**U.
        S. SECURITIES AND EXCHANGE COMMISSION**
 WASHINGTON,
        D.C. 20549
 
 
 **FORM
        10 - Q/A**
 Amendment
        No. 1
 (Mark
        One)
 **x** **QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF**
 **THE
        SECURITIES EXCHANGE ACT OF 1934**
 
 **For
        the Quarterly Period Ended March 31, 2006**
 
 **OR**
 
 **o** **TRANSITION
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF**
 **THE
        SECURITIES EXCHANGE ACT OF 1934**
 
 **Commission
        File Number 0-21743**
 
 **NEOMEDIA
        TECHNOLOGIES, INC.**
 (Exact
        Name of Issuer as Specified In Its Charter)
 
 **Delaware**
              **36-3680347**(State
                  or Other Jurisdiction of Incorporation or Organization)
              (I.R.S.
                  Employer Identification No.)**2201
                  Second Street, Suite 600, Fort Myers, Florida**
              **33901**(Address
                  of Principal Executive Offices)
              (Zip
                  Code)**239-337-3434**Issuer's Telephone Number (Including Area Code)
 
 Check
        whether the issuer (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Exchange Act during the past 12 months (or for such shorter
        period
        that the registrant was required to file such reports), and (2) has been
        subject
        to such filing requirements for the past 90 days. Yes x No o
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
        one): Large Accelerated Filer o Accelerated
        Filer x Non-accelerated
        Filer o
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 Yes o No x
  As
        of
        April 28, 2006, there were 630,759,953 outstanding shares of the issuer's
        Common
        Stock, and 22,000 outstanding shares of the issuer's Series C Convertible
        Preferred Stock.
  
 **EXPLANATORY
          NOTE**
 
 
 **Restatement
          of Prior Reported Amounts**
 
 This
          form
          10-Q/A is being filed to restate the revenue and cost of goods sold reported
          by
          NeoMedia filed on form 10-Q for the three months ended March 31, 2006 (the
          “Original Filing”). This amendment amends and restates the Original Filing
          solely as a result of, and to reflect, the restatement, and no other information
          in the Original Filing is amended hereby except for an update to NeoMedia’s
          revenue recognition policy.
 
 The
          restatement of revenue and cost of goods sold is required because while
          preparing NeoMedia’s annual report for the year ended December 31, 2006, the
          Company became aware that it incorrectly applied the principles of EITF
          99-19.
          The Company, in reviewing its accounting practices with respect to revenue
          recognition of its subsidiary NeoMedia Telecom Services, became aware that
          it
          incorrectly applied the principles of EITF 99-19, “Reporting Revenue Gross as a
          Principal vs. Net as an Agent.” As a result, the Company had overstated its net
          sales and its cost of goods sold during the three months ended March 31,
          2006.
          These amounts are reflected on the statement of operations. The adjustment
          does
          not affect net income (loss) during any period. The adjustment does not
          affect
          the statement of cash flows or balance sheet.
 
 The
          NeoMedia Telecom Services business was acquired in March 2006 through the
          acquisition by the Company of BSD Software. Therefore the adjustment does
          not
          affect any results reported during the years ended December 31, 2005 or
          2004, or
          any interim periods during 2005 or 2004.
 
 As
          a
          result, the Company has restated certain financial information that was
          previously reported in its unaudited quarterly reports on Form 10-Q for
          the
          three month period ended March 31, 2006. The following tables provide a
          reconciliation of amounts previously reported by the
          Company.
   **Previously**
              
              **Restatement**
              
              **Restated****Reported**
              
              **Adjustment**
              
              **Amount****Three
                  months ended March 31, 2006**Net
                  sales
              
              $
              2,052
              
              
              ($205
              )
              $
              1,847Cost
                  of sales
              
              
              1,246
              
              
              (205
              )
              
              1,041
 
 
  **TABLE
        OF CONTENTS**
 PART
                    I —
                FINANCIAL
                    INFORMATION
                
                1ITEM
                    1
                FINANCIAL
                    STATEMENTS
                
                1CONDENSED
                    CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2006 (UNAUDITED)
                    AND DECEMBER
                    31, 2005
                
                1CONDENSED
                    CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                    FOR THE
                    THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (UNAUDITED)
                
                2CONDENSED
                    CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
                    THREE MONTHS ENDED  MARCH 31, 2006 AND 2005
                    (UNAUDITED)
                
                3NOTES
                    TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                
                4ITEM
                    2.
                MANAGEMENT'S
                    DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND
                    RESULTS OF OPERATIONS
                
                39ITEM
                    3.
                QUANTITATIVE
                    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
                
                50ITEM
                    4.
                CONTROLS
                    AND PROCEDURES
                
                50PART
                    II —
                OTHER
                    INFORMATION
                
                51ITEM
                    1.
                LEGAL
                    PROCEEDINGS
                
                51ITEM
                    3.
                DEFAULT
                    UPON SENIOR SECURITIES
                
                61ITEM
                    4.
                SUBMISSION
                    OF MATTERS TO A VOTE OF SECURITY HOLDERS
                
                61ITEM
                    5.
                OTHER
                    INFORMATION
                
                61ITEM
                    6.
                EXHIBITS
                    AND REPORTS ON FORM 8-K
                
                62SIGNATURES
                
                64
  
 
 **PART
        I —   FINANCIAL INFORMATION**
 
 **ITEM
        1. FINANCIAL STATEMENTS**
  **NeoMedia
        Technologies, Inc. and Subsidiaries**
 **Condensed
        Consolidated Balance Sheets**
 **(In
        Thousands, Except Share Data)**
 **March
                    31**
                
                **December
                    31****2006**
                
                **2005****ASSETS**
                
                (unaudited)
                
                *Current
                    assets:Cash
                    and cash equivalents
                
                $
                7,115
                
                $
                2,291Trade
                    accounts receivable, net of allowance for doubtful accounts of
                    $73 and
                    $203, respectively
                
                
                5,159
                
                
                341Inventories,
                    net of allowance for obsolete & slow-moving inventory of
                    $0
                
                
                852
                
                
                423Investment
                    in marketable securities
                
                
                453
                
                
                104Prepaid
                    expenses and other current assets
                
                
                1,478
                
                
                151Total
                    current assets
                
                
                15,057
                
                
                3,310Leasehold
                    improvements & property and equipment, net
                
                
                628
                
                
                236Capitalized
                    patents, net
                
                
                3,072
                
                
                3,134Micro
                    paint chemical formulations and proprietary process, net
                
                
                1,422
                
                
                1,450Goodwill
                
                
                48,881
                
                
                1,099Other
                    Intangible assets, net
                
                
                22,057
                
                
                246Cash
                    surrender value of life insurance policy
                
                
                799
                
                
                769Loan
                    to Mobot
                
                
                —
                
                
                1,500Other
                    long-term assets
                
                
                893
                
                
                667**Total
                    assets**
                
                **$**
                **92,809**
                
                **$**
                **12,411****LIABILITIES
                    AND SHAREHOLDERS' DEFICIT**Current
                    liabilities:Accounts
                    payable
                
                $
                5,408
                
                $
                1,574Amounts
                    payable under settlement agreements
                
                
                97
                
                
                1,844Liabilities
                    of discontinued business unit
                
                
                676
                
                
                97Taxes
                    payable
                
                
                1,112
                
                
                80Accrued
                    expenses
                
                
                4,460
                
                
                898Deferred
                    revenues
                
                
                2,576
                
                
                676Notes
                    payable
                
                
                3,774
                
                
                3,015Derivative
                    financial instruments
                
                
                23,432
                
                
                —Total
                    current liabilities
                
                
                41,535
                
                
                8,184Preferred
                      stock, $0.01 par value, 25,000,000 shares authorized, 22,000
                      issued and
                      outstanding, liquidation value of $22,000
                
                
                1,847
                
                
                —Shareholders'
                    equity:Common
                      stock, $0.01 par value, 1,000,000,000 shares authorized, 630,885,698
                      and
                      475,387,910 shares issued and 629,244,272 and
                      467,601,717 outstanding, respectively
                
                
                6,293
                
                
                4,676Additional
                    paid-in capital
                
                
                151,407
                
                
                106,456Deferred
                    stock-based compensation
                
                
                (146
                )
                
                (169
                )Deferred
                    equity financing costs
                
                
                (13,256
                )
                
                (13,256
                )Accumulated
                    deficit
                
                
                (93,842
                )
                
                (92,524
                )Accumulated
                    other comprehensive loss
                
                
                (250
                )
                
                (177
                )Treasury
                    stock, at cost, 201,230 shares of common stock
                
                
                (779
                )
                
                (779
                )Total
                    shareholders' equity
                
                
                49,427
                
                
                4,227**Total
                    liabilities and shareholders' equity**
                
                **$**
                **92,809**
                
                **$**
                **12,411**
 The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
 
 *
        -
        Derived from NeoMedia's audited financial statements for the year ended December
        31, 2005.
  1
  **NeoMedia
        Technologies, Inc. and Subsidiaries**
 **Condensed
        Consolidated Statements of Operations**
 **and
        Comprehensive Loss (Unaudited)**
 **(In
        Thousands, Except per Share Data)**
 **Three
                    Months Ended March 31,****2006**
                
                **2005**NET
                    SALES:Technology
                    license, service and products
                
                $
                1,470
                
                $
                292Micro
                    paint repair products and services
                
                
                377
                
                
                455Total
                    net sales
                
                
                1,847
                
                
                747COST
                    OF SALES:Technology
                    license, service and products
                
                
                622
                
                
                176Micro
                    paint repair products and services
                
                
                419
                
                
                273Total
                    cost of sales
                
                
                1,041
                
                
                449GROSS
                    PROFIT
                
                
                806
                
                
                298Sales
                    and marketing expenses
                
                
                1,540
                
                
                795General
                    and administrative expenses
                
                
                1,326
                
                
                603Research
                    and development costs
                
                
                550
                
                
                184Stock
                    based compensation expense
                
                
                1,517
                
                
                96Loss
                    from operations
                
                
                (4,127
                )
                
                (1,380
                )Other
                    income
                
                
                4
                
                
                —Gain
                    (loss) on extinguishment of debt
                
                
                (1,964
                )
                
                138Interest
                    income
                
                
                2
                
                
                23Gain
                    on derivative financial instruments
                
                
                4,768
                
                
                —**NET
                    LOSS**
                
                
                (1,317
                )
                
                (1,219
                )Accretion
                    of dividends on convertible preferred stock
                
                
                (137
                )
                
                —**NET
                    LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS**
                
                
                (1,454
                )
                
                (1,219
                )**Comprehensive
                    Loss**Net
                    loss
                
                
                (1,317
                )
                
                (1,219
                )Other
                    comprehensive loss:Unrealized
                    gain (loss) on marketable securities
                
                
                149
                
                
                (42
                )Foreign
                    currency translation adjustment
                
                
                (222
                )
                
                11**COMPREHENSIVE
                    LOSS**
                
                **$**
                **(1,390**
                **)**
                **$**
                **(1,250**
                **)****LOSS
                    PER SHARE — BASIC AND DILUTED**
                
                **$**
                **(0.00**
                **)**
                **$**
                **(0.00**
                **)****LOSS
                    PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS**
                
                **$**
                **(0.00**
                **)**
                **$**
                **(0.00**
                **)****Weighted
                    average number of common shares — basic and
                    diluted**
                
                
                **527,991,819**
                
                
                **437,764,971**
  The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
  2
  **NeoMedia
        Technologies, Inc. and Subsidiaries**
 **Condensed
        Consolidated Statements of Cash Flows (Unaudited)**
 **(In
        Thousands)**
 **Three
                      Months Ended****March
                      31,****2006**
                  
                  **2005**CASH
                      FLOWS FROM OPERATING ACTIVITIES:Net
                      loss
                  
                  
                  ($1,317
                  )
                  
                  ($1,219
                  )Adjustments
                      to reconcile net loss to net cash used in operating
                      activities:Depreciation
                      and amortization
                  
                  
                  453
                  
                  
                  160Loss
                      on early extinguishment of debt
                  
                  
                  1,964
                  
                  
                  —Gain
                      on derivative financial instruments
                  
                  
                  (4,768
                  )
                  
                  —Stock-based
                      compensation expense
                  
                  
                  1,517
                  
                  
                  96(Increase)
                      decrease in value of life insurance policies
                  
                  
                  (30
                  )
                  
                  10Changes
                      in operating assets and liabilitiesTrade
                      accounts receivable, net
                  
                  
                  432
                  
                  
                  (265
                  )Inventory
                  
                  
                  (323
                  )
                  
                  3Other
                      current assets
                  
                  
                  (156
                  )
                  
                  54Accounts
                      payable, amounts due under financing agreements, liabilities
                      in
                      excessof
                      assets of discontinued business unit, accrued expenses and
                      stock
                      liability
                  
                  
                  (249
                  )
                  
                  (425
                  )Deferred
                      revenue other current liabilities
                  
                  
                  (109
                  )
                  
                  (74
                  )Net
                      cash used in operating activities
                  
                  
                  (2,586
                  )
                  
                  (1,660
                  )CASH
                      FLOWS FROM INVESTING ACTIVITIES:Cash
                      paid to acquire Mobot, Inc., Sponge Ltd., Gavitec AG, and 12Snap
                      AG, net
                      of cash and marketable securities acquired
                  
                  
                  (11,891
                  )
                  
                  —Amounts
                      issued under notes receivable
                  
                  
                  (500
                  )
                  
                  —Investments
                  
                  
                  —
                  
                  
                  (500
                  )Acquisition
                      related costs
                  
                  
                  (59
                  )
                  
                  —Capitalization
                      of software development and purchased intangible assets
                  
                  
                  (8
                  )
                  
                  (38
                  )Acquisition
                      of property and equipment
                  
                  
                  (66
                  )
                  
                  (88
                  )Net
                      cash used in investing activities
                  
                  
                  (12,524
                  )
                  
                  (626
                  )CASH
                      FLOWS FROM FINANCING ACTIVITIES:Net
                      proceeds from issuance of Series C Convertible Preferred Stock,
                      net of
                      issuance costs of $2,725 in 2006
                  
                  
                  14,066
                  
                  
                  —Net
                      proceeds from issuance of common stock, net of issuance costs
                      of $24 in
                      2006 and $85 in 2005
                  
                  
                  210
                  
                  
                  1,505Net
                      proceeds from exercise of stock options and warrants
                  
                  
                  8,131
                  
                  
                  173Borrowings
                      under notes payable and long-term debt
                  
                  
                  —
                  
                  
                  10,500Repayments
                      on notes payable and long-term debt
                  
                  
                  (2,251
                  )
                  
                  (1,600
                  )Cash
                      commitment fee for $100 million Standby Equity Distribution
                      Agreement
                  
                  
                  —
                  
                  
                  (1,000
                  )Net
                      cash provided by financing activities
                  
                  
                  20,156
                  
                  
                  9,578**EFFECT
                      OF EXCHANGE RATE CHANGES ON CASH**
                  
                  
                  (222
                  )
                  
                  11**NET
                      INCREASE IN CASH AND CASH EQUIVALENTS**
                  
                  
                  **4,824**
                  
                  
                  **7,303**CASH
                      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                  
                  
                  2,291
                  
                  
                  2,634**CASH
                      AND CASH EQUIVALENTS, END OF PERIOD**
                  
                  **$**
                  **7,115**
                  
                  **$**
                  **9,937**SUPPLEMENTAL
                      CASH FLOW INFORMATION:Interest
                      paid/(received) during the period
                  
                  $
                  13
                  
                  $
                  47Income
                      taxes paid
                  
                  
                  —
                  
                  
                  —Non-cash
                      investing and financing activities:Unrealized
                      gain (loss) on marketable securities
                  
                  
                  149
                  
                  
                  (42
                  )Prepaid
                      acquisition costs applied to purchase price
                  
                  
                  168
                  
                  
                  —Fair
                        value of shares and notes receivable from Pickups Plus, Inc.
                        acquired in
                        exchange for Series C Convertible Preferred Stock
                  
                  
                  594
                  
                  
                  —Carrying
                      value of promissory note and accrued interest paid in exchange
                      for Series
                      C Convertible Preferred Stock
                  
                  
                  (3,208
                  )
                  
                  —Fair
                        value of shares issued to acquire Mobot, Inc., Sponge Ltd.,
                        Gavitec AG,
                        12Snap AG, and BSD Software, Inc.
                  
                  
                  46,964
                  
                  
                  —Change
                        in net assets resulting from acquisitions of Mobot, Inc.,
                        Sponge Ltd.,
                        Gavitec AG, 12Snap AG, and BSD Software, Inc.
                  
                  
                  60,594
                  
                  
                  —Accretion
                      of dividends on Series C Convertible Preferred Stock
                  
                  
                  137
                  
                  
                  —Fair
                      value of outstanding warrants converted to liabilities
                  
                  
                  13,884
                  
                  
                  —Portion
                      of change in fair value of outstanding warrants converted to
                      liabilities
                      recorded to paid-in capital
                  
                  
                  3,790
                  
                  
                  —Fair
                      value of Series C Convertible Preferred Stock (host instrument
                      only)
                  
                  
                  4,908
                  
                  
                  —Deferred
                      stock-based financing costs associated with Series C Convertible
                      Preferred
                      Stock
                  
                  
                  3,198
                  
                  
                  —Difference
                      between net proceeds and recorded fair value of Series C Convertible
                      Preferred Stock
                  
                  
                  4,041
                  
                  
                  —Advance
                      receivable from Mobot, Inc. forgiven upon acquisition
                  
                  
                  1,500
                  
                  
                  —Accretion
                      of dividend on Series C Convertible Preferred Stock
                  
                  
                  137
                  
                  
                  —Fair
                      value of stock issued for services and deferred to future
                      periods
                  
                  
                  —
                  
                  
                  239Gain
                      on extinguishment of debt paid in common stock
                  
                  
                  —
                  
                  
                  138Direct
                      costs associated with Standby Equity Distribution Agreement
                      and Equity
                      Line of Credit
                  
                  
                  —
                  
                  
                  1,204Fair
                      value of warrants as fees related to the $100 million Standby
                      Equity
                      Distribution Agreement
                  
                  
                  —
                  
                  
                  12,256
  The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
  3
  **NEOMEDIA
        TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **UNAUDITED
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
  **1.  
        BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS**
  **Basis
        of Presentation**
 
 The
        condensed consolidated financial statements include the financial statements
        of
        NeoMedia Technologies, Inc. and its wholly-owned subsidiaries (“NeoMedia” or the
“Company”). The accompanying unaudited condensed consolidated financial
        statements have been prepared in accordance with the instructions to Form
        10-Q
        and do not include all of the information and footnotes required by accounting
        principles generally accepted in the United States of America for complete
        consolidated financial statements. These condensed consolidated financial
        statements and related notes should be read in conjunction with the Company's
        Form 10-KSB for the fiscal year ended December 31, 2005. In the opinion of
        management, these condensed consolidated financial statements reflect all
        adjustments which are of a normal recurring nature and which are necessary
        to
        present fairly the consolidated financial position of NeoMedia as of March
        31,
        2006, the results of operations for the three month periods ended March 31,
        2006
        and 2005, and cash flows for the three month period ended March 31, 2006
        and
        2005. The results of operations for the three month periods ended March 31,
        2006
        are not necessarily indicative of the results which may be expected for the
        entire fiscal year. All significant intercompany accounts and transactions
        have
        been eliminated in preparation of the condensed consolidated financial
        statements.
 
 **Going
        Concern**
 
 The
        accompanying condensed consolidated financial statements have been prepared
        in
        conformity with accounting principles generally accepted in the United States
        of
        America, which contemplate continuation of the Company as a going concern.
        However, the Company has reported net losses of $1,317,000 and $1,219,000
        for
        the three months ended March 31, 2006 and 2005 and $9,147,000 and $7,230,000
        for
        the years ended December 31, 2005 and 2004, respectively, and has an accumulated
        deficit of $93,842,000 as of March 31, 2006. In addition, the Company had
        working capital deficit of $26,478,000 as of March 31, 2006.
 
 If
        the
        Company's financial resources are insufficient, the Company may require
        additional financing in order to execute its operating plan and continue
        as a
        going concern. The Company cannot predict whether this additional financing
        will
        be in the form of equity, debt, or another form. The Company may not be able
        to
        obtain the necessary additional capital on a timely basis, on acceptable
        terms,
        or at all. In any of these events, the Company may be unable to implement
        its
        current plans for expansion, repay its debt obligations as they become due
        or
        respond to competitive pressures, any of which circumstances would have a
        material adverse effect on its business, prospects, financial condition and
        results of operations. The financial statements do not include any adjustments
        relating to the recoverability and reclassification of recorded asset amounts
        or
        amounts and reclassification of liabilities that might be necessary, should
        the
        Company be unable to continue as a going concern.
 
 Should
        these financing sources fail to materialize, management would seek alternate
        funding sources through sale of common and/or preferred stock. Management's
        plan
        is to secure adequate funding to bridge the profitability from the NeoMedia
        Mobile, NeoMedia Micro Paint Repair, and NeoMedia Telecom Services
        businesses.
  4
  **Nature
        of Business Operations**
 
 During
        2005, NeoMedia was structured and evaluated by its Board of Directors and
        management as three distinct business units: NeoMedia Internet Switching
        Software (NISS), NeoMedia Micro Paint Repair (NMPR), and NeoMedia Consulting
        and
        Integration Services (NCIS).
 
