UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10 - Q



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





For the quarterly period ended June 30, 2013



or



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





For the transition period from __________ to ____________



Commission File Number 0-21743



NeoMedia Technologies, Inc.

(Exact Name of Issuer as Specified In Its
Charter)



|Delaware                        |  | 36-3680347         
|------------------------------- |  | -------------------
|(State or other jurisdiction of |  | (I.R.S. Employer   
|incorporation or organization)  |  | Identification No.)



100 W Arapahoe Avenue, Suite 9, Boulder,
Colorado 80302

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



303-546-7946

(Registrants’ telephone number, including
area code)



Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YesxNo ̈



Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. YesxNo ̈



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



Large
accelerated filer ̈Accelerated filer ̈Non-accelerated filer ̈Smaller Reporting Companyx



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



The number of outstanding shares of the
registrant’s Common Stock on August 2, 2013 was 4,984,827,279.





Page 1







NeoMedia Technologies, Inc.

Form 10-Q

For the Quarterly Period Ended June 30,
2013

Index



|           |                                                                                       | Page
|---------- | ------------------------------------------------------------------------------------- | ----
|           |                                                                                       |     
|PART I     | Financial Information                                                                 | 3   
|           |                                                                                       |     
|ITEM 1.    | Financial Statements                                                                  | 3   
|ITEM 2.    | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 20  
|ITEM 3.    | Quantitative and Qualitative Disclosures About Market Risk                            | 24  
|ITEM 4.    | Controls and Procedures                                                               | 24  
|           |                                                                                       |     
|PART II    | Other Information                                                                     | 26  
|           |                                                                                       |     
|ITEM 1.    | Legal Proceedings                                                                     | 26  
|ITEM 1A.   | Risk Factors                                                                          | 26  
|ITEM 2.    | Unregistered Sales of Equity Securities and Use of Proceeds                           | 26  
|ITEM 3.    | Defaults Upon Senior Securities                                                       | 26  
|ITEM 4.    | Mine Safety Disclosures                                                               | 26  
|ITEM 5.    | Other Information                                                                     | 26  
|ITEM 6.    | Exhibits                                                                              | 27  
|           |                                                                                       |     
|Signatures | 28                                                                                   





Page 2







PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements



NeoMedia Technologies, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share and per share
data)



|                                                                                                                                                                                                                                                 |  | June 30, 2013 |          |   | December 31, 2012 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | -------- | - | ----------------- | -
|ASSETS                                                                                                                                                                                                                                           |  | (Unaudited)   |          |   |                   |  
|Current Assets:                                                                                                                                                                                                                                  |  |               |          |   |                   |  
|Cash and cash equivalents                                                                                                                                                                                                                        |  | $             | 70       |   |                   | $
|Trade accounts receivable                                                                                                                                                                                                                        |  |               | 885      |   |                   |  
|Prepaid expenses and other assets                                                                                                                                                                                                                |  |               | 39       |   |                   |  
|Total current assets                                                                                                                                                                                                                             |  |               | 994      |   |                   |  
|                                                                                                                                                                                                                                                 |  |               |          |   |                   |  
|Property, plant and equipment, net                                                                                                                                                                                                               |  |               | 27       |   |                   |  
|Goodwill                                                                                                                                                                                                                                         |  |               | 3,418    |   |                   |  
|Proprietary software, net                                                                                                                                                                                                                        |  |               | -        |   |                   |  
|Patents and other intangible assets                                                                                                                                                                                                              |  |               | 1,353    |   |                   |  
|Other long term assets                                                                                                                                                                                                                           |  |               | -        |   |                   |  
|Total assets                                                                                                                                                                                                                                     |  | $             | 5,792    |   |                   | $
|                                                                                                                                                                                                                                                 |  |               |          |   |                   |  
|LIABILITIES AND SHAREHOLDERS' DEFICIT                                                                                                                                                                                                            |  |               |          |   |                   |  
|Current Liabilities:                                                                                                                                                                                                                             |  |               |          |   |                   |  
|Accounts payable                                                                                                                                                                                                                                 |  | $             | 562      |   |                   | $
|Accrued expenses                                                                                                                                                                                                                                 |  |               | 497      |   |                   |  
|Deferred revenue and customer prepayments                                                                                                                                                                                                        |  |               | 2,852    |   |                   |  
|Notes payable                                                                                                                                                                                                                                    |  |               | -        |   |                   |  
|Deferred tax liability                                                                                                                                                                                                                           |  |               | 706      |   |                   |  
|Derivative financial instruments - warrants                                                                                                                                                                                                      |  |               | 276      |   |                   |  
|Derivative financial instruments - Series C and D preferred stock and debentures payable                                                                                                                                                         |  |               | 4,286    |   |                   |  
|Debentures payable - carried at amortized cost                                                                                                                                                                                                   |  |               | 53       |   |                   |  
|Debentures payable - carried at fair value                                                                                                                                                                                                       |  |               | 82,906   |   |                   |  
|Total current liabilities                                                                                                                                                                                                                        |  |               | 92,138   |   |                   |  
|                                                                                                                                                                                                                                                 |  |               |          |   |                   |  
|Commitments and contingencies                                                                                                                                                                                                                    |  |               | -        |   |                   |  
|                                                                                                                                                                                                                                                 |  |               |          |   |                   |  
|Series C convertible preferred stock, $0.01 par value, 27,000 shares authorized, 4,816 and 4,840 shares issued and outstanding, respectively, and a liquidation value of $4,816 and $4,480 at June 30, 2013 and December 31, 2012, respectively. |  |               | 4,816    |   |                   |  
|Series D convertible preferred stock, $0.01 par value, 25,000 shares authorized, 3,481 shares issued and outstanding, respectively, and a liquidation value of $348 at June 30, 2013 and December 31, 2012, respectively.                        |  |               | 348      |   |                   |  
|                                                                                                                                                                                                                                                 |  |               |          |   |                   |  
|Shareholders' deficit:                                                                                                                                                                                                                           |  |               |          |   |                   |  
|Common stock, $0.001 par value, 5,000,000,000 shares authorized, 4,909,827,279 and 2,106,035,882 shares issued and outstanding as of June 30, 2013 and December 31, 2012, respectively                                                           |  |               | 4,910    |   |                   |  
|Additional paid in capital                                                                                                                                                                                                                       |  |               | 190,923  |   |                   |  
|Accumulated deficit                                                                                                                                                                                                                              |  |               | (286,663 | ) |                   |  
|Accumulated other comprehensive loss                                                                                                                                                                                                             |  |               | 99       |   |                   |  
|Treasury stock, at cost, 2,012 shares of common stock                                                                                                                                                                                            |  |               | (779     | ) |                   |  
|Total shareholders' deficit                                                                                                                                                                                                                      |  | $             | (91,510  | ) |                   | $
|Total liabilities and shareholders' deficit                                                                                                                                                                                                      |  | $             | 5,792    |   |                   | $

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





Page 3







NeoMedia Technologies,
Inc. and Subsidiaries

Condensed Consolidated Statements of
Operations and Comprehensive Income (Loss) (Unaudited)

(in thousands, except
share and per share data)





|                                                                                                              |  | For the three months ended June 30, |               |   | For the six months ended June 30, |  
|------------------------------------------------------------------------------------------------------------- |  | ----------------------------------- | ------------- | - | --------------------------------- | -
|                                                                                                              |  | 2013                                |               |   | 2012                              |  
|                                                                                                              |  |                                     |               |   |                                   |  
|Revenue                                                                                                       |  | $                                   | 1,667         |   |                                   | $
|Cost of revenues                                                                                              |  |                                     | 269           |   |                                   |  
|Gross profit                                                                                                  |  |                                     | 1,398         |   |                                   |  
|                                                                                                              |  |                                     |               |   |                                   |  
|Sales and marketing expenses                                                                                  |  |                                     | 47            |   |                                   |  
|General and administrative expenses                                                                           |  |                                     | 665           |   |                                   |  
|Research and development costs                                                                                |  |                                     | 172           |   |                                   |  
|                                                                                                              |  |                                     |               |   |                                   |  
|Operating income (loss)                                                                                       |  |                                     | 514           |   |                                   |  
|                                                                                                              |  |                                     |               |   |                                   |  
|Loss on extinguishment of debt                                                                                |  |                                     | -             |   |                                   |  
|Gain/(loss) from change in fair value of hybrid financial instruments                                         |  |                                     | (29,569       | ) |                                   |  
|Gain/(loss) from change in fair value of derivative liability - warrants                                      |  |                                     | 289           |   |                                   |  
|Gain/(loss) from change in fair value of derivative liability - Series C and D preferred stock and debentures |  |                                     | (1,849        | ) |                                   |  
|Other Income                                                                                                  |  |                                     | 227           |   |                                   |  
|Interest (expense) / income                                                                                   |  |                                     | 16            |   |                                   |  
|                                                                                                              |  |                                     |               |   |                                   |  
|Net income (loss) available to common shareholders                                                            |  | $                                   | (30,372       | ) |                                   | $
|                                                                                                              |  |                                     |               |   |                                   |  
|Comprehensive income (loss):                                                                                  |  |                                     |               |   |                                   |  
|Net income (loss)                                                                                             |  |                                     | (30,372       | ) |                                   |  
|Other comprehensive gain/(loss) - investment in GmbH and foreign currency adjustment                          |  |                                     | (223          | ) |                                   |  
|                                                                                                              |  |                                     |               |   |                                   |  
|Comprehensive income (loss):                                                                                  |  | $                                   | (30,595       | ) |                                   | $
|                                                                                                              |  |                                     |               |   |                                   |  
|Net income (loss) per share, basic and diluted:                                                               |  |                                     |               |   |                                   |  
|Basic                                                                                                         |  | $                                   | (0.007        | ) |                                   | $
|Fully diluted                                                                                                 |  | $                                   | (0.007        | ) |                                   | $
|                                                                                                              |  |                                     |               |   |                                   |  
|Weighted average number of common shares:                                                                     |  |                                     |               |   |                                   |  
|Basic                                                                                                         |  |                                     | 4,057,691,643 |   |                                   |  
|Fully diluted                                                                                                 |  |                                     | 4,057,691,643 |   |                                   |  











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



Page 4







NeoMedia Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of
Cash Flows (Unaudited)

