**U.
      S. SECURITIES AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549


_________________________________





**FORM
      10 - Q**


(Mark
      One)


**x QUARTERLY
      REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF**


**THE
      SECURITIES EXCHANGE ACT OF 1934**





**For
      the Quarterly Period Ended March 31, 2007**





**OR**





**o TRANSITION
      REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF**


**THE
      SECURITIES EXCHANGE ACT OF 1934**





**Commission
      File Number 0-21743**





**NEOMEDIA
      TECHNOLOGIES, INC.**


(Exact
      Name of Issuer as Specified In Its Charter)





**Delaware**
            **36-3680347**(State
                or Other Jurisdiction of
            (I.R.S.
                EmployerIncorporation
                or Organization)
            Identification
                No.)





**2201
                Second Street, Suite 600, Fort Myers, Florida**
            **33901**(Address
                of Principal Executive Offices)
            (Zip
                Code)





**239-337-3434**


Issuer's
      Telephone Number (Including Area Code)




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes x No
o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one): Large Accelerated Filer o
      Accelerated Filer x Non-accelerated
      Filer o




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




As
      of May
      7, 2007, there were 891,400,239 shares of common stock and 21,622 shares of
      Series C Convertible Preferred Stock outstanding .











**TABLE
      OF CONTENTS**








PART
                I -- FINANCIAL INFORMATION
            1ITEM
                1. FINANCIAL STATEMENTS
            1CONDENSED
                CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2007 (UNAUDITED) AND
                DECEMBER
                31, 2006
            1CONDENSED
                CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FOR
                THE THREE
                MONTHS ENDED MARCH 31, 2007 AND 2006 (UNAUDITED)
            2CONDENSED
                CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
                MARCH 31,
                2007 AND 2006 (UNAUDITED)
            3UNAUDITED
                NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            5ITEM
                2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                RESULTS
                OF OPERATIONS
            61ITEM
                3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK.
            81ITEM
                4. CONTROLS AND PROCEDURES
            81PART
                II -- OTHER INFORMATION
            83ITEM
                1. LEGAL PROCEEDINGS
            83ITEM
                1A. RISK FACTORS
            84ITEM
                2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
                PROCEEDS
            95ITEM
                3. DEFAULT UPON SENIOR SECURITIES
            95ITEM
                4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
            96ITEM
                5. OTHER INFORMATION
            96SIGNATURES
            99










**PART
      I -- FINANCIAL INFORMATION**




**ITEM
      1. FINANCIAL STATEMENTS**


**NeoMedia
      Technologies, Inc. and Subsidiaries**


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


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




**March
                31,**
            
            **December
                31,****2007**
            
            **2006
                *****ASSETS**
            
            (unaudited)Current
                assets:Cash
                and cash equivalents
            
            $
            2,295
            
            $
            2,813Trade
                accounts receivable, net of allowance for doubtful accounts of $13
                and
                $68, respectively
            
            
            152
            
            
            187Other
                accounts receivable
            
            
            241
            
            
            550Inventories,
                net of allowance for obsolete & slow-moving inventory of $26 and $53
                respectively
            
            
            123
            
            
            80Investment
                in marketable securities
            
            
            31
            
            
            57Prepaid
                expenses and other current assets
            
            
            123
            
            
            102Assets
                held for sale
            
            
            16,174
            
            
            19,420Total
                current assets
            
            
            19,139
            
            
            23,209Leasehold
                improvements & property and equipment, net
            
            
            168
            
            
            191Goodwill
            
            
            3,418
            
            
            3,418Capitalized
                patents, net
            
            
            2,764
            
            
            2,839Proprietary
                software, net
            
            
            3,951
            
            
            4,138Other
                Intangible assets, net
            
            
            47
            
            
            42Cash
                surrender value of life insurance policy
            
            
            867
            
            
            863Other
                long-term assets
            
            
            3,325
            
            
            3,425**Total
                assets**
            
            $
            33,679
            
            $
            38,125**LIABILITIES
                AND SHAREHOLDERS’ DEFICIT**Current
                liabilities:Accounts
                payable
            
            $
            2,710
            
            $
            2,442Liabilities
                held for sale
            
            
            7,411
            
            
            10,257Taxes
                payable
            
            
            41
            
            
            5Accrued
                expenses
            
            
            3,267
            
            
            4,016Deferred
                revenues and other
            
            
            741
            
            
            575Notes
                payable
            
            
            15
            
            
            15Accrued
                purchase price guarantee
            
            
            4,787
            
            
            19,667Derivative
                financial instruments
            
            
            25,949
            
            
            25,819Deferred
                tax liability
            
            
            677
            
            
            706Debentures
                payable
            
            
            18,336
            
            
            7,500Preferred
                stock, $0.01 par value, 25,000,000 shares authorized, 22,000
                issued,21,622
                shares outstanding, liquidation value of $21,657.
            
            
            21,657
            
            
            21,657**Total
                liabilities**
            
            
            85,591
            
            
            92,659Commitments
                and contingencies (Note 13)Shareholders’
                deficit:Common
                stock, $0.01 par value, 5,000,000,000 shares authorized, 898,836,158
                and639,233,173
                shares issued and 897,194,732 and 637,591,747 outstanding,
                respectively
            
            
            8,972
            
            
            6,376Additional
                paid-in capital
            
            
            112,083
            
            
            100,541Accumulated
                deficit
            
            
            (171,461
            )
            
            (159,962
            )Accumulated
                other comprehensive loss
            
            
            (727
            )
            
            (710
            )Treasury
                stock, at cost, 201,230 shares of common stock
            
            
            (779
            )
            
            (779
            )Total
                shareholders’ deficit
            
            
            (51,912
            )
            
            (54,534
            )**Total
                liabilities and shareholders’ deficit**
            
            $
            33,679
            
            $
            38,125





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


*
      Amounts
      have been reclassified from the audited December 31, 2006 consolidated balance
      sheet to reflect assets and liabilities held for sale in relation to our
      discontinued operations.