 NCIS
        is
        the original business line upon which the Company was founded. This unit
        resells
        client-server equipment and related software, and general and specialized
        consulting services. Because of decreased demand for systems integration
        products, and increased consolidation and competition in the industry in
        general, during 2005 resources allocated to the NCIS business unit were
        increasingly used in sales and business development efforts associated with
        the
        NISS business unit. During February 2006, NeoMedia's Board of Directors elected
        to formally wind down the NCIS business unit. As a result, during February
        2006,
        NeoMedia closed its Lisle, Illinois facility out of which the NCIS business
        unit
        was based. NeoMedia does, however, plan to continue servicing existing contracts
        and customers.
 
 During
        the first quarter of 2006, following the completion of the acquisitions of
        12Snap AG (“12Snap”), Sponge Ltd. (“Sponge”), Gavitec AG (“Gavitec”), Mobot,
        Inc. (“Mobot”), and BSD Software, Inc. (“BSD”), as well as the winding down of
        the NCIS business unit, NeoMedia restructured into the following three business
        units:
  ·
                NeoMedia
                    Mobile (NMM) - encompassing NeoMedia's physical-world-to-internet
                    and
                    mobile marketing technologies branded under PaperClick, 12Snap,
                    Sponge,
                    Gavitec and Mobot·
                NeoMedia
                    Micro Paint Repair (NMPR) - encompassing the micro paint and
                    auto
                    aftermarket accessories manufactured and distributed by
                    NeoMedia·
                NeoMedia
                  Telecom Services (NTS) - encompassing the billing, clearinghouse
                  and
                  information management services of recently-acquired
                  BSD
  **Reclassifications**
 
 Certain
        amounts in the 2005 condensed consolidated financial statements have been
        reclassified to conform to the 2006 presentation, most notably, “License
        revenue” and “Resales of software and technology equipment and service fees”,
        which were formerly shown as separate line items on NeoMedia's consolidated
        statement of operations, are now condensed into the category entitled,
“Technology license, service & products.” This is primarily due to the
        winding down of the former NCIS business unit and consolidation of revenues
        relating to the NCIS unit into the NMM unit, as well as the addition of new
        revenue streams from Mobot, Sponge, Gavitec, 12Snap, and BSD that fall into
        the
        same general category.
  5
  **2.  
        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 As
        a
        result of the addition of the operations of Mobot, Sponge, Gavitec, 12Snap
        and
        BSD, and the Series C Convertible Preferred Stock sale during the three months
        ended March 3,1 2006, NeoMedia is presenting herewith certain significant
        accounting policies that were not applicable as of the filing of its last
        annual
        report for the year ended December 31, 2005.
  **Stock-based
        Compensation**
 
 Beginning
        January 1, 2006, NeoMedia began to account for stock-based compensation in
        accordance with SFAS No. 123(R), *Share-Based Payment* . Under
        the fair value recognition provisions of this statement, share-based
        compensation cost is measured at the grant date based on the value of the
        award
        and is recognized as expense over the vesting period. Determining the fair
        value
        of share-based awards at the grant date requires judgment, including estimating
        expected dividends. In addition, judgment is also required in estimating
        the
        amount of share-based awards that are expected to be forfeited. If actual
        results differ significantly from these estimates, stock-based compensation
        expense and our results of operations could be materially impacted. Stock-based
        compensation expense is calculated using the Black-Scholes-Merton option
        pricing
        model on the date of grant. This option valuation model requires input of
        highly
        subjective assumptions. Because NeoMedia's employee stock options have
        characteristics significantly different from those of traded options, and
        because changes in the subjective input assumptions can materially affect
        the
        fair value estimate, in management's opinion, the existing model does not
        necessarily provide a reliable single measure of fair value of its employee
        stock options.
 
 **Fair
        Value of Derivatives**
 
 The
        Company generally does not use derivative financial instruments to hedge
        exposures to cash-flow risks or market-risks that may affect the fair values
        of
        its financial instruments. However, certain other financial instruments,
        such as
        warrants and embedded conversion features that are indexed to the Company's
        common stock, are classified as liabilities when either (a) the holder possesses
        rights to net-cash settlement or (b) physical or net-share settlement is
        not
        within the control of the Company. In such instances, net-cash settlement
        is
        assumed for financial accounting and reporting, even when the terms of the
        underlying contracts do not provide for net-cash settlement. Such financial
        instruments are initially recorded at fair value and subsequently adjusted
        to
        fair value at the close of each reporting period.
 
 The
        caption “Derivative Financial Instruments” consists of (i) the fair values
        associated with derivative features embedded in the Series C Convertible
        Preferred Stock, (ii) the fair values of the detachable warrants that were
        issued in connection with the preferred stock financing arrangement, and
        (iii)
        the fair value of detachable warrants that were outstanding prior to the
        issuance of the Series C Preferred Shares. **
 
 **Sales
        Taxes Payable**
 
 Sales
        taxes payable represents amounts collected on behalf of specific regulatory
        agencies that require remittance on a specified date. These amounts are
        collected at the time of sales and are detailed on invoices provided to
        customers. At March 31, 2006 sales taxes payable were $1,112,000, of which
        $980,000 were delinquent sales taxes assumed by NeoMedia in connection with
        its
        acquisitions, certain of which are subject to payment plans.
 
 **Revenue
        Recognition**
 
 NeoMedia
        derives  revenues from the following  sources:  (1) license
        revenues relating to patents and internally-developed software, (2) hardware,
        software, and service revenues related to mobile marketing campaign design
        and
        implementation, and (3) sale of its proprietary Micro Paint Repair
        solution.
 
 (1)
              Technology
                  license fees, including Intellectual Property licenses, represent
                  revenue
                  from the licensing of NeoMedia’s proprietary  software  tools
                  and  applications products.  NeoMedia licenses its 
                  development  tools and  application  products pursuant to
                  non-exclusive and  non-transferable  license agreements. 
                  The basis for license fee revenue recognition is substantially
                  governed by
                  American  Institute  of  Certified  Public 
                  Accountants  ("AICPA")  Statement of Position 97-2 "Software
                  Revenue  Recognition" ("SOP 97-2"), as amended, and Statement of
                  Position 98-9, Modification of SOP 97-2, “Software Revenue Recognition,
                  With Respect to Certain Transactions.”.  License revenue is
                  recognized if persuasive  evidence of an agreement 
                  exists,  delivery has occurred, pricing is fixed and determinable,
                  and collectibility is probable.  The Company defers revenue related
                  to license fees for which amounts have been collected but for which
                  revenue has not been recognized in accordance with the above, and
                  recognizes the revenue over the appropriate
                  period.
 
 (2)
              Technology
                  service and product revenue, which includes sales of software and
                  technology equipment and service fee is recognized  based on
                  guidance  provided in  SEC Staff  Accounting 
                  Bulletin  (“SAB”) No. 104,  "Revenue  Recognition  in
                  Financial Statements,"  as amended (SAB 104).  Software
                  and technology equipment resale revenue is
                  recognized when persuasive evidence of an arrangement exists, the
                  price to the customer is fixed and determinable, delivery of the
                  service
                  has occurred and collectibility is reasonably assured.
                  Service revenues including maintenance fees for
                  providing system updates for software products, user documentation
                  and
                  technical support are recognized over the life of
                  the contract. The Company’s subsidiaries, Mobot (sold during 2006),
                  and Gavitec follow this policy. The Company defers revenue related
                  to
                  technology service and product revenue for which amounts have been
                  invoiced and or collected but for which the requisite service has
                  not been
                  provided. Revenue is then recognized over the matching service
                  period.
  6
  (3)
              Technology
                  service also includes mobile marketing services to its customers
                  which
                  mobile marketing projects are recognized after the completion of
                  the
                  project and accepted by the customer.  All response and messaging
                  based revenues are recognized at the time such responses are received
                  and
                  processed and the Company recognizes its premium messaging revenues
                  on a
                  net basis based on guidance provided in Emerging Issues Task Force
                  Issues
                  No. 99-19 (EITF 99-19), “Reporting Revenue Gross as Principal or Net as an
                  Agent” and No. 01-09 (EITF 01-09), “Accounting for Consideration Given by
                  a Vendor to a Customer.”  Consulting and management revenues and
                  revenues for periodic services are recognized as services are
                  performed.  NeoMedia uses  stand-alone  pricing to
                  determine an element's  vendor  specific  objective 
                  evidence  (“VSOE”) in order to allocate an arrangement  fee
                  amongst various pieces of a  multi-element  contract.  The
                  Company’s subsidiaries 12Snap and Sponge (sold during 2006) follow this
                  policy. Telecom revenues from NeoMedia’s subsidiary BSD are recognized at
                  the time that calls are accepted by the clearinghouse for billing
                  to
                  customers on a net basis, based on guidance in EITF 99-19. The
                  Company
                  defers revenue related to mobile marketing service fees for which
                  amounts
                  have been invoiced and/or collected but for which revenue has not
                  been
                  recognized. Revenue is then recognized over the matching service
                  period.
 
 (4)
              Revenue
                  for licensing and exclusivity on NeoMedia’s Micro Paint Repair systems is
                  recognized equally over the term of the contract, which is currently
                  one
                  year.  A portion of the initial fee paid by the customer is allocated
                  to licensing, training costs and initial products sold with the
                  system.
                  Revenue is recognized upon completion of training and shipment
                  of the
                  products, provided there is VSOE in a multiple element arrangement. 
                  Ongoing product and service revenue is recognized as products are
                  shipped
                  and services performed.  The Company defers revenue related to micro
                  paint repair licensing for which amounts have been invoiced and/or
                  collected and revenue is then recognized over the estimated contract
                  period, which is currently one year.
 
 7
 
 **3.  
        ACQUISITIONS**
 
 During
        the three months ended March 31, 2006, NeoMedia completed acquisitions of
        Mobot,
        Sponge, Gavitec, 12Snap, and BSD.
 
 **Acquisition
        of Mobot**
 
 On
        February 9, 2006, NeoMedia and Mobot. ( www.mobot.com )
        signed
        a definitive merger agreement, subject to closing conditions, under which
        NeoMedia acquired all of the outstanding shares of Mobot in exchange for
        $3,500,000 cash and 16,931,493 shares of NeoMedia common stock (2,604,845
        of
        which are being held in escrow for a period of one year from the closing
        date
        for the purpose of securing the indemnification obligations outlined in the
        purchase agreement). On February 17, 2006, NeoMedia and Mobot completed the
        closing requirements and the acquisition became effective. Pursuant to the
        terms
        of the merger agreement, the number of shares of NeoMedia common stock to
        be
        issued as stock consideration was calculated using a share price of $0.3839,
        which was the volume-weighted average closing price of NeoMedia common stock
        for
        the ten days up to and including February 8, 2006. In the event that NeoMedia's
        stock price (at the time the consideration shares are saleable) is less than
        $0.3839, NeoMedia is obligated to compensate Mobot shareholders in cash for
        the
        difference between the price at the time the shares become saleable and $0.3839.
        Assuming a stock price at the time the shares become saleable of $0.25, which
        was the last sale price on May 10, 2006, NeoMedia would have a cash liability
        of
        $2.3 million resulting from this clause. In addition to cash and stock, at
        closing NeoMedia forgave notes payable totaling $1,500,000 due from Mobot.
        This
        amount is considered other additional consideration in the purchase price
        allocation.
 
 Mobot
        is
        a pioneer in visual search and recognition technology designed to make marketing
        effective and innovative using mobile devices. Launched in 2004 to help
        companies cultivate rewarding relationships with the world's 1.5 billion
        mobile
        phone users, Mobot gives marketers, content providers and carriers the tools
        to
        make it easy for any consumer with a camera phone to interact with their
        offerings. Mobot's customers include, amongst others, ELLEgirl magazine,
        for
        which Mobot “turned on” advertisements throughout the magazine that linked to
        content and customer loyalty promotions on the mobile Internet; The Light
        Agency, who distributes Mobot's visual search and recognition technology
        to the
        U.K. grocery sector through its award-winning mobile phone-based loyalty
        program
        with the Sainsburys-owned convenience store chain Jackson's; and Warner Music
        Group's U.S. sales and retail marketing company WEA Corp., running a
        snap-and-enter contest in music stores for music fans to win tailored offers,
        samples and discounts.
 
 NeoMedia
        completed the acquisitions of Mobot, Sponge, Gavitec, and 12Snap in an effort
        to
        gain entry into the rapidly evolving global mobile marketing
        industry.
  8
  The
        acquisition was accounted for under the purchase method. The actual purchase
        price was based on cash paid, the fair value of NeoMedia stock around the
        date
        of the acquisition, and direct costs associated with the combination. The
        purchase price has initially been allocated (subject to final determination)
        as
        follows:
 (Dollars
                    inThousands)Value of 16,931,493 shares issued at $0.395 per share (1)
                
                $
                6,688Cash paid
                
                
                3,500Direct costs of acquisition
                
                
                8Advances to Mobot forgiven at acquisition
                
                
                1,500Total Fair Value of Purchase Price
                
                
                11,696Assets
                    Acquired:Cash and cash equivalents
                
                $
                328Accounts receivable
                
                
                44Other current assets
                
                
                29Property, plant & equipment
                
                
                30Customer contracts and relationships
                
                
                400Capitalized software platform
                
                
                5,000Copyrighted materials
                
                
                200Goodwill
                
                
                6,084Total Assets Acquired
                
                
                12,115Less
                    Liabilities Assumed:Accounts payable
                
                
                51Accrued liabilities
                
                
                132Deferred revenue
                
                
                236Total Liabilities Assumed
                
                
                419Net
                    assets acquired
                
                $
                11,696
  (1)
        -
        Shares were valued using the average stock price for two days before and
        two
        days after the measurement date, as defined in SFAS 141 and EITF
        99-12
  The
        combination is being accounted for as a purchase business combination as
        defined
        by Statement of Financial Accounting Standards No. 141, Business Combinations.
        A
        final determination of the allocation of the purchase price to the assets
        acquired and liabilities assumed has not been made, and should be considered
        preliminary and is subject to the completion of a comprehensive independent
        valuation of the assets acquired and liabilities assumed. The Company expects
        to
        obtain an independent valuation, currently in process, by the filing of its
        second quarter 2006 Form 10-Q in August 2006.
 
 The
        values assigned to intangible assets, aside from goodwill, are subject to
        amortization. The intangible assets were assigned the following lives for
        amortization purposes:
  Estimated
                  UsefulIntangible
                  asset
              
              Life
                  (in years)Customer
                  contracts and relationships
              
              
              5Copyrighted
                  materials
              
              
              5Capitalized
                  software platform
              
              
              7
  9
  Goodwill
        was not assigned a life and will be tested for impairment as defined by
        Statement of Financial Accounting Standards No. 144, Accounting for the
        Impairment or Disposal of Long-Lived Assets.
  The
        accompanying consolidated statement of operations presented herein contains
        the
        results of operations for Mobot for the period from February 18, 2006, through
        March 31, 2006. Pro-forma results of operations for the three months ended
        March
        31, 2006 and 2005 are presented at the end of this Note 3.
 
 **Acquisition
        of Sponge**
 
 On
        February 20, 2006, NeoMedia and Sponge signed a definitive share purchase
        agreement, subject to closing conditions, under which NeoMedia acquired all
        of
        the outstanding shares of Sponge in exchange for $6,141,000 cash and 33,097,135
        shares of NeoMedia common stock (3,400,490 of which are being held in escrow
        for
        a period of one year from the closing date for the purpose of securing the
        indemnification obligations outlined in the purchase agreement). The agreement
        also calls for Sponge to earn an additional £2,500,000 (approximately $4.4
        million) in the form of NeoMedia common stock if, during the two-year period
        beginning at closing, the Sponge business earns in excess of £1,300,000
        (approximately $2.3 million) in net profits. On February 23, 2006, NeoMedia
        and
        Sponge completed the closing requirements and the acquisition became effective.
        Pursuant to the terms of the merger agreement, the number of shares of NeoMedia
        common stock to be issued as consideration was calculated using a share price
        of
        $0.384, which was the volume-weighted average closing price of NeoMedia common
        stock for the ten days up to and including February 8, 2006. In the event
        that
        NeoMedia's stock price (at the time the consideration shares are saleable)
        is
        less than $0.384, NeoMedia is obligated to compensate Sponge shareholders
        in
        cash for the difference between the price at the time the shares become saleable
        and $0.384. Assuming a stock price at the time the shares become saleable
        of
        $0.25, which was the last sale price on May 10, 2006, NeoMedia would have
        a cash
        liability of $4.4 million resulting from this clause.
 
 Founded
        in 2001, Sponge has grown to become a U.K. market leader in providing mobile
        applications to agencies and media groups, and gain recognition as one of
        Europe's top independent developers of mobile applications and content. Today,
        Sponge counts more than 40 agencies, including WPP, Aegis and BBH, as clients,
        and supplies services for over 100 world-class brands, including Coca
        Cola ® ,
        Heineken ® and
        Diageo. Sponge also supplies a range of mobile services to media groups,
        including News International, Trinity Mirror, Endemol and IPC. For Walker's
        (Frito-Lay) potato chips, Sponge enabled a promotion that offered consumers
        of
        Walker's — the U.K.'s largest snack brand — to win an iPod every 5 minutes for 4
        weeks, by texting a unique code found on-pack into the Sponge platform. More
        than 5% of the total U.K. population participated in the campaign, which
        has
        been expanded to Belgium and the Netherlands on the basis of its success
        in the
        U.K. A total of 23% of the U.K. population interacted with Sponge applications
        in 2005.
 
 NeoMedia
        completed the acquisitions of Mobot, Sponge, Gavitec, and 12Snap in an effort
        to
        gain entry into the rapidly evolving global mobile marketing
        industry.
  10
  The
        acquisition was accounted for under the purchase method. The actual purchase
        price was based on cash paid, the fair value of NeoMedia stock around the
        date
        of the acquisition, and direct costs associated with the combination. The
        purchase price has initially been allocated (subject to final determination)
        as
        follows:
 (Dollars
                    inThousands)Value
                    of 33,097,135 shares issued at $0.395 per share (1)
                
                $
                13,073Cash paid
                
                
                6,141Direct costs of acquisition
                
                
                73Total
                    Fair Value of Purchase Price
                
                
                19,287Assets
                    Acquired:Cash and cash equivalents
                
                $
                177Accounts receivable
                
                
                617Other current assets
                
                
                35Property, plant & equipment
                
                
                53Customer contracts and relationships
                
                
                400Capitalized software platform
                
                
                1,300Brand name
                
                
                500Copyrighted materials
                
                
                50Goodwill
                
                
                16,871Total Assets Acquired
                
                
                20,003Less
                    Liabilities Assumed:Accounts payable
                
                
                190Accrued liabilities
                
                
                322Other current liabilities
                
                
                204Total Liabilities Assumed
                
                
                716Net
                    assets acquired
                
                $
                19,287
  (1)
        -
        Shares were valued using the average stock price for two days before and
        two
        days after the measurement date, as defined in SFAS 141 and EITF
        99-12
 
 The
        combination is being accounted for as a purchase business combination as
        defined
        by Statement of Financial Accounting Standards No. 141, Business Combinations.
        A
        final determination of the allocation of the purchase price to the assets
        acquired and liabilities assumed has not been made, and should be considered
        preliminary and is subject to the completion of a comprehensive independent
        valuation of the assets acquired and liabilities assumed. The Company expects
        to
        obtain an independent valuation, currently in process, by the filing of its
        second quarter 2006 Form 10-Q in August 2006.
 
 The
        values assigned to intangible assets, aside from goodwill, are subject to
        amortization. The intangible assets were assigned the following lives for
        amortization purposes:
 Estimated
                    UsefulIntangible
                    asset
                
                Life
                    (in years)Customer
                    contracts and relationships
                
                
                5Copyrighted
                    materials
                
                
                5Capitalized
                    software platform
                
                
                7Brand
                    name
                
                
                10
  11
  Goodwill
        was not assigned a life and will be tested for impairment as defined by
        Statement of Financial Accounting Standards No. 144, Accounting for the
        Impairment or Disposal of Long-Lived Assets.
 
 The
        purchase agreement calls for Sponge to earn an additional £2,500,000
        (approximately $4.4 million) in the form of NeoMedia common stock if, during
        the
        two-year period beginning on February 23, 2006, the Sponge business earns
        in
        excess of £1,300,000 (approximately $2.3 million) in net profits, plus £1 of
        NeoMedia common stock for each £1 the earning exceed £1,300,000 during the
        two-year period. No shares are to be issued pro rata if the earnings target
        is
        not met.
 
 At
        the
        end of the two-year measurement period (February 22, 2008), if the earnings
        target is met, the financial impact on NeoMedia of the issuance of additional
        shares would be a proportionate increase of approximately $4.4 million in
        the
        long-term assets acquired from Sponge, with a corresponding increase in
        depreciation expense from the point of issuance forward. If the earnings
        target
        is not met, no additional shares would be issued and there would be no financial
        impact to NeoMedia. Pursuant to SFAS 141, NeoMedia has not allocated a value
        to
        the contingent consideration in the initial purchase price.
  The
        accompanying consolidated statement of operations presented herein contains
        the
        results of operations for Sponge for the period from February 24, 2006, through
        March 31, 2006. Pro-forma results of operations for the three months ended
        March
        31, 2006 and 2005 are presented at the end of this Note 3.
 