(in thousands)



|                                                                                                              |  | For the six months ended June 30, |        
|------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | -------
|                                                                                                              |  | 2013                              |        
|                                                                                                              |  |                                   |        
|Cash Flows from Operating Activities:                                                                         |  |                                   |        
|Net income / (loss)                                                                                           |  | $                                 | (21,284
|Adjustments to reconcile net loss to net cash provided by operating activities:                               |  |                                   |        
|Depreciation and amortization                                                                                 |  |                                   | 253    
|Loss on extinguishment of debt                                                                                |  |                                   | -      
|(Gain)/loss from change in fair value of hybrid financial instruments                                         |  |                                   | 2,149  
|(Gain)/loss from change in fair value of derivative liability - warrants                                      |  |                                   | (3,411 
|(Gain)/loss from change in fair value of derivative liability - Series C and D preferred stock and debentures |  |                                   | 22,795 
|Interest expense related to convertible debt                                                                  |  |                                   | -      
|Stock based compensation expense                                                                              |  |                                   | 1      
|Increase in value of life insurance policies                                                                  |  |                                   | -      
|                                                                                                              |  |                                   |        
|Changes in operating assets and liabilities:                                                                  |  |                                   |        
|(Increase) decrease in accounts receivable                                                                    |  |                                   | (441   
|(Increase) decrease in prepaid expenses and other assets                                                      |  |                                   | 80     
|Increase (decrease) in accounts payable & accrued expenses                                                    |  |                                   | 91     
|Increase (decrease) in deferred revenue and customer prepayments                                              |  |                                   | (1,108 
|Net cash used in operating activities                                                                         |  |                                   | (875   
|                                                                                                              |  |                                   |        
|Cash Flows from Investing Activities                                                                          |  |                                   |        
|Acquisition of property and equipment                                                                         |  |                                   | -      
|Net cash used in investing activities                                                                         |  |                                   | -      
|                                                                                                              |  |                                   |        
|Cash Flows from Financing Activities                                                                          |  |                                   |        
|Borrowing under convertible debt instruments, net                                                             |  |                                   | -      
|Net cash provided by financing activities                                                                     |  |                                   | -      
|                                                                                                              |  |                                   |        
|Effect of exchange rate changes on cash                                                                       |  |                                   | 334    
|                                                                                                              |  |                                   |        
|Net change in cash and cash equivalents                                                                       |  |                                   | (541   
|                                                                                                              |  |                                   |        
|Cash and cash equivalents, beginning of period                                                                |  |                                   | 611    
|Cash and cash equivalents, end of period                                                                      |  | $                                 | 70     
|                                                                                                              |  |                                   |        
|                                                                                                              |  |                                   |        
|Supplemental cash flow information:                                                                           |  |                                   |        
|Series C preferred stock converted to common stock                                                            |  |                                   | 24     
|Series D preferred stock converted to common stock                                                            |  |                                   | -      
|Convertible debentures converted to common stock                                                              |  |                                   | 2,561  









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





Page 5









NeoMedia Technologies,
Inc. and Subsidiaries

Notes to Condensed Consolidated Financial
Statements

June 30, 2013 and December 31, 2012

(Unaudited)



Note 1 - General



Business – NeoMedia
Technologies, Inc., a Delaware corporation (“NeoMedia”, and also referred to herein as “us”, “we”
and “our”), was founded in 1989 and is headquartered in Boulder, Colorado. We have pioneered 2D mobile barcode technology
and infrastructure solutions that enable the mobile barcode ecosystem world-wide. NeoMedia strives to harness the power of the
mobile phone in innovative ways with state-of-the-art mobile barcode technology. With this technology, mobile phones with cameras
become barcode scanners and this enables a range of practical applications including mobile marketing, mobile commerce and advertising.
In addition, we offer barcode management reader solutions as well as intellectual property licensing.



Going Concern – We
have historically incurred net losses from operations and we expect that we will continue to have negative cash flows as we implement
our business plan. There can be no assurance that our continuing efforts to execute our business plan will be successful and that
we will be able to continue as a going concern. The accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America (“US GAAP”), which contemplates our continuation
as a going concern. Net (loss) for the six months ended June 30, 2013 and 2012, respectively, was $(21.3) million and $(41.4) million,
of which $(21.5) million and $(35.3) million, respectively, were net losses related to our financing instruments. Our operating
income was $5,800 for the six months ended June 30, 2013, and our operating loss was $(1.8) million for the six months ended June
30, 2012.



Net cash used by operations during the
six months ended June 30, 2013 and 2012 was $(875,000) and $(2.0) million, respectively. At June 30, 2013, we have an accumulated
deficit of $(287) million. We also have a working capital deficit of $(91.1) million, of which $(87.5) million is related to our
financing instruments related to the fair value of warrants and those debentures that are recorded as hybrid financial instruments
and the amortized cost carrying value of certain of our debentures and the fair value of the associated derivative liabilities.



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



We currently do not have sufficient cash
or commitments for financing to sustain our operations for the next twelve months. Our plan is to develop new client and customer
relationships and substantially increase our revenue derived from improved products and IP licensing. If our revenues do not reach
the level set anticipated in our plan and our operating expenses cannot be reduced to sustain our operations, we may require additional
financing in order to execute our operating plan; however, we believe that our revenues will reach such level and such additional
financing will not be necessary. If additional financing is required, we cannot predict whether this additional financing will
be in the form of equity, debt, or another form and we may not be able to obtain the necessary additional capital on a timely basis,
on acceptable terms, or at all. In the event that these financing sources do not materialize, or that we are unsuccessful in increasing
our revenues and profits, we may be unable to implement our current plans for expansion, repay our debt obligations or respond
to competitive pressures, any of which circumstances would have a material adverse effect on our business, prospects, financial
condition and results of operations.



The Convertible debentures and preferred
stock used to finance the Company, which may be converted into Common Stock at the sole option of the holders, have a highly dilutive
impact when they are converted, greatly increasing the number of common shares outstanding. During the three and six months ended
June 30, 2013, there were 1,564,810,047 and 2,803,791,397 shares of common stock issued for these conversions, respectively. The Company
cannot predict if nor when each holder may or may not elect to convert into common shares.



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



Note 2 - Summary of Significant Accounting
Policies



The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with US GAAP for interim financial information and Rule
8.03 of Regulation S-X. They do not include all of the information and footnotes required by US GAAP for complete financial
statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair presentation have been included. The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year. For further information, refer to our financial statements as of
December 31, 2012 and 2011, and for the years then ended, including notes thereto, in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2012.



Page 6









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



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



Stock-Based Compensation -
FASB ASC 718, Stock Compensation, requires that all stock-based compensation be recognized as an expense in the financial
statements and that such cost be measured at the grant date fair value of the award.  We account for modifications of the
terms of existing option grants as exchanges of the existing equity instruments for new instruments.  The fair value of the
modified option at the grant date is compared with the value at that date of the original option immediately before its terms are
modified.  Any excess fair value of the modified option over the original option is recognized as additional compensation
expense.



Revenue Recognition –
We derive revenues from the following sources: (1) license fees relating to intellectual property, and (2) software and service
revenues related to mobile marketing barcode infrastructure management and development, barcode readers and internally developed
software.



In accordance with Financial Accounting
Standard Board (“FASB”) and Securities and Exchange Commission (“SEC”) Staff Accounting guidance on revenue
recognition the Company considers revenue earned and realizable when: (a) persuasive evidence of the sales arrangement exists,
(b) the arrangement fee is fixed or determinable, (c) service delivery or performance has occurred, (d) customer acceptance has
been received, if contractually required, and (e) collectability of the arrangement fee is probable. Revenue associated with licensing
agreements primarily consists of non-refundable upfront license fees. Non-refundable upfront license fees received under license
agreements, whereby continued performance or future obligations are considered inconsequential to the relevant license technology,
are recognized as revenue upon delivery of the technology. The Company typically uses signed contractual agreements as persuasive
evidence of a sales arrangement.



If at the inception of an arrangement the
fee is not fixed or determinable, we defer revenue until the arrangement fee becomes due and payable. If we determine collectability
is not probable, we defer revenue until we receive payment or collection becomes probable, whichever is earlier. The determination
of whether fees are collectible requires judgment of our management, and the amount and timing of revenue recognition may change
if different assessments are made.





Page 7







Basic and Diluted Net Income (Loss)
Per Share – Basic net income (loss) per share is computed by dividing net income (loss) attributable to common shareholders
by the weighted average number of shares of our Common Stock, par value $0.001 per share (“Common Stock”), outstanding
during the period. During the three and six months ended June 30, 2013 and the six months ended June 30, 2012, we reported a net
loss per share, and as such, basic and diluted losses per share were equivalent. During the three months ended June 30, 2012, we
reported net income per share and included dilutive instruments in the fully diluted net income per share calculation. For the
three and six months ended June 30, 2013 and 2012, approximately 513,342,555 and 513,342,555 and zero and 6,964,579,511, respectively,
of potentially dilutive shares were excluded from the calculation as they were anti-dilutive.



|                                                                                                                                                          |  | Three Months Ended                              |               |   | Six Months Ended |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------- | ------------- | - | ---------------- | -
|                                                                                                                                                          |  | June 30,                                        |               |   | June 30,         |  
|                                                                                                                                                          |  | 2013                                            |               |   | 2012             |  
|                                                                                                                                                          |  | (in thousands, except share and per share data) |              
|Numerator:                                                                                                                                                |  |                                                 |               |   |                  |  
|                                                                                                                                                          |  |                                                 |               |   |                  |  
|Net income (loss) available to common shareholders                                                                                                        |  | $                                               | (30,372       | ) |                  | $
|                                                                                                                                                          |  |                                                 |               |   |                  |  
|Numerator for diluted earnings per share- income (loss) available to common stockholders after assumed conversions of debentures and exercise of warrants |  | $                                               | (30,372       | ) |                  | $
|                                                                                                                                                          |  |                                                 |               |   |                  |  
|Denominator:                                                                                                                                              |  |                                                 |               |   |                  |  
|                                                                                                                                                          |  |                                                 |               |   |                  |  
|Weighted average shares used to compute basic EPS                                                                                                         |  |                                                 | 4,057,691,643 |   |                  |  
|                                                                                                                                                          |  |                                                 |               |   |                  |  
|Denominator for diluted earnings per share-adjusted weighted average shares and assumed conversions and exercise of options                               |  |                                                 | 4,057,691,643 |   |                  |  
|                                                                                                                                                          |  |                                                 |               |   |                  |  
|Basic earnings per share                                                                                                                                  |  | $                                               | (0.007        | ) |                  | $
|                                                                                                                                                          |  |                                                 |               |   |                  |  
|Diluted earnings per share                                                                                                                                |  | $                                               | (0.007        | ) |                  | $



Goodwill –Goodwill
represents the excess of the purchase price paid for NeoMedia Europe over the fair value of the identifiable net assets and liabilities
acquired, based on an independent appraisal of the assets and liabilities acquired. In accordance with FASB ASC 350, Intangibles
- Goodwill and Other goodwill is not amortized, but is tested for impairment, at least annually, by applying the recognition
and measurement provisions of FASB ASC 350, which require that we compare the carrying amount of the asset to its fair value. If
impairment of the carrying value based on the estimated fair value exists, we measure the impairment through the use of discounted
cash flows. If the carrying amount exceeds fair value, an impairment loss is recognized. Our last test for impairment was completed
as of December 31, 2012, and no adjustment was deemed needed.



Recent Accounting Pronouncements

In February 2013, the FASB issued ASU No.
2013-02, Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income, which is included in ASC 220, Comprehensive
Income. This update improves the reporting of reclassification out of accumulated other comprehensive income. The guidance is effective
for the Company’s interim and annual reporting periods beginning January 1, 2013, and applied prospectively. Management does
not anticipate that the accounting pronouncement will have any material future effect on our consolidated financial statements.



