion 29, APB 18, Statement of Financial
      Accounting Standards (FAS) 141, FAS 144, and Emerging Issues Task Force Issue
      01-2. A loss of $0.4 million was recognized for the three months ended March
      31,
      2008, which was primarily attributable to deferred compensation expense
      associated with stock options granted to employees of the divested businesses
      prior to the divestitures and wind-down expenses associated with Micro Paint
      Repair-US operations. For the three months ended March 31, 2007, we recognized
      a
      loss of $2.6 million for discontinued operations, which included a charge of
      $2.5 million for impairment of intangible assets related to our prior
      acquisition of 12Snap, other operating costs of $2.8 million and stock
      compensation expense of $0.5 million, that were offset by revenues related
      to
      the discontinued operations during the period of $3.2 million.




**Liquidity
      and Capital Resources**




As
      of
      March 31, 2008, we had $0.2 million in cash and cash equivalents as
      noted on our consolidated balance sheet and statement of cash flows. This is
      a
      decrease of $1.2 million or 84.5% compared to a total of $1.4 million
      as of December 31, 2007.




On
      a
      comparative basis, cash used by operating activities of continuing operations
      decreased $2.0 million to $1.6 million for the three months ended
      March 31, 2008 compared to $3.6 million of cash used by operating
      activities for the period ended March 31, 2007. The decrease in cash used
      by continuing operations is primarily due to fluctuations in fair values of
      warrants and embedded conversion features related to our convertible financing
      instruments.




Cash
      provided by investing activities increased by $2.0 million to $1.0 million
      for
      the three months ended March 31, 2008 compared to $1.0 million of cash used
      in
      investing activities for the period ended March 31, 2007. This increase was
      primarily due the sale of our remaining ownership of 12Snap, which resulted
      in
      net proceeds to us of $0.8 million, combined with cash and other assets in
      the
      amount of $0.3 million retained by us from Micro Paint Repair-US after the
      operation was shut down, reflecting a partial settlement of intercompany loans,
      offset by expenditures of $0.07 million for computer equipment and $0.014
      million of interest paid on purchase price guarantee obligations. For the three
      months ended March 31, 2007, we paid purchase price guarantee obligations in
      the
      amount of $2.4 million offset by $0.5 million cash received in repayment of
      a
      note receivable and cash and other assets in the amount of $0.9 million retained
      by us from subsidiaries disposed during the period, resulting in net use of
      cash
      by investing activities of $1.0 million.


22




Cash
      used
      in financing activities was $0.03 million for the three months ended March
      31,
      2008 compared to $6.7 million cash provided by financing activities for the
      three months ended March 31, 2007. During the current period, we repaid $0.03
      on
      notes payable. For the three months ended March 31, 2007, we borrowed funds
      under a convertible debenture which resulted in $6.7 million in debt related
      to
      the convertible financing instrument, and also received a nominal amount of
      cash
      from exercised stock options.




Cash
      used
      in discontinued operations was $0.4 million and $2.6 million for the
      periods ending March 31, 2008 and 2007, respectively, representing a decrease
      of
      $2.2 million for the current period. The decrease reflects the reduced costs
      incurred for the discontinued operations subsequent to their disposal. Our
      future ongoing costs related to discontinued operations will be the recognition
      of stock based compensation expense related to stock options granted to
      employees of the discontinued operations prior to the disposals of the units,
      which will be fully expensed by the end of the second quarter of
      2009.




As
      of
      March 31, 2008, we have a working capital deficiency of $80.0 million, of which
      $19.1 million relates to the fair value of derivative financial instruments,
      and
      $49.3 million relates to the carrying value of debentures and convertible
      preferred stock that are convertible into shares of our common stock. We intend
      to attempt to fund our working capital deficiency as described in “Sources of
      Cash and Projected Cash Requirements”.




**Significant
      Liquidity Events**




**Going
      Concern**




The
      accompanying consolidated financial statements have been prepared in conformity
      with accounting principles generally accepted in the United States of America,
      which contemplate continuation of the Company as a going concern. Net income
      for
      the three months ended March 31, 2008 was $3.6 million compared to net loss
      of
      $11.5 million for the three months ended March 31, 2007. Net cash used for
      operations was $1.6 million and $3.6 million, for the three months ended March
      31, 2008 and 2006, respectively. We also have an accumulated deficit of $197.8
      million and a working capital deficit of $80.0 million as of March 31,
      2008.




We
      have
      an obligation as of December 31, 2007 of $4.5 million relating to purchase
      price
      guarantee associated with our acquisition of 12Snap.




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




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




Should
      financing sources fail to materialize, management would seek alternate funding
      sources such as the sale of common and/or preferred stock, the issuance of
      debt,
      or the sale of our marketable assets. Our plan is to attempt to secure adequate
      funding to bridge the commercialization of our NeoReader TM business.




In
      the
      event that these financing sources do not materialize, or that we are
      unsuccessful in increasing our revenues and profits, we will be forced to
      further reduce our costs, may be unable to repay our debt obligations as they
      become due, or respond to competitive pressures, any of which circumstances
      would have a material adverse effect on our business, prospects, financial
      condition and results of operations. Additionally, if these funding sources
      or
      increased revenues and profits do not materialize, and we are unable to secure
      additional financing, we could be forced to reduce or cease our business
      operations.


23




**Sale
      of 12Snap Put Option – January 28, 2008**




On
      January 28, 2008, we exercised a put option related to 12Snap whereby we sold
      our remaining 10% ownership of 12Snap to Bernd Michael, a private investor
      and
      former shareholder of 12Snap prior to our acquisition of 12Snap. The option
      agreement gave us the right to sell and the Buyer had the right to acquire
      the
      remaining 10% stake held by us for a purchase price of $0.8 million after
      December 31, 2007. This resulted in net proceeds of $0.8 million to us in
      January 2008.




**Sources
      of Cash and Projected Cash Requirements**




As
      of
      March 31, 2008, our cash balances were $0.2 million. Our plan is to attempt
      to
      secure adequate funding to bridge the commercialization of our
      NeoReader TM business.