 **Acquisition
        of Gavitec**
 
 On
        February 17, 2006, NeoMedia and Gavitec signed a definitive sale and purchase
        agreement, subject to closing conditions, under which NeoMedia acquired all
        of
        the outstanding shares of Gavitec in exchange for $1,800,000 cash and 13,660,511
        shares of NeoMedia common stock (1,366,051 of which are being held in escrow
        until December 31, 2006 for the purpose of securing the indemnification
        obligations outlined in the purchase agreement). Pursuant to the terms of
        the
        merger agreement, the number of shares of NeoMedia common stock to be issued
        as
        consideration was calculated using a share price of $0.389, which was the
        volume-weighted average closing price of NeoMedia common stock for the ten
        days
        up to and including February 16, 2006. On February 23, 2006, NeoMedia and
        Gavitec completed the closing requirements and the acquisition became effective.
        In the event that NeoMedia's stock price (at the time the consideration shares
        are saleable) is less than $0.389, NeoMedia is obligated to compensate Gavitec
        shareholders in cash for the difference between the price at the time the
        shares
        become saleable and $0.389. Assuming a stock price at the time the shares
        become
        saleable of $0.25, which was the last sale price on May 10, 2006, NeoMedia
        would
        have a cash liability of $2.0 million resulting from this clause.
 
 Gavitec
        was founded in 1997 as a specialized provider and manufacturer of products
        and
        solutions for mobile marketing and mobile information technology. As a
        technology leader in code-reading systems and software for mobile applications,
        Gavitec offers its clients standardized or individual solutions in the areas
        of
        mobile marketing, mobile ticketing, mobile couponing, and mobile payment
        systems. Gavitec has run an in-market pilot program in Switzerland for its
        mobile macro-payment system with the leading Swiss retail bank PostFinance,
        Unisys, seven selected retailers including Migros, CoOp and McDonald's and
        approximately a thousand consumers. Participants receive a personal Data
        Matrix
        code via text message to their mobile phone. Then to complete a purchase,
        participants hold their cell phone over Gavitec's EXIO code reader and enter
        their PIN code to debit their PostFinance account. Gavitec has also run trials
        with “Coast Mobile” in conjunction with the British Broadcasting Corporation
        (BBC) and News International's The Times newspaper, along with a number of
        other
        interactive mobile campaigns.
 
 NeoMedia
        completed the acquisitions of Mobot, Sponge, Gavitec, and 12Snap in an effort
        to
        gain entry into the rapidly evolving global mobile marketing
        industry.
  12
  The
        acquisition was accounted for under the purchase method. The actual purchase
        price was based on cash paid, the fair value of NeoMedia stock around the
        date
        of the acquisition, and direct costs associated with the combination. The
        purchase price has initially been allocated (subject to final determination)
        as
        follows:
 (Dollars
                    inThousands)Value
                    of 13,660,511 shares issued at $0.386 per share(1)
                
                $
                5,273Cash
                    paid
                
                
                1,800Direct
                    costs of acquisition
                
                
                26Total Fair Value of Purchase Price
                
                
                7,099Assets
                    Acquired:Cash and cash equivalents
                
                $
                74Accounts receivable
                
                
                173Inventory
                
                
                106Other current assets
                
                
                53Property, plant & equipment
                
                
                15Intangible assets
                
                
                3Capitalized software platform
                
                
                5,600Brand name
                
                
                500Copyrighted materials
                
                
                50Goodwill
                
                
                1,023Total Assets Acquired
                
                
                7,597Less
                    Liabilities Assumed:Accounts payable
                
                
                113Accrued liabilities
                
                
                24Deferred revenue
                
                
                117Other current liabilities
                
                
                244Total Liabilities Assumed
                
                
                498Net
                    assets acquired
                
                $
                7,099
  (1)
        -
        Shares were valued using the average stock price for two days before and
        two
        days after the measurement date, as defined in SFAS 141 and EITF
        99-12
  The
        combination is being accounted for as a purchase business combination as
        defined
        by Statement of Financial Accounting Standards No. 141, Business Combinations.
        A
        final determination of the allocation of the purchase price to the assets
        acquired and liabilities assumed has not been made, and should be considered
        preliminary and is subject to the completion of a comprehensive independent
        valuation of the assets acquired and liabilities assumed. The Company expects
        to
        obtain an independent valuation, currently in process, by the filing of its
        second quarter 2006 Form 10-Q in August 2006.
 
 The
        values assigned to intangible assets, aside from goodwill, are subject to
        amortization. The intangible assets were assigned the following lives for
        amortization purposes:
 Estimated
                    UsefulIntangible
                    asset
                
                Life
                    (in years)Copyrighted
                    materials
                
                
                5Capitalized
                    software platform
                
                
                7Brand
                    name
                
                
                10
  13
  Goodwill
        was not assigned a life and will be tested for impairment as defined by
        Statement of Financial Accounting Standards No. 144, Accounting for the
        Impairment or Disposal of Long-Lived Assets.
  The
        accompanying consolidated statement of operations presented herein contains
        the
        results of operations for Gavitec for the period from February 24, 2006,
        through
        March 31, 2006. Pro-forma results of operations for the three months ended
        March
        31, 2006 and 2005 are presented at the end of this Note 3.
  **Acquisition
        of 12Snap**
 
 On
        February 10, 2006, NeoMedia and 12Snap signed a definitive sale and purchase
        agreement, subject to closing conditions, under which NeoMedia acquired all
        of
        the outstanding shares of 12Snap in exchange for $2,500,000 cash and 49,294,581
        shares of NeoMedia common stock (6,319,818 of which are being held in escrow
        until June 30, 2006 for the purpose of securing the indemnification obligations
        outlined in the purchase agreement). On February 28, 2006, NeoMedia and 12Snap
        completed the closing requirements and the acquisition became effective.
        Pursuant to the terms of the merger agreement, the number of shares of NeoMedia
        common stock to be issued as consideration was calculated using a share price
        of
        $0.3956, which was the volume-weighted average closing price of NeoMedia
        common
        stock for the ten days up to and including February 9, 2006. In the event
        that
        NeoMedia's stock price (at the time the consideration shares are saleable)
        is
        less than $0. 3956, NeoMedia is obligated to compensate 12Snap shareholders
        in
        cash for the difference between the price at the time the shares become saleable
        and $0.3956. Assuming a stock price at the time the shares become saleable
        of
        $0.25, which was the last sale price on May 10, 2006, NeoMedia would have
        a cash
        liability of $7.2 million resulting from this clause.
 
 12snap
        AG
        is headquartered in Munich with branches in Düsseldorf, New York, London, Milan,
        Stockholm and Vienna. As an expert in innovative marketing and entertainment
        for
        mobile phones, 12snap combines know-how in mobile applications, mobile loyalty
        and mobile marketing. In the mobile marketing space, 12snap creates and
        implements national and pan-European mobile marketing campaigns for
        international brands; its mobile loyalty business unit offers customer loyalty
        programs for companies and brands, and its mobile applications business unit
        is
        the center for development and software. 12snap sells and licenses a wide
        spectrum of mobile solutions to satisfy the demands of the current growing
        market and the new uses of the third mobile phone generation from dynamic
        video
        services and multiplayer games to personalized messaging applications. 12snap
        has 75 employees, and services to companies including McDonald's,
        MTV ® ,
        Coca-Cola, Ferrero, Wella, adidas, Unilever and Gillette ® .
 
 NeoMedia
        completed the acquisitions of Mobot, Sponge, Gavitec, and 12Snap in an effort
        to
        gain entry into the rapidly evolving global mobile marketing
        industry.
  14
  The
        acquisition was accounted for under the purchase method. The actual purchase
        price was based on cash paid, the fair value of NeoMedia stock around the
        date
        of the acquisition, and direct costs associated with the combination. The
        purchase price has initially been allocated (subject to final determination)
        as
        follows:
 (Dollars
                    inThousands)Value
                    of 49,294,581 shares issued at $0.394 per share (1)
                
                $
                19,422Cash
                    paid
                
                
                2,500Direct
                    costs of acquisition
                
                
                113Total Fair Value of Purchase Price
                
                
                22,035Assets
                    Acquired:Cash and cash equivalents
                
                $
                465Investment in marketable securities
                
                
                951Accounts receivable
                
                
                2,683Other current assets
                
                
                554Property, plant & equipment
                
                
                224Intangible assets
                
                
                93Customer contracts and relationships
                
                
                400Capitalized software platform
                
                
                4,400Brand name
                
                
                1,400Copyrighted materials
                
                
                50Goodwill
                
                
                19,590Total
                    Assets Acquired
                
                
                30,810Less
                    Liabilities Assumed:Accounts payable
                
                
                977Accrued liabilities
                
                
                1,990Deferred revenue
                
                
                1,434Other current liabilities
                
                
                225Notes payable
                
                
                4,149Total
                    Liabilities Assumed
                
                
                8,775Net
                    assets acquired
                
                $
                22,035
  (1)
        -
        Shares were valued using the average stock price for two days before and
        two
        days after the measurement date, as defined in SFAS 141 and EITF
        99-12
  The
        combination is being accounted for as a purchase business combination as
        defined
        by Statement of Financial Accounting Standards No. 141, Business Combinations.
        A
        final determination of the allocation of the purchase price to the assets
        acquired and liabilities assumed has not been made, and should be considered
        preliminary and is subject to the completion of a comprehensive independent
        valuation of the assets acquired and liabilities assumed. The Company expects
        to
        obtain an independent valuation, currently in process, by the filing of its
        second quarter 2006 Form 10-Q in August 2006.
  15
  The
        values assigned to intangible assets, aside from goodwill, are subject to
        amortization. The intangible assets were assigned the following lives for
        amortization purposes:
  Estimated
                    UsefulIntangible
                    asset
                
                Life
                    (in years)Customer
                    contracts and relationships
                
                
                5Copyrighted
                    materials
                
                
                5Capitalized
                    software platform
                
                
                7Brand
                    name
                
                
                10
  Goodwill
        was not assigned a life and will be tested for impairment as defined by
        Statement of Financial Accounting Standards No. 144, Accounting for the
        Impairment or Disposal of Long-Lived Assets.
  The
        accompanying consolidated statement of operations presented herein contains
        the
        results of operations for 12Snap for the period from March 1, 2006, through
        March 31, 2006. Pro-forma results of operations for the three months ended
        March
        31, 2006 and 2005 are presented at the end of this Note 3.
  **Acquisition
        of BSD**
 
 On
        March
        21, 2006, NeoMedia completed its acquisition of BSD Software, Inc. of Calgary,
        Alberta, Canada for 7,123,698 shares of NeoMedia common stock. Pursuant to
        the
        terms of the merger agreement, the number of shares of NeoMedia common stock
        to
        be issued as consideration was calculated using a share price of $0.3467,
        which
        was the volume-weighted average closing price of NeoMedia common stock for
        the
        five days preceding March 21, 2006. BSD owns 90% of the outstanding shares
        of
        Triton Global Business Services, Inc., a provider of live and automated operator
        calling services and e-business support, including billing, clearinghouse
        and
        information management services, to companies in the telecommunications
        industry.
 
 NeoMedia
        completed the acquisitions of BSD for the purpose of increasing its revenue
        and
        profit through establishment of a Telecom Services business unit, as well
        as
        gaining access to the Canadian telecom industry in order to penetrate that
        market with the products of the NeoMedia Mobile division.
  16
  The
        acquisition was accounted for under the purchase method. The actual purchase
        price was based on cash paid, the fair value of NeoMedia stock around the
        date
        of the acquisition, and direct costs associated with the combination. The
        purchase price has initially been allocated (subject to final
        determination) as follows:
 (Dollars
                    inThousands)Value
                    of 7,123,698 shares issued at $0.352 per share (1)
                
                $
                2,508Direct
                    costs of acquisition
                
                
                8Total Fair Value of Purchase Price
                
                
                2,516Assets
                    Acquired:Cash and cash equivalents
                
                $
                55Accounts receivable
                
                
                1,733Other current assets
                
                
                13Property, plant & equipment
                
                
                61Customer contracts and relationships
                
                
                1,600Copyrighted materials
                
                
                150Goodwill
                
                
                4,202Total Assets Acquired
                
                
                7,814Less
                    Liabilities Assumed:Accounts payable
                
                
                2,423Accrued liabilities
                
                
                1,224Notes payable
                
                
                1,651Total Liabilities Assumed
                
                
                5,298Net
                    assets acquired
                
                $
                2,516
  (1)
        -
        Shares were valued using the average stock price for two days before and
        two
        days after the measurement date, as defined in SFAS 141 and EITF
        99-12
 
 The
        combination is being accounted for as a purchase business combination as
        defined
        by Statement of Financial Accounting Standards No. 141, Business Combinations.
        A
        final determination of the allocation of the purchase price to the assets
        acquired and liabilities assumed has not been made, and should be considered
        preliminary and is subject to the completion of a comprehensive independent
        valuation of the assets acquired and liabilities assumed. The Company expects
        to
        obtain an independent valuation, currently in process, by the filing of its
        second quarter 2006 Form 10-Q in August 2006.
 
 The
        values assigned to intangible assets, aside from goodwill, are subject to
        amortization. The intangible assets were assigned the following lives for
        amortization purposes:
  Estimated
                    UsefulIntangible
                    asset
                
                Life
                    (in years)Customer
                    contracts and relationships
                
                
                5Copyrighted
                    materials
                
                
                5
  Goodwill
        was not assigned a life and will be tested for impairment as defined by
        Statement of Financial Accounting Standards No. 144, Accounting for the
        Impairment or Disposal of Long-Lived Assets.
  17
  The
        accompanying consolidated statement of operations presented herein contains
        the
        results of operations for BSD for the period from March 22, 2006, through
        March
        31, 2006. Pro-forma results of operations for the three months ended March
        31,
        2006 and 2005 are presented at the end of this Note 3.
  **Pro
        Forma Financial Information**
 
 Pro-forma
        operations as if NeoMedia combined with Mobot, Sponge, Gavitec, 12Snap and
        BSD
        as of January 1, 2006 are as follows:
 **Three
                    Months Ended March 31, 2006****Pro-forma****Adjust-**
                
                **Pro-forma****NeoMedia**
                
                **Mobot**
                
                **Sponge**
                
                **Gavitec**
                
                **12Snap**
                
                **BSD**
                
                **ments**
                
                **Combined**Total
                    net sales
                
                $
                1,847
                
                $
                85
                
                $
                811
                
                $
                778
                
                $
                3,044
                
                $
                379
                
                
                ($1,304)
                (A)
                $
                5,640Net
                    income (loss)
                
                
                ($1,318
                )
                
                ($383
                )
                $
                112
                
                
                ($1,201
                )
                $
                542
                
                
                ($137
                )
                
                ($381)
                (A)
                
                ($2,766
                )Net
                    income (loss) per share-basic and diluted
                
                
                ($0.00
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                0.00
                    (A)
                (B)
                
                ($0.00
                )Weighted
                    average common shares outstanding
                
                
                527,991,819
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                155,445,734
                (B)
                
                683,437,553
  (A)
        -
        Adjustments are to reflect operations of each acquisition from the closing
        date
        through March 31, 2006 and amortization of intangible assets for the period
        January 1, 2006 through the respective closing dates. Results of operations
        for
        each acquisition from its respective closing date through March 31, 2006
        are
        included in NeoMedia's operations for the three months ended March 31, 2006.
        Closing dates for each acquisition were: Mobot (February 17, 2006); Sponge
        and
        Gavitec (February 23, 2006); 12Snap (February 28, 2006); and BSD (March 21,
        2006).
 
 (B)
        -
        Adjustment for shares that would have been issued in connection with
        acquisitions if they had occurred on January 1, 2006, calculated as
        follows:
 **Mobot**
                
                **Sponge**
                
                **Gavitec**
                
                **12Snap**
                
                **BSD**
                
                **Total**Total
                    stock consideration
                
                $
                6,500,000
                
                $
                11,400,000
                
                $
                5,400,000
                
                $
                19,500,000
                
                $
                2,279,263
                
                $
                45,079,263NeoMedia
                    stock price around January 1, 2006 (measurement date)
                
                $
                0.290
                
                $
                0.290
                
                $
                0.290
                
                $
                0.290
                
                $
                0.290Pro
                    forma number of shares ofNeoMedia
                    to be issued as purchase price consideration
                
                
                22,413,793
                
                
                39,310,345
                
                
                18,620,690
                
                
                67,241,379
                
                
                7,859,527
                
                
                155,445,734
  Pro-forma
        operations as if NeoMedia combined with Mobot, Sponge, Gavitec, 12Snap and
        BSD
        as of January 1, 2005 are as follows:
 **Three
                    Months Ended March 31, 2005****Pro-forma****(B)**
                
                **Adjust-**
                
                **Pro-forma****NeoMedia**
                
                **Mobot**
                
                **Sponge**
                
                **Gavitec**
                
                **12Snap**
                
                **BSD**
                
                **ments**
                
                **Combined**Total
                    net sales
                
                $
                747
                
                $
                99
                
                $
                541
                
                $
                806
                
                $
                1,832
                
                $
                350
                
                
                —
                
                $
                4,375Net
                    income (loss)
                
                
                ($1,219
                )
                
                ($193
                )
                $
                151
                
                
                ($1,180
                )
                
                ($743
                )
                $
                52
                
                
                ($830)
                (A)
                
                ($3,962
                )Net
                    income (loss) per share-basic and diluted
                
                
                ($0.00
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                0.01
                (B)
                
                ($0.01
                )Weighted
                    average common shares outstanding
                
                
                437,764,971
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                172,717,482
                (B)
                
                610,482,453
  (A)
        -
        Adjustment for amortization of intangible assets for the period January 1,
        2005
        through March 31, 2005.
 (B)
        -
        Adjustment for shares that would have been issued in connection with
        acquisitions if they had occurred on January 1, 2005, calculated as
        follows:
 **Mobot**
                
                **Sponge**
                
                **Gavitec**
                
                **12Snap**
                
                **BSD**
                
                **Total**Total
                    stock consideration
                
                $
                6,500,000
                
                $
                11,400,000
                
                $
                5,400,000
                
                $
                19,500,000
                
                $
                2,279,263
                
                $
                45,079,263NeoMedia
                    stock price around January 1, 2005 (measurement date)
                
                $
                0.261
                
                $
                0.261
                
                $
                0.261
                
                $
                0.261
                
                $
                0.261Pro
                    forma number of shares ofNeoMedia
                    to be issued as purchase price consideration
                
                
                24,904,215
                
                
                43,678,161
                
                
                20,689,655
                
                
                74,712,644
                
                
                8,732,808
                
                
                172,717,482
  18
  **Tax
        Implications of Acquisitions**
 
 For
        income tax purposes, amounts assigned to particular assets acquired and
        liabilities assumed in the business combinations are different than amounts
        used
        for financial reporting. The differences in assigned values for financial
        reporting and tax purposes result in temporary differences. In applying SFAS
        109, “Accounting for Income Taxes”, the Company is required to recognize the tax
        effect of these temporary differences and, accordingly, a deferred tax liability
        has been recognized. The Company determined that its pre-existing and
        acquired deferred tax assets, and those acquired, including those subject
        to
        limitations, were more likely than not to be realized to the extent of the
        deferred tax liability. The reduction in the valuation allowance resulting
        in an
        asset was used to offset the deferred tax liability arising from the business
        combinations, pursuant to SFAS 109.
 
 In
        addition, the acquisitions of Sponge, Gavitec, 12Snap, and BSD involve a
        change
        of control of foreign entities, and as a result any net operating loss
        carryforward in existence prior to the acquisition may have limited or no
        use
        for NeoMedia.
 
 **Intangible
        Assets Acquired**
 
 As
        of
        March 31, 2006, intangible assets acquired (subject to adjustment) in connection
        with the acquisitions of Mobot, Sponge, Gavitec, 12Snap, and BSD were valued
        as
        follows:
 (in
                    thousands)**Mobot**
                
                **Sponge**
                
                **Gavitec**
                
                **12
                    Snap**
                
                **BSD**
                
                **Total**Customer
                    Contracts
                
                $
                400
                
                $
                400
                
                $
                -
                
                $
                400
                
                $
                1,600
                
                $
                2,800Proprietary
                    Software Platform
                
                
                5,000
                
                
                1,300
                
                
                5,600
                
                
                4,400
                
                
                -
                
                
                16,300Brand
                    Name
                
                
                -
                
                
                500
                
                
                500
                
                
                1,400
                
                
                -
                
                
                2,400Copyrighted
                    Materials
                
                
                200
                
                
                50
                
                
                50
                
                
                50
                
                
                150
                
                
                500Goodwill
                
                
                6,084
                
                
                16,871
                
                
                1,023
                
                
                19,590
                
                
                4,202
                
                
                47,770Total
                
                $
                11,684
                
                $
                19,121
                
                $
                7,173
                
                $
                25,840
                
                $
                5,952
                
                $
                69,770
 Accumulated
        amortization on the acquired intangibles as of March 31, 2006 was:
 (in
                    thousands)**Mobot**
                
                **Sponge**
                
                **Gavitec**
                
                **12
                    Snap**
                
                **BSD**
                
                **Total**Customer
                    Contracts
                
                $
                9
                
                $
                8
                
                $
                -
                
                $
                7
                
                $
                27
                
                $
                51Proprietary
                    Software Platform
                
                
                83
                
                
                19
                
                
                79
                
                
                52
                
                
                -
                
                
                233Brand
                    Name
                
                
                -
                
                
                5
                
                
                5
                
                
                12
                
                
                -
                
                
                22Copyrighted
                    Materials
                
                
                5
                
                
                1
                
                
                1
                
                
                1
                
                
                2
                
                
                10Total
                
                $
                97
                
                $
                33
                
                $
                85
                
                $
                72
                
                $
                29
                
                $
                316
 
 The
        carrying value of the acquired intangibles as of March 31, 2006
        was:
 (in
                    thousands)**Mobot**
                
                **Sponge**
                
                **Gavitec**
                
                **12
                    Snap**
                
                **BSD**
                
                **Total**Customer
                    Contracts
                
                $
                391
                
                $
                392
                
                $
                -
                
                $
                393
                
                $
                1,573
                
                $
                2,749Proprietary
                    Software Platform
                
                
                4,917
                
                
                1,281
                
                
                5,521
                
                
                4,348
                
                
                -
                
                
                16,067Brand
                    Name
                
                
                -
                
                
                495
                
                
                495
                
                
                1,388
                
                
                -
                
                
                2,378Copyrighted
                    Materials
                
                
                195
                
                
                49
                
                
                49
                
                
                49
                
                
                148
                
                
                490Goodwill
                
                
                6,084
                
                
                16,871
                
                
                1,023
                
                
                19,590
                
                
                4,202
                
                
                47,770Total
                
                $
                11,587
                
                $
                19,088
                
                $
                7,088
                
                $
                25,768
                
                $
                5,923
                
                $
                69,454
  19
  Estimated
        amortization expense on the acquired intangibles is expected to be:
 (in
                    thousands)**Customer
                    Contracts**
                
                **Proprietary
                    Software**
                
                **Brand
                    Name**
                
                **Copyrighted
                    Materials**
                
                **Total**2006
                
                $
                471
                
                $
                1,979
                
                $
                202
                
                $
                85
                
                $
                2,7372007
                
                
                560
                
                
                2,329
                
                
                240
                
                
                100
                
                
                3,2292008
                
                
                560
                
                
                2,329
                
                
                240
                
                
                100
                
                
                3,2292009
                
                
                560
                
                
                2,329
                
                
                240
                
                
                100
                
                
                3,2292010
                
                
                560
                
                
                2,329
                
                
                240
                
                
                100
                
                
                3,229Thereafter
                
                
                89
                
                
                4,005
                
                
                1,238
                
                
                1,365
                
                
                6,697Total
                
                $
                2,800
                
                $
                15,300
                
                $
                2,400
                
                $
                1,850
                
                $
                22,350
  It
        is
        important to note that actual amortization expense could differ materially
        from
        the table due to subjective factors such as changes in assumptions of useful
        lives, impairment charges, or changes in the purchase price allocation upon
        final determination. The Company expects to obtain an independent valuation,
        currently in process, by the filing of its second quarter 2006 Form 10-Q
        in
        August 2006.
 