In March 2013,
the FASB issued ASU No. 2013-05,Liabilities (Topic 830): Parent’s Accounting for Cumulative Translation Adjustment
upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.
This ASU is effective for interim and annual periods beginning after December 15, 2013 and requires the release of any cumulative
translation adjustment into net income upon derecognition of certain subsidiaries or groups of assets within a foreign entity or
of an investment in foreign entity.Management does not anticipate that the accounting pronouncement will have any material
future effect on our consolidated financial statements.





Page 8







In July 2013, FASB issued ASU No. 2013-11,
Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax
Loss, or a Tax Credit Carryforward Exists.This ASU is effective for interim and annual periods beginning after December 15,
2013. This update standardizes the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar
tax loss, or a tax credit carryforward exists. Management does not anticipate that the accounting pronouncement will have any material
future effect on our consolidated financial statements.



Note 3 – Accrued Liabilities



|Accrued liabilities consist of the following as of June 30, 2013 and December 31, 2012: |  |          |    
|--------------------------------------------------------------------------------------- |  | -------- | ---
|                                                                                        |  |          |    
|                                                                                        |  | June 30, |    
|                                                                                        |  | 2013     |    
|                                                                                        |  |          |    
|Accrued operating expenses                                                              |  | $        | 313
|Accrued payroll related expenses                                                        |  |          | -  
|Accrued interest                                                                        |  |          | -  
|Accrued legal fees                                                                      |  |          | 184
|Total                                                                                   |  | $        | 497



Note 4 – Financing



At June 30, 2013, financial instruments
arising from our financing transactions with YA Global Investments, L.P., an accredited investor, included shares of our Series
C Preferred Stock issued in February 2006, Series D Preferred Stock issued in January 2010, a series of thirty-two secured convertible
debentures issued between August 2006 and July 2012 and various warrants to purchase shares of our Common Stock. All of our assets
are pledged to secure our obligations under the debt securities. At various times, YA Global has assigned or distributed portions
of its holdings of these securities to other holders, including persons who are officers of YA Global and its related entities,
as well as to other holders who are investors in YA Global’s funds.



Secured Debentures -The
underlying agreements for each of the current thirty-two debentures that we have issued are very similar in form, except in regard
to the interest rate, conversion prices, and the number of warrants that were issued in conjunction with each of the debentures.
The debentures are convertible into our Common Stock, at the option of the holder, at the lower of a fixed conversion price per
share or a percentage of the lowest volume-weighted average price (“VWAP”) for a specified number of days prior to
the conversion (the “look-back period”). Typically, the conversion is limited such that the holder cannot exceed 9.99%
ownership of the outstanding Common Stock, unless the holder waives their right to such limitation. All of the debentures are secured
according to the terms of a Security Pledge Agreement dated August 23, 2006, which was entered into in connection with the first
convertible debenture issued to YA Global and which provides YA Global with a security interest in substantially all of our assets.
The debentures are also secured by a Patent Security Agreement dated July 29, 2008. On August 13, 2010, our wholly owned subsidiary,
NeoMedia Europe GmbH, became a guarantor of all outstanding financing transactions between us and YA Global, through pledges of
their intellectual property and other movable assets. As security for our obligations to YA Global, all of our Pledged Property,
Patent Collateral and other collateral is affirmed through the several successive Ratification Agreements which have been executed
in connection with each of the 2010, 2011 and 2012 financings.



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



We evaluated the financing transactions
in accordance with FASB ASC 815, Derivatives and Hedging, and determined that the conversion features of the Series C and
Series D Preferred Stock and the Debentures were not afforded the exemption for conventional convertible instruments due to their
variable conversion rates. The contracts have no explicit limit on the number of shares issuable so they did not meet the conditions
set forth in current accounting standards for equity classification. Accordingly, either the embedded derivative instruments, including
the conversion option, must be bifurcated and accounted for as derivative instrument liabilities or, as permitted by FASB ASC 815-15-25-4,
Recognition of Embedded Derivatives, the instruments may be carried in their entirety at fair value.



At inception, we elected to bifurcate the
embedded derivatives related to the Series C and Series D Preferred Stock and certain debentures, while electing the fair value
option for the March 2007, August 2007, April 2008, May 2008 and April 2012 Debentures. FASB ASC 825, Financial Instruments,
allows us to elect the fair value option for recording financial instruments when they are initially recognized or if there is
an event that requires re-measurement of the instruments at fair value, such as a significant modification of the debt.





Page 9







On May 25, 2012, the terms of the debentures
held by YA Global were modified to extend the stated maturity dates to August 1, 2013 and reduce the interest rates to 9.5% per
year, with interest being payable on the maturity date in cash or, provided certain equity conditions are satisfied, in shares
of our Common Stock at the applicable conversion price. Because the effect of the modifications exceeded a significance threshold
relative to cash flows prescribed by ASC 470-50, Debt Modifications and Extinguishments, the modifications of the amounts
due under these arrangements were accounted for as extinguishments, whereby the existing debentures are considered to be retired
and new debentures issued. The existing instruments were first adjusted to fair value as of May 25, 2012 using the interest rate
and maturity date prior to the amendment. The fair value of the new instruments was then calculated using the modified interest
rate and maturity date to determine the fair value of the instrument subsequent to the amendment. The differences in the fair values
before and after the amendment were recorded as an extinguishment loss of approximately $27.5 million in the accompanying statements
of operations.



As of the date of the modification, we
have elected to carry all modified debentures at the fair value of the hybrid instrument with changes in the fair value of the
debentures charged or credited to income each period.



On February
4, 2013, we entered into a Debenture Extension Agreement with YA Global to extend the maturity dates of the secured convertible
debentures to August 1, 2014. Because the effect of the extension did not exceed a significance threshold relative to cash
flows prescribed by ASC 470-50, Debt Modifications and Extinguishments, extinguishment accounting was not applicable.



The following table summarizes the significant
terms of each of the convertible debentures for which the entire hybrid instrument is recorded at fair value as of June 30, 2013:



|          |          |                |  |          |  |          |  | Conversion Price – Lower of Fixed Price or Percentage of VWAP for Look-back period |  |                  
|--------- | -------- | -------------- |  | -------- |  | -------- |  | ---------------------------------------------------------------------------------- |  | -----------------
|Debenture |          |                |  |          |  |          |  |                                                                                    |  | Anti-            
|Default   | Dilution | Look-         
|Issuance  |          | Face           |  | Interest |  | Interest |  | Fixed                                                                              |  | Adjusted         
|Year      |          | Amount         |  | Rate     |  | Rate     |  | Price                                                                              |  | Price            
|          |          | (in thousands) |  |          |  |          |  |                                                                                    |  |                  
|2006      |          | $6,493         |  | 9.50%    |  | n/a      |  | $2.00                                                                              |  | $0.00            
|2007      |          | 7,373          |  | 9.50%    |  | n/a      |  | $2.00                                                                              |  |                  
|2008      |          | 6,308          |  | 9.50%    |  | 20%-24%  |  | $1.00-$2.00                                                                        |  | $0.00032-$0.00038
|2009      |          | 1,062          |  | 9.50%    |  | 20%      |  | $2.00                                                                              |  | $0.00            
|2010      |          | 3,806          |  | 9.50%    |  | 20%      |  | $0.10- $0.30                                                                       |  | $0.00            
|2011      |          | 1,551          |  | 9.50%    |  | 20%      |  | $0.10                                                                              |  | $0.00            
|2012      |          | 1,543          |  | 9.50%    |  | 20%      |  | $0.10                                                                              |  | $0.00            
|Total     |          | $28,136        |  |          |  |          |  |                                                                                    |  |                  



For the portion of the debentures held
by investors other than YA Global (which debentures were not modified on May 25, 2012) and for the Series C and Series D Preferred
Stock, the election to carry the instruments at fair value in their entirety is not available. Accordingly, we continue to bifurcate
the compound embedded derivatives related to the Series C and Series D Preferred Stock and these debentures and carry these financial
instruments as liabilities in the accompanying balance sheet. Significant components of the compound embedded derivative include
(i) the embedded conversion feature, (ii) down-round anti-dilution protection features and (iii) default, non-delivery and buy-in
puts, all of which were combined into one compound instrument that is carried at fair value as a derivative liability. Changes
in the fair value of the compound derivative liability are charged or credited to income each period.





Page 10







The table below summarizes the significant
terms of the debentures that are carried at their amortized cost and for which the compound embedded derivative is bifurcated and
accounted for as a derivative liability as of June 30, 2013:





|                  |      |  |                    |   |    |          |  |  |          |   |  | Conversion
    Price – Lower of Fixed Price or Percentage of VWAP for Look-back Period |    
|----------------- | ---- |  | ------------------ | - | -- | -------- |  |  | -------- | - |  | -------------------------------------------------------------------------------------- | ---
|                  |      |  |                    |   |    |          |  |  | Default  |   |  |                                                                                        |    
|Debenture         |      |  | Face               |   |    | Interest |  |  | Interest |   |  | Fixed                                                                                  |    
|Issuance
    Year |      |  | Amount             |   |    | Rate     |  |  | Rate     |   |  | Price                                                                                  |    
|                  |      |  | (in
    thousands) |   |    |          |  |  |          |   |  |                                                                                        |    
|                  | 2006 |  |                    | $ | 53 |          |  |  | 10       | % |  |                                                                                        | n/a
|                  |      |  |                    |   |    |          |  |  |          |   |  |                                                                                        |    



Conversions and Repayments–Our preferred
stock and convertible debentures are convertible into shares of our Common Stock. Upon conversion of any of the convertible financial
instruments in which the compound embedded derivative is bifurcated, the carrying amount of the debt, including any unamortized
premium or discount, and the related derivative instrument liability are credited to the capital accounts upon conversion to reflect
the stock issued and no gain or loss is recognized. For instruments that are recorded in their entirety at the fair value of the
hybrid instrument, the fair value of the hybrid instrument converted is credited to the capital accounts upon conversion to reflect
the stock issued and no gain or loss is recognized. Beginning in April 2013, the trading market price of our Common Stock (and
the conversion price) was less than its par value. We are limited to issuing shares of Common Stock at no less than the par value,
and all shares of our Common Stock issued in those conversions were issued at par value. However, the methodology used to estimate
the number of shares of convertible debentures and preferred stock converted during this time are based upon the value received
for the shares issued, with the difference between that value and the par value recorded as a deemed dividend.