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




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




**Contractual
      Obligations**




There
      have been no material changes to our contractual obligations from the
      information provided in the “Contractual Obligations” portion of Item 7 -
      Management’s Discussion Analysis of Financial Condition and Results of
      Operations, included in our Annual Report on Form 10-K for the fiscal year
      ended
      December 31, 2007.




**Off-Balance
      Sheet Arrangements**




As
      of
      March 31, 2008, we did not have any relationships with unconsolidated
      entities or financial partnerships, such as entities often referred to as
      structured finance, variable interest or special purpose entities, which would
      have been established for the purpose of facilitating off-balance sheet
      arrangements or other contractually narrow or limited purposes. As such, we
      are
      not exposed to any financing, liquidity, market or credit risk that could arise
      if we had engaged in such relationships.




**Related
      Party Transactions**




In
      December 2006, we entered into a twenty-five month consulting agreement with
      SKS
      Consulting of South Florida Corp. (“SKS”) whereby we pay SKS $1,000 per day
      worked on our behalf and 60,000 warrants per month for services rendered by
      George O’Leary and Jay Bonk. In payment of this agreement, we paid SKS $3,000
      and issued stock valued at $2,381 to Mr. O’Leary and stock valued at $794 to Mr.
      Bonk during the three months ended March 31, 2008. Mr. O’Leary is on our Board
      of Directors.




**Critical
      Accounting Policies and Estimates**




There
      have been no material changes to our critical accounting policies and estimates
      from the information provided in Item 2, “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,
      2007.




**Recently
      Issued Accounting Standards**




For
      a
      discussion of recently issued accounting standards, see Note 2, Summary of
      Significant Accounting Policies, to the Consolidated Financial
      Statements.


24




**ITEM 3.
      Quantitative and Qualitative Disclosures About Market Risk**




We
      are
      exposed to certain market risks which exist as part of our ongoing business
      operations. We currently do not engage in derivative and hedging transactions
      to
      mitigate the affects of the risks below. In the future, we may enter into
      foreign currency forward contracts to manage foreign currency risk.




**Interest
      Rate Risk** ***.*** Because
      our debt is primarily tied to borrowing rates in the United States, changes
      in
      U.S. interest rates would affect the interest paid on our borrowings and/or
      earned on our cash and cash equivalents. Based on our overall interest rate
      exposure at March 31, 2008, a near-term change in interest rates, based on
      historical small movements, would not materially effect our operations or the
      fair value of interest rate sensitive instruments. Our current debt instruments
      have fixed interest rates and terms and, therefore, a significant change in
      interest rates would not have a material adverse effect on our financial
      position or results of operations; however, changes in interest rates may
      increase our cost of borrowing in the future.




**Investment
      Risk** ***.*** As
      of March 31, 2008, we do not have material amounts invested in other public
      or
      privately-held companies and therefore there is minimal associated investment
      risk with our investment portfolio.




**Foreign
      Currency Risk** ***.*** We
      conduct business internationally in two currencies, and as such, are exposed
      to
      adverse movements in foreign currency exchange rates. Our exposure to foreign
      exchange rate fluctuations arise in part from: (1) translation of the
      financial results of our Gavitec subsidiary into U.S. dollars in
      consolidation; (2) the re-measurement of non-functional currency assets,
      liabilities and intercompany balances into U.S. dollars for financial
      reporting purposes; and (3) non-U.S. dollar denominated sales to
      foreign customers. Historically, neither fluctuations in foreign exchange rates
      nor changes in foreign economic conditions have had a significant impact on
      our
      financial condition or results of operations. Foreign exchange rate fluctuations
      did not have a material impact on our financial results for the three months
      ended March 31, 2008 and 2007.




**ITEM 4T.
      Controls and Procedures**




**Disclosure
      Controls and Procedures.** Our
      management, with the participation of our Chief Executive Officer and Chief
      Financial Officer, has 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 Securities Exchange Act of 1934, as amended (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 Securities and Exchange Act of 1934
      is
      recorded, processed, summarized and reported within the time periods specified
      in the rules and forms of the Securities and Exchange Commission, and that
      such
      information is accumulated and communicated to our management, including our
      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, 2008, at the reasonable assurance
      level, because of the material weaknesses described in Item 9A of our Annual
      Report on Form 10−K for the fiscal year ended December 31, 2007, which we are
      still in the process of remediating. Please see “Management’s Report on Internal
      Control over Financial Reporting” in Item 9A of the 2007 Form 10−K for a full
      description of these weaknesses.




Notwithstanding
      the material weaknesses described in Item 9A of the Form 10−K for the fiscal
      year ended December 31, 2007, 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 for all periods presented herein.




**Management’s
      Remediation Efforts**




As
      of the
      date of this filing, we have taken the following step to strengthen our internal
      control over financial reporting. Notwithstanding our efforts, the material
      weaknesses described in Item 9A of our Form 10−K for the fiscal year ended
      December 31, 2007, will not be considered remediated until the new controls
      operate for a sufficient period of time and are tested (in accordance with
      the
      requirements of Section 404 of the Sarbanes-Oxley Act) to enable management
      to
      conclude that the controls are operating effectively.




·
            **Financial
                Expert on the Audit Committee**.
                On February 6, 2008, our Board of Directors appointed George G. O’Leary as
                Chairman of the Audit Committee. Mr. O’Leary meets the definition of an
                Audit Committee Financial Expert as defined by Section 407 of the
                Sarbanes-Oxley Act.




We
      are
      currently addressing each of the material weaknesses in internal control over
      financial reporting cited in our 2007 Form 10−K and are committed to remediating
      them as expeditiously as possible. We will devote significant time and resources
      to the remediation effort.


25




**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.




**Internal
      Control over Financial Reporting.** There
      have not been any changes in our internal control over financial reporting
      (as
      such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
      Act) during the most recent fiscal quarter that have materially affected, or
      are
      reasonably likely to materially affect, our 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 pending legal proceedings, see Note 12 - Contingencies, to the
      Consolidated Financial Statements.




**ITEM
      1A. Risk Factors**




You
      should carefully consider the following factors and all other information
      contained in this Form 10-Q and our Form 10-K for the year ended December 31,
      2007 before you make any investment decisions with respect to our securities.
      The risks and uncertainties described below may not be the only risks we
      face.