 **Letter
        of Intent to Acquire Hip Cricket**
 
 On
        February 16, 2006, NeoMedia signed a non-binding letter of intent to acquire
        HipCricket, Inc. (“HipCricket”) of Essex, CT ( www.hipcricket.com ) in
        exchange for $500,000 cash and $4,000,000 of NeoMedia common stock. The number
        of shares to be issued as stock consideration is to be determined using the
        volume-weighted average closing price of NeoMedia stock for the ten days
        prior
        to the signing of a definitive purchase agreement. The letter of intent is
        subject to due diligence and signing of a mutually agreeable definitive purchase
        agreement by both parties.
 
 In
        addition to signing the LOI, NeoMedia loaned HipCricket the principal amount
        of
        $500,000 in the form of two unsecured promissory notes. The notes accrue
        interest at a rate of 8% per annum. The notes will be applied toward the
        cash
        portion of the purchase price upon signing of a definitive purchase agreement
        for the acquisition of all of the outstanding shares of HipCricket by NeoMedia,
        as contemplated in the LOI. In the event the acquisition is not consummated,
        the
        notes will become due 90 days after termination of the LOI. In the event
        the LOI
        is terminated and the notes are not repaid within 90 days of such cancellation,
        the notes will convert into shares of HipCricket common stock.
 
 HipCricket
        is a leading mobile marketing firm that provides innovative, custom solutions
        to
        broadcasters and brand marketers. Today, HipCricket works with five of the
        top
        10 radio groups in the U.S. as well as with some 40 major brand marketers.
        HipCricket combines senior marketing expertise with state-of-the-art mobile
        and
        event marketing technologies to offer clients unprecedented interactivity
        with
        their consumers, viewers, listeners or customers on a one-to-one personal
        level.
  20
  **4. 
        FINANCING**
 
 **Securities
        Purchase Agreement - Series C Convertible Preferred Stock**
 
 The
        Company entered into a Securities Purchase Agreement, dated February 17,
        2006
        (the “Agreement”) with Cornell Capital Partners LP, an accredited investor (the
“Purchasers”). Pursuant to the Agreement, the Purchasers agreed to purchase 8%
        cumulative Series C convertible preferred stock to be fully
        converted three (3) years from the date of issuance in the aggregate amount
        of $22,000,000. Net consideration from this arrangement amounted to $17,854,000,
        comprised of cash of $14,066,000, marketable securities with a calculated
        fair
        value of $579,000 and a purchase value of $2,000,000, and the extinguishment
        of
        $3,209,000 of preexisting indebtedness. In addition, the Purchaser withheld
        $2,725,000 commitment and structuring fees from the gross proceeds. The
        Agreement also provides for the issuance to the Purchasers, at no additional
        cost to the purchasers, warrants to purchase shares of the Company's common
        stock. The Agreement also calls for the purchasers to acquire an additional
        $5,000,000 of Series C convertible preferred stock on the date a registration
        statement filed by the Company is declared effective by the U.S. Securities
        and
        Exchange Commission. In connection with the Agreement, the Company also entered
        into a registration rights agreement with the Purchasers that requires the
        Company to (i) file a registration statement with the SEC registering the
        resale
        of the shares of common stock issuable upon conversion of the preferred stock
        and the exercise of the warrants, (ii) achieve effectiveness within a stated
        period and (iii) maintain effectiveness of the registration statement. Failure
        to meet these requirements will require the Company to incur liquidating
        damages
        amounting to 1.0% for each month, but in no event shall consideration paid
        as
        liquidating damages exceed $1,200,000.
  On
        February 17, 2006, the Company issued the Purchasers $22,000,000 in aggregate
        principal amount of such 8% cumulative Series C convertible preferred stock.
        At
        any time from the closing date until February 17, 2009, the Purchasers have
        the
        right to convert the preferred stock, in whole or in part, into common stock
        of
        the Company at the then effective conversion price, which varies relative
        to the
        Company's trading stock price, as follows: $0.50 per share, or 97% of the
        lowest
        closing bid prices (as reported by Bloomberg) of the common stock for the
        30
        trading days immediately preceding the conversion date. The conversions are
        limited such that the holder cannot exceed 4.99% ownership, unless the holders
        waive their right to such limitation. The limitation will terminate under
        any
        event of default.
 
 The
        series 8% cumulative Series C convertible preferred stock also afford the
        Purchasers anti-dilution protection should, at any time while the Series C
        preferred stock instruments are outstanding, the Company offer, sell or
        grant any option to purchase or offer, sell or grant any right to re-price
        its
        securities, or otherwise dispose of or issue any common stock or common stock
        equivalents, entitle any person to acquire shares of common stock at an
        effective price per share less than the then effective conversion price
        (excluding employee stock options), as calculated by the formula described
        above; then, in such instance, the conversion price for the convertible
        preferred stock shares shall be reduced to the lower price. In case of any
        such
        adjustment in the effective conversion price for the convertible preferred
        shares, this could significantly dilute existing investors.
  Under
        the
        Agreement, the Purchasers also received “A” warrants, “B” warrants and “C”
warrants to purchase an aggregate of up to 75,000,000 shares of common stock.
        The warrants are exercisable in three separate traunches at a price of $0.50,
        $0.40 and $0.35 respectively per share, subject to adjustment, included under
        anti-dilution protection similar to that described above. The warrants have
        a
        five-year contractual life. NeoMedia can force exercise of the warrants if
        the
        closing bid price of NeoMedia stock is more than $0.05 greater than the exercise
        price of any of the warrants for 15 consecutive days.
  The
        8%
        cumulative Series C convertible preferred stock contains consequences in
        case of
        default. Events of default which could subject the Company to penalties and
        liabilities as specified in the Agreement include:
  ·
                Any
                    case or action of bankruptcy or insolvency commenced by the Company
                    or any
                         subsidiary, against the Company or adjudicated by a court
                    against the
                    Company for the benefit of
                    creditors;
 ·
                Any
                    default in its obligations under a mortgage or debt in excess
                    of
                    $100,000;
  21




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




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




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




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




Other
        provisions included in the Agreement include the following:


·
              The
                  8% cumulative Series C convertible preferred stock is convertible
                  into
                  common stock, at the option of the Purchaser, at any time after
                  the
                  effective date.




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




·
              The
                  8% cumulative Series C convertible preferred stock has voting rights
                  on an
                  “as converted” basis, meaning the Purchaser is entitled to vote the number
                  of shares of common stock into which the 8% cumulative Series C
                  convertible preferred stock was convertible as of the record date
                  for a
                  meeting of shareholders




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






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




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




·
              If
                  the Company offers, sells or grants stock at an effective per share
                  price
                  less than the then 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 (excluding employee
                  stock
                  options or shares issued as consideration in a business
                  combination);





22




At
      February 17, 2006, a summary is as follows:


**Instrument:**Convertible
                  Preferred Stock(1)
              
              $
              1,711,000Common
                  stock warrants(2)
              
              
              16,172,000Embedded
                  conversion feature
              
              
              1,935,000Debt
                  extinguishment loss(3)
              
              
              (1,964,000
              )Total gross proceeds
              
              $
              17,854,000





(1)
            The
                discount to the face value of the 8% cumulative Series C convertible
                preferred stock that resulted from the allocation along with deferred
                costs is being accreted through periodic charges to additional paid-in
                capital using the effective interest method. Accretion of the deferred
                costs amounted to $137,000 and $0 during the quarters ended March
                31, 2006
                and 2005, respectively.





(2)
            The
                Company issued additional warrants to purchase aggregate 75,000,000
                shares
                of common stock in connection with the 8% cumulative Series C convertible
                preferred stock. The Company also issued 2,000,000 warrants (valued
                at
                $447,000) as financing fees.





(3)
            The
                financing arrangement settled face value $3,209,000 of preexisting
                indebtedness. The debt extinguishment loss was calculated as the
                amount
                that the fair value of securities issued (using a relative fair value
                basis) exceeded the Company's carrying
                value.





The
      carrying value of the 8% cumulative Series C convertible preferred stock
      amounted to $1,847,000, net of unaccreted deferred cost of $25,432,000, at
      March
      31, 2006. Face value of Series C convertible preferred stock at March 31, 2006
      is $22,000,000. Derivative financial instruments arising from the issuance
      of
      Series C convertible preferred stock are initially recorded and continuously
      carried at fair values. 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 on the Company's balance sheet at March 31,
      2006:


**(Assets)
                  Liabilities:**
              
              **March
                  31, 2006**Cornell
                  warrants
              
              $
              13,280,000Embedded
                  conversion feature
              
              
              1,575,000Other
                  warrants(1)
              
              
              8,577,000$
              23,432 ,000




(1)
            The
                fair values of certain other derivative financial instruments (warrants)
                that existed at the time of the issuance of Series C convertible
                preferred
                stock were reclassified from stockholders' equity to liabilities
                when, in
                connection with the issuance of Series C convertible preferred stock,
                the
                Company no longer controlled its ability to share-settle these
                instruments. These derivative financial instruments had fair values
                of
                $13,883,000 and $8,195,000 on February 17, 2006 and March 31, 2006,
                respectively. These warrants will be reclassified to stockholders'
                equity
                when the Company reacquires the ability to share-settle the
                instruments.





The
      following tabular presentation reflects the number of common shares into which
      the aforementioned derivative financial instruments are indexed at March 31,
      2006:


**Shares
                  of**
                **common
                  stock**Cornell
                  warrants
              
              
              75,000,000Embedded
                  conversion feature (1)
              
              
              71,585,000Other
                  warrants
              
              
              33,325,000179,910,000




(1)
            The
                terms of the embedded conversion features (ECF) in the Series C
                Convertible Preferred Stock provide for variable conversion rates
                that are
                indexed to the Company's trading common stock price. As a result,
                the
                number of indexed shares is subject to continuous fluctuation. For
                presentation purposes, the number of shares of common stock into
                which the
                ECF was convertible as of March 31, 2006 was calculated as the face
                value
                of $22,000,000 plus assumed dividends of $220,000 if declared,
                divided by 97% of the lowest closing bid price for the 30 trading
                days
                preceding March 31, 2006.





23




Derivative
      income for the three months ended March 31, 2006 and 2005 associated with
      adjustments recorded to reflect the aforementioned derivatives at fair value
      amounted to $2,870,000 and $0, respectively.




Fair
      value considerations for derivative financial instruments :





Freestanding
      derivative instruments, consisting of warrants that arose from the Cornell
      financing and those reclassified as described above are valued using the
      Black-Scholes-Merton valuation methodology because that model embodies all
      of
      the relevant assumptions that address the features underlying these instruments.
      Significant assumptions included in this model as of March 31, 2006 are as
      follows:


Holder
              
              Cornell
              
              OtherInstrument
              
              Warrants
              
              WarrantsExercise
                  price
              
              $0.35
                  - $0.50
              
              $0.01
                  - $3.45Term
                  (years)
              
              5.0
              
              1.0
                  - 5.0Volatility
              
              70.80%
              
              52.56%
                  -70.80%Risk-free
                  rate
              
              3.65%
              
              3.65%


Embedded
        derivative financial instruments, arising from the Series C Convertible
        Preferred Stock, consist of multiple individual features that were embedded
        in
        the instrument. The Company evaluated all significant features of the hybrid
        instruments and, where required under current accounting standards, bifurcated
        features for separate report classification. These features were aggregated
        into
        one compound derivative financial instrument for financial reporting purposes.
        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.
 
 Assumptions
        included exercise estimates/behaviors and the following other significant
        estimates:
  **Instrument**
              
              **Features**Conversion
                  prices
              
              $0.95
                  - $1.29Remaining
                  terms (years)
              
              1
                  -
                  5Equivalent
                  volatility
              
              52.56%
                  - 56.47%Equivalent
                  interest-risk adjusted rate
              
              8.17%
                  - 8.58%Equivalent
                  credit-risk adjusted yield rate
              
              14.50%





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.




24




**Standby
      Equity Distribution Agreements with Cornell**




On
      October 27, 2003, NeoMedia and Cornell entered into a $20 million Standby Equity
      Distribution Agreement (the “2003 SEDA”). The agreement provides for a maximum
“draw” of $280,000 per week, not to exceed $840,000 in any 30-day period, and
      Cornell will purchase up to $20 million of the Company's common stock over
      a
      two-year period. The SEDA became effective during January 2004, and expired
      after a two-year term in January 2006. During the three months ended March
      31,
      2006 and 2005, NeoMedia sold 751,880 and 6,998,931 shares of its common stock
      to
      Cornell pursuant to the 2003 SEDA. The following table summarizes funding
      received from Cornell during the three months ended March 31, 2006 and
      2005:


**Three**
              
              **Three****Months**
              
              **Months****Ended**
              
              **Ended****March
                  31,**
              
              **March
                  31,****2006**
              
              **2005**Number
                  of shares sold to Cornell
              
              
              751,880
              
              
              6,998,931Gross
                  Proceeds from sale of shares to Cornell
              
              $
              234,000
              
              $
              1,709,000Less:
                  discounts and fees*
              
              
              (24,000
              )
              
              (204,000
              )Net Proceeds from sale of shares to Cornell
              
              $
              210,000
              
              $
              1,505,000




*
      Pursuant to the terms of the 2003 SEDA , stock is valued at 98% of the lowest
      closing bid price during the week it was sold.




On
      March
      30, 2005, NeoMedia and Cornell entered into a Standby Equity Distribution
      Agreement (the “2005 SEDA”) under which Cornell agreed to purchase up to $100
      million of NeoMedia common stock over a two-year period, with the timing and
      amount of the purchase at NeoMedia's discretion. The maximum amount of each
      purchase would be $2,000,000 with a minimum of five business days between
      advances. The shares would be valued at 98% of the lowest closing bid price
      during the five-day period following the delivery of a notice of purchase by
      NeoMedia, and NeoMedia would pay 5% of the gross proceeds of each purchase
      to
      Cornell. Concurrent with the SEDA, NeoMedia entered into an escrow agreement
      with Cornell and an escrow agent, under which the escrow agent holds in an
      escrow account shares of NeoMedia common stock, and the cash paid by Cornell
      for
      such shares, issued pursuant to an advance under the SEDA. The shares and funds
      can only be released upon receipt by the escrow agent of a joint disbursement
      instruction signed by NeoMedia and Cornell. NeoMedia expects to file a
      registration statement with the SEC to register the shares underlying the 2005
      SEDA. The 2005 SEDA would become available at the time the SEC declares
      effective a registration statement containing such shares.





As
      a
      commitment fee for Cornell to enter into the 2005 SEDA, NeoMedia issued 50
      million warrants to Cornell with an exercise price of $0.20 per share, and
      a
      term of three years, and also paid a cash commitment fee of $1 million. During
      the three months ended March 31, 2006, Cornell exercised 40 million of the
      warrants, generating cash proceeds of $8 million to NeoMedia. NeoMedia also
      issued 4 million warrants with an exercise price of $0.227 to a consultant
      as a
      fee in connection with the 2005 SEDA, which have not been exercised. As of
      March
      31, 2005, NeoMedia recorded the $12.3 million fair value of the warrants to
      “Deferred equity financing costs” and, upon effectiveness of the 2005 SEDA, will
      amortize this amount to additional paid-in capital straight-line over the
      two-year life of the 2005 SEDA.




25




**Promissory
      Note Payable to Cornell**





On
      March
      30, 2005, NeoMedia borrowed from Cornell the principal amount of $10,000,000
      before discounts and fees in the form of a secured promissory note. Cornell
      withheld structuring and escrow fees of $68,000 related to the note. The note
      was originally scheduled to be repaid at a rate of $1,120,000 per month
      commencing May 1, 2005, which was subsequently changed to $840,000 per month,
      continuing until principal and interest were paid in full. The note accrued
      interest at a rate of 8% per annum on any unpaid principal. In connection with
      the note, NeoMedia and Cornell entered into a Security Agreement under which
      the
      note was secured by all of NeoMedia's assets other than its patents and patent
      applications. NeoMedia also escrowed 25,000,000 shares of its restricted common
      stock as security for the note. During the period from March 30, 2005 through
      January 9, 2006, NeoMedia made payments against the principal totaling
      $7,210,000. On February 17, 2006, NeoMedia retired the balance of the principal
      in the amount of $2,790,000, plus accrued interest of $419,000, from the
      proceeds of the Series C convertible preferred financing arrangement with
      Cornell. In connection with the payment and issuance of the Series C Convertible
      Preferred Stock, NeoMedia recognized a loss on extinguishment of debt of
      $1,964,000 during the three months ended March 31, 2006.




**5. 
      INVESTMENT IN MARKETABLE SECURITIES**





On
      February 25, 2005, NeoMedia invested $250,000 in exchange for 8,333,333 shares
      of PUPS restricted common stock. On February 17, 2006, as a component of net
      proceeds from the issuance of 8% Series C Convertible Preferred Stock, NeoMedia
      received marketable securities with a fair value of $579,000, of which, $200,000
      represented 20,000,000 shares of PUPS common stock and $379,000 in notes
      designated as held to maturity. NeoMedia acquired an additional 20,000,000
      shares of PUPS common stock for a purchase price equal to $389,000. PUPS is
      a
      retail operator and franchiser of retail automotive parts and accessories stores
      catering to the light truck market, and also provides new vehicle preparation,
      environmental protection packages, detailing and reconditioning products and
      services. In accordance with Statements of Financial Accounting Standards No.
      115, “Accounting for Certain Investments in Debt and Equity Securities,” the
      investment in PUPS is being recorded as available-for-sale securities and
      reported at fair value. Accordingly, unrealized gains and losses on the equity
      securities are reflected in the condensed consolidated statement of operations
      and comprehensive income (loss).





The
      investments in marketable securities are summarized as follows:


**As
                  of March 31, 2006**Unrealized
              
              Unrealized
              
              FairCost
              
              Holding
                  Gain
              
              Holding
                  Losses
              
              ValueAvailable-for-sale
              
              $
              639,000
              
              $
              -
              
              
              ($
                  186,000
              )
              $
              453,000Held
                  to maturity
              
              $
              379,000
              
              $
              -
              
              $
              -
              
              $
              379,000





Held
      to
      maturity securities consist of four notes receivable from PUPS with a face
      value
      of $1,365,000 and a fair value of $379,000. The fair value of $379,000 is
      recorded in other long-term assets on the consolidated balance sheet as of
      March
      31, 2006. The notes are delinquent and accrue interest at rates between 12-24%.
      NeoMedia has not recorded any interest since the Company is using the cost
      recovery method.




26




**6.  
      FINANCIAL INSTRUMENTS**




The
      carrying amount of the Company's cash equivalents, accounts receivable, prepaid
      expenses, other current assets, cash surrender value of life insurance policy,
      accounts payable and accrued expenses, accrued salaries and benefits, and
      payable to merchants approximates their estimated fair values due to the
      short-term maturities of those financial instruments.





Rates
      currently available to the Company for debt with similar terms and remaining
      maturities are used to estimate fair value of existing debt.




It
      is not
      practicable to estimate the fair value of the Company's 17% investment in the
      common stock of i-Point Media Ltd. and its investments of 250,000 shares of
      preferred stock of Intactis Software, Inc., because of the lack of quoted market
      prices and the inability to estimate fair value without incurring excessive
      costs. During the year ended December 31, 2005 NeoMedia took an impairment
      of
      the carrying values of its investments in iPoint-media and Intactis of $530,000
      and $250,000, respectively. No impairment charge was taken during the three
      months ended March 31, 2006. The net carrying value of these investments were
      $470,000 amd $0 as of March 31, 2006.