The following table provides a summary
of the preferred stock conversions that have occurred since inception and the number of common shares issued upon conversion.



|                         |  |                  |    |  | Preferred |  |    | Preferred |  |  | Common | 
|------------------------ |  | ---------------- | -- |  | --------- |  | -- | --------- |  |  | ------ | 
|                         |  | Preferred shares |    |  | shares    |  |    | shares    |  |  | shares | 
|                         |  | issued           |    |  | converted |  |    | remaining |  |  | issued | 
|                         |  | (in thousands)   |   
|                         |  |                  |   
|                         |  |                  |    |  |           |  |    |           |  |  |        | 
|Series C Preferred Stock |  |                  | 22 |  |           |  | 17 |           |  |  | 5      | 
|Series D Preferred Stock |  |                  | 25 |  |           |  | 22 |           |  |  | 3      | 





The outstanding principal and accrued interest
for the debentures as of June 30, 2013 is reflected in the following table in addition to the principal and interest converted
since inception and the number of common shares issued upon conversion.



|           |  | Outstanding         |        |  | Principal and    |   |        |        | 
|---------- |  | ------------------- | ------ |  | ---------------- | - | ------ | ------ | 
|           |  | principal and       |        |  | accrued interest |   |        | Common | 
|           |  | accrued interest at |        |  | converted since  |   |        | shares | 
|           |  | June 30, 2013       |        |  | inception        |   |        | issued | 
|           |  | (in thousands)      |       
|           |  |                     |       
|           |  |                     |        |  |                  |   |        |        | 
|Debentures |  | $                   | 42,599 |  |                  | $ | 11,720 |        | 



Warrants - YA Global holds
warrants to purchase shares of our Common Stock that were issued in connection with the convertible debentures and the Series C
and Series D Preferred Stock. The warrants are exercisable at a fixed exercise price which, from time to time, has been reduced
due to anti-dilution provisions when the Company has entered into subsequent financing arrangements with a lower price. The exercise
prices may be reset again in the future if we subsequently issue stock or enter into a financing arrangement with a lower price.
In addition, upon each adjustment in the exercise price, the number of warrant shares issuable is adjusted to the number of shares
determined by multiplying the warrant exercise price in effect prior to the adjustment by the number of warrant shares issuable
prior to the adjustment divided by the warrant exercise price resulting from the adjustment.





Page 11







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



Effective February
1, 2013, 1.4 billion of the 1.9 billion warrants held by YA Global were cancelled and the remaining 500 million had their exercise
price reduced to $0.0001 per share.These changes resulted in a decrease in fair value of the warrants of approximately
$1.64 million during the first quarter of 2013 as reflected in the gain (loss) from change in fair value of derivative liabilities-warrants.



Fair value disclosures



Bifurcated Embedded Derivative Instruments
– Series C and Series D Preferred Stock and convertible debentures held by investors other than YA Global - For financings
in which the embedded derivative instruments are bifurcated and recorded separately, the compound embedded derivative instruments
are valued using a Monte Carlo Simulation methodology because that model embodies certain relevant assumptions (including, but
not limited to, interest rate risk, credit risk, and conversion/redemption privileges) that are necessary to value these complex
derivatives.



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



The assumptions included in the
calculations are highly subjective and subject to interpretation. Assumptions used as of June 30, 2013 included exercise
estimates/behaviors and the following other significant estimates: (i) Preferred Stock: remaining term of 1.09 years,
equivalent volatility of 136%, equivalent interest rate of 8%, equivalent credit-risk adjusted rate of 6.5% and conversion
price of $0.00038, (ii) convertible debentures: Anti-dilution adjusted conversion price of $0.00032-$0.00038. Equivalent amounts
reflect the net results of multiple modeling simulations that the Monte Carlo Simulation methodology applies to underlying
assumptions.



Due to the variability of the conversion
prices, fluctuations in the trading market price of our Common Stock may result in significant variations to the calculated conversion
price. For each debenture, we analyze the ratio of the conversion price (as calculated based on the percentage of VWAP for the
appropriate look-back period) to the trading market price for a period of time equal to the term of the debenture to determine
the average ratio for the term of the note. Each quarter, the ratio in effect on the date of the valuation is compared with the
average ratio over the term of the debenture to determine if the calculated conversion price is representative of past trends or
if it is considered unrepresentative due to a large fluctuation in the Common Stock price over a short period of time. If the calculated
conversion price results in a ratio that deviates significantly from the average ratio over the term of the agreement, the average
ratio of the conversion price to the trading market price is then multiplied by the current trading market price to determine the
variable conversion price for use in the fair value calculations. This variable conversion price is then compared with the fixed
conversion price and, as required by the terms of the debentures, the lower of the two amounts is used as the conversion price
in the Monte Carlo Simulation model used for valuation purposes. On June 30, 2013, the fixed conversion price for each of the debentures
was equal to or higher than the calculated variable conversion price. Accordingly, the variable conversion price was used in the
Monte Carlo Simulation model. This analysis is performed each quarter to determine if the calculated conversion price is reasonable
for purposes of determining the fair value of the embedded conversion features (for instruments recorded under FASB ASC 815-15-25-1)
or the fair value of the hybrid instrument (for instruments recorded under FASB ASC 815-15-25-4).





Page 12







The following table reflects the face value
of the instruments, their amortized carrying value and the fair value of the separately-recognized compound embedded derivative,
as well the number of common shares into which the instruments are convertible as of June 30, 2013 and December 31, 2012.



|June 30, 2013            |  |                |       |  |          |   |       |          |  |   | Embedded   |  |  | Common |      
|------------------------ |  | -------------- | ----- |  | -------- | - | ----- | -------- |  | - | ---------- |  |  | ------ | -----
|                         |  | Face           |       |  | Carrying |   |       | Accrued  |  |   | Conversion |  |  | Stock  |      
|                         |  | Value          |       |  | Value    |   |       | Interest |  |   | Feature    |  |  | Shares |      
|                         |  | (in thousands) |      
|                         |  |                |       |  |          |   |       |          |  |   |            |  |  |        |      
|Series C Preferred Stock |  | $              | 4,816 |  |          | $ | 4,816 |          |  | $ | -          |  |  | $      | 3,967
|Series D Preferred Stock |  | $              | 348   |  |          | $ | 348   |          |  | $ | -          |  |  |        | 287  
|                         |  |                |       |  |          |   |       |          |  |   |            |  |  |        |      
|Debentures:              |  |                |       |  |          |   |       |          |  |   |            |  |  |        |      
|2006                     |  | $              | 53    |  |          | $ | 53    |          |  | $ | 9          |  |  |        | 32   
|Total                    |  | $              | 53    |  |          | $ | 53    |          |  | $ | 9          |  |  | $      | 4,286





|December 31, 2012        |  |                |       |  |          |   |       |          |  |   | Embedded   |  |  | Common |      
|------------------------ |  | -------------- | ----- |  | -------- | - | ----- | -------- |  | - | ---------- |  |  | ------ | -----
|                         |  | Face           |       |  | Carrying |   |       | Accrued  |  |   | Conversion |  |  | Stock  |      
|                         |  | Value          |       |  | Value    |   |       | Interest |  |   | Feature    |  |  | Shares |      
|                         |  | (in thousands) |      
|                         |  |                |       |  |          |   |       |          |  |   |            |  |  |        |      
|Series C Preferred Stock |  | $              | 4,840 |  |          | $ | 4,840 |          |  | $ | -          |  |  | $      | 1,988
|Series D Preferred Stock |  | $              | 348   |  |          | $ | 348   |          |  | $ | -          |  |  |        | 143  
|                         |  |                |       |  |          |   |       |          |  |   |            |  |  |        |      
|Debentures:              |  |                |       |  |          |   |       |          |  |   |            |  |  |        |      
|2006                     |  | $              | 53    |  |          | $ | 53    |          |  | $ | 7          |  |  |        | 16   
|Total                    |  | $              | 53    |  |          | $ | 53    |          |  | $ | 7          |  |  | $      | 2,147



The terms of the embedded conversion features
in the convertible instruments presented above provide for variable conversion rates that are indexed to our quoted Common Stock
price. As a result, the number of indexed shares is subject to continuous fluctuation. For presentation purposes, the number of
shares of Common Stock into which the embedded conversion feature of the Series C and Series D Preferred Stock was convertible
as of June 30, 2013 and December 31, 2012 was calculated as face value plus assumed dividends (if declared), divided by the lesser
of the fixed rate or the calculated variable conversion price using the 125 day look-back period. The number of shares of Common
Stock into which the embedded conversion feature in the convertible debentures was convertible as of June 30, 2013 and December
31, 2012 was calculated as the face value of each instrument divided by the variable conversion price using the appropriate look-back
period.



As discussed above, on February 4, 2013,
the terms of the debentures held by YA Global were modified to extend the stated maturity dates to August 1, 2014 and those debentures
are accounted for as hybrid instruments and are carried in their entirety at fair value. The debentures outstanding at June 30,
2013 of $53,000 shown above represent a portion of the debentures issued to YA Global which had previously been transferred by
YA Global to other parties. These debentures were not modified and matured on July 29, 2012. At June 30, 2013 the debentures had
not yet been converted or repaid.





Page 13







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



|Gain (loss) from change in fair value of derivative liability- Series C and D Preferred Stock and debentures | 
|------------------------------------------------------------------------------------------------------------ | 
|                                                                                                             | 
|                                                                                                             | 
|                                                                                                             | 
|                                                                                                             | 
|Series C Preferred Stock                                                                                     | 
|Series D Preferred Stock                                                                                     | 
|                                                                                                             | 
|Debentures:                                                                                                  | 
|2006                                                                                                         | 
|2008                                                                                                         | 
|2009                                                                                                         | 
|2010                                                                                                         | 
|2011                                                                                                         | 
|2012                                                                                                         | 
|Gain (loss) from change in fair value of derivative liability                                                | 



Hybrid Financial Instruments Carried at
Fair Value –- Since inception, the March 2007, August 2007, April 2008, May 2008 and April 2012 convertible debentures have
been recorded in their entirety at fair value as hybrid instruments in accordance with FASB ASC 815-15-25-4 with subsequent changes
in fair value charged or credited to income each period. As of May 25, 2012, we elected the fair value option for all other convertible
debentures held by YA Global upon a re-measurement date that was triggered by significant modifications of the financial instruments.



Because these debentures are carried in
their entirety at fair value, the value of the embedded conversion feature is embodied in those fair values. At inception, the
March 2007, August 2007, April 2008 and May 2008 debentures were valued using the Common Stock equivalent approach. For the April
26, 2012 debenture and, effective May 25, 2012 for all other debentures, the Company changed its method of estimating the fair
value of the hybrid instrument to consider the present value of the cash flows of the instrument, using a risk-adjusted interest
rate, enhanced by the value of the conversion option, valued using a Monte Carlo model. This method was considered by our management
to be the most appropriate method of encompassing the credit risk and exercise behavior that a market participant would consider
when valuing the hybrid financial instrument. Inputs used to value the hybrid instruments as of June 30, 2013 included: (i) present
value of future cash flows for the debenture using a risk adjusted interest rate of 6.50%, (ii) remaining term of 1.09 years, (iii)
equivalent volatility of 136%, equivalent interest rate of 9.5%, equivalent credit-risk adjusted rate of 6.50% and anti-dilution
adjusted conversion prices ranging from $0.00032- $0.00038.