**Risks
      Related to Our Business**




***We
      have incurred losses since inception and could incur losses in the future,
      and
      we have a substantial accumulated deficit and a substantial working capital
      deficit, which means that we may not be able to continue
      operations.***




We
      have
      incurred substantial operating losses since inception, and could continue to
      incur substantial losses for the foreseeable future. To succeed, we must develop
      new client and customer relationships and substantially increase our revenue
      derived from improved products and additional value-added services. We have
      expended, and to the extent we have available financing, we intend to continue
      to expend, substantial resources to develop and improve our products, increase
      our value-added services and to market our products and services. These
      development and marketing expenses must be incurred well in advance of the
      recognition of revenue. As a result, we may not be able to achieve or sustain
      profitability. A number of factors could increase our operating expenses, such
      as:




·
            adapting
                corporate infrastructure and administrative resources to accommodate
                additional customers and future
                growth;




·
            developing
                products, distribution, marketing, and management for the
                broadest-possible market;




·
            broadening
                customer technical support
                capabilities;




·
            developing
                or acquiring new products and associated technical
                infrastructure;


26




·
            developing
                additional indirect distribution
                partners;




·
            increased
                costs from third party service
                providers;




·
            improving
                data security features; and




·
            legal
                fees and settlements associated with litigation and
                contingencies.




To
      the
      extent that increases in operating expenses are not offset by increases in
      revenues, operating losses will increase.




The
      accompanying consolidated financial statements have been prepared in conformity
      with accounting principles generally accepted in the United States of America,
      which contemplate our continuation as a going concern. Net income (loss) from
      continuing operations for the three months ended March 31, 2008 and 2007 was
      $4.0 million and ($8.9) million, respectively. Net cash used for operations
      was
      $1.6 million and $3.6 million for the three months ended March 31, 2008 and
      2007, respectively. We also have an accumulated deficit of $197.8
      million  and
      a
      working capital deficit of $80.0 million  as
      of
      March 31, 2008.




We
      have
      an obligation as of March 31, 2008 of $4.5 million relating to purchase price
      guarantee associated with our acquisition of 12Snap.




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




***We
      will need to raise additional funds to continue our
      operations.***




We
      had
      cash balances of $0.2 million as of March 31, 2008. In order to satisfy our
      obligations that are currently due and that will come due, and maintain our
      operations in the absence of a material increase in revenues, we will need
      to
      raise additional cash from outside sources.




In
      the
      event that i) our stock price does not increase to levels where we can force
      exercise of enough of our outstanding warrants to generate material operating
      capital, ii) the market for our stock will not support the sale of shares
      underlying such warrants or other funding sources, or iii) we do not realize
      a
      material increase in revenue during the next twelve (12) months, we will have
      to
      seek additional cash sources.




There
      can
      be no assurances that such funding sources will be available. If necessary
      funds
      are not available, our business and operations would be materially adversely
      affected and in such event, we would be forced to attempt to reduce costs and
      adjust our business plan, and could be forced to sell certain of our assets,
      including but not limited to, our remaining subsidiaries and curtail or cease
      our operations.




***Our
      management and Board of Directors may be unable to execute their plans to turn
      around the Company, grow our revenues and achieve profitability and positive
      cash flows.***




In
      February 2007 we added George O’Leary to our Board of Directors. In June 2007,
      the previous CEO was replaced by William J. Hoffman as Chief Executive Officer,
      and since that time we have also added several key executives to our management
      team. If our new CEO is unable to attract and retain management to execute
      our
      plans, or if management and the Board of Directors are unable to execute those
      plans, then we may fail to grow our revenues, contain costs and achieve
      profitability and positive cash flows.




***We
      have guaranteed the value of stock issued in connection with prior-year mergers
      through the registration of the shares, which could result in a material cash
      liability.***




Pursuant
      to the terms of the merger agreement with 12Snap, we were obligated to
      compensate the sellers in cash for the difference between the price at the
      time
      the shares became saleable and the price the shares were valued for purposes
      of
      the merger agreement. At the time the shares became saleable, such obligation
      amounted to $16.2 million.




On
      March
      19, 2007, we issued 197,620,948 shares valued at $9.4 million as partial
      settlement of the $16.2 million obligation, leaving a balance of $6.8 million
      after the stock payment. Also during 2007, we made payments of $0.5 million
      and
      negotiated a reduction of $1.76 million in the obligation, leaving a balance
      as
      of March 31, 2008 of $4.5 million in purchase price guarantees, the entire
      balance of which is currently due and payable.


27




***All
      of our assets are pledged to secure certain debt obligations, which we could
      fail to repay and could result in the foreclosure upon our
      assets.***




Pursuant
      to our secured convertible debentures issued to YA Global Investments, LP (fka
      Cornell Capital Partners LP and herewith “Yorkville”), in the principal amounts
      of $7.5 million, $5.0 million, $2.5 million and $1.8 million, dated March 27,
      2007, August 24, 2006, December 29, 2006 and August 24, 2007, respectively,
      we
      were required to secure the convertible debentures’ repayment with substantially
      all of our  assets.
      In the event we are unable to repay the secured convertible debentures, we
      could
      lose all of our assets and be forced to cease our operations. As of December
      31,
      2006, we were in default of the Investor Registration Rights Agreement pursuant
      to the August 24, 2006 and December 29, 2006 Agreements and as a result, the
      full fair value of the secured convertible debentures are callable in the amount
      of $5 million and $2.5 million, respectively, and Yorkville could foreclose
      on
      our assets if we are unable to pay these amounts. Prior to the default, we
      were
      accreting dividends on the Series C convertible preferred stock, using the
      effective interest method, through periodic charges to additional paid in
      capital. Due to the default status, we accreted dividends to the full face
      value
      as of December 31, 2006 of the Series C convertible preferred stock, resulting
      in an additional charge of $18.2 million to net loss attributable to common
      shareholders for the year ended December 31, 2006. The Series C convertible
      preferred stock is now reported as demand debt in the current liabilities
      section of the balance sheet, pursuant to the guidance outlined in FAS
      150.