For
      all
      available-for-sale investment securities, the carrying values represents fair
      value of the securities and unrealized gain (losses) that are other than
      temporary are recognized as other comprehensive income (loss). NeoMedia does
      not
      hold these securities for speculative or trading purposes. Also see Note
      5.




**7.
      COMPUTATION OF NET LOSS PER SHARE**





Basic
      net
      loss per share is computed by dividing net loss by the weighted average number
      of shares of common stock outstanding during the period. NeoMedia has excluded
      all outstanding stock options and warrants from the calculation of diluted
      net
      loss per share because these securities are anti-dilutive for all years
      presented. The shares excluded from the calculation of diluted net loss per
      share are detailed in the table below:





**March
                31,**
              **2006**
            
            **March
                31,**
              **2005**Outstanding
                Stock Options
            
            
            124,005,799
            
            
            83,206,621Outstanding
                Warrants
            
            
            108,325,000
            
            
            72,825,000Convertible
                Preferred Stock (on an as converted basis) - March 31,
                2006
            
            
            71,585,052
            
            
            —




27




**8. 
      STOCK BASED COMPENSATION**





At
      March
      31, 2006, NeoMedia has four employee stock option plans (the 1996 Stock Option
      Plan, the 1998 Stock Option Plan, the 2003 Stock Option Plan, and the 2005
      Stock
      Option Plan) and one employee stock compensation plan (the 2003 Stock Incentive
      Plan) (collectively, the “Plans”). Prior to January 1, 2006, NeoMedia accounted
      for those plans under the recognition and measurement provisions of APB Opinion
      No. 25, Accounting for Stock Issued to Employees, and related Interpretations,
      as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation.
      No stock-based employee compensation cost was recognized in the statement of
      operations for the fiscal years or interim periods ended prior to December
      31,
      2005, as all options granted under those plans had an exercise price equal
      to
      the market value of the underlying common stock on the date of grant. Effective
      January 1, 2006, NeoMedia adopted the fair value recognition provisions of
      FASB
      Statement No. 123(R), Share-Based Payment, using the
      modified-prospective-transition method. Under that transition method,
      compensation cost recognized in the first quarter of 2006 includes: (a)
      compensation cost for all share-based payments granted prior to, but not yet
      vested as of January 1, 2006, based on the grant date fair value estimated
      in
      accordance with the original provisions of Statement 123, and (b) compensation
      cost for all share-based payments granted subsequent to January 1, 2006, based
      on the grant-date fair value estimated in accordance with the provisions of
      Statement 123(R). Results for prior periods have not been restated.




As
      a
      result of adopting Statement 123(R) on January 1, 2006, NeoMedia's net loss
      for
      the three months ended March 31, 2006 is $1,477,000 higher than if it had
      continued to account for share-based compensation under Opinion 25. Basic and
      diluted income per share for the three months ended March 31, 2006 would have
      been $0.00 if NeoMedia had not adopted Statement 123(R), compared to reported
      basic and diluted loss per share of $0.00. Estimated income tax benefits
      recognized during the three months ended March 31, 2006 were offset by a
      valuation allowance since realization was not reasonably
      assured.




Prior
      to
      the adoption of Statement 123(R), it was NeoMedia's policy to present all tax
      benefits of deductions resulting from the exercise of stock options as operating
      cash flows in its statement of cash flows, however, due to NeoMedia's tax loss
      carryforward, any such benefits were always fully offset by a valuation
      allowance. Statement 123(R) requires the cash flows resulting from the tax
      benefits resulting from tax deductions in excess of the compensation cost
      recognized for those options (excess tax benefits) to be classified as financing
      cash flows. NeoMedia will use this presentation if and when it has exhausted
      its
      tax loss carryforward.




28






The
      following table illustrates the effect on net loss and loss per share if
      NeoMedia had applied the fair value recognition provisions of Statement 123
      to
      options granted under NeoMedia's stock option plans in 2005. For purposes of
      this pro forma disclosure, the value of the options is estimated using a
      Black-Scholes option-pricing formula and amortized to expense over the options'
      vesting periods.




**Three
                Months****Ended**
              **March
                31,****2005**Net
                Loss, as reported
            
            
            ($1,219
            )Add:
                stock-based employee compensationexpense
                included in reported net income,net
                of related tax effects
            
            
            —Deduct:
                Total stock-based employeecompensation
                expense determined underfair
                value method for all awards, net ofrelated
                tax effects
            
            
            (725
            )Pro-forma
                net loss
            
            
            ($1,944
            )Net
                Loss per share:Basic
                and diluted - as reported
            
            
            ($0.00
            )Basic
                and diluted - pro-forma
            
            
            ($0.00
            )





Note
      that
      the above pro forma disclosures are provided for the three months ended March
      31, 2005 because employee stock options were not accounted for using the
      fair-value method during those periods.





The
      Plans
      permit the grant of share options and shares to NeoMedia's employees, board
      of
      directors, and outside consultants. NeoMedia believes that such awards better
      align the interests of its employees with those of its shareholders. Option
      awards are generally granted with an exercise price equal to the market price
      of
      NeoMedia's stock at the date of grant; those option awards generally vest over
      a
      period of 3 years and have 10-year contractual terms. Shares granted upon the
      exercise of stock options are granted from treasury. The fair value of each
      option award is estimated on the date of grant using the Black-Scholes valuation
      model that uses the assumptions noted in the following table. Because
      Black-Scholes valuation model incorporates ranges of assumptions for inputs,
      those ranges are disclosed. Expected volatilities are based on the expected
      impact on future stock price of expected future revenue and earnings, historical
      volatility of NeoMedia's stock, and other factors. NeoMedia uses historical
      data
      to estimate option exercise and employee termination within the valuation model.
      The expected term of options granted represents the period of time that options
      granted are expected to be outstanding.




**Three
                months ended**
              **March
                31,****2006**
            
            **2005**Volatility
            
            
            56
            %
            
            431%
                - 440
            %Expected
                dividends
            
            
            —
            
            
            —Expected
                term (in years)
            
            
            3
            
            
            3Risk-free
                rate
            
            
            4.35
            %
            
            4.50
            %





As
      of
      January 1, 2006, NeoMedia reevaluated its volatility calculation to take into
      consideration the guidance outlined in SFAS 123R. Prior to January calculated
      volatility using only historical share price data. Under the provisions of
      SFAS
      123, from January 1, 2006 onward NeoMedia has considered historical volatility,
      as well expected future volatility. As a result, NeoMedia's volatility decreased
      significantly for stock based compensation granted during the three months
      ended
      March 31, 2006. NeoMedia will evaluate its volatility on an ongoing basis using
      the most current information available. NeoMedia expects that, under the
      guidelines of SFAS 123R, future volatility will more closely resemble 2006
      levels than previous years.




29





A
      summary
      of option activity under the Plans as of March 31, 2006, and changes during
      the
      three months then ended is presented below:




**Weighted****Weighted**
            
            **Average****Average**
            
            **Remaining**
            
            **Aggregate****Exercise**
            
            **Contractual**
            
            **Intrinsic****Shares**
            
            **Price**
            
            **Term**
            
            **Value**(In
                thousands)
            
            
            
            (in
                years)
            
            (In
                thousands)Outstanding
                at January 1, 2006
            
            
            100,041
            
            $
            0.18Granted
            
            
            24,695
            
            $
            0.37Exercised
            
            
            (731
            )
            $
            0.18Forfeited
            
            
            —
            
            
            —Outstanding
                at March 31, 2006
            
            
            124,005
            
            $
            0.22
            
            
            8.8
            
            $
            16,989Vested
                or expected to vest at March 31, 2006
            
            
            76,126
            
            $
            0.16
            
            
            5.2
            
            $
            14,439





The
      weighted-average grant-date fair value of options granted during the three
      months ended March 31, 2006 was $0.11. The total intrinsic value of options
      exercised during the three months ended March 31, 2006 was $156,000. Total
      cash
      received from options exercised was $131,000 and $174,000 for the three months
      ended March 31, 2006 and 2005, respectively.





A
      summary
      of the status of NeoMedia's nonvested shares as of March 31, 2006, and changes
      during the three months ended March 31, 2006, is presented below:





**Weighted****Average****Grant
                Date****Nonvested
                Shares**
            
            **Shares**
            
            **Fair
                Value**(in
                thousands)Nonvested
                at January 1, 2006
            
            
            44,215
            
            $
            0.18Granted
            
            
            15,146
            
            $
            0.12Vested
            
            
            (11,481
            )
            $
            0.19Forfeited
            
            
            —
            
            
            —Nonvested at March 31, 2006
            
            
            47,880
            
            $
            0.16





As
      of
      March 31, 2006, there was $10,127,000 of total unrecognized compensation cost
      related to nonvested share-based compensation arrangements granted under the
      Plans. That cost is expected to be recognized over a weighted-average period
      of
      2.4 years.




30




**9. 
      SEGMENT REPORTING**




As
      of
      March 31, 2006, NeoMedia was structured and evaluated by its Board of Directors
      and Management as three distinct business units:




·
            NeoMedia
                Mobile (NMM) - encompassing NeoMedia's physical-world-to-internet
                and
                mobile marketing technologies branded under PaperClick, 12Snap, Sponge,
                Gavitec and Mobot




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


·
              NeoMedia
                  Telecom Services (NTS) - encompassing the billing, clearinghouse
                  and
                  information management services of recently-acquired
                  BSD




NeoMedia's
      reportable segments are strategic business units that offer different technology
      and marketing strategies. NMM is headquartered in Ft. Myers, Florida, and
      operates principally in the United States and in Europe through the recent
      acquisitions of Sponge (United Kingdom), 12Snap (Germany) and Gavitec (Germany).
      NMPR is headquartered in Ft. Myers, Florida, and currently sells into Canada,
      the United States, Australia, New Zealand, Scandinavia, Mexico and China. NTS
      is
      headquartered in Calgary, Alberta, Canada and presently primarily operates
      within Canada.




31




Consolidated
      net sales by geographic area for the three-month periods ended March 31, 2006
      and 2005 were as follows:




(in
                thousands)**Three
                Months Ended****March
                31,****2006**
            
            **2005****Net
                Sales:**United
                States
            
            $
            442
            
            $
            610Germany
            
            
            217
            
            
            —United
                Kingdom
            
            
            300
            
            
            —Canada
            
            
            188
            
            
            137Italy
            
            
            687
            
            
            —Other
            
            
            13
            
            
            —$
            1,847
            
            $
            747





32




Consolidated
      net sales, net operating losses for the three-month periods ended March 31,
      2006
      and 2005, and identifiable assets as of March 31, 2006, by business unit were
      as
      follows:





(in
                thousands)**Three
                Months Ended****March
                31,****2006**
            
            **2005****Net
                Sales:**NeoMedia
                Mobile (1)
            
            $
            1,443
            
            $
            20NeoMedia
                Telecom Services (2)
            
            
            27
            
            
            —NeoMedia
                Micro Paint Repair (3)
            
            
            377
            
            
            455NeoMedia
                Consulting & Integration Services (4)
            
            
            —
            
            
            272$
            1,847
            
            $
            747**Net
                Loss:**NeoMedia
                Mobile (1)
            
            
            ($1,868
            )
            
            ($254
            )NeoMedia
                Telecom Services (2)
            
            
            (400
            )
            
            —NeoMedia
                Micro Paint Repair (3)
            
            
            (452
            )
            
            (165
            )NeoMedia
                Consulting & Integration Services (4)
            
            
            —
            
            
            (323
            )Corporate
                overhead (5)
            
            
            (1,401
            )
            
            (477
            )Charges
                related to convertible preferred stock sale
            
            
            2,804
            
            
            —($1,317
            )
            
            ($1,219
            )**Identifiable
                Assets**NeoMedia
                Mobile (1)
            
            $
            72,058NeoMedia
                Telecom Services (2)
            
            
            7,893NeoMedia
                Micro Paint Repair
            
            
            4,217NeoMedia
                Consulting & Integration Services (3)
            
            
            —Corporate
            
            
            8,641$
            92,809





(1)
      -
      NeoMedia Mobile consists of NeoMedia's PaperClick and patent business, Mobot,
      Sponge, Gavitec, and 12Snap. Mobot operations are included in NeoMedia's
      consolidated financial results for the period February 18, 2006 through March
      31, 2006. Gavitec and Sponge operations are included in NeoMedia's consolidated
      financial results for the period February 24, 2006 through March 31, 2006.
      12Snap operations are included in NeoMedia's consolidated financial results
      for
      the period March 1, 2006 through March 31, 2006. Net loss includes $563,000
      of
      stock based compensation recognized pursuant to SFAS 123





(2)
      -
      NeoMedia Telecom Services consists of the operations of BSD Software, Inc.,
      acquired March 21, 2006, and included in NeoMedia's consolidated financial
      results for the period March 22, 2006 through March 31, 2006. Net loss includes
      $405,000 of stock based compensation recognized pursuant to SFAS
      123





(3)
      - Net
      loss includes $161,000 of stock based compensation recognized pursuant to SFAS
      123





(4)
      -
      NeoMedia Consulting & Integration Services business unit was wound down
      during the first quarter of 2006 and combined with the NeoMedia Mobile business
      unit. Results from operations previously included in this business unit are
      now
      included in the NeoMedia Mobile business unit





(5)
      - Net
      loss includes $348,000 of stock based compensation recognized pursuant to SFAS
      123





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




33




**11.
      ACCRUED LIABILITIES**





Accrued
      liabilities consist of the following as of March 31, 2006:




(dollars
                inthousands)Accruals
                related to silent partner agreements
            
            $
            1,382Accrued
                legal and accounting costs
            
            
            1,156Accruals
                for disputed services
            
            
            984Accrued
                operating expenses
            
            
            572Payroll
                related accruals
            
            
            366Total
            
            $
            4,460




**12. 
      INVENTORY**





Inventories,
      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, 2006:




(dollars
                inthousands)Raw
                materials
            
            $
            61Work-in-process
            
            
            17Finished
                goods
            
            
            774$
            852





**13. 
      COMMITMENTS AND CONTINGENCIES**





NeoMedia
      and its subsidiaries lease office facilities and certain office and computer
      equipment under various operating leases. NeoMedia is party to various payment
      arrangements with its vendors that call for fixed payments on past due
      liabilities. NeoMedia is also party to various consulting agreements that carry
      payment obligations into future years. Additionally, NeoMedia issued Series
      C
      Convertible Preferred shares with face value of $22,000,000 (and a commitment
      for an additional $5,000,000 purchase by the purchasers under the same terms)
      that are subject to conversion no later than February 17, 2009. NeoMedia holds
      notes payable to certain vendors and silent partners that mature at various
      dates in the future.





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





(dollars
                in thousands)**Series
                C****Vendor
                &**
            
            
            
            **Convertible****Operating**
            
            **Consulting**
            
            **Notes**
            
            **Preferred****Leases**
            
            **Agreements**
            
            **Payable**
            
            **Stock**
            
            **Total**2006
                (remaining nine months)
            
            $
            755
            
            $
            470
            
            $
            3,137
            
            $
            —
            
            $
            4,3622007
            
            
            772
            
            
            473
            
            
            634
            
            
            —
            
            
            1,8792008
            
            
            515
            
            
            269
            
            
            3
            
            
            —
            
            
            7872009
            
            
            186
            
            
            153
            
            
            —
            
            
            27,000
            
            
            27,3392010
            
            
            85
            
            
            117
            
            
            —
            
            
            —
            
            
            202Thereafter
            
            
            363
            
            
            117
            
            
            —
            
            
            —
            
            
            480Total
            
            $
            2,676
            
            $
            1,599
            
            $
            3,774
            
            $
            27,000
            
            $
            35,049





34




It
      is not
      possible to predict the maximum potential amount of future payments under these
      or similar agreements due to the conditional nature of the Company's obligations
      and the facts and circumstances involved in each particular agreement. The
      Company does not record a liability for claims related to indemnification unless
      the Company concludes that the likelihood of a material claim is probable and
      estimable. Historically, payments pursuant to these indemnifications have been
      immaterial. See Item 1 of Part II of this Form 10-Q for discussion of legal
      proceedings.




**14.
      OTHER**





**Liabilities
      related to silent partnership arrangements**




12Snap,
      a
      wholly-owned subsidiary of NeoMedia, entered into three silent partnership
      arrangements in 2000 with principal borrowing amounts, totaling
      EUR 3,500,000 (approximately $4.2 million). Silent partnerships are a
      common form of investment in Germany. The purpose of a silent partnership is
      to
      financially support the Company in its efforts to research, design and develop
      its product and services, while allowing the lenders not to become a legal
      owner
      of the company and thus not become liable for the obligation of the company.
      The
      lenders are not involved in the management of 12Snap, but significant business
      decisions such as changes in the articles of incorporation, mergers and
      acquisitions or significant contractual matters are subject to their
      approval.




The
      partnership agreements regularly terminate on December 31, 2008 and 2009.
      However, due to the acquisition of all shares of 12Snap by NeoMedia, an early
      termination has been agreed on for all silent partnership agreements. Those
      silent partnerships have thus terminated as of February 28, 2006. According
      to
      the termination agreements EUR 1,750,000 (approximately $2.1 million) were
      repaid to the silent partners in March 2006. Another installment amounting
      to
      EUR 1,750,000 (approximately $2.1 million) plus interest will be due as of
      December 31, 2006.




**Debt
      of NeoMedia Telecom Services**





The
      NeoMedia Telecom Services business unit was formed in March 2006 with the
      acquisition of BSD Software, Inc. BSD was party to certain debt agreements
      prior
      to the acquisition which became obligations of NeoMedia upon completion of
      the
      acquisition, as follows:





Wayside
      Solutions, Inc., a corporation affiliated with BSD, provided financing services
      to BSD prior to the acquisition. Prior to the acquisition, NeoMedia reached
      an
      agreement with Wayside to pay the outstanding debt due to Wayside subsequent
      to
      completion of the acquisition. The agreement calls for NeoMedia to pay up to
      $789,000 of Wayside debt through a cash payment plan, or, in the event NeoMedia
      files a registration statement, NeoMedia can elect to pay the remaining balance
      in shares of its common stock immediately prior to filing of the registration
      statement and include the shares for registration. As of March 31, 2006,
      NeoMedia had recorded a liability of $789,000 relating to this liability.
      NeoMedia had not made any payments against the liability as of the date of
      this
      filing.




Amounts
      due to Guy Fietz, CEO, President and a shareholder of BSD, and now Vice
      President and General Manager of NeoMedia Telecom Services, totaled $512,000
      at
      March 31, 2006. These amounts were paid in full during April 2006 through the
      issuance of 1,512,093 shares of NeoMedia common stock.




NeoMedia
      also assumed amounts due to former BSD shareholders which bear interest at
      rates
      varying from 0%-10% per annum, are unsecured and due on demand and are subject
      to cash payment plans. Amounts due under such arrangements were $230,000 as
      of
      March 31, 2006.




**Micro
      Paint Developments in China**




35




On
      February 28, 2006, NeoMedia signed a 10-year exclusive supplier agreement with
      Automart, a Beijing-based joint venture operating under the laws of the People's
      Republic of China specializing in automobile sales, financing, insurance and
      repair. Automart is the brand name of Jinche Yingang Auto Technological Services
      Limited, with which NeoMedia signed a distribution agreement in August 2005.
      The
      new agreement expands on the previous agreement, giving Automart the exclusive
      rights to distribute NeoMedia's micro paint repair products to their own stores
      and others throughout China, Hong Kong, Macao, and Taiwan, and also guaranteeing
      that Automart will purchase at least 70% of its non-micro paint products through
      NeoMedia as its distributor. NeoMedia has signed distribution agreements with
      DuPont and PPG, and intends to become a distributor of other automotive
      aftermarket products to Automart.





During
      the fourth quarter of 2005 and first quarter of 2006, NeoMedia shipped and
      invoiced $825,000 of Micro Paint Repair products to Automart that has not yet
      been recognized in revenue as of March 31, 2006. If and when collectibility
      is
      reasonably assured, NeoMedia expects to recognize revenue for these shipments.
      The amount of $560,000 is included in inventory as of March 31,
      2006.




**Pick
      Ups Plus and Automotive Preservation**





On
      February 25, 2005, NeoMedia invested $250,000 in exchange for 8,333,333 shares
      of Pickups Plus, Inc. (“PUPS”)(OTCBB:PUPS) restricted common stock. PUPS is a
      retail operator and franchiser of retail automotive parts and accessories stores
      catering to the light truck market, and also provides new vehicle preparation,
      environmental protection packages, detailing and reconditioning products and
      services. In addition, on February 17, 2006, NeoMedia acquired an additional
      20,000,000 shares of PUPS common stock from Cornell Capital Partners acquired
      from the proceeds of the Series C Convertible Preferred Stock sale. The total
      of
      28,333,333 shares owned represent approximately 19.75% of PUPS outstanding
      shares (based on 143,482,281 PUPS shares outstanding as of March 15, 2006).
      Because the investment represents less than 20% of PUPS outstanding shares,
      and
      because NeoMedia does not exercise significant influence over PUPS operations
      or
      decision making, NeoMedia has recorded the investment as available for sale
      securities and reported at fair value. As of March 31, 2006, NeoMedia has
      recorded an unrealized holding loss of $186,000 due to the decrease in the
      quoted market price of PUPS common stock.