The following table reflects the face value of the financial
instruments, the fair value of the hybrid financial instrument and the number of common shares into which the instruments are convertible
as of June 30, 2013 and December 31, 2012.



|June 30, 2013 |  |                |        |  |       |   |        | Common | 
|------------- |  | -------------- | ------ |  | ----- | - | ------ | ------ | 
|              |  | Face           |        |  | Fair  |   |        | Stock  | 
|              |  | Value          |        |  | Value |   |        | Shares | 
|              |  | (in thousands) |       
|Debentures:   |  |                |        |  |       |   |        |        | 
|2006          |  | $              | 6,493  |  |       | $ | 18,926 |        | 
|2007          |  |                | 7,373  |  |       |   | 22,423 |        | 
|2008          |  |                | 6,308  |  |       |   | 21,825 |        | 
|2009          |  |                | 1,062  |  |       |   | 3,548  |        | 
|2010          |  |                | 3,806  |  |       |   | 9,691  |        | 
|2011          |  |                | 1,551  |  |       |   | 3,194  |        | 
|2012          |  |                | 1,543  |  |       |   | 3,299  |        | 
|Total         |  | $              | 28,136 |  |       | $ | 82,906 |        | 





Page 14







|December 31, 2012 |  |                |        |  |       |   |        | Common | 
|----------------- |  | -------------- | ------ |  | ----- | - | ------ | ------ | 
|                  |  | Face           |        |  | Fair  |   |        | Stock  | 
|                  |  | Value          |        |  | Value |   |        | Shares | 
|                  |  | (in thousands) |       
|Debentures:       |  |                |        |  |       |   |        |        | 
|2006              |  | $              | 6,180  |  |       | $ | 14,758 |        | 
|2007              |  |                | 6,856  |  |       |   | 17,172 |        | 
|2008              |  |                | 6,468  |  |       |   | 15,492 |        | 
|2009              |  |                | 1,644  |  |       |   | 3,565  |        | 
|2010              |  |                | 3,806  |  |       |   | 7,178  |        | 
|2011              |  |                | 1,954  |  |       |   | 3,080  |        | 
|2012              |  |                | 1,979  |  |       |   | 3,047  |        | 
|Total             |  | $              | 28,887 |  |       | $ | 64,292 |        | 



Changes in the fair value of convertible
instruments that are carried in their entirety at fair value are reported as “Gain (loss) from change in fair value of hybrid
financial instruments” in the accompanying consolidated statements of operations. The changes in fair value of these hybrid
financial instruments were as follows:



|Gain (loss) from change in fair value of hybrid financial instruments | 
|--------------------------------------------------------------------- | 
|                                                                      | 
|                                                                      | 
|                                                                      | 
|                                                                      | 
|                                                                      | 
|2006                                                                  | 
|2007                                                                  | 
|2008                                                                  | 
|2009                                                                  | 
|2010                                                                  | 
|2011                                                                  | 
|2012                                                                  | 
|                                                                      | 
|Less: Day-one loss from debenture financings                          | 
|Gain (loss) from changes in fair value of hybrid instruments          | 





Page 15







Warrants-The following
table summarizes the warrants outstanding, their fair value and their exercise price after adjustment for anti-dilution provisions:



|A summary of the Common Stock
    warrants outstandingfollows: |  |            |      | 
|-------------------------------------------------------------- |  | ---------- | ---- | 
|                                                               |  |            |      | 
|                                                               |  |            |      | 
|                                                               |  |            |      | 
|                                                               |  |            |      | 
|                                                               |  | Expiration |      | 
|                                                               |  | Year       |      | 
|Warrants issued with preferred stock:                          |  |            |      | 
|                                                               |  |            |      | 
|Series D Preferred
    Stock                                   |  |            | 2017 | 
|                                                               |  |            |      | 
|Warrants issued with
    debentures:                           |  |            |      | 
|                                                               |  |            |      | 
|2008                                                           |  |            | 2015 | 
|                                                               |  |            |      | 
|2010                                                           |  |            | 2015 | 
|                                                               |  |            |      | 
|2011                                                           |  |            | 2016 | 
|                                                               |  |            |      | 
|2012                                                           |  |            | 2017 | 
|                                                               |  |            |      | 
|Total                                                          |  |            |      | 





The warrants are valued using a binomial
lattice option valuation methodology because that model embodies all of the significant relevant assumptions that address the features
underlying these instruments. Significant assumptions used in this model as of June 30, 2013 included an expected life equal to
the remaining term of the warrants, an expected dividend yield of zero, estimated volatility ranging from 118% to 199%, and risk-free
rates of return of 0.02% to 1.41%. For the risk-free rates of return, we use the published yields on zero-coupon Treasury Securities
with maturities consistent with the remaining term of the warrants and volatility is based upon our expected Common Stock price
volatility over the remaining term of the warrants. As a result of the repricing on February 1, 2013, the exercise price of the
warrants is currently $.0001. The anti-dilution provisions are still applicable so in the future the fixed exercise price of the
warrants may be reset to equal to the lowest price of any subsequently issued common share indexed instruments with a conversion
price below the current exercise price of the warrant.



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



|Gain (loss) from change in fair value of derivative liability- warrants |  |                             |     |  |                           |   |        |      | 
|----------------------------------------------------------------------- |  | --------------------------- | --- |  | ------------------------- | - | ------ | ---- | 
|                                                                        |  |                             |     |  |                           |   |        |      | 
|                                                                        |  | Three months ended June 30, |     |  | Six months ended June 30, |  
|                                                                        |  | 2013                        |     |  | 2012                      |   |        | 2013 | 
|Warrants issued with preferred stock:                                   |  | (in thousands)              |     |  | (in thousands)            |  
|Series D Preferred Stock                                                |  | $                           | 51  |  |                           | $ | 6,819  |      | 
|                                                                        |  |                             |     |  |                           |   |        |      | 
|Warrants issued with debentures:                                        |  |                             |     |  |                           |   |        |      | 
|2007                                                                    |  |                             | -   |  |                           |   | 4,356  |      | 
|2008                                                                    |  |                             | 137 |  |                           |   | 19,093 |      | 
|2010                                                                    |  |                             | 48  |  |                           |   | 6,525  |      | 
|2011                                                                    |  |                             | 33  |  |                           |   | 4,578  |      | 
|2012                                                                    |  |                             | 20  |  |                           |   | 1,038  |      | 
|Total                                                                   |  | $                           | 289 |  |                           | $ | 42,409 |      | 



Reconciliation of changes in fair value
–Assets and liabilities measured at fair value are classified in their entirety based on the lowest level
of input that is significant to their fair value measurement. Our derivative financial instruments that are measured at fair value
on a recurring basis are all measured at fair value using Level 3 inputs. Level 3 inputs are unobservable inputs that are supported
by little or no market activity and that are significant to the fair value of the assets or liabilities.





Page 16







The following represents a reconciliation
of the changes in fair value of financial instruments measured at fair value using Level 3 inputs and changes in the fair value
of hybrid instruments carried at fair value during the six months ended June 30, 2013:



|                                      |  | Compound    |       |   |             |   |        |             |  |   |        |  
|------------------------------------- |  | ----------- | ----- | - | ----------- | - | ------ | ----------- |  | - | ------ | -
|                                      |  | Embedded    |       |   | Warrant     |   |        | Hybrid      |  |   |        |  
|                                      |  | Derivatives |       |   | Derivatives |   |        | Instruments |  |   | Total  |  
|                                      |  |             |       |   |             |   |        |             |  |   |        |  
|Beginning balance, December 31, 2012: |  | $           | 2,147 |   |             | $ | 3,687  |             |  | $ | 64,292 |  
|                                      |  |             |       |   |             |   |        |             |  |   |        |  
|Fair value adjustments:               |  |             |       |   |             |   |        |             |  |   |        |  
|Compound embedded derivatives         |  |             | 2,149 |   |             |   | -      |             |  |   | -      |  
|Warrant derivatives                   |  |             | -     |   |             |   | (3,411 | )           |  |   | -      |  
|Hybrid instruments                    |  |             | -     |   |             |   | -      |             |  |   | 22,795 |  
|                                      |  |             |       |   |             |   |        |             |  |   |        |  
|Conversions:                          |  |             |       |   |             |   |        |             |  |   |        |  
|Series C Preferred Stock              |  |             | (10   | ) |             |   | -      |             |  |   | -      |  
|August 24, 2006 financing             |  |             | -     |   |             |   | -      |             |  |   | (644   | )
|December 29, 2006 financing           |  |             | -     |   |             |   | -      |             |  |   | (503   | )
|March 27, 2007 financing              |  |             | -     |   |             |   | -      |             |  |   | (242   | )
|April 11, 2008 financing              |  |             | -     |   |             |   | -      |             |  |   | (71    | )
|July 29, 2008 financing               |  |             | -     |   |             |   | -      |             |  |   | (234   | )
|July 15, 2009 financing               |  |             | -     |   |             |   | -      |             |  |   | (823   | )
|August 14, 2009 financing             |  |             | -     |   |             |   | -      |             |  |   | (475   | )
|February 8, 2011 financing            |  |             | -     |   |             |   | -      |             |  |   | (28    | )
|April 13, 2011 financing              |  |             | -     |   |             |   | -      |             |  |   | (199   | )
|October 25, 2011 financing            |  |             | -     |   |             |   | -      |             |  |   | (37    | )
|December 8, 2011 financing            |  |             | -     |   |             |   | -      |             |  |   | (217   | )
|March 26, 2012 financing              |  |             | -     |   |             |   | -      |             |  |   | (141   | )
|June 1, 2012 financing                |  |             | -     |   |             |   | -      |             |  |   | (567   | )
|Ending balance, June 30, 2013         |  | $           | 4,286 |   |             | $ | 276    |             |  | $ | 82,906 |  
|                                      |  |             |       |   |             |   |        |             |  |   |        |  



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



Note 5 – Contingencies



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



Note 6 – Stock-Based Compensation



Total stock-based compensation expense recorded in the statement
of operations was $786 and $6,500 for the three months ended June 30, 2013 and 2012, respectively and $786 and $13,700 for the
six months ended June 30, 2013 and 2012, respectively.





Page 17







A summary of the transactions and status
of our granted, vested and exercisable options during the six months ended June 30, 2013 follows:





|                                 |  |                |       |   |           |   |      |                |  |   | Weighted-   | 
|-------------------------------- |  | -------------- | ----- | - | --------- | - | ---- | -------------- |  | - | ----------- | 
|                                 |  |                |       |   |           |   |      |                |  |   | Average     | 
|                                 |  |                |       |   | Weighted- |   |      |                |  |   | Contractual | 
|                                 |  |                |       |   | Average   |   |      | Aggregate      |  |   | Life        | 
|                                 |  |                |       |   | Exercise  |   |      | Intrinsic      |  |   | Remaining   | 
|                                 |  | Shares         |       |   | Price     |   |      | Value          |  |   | in Years    | 
|                                 |  | (in thousands) |       |   |           |   |      | (in thousands) |  |   |             | 
|Outstanding at December 31, 2012 |  |                | 1,340 |   |           | $ | 0.02 |                |  |   | -           | 
|Granted                          |  |                | -     |   |           |   | -    |                |  |   | -           | 
|Exercised                        |  |                | -     |   |           |   | -    |                |  |   | -           | 
|Forfeited                        |  |                | (167  | ) |           |   | -    |                |  |   | -           | 
|Outstanding at June 30, 2013     |  |                | 1,173 |   |           | $ | 0.02 |                |  | $ | -           | 
|Exercisable at June 30, 2013     |  |                | 897   |   |           | $ | 0.02 |                |  | $ | -           | 



The following table summarizes information about our stock options
outstanding at June 30, 2013:





|Options Outstanding |                 |  | Options Exercisable | 
|------------------- | --------------- |  | ------------------- | 
|Exercise Prices     |                 |  | Number of Shares    | 
|                    |                 |  | (in thousands)      | 
|                    |                 |  |                     | 
|                    | $0.01           |  |                     | 
|                    | $0.014 to $0.03 |  |                     | 
|                    | $0.05           |  |                     | 
|                    |                 |  |                     | 





Note 7 – Transactions with Related
Parties



Pursuant to ASC 850 “Related Party
Disclosure”, the Company has evaluated related parties and all transactions associated with those and determined that no
transactions exist which would require disclosure.