***Because
      our historical financial information is not representative of our future
      results, investors and analysts will have difficulty analyzing our future
      earnings potential.***




Because
      we have grown through acquisitions and our past operating results reflect the
      costs of integrating these acquisitions, as well as revenues from operations
      which have now been sold, historical results are not representative of future
      expected operating results. We have recognized very sizable charges and
      expenditures in the past for impairment charges and discontinued operations.
      Because these items are not recurring, it is more difficult for investors to
      predict future results.




***We
      have material weaknesses in our i*** ***nternal
      control over financial reporting that may prevent us from being able to
      accurately report our financial results or prevent fraud, which could harm
      our
      business and operating results.***




Effective
      internal controls are necessary for us to provide reliable and accurate
      financial reports and prevent fraud. In addition, Section 404 under the
      Sarbanes-Oxley Act of 2002 requires that we  assess,
      and our independent registered public accounting firm attest to, the design
      and
      operating effectiveness of internal control over financial reporting. If
      we  cannot
      provide reliable and accurate financial reports and prevent fraud, our business
      and operating results could be harmed. We have in
      the
      past discovered, and may in the future discover, areas of our internal controls
      that need improvement. We  identified
      five (5) material weaknesses in our internal control as of December 31, 2007.
      These matters and our efforts regarding remediation of these matters, as well
      as
      efforts regarding internal controls generally are discussed in detail in Part
      II, Item 9A(T), Controls and Procedures, of our Annual Report on Form 10-K
      for
      the year ended December 31, 2007.  However, as our  material
      weaknesses in our internal controls demonstrate, we  cannot
      be
      certain that the remedial measures we have taken to date will ensure that
      we  design,
      implement, and maintain adequate controls over our financial processes and
      reporting in the future. Additionally, since the requirements of Section 404
      are
      ongoing and apply for future years, we  cannot
      be
      certain that we or our independent registered public accounting firm will not
      identify additional deficiencies or material weaknesses in our internal controls
      in the future, in addition to those identified as of December 31, 2007.
      Remedying the material weaknesses that have been presently identified, and
      any
      additional deficiencies, significant deficiencies or material weaknesses that
      we  or
      our
      independent registered public accounting firm may identify in the future, could
      in the future require us  to
      incur
      significant costs, hire additional personnel, expend significant time and
      management resources or make other changes. Any delay or failure to design
      and
      implement new or improved controls, or difficulties encountered in their
      implementation or operation, could harm our operating results, cause
      us  to
      fail
      to meet our financial reporting obligations, or prevent us  from
      providing reliable and accurate financial reports or avoiding or detecting
      fraud. Disclosure of our  material
      weaknesses, any failure to remediate such material weaknesses in a timely
      fashion or having or maintaining ineffective internal controls could cause
      investors to lose confidence in our reported financial information, which could
      have a negative effect on the trading price of our  stock
      and
      our access to capital.


28




***There
      is limited information upon which investors can evaluate our business because
      the physical-world-to-internet market has existed for only a short period of
      time.***




The
      physical-world-to-internet market in which we operate is a recently developed
      market. Further, we have conducted operations in this market only since March
      1996. Consequently, we have a relatively limited operating history upon which
      an
      investor may base an evaluation of our primary business and determine our
      prospects for achieving our intended business objectives. To date, we have
      had
      limited sales of our physical-world-to-internet products. We are prone to all
      of
      the risks inherent to the establishment of any new business venture, including
      unforeseen changes in our business plan. An investor should consider the
      likelihood of our future success to be highly speculative in light of our
      limited operating history in our primary market, as well as the limited
      resources, problems, expenses, risks, and complications frequently encountered
      by similarly situated companies in new and rapidly evolving markets, such as
      the
      physical-world-to-internet space. To address these risks, we must, among other
      things:




·
            maintain
                and increase our client base;


·
            implement
                and successfully execute our business and marketing
                strategy;


·
            continue
                to develop and upgrade our
                products;


·
            continually
                update and improve service offerings and
                features;


·
            respond
                to industry and competitive developments;
                and


·
            attract,
                retain, and motivate qualified
                personnel.




We
      may
      not be successful in addressing these risks. If we are unable to do so, our
      business, prospects, financial condition, and results of operations would be
      materially and adversely affected.




***Our
      future success depends on the timely introduction of new products and the
      acceptance of these new products in the marketplace.***




Rapid
      technological change and frequent new product introductions are typical for
      the
      markets we serve. Our future success will depend in large part on continuous,
      timely development and introduction of new products that address evolving market
      requirements. To the extent that we fail to introduce new and innovative
      products, we may lose market share to our competitors, which may be difficult
      to
      regain. Any inability, for technological or other reasons, to successfully
      develop and introduce new products could materially and adversely affect our
      business.




***Our
      common stock is deemed to be “Penny Stock” which may make it more difficult for
      investors to sell their shares due to suitability
      requirements.***




Our
      common stock is deemed to be “penny stock” as that term is defined in
      Rule 3a51-1 promulgated under the Securities Exchange Act of 1934, as
      amended. These requirements may reduce the potential market for our common
      stock
      by reducing the number of potential investors. This may make it more difficult
      for investors in our common stock to sell shares to third parties or to
      otherwise dispose of them. This could cause our stock price to decline. Penny
      stocks are stock:




·
            with
                a price of less than $5.00 per
                share;


·
            that
                are not traded on a “recognized” national
                exchange;


·
            whose
                prices are not quoted on the NASDAQ automated quotation system (NASDAQ
                listed stock must still have a price of not less than $5.00 per share);
                or


·
            in
                issuers with net tangible assets less than $2 million (if the issuer
                has
                been in continuous operation for at least three years) or $10 million
                (if in continuous operation for less than three years), or with average
                revenues of less than $6 million for the last three
                years.




Broker-dealers
      dealing in penny stocks are required to provide potential investors with a
      document disclosing the risks of penny stocks. Moreover, broker-dealers are
      required to determine whether an investment in a penny stock is a suitable
      investment for a prospective investor.