Also
      on
      February 25, 2005, NeoMedia signed two non-binding Letters of Intent to acquire
      up to 100% of Automotive Preservation, Inc. (“AP”), a distributor of automotive
      paint and accessory products, from AP's parent company, PUPS. The first Letter
      of Intent calls for NeoMedia to initially acquire 30% of AP for $1,600,000,
      to
      be paid $600,000 in cash, $554,000 in shares of NeoMedia restricted common
      stock, and $446,000 through the assumption of AP debt by NeoMedia. Under the
      second Letter of Intent, upon completion of the acquisition of the initial
      30%
      of AP by NeoMedia, NeoMedia would have the option to acquire an additional
      30%
      of AP for $1,650,000, payable in shares of NeoMedia restricted common stock.
      The
      second Letter of Intent also gives NeoMedia the option to purchase the final
      40%
      of AP for either: (i) $2,200,000, payable in shares of NeoMedia restricted
      common stock, if NeoMedia exercises this right within 12 months of acquiring
      the
      second 30% of AP, or (ii) a price equivalent to AP's previous quarter EBITDA
      multiplied by 8, payable in shares of NeoMedia restricted common stock. Both
      Letters of Intent are non-binding and subject to due diligence by NeoMedia
      and
      AP. On September 21, 2005, the BOD approved to change the deal structure for
      the
      acquisition of AP, so that the Company would acquire only 30% of AP for a total
      purchase price of $1.6 million of which $600,000 would be paid in cash and
      $446,000 would be paid through the assumption of debt, and $554,000 through
      the
      issuance of restricted NeoMedia stock. NeoMedia will not acquire the remaining
      70% of AP under the new structure.




**15** **.**  **RESTATEMENT
      OF PREVIOUSLY REPORTED FINANCIAL INFORMATION**





The
      Company, in reviewing its accounting practices with respect to revenue
      recognition of its subsidiary NeoMedia Telecom Services, became aware that
      it
      incorrectly applied the principles of EITF 99-19, “Reporting Revenue Gross as a
      Principal vs. Net as an Agent.” As a result, the company had overstated its net
      sales and its cost of goods sold during the three months ended March 31, 2006.
      These amounts are reflected on the statement of operations. The adjustment
      does
      not affect net income (loss) during any period. The adjustment does not affect
      the statement of cash flows or balance sheet.





The
      NeoMedia Telecom Services business was acquired in March 2006 through the
      acquisition by the Company of BSD Software. Therefore the adjustment does not
      affect any results reported during the three months ended March 31, 2005.





As
      a
      result, the Company has restated certain financial information that was
      previously reported in its unaudited quarterly reports on Form 10-Q for the
      three month period ended March 31, 2006. The following tables provide a
      reconciliation of amounts previously reported by the Company.





**Previously**
            
            **Restatement**
            
            **Restated****Three
                months ended March 31, 2006**
            
            **Reported**
            
            **Adjustment**
            
            **Amount**Net
                sales
            
            $
            2,052
            
            
            ($205
            )
            $
            1,847Cost
                of sales
            
            
            1,246
            
            
            (205
            )
            
            1,041





36




**16.
      SUBSEQUENT EVENTS**





During
      April 2006, NeoMedia announced its intention to issue a stock dividend with
      the
      distribution of common shares of Pickups Plus, Inc. as a property dividend.
      NeoMedia will distribute 8,333,333 shares of Pickups Plus common stock, which
      it
      acquired in February 2005, to NeoMedia shareholders of record as of April 28,
      2006. The shares will be distributed at such time as Pickups Plus files and
      makes effective a registration statement registering the shares.




37




During
      April 2006, the Instituto Mexicano de la Propiedad Industrial, the patent office
      in Mexico, awarded patent No. 233529 to NeoMedia, which corresponds to patents
      issued to the company by the U.S. Patent Office and the Canadian Intellectual
      Property Office, for a "Method and System for Accessing Electronic Resources
      via
      Machine-Readable Data on Intelligent Documents." Dr. Kevin Hunter, NeoMedia's
      chief scientist, is the inventor of record. NeoMedia has also filed for patents
      for the process in Europe, Japan and Brazil. The patent deals with improved
      methods of storing information placed directly on physical objects as
      PC-readable data utilizing 2-dimensional bar codes and various data compression
      techniques.





During
      April 2006, 12snap introduced its mobile marketing applications - 12cam, 12yella
      and 12pixmix - into 17 countries in the Middle East, North Africa and Turkey
      through a distribution agreement with Egyptian-based telecommunications firm
      Telecom Arabia, a specialist in marketing and distribution of mobile phone
      applications and software in the Arab countries. Under the terms of the
      agreement, Telecom Arabia will pursue marketing and sales opportunities and
      coordinate pricing and distribution strategies to various channels, including
      mobile phone retailers and network providers. Additionally, Telecom Arabia
      will
      help to develop local product interfaces and ensure compliance with copyright
      regulations in each of the 17 countries.





During
      April 2006, 12snap **** signed
      an
      agreement with Lufthansa to leverage 12snap's expertise to "mobilize" the
      cross-media communication of Lufthansa's involvement in soccer in Germany.
      12snap prevailed in a multi-company pitch. Soccer fans will be able to receive
      a
      comprehensive mobile entertainment package from Lufthansa, ranging from
      soccer-themed content and games, to competitions, video clips and an interactive
      quiz. The mobile application will run on 12snap's technology platform, which
      has
      been the basis for executing its award-winning mobile marketing campaigns for
      several years. Lufthansa is the official partner of the German Soccer
      Association and of record-holding champion club FC Bayern Munich.




38





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





During
      2006, NeoMedia has continued its efforts to commercialize its NeoMedia Mobile
      and NeoMedia Micro Paint Repair business units, both in North America and
      overseas. As part of the commercialization efforts, NeoMedia began to implement
      an aggressive growth campaign focusing on expansion through three major avenues:
      acquisition and globalization.




To
      this
      end, during the second half of 2005 and the first quarter of 2006, NeoMedia
      made
      the following strategic maneuvers:





August
                2005:
            
            signed
                agreement to distribute Micro Paint products to China via Jinche
                Automotive GroupSeptember
                2005:
            
            signed
                agreement to distribute Micro Paint products to Mexico and Latin
                America
                via Micropaint de MexicoOctober
                2005:
            
            signed
                agreement to distribute Micro Paint products to Scandinavia via
                WITHO-ASDecember
                2005:
            
            signed
                agreements to distribute DuPont and PPG automotive aftermarket products
                to
                Jinche in ChinaFebruary
                2006:
            
            completed
                acquisitions of Mobot (US), 12Snap (Europe), Gavitec (Europe), and
                Sponge
                (Europe); signed letter of intent to acquire Hip Cricket; completed
                $22
                million funding to
                finance acquisitions and future growthMarch
                2006:
            
            completed
                acquisition of BSD Software, creating the NeoMedia Telecom Services
                (NTS)
                business unit




**Acquisitions**





During
      2005 and the first quarter of 2006, NeoMedia has aggressively pursued
      acquisitions that will confirm its presence in the global mobile marketing
      space. To this end, during the three months ended March 31, 2006, NeoMedia
      completed, or agreed to complete, acquisitions of Mobot, Sponge, Gavitec,
      12Snap, BSD, and Hip Cricket. It is the intention of NeoMedia's board of
      directors and management to continue to pursue strategic acquisitions in both
      its mobile marketing and the micro paint repair business units.




**First
      Quarter 2006 Developments for New Acquisitions**





*Mobot* continued its ground-breaking work with ELLEgirl and The Light Agency over
      Q1.
      With ELLEgirl, Hachette's magazine, Mobot provides its visual search and
      recognition technology to deliver exciting promotions within each monthly issue.
      In a recent issue a “Daily Instant Win” campaign encouraged readers to use
      camera phones to snap a picture of a different advertisement each day, and
      through Mobot's visual-matching technology, enter to win numerous prizes. Mobot
      is also continuing its partnership with The Light Agency to exclusively
      distribute its visual search and recognition technology to the U.K. grocery
      sector. Mobot's technology enhances The Light Agency's award-winning mobile
      phone-based loyalty program with the Sainsburys-owned convenience store chain
      Jackson's by allowing consumers to receive offers on products by snapping a
      photo in-store and sending it to Mobot's server via mobile.





*Sponge* has
      managed a range of mobile activity in first quarter 2006 for IPC Magazines,
      Audi, Frito Lay and Thomson Holidays. Through a range of sales promotion and
      interactive agencies, Sponge has also worked on a number of brand promotions,
      including: a major specialist motorcycle magazine; on-pack text-to-win mechanics
      for two drink brands; and a campaign for a men's cosmetics brand. Based in
      the
      UK, Sponge's campaigns in first quarter 2006 expanded geographically with
      activity in Ireland, France, The Netherlands and the U.S. Sponge has also made
      a
      number of developments to its platform to launch its Draw Engine which enables
      the easy deployment of ratio, timed and winning moments draws - very frequently
      requested by major brands and agencies after Sponge's successful Walker's (Frito
      Lay) campaign in 2005 (whereby over 5 % of the U.K. population participated).
      Additional developments include the addition of highest bid auction application
      alongside lowest bid auction mechanics, which resulted in Thomson Holidays
      and
      its digital interactive agency Remote Media running their second successful
      campaign with Sponge.




39




*Gavitec* continues to successfully market its Exio and MD20 scanners through mobile
      solutions partners to clients including McDonald's Portugal, EMT (Empresa
      Malagueña de Transportes), a Spanish public transport company and BNP Paribas, a
      leading European and global banking and financial institution. TopSolutions,
      a
      leading software development and systems integration house, is Gavitec's mobile
      solutions partner for McDonald's Portugal, which is running a large scale
      mobile-couponing program. EMT continued to run a pilot during first quarter
      2006
      that gave EMT the distinction of being the first Spanish public transport
      company effectively and successfully using mobile ticketing. Through the use
      of
      Gavitec technology, EMT passengers are now able to pay for and receive bus
      tickets using their own mobile phones. BNP Paribas, in conjunction with
      RedShift, an interactive marketing agency and mobile solution partner, expects
      to launch the first interactive mobile campaign in France using Gavitec's
      scanning and browsing applications based on 2D codes. On the technological
      front, Gavitec furthered the development of its code-reading capabilities adding
      QR-Engine on JAVA to augment its existing DataMatrix technology on JAVA. Now,
      the engine can be downloaded via Internet or telephone connection to a
      considerable number of mobile phones, providing the opportunity to distribute
      the innovative software to a broader audience — business-to-consumer "mass
      market" applications.





In
      the
      first quarter of 2006, *12snap* reached
      consumers far beyond its headquarters in Germany and offices in the UK,
      Italy, Sweden and Austria. Through campaigns for such high profile brand names
      as adidas and Nokia, 12snap reached many countries throughout the EMEA (Europe,
      Middle East & Africa) region. This geographic reach also allowed 12snap to
      strengthen its technology to be compatible with the different carriers and
      handsets available in the EMEA. Additionally, 12snap continued to roll out
      new
      and exciting mobile marketing campaigns for Coca-Cola, most recently
      implementing the “Coke Fridge” campaign - a year-long campaign which updates
      itself dynamically over the mobile internet generating great excitement and
      response - more than 1.3 million codes were collected from Coke bottles by
      consumers in just the first six weeks of this campaign.





*NeoMedia
      Telecom* successfully
      tested a new technological solution throughout first quarter 2006 that is now
      market ready; its new IP billing solution combines telecommunications costs
      from
      multiple providers, including content and special services, and consolidates
      them onto one single bill. Based on Internet Protocol (IP), the new service
      lets
      customers of NeoMedia Telecom bill their customers through local exchange
      carriers. Prior to the acquisition, BSD was recognized in the Branham TOP 300
      largest tech companies in Canada (at #158) - a prestigious IT award highlighting
      the top Canadian IT companies.




**Consulting
      & Integration Services Business Unit**





As
      part
      of the acceleration of global expansion in PaperClick and Paint, as well as
      the
      creation of the NeoMedia Telecom Services (NTS) business unit through the BSD
      acquisition, NeoMedia also decided in February 2006 to wind down its legacy
      NeoMedia Consulting & Integration Services (NCIS) business unit. The NCIS
      unit consisted of client-server equipment and related software resales. The
      resale market has been commoditized over the past several years, and NeoMedia
      believes its resources are better spent on the development and commercialization
      of its NMM, NMPR and NTS business units. Certain of the proprietary products
      associated with the NCIS business, such as PDF-417 and Maxicode print encoder
      software and WISP migration tools, will be retained by NeoMedia and consolidated
      with the NMM unit. NeoMedia does not intend to pursue additional resales of
      hardware and software or integration services not directly related to its other
      business units.




40




**Restatement
      of previously reported financial results**





The
      Company, in reviewing its accounting practices with respect to revenue
      recognition of its subsidiary NeoMedia Telecom Services, became aware that
      it
      incorrectly applied the principles of EITF 99-19, “Reporting Revenue Gross as a
      Principal vs. Net as an Agent.” As a result, the company had overstated its net
      sales and its cost of goods sold during the three months ended March 31, 2006.
      These amounts are reflected on the statement of operations. The adjustment
      does
      not affect net income (loss) during any period. The adjustment does not affect
      the statement of cash flows or balance sheet.





The
      NeoMedia Telecom Services business was acquired in March 2006 through the
      acquisition by the Company of BSD Software. Therefore the adjustment does not
      affect any results reported during the three months ended March 31, 2005.





As
      a
      result, the Company has restated certain financial information that was
      previously reported in its unaudited quarterly reports on Form 10-Q for the
      three month period ended March 31, 2006. The following tables provide a
      reconciliation of amounts previously reported by the Company.





**Previously**
            
            **Restatement**
            
            **Restated****Three
                months ended March 31, 2006**
            
            **Reported**
            
            **Adjustment**
            
            **Amount**Net
                sales
            
            $
            2,052
            
            
            ($205
            )
            $
            1,847Cost
                of sales
            
            
            1,246
            
            
            (205
            )
            
            1,041




**Critical
      Accounting Policies**





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





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





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




—
            A
                significant decrease in the market price of the asset—  
                ­
            A
                significant adverse change in the extent or manner in which the asset
                is
                being used, or in its physical condition—  
                ­
            A
                significant adverse change in legal factors or in the business climate
                that could affect the value of the asset, including an adverse action
                or
                assessment by a regulator—  
                ­
            An
                accumulation of costs significantly in excess of the amount originally
                expected—  
                ­
            A
                current-period operating or cash flow loss combined with a history
                of
                operating or cash flow losses or a projection or forecast that
                demonstrates continuing losses associated with the use of the
                asset—  
                ­
            A
                current expectation that, more likely than not,****the
                asset will be sold or otherwise disposed of significantly before
                the end
                of its previously estimated useful
                life.





NeoMedia
      follows the two-step process outlined in SFAS 144 for determining if an
      impairment charge should be taken: (1) the expected undiscounted cashflows
      from
      a particular asset or asset group are compared to the carrying value; if the
      expected undiscounted cashflows are greater than the carrying value, no
      impairment is taken, but if the expected undiscounted cashflows are less than
      the carrying value, then (2) an impairment charge is taken for the difference
      between the carrying value and the expected discounted cashflows. The
      assumptions used in developing expected cashflow estimates are similar to those
      used in developing other information used by NeoMedia for budgeting and other
      forecasting purposes. In instances where a range of potential future cashflows
      is possible, NeoMedia uses a probability-weighted approach to weigh the
      likelihood of those possible outcomes. NeoMedia used a rate of 10% for purposes
      of discounting cashflows in 2006 and 2005.




41




*Financial
      Instruments and Concentrations of Credit Risk.* The
      Company's financial instruments consist of cash and cash equivalents, accounts
      receivable, accounts payable, and accrued expenses, notes payable, derivative
      financial instruments, other current liabilities and convertible preferred
      stock. Management believes the carrying values of cash and cash equivalents,
      accounts payable, accounts payable and accrued expenses, notes payable, and
      other current liabilities approximate their fair values due to their short-term
      nature. The fair value of convertible preferred stock is estimated on March
      31,
      2006 to be approximately $18,173,000.





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





The
      caption “Derivative Financial Instruments” consists of (i) the fair values
      associated with derivative features embedded in the Series C Convertible
      Preferred Stock, (ii) the fair values of the detachable warrants that were
      issued in connection with the preferred stock financing arrangement, and (iii)
      the fair value of detachable warrants that were outstanding prior to the
      issuance of the Series C Preferred Shares..





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





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





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





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




42




*Revenue
      Recognition.*




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





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





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





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





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




*Income
      Tax Valuation Allowance.* Deferred
      tax assets are reduced by a valuation allowance when, in the opinion of
      management, it is more likely than not that some portion or all of the deferred
      tax assets will not be recognized. The Company has recorded a 100% valuation
      allowance as of March 31, 2006 and 2005.





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





**Stock-Based
      Compensation**




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




43


Prior
      to
      January 1, 2006, NeoMedia accounted for its stock-based compensation plans
      under the intrinsic-value method prescribed in Accounting Principles Board
      Opinion No. 25 “Accounting for Stock Issued to Employees,” (“APB 25”) and
      related interpretations as permitted by Statement of Financial Accounting
      Standards No. 123, “Accounting for Stock-Based Compensation.” (“SFAS 123”).
      Under APB 25, when the exercise price of options granted to employees equals
      the
      market price of the common stock on the date of grant, no compensation expense
      is recorded.  When the exercise price of options granted to employees is
      less than the market price of the common stock on the date of grant,
      compensation expense is recognized over the vesting period.




44




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





Approximately
      68% of the stock-based compensation expense recorded in the three months ended
      March 31, 2006 relates to the continued vesting of stock options that were
      granted prior to January 1, 2006. In accordance with the transition provisions
      of SFAS 123R, the grant date estimates for these options have not been
      changed.




As
      of
      March 31, 2006, there was $10.1 million of total stock-based compensation
      expense not yet recognized relating to non-vested awards granted under
      NeoMedia's option plans and restricted stock agreements as calculated under
      SFAS
      123R. This expense is net of estimated forfeitures and is expected to be
      recognized over a weighted-average period of approximately 2.4 years. The
      amount of stock-based compensation expense to be recorded in any future period
      cannot be exactly predicted due to the uncertainty of future grant levels and
      actual forfeitures to be recorded. Additionally, changes to the assumptions
      used
      in the Black Scholes model could cause a material change in the amount of
      compensation expense to be recorded in future reporting periods.




**Effect
      Of Recently Issued Accounting Pronouncements**




A
      discussion of recent accounting pronouncements is included in Note 2 to the
      consolidated financial statements included in our Annual Report on Form 10-KSB
      for the year ended December 31, 2005.




45




**Results
      Of Operations For The Three Months Ended March 31, 2006 As Compared To The
      Three
      Months Ended March 31, 2005**





*Net
      sales.* Total
      net sales for the three months ended March 31, 2006 were $1.847,000, which
      represented a $1,100,000, or 147%, increase from $747,000 for the three months
      ended March 31, 2005.  This increase primarily resulted from sales of
      subsidiaries 12Snap, Sponge, Mobot, Gavitec, and BSD, all of which were acquired
      during the first quarter of 2006.  NeoMedia could realize a material
      increase in revenue over the next 12 months relative to 2005 due to the
      acquisitions of Mobot, 12Snap, Sponge, Gavitec, and BSD for the entire
      quarter.  NeoMedia could also realize a material increase in revenue over
      the next 12 months if the Company is successful in implementing its
      PaperClick ® go-to-market strategy, if pending court cases involving its intellectual
      property are resolved in NeoMedia's favor, or if it is successful in
      implementing the expansion of the Micro Paint Repair business unit into China
      and other geographies.





*Technology
      license, service, product and licenses.* Technology service, product and license sales increased $1,178,000, or 403%
      to
      $1,470,000 for the three months ended March 31, 2006 compared to $292,000 for
      the three months ended March 31, 2005.  The increase was primarily the
      result of sales of subsidiaries 12Snap, Sponge, Mobot, Gavitec, and BSD, all
      of
      which were acquired during the first quarter of 2006.   NeoMedia could
      realize an increase in license fees over the next 12 months due to the recent
      acquisitions of Mobot, 12Snap, Sponge, Gavitec, and BSD, if the Company is
      successful in implementing its PaperClick ® go-to-market strategy, or if pending court cases involving its intellectual
      property are resolved in NeoMedia's favor.





*Micro Paint Repair products and services.* Sales
      of Micro Paint Repair products and services were $377,000 for the three months
      ended March 31, 2006, compared with $455,000 for the three months ended March
      31, 2005, a decrease of $78,000, or 17%.  The decrease was primarily due to
      a shipment of products totaling $290,000 to the Company's distributor in New
      Zealand during the first quarter of 2005. In addition, during the fourth quarter
      of 2005 and first quarter of 2006, NeoMedia shipped and invoiced $825,000 of
      product to Beijing Sino-US Jinche Yingang Auto Technological Services Limited
      that has not yet been recognized as revenue as of March 31, 2006 Once
      collectibility is reasonably assured, NeoMedia expects to recognize revenue
      for
      these shipments.  NeoMedia could realize a material increase in Micro Paint
      Repair revenue if the Company is successful in continuing the expansion of
      the
      business unit into China and other geographies.





*Cost of technology license, service, product and
      licenses.* Cost of
      technology services, products and licenses fees were $622,000 for the three
      months ended March 31, 2006 compared to $176,000 for the three months ended
      March 31, 2006, an increase of $446,000, or 253%.  The increase was due
      almost entirely from the cost of sales of subsidiaries 12Snap, Sponge, Mobot,
      Gavitec, and BSD, all of which were acquired during the first quarter of
      2006.