Note 8 – Change in Accounting
Policy



In early 2013, the Company expanded its
business strategy specifically related to the monetization of its intellectual property and has been pursuing brand licenses with
major corporations. This expansion of strategy gave rise to a change in accounting principle by which we recognize revenue as
detailed in Note 2, above, changing from the proportional performance methodology to the completed performance methodology. The
Company’s contracts consider the delivery of a number of elements including but not limited to a prospective license to
utilize methodologies covered by certain licensed patents, as defined specifically by the agreement in question, for a specified
license term. Upon delivery of all contractual elements, the Company recognizes all revenue associated with the contract provided
that all other recognition criteria have been met. We evaluated our accounting principles related to revenue recognition in Q2
2013 and determined that the completed performance methodology was preferable and such change represents, in the our circumstances,
the adoption of a preferable accounting principle in conformity with ASC 250, Accounting Changes and Error Corrections.







The Company conducted a quantitative analysis
of the impact of the accounting policy change on our balance sheet and income statement for the fiscal year ended December 31,
2012 and the fiscal quarter ended March 31, 2013 which are presented below. The analysis shows that when considering the overall
impact on the financial statements for the December 31, 2012 and March 31, 2013 prior periods, the impact is immaterial. For the
year ended December 31, 2012 and the three months ended March 31, 2013, our net loss and total current liabilities are impacted
by less than 1%. Our conclusion is that the change in accounting policy enacted in 2013 has no material effect on prior period
financial statements.







Page 18







|As of and for the year ended December 31, 2012                            |  |             |         |   |                             |   |      |             | 
|------------------------------------------------------------------------- |  | ----------- | ------- | - | --------------------------- | - | ---- | ----------- | 
|                                                                          |  | As reported |         |   | Effect of Accounting Change |   |      | As Adjusted | 
|Consolidated
    Statement of Operations and Comprehensive Loss           |  |             |         |   |                             |   |      |             | 
|Revenue                                                                   |  | $           | 2,344   |   |                             | $ | 208  |             | 
|Net (loss)
    attributable to common shareholders                        |  | $           | (19,386 | ) |                             | $ | 208  |             | 
|                                                                          |  |             |         |   |                             |   |      |             | 
|Consolidated
    Balance Sheet                                            |  |             |         |   |                             |   |      |             | 
|Assets                                                                    |  |             |         |   |                             |   |      |             | 
|Current Assets                                                            |  | $           | 948     |   |                             | $ | -    |             | 
|Long-Term Assets                                                          |  |             | 5,091   |   |                             |   | -    |             | 
|Total Assets                                                              |  | $           | 6,039   |   |                             | $ | -    |             | 
|                                                                          |  |             |         |   |                             |   |      |             | 
|Liabilities and Shareholders Deficit                                      |  |             |         |   |                             |   |      |             | 
|Current Liabilities, excluding Deferred revenue and customer pre-payments |  | $           | 71,840  |   |                             | $ | -    |             | 
|Deferred revenue and customer prepayments                                 |  |             | 3,735   |   |                             |   | (208 | )           | 
|Total Current Liabilities                                                 |  |             | 75,575  |   |                             |   | (208 | )           | 
|                                                                          |  |             |         |   |                             |   |      |             | 
|Series C & D Convertible Preferred Stock                                  |  |             | 5,188   |   |                             |   | -    |             | 
|                                                                          |  |             |         |   |                             |   |      |             | 
|Total Shareholders' Deficit                                               |  |             | (74,724 | ) |                             |   | 208  |             | 
|Total Liabilities and  Shareholders Deficit                               |  | $           | 6,039   |   |                             | $ | -    |             | 





As of and for the three months ended March 31, 2013



|                                                                          |  | As reported |         |   | Effect of Accounting Change |   |     | As Adjusted | 
|------------------------------------------------------------------------- |  | ----------- | ------- | - | --------------------------- | - | --- | ----------- | 
|Condensed
    Consolidated Statement of Operations and Comprehensive Loss |  |             |         |   |                             |   |     |             | 
|Revenue                                                                   |  | $           | 602     |   |                             | $ | (21 | )           | 
|Net income (loss) attributable to common shareholders                     |  | $           | 9,036   |   |                             | $ | (21 | )           | 
|                                                                          |  |             |         |   |                             |   |     |             | 
|Condensed
    Consolidated Balance Sheet                                  |  |             |         |   |                             |   |     |             | 
|Assets                                                                    |  |             |         |   |                             |   |     |             | 
|Current Assets                                                            |  | $           | 365     |   |                             | $ | -   |             | 
|Long-Term Assets                                                          |  |             | 4,870   |   |                             |   | -   |             | 
|Total Assets                                                              |  | $           | 5,235   |   |                             | $ | -   |             | 
|                                                                          |  |             |         |   |                             |   |     |             | 
|Liabilities and Shareholders Deficit                                      |  |             |         |   |                             |   |     |             | 
|Current Liabilities, excluding Deferred revenue and customer pre-payments |  | $           | 59,162  |   |                             | $ | -   |             | 
|Deferred revenue and customer prepayments                                 |  |             | 3,348   |   |                             |   | 21  |             | 
|Total Current Liabilities                                                 |  |             | 62,510  |   |                             |   | 21  |             | 
|                                                                          |  |             |         |   |                             |   |     |             | 
|Series C & D Convertible Preferred Stock                                  |  |             | 5,188   |   |                             |   | -   |             | 
|                                                                          |  |             |         |   |                             |   |     |             | 
|Total Shareholders' Deficit                                               |  |             | (62,463 | ) |                             |   | (21 | )           | 
|Total Liabilities and  Shareholders Deficit                               |  | $           | 5,235   |   |                             | $ | -   |             | 



Note 9 – Subsequent Events



Pursuant to ASC 855 “Subsequent Events”,
management has evaluated all events and transactions that occurred from June 30, 2013 through the date of issuance of the financial
statements.  During this period we did not have any significant subsequent events, except as disclosed below:



| | · | Subsequent to June 30, 2013, holders of convertible debentures have converted $27,000 of principal
and accrued interest on those debentures into 75,000,000 shares of our Common Stock.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





Page 19







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



Overview



NeoMedia has positioned itself to pioneer
2D mobile barcode technology and infrastructure solutions that enable the mobile barcode ecosystem world-wide. We believe that
our extensive intellectual property portfolio differentiates us from the competition. We strive to harness the power of the mobile
phone in innovative ways with state-of-the-art mobile barcode technology. With this technology, mobile phones with cameras become
barcode scanners and this enables a range of practical applications including mobile marketing and advertising as well as mobile
couponing. We offer barcode management and infrastructure solutions, barcode reader solutions and IP licensing.



We are focused in two key areas: the first
is the maximization of our patent portfolio through IP licensing and enforcement, and the second is our two tiered sales approach
on partnering with brands and agencies directly as well as partnering with key mobile marketing organizations to maximize the reach
of our barcode management and infrastructure solutions. We are focusing our sales and marketing activities primarily in the United
States and Europe and pursue other regions opportunistically.



NeoMedia has been active in, and strived
to be an innovator in, the mobile barcode field since the mid-1990s, and during that time has spearheaded the development of a
robust IP portfolio. In September 2011, we announced an agreement with Global IP Law Group to help further monetize our patent
portfolio and lead the licensing of our IP, focusing on the US market but covering all markets in which we have patent coverage.
We recently won an appeal for a key patent in our portfolio in the EU and believe this European Patent Office (“EPO”)
win is key to the growth of our patent business in Europe. We currently have IP agreements with twenty companies. We are hopeful
that our IP licensing activities will continue to generate new licensees over the course of 2013. We have established a rate card
and standard licensing agreements for IP licensing, for brands and 2D providers, which we anticipate will help to expedite the
licensing opportunities underway. We intend to continue to vigorously pursue or defend, as applicable, claims affecting the business
interests and intellectual property of the Company including litigation activities, where appropriate. In addition, through our
licensing program, several companies, including technology companies and brands, have agreed to cease and desist in their mobile
barcode activities.



Our barcode management and infrastructure
solution includes both our barcode reader (NeoReader®), our enterprise grade barcode infrastructure solution (NeoSphereTM)
and our self-service code creation platform (QodeScanTM). Mobile barcodes continue to be an increasingly important engagement
tool for brands and marketers and we continue to see interest from prospective customers from across the globe.



We continue to be faced with downward price
pressure in the market given the fragmented competitive environment for mobile barcode solutions as well as the ‘battle’
between free and fee based solutions. We believe that NeoMedia will continue to differentiate itself on the basis of its high quality
product and service offerings, customizable and full service solutions and our robust intellectual property portfolio. The sales
process for mobile barcodes is a consultative sales process and our research suggests that in most cases, organizations are seeking
an end-to-end solution, including mobile websites, rich media, etc. Accordingly, NeoMedia has extended its partner relationships
to offer its customers a full service solution. Given the consultative sale process, the sales cycles tend to be longer and more
resource intensive. We are hopeful that QodeScan will help reduce the effort required to support small or low cost sales opportunities,
freeing staff to focus on larger opportunities.



NeoMedia continues to promote an open and
interoperable approach to the market to empower the mobile ecosystem - and deploys an indirect methodology for our customers. Our
research suggests we are one of the few providers in the global ecosystem to offer Aztec, Code 39 and PDF417 code support, in addition
to QR, Data matrix and a variety of 1D symbologies.



NeoReader has also experienced continued
growth in Q2-2013. With pre-install agreements with Sony Mobile and Samsung Electronics Italy, as well as being downloadable from
the key “app stores” including Android, Apple, Blackberry, Nokia and Ovi as well as via our own website, http://get.neoreader.com,
our reader now has 40 million installations.  NeoReader is offered to consumers free of charge and we anticipate the growth
in consumer utilization will continue and help encourage brand adoption of mobile barcodes.  We have also added mobile advertising
support to our NeoReader product as well as the opportunity to delete mobile ads, at an additional fee. NeoMedia also offers NeoReader
Enterprise and SDK for enterprise opportunities and we have seen a significant increase in demand for NeoReader SDK, primarily
from Asia and Europe. We believe we have the best decoding algorithms (speed and performance) in the industry, which differentiate
our reader from the majority of solutions in the market.



Our successes in our two key areas of focus
has meant that we are self-sufficient from a cash flow perspective given our increasing revenues and stabilized costs. In Q2 2013,
we generated operating income for the first time in the Company’s recent history. We have not had to raise and take any additional
outside funding since Summer-2012 and expect this to continue.