29




***Existing
      shareholders will experience significant dilution when certain investors
      convert their preferred stock to common stock, convert outstanding convertible
      debentures or when the investors exercise their warrants and receive common
      stock shares under the investment agreement with the
      investors.***




The
      issuance of shares of common stock pursuant to the conversion of Series C
      convertible preferred stock, the conversion of convertible debentures or the
      exercise of warrants pursuant to our transactions with Yorkville will have
      a
      dilutive impact on our stockholders. As a result, our net income or loss per
      share could decrease in future periods, and the market price of our common
      stock
      could decline.  In addition, the lower our stock price is, the more shares
      of common stock we will have to issue pursuant to the conversion of preferred
      stock or the convertible debentures.  If our stock price is lower,
      then existing stockholders would experience greater dilution.




***Due
      to accounting treatment of certain convertible preferred stock and convertible
      debenture instruments issued by us, a fluctuation in our stock price could
      have
      a material impact on our results of operations.***




During
      the three months ended March 31, 2008, we recognized a gain in the amount of
      $5.4 million resulting from adjustments recorded to reflect the change in fair
      value from revaluation of warrants and embedded conversion features in
      connection with our Series C convertible preferred stock and our convertible
      debentures. We will adjust the carrying value of our derivative instruments
      to
      market at each balance sheet date. As a result, we could experience significant
      fluctuations in our net income (loss) in future periods from such charges based
      on corresponding movement in our share price.




***We
      are uncertain of the success of our mobile business and the failure of this
      business would negatively affect the price of our
      stock.***




We
      provide products and services that provide a link from physical objects,
      including printed material, to the mobile internet. We can provide no assurance
      that:




·
            our
                mobile business unit will ever achieve
                profitability;


·
            our
                current product offerings will not be adversely affected by the focusing
                of our resources on the physical-world-to-internet space;
                or


·
            the
                products we develop will obtain market
                acceptance.




In
      the
      event that our mobile business unit should never achieve profitability, that
      our
      current product offerings should so suffer, or that our products fail to obtain
      market acceptance, our business, prospects, financial condition, and results
      of
      operations would be materially adversely affected.




***A
      large percentage of our assets are intangible assets, which will have little
      or
      no value if our operations are unsuccessful.***




At
      March
      31, 2008, approximately eighty-one (81%) of our total assets used in continuing
      operations were intangible assets and goodwill, consisting primarily of rights
      related to our patents, other intellectual property, and excess of purchase
      price over fair market value paid for Gavitec. If our operations are
      unsuccessful, these assets will have little or no value, which would materially
      adversely affect the value of our stock and the ability of our stockholders
      to
      recoup their investments in our stock.




We
      review
      our amortizable intangible assets for impairment when events or changes in
      circumstances indicate the carrying value may not be recoverable. Goodwill
      is
      required to be tested for impairment at least annually. We may be required
      to
      record a significant charge to earnings in our financial statements during
      the
      period in which any impairment of our goodwill or amortizable intangible assets
      is determined, resulting in an impact on results of operations.




***Certain
      of our emerging products and services have limited history and may not result
      in
      success.***




To
      date,
      we have conducted limited marketing efforts directly relating to our emerging
      technology products, consisting primarily of the NeoReader TM suite of
      products, and certain products of Gavitec. Many of our marketing efforts with
      respect to these emerging technologies have been largely untested in the
      marketplace, and may not result in materially increased sales of these emerging
      products and services. To penetrate the emerging markets in which we compete,
      we
      expect that we will have to exert significant efforts to create awareness of,
      and demand for, our emerging products and services. To the extent funding is
      available, we intend to continue to expand our sales and marketing resources
      as
      the market continues to mature. Our failure to further develop our sales and
      marketing capabilities and successfully market our emerging products and
      services would have a material adverse effect on our business, prospects,
      financial condition, and results of operations.




30




***Our
      internally developed systems are inefficient and may put us at a competitive
      disadvantage.***




We
      use
      internally developed technologies for a portion of our systems integration
      services, as well as the technologies required to interconnect our clients’ and
      customers’ physical-world-to-internet systems and hardware with our own. As we
      develop these systems in order to integrate disparate systems and hardware
      on a
      case-by-case basis, these systems are inefficient and require a significant
      amount of customization. Such client and customer-specific customization is
      time
      consuming and costly and may place us at a competitive disadvantage when
      compared to competitors with more efficient systems.




***We
      could fail to attract or retain key personnel, which could have a materially
      adverse effect on our business.***




Our
      future success will depend in large part on our ability to attract, train,
      and
      retain additional highly skilled executive level management, creative,
      technical, and sales personnel. Competition is intense for these types of
      personnel from other technology companies and more established organizations,
      many of which have significantly larger operations and greater financial,
      marketing, human, and other resources than we have. We may not be successful
      in
      attracting and retaining qualified personnel on a timely basis, on competitive
      terms, or at all. Our failure to attract and retain qualified personnel could
      have a material adverse effect on our business, prospects, financial condition,
      and results of operations.




***We
      may be unsuccessful in integrating our Gavitec acquisition with our current
      business, which could have a materially adverse effect on our
      business.***




The
      success of the acquisition of Gavitec could depend on the ability of our
      executive management to integrate the business plan of Gavitec with our overall
      business plan. Failure to properly integrate the business could have a material
      adverse effect on the expected revenue and operations of the acquisition, as
      well as the expected return on investment for us. We acquired Gavitec during
      the
      first quarter of 2006, when we also acquired four other businesses – Mobot,
      Sponge, 12Snap and NeoMedia Telecom Services, each of which have been
      subsequently divested, less than two (2) years after acquisition. As a result
      of
      these divestitures, we have experienced a substantial decrease in revenues,
      operating losses and consolidated assets in the current year as compared to
      the
      prior year. For the three months ended March 31, 2008, Gavitec accounted for
      approximately fifty-six percent (56%) of our consolidated revenues. In addition,
      Gavitec assets represented approximately four percent (4%) of our consolidated
      assets as of March 31, 2008.