*Cost
      of Micro Paint Repair products and services.* Cost of Micro Paint Repair products and services was $419,000 for the three
      months ended March 31, 2006, compared with $273,000 for the three months ended
      March 31, 2005, an increase of $146,000, or 54%.  This increase is the
      result of fixed cost of goods sold associated with NeoMedia's corporate Micro
      Paint facility in Ft. Myers, Florida. The facility operated at a gross margin
      loss during the first quarter of 2006 as it gained market traction.  Cost
      of micro paint repair products and services as a percentage of related sales
      was
      111% in 2006, compared to 60% in 2005.  NeoMedia expects cost of micro
      paint repair products and services to more closely resemble 2005 as compared
      to
      2006 as the corporate facility increases its customer base and profitability
      and
      product sales expand globally.





*Gross Profit.* Gross profit was $806,000 for the three months ended March 31, 2006, an increase
      of $508,000, or 170%, compared with gross profit of $298,000 for the three
      months ended March 31, 2005.  This increase was primarily the result of the
      gross profit of the subsidiaries 12Snap, Sponge, Mobot, Gavitec, and BSD, all
      of
      which were acquired during the first quarter of 2006.





*Sales
      and marketing.* Sales
      and marketing expenses were $1,540,000 for the three months ended March 31,
      2006, compared to $795,000 for the three months ended March 31, 2005, an
      increase of $745,000 or 94%.  This increase resulted primarily from the
      addition of sales force and cost associated with added sales and marketing
      resources associated with Mobot, 12Snap, Sponge, Gavitec, and BSD. 
NeoMedia expects sales and marketing expense to increase over the next 12 months
      with the continued development and expansion of the NeoMedia Mobile , NeoMedia
      Micro Paint Repair, and NeoMedia Telecom product groups.




46




*General
      and administrative.* General
      and administrative expenses increased by $721,000, or 120%, to $1,326,000 for
      the three months ended March 31, 2006, compared to $603,000 for the three months
      ended March 31, 2005. The increase resulted primarily from increased
      infrastructure expense coupled with the expenses of the subsidiaries 12Snap,
      Sponge, Mobot, Gavitec, and BSD, all of which were acquired during the first
      quarter of 2006.  NeoMedia expects general and administrative expense to
      increase over the next 12 months with the continued expansion of the NeoMedia
      Mobile business.





*Stock
      based compensation expense.* Stock
      based compensation was $1,517,000 for the three months ended March 31, 2006,
      as
      compared with $96,000 for the three months ended March 31, 2005, and increase
      of
      $1,421,000, or 1,480%.  The increase was due to the adoption of SFAS 123R
      (Share Based Payment) on January 1, 2006.





*Research
      and development.* During
      the three months ended March 31, 2006, NeoMedia charged to expense $550,000
      of
      research and development costs, an increase of $366,000 or 199% compared to
      $184,000 for the three months ended March 31, 2005.  The increase is
      primarily due to the addition of development staff hired and acquired in
      connection with the commercialization of the NeoMedia Mobile business
      unit.  NeoMedia expects research and development costs to increase over the
      next 12 months with the continued development efforts of NeoMedia Mobile
      business unit products and services worldwide.





*Gain
      and loss on extinguishment of debt.* NeoMedia
      incurred a loss on extinguishment of debt of $1,964,000 for the three months
      ended March 31, 2006 in connection with the Series C preferred stock issued
      and
      sold to Cornell on February 17, 2006. ** A loss
      was incurred on the surrender  of a certain promissory note to Cornell
      dated March 30, 2005 in connection with the preferred stock sale. During the
      three months ended March 31, 2005, NeoMedia recognized a gain on extinguishment
      of debt of $138,000, resulting from the payment of debt at a discount to the
      book value of the debt.  These gains resulted from a difference between the
      cash or market value of stock issued to settle the debt and the carrying value
      of the debt at the time of settlement.





*Interest
      income.* Interest
      income consists primarily of interest accrued for creditors as part of financed
      purchases, past due balances, and notes payable, net of interest earned on
      cash
      equivalent investments.  Interest income decreased by $21,000, or 91%, to
      $2,000 for the three months ended March 31, 2006 from $23,000 for the three
      months ended March 31, 2005, due to a reduction in interest bearing
      notes.





*Gain
      on derivative financial instruments.* Gain on
      derivative financial instruments was $4,768,000 for the three months ended
      March
      31, 2006.  The gain is on the derivatives associated with the preferred
      stock sale on February 17, 2006.  Certain derivatives were created at the
      time of the offering and those derivatives are recorded at fair value on the
      accompanying balance sheet. ** The gain
      for the three months ended March 31, 2006 is the reduction in value of the
      derivative from February 17, 2006 to March 31, 2006 and is due almost entirely
      to a reduction in NeoMedia's stock price from February 17, 2006 to March 31,
      2006.   There was no such gain or loss on derivative financial
      instruments for the three months ended March 31, 2005.





*Net
      Loss* . 
      The net loss for the three months ended March 31, 2006 was $1,317,000, which
      represented a $98,000, or 8% increase from a $1,219,000 loss for the three
      months ended March 31, 2005.  The increase in net loss is due to the
      increase in loss from operations coupled with the loss on extinguishment of
      debt
      and was offset to a large degree by the gain on derivative financial
      instruments.




47




**Liquidity
      and Capital Resources**





Net
      cash
      used in operating activities was $2,586,000 for the three months ended March
      31,
      2006, compared with $1,660,000 for the three months ended March 31, 2006.
      NeoMedia's net cash flow used in investing activities for the three months
      ended
      March 31, 2006 and 2005 was $12,524,000 and $626,000, respectively. Net cash
      provided by financing activities for the three months ended March 31, 2006
      and
      2005 was $20,156,000 and $9,578,000, respectively.





During
      the three months ended March 31, 2006, NeoMedia made payments totaling $2.1
      million to silent partners of 12Snap, a NeoMedia wholly-owned subsidiary, as
      partial payment under silent partner agreements entered into by 12Snap prior
      to
      the acquisition.





In
      the
      event that NeoMedia's stock price at the time the consideration shares issued
      in
      connection with the recent acquisitions of Mobot, Sponge, Gavitec, and 12Snap
      become saleable is less than the contractual price (between $0.3839 and
      $0.3956), NeoMedia is obligated to compensate the sellers in cash for the
      difference between the price at the time the shares become saleable and the
      relevant contractual price. Assuming a stock price at the time the shares become
      saleable of $0.25, which was the last sale price on May 10, 2006, NeoMedia
      would
      have a cash liability of $15.9 million resulting from these
      clauses.





**Contractual
      Obligations**





NeoMedia
      and its subsidiaries lease office facilities and certain office and computer
      equipment under various operating leases. NeoMedia is party to various payment
      arrangements with its vendors that call for fixed payments on past due
      liabilities. NeoMedia is also party to various consulting agreements that carry
      payment obligations into future years. Additionally, NeoMedia issued Series
      C
      Convertible Preferred shares with face value of $22,000,000 (and a commitment
      for an additional $5,000,000 purchase by the purchasers under the same terms)
      that are subject to conversion no later than February 17, 2009.





In
      addition, NeoMedia is obligated to make debt payments by December 31, 2006
      in
      connection with silent partner agreements totaling approximately $2.1 million
      plus accrued interest and penalties.





The
      NeoMedia Telecom Services business unit was formed in March 2006 with the
      acquisition of BSD Software, Inc. BSD was party to certain debt agreements
      prior
      to the acquisition which became obligations of NeoMedia upon completion of
      the
      acquisition, as follows:





Wayside
      Solutions, Inc., a corporation affiliated with BSD, provided financing services
      to BSD prior to the acquisition. Prior to the acquisition, NeoMedia reached
      an
      agreement with Wayside to pay the outstanding debt due to Wayside subsequent
      to
      completion of the acquisition. The agreement calls for NeoMedia to pay up to
      $789,000 of Wayside debt through a cash payment plan, or, in the event NeoMedia
      files a registration statement, NeoMedia can elect to pay the remaining balance
      in shares of its common stock immediately prior to filing of the registration
      statement and include the shares for registration. As of March 31, 2006,
      NeoMedia had recorded a liability of $789,000 relating to this liability.
      NeoMedia had not made any payments against the liability as of the date of
      this
      filing.




Amounts
      due to Guy Fietz, CEO, President and a shareholder of BSD, and now Vice
      President and General Manager of NeoMedia Telecom Services, totaled $512,000
      at
      March 31, 2006. These amounts were paid in full during April 2006 through the
      issuance of 1,512,093 shares of NeoMedia common stock.




NeoMedia
      also assumed amounts due to former BSD shareholders which bear interest at
      rates
      varying from 0%-10% per annum, are unsecured and due on demand and are subject
      to cash payment plans. Amounts due under such arrangements were $230,000 as
      of
      March 31, 2006.




48




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





(dollars
                in thousands)**Series
                C****Vendor
                &**
            
            
            
            **Convertible****Operating**
            
            **Consulting**
            
            **Notes**
            
            **Preferred****Leases**
            
            **Agreements**
            
            **Payable**
            
            **Stock**
            
            **Total**2006
                (remaining nine months)
            
            $
            755
            
            $
            470
            
            $
            3,137
            
            $
            —
            
            $
            4,3622007
            
            
            772
            
            
            473
            
            
            634
            
            
            —
            
            
            1,8792008
            
            
            515
            
            
            269
            
            
            3
            
            
            —
            
            
            7872009
            
            
            186
            
            
            153
            
            
            —
            
            
            27,000
            
            
            27,3392010
            
            
            85
            
            
            117
            
            
            —
            
            
            —
            
            
            202Thereafter
            
            
            363
            
            
            117
            
            
            —
            
            
            —
            
            
            480Total
            
            $
            2,676
            
            $
            1,599
            
            $
            3,774
            
            $
            27,000
            
            $
            35,049




**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 NeoMedia as a going concern. However, NeoMedia
      has reported net losses of $1,317,000 and $1,219,000 for the three months ended
      March 31, 2006 and 2005, respectively and has an accumulated deficit of
      $93,843,000 as of March 31, 2006. In addition, NeoMedia had working capital
      deficit of $26,478,000 as of March 31, 2006. All of the factors discussed above,
      amongst others, raise substantial doubt about the Company's ability to continue
      as a going concern.





If
      NeoMedia's financial resources are insufficient NeoMedia may require additional
      financing in order to execute its operating plan and continue as a going
      concern. NeoMedia cannot predict whether this additional financing will be
      in
      the form of equity, debt, or another form. NeoMedia 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, NeoMedia may be unable to implement its current
      plans for expansion, repay its debt obligations as they become due, pay any
      additional costs required under its recently completed acquisition agreements,
      or respond to competitive pressures, any of which circumstances would have
      a
      material adverse effect on its business, prospects, financial condition and
      results of operations. The financial statements do not include any adjustments
      relating to the recoverability and reclassification of recorded asset amounts
      or
      amounts and reclassification of liabilities that might be necessary, should
      NeoMedia be unable to continue as a going concern.





NeoMedia
      intends to fund its growth and working capital deficiencies from the following
      sources during 2006 and beyond:





During
      the first quarter of 2006, NeoMedia received approximately $14.1 million net
      proceeds from the convertible preferred stock sale to Cornell, and an additional
      $8 million proceeds received upon exercise of warrants held by Cornell. NeoMedia
      used $13.8 million of the proceeds to pay the cash portion of the purchase
      price
      of Mobot, Gavitec, Sponge, and 12Snap. NeoMedia can force conversion of certain
      warrants held by Cornell if the closing bid price of NeoMedia stock is greater
      than $0.30 for five consecutive days, at which point NeoMedia would receive
      an
      additional $2 million proceeds. NeoMedia also is also entitled to receive an
      additional $5 million upon registration of the shares underlying the convertible
      preferred stock held by Cornell.





On
      March
      30, 2005, NeoMedia and Cornell Capital Partners entered into a Standby Equity
      Distribution Agreement under which Cornell Capital Partners agreed to purchase
      up to $100 million of NeoMedia's common stock over a two-year period, with
      the
      timing and amount of the purchase at NeoMedia's discretion. The maximum amount
      of each purchase would be $2,000,000 with a minimum of five business days
      between advances. NeoMedia expects to file a registration statement with the
      SEC
      during 2006 to register the shares underlying the $100 million 2005 SEDA. The
      2005 SEDA would become available at the time the SEC declares effective a
      registration statement containing such shares. As of the date of this filing,
      the Company had not yet filed such registration statement.




49




There
      can
      be no assurances that the market for NeoMedia's stock will support the sale
      of
      sufficient shares of NeoMedia's common stock to raise sufficient capital to
      sustain operations for such a period, or that actual revenue will meet
      management's expectations. If necessary funds are not available, NeoMedia's
      business and operations would be materially adversely affected and in such
      event, NeoMedia would attempt to reduce costs and adjust its business
      plan.





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




NeoMedia
      previously filed its periodic reports as a small business issuer through the
      period ended December 31, 2005. The information required by Item 305 of
      Regulation S-K was not required under the disclosure requirements for small
      business issuers. Pursuant to Item 305 of Regulation S-K, disclosure of
      quantitative and qualitative information about market risk is required in the
      first annual report. Information relating to interim financial statements is
      not
      required until after the first fiscal year end in which Item 305 is applicable.
      Accordingly, NeoMedia anticipates providing a quantitative and qualitative
      analysis regarding market risk in our Form 10-K for the year ending December
      31,
      2006.




**ITEM
      4.  CONTROLS AND PROCEDURES**





There
      were no policy reviews, improvements of documentation or general improvement
      in
      the state of internal controls that led to any change during the fiscal quarter,
      or subsequent to the end of the fiscal quarter through the date of this Form
      10-Q, that materially affected or were reasonably likely to materially affect,
      internal controls over financial reporting




***Evaluation
      of Disclosure Controls and Procedures*** .
      As of
      the end of the period covered by this report, the Company carried out an
      evaluation, under the supervision and with the participation of the Company's
      Principal Executive Officer and Principal Financial Officer, of the
      effectiveness of the design and operation of the Company's disclosure controls
      and procedures. The Company's disclosure controls and procedures are designed
      to
      provide a reasonable level of assurance of achieving the Company's disclosure
      control objectives. The Company's Principal Executive Officer and Principal
      Financial Officer have concluded that the Company's disclosure controls and
      procedures are, in fact, effective at this reasonable assurance level as of
      the
      end of period covered. In addition, the Company reviewed its internal controls,
      and there have been no significant changes in its internal controls or in other
      factors that could significantly affect those controls subsequent to the date
      of
      their last evaluation or from the end of the reporting period to the date of
      this Form 10-Q.





***Changes
      in Internal Controls*** .
      In
      connection with the evaluation of the Company's internal controls during the
      Company's fiscal quarter ended March 31, 2006, the Company's Principal Executive
      Officer and Principal Financial Officer have determined that there were no
      changes to the Company's internal controls over financial reporting that have
      materially affected, or are reasonably likely to materially effect, the
      Company's internal controls over financial reporting during the quarter ended
      March 31, 2006, or subsequent to the date of their last evaluation, or from
      the
      end of the reporting period to the date of this Form 10-Q.




50





**PART
      II — OTHER INFORMATION**




**ITEM
      1.  LEGAL PROCEEDINGS**





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




**Scanbuy,
      Inc.**




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





On
      April
      20, 2004, NeoMedia re-filed its suit against Scanbuy in the Southern District
      of
      New York alleging patent infringement. Scanbuy filed its answer on June 2,
      2004.
      NeoMedia filed its answer and affirmative defenses on July 23, 2004. Discovery
      is ongoing.





**Other
      Litigation**





On
      October 19, 2005, Wachovia Bank, N.A. filed a complaint against NeoMedia in
      the
      twentieth judicial circuit court of Lee County, Florida, seeking payment of
      $97,000 of rent from previous years. NeoMedia has placed the requested funds
      into escrow with the court, pending resolution of the matter.





In
      December 2002, Triton Global Communications, a subsidiary of BSD Software,
      Inc.,
      sued CanTalk for breach of contract. The action was brought before the Court
      of
      Queen's Bench, Winnipeg, Canada. The action alleges that CanTalk failed to
      perform under an outsource agreement pursuant to which CanTalk was to provide
      support for Triton's entry into the international operator service market.
      In
      response to the suit, CanTalk filed a counterclaim against Triton for $10,000
      alleging breach of contract.  Triton believes that CanTalk's counterclaim
      is without merit and it intends to defend the counterclaim.  There is no
      certainty that Triton will be successful in their defense of said
      counterclaim.





In
      July
      2005 Broad Reach Network Inc. (BRN) filed a Statement of Claim against Triton
      Global Business Services Inc., a subsidiary of the former BSD Software, Inc.,
      and now a subsidiary of NeoMedia effective with completion of the acquisition
      of
      BSD by NeoMedia on March 21, 2006. The action was brought before the court
      of
      Queen's Bench, Calgary, Alberta. BRN is suing for damages and judgment in the
      amount of CDN $81,000 (approximately $69,000).  TGBSI has filed a statement
      of defense denying the amount of the indebtedness to BRN and filed a countersuit
      in the amount of CDN $50,000 for breach of contract.  The Company has
      accrued an amount in its liabilities to cover this contingency.  The final
      amount paid could differ materially from the amount accrued.





On
      April
      18, 2006, 12Snap AG, a wholly-owned subsidiary of NeoMedia acquired on February
      28, 2006, received a letter of Technologie Beteiligungsfonds Bayern GmbH &
Co. KG, Munich, to initiate arbitration proceedings. Technologie
      Beteiligungsfonds claims for a final payment in the amount of EUR 353,400 plus
      interest of 5% per annum since March 1, 2006 arising out of a silent partnership
      agreement with 12Snap. The Company expects the matter will be subject to a
      German arbitration proceeding during the second or third quarter of
      2006.




51





**ITEM
      1A.  RISK FACTORS**





**Risks
      Related to NeoMedia's Business**




**NeoMedia
      has Historically Lost Money and Losses May Continue**




NeoMedia
      has incurred substantial losses since inception, and anticipates continuing
      to
      incur substantial losses for the foreseeable future. NeoMedia incurred a loss
      of
      $1,317,000, $1,219,00, $9,147,000 and $7,230,000 for the three months ended
      March 31, 2006 and 2005, and the years ended December 31, 2005 and 2004,
      respectively. NeoMedia's accumulated losses were approximately $93,843,000
      and
      $92,524,000 as of March 31, 2006 and December 31, 2005, respectively. As of
      March 31, 2006 and December 31, 2005 and 2004, NeoMedia had a working capital
      deficit of approximately $26,478,000, $4,874,000 and $2,597,000, respectively.
      NeoMedia had stockholders' equity of $49,427,000, $4,227,000 and $4,392,000
      as
      of March 31, 2006 and December 31, 2005 and 2004, respectively. NeoMedia
      generated revenues of $2,052,000, $747,000, $2,156,000 and $1,700,000 for the
      three months ended March 31, 2006 and 2005 and the years ended December 31,
      2005
      and 2004, respectively. In addition, during the three months ended March 31,
      2006 and 2005 and the years ended December 31, 2005 and 2004, NeoMedia recorded
      negative cash flows from operations of $2,586,000, $1,660,000, $6,509,000 and
      $4,650,000, respectively. To succeed, NeoMedia must develop new client and
      customer relationships and substantially increase its revenue derived from
      improved products and additional value-added services. NeoMedia has expended,
      and to the extent it has available financing, NeoMedia intends to continue
      to
      expend, substantial resources to develop and improve its products, increase
      its
      value-added services and to market its products and services. These development
      and marketing expenses must be incurred well in advance of the recognition
      of
      revenue. As a result, NeoMedia may not be able to achieve or sustain
      profitability.




**NeoMedia's
      Independent Registered Public Accounting Firm Have Added Going Concern Language
      To Their Report On NeoMedia's Consolidated Financial Statements, Which Means
      That NeoMedia May Not Be Able To Continue Operations**




The
      report of Stonefield Josephson, Inc., NeoMedia's independent registered public
      accounting firm, with respect to NeoMedia's consolidated financial statements
      and the related notes for the years ended December 31, 2005 and 2004, indicates
      that, at the date of their report, NeoMedia had suffered significant recurring
      losses from operations and its working capital deficit raised substantial doubt
      about its ability to continue as a going concern. NeoMedia's consolidated
      financial statements do not include any adjustments that might result from
      this
      uncertainty.




**NeoMedia
      Has Guaranteed The Value of Stock Issued In Connection With Recent Mergers
      Through The Registration Of The Shares, Which Could Result In A Material Cash
      Liability**




Pursuant
      to the terms of the merger agreements with Mobot, Sponge, Gavitec, and 12Snap,
      in the event that NeoMedia's stock price at the time the consideration shares
      issued in connection with each acquisition are saleable is less than the price
      at which they were valued for purposes of the merger agreement (between $0.3839
      and $0.3956 per share), NeoMedia is obligated to compensate the sellers in
      cash
      for the difference between the price at the time the shares become saleable
      and
      the price the shares were valued for purposes of the merger agreement.
      Subsequent to the closing of the acquisitions, NeoMedia's stock has traded
      as
      low as $0.202 per share. Assuming a stock price at the time the shares become
      saleable of $0.25, which was the last sale price on May 10, 2006, NeoMedia
      would
      have a cash liability of $15.9 million resulting from these
      clauses.