Page 20







Comparison of the Three and Six Months
Ended June 30, 2013 and 2012



Results
of Operations



We continue to focus on growing our patent
licensing and barcode management and infrastructure business. During the six months ended June 30, 2013 and 2012, our operating
income/(loss) was $5,800 and $(1.8) million, respectively. The generation of operating income in the six months ended June 30,
2013 is attributable to an increase in 2D core and IP licensing revenue and significant decreases in operating expenses leading
to substantial operating income during the second quarter of 2013, marking the first time in the Company’s recent history
that operating income was realized. Our net loss was $21.3 million and $41.4 million for the six months ended June 30, 2013 and
2012, respectively. Our net loss includes gains and losses from the change in fair value of our hybrid financial instruments, warrants
and debentures. We incur these gains and losses principally as a result of changes in the market value of our Common Stock. During
the six months ended June 30, 2013, we reported losses on our hybrid financial instruments, warrants and debentures, totaling $21.5
million and during the six months ended June 30, 2012, we reported losses on our hybrid financial instruments, warrants and debentures,
totaling $35.3 million. Due to the volatility of our Common Stock price during the six months ended June 30, 2013, changes in the
fair value of our derivative liabilities have a material impact on our overall net loss which makes quarterly and annual comparisons
difficult.



Revenues. Revenues for the
three months ended June 30, 2013 and 2012, respectively, were $1,667,000 and $461,000, an increase of $1,206,000, or 262%. Revenues
for the six months ended June 30, 2013 and 2012 were $2,269,000 and $1,187,000, an increase of $1,082,000, or 91%.



These increases in revenue are attributable
to new IP clients and our change to IP revenue recognition policy as well as an increasing number of NeoReader SDK sales and the
launch of our QodeScan self -service barcode management service.



Cost of Revenues. Cost of
revenues was $269,000 for the three months ended June 30, 2013 compared with $6,000 for the three months ended June 30, 2012, an
increase of $263,000, or 4383%. Cost of revenues was $300,000 for the six months ended June 30, 2013 compared with $28,000 for
the six months ended June 30, 2012, an increase of $272,000 or 971%. Cost of revenue is tied to the timing and amount of sales
commissions and certain third party professional fees related to the sale of IP licenses. These expenses are proportional to revenue
recognized and as such increases in revenue in 2013 have given rise to increased costs of revenue.



Sales and Marketing. Sales
and marketing expenses were $47,000 and $215,000 for the three months ended June 30, 2013 and 2012, respectively, a decrease of
$168,000, or 78%. Sales and marketing expenses were $108,000 and $420,000 for the six months ended June 30, 2013 and 2012, respectively,
a decrease of $312,000 or 74%. The continuing decrease in sales and marketing costs are a result of cost containment. We expect,
however, that our sales and marketing expense will increase as we continue to promote our business strategy.



General and Administrative.
General and administrative expenses were $665,000 and $913,000 for the three months ended June 30, 2013 and 2012, respectively,
a decrease of $248,000, or 27%. General and administrative expenses were $1,471,000 and $1,913,000 for the six months ended June
30, 2013 and 2012, respectively, a decrease of $442,000 or 23%. General and administrative expenses decreased due to ongoing personnel
and other cost reduction activities partially offset by associated legal fees and intellectual property enforcement activities.
A significant expense for us is the cost to maintain our public company status including legal, auditors, filings and SEC compliance.
We also had higher than anticipated expense this quarter related to an arbitration proceeding which concluded in Q2.



Research and Development.
Research and development expenses were $172,000 and $259,000 for the three months ended June 30, 2013 and 2012, respectively, a
decrease of $87,000, or 34%. Research and development expenses were $384,000 and $593,000 for the six months ended June 30, 2013
and 2012, respectively, a decrease of $209,000 or 35%. Research and development expenses decreased as we focused our development
efforts in our 2D Core services and subsequently launched our QodeScan self-service barcode management platform, resulting in a
reduced requirement for ongoing development services.



Income (Loss) from Operations.
 For the three months ended June 30, 2013, our income from operations was $514,000. For the three months ended June
30, 2012, our loss from operations was $932,000. For the six months ended June 30, 2013, our income from operations was $5,800.
For the six months ended June 30, 2012, our loss from operations was $1,767,000. This improvement was primarily the result of increased
revenue and gross profit due to our changes in operating strategy, as defined in Item 2 – “Overview.”.



Gain (Loss) from Change in Fair Value
of Hybrid Financial Instruments. We carry certain of our debentures at fair value, in accordance with FASB ASC 815-15-25,
and do not separately account for the embedded conversion feature. The change in the fair value of these liabilities includes changes
in the value of the accrued interest due under these instruments, as well as changes in the fair value of the Common Stock underlying
the instruments. For the three months ended June 30, 2013 and 2012, the liability related to these hybrid instruments fluctuated,
resulting in a loss of $29.6 million and gain of $36.7 million, respectively. For the six months ended June 30, 2013 and 2012,
the liability related to these hybrid instruments fluctuated, resulting in a loss of $22.8 million and a gain of $5.6 million,
respectively.



Page 21







Gain (Loss) from Change in Fair Value
of Derivative Liabilities – Warrants. We account for our outstanding Common Stock warrants that were issued in connection
with our preferred stock and our debentures, at fair value. For the three months ended June 30, 2013 and 2012, the liability related
to these instruments fluctuated, resulting in gains of $289,000 and $42.4 million, respectively. For the six months ended June
30, 2013 and 2012, the liability related to warrants fluctuated resulting in gains of $3.4 million and $921,000, respectively.



Gain (Loss) from Change in Fair Value
of Derivative Liabilities – Series C and D Preferred Stock and Debentures. For our Series C and D Preferred Stock,
and certain of our debentures, we account for the embedded conversion feature separately as a derivative financial instrument.
We carry these derivative financial instruments at fair value. For the three months ended June 30, 2013 and 2012, the liability
related to these hybrid instruments fluctuated, resulting in a loss of $1.8 million and a gain of $75.4 million, respectively.
For the six months ended June 30, 2013 and 2012, the liability related to the derivative instruments embedded in the Series C and
D Preferred Stock and these debentures fluctuated, resulting in losses of $2.1 million and $14.3 million, respectively.



The changes in the fair values of our hybrid
financial instruments and our derivative liabilities were primarily the result of fluctuations in the value of our Common Stock
during the period. Because our Common Stock price has been volatile and because many of our derivative financial instruments include
relatively low fixed conversion or exercise prices, it is possible that further fluctuations in the market price of our Common
Stock could cause the fair value of these instruments to increase or decrease significantly in future periods. The fair values
of these instruments are subject to volatility so long as the preferred stock, debentures and warrants are outstanding. These instruments
will no longer be volatile upon their conversion or exercise into Common Stock.



Other income. Other income
for the three and six months ended June 30, 2013 was $227,000 related to an arbitration proceeding which concluded in Q2 2013.
There was no comparable activity in the prior periods.



Interest Expense Related to Convertible
Debt - Following the May 25, 2012 modification of the debentures, which extended their due date, the debentures are no
longer carried at amortized cost but are carried as hybrid financial instruments at fair value. As a result, the interest on these
debentures subsequent to May 25, 2012 is reported as part of the Gain (Loss) from Change in Fair Value of Hybrid Financial Instruments
and is no longer separately reported as interest expense.



Net Income (Loss) - As a
result of the above, during the three months ended June 30, 2013 and 2012, we experienced net loss of $30.4 million and net income
of $124.1 million, respectively. During the six months ended June 30, 2013 and 2012, we experienced a net loss of $21.3 million
and $41.4 million, respectively. This change resulted primarily from gains in the fair value of our hybrid and derivative instruments
during the three months ended June 30, 2012 compared with losses for the three months ended June 30, 2013 and the six months ended
June 30, 2013 and 2012.



Other Comprehensive Income –
For the three months ended June 30, 2013 and 2012, other comprehensive losses were $223,000 and $8,000, respectively. For the six
months ended June 30, 2013 and 2012, other comprehensive losses were $334,000 and $15,000, respectively. These losses were due
to an accumulation of foreign currency transactions related to our subsidiary in Europe.



The table below highlights the results
from operations outlined above. Significant period-over-period increases in revenue and operating income substantiate our operating
strategy outlined above.





Page 22







|                                                                                                                  |  | Three
    months ended June 30, |         |   | Six
    months ended June 30, |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ----------------------------- | -
|                                                                                                                  |  | 2013                            |         |   | 2012                          |  
|                                                                                                                  |  | (in
    thousands)              |        
|                                                                                                                  |  |                                 |         |   |                               |  
|Revenue                                                                                                           |  | $                               | 1,667   |   |                               | $
|                                                                                                                  |  |                                 |         |   |                               |  
|Operating
    income (loss)                                                                                       |  |                                 | 514     |   |                               |  
|Loss
    on extinguishment of debt                                                                                |  |                                 | -       |   |                               |  
|Gain/(loss)
    from change in fair value of hybrid financial instruments                                         |  |                                 | (29,569 | ) |                               |  
|Gain/(loss)
    from change in fair value of derivative liability - warrants                                      |  |                                 | 289     |   |                               |  
|Gain/(loss)
    from change in fair value of derivative liability - Series C and D preferred stock and debentures |  |                                 | (1,849  | ) |                               |  
|Other
    income                                                                                                  |  |                                 | 227     |   |                               |  
|Interest
    (expense) / income                                                                                   |  |                                 | 16      |   |                               |  
|Net
    Income (loss) available to common shareholders                                                            |  | $                               | (30,372 | ) |                               | $



Liquidity
and Capital Resources



As of June 30, 2013, we had $70,000 in
cash and cash equivalents, a decrease of $541,000, compared with $611,000 as of December 31, 2012.



Cash used in operating activities decreased
to $875,000 for the six months ended June 30, 2013, compared with $1,981,000 for the six months ended June 30, 2012, representing
increased income due to our patent licensing activities and decreased operational expenses.



There was no cash provided by or used in
investing activities during the six months ended June 30, 2013 as compared to $3,000 used during the prior period.



There was no cash provided by or used in
financing activities during the six months ended June 30, 2013. Cash provided by financing activities during the six months ended
June 30, 2012 was $2,075,000, reflecting gross proceeds of $2,200,000 from five debentures issued to YA Global, net of $125,000
in structuring and due diligence fees.



Conversions of our debentures into Common
Stock have a positive effect on our future liquidity by reducing the amount we will have to repay. During the six months ended
June 30, 2013, investors converted 24 shares of Series D Preferred Stock and $2,560,876 of principal and accrued interest on the
convertible debentures. During the six months ended June 30, 2012, investors converted 246 shares of Series C Preferred Stock,
10,469 shares of Series D Preferred Stock, and $3,411,263 of principal and accrued interest on the convertible debentures. These
conversions have reduced the carrying value of the Series C and D Preferred Stock and the associated derivative liabilities and
the debentures payable carried at fair value, and as a result, have continued to strengthen our balance sheet.