***We
      may be unable to protect our intellectual property rights and may be liable
      for
      infringing the intellectual property rights of others, which could have a
      materially adverse effect on our business.***




Our
      success in the physical-world-to-internet market is dependent upon our
      proprietary technology, including patents and other intellectual property,
      and
      on the ability to protect proprietary technology and other intellectual property
      rights. In addition, we must conduct our operations without infringing on the
      proprietary rights of third parties. We also intend to rely upon unpatented
      trade secrets and the know-how and expertise of our employees, as well as our
      patents. To protect our proprietary technology and other intellectual property,
      we rely primarily on a combination of the protections provided by applicable
      patent, copyright, trademark, and trade secret laws as well as on
      confidentiality procedures and licensing arrangements. Although we believe
      that
      we have taken appropriate steps to protect our unpatented proprietary rights,
      including requiring that our employees and third parties who are granted access
      to our proprietary technology enter into confidentiality agreements, we can
      provide no assurance that these measures will be sufficient to protect our
      rights against third parties. Others may independently develop or otherwise
      acquire patented or unpatented technologies or products similar or superior
      to
      ours.




We
      license from third parties certain software tools that are included in our
      services and products. If any of these licenses were terminated, we could be
      required to seek licenses for similar software from other third parties or
      develop these tools internally. We may not be able to obtain such licenses
      or
      develop such tools in a timely fashion, on acceptable terms, or at all.
      Companies participating in the software and internet technology industries
      are
      frequently involved in disputes relating to intellectual property. We may in
      the
      future be required to defend our intellectual property rights against
      infringement, duplication, discovery, and misappropriation by third parties
      or
      to defend against third party claims of infringement. Likewise, disputes may
      arise in the future with respect to ownership of technology developed by
      employees who were previously employed by other companies. Any such litigation
      or disputes could result in substantial costs to, and a diversion of resources
      by us. An adverse determination could subject us to significant liabilities
      to
      third parties, require us to seek licenses from, or pay royalties to, third
      parties, or require us to develop appropriate alternative technology. Some
      or
      all of these licenses may not be available to us on acceptable terms or at
      all,
      and we may be unable to develop alternate technology at an acceptable price
      or
      at all. Any of these events could have a material adverse effect on our
      business, prospects, financial condition, and results of
      operations.


31




We
      are
      currently involved in litigation to defend some of our patents from infringement
      from Scanbuy, and our ‘048 patent is currently under reexamination by the United
      States Patent and Trademark Office (USPTO) in conjunction with the Electronic
      Frontier Foundation, as described in Note 12 - Contingencies. While
      it
      is not possible to determine with certainty the outcome of these matters, it
      is
      possible that the eventual resolution of the following legal actions could
      have
      a material adverse effect on our financial position or operating
      results .




***We
      are exposed to product liability claims and an uninsured claim could have a
      material adverse effect on our business, prospects, financial condition, and
      results of operations, as well as the value of our
      stock.***




Many
      of
      our projects are critical to the operations of our clients’ businesses. Any
      failure in a client’s information system could result in a claim for substantial
      damages against us, regardless of our responsibility for such failure. We could,
      therefore, be subject to claims in connection with the products and services
      that we sell. We currently maintain product liability insurance. There can
      be no
      assurance that:




·
            We
                have contractually limited our liability for such claims adequately
                or at
                all; or


·
            We
                would have sufficient resources to satisfy any liability resulting
                from
                any such claim.




The
      successful assertion of one or more large claims against us could have a
      material adverse effect on our business, prospects, financial condition, and
      results of operations.




***We
      utilize data centers maintained by third parties, which could affect our ability
      to support our customers or financial performance.***




Many
      of
      the network services and computer servers utilized by us in our provision of
      services to customers are housed in data centers owned by third-party vendors.
      In the future, we may house additional servers and hardware items in facilities
      owned or operated by other vendors.




A
      disruption in the ability of one of these data centers to provide service to
      us
      could cause a disruption in service to our customers. A data center could be
      disrupted in its operations through a number of contingencies, including
      unauthorized access, computer viruses, accidental or intentional actions,
      electrical disruptions, and other extreme conditions. Although we believe we
      have taken adequate steps to protect our operations through our contractual
      arrangements with our data centers, we cannot eliminate the risk of a disruption
      in service resulting from the accidental or intentional disruption in service
      by
      a date center. Any significant disruption could cause significant harm to us,
      including a significant loss of customers. In addition, a data center could
      raise its prices or otherwise change its terms and conditions in a way that
      adversely affects our ability to support our customers or financial
      performance.




***We
      will not pay cash dividends and investors may have to sell their shares in
      order
      to realize their investment.***




We
      have
      not paid any cash dividends on our common stock and do not intend to pay cash
      dividends in the foreseeable future. We intend to retain future earnings, if
      any, for reinvestment in the development and marketing of our products and
      services. As a result, investors may have to sell their shares of common stock
      to realize their investment.




***Some
      provisions of our certificate of incorporation and bylaws may deter takeover
      attempts, which may limit the opportunity of our stockholders to sell their
      shares at a premium to the then-current market price.***




Some
      of
      the provisions of our Certificate of Incorporation and bylaws could make it
      more
      difficult for a third party to acquire us, even if doing so might be beneficial
      to our stockholders by providing them with the opportunity to sell their shares
      at a premium to the then-current market price. On December 10, 1999, our Board
      of Directors adopted a stockholders rights plan and declared a non-taxable
      dividend of one right to acquire our Series A Preferred Stock, par value $0.01
      per share, on each outstanding share of our common stock to stockholders of
      record on December 10, 1999 and each share of common stock issued thereafter
      until a pre-defined hostile takeover date. The stockholder rights plan was
      adopted as an anti-takeover measure, commonly referred to as a “poison pill”.
      The stockholder rights plan was designed to enable all stockholders not engaged
      in a hostile takeover attempt to receive fair and equal treatment in any
      proposed takeover of us and to guard against partial or two-tiered tender
      offers, open market accumulations, and other hostile tactics to gain control
      of
      us. The stockholders rights plan was not adopted in response to any effort
      to
      acquire control of us at the time of adoption. This stockholders rights plan
      may
      have the effect of rendering more difficult, delaying, discouraging, preventing,
      or rendering more costly an acquisition of us or a change in control of us.
      Certain of our principal stockholders, Charles W. Fritz, William E. Fritz and
      The Fritz Family Limited Partnership and their holdings were exempted from
      the
      triggering provisions of our “poison pill” plan, as a result of the fact that,
      as of the plan’s adoption, their holdings might have otherwise triggered the
“poison pill”.