**There
      is Limited Information Upon Which Investors Can Evaluate NeoMedia's 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 NeoMedia operates is a recently
      developed market. Further, NeoMedia has conducted operations in this market
      only
      since March 1996. Consequently, NeoMedia has a relatively limited operating
      history upon which an investor may base an evaluation of NeoMedia's primary
      business and determine NeoMedia's prospects for achieving its intended business
      objectives. To date, NeoMedia has sold its physical-world-to-Internet products
      to only 12 companies. NeoMedia is prone to all of the risks inherent to the
      establishment of any new business venture, including unforeseen changes in
      its
      business plan. An investor should consider the likelihood of NeoMedia's future
      success to be highly speculative in light of its limited operating history
      in
      its 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, NeoMedia must, among other things:




52




·
            maintain
                and increase its client base;·
            implement
                and successfully execute its business and marketing
                strategy;·
            continue
                to develop and upgrade its products;·
            continually
                update and improve service offerings and features;·
            respond
                to industry and competitive developments; and·
            attract,
                retain, and motivate qualified
                personnel.




NeoMedia
      may not be successful in addressing these risks. If NeoMedia is unable to do
      so,
      its business, prospects, financial condition, and results of operations would
      be
      materially and adversely affected.





**NeoMedia's
      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 NeoMedia serves. NeoMedia's 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 NeoMedia fails to introduce
      new
      and innovative products, it may lose market share to its 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 NeoMedia's business.




**NeoMedia's
      Common Stock Is Deemed To Be “Penny Stock,” Which May Make It More Difficult For
      Investors To Sell Their Shares Due To Suitability
      Requirements**




NeoMedia's
      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 NeoMedia's
      common stock by reducing the number of potential investors. This may make it
      more difficult for investors in NeoMedia's common stock to sell shares to third
      parties or to otherwise dispose of them. This could cause NeoMedia's 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.




53




**Existing
      Shareholders Will Experience Significant Dilution When Certain Investors
      Convert Their Preferred Stock to Common Stock 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 pursuant to our transaction with Cornell Capital
      Partners 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 our preferred stock.  If our stock price is lower, then
      our existing stockholders would experience greater dilution.




**Due
      To The Accounting Treatment Of Certain Convertible Preferred Stock Instruments
      Issued By NeoMedia, A Fluctuation In NeoMedia's Stock Price Could Have A
      Material Impact On NeoMedia's Results Of Operations**




During
      the first quarter of 2006, NeoMedia recognized income in the amount of
      $4,768,000 from adjustments recorded to reflect the change in fair value of
      derivatives issued in connection with its Series C Convertible Preferred Shares.
      The income results from a decrease in NeoMedia's share price from $0.389 per
      share at the time of issuance of the Series C Convertible Preferred Shares
      (February 17, 2006) to $0.345 at March 31, 2006. NeoMedia will adjust the
      carrying value of the derivative instruments to market at each balance sheet
      date. As a result, NeoMedia could experience significant fluctuations in its
      net
      income (loss) in future periods as a result of such charges.




**NeoMedia
      is Uncertain Of The Success Of Its NeoMedia Mobile Business Unit And The Failure
      Of This Unit Would Negatively Affect The Price Of NeoMedia's
      Stock**




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




·
            its
                NeoMedia Mobile business unit will ever achieve
                profitability;·
            its
                current product offerings will not be adversely affected by the focusing
                of its resources on the physical-world-to-Internet space;
                or·
            the
                products NeoMedia develops will obtain market
                acceptance.




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




**A
      Large Percentage Of NeoMedia's Assets Are Intangible Assets, Which Will Have
      Little Or No Value If NeoMedia's Operations Are
      Unsuccessful**




At
      March
      31, 2006 and December 31, 2005 and 2004, approximately 81%, 48% and 49%,
      respectively, of NeoMedia's total assets were intangible assets, consisting
      primarily of rights related to NeoMedia's patents, other intellectual property,
      and excess of purchase price over fair market value paid for Mobot, Sponge,
      Gavitec, 12Snap, BSD, and CSI International, Inc. If NeoMedia's operations
      are
      unsuccessful, these assets will have little or no value, which would materially
      adversely affect the value of NeoMedia's stock and the ability of NeoMedia's
      stockholders to recoup their investments in NeoMedia's capital
      stock.





NeoMedia
      reviews its 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. NeoMedia may be required
      to record a significant charge to earnings in its 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.




54




**Certain
      Of NeoMedia's Emerging Products and Services Have Limited History And May Not
      Result In Success**




To
      date,
      NeoMedia has conducted limited marketing efforts directly relating to its
      emerging technology products, consisting primarily of the PaperClick suite
      of
      products, and certain products of recent acquisitions Mobot and Gavitec. Many
      of
      NeoMedia's 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 it competes, NeoMedia expects that it will have to
      exert significant efforts to create awareness of, and demand for, its emerging
      products and services. NeoMedia intends to continue to expand its sales and
      marketing resources as the market continues to mature. NeoMedia's failure to
      further develop its sales and marketing capabilities and successfully market
      its
      emerging products and services would have a material adverse effect on its
      business, prospects, financial condition, and results of
      operations.




**NeoMedia's
      Internally Developed Systems Are Inefficient And May Put NeoMedia At A
      Competitive Disadvantage**




NeoMedia
      uses internally developed technologies for a portion of its systems integration
      services, as well as the technologies required to interconnect its clients'
      and
      customers' physical-world-to-Internet systems and hardware with its own. As
      NeoMedia develops 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 NeoMedia at a
      competitive disadvantage when compared to competitors with more efficient
      systems.




**NeoMedia
      Could Fail to Attract Or Retain Key Personnel**




NeoMedia's
      future success will depend in large part on its 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 NeoMedia has. NeoMedia may not be
      successful in attracting and retaining qualified personnel on a timely basis,
      on
      competitive terms, or at all. NeoMedia's failure to attract and retain qualified
      personnel could have a material adverse effect on its business, prospects,
      financial condition, and results of operations.




**NeoMedia
      Depends Upon Its Senior Management And Their Loss Or Unavailability Could Put
      NeoMedia At A Competitive Disadvantage**




NeoMedia's
      success depends largely on the skills of certain key management and technical
      personnel, including Charles T. Jensen, NeoMedia's President and Chief Executive
      Officer, Charles W. Fritz, NeoMedia's founder and Chairman of the Board of
      Directors, Martin N. Copus, NeoMedia's Chief Operating Officer and head of
      the
      NMM business unit, and David A. Dodge, NeoMedia's Chief Financial Officer.
      The
      loss of the services of Messrs. Jensen, Fritz, Copus, or Dodge could materially
      harm NeoMedia's business because of the cost and time necessary to replace
      and
      train a replacement. Such a loss would also divert management attention away
      from operational issues. NeoMedia does not presently maintain a key-man life
      insurance policy on Messrs. Jensen, Fritz, Copus, or Dodge.




**NeoMedia
      May Be Unsuccessful In Integrating Its Recently Completed and Pending
      Acquisitions With Its Current Business**




The
      success of the acquisitions of Mobot, 12Snap, Sponge, Gavitec, and BSD could
      depend on the ability of NeoMedia's executive management to integrate the
      business plan of each company with NeoMedia's overall business plan. Failure
      to
      properly integrate the business could have a material adverse effect on the
      expected revenue and operations of the acquisitions, as well as the expected
      return on investment for NeoMedia.




55




**NeoMedia
      May Be Unable To Protect Its Intellectual Property Rights And May Be Liable
      For
      Infringing The Intellectual Property Rights Of Others**




NeoMedia's
      success in the physical-world-to-Internet market is dependent upon its
      proprietary technology, including patents and other intellectual property,
      and
      on the ability to protect proprietary technology and other intellectual property
      rights. In addition, NeoMedia must conduct its operations without infringing
      on
      the proprietary rights of third parties. NeoMedia also intends to rely upon
      unpatented trade secrets and the know-how and expertise of its employees, as
      well as its patents. To protect its proprietary technology and other
      intellectual property, NeoMedia relies 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 NeoMedia believes that it has taken appropriate steps to protect its
      unpatented proprietary rights, including requiring that its employees and third
      parties who are granted access to NeoMedia's proprietary technology enter into
      confidentiality agreements, NeoMedia can provide no assurance that these
      measures will be sufficient to protect its rights against third parties. Others
      may independently develop or otherwise acquire patented or unpatented
      technologies or products similar or superior to NeoMedia's.





NeoMedia
      licenses from third parties certain software tools that are included in
      NeoMedia's services and products. If any of these licenses were terminated,
      NeoMedia could be required to seek licenses for similar software from other
      third parties or develop these tools internally. NeoMedia 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. NeoMedia may in the future be required to defend its
      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 effort by, NeoMedia. An adverse determination
      could
      subject NeoMedia to significant liabilities to third parties, require NeoMedia
      to seek licenses from, or pay royalties to, third parties, or require NeoMedia
      to develop appropriate alternative technology. Some or all of these licenses
      may
      not be available to NeoMedia on acceptable terms or at all, and NeoMedia 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 NeoMedia's business,
      prospects, financial condition, and results of operations.




**NeoMedia
      Is Exposed To Product Liability Claims And An Uninsured Claim Could Have A
      Material Adverse Effect On NeoMedia's Business, Prospects, Financial Condition,
      And Results Of Operations, As Well As The Value Of NeoMedia's
      Stock**




Many
      of
      NeoMedia's projects are critical to the operations of its clients' businesses.
      Any failure in a client's information system could result in a claim for
      substantial damages against NeoMedia, regardless of NeoMedia's responsibility
      for such failure. NeoMedia could, therefore, be subject to claims in connection
      with the products and services that it sells. NeoMedia currently maintains
      product liability insurance. There can be no assurance that:




·
            NeoMedia
                has contractually limited its liability for such claims adequately
                or at
                all; or·
            NeoMedia
                would have sufficient resources to satisfy any liability resulting
                from
                any such claim.




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




**NeoMedia
      Will Not Pay Cash Dividends and Investors May Have To Sell Their Shares In
      Order
      To Realize Their Investment**




NeoMedia
      has not paid any cash dividends on its common stock and does not intend to
      pay
      cash dividends in the foreseeable future. NeoMedia intends to retain future
      earnings, if any, for reinvestment in the development and marketing of
      NeoMedia's products and services. As a result, investors may have to sell their
      shares of common stock to realize their investment.




56




**Some
      Provisions Of NeoMedia's Certificate of Incorporation And bylaws May Deter
      Takeover Attempts, Which May Limit The Opportunity Of NeoMedia's Stockholders
      To
      Sell Their Shares At A Premium To The Then-Current Market
      Price**




Some
      of
      the provisions of NeoMedia's Certificate of Incorporation and bylaws could
      make
      it more difficult for a third party to acquire NeoMedia, even if doing so might
      be beneficial to NeoMedia's stockholders by providing them with the opportunity
      to sell their shares at a premium to the then-current market price. On December
      10, 1999, NeoMedia's Board of Directors adopted a stockholders rights plan
      and
      declared a non-taxable dividend of one right to acquire Series A Preferred
      Stock
      of NeoMedia, par value $0.01 per share, on each outstanding share of NeoMedia's
      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 NeoMedia and to guard
      against partial or two-tiered tender offers, open market accumulations, and
      other hostile tactics to gain control of NeoMedia. The stockholders rights
      plan
      was not adopted in response to any effort to acquire control of NeoMedia 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 NeoMedia or a change in control of NeoMedia. Certain of
      NeoMedia's directors, officers and principal stockholders, Charles W. Fritz,
      William E. Fritz and The Fritz Family Limited Partnership and their holdings
      were exempted from the triggering provisions of NeoMedia's “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”.





In
      addition, NeoMedia's Certificate of Incorporation authorizes the 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 the 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.




NeoMedia
      is authorized to issue a total of 25,000,000 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 NeoMedia's common stock, and,
      therefore, could reduce the value of shares of NeoMedia's common stock. In
      addition, specific rights granted to future holders of preferred stock could
      be
      used to restrict NeoMedia's ability to merge with, or sell NeoMedia's assets
      to,
      a third party. The ability of the 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 NeoMedia or a change
      in
      NeoMedia's control thereby preserving control by the current
      stockholders.




57




**Risks
      Relating To NeoMedia's Industry**




**The
      Security of the Internet Poses Risks To The Success Of NeoMedia's 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 NeoMedia's
      physical-world-to-Internet business.




**NeoMedia
      Will Only Be Able To Execute Its Physical-World-To-Internet Business Plan If
      Internet Usage and Electronic Commerce Continue To Grow**




NeoMedia's
      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, NeoMedia's physical-world-to-Internet business, and
      therefore NeoMedia's 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
      NeoMedia 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 networks 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 NeoMedia's physical-world-to-Internet product and
      networks in particular.




**NeoMedia
      May Not Be Able To Adapt As The Internet, Physical-World-To-Internet, And
      Customer Demands Continue To Evolve**




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




58





·
            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.





NeoMedia's
      success will depend, in part, on its ability to:




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





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





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





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




**NeoMedia's
      Competitors In The Micro Paint Repair Industry Could Duplicate NeoMedia's
      Proprietary Processes**




NeoMedia's
      success in the micro paint repair industry depends upon proprietary chemical
      products and processes. There is no guarantee that NeoMedia's competitors will
      not duplicate NeoMedia's proprietary processes.




**NeoMedia
      May Not Be Able To Compete Effectively In Markets Where Its 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 NeoMedia. NeoMedia believes that competition will intensify and increase
      in
      the near future. NeoMedia's target market is rapidly evolving and is subject
      to
      continuous technological change. As a result, NeoMedia's 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 NeoMedia's
      business, prospects, financial condition, and results of
      operations.





Some
      of
      NeoMedia's competitors have longer operating histories, larger customer bases,
      longer relationships with clients, and significantly greater financial,
      technical, marketing, and public relations resources than NeoMedia. NeoMedia
      may
      not successfully compete in any market in which it conducts or may conduct
      operations. Many of NeoMedia's competitors in the Micro Paint Repair business
      have a longer operating history in the industry, as well as access to greater
      financial resources. NeoMedia may not be able to penetrate markets or market
      its
      products as effectively as NeoMedia's better-funded more-established
      competitors.




**In
      The Future There Could Be Government Regulations And Legal Uncertainties Which
      Could Harm NeoMedia's Business**




Any
      new
      legislation or regulation, the application of laws and regulations from
      jurisdictions whose laws do not currently apply to NeoMedia's business, or
      the
      application of existing laws and regulations to the Internet and other online
      services, could have a material adverse effect on NeoMedia's 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 NeoMedia's services
      and
      increase NeoMedia's cost of doing business, or otherwise have a material adverse
      effect on NeoMedia's 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.




59




Certain
      of NeoMedia's proprietary technology allows for the storage of demographic
      data
      from NeoMedia's 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 NeoMedia's
      ability to collect and use information collected by NeoMedia's 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. NeoMedia could incur significant additional
      expenses if new regulations regarding the use of personal information are
      introduced or if NeoMedia's privacy practices are investigated.





Certain
      of NeoMedia's micro paint solutions could be subject to environmental
      regulations.




60





**Item
      2.  Unregistered Sales of Equity Securities and Use of Proceeds (a), (b),
      (c) and (d)**




During
      the three months ended March 31, 2006, NeoMedia issued 112,983,720 unregistered
      shares of common stock as consideration for the acquisitions of Mobot, Sponge,
      Gavitec, and 12Snap. NeoMedia did not receive any cash proceeds from the
      issuance of the shares.





**Item
      3.  Default upon Senior Securities**




None.





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




On
      May 2,
      2006, NeoMedia filed a definitive proxy statement, submitting to a vote of
      securities holders the following items: (i) re-election of its current five
      directors, (ii) ratification of Stonefield Josephson, Inc. as NeoMedia's
      auditors for the fiscal year ended December 31, 2006, and (iii) an increase
      to
      the Company's authorized common shares to 5 billion.  The shareholder
      meeting is scheduled for June 28, 2006.





**Item
      5.  Other Information**




None.




61





**Item
      6. Exhibits and reports on form 8-K**




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




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


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




NeoMedia
      filed a report on Form 8-K on February 10, 2006, with respect to Item 8.01,
      reporting that Cornell Capital Partners had exercised warrants to purchase
      20,000,000 shares of NeoMedia common stock, par value $0.01 per share. The
      warrants were issued to Cornell Capital on March 30, 2005 as a commitment fee
      for Cornell Capital entering into that certain Standby Equity Distribution
      Agreement, dated March 30, 2006 by and between NeoMedia and Cornell Capital.
      The
      warrants had an exercise price equal to $0.20 per share. In connection with
      the
      exercise of the 20,000,000 Warrants, NeoMedia received proceeds of
      $4,000,000.





NeoMedia
      filed a report on Form 8-K on February 10, 2006, with respect to Item 1.01,
      reporting that it had signed a definitive merger agreement under which NeoMedia
      acquired all of the outstanding shares of Mobot in exchange for $3,500,000
      cash
      and $6,500,000 in shares of NeoMedia common stock.





NeoMedia
      filed a report on Form 8-K on February 14, 2006, with respect to Item 1.01,
      reporting that it had signed a definitive sale and purchase agreement under
      which NeoMedia acquired all of the outstanding shares of 12Snap AG of Munich,
      Germany, in exchange for $2,500,000 cash and $19,500,000 in shares of NeoMedia
      common stock.





NeoMedia
      filed a report on Form 8-K on February 20, 2006, with respect to Items 1.01
      and
      8.01, reporting that it had signed a non-binding letter of intent to acquire
      HipCricket, Inc. of Essex, CT in exchange for $500,000 cash and $4,000,000
      of
      NeoMedia common stock. The 8-K also reported that NeoMedia had loaned Hip
      Cricket $250,000 in the form of an unsecured promissory note, the principal
      and
      interest of which would be applied toward the purchase price in the event the
      acquisition is completed.





NeoMedia
      filed a report on Form 8-K on February 21, 2006, with respect to Items 1.01
      and
      3.02, reporting that it had entered into a $27 million convertible preferred
      stock sale agreement with Cornell Capital Partners.





NeoMedia
      filed a report on Form 8-K on February 21, 2006, with respect to Item 1.01,
      reporting that it had signed a definitive sale and purchase agreement under
      which NeoMedia acquired all of the outstanding shares of Gavitec AG of Wurselen,
      Germany in exchange for $1,800,000 cash and $5,400,000 in shares of NeoMedia
      common stock.




62




NeoMedia
      filed a report on Form 8-K on February 21, 2006, with respect to Item 2.01,
      reporting that it had completed all of the closing requirements for the
      acquisition of Mobot, Inc.




NeoMedia
      filed a report on Form 8-K on February 22, 2006, with respect to Item 1.01,
      reporting that it had signed a definitive share purchase agreement under which
      it acquired all of the outstanding shares of Sponge Ltd. Of London, in exchange
      for £3,450,000 (approximately $6 million) cash and £6,550,000 (approximately
      $11.4 million) in shares of NeoMedia common stock. The agreement also calls
      for
      Sponge to earn an additional £2,500,000 (approximately $4.4 million) in the form
      of NeoMedia common stock if, during the two-year period beginning at closing,
      the Sponge business earns in excess of £1,300,000 (approximately $2.3 million)
      in net profits.





NeoMedia
      filed a report on Form 8-K on February 24, 2006, with respect to Item 2.01,
      reporting that it had completed all of the closing requirements for the
      acquisitions of 12 Snap AG, Gavitec AG, and Sponge Ltd.


NeoMedia
      filed a report on Form 8-K on March 2, 2006, with respect to Item 1.01,
      reporting that it had signed a 10-year exclusive agreement with Beijing Sino-US
      Jinche Yingang Auto Technological Services Limited.





NeoMedia
      filed a report on Form 8-K on March 22, 2006, with respect to Item 1.01,
      reporting that it had loaned an additional $250,000 to Hip Cricket, Inc.,
      pursuant to the terms of a previously signed letter of intent.





NeoMedia
      filed a report on Form 8-K on March 23, 2006, with respect to Item 2.01,
      reporting that it had closed its acquisition of BSD Software, Inc.




NeoMedia
      filed a report on Form 8-K on April 3, 2006, with respect to Item 8.01,
      reporting that Cornell Capital Partners had exercised warrants to purchase
      20,000,000 shares of NeoMedia common stock, par value $0.01 per share. The
      warrants were issued to Cornell Capital on March 30, 2005 as a commitment fee
      for Cornell Capital entering into that certain Standby Equity Distribution
      Agreement, dated March 30, 2006 by and between NeoMedia and Cornell Capital.
      The
      warrants had an exercise price equal to $0.20 per share. In connection with
      the
      exercise of the 20,000,000 Warrants, NeoMedia received proceeds of
      $4,000,000.





NeoMedia
      filed amendment No. 1 to Form 8-K on May 3, 2006, with respect to Items 2.01
      and
      9.01, for the purposes of providing the required financial statements of Mobot,
      Inc.





NeoMedia
      filed amendment No. 1 to Form 8-K on May 8, 2006, with respect to Items 2.01
      and
      9.01, for the purposes of providing the required financial statements of 12Snap
      AG.





NeoMedia
      filed amendment No. 1 to Form 8-K on May 8, 2006, with respect to Items 2.01
      and
      9.01, for the purposes of providing the required financial statements of Gavitec
      AG.





NeoMedia
      filed amendment No. 1 to Form 8-K on May 9, 2006, with respect to Items 2.01
      and
      9.01, for the purposes of providing the required financial statements of Sponge
      Ltd.




63





**SIGNATURES**





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




**NEOMEDIA
                TECHNOLOGIES, INC.**RegistrantDate: May
                1,
                2007
            By:
            */s/
              Charles W. Fritz*Charles
                W. Fritz, Interim Chief Executive Officer,And
                Chairman of the Board




Date:
                May 1,
                2007
            By:
            */s/
              David A. Dodge*David
                A. Dodge, Vice President,Chief
                Financial Officer and principal accounting
                officer




64