Going Concern – We
have historically incurred net losses from operations and we expect that we will continue to have negative cash flows as we implement
our business plan. There can be no assurance that our continuing efforts to execute our business plan will be successful and that
we will be able to continue as a going concern. The accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America (“US GAAP”), which contemplates our continuation
as a going concern. Net (loss) for the six months ended June 30, 2013 and 2012, respectively, was $(21.3) million and $(41.4) million,
of which $(21.5) million and $(35.3) million, respectively, were net losses related to our financing instruments. Our operating
income was $5,800 for the six months ended June 30, 2013, and our operating loss was $(1.8) million for the six months ended June
30, 2012.



Net cash used by operations during the
six months ended June 30, 2013 and 2012 was $(875,000) and $(2.0) million, respectively. At June 30, 2013, we have an accumulated
deficit of $(287) million. We also have a working capital deficit of $(91.1) million, of which $(87.5) million is related to our
financing instruments related to the fair value of warrants and those debentures that are recorded as hybrid financial instruments
and the amortized cost carrying value of certain of our debentures and the fair value of the associated derivative liabilities.





Page 23







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



We currently do not have sufficient cash,
or commitments for financing to sustain our operations for the next twelve months. Our plan is to develop new client and customer
relationships and substantially increase our revenue derived from improved products and IP licensing. If our revenues are not to
plan and our operating expenses cannot be reduced to sustain our operations, we may require additional financing in order to execute
our operating plan; however, we believe that such additional financing will not be necessary. If additional financing is required,
we cannot predict whether this additional financing will be in the form of equity, debt, or another form and we may not be able
to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In the event that these financing
sources do not materialize, or that we are unsuccessful in increasing our revenues and profits, we may be unable to implement our
current plans for expansion, repay our debt obligations or respond to competitive pressures, any of which circumstances would have
a material adverse effect on our business, prospects, financial condition and results of operations.



The convertible debentures and preferred
stock used to finance the Company, which may be converted into Common Stock at the sole option of the holders, have a highly dilutive
impact when they are converted, greatly increasing the number of common shares outstanding. During the three months ended June
30, 2013, there were 1,564,810,047 shares of Common Stock issued for these conversions. The Company cannot predict if and when
each holder may or may not elect to convert into common shares.



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



Sources of Cash and Projected Cash
Requirements – As of June 30, 2013, our cash balance was $70,000. NeoMedia’s past financing agreements
with YA Global have certain ramifications that could affect future liquidity and business operations. For example, pursuant to
the terms of the debenture agreements between us and YA Global, without YA Global’s consent we cannot (i) issue or sell
any shares of our Common Stock or our preferred stock without consideration or for consideration per share less than the closing
bid price immediately prior to its issuance, (ii) issue or sell any preferred stock, warrant, option, right, contract, call,
or other security or instrument granting the holder thereof the right to acquire our Common Stock for consideration per share less
than the closing bid price immediately prior to its issuance, (iii) enter into any security instrument granting the holder a security
interest in any of our assets or (iv) file any registration statements on Form S-8. In addition, pursuant to security agreements
between us and YA Global, YA Global has a security interest in all of our assets. Such covenants could severely harm our ability
to raise additional funds from sources other than YA Global, and would likely result in a higher cost of capital in the event we
secured funding. Additionally, pursuant to the terms of the Investment Agreement between us and YA Global in connection with our
Series C Preferred Stock, we cannot (i) enter into any debt arrangements in which we are the borrower, (ii) grant any security
interest in any of our assets or (iii) grant any security below market price.



Critical Accounting Policies and Estimates



Other than the change in our revenue recognition policy as described
in Note 8 to the financial statements, there have been no material changes to our critical accounting policies and estimates from
the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.



ITEM 3. Quantitative and Qualitative
Disclosures about Market Risk



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



ITEM 4. Controls and Procedures



Evaluation of Disclosure Controls
and Procedures

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



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





Page 24







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



For the period ended June 30, 2013, our
CEO and CFO concluded that our disclosure controls and procedures were not effective at a reasonable assurance level, because of
material weaknesses with respect to entity level controls over financial reporting, which we are in the process of remediating.
Such weaknesses were:



| | · | Our senior management did not establish and maintain proper oversight
as to internal control over financial reporting as of June 30, 2013. Specifically, our senior management was unable, due to time
constraints, to completely address the control weaknesses brought to their attention through the audit process. The management
of the Company continues to enhance internal controls within the time and resource constraints of the Company.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | We, through our senior management, did not maintain formalized accounting
policies and procedures as of June 30, 2013. As these policies are being implemented, they will provide guidance to accounting
personnel in the proper treatment and recording of financial transactions, as well as proper internal controls over financial reporting.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Senior management did not consistently ensure that recurring and non-recurring
journal entries were subject to proper review and approval prior to preparation of the resulting financial statements as of June
30, 2013. Although our review did not disclose any materially incorrect or improper entries, proper review and approval of all
financial transactions should occur.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Changes in Internal Control over
Financial Reporting



During the second quarter of 2013, senior
management established and maintained proper oversight over financial reporting through the creation of certain accounting policies
and procedures, including a formalized review process of recurring and non-recurring journals entries, to ensure that (1) accounting
personnel received proper guidance regarding the treatment and recording of financial transactions and (2) senior management appropriately
reviewed information prior to the preparation of financial statements.



While we consider our remediation efforts
substantially complete, management believes the above material weaknesses remain until our new controls over financial reporting
are operating effectively for an appropriate period of time.





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PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings



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



ITEM 1A. Risk Factors



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



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



None



ITEM 3. Defaults upon Senior Securities



None



ITEM 4. Mine Safety Disclosures



Not Applicable



ITEM 5. Other Information



None





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ITEM 6. Exhibits



|ExhibitNo. |  | Description                                                                                                                                                                                                                                                                                                                                                                     |  | FiledHerewith |  | Form |  | Exhibit |  | FilingDate
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- |  | ---- |  | ------- |  | ----------
|3.1        |  | Articles of Incorporation of Dev-Tech Associates, Inc. and amendment thereto                                                                                                                                                                                                                                                                                                    |  |               |  | SB-2 |  | 3.1     |  | 11/25/1996
|3.2        |  | By-laws of the Company                                                                                                                                                                                                                                                                                                                                                          |  |               |  | 8-K  |  | 3.2     |  | 12/21/2010
|3.3        |  | Restated Certificate of Incorporation of DevSys, Inc.                                                                                                                                                                                                                                                                                                                           |  |               |  | SB-2 |  | 3.3     |  | 11/25/1996
|3.4        |  | Articles of Merger and Agreement and Plan of Merger of DevSys, Inc. and Dev-Tech Associates, Inc.                                                                                                                                                                                                                                                                               |  |               |  | SB-2 |  | 3.5     |  | 11/25/1996
|3.5        |  | Certificate of Merger of Dev-Tech Associates, Inc. into DevSys, Inc.                                                                                                                                                                                                                                                                                                            |  |               |  | SB-2 |  | 3.6     |  | 11/25/1996
|3.6        |  | Articles of Incorporation of Dev-Tech Migration, Inc. and amendment thereto                                                                                                                                                                                                                                                                                                     |  |               |  | SB-2 |  | 3.7     |  | 11/25/1996
|3.7        |  | Restated Certificate of Incorporation of DevSys Migration, Inc.                                                                                                                                                                                                                                                                                                                 |  |               |  | SB-2 |  | 3.9     |  | 11/25/1996
|3.8        |  | Form of Agreement and Plan of Merger of Dev-Tech Migration, Inc. into DevSys Migration, Inc.                                                                                                                                                                                                                                                                                    |  |               |  | SB-2 |  | 3.11    |  | 11/25/1996
|3.9        |  | Form of Certificate of Merger of Dev-Tech Migration, Inc. into DevSys Migration, Inc.                                                                                                                                                                                                                                                                                           |  |               |  | SB-2 |  | 3.12    |  | 11/25/1996
|3.10       |  | Certificate of Amendment to Certificate of Incorporation of DevSys, Inc. changing our name to NeoMedia Technologies, Inc.                                                                                                                                                                                                                                                       |  |               |  | SB-2 |  | 3.13    |  | 11/25/1996
|3.11       |  | Form of Certificate of Amendment to Certificate of Incorporation of the Company authorizing a reverse stock split                                                                                                                                                                                                                                                               |  |               |  | SB-2 |  | 3.14    |  | 11/25/1996
|3.12       |  | Form of Certificate of Amendment to Restated Certificate of Incorporation of the Company increasing authorized capital and creating preferred stock                                                                                                                                                                                                                             |  |               |  | SB-2 |  | 3.15    |  | 11/25/1996
|3.13       |  | Certificate of Designation of the Series C Convertible Preferred Stock dated February 17, 2006                                                                                                                                                                                                                                                                                  |  |               |  | 8-K  |  | 10.9    |  | 2/21/2006 
|3.14       |  | Certificate of Amendment to the Certificate of Designation of the Series C Convertible Preferred Stock dated January 5, 2010                                                                                                                                                                                                                                                    |  |               |  | 8-K  |  | 3.1     |  | 1/11/2010 
|3.15       |  | Certificate of Designation of the Series D Convertible Preferred Stock dated January 5, 2010                                                                                                                                                                                                                                                                                    |  |               |  | 8-K  |  | 10.1    |  | 1/8/2010  
|3.16       |  | Certificate of Amendment to the Certificate of Designation of the Series D Convertible Preferred Stock dated January 7, 2010                                                                                                                                                                                                                                                    |  |               |  | 8-K  |  | 3.3     |  | 1/11/2010 
|3.17       |  | Certificate of Amendment to the Certificate of Designation of the Series D Convertible Preferred Stock dated March 5, 2010                                                                                                                                                                                                                                                      |  |               |  | 8-K  |  | 3.1     |  | 3/11/2010 
|18.1       |  | Preferability Letter dated August 1, 2013 from the Company’s Auditors, Stark Schenkein LLP regarding a change in the Company’s accounting policies related to revenue recognition                                                                                                                                                                                               |  | X             |  |      |  |         |  |           
|31.1       |  | Certification by Principal Executive Officer pursuant to Rule 13a-14(a)/ 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                        |  | X             |  |      |  |         |  |           
|31.2       |  | Certification by Principal Financial and Principal Accounting Officer pursuant to Rule 13a-14(a)/ 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                               |  | X             |  |      |  |         |  |           
|32.1       |  | Certification by Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                           |  | X             |  |      |  |         |  |           
|32.2       |  | Certification by Principal Financial and Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                  |  | X             |  |      |  |         |  |           
|101        |  | Interactive data. The
        following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 formatted in Extensible
        Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii)
        the Consolidated Statements of Cash Flows and (iv) related notes. |  | X             |  |      |  |         |  |           





Page 27







SIGNATURE



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



|                      | NEOMEDIA TECHNOLOGIES, INC.                                                                         
|--------------------- | ----------------------------------------------------------------------------------------------------
|                      | (Registrant)                                                                                        
|                      |                                                                                                     
|Dated: August 5, 2013 | /s/ Colonel Barry S. Baer                                                                           
|                      | Colonel (Ret.) Barry S. Baer, Chief Financial Officer and Principal Financial and Accounting Officer





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