32




In
      addition, our Certificate of Incorporation authorizes our Board of Directors
      to
      designate and issue preferred stock, in one or more series, the terms of which
      may be determined at the time of issuance by our Board of Directors, without
      further action by stockholders, and may include voting rights, including the
      right to vote as a series on particular matters, preferences as to dividends
      and
      liquidation, conversion, redemption rights, and sinking fund
      provisions.




We
      are
      authorized to issue a total of 25 million shares of Preferred Stock, par value
      $0.01 per share. The issuance of any preferred stock could have a material
      adverse effect on the rights of holders of our common stock, and, therefore,
      could reduce the value of shares of our common stock. In addition, specific
      rights granted to future holders of preferred stock could be used to restrict
      our ability to merge with, or sell our assets to, a third party. The ability
      of
      our Board of Directors to issue preferred stock could have the effect of
      rendering more difficult, delaying, discouraging, preventing, or rendering
      more
      costly an acquisition of us or a change in our control.




**Risks
      Relating To Our Industry**




***The
      security of the internet poses risks to the success of our entire
      business.***




Concerns
      over the security of the internet and other electronic transactions, and the
      privacy of consumers and merchants, may inhibit the growth of the internet
      and
      other online services generally, especially as a means of conducting commercial
      transactions, which may have a material adverse effect on our
      physical-world-to-internet business.




***We
      will only be able to execute our physical-world-to-internet business plan if
      internet usage and electronic commerce continue to
      grow.***




Our
      future revenues and any future profits are substantially dependent upon the
      widespread acceptance and use of the internet and camera devices on mobile
      telephones. If use of the internet and camera devices on mobile telephones
      does
      not continue to grow or grows more slowly than expected, or if the
      infrastructure for the internet and camera devices on mobile telephones does
      not
      effectively support the growth that may occur, or does not become a viable
      commercial marketplace, our physical-world-to-internet business, and therefore
      our business, prospects, financial condition, and results of operations, could
      be materially adversely affected. Rapid growth in the use of, and interest
      in,
      the internet and camera devices on mobile telephones is a recent phenomenon,
      and
      may not continue on a lasting basis. In addition, customers may not adopt,
      and
      continue to use mobile telephones as a medium of information retrieval or
      commerce. Demand and market acceptance for recently introduced services and
      products over the mobile internet are subject to a high level of uncertainty,
      and few services and products have generated profits. For us to be successful,
      consumers and businesses must be willing to accept and use novel and cost
      efficient ways of conducting business and exchanging information.




In
      addition, the public in general may not accept the use of the internet and
      camera devices on mobile telephones as a viable commercial or information
      marketplace for a number of reasons, including potentially inadequate
      development of the necessary network infrastructure or delayed development
      of
      enabling technologies and performance improvements. To the extent that mobile
      phone internet usage continues to experience significant growth in the number
      of
      users, their frequency of use, or in their bandwidth requirements, the
      infrastructure for the mobile internet may be unable to support the demands
      placed upon them. In addition, the mobile internet and mobile interactivity
      could lose its viability due to delays in the development or adoption of new
      standards and protocols required to handle increased levels of mobile internet
      activity, or due to increased governmental regulation. Significant issues
      concerning the commercial and informational use of the mobile internet, and
      online network technologies, including security, reliability, cost, ease of
      use,
      and quality of service, remain unresolved and may inhibit the growth of internet
      business solutions that utilize these technologies. Changes in, or insufficient
      availability of, telecommunications services to support the internet, the web
      or
      other online services also could result in slower response times and adversely
      affect usage of the internet, the web and other online networks generally and
      our physical-world-to-internet product and networks in
      particular.


33




***We
      may not be able to adapt as the internet, physical-world-to-internet, and
      customer demands continue to evolve.***




We
      may
      not be able to adapt as the mobile internet and physical-world-to-internet
      markets and consumer demands continue to evolve. Our failure to respond in
      a
      timely manner to changing market conditions or client requirements would have
      a
      material adverse effect on our business, prospects, financial condition, and
      results of operations. The mobile internet and physical-world-to-internet
      markets are characterized by:




·
            rapid
                technological change;


·
            changes
                in user and customer requirements and
                preferences;


·
            frequent
                new product and service introductions embodying new technologies;
                and


·
            the
                emergence of new industry standards and practices that could render
                proprietary technology and hardware and software infrastructure
                obsolete.




Our
      success will depend, in part, on our ability to:




·
            enhance
                and improve the responsiveness and functionality of our products
                and
                services;


·
            license
                or develop technologies useful in our business on a timely
                basis;


·
            enhance
                our existing services, and develop new services and technologies
                that
                address the increasingly sophisticated and varied needs of our prospective
                or current customers; and


·
            respond
                to technological advances and emerging industry standards and practices
                on
                a cost-effective and timely basis.




***We
      may not be able to compete effectively in markets where our competitors have
      more resources.***




While
      the
      market for physical-world-to-internet technology is relatively new, it is
      already highly competitive and characterized by an increasing number of entrants
      that have introduced or developed products and services similar to those offered
      by us. We believe that competition will intensify and increase in the near
      future. Our target market is rapidly evolving and is subject to continuous
      technological change. As a result, our competitors may be better positioned
      to
      address these developments or may react more favorably to these changes, which
      could have a material adverse effect on our business, prospects, financial
      condition, and results of operations.




Some
      of
      our competitors have longer operating histories, larger customer bases, longer
      relationships with clients, and significantly greater financial, technical,
      marketing, and public relations resources than we do. We may not successfully
      compete in any market in which we conduct or may conduct operations. We may
      not
      be able to penetrate markets or market our products as effectively as our
      better-funded more-established competitors.




***In
      the future, there could be government regulations and legal uncertainties which
      could harm our business.***




Any
      new
      legislation or regulation, the application of laws and regulations from
      jurisdictions whose laws do not currently apply to our business, or the
      application of existing laws and regulations to the internet and other online
      services, could have a material adverse effect on our business, prospects,
      financial condition, and results of operations. Due to the increasing popularity
      and use of the internet, the web and other online services, federal, state,
      and
      local governments may adopt laws and regulations, or amend existing laws and
      regulations, with respect to the internet or other online services covering
      issues such as taxation, user privacy, pricing, content, copyrights,
      distribution, and characteristics and quality of products and services. The
      growth and development of the market for electronic commerce may prompt calls
      for more stringent consumer protection laws to impose additional burdens on
      companies conducting business online. The adoption of any additional laws or
      regulations may decrease the growth of the internet, the Web or other online
      services, which could, in turn, decrease the demand for our services and
      increase our cost of doing business, or otherwise have a material adverse effect
      on our business, prospects, financial condition, and results of operations.
      Moreover, the relevant governmental authorities have not resolved the
      applicability to the internet, the Web and other online services of existing
      laws in various jurisdictions governing issues such as property ownership and
      personal privacy and it may take time to resolve these issues
      definitively.


34




Certain
      of our proprietary technology allow for the storage of demographic data from
      our
      users. In 2000, the European Union adopted a directive addressing data privacy
      that may limit the collection and use of certain information regarding internet
      users. This directive may limit our ability to collect and use information
      collected by our technology in certain European countries. In addition, the
      Federal Trade Commission and several state governments have investigated the
      use
      by certain internet companies of personal information. We could incur
      significant additional expenses if new regulations regarding the use of personal
      information are introduced or if our privacy practices are
      investigated.




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




On
      March
      1, 2007, we issued 61 million shares of common stock to the former Gavitec
      shareholders as partial payment against the purchase price protection clause
      of
      the original sale and purchase agreement between the former Gavitec shareholders
      and us. The shares were valued at $0.053 per share, which was the fair value
      at
      the time of issuance.




On
      March
      19, 2007, we issued 197,620,948 shares of common stock to the former 12Snap
      shareholders as partial payment against the purchase price protection clause
      of
      the original sale and purchase agreement between the former 12Snap shareholders
      and us. The shares were valued at $0.045 per share, which was the fair value
      at
      the time of issuance.




On
      March
      27, 2007, we entered into a Securities Purchase Agreement with Yorkville,
      pursuant to which Yorkville agreed to purchase 13% secured convertible
      debentures maturing two years from the date of issuance in the aggregate amount
      of $7.4 million. The March Debenture Agreement also provided for the issuance
      to
      Yorkville warrants to purchase 125 million shares of our common stock at an
      exercise price of $0.04 per share. At any time from the closing date until
      March
      27, 2009, Yorkville has the right to convert the convertible debenture into
      our
      common stock at the then effective conversion price, which varies relative
      to
      our trading stock price, as follows: the lower of $0.05 per share, or 90% of
      the
      lowest closing bid price (as reported by Bloomberg) of the common stock for
      the
      30 trading days immediately preceding the conversion date. The conversion is
      limited such that Yorkville cannot exceed 4.99% ownership, unless Yorkville
      waives their right to such limitation. The limitation will terminate under
      any
      event of default. In connection with the March Debenture Agreement, we applied
      $1.3 million of the gross proceeds toward payment of liquidated damages accrued
      on previous convertible instruments payable to Yorkville, and $0.4 million
      toward accrued interest on previous convertible debentures. Yorkville also
      retained fees of $0.8 million, resulting in net proceeds to us of $5.0
      million.




On
      July
      20, 2007, we issued 517,415 shares of common stock to SKS Consulting of South
      Florida Corp. (“SKS”) as partial payment against the consulting agreement we
      have with SKS. The shares were valued at $0.0251 per share, which was the fair
      value at the time of issuance.




On
      August
      16, 2007, we issued 28,854,685 shares of unregistered common stock to Tesscourt
      Capital, Ltd. as settlement of debt.




On
      August
      24, 2007, we entered into a Securities Purchase Agreement with Yorkville,
      pursuant to which Yorkville agreed to purchase 14% secured convertible
      debentures maturing two years from the date of issuance in the aggregate amount
      of $1.775 million. The August Debenture Agreement also provided for the issuance
      to Yorkville warrants to purchase 75 million shares of our common stock at
      an
      exercise price of $0.02 per share. At any time from the closing date until
      August 24, 2009, Yorkville has the right to convert the convertible debenture
      into our common stock at the then effective conversion price, which varies
      relative to our trading stock price, as follows: the lower of $0.02 per share,
      or 80% of the lowest closing bid price (as reported by Bloomberg) of the common
      stock for the 10 trading days immediately preceding the conversion date. The
      conversion is limited such that Yorkville cannot exceed 4.99% ownership, unless
      Yorkville waives their right to such limitation. The limitation will terminate
      under any event of default. Yorkville retained fees of $0.2 million, resulting
      in net proceeds to us of $1.575 million.




On
      October 2, 2007, we issued 264,753 shares of common stock to SKS Consulting
      of
      South Florida Corp. (“SKS”) as partial payment against the consulting agreement
      we have with SKS. The shares were valued at $0.019 per share, which was the
      fair
      value at the time of issuance.




On
      October 31, 2007, we issued 6,190,476 shares of unregistered common stock to
      Guy
      Fietz in conjunction with the disposition of the NeoMedia Telecom Services
      business unit.


35




On
      December 17, 2007, we issued 820,313 shares of common stock to Corporate
      Resources, Inc. as partial payment against a placement fee incurred in filling
      a
      management position with us. The shares were valued at $0.016 per share, which
      was the fair value at the time of issuance.




On
      January 21, 2008, we issued 288,620 shares of common stock to SKS Consulting
      of
      South Florida Corp. (“SKS”) as partial payment against the consulting agreement
      we have with SKS. The shares were valued at $0.011 per share, which was the
      fair
      value at the time of issuance.




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




**ITEM
      3.** **Default
      Upon Senior Securities**




None.




**ITEM
      4.****Submission
      of Matters to a Vote of Security Holders**




None.




**ITEM
      5. O** **ther
      Information**




None.




**ITEM
      6. E****xhibits**




31.1
            Certifications
                of Chief Executive Officer Pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200231.2
            Certifications
                of Chief Financial Officer Pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200232.1
            Certification
                of Chief Executive Officer Pursuant to Section 906 of the
                Sarbanes-Oxley Act of 200232.2
            Certification
                of Chief Financial Officer Pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002




36


**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
                15, 2008
            */s/ Frank J. Pazera*Frank J. PazeraChief Financial Officer & Principal Accounting
                Officer




37