1


**NeoMedia
      Technologies, Inc. and Subsidiaries**


**Condensed
      Consolidated Statements of Operations** ****


**and
      Comprehensive Income (Loss) (Unaudited)**


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


**Three
                Months Ended March 31,****2007**
            
            **2006**Net
                sales
            
            $
            399
            
            $
            199Cost
                of sales
            
            
            313
            
            
            131Gross
                profit
            
            
            86
            
            
            68Sales
                and marketing expenses
            
            
            859
            
            
            1,194General
                and administrative expenses
            
            
            2,440
            
            
            1,347Research
                and development costs
            
            
            506
            
            
            485Loss
                from operations
            
            
            (3,719
            )
            
            (2,958
            )Loss on
                extinguishment of debt
            
            
            ---
            
            
            (1,964
            )Interest
                income (expense), net
            
            
            (1,698
            )
            
            6Gain/(loss)
                on derivative financial instruments
            
            
            (3,508
            )
            
            4,768**LOSS
                FROM CONTINUING OPERATIONS**
            
            
            **(8,925**
            **)**
            
            **(148**
            **)****DISCONTINUED
                OPERATIONS (Note 4)**Loss
                from operations of discontinuing operations
            
            
            (2,574
            )
            
            (1,169
            )**NET
                LOSS**
            
            
            (11,499
            )
            
            (1,317
            )Accretion
                of dividends on convertible preferred stock
            
            
            (433
            )
            
            (137
            )**NET
                LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS**
            
            
            **(11,932**
            **)**
            
            **(1,454**
            **)**Comprehensive
                Loss:Net
                loss
            
            
            (11,499
            )
            
            (1,317
            )Other
                comprehensive loss:Unrealized
                gain/( loss) on marketable securities
            
            
            (26
            )
            
            149Foreign
                currency translation adjustment
            
            
            9
            
            
            (222
            )**COMPREHENSIVE
                LOSS**
            
            **$**
            **(11,516**
            **)**
            **$**
            **(1,390**
            **)****Loss
                per share from continuing operations--basic and
                diluted**
            
            **$**
            **(0.02**
            **)**
            **$**
            **(0.00**
            **)****Loss
                per share from discontinued operations--basic and
                diluted**
            
            **$**
            **(0.00**
            **)**
            **$**
            **(0.00**
            **)****Net
                loss per share--basic and diluted**
            
            **$**
            **(0.02**
            **)**
            **$**
            **(0.00**
            **)****Weighted
                average number of common shares--basic and
                diluted**
            
            
            **684,819,898**
            
            
            **527,991,819**




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


2




**NeoMedia
      Technologies, Inc. and Subsidiaries**


**Condensed
      Consolidated Statements of Cash Flows (Unaudited)**


**(In
      Thousands)**


**Three
                Months****Ended
                March 31,****2007**
            
            **2006**CASH
                FLOWS FROM OPERATING ACTIVITIES:Loss
                from continuing operations
            
            
            ($8,925
            )
            
            ($148
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            280
            
            
            166Loss
                on early extinguishment of debt
            
            
            —
            
            
            1,964Change
                in fair value from revaluation of warrants and embedded conversion
                features
            
            
            3,508
            
            
            (4,768
            )Stock-based
                compensation expense
            
            
            891
            
            
            895Interest
                expense related to convertible debt
            
            
            781
            
            
            —Increase
                in value of life insurance policies
            
            
            (4
            )
            
            (30
            )Changes
                in operating assets and liabilitiesTrade
                and other accounts receivable
            
            
            (6
            )
            
            142Inventories
            
            
            (43
            )
            
            —Prepaid
                expenses and other current assets
            
            
            (21
            )
            
            (149
            )Accounts
                payable and accrued liabilities
            
            
            (232
            )
            
            (641
            )Deferred
                revenue and other current liabilities
            
            
            137
            
            
            612Net
                cash used in operating activities
            
            
            (3,634
            )
            
            (1,957
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Cash
                paid to acquire Mobot, Inc., Sponge Ltd., Gavitec AG, and 12Snap
                AG, net
                of cash acquired
            
            
            —
            
            
            (13,867
            )Acquisition
                of property and equipment
            
            
            —
            
            
            (23
            )Acquisition
                of patents and other intangible assets
            
            
            —
            
            
            (8
            )Advances
                to discontinued subsidiaries Micro Paint, 12Snap, Telecom Services,
                Mobot,
                and Sponge
            
            
            (1,641
            )
            
            (2,470
            )Acquisition
                related costs
            
            
            —
            
            
            (59
            )Payment
                of purchase price guarantee obligations
            
            
            (2,372
            )
            
            —Amounts
                received (issued) under notes receivable
            
            
            450
            
            
            (500
            )Net
                cash used in investing activities
            
            
            (3,563
            )
            
            (16,927
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Borrowing
                under convertible debt instrument, net of fees of $781 in
                2007
            
            
            6,678
            
            
            —Repayments
                on notes payable and convertible debt instrument
            
            
            —
            
            
            (210
            )Net
                proceeds from issuance of common stock, net of issuance costs of
                $24 in
                2006
            
            
            —
            
            
            210Net
                proceeds from issuance of Series C convertible preferred stock, net
                of
                issuance costs of $2,725 in 2006
            
            
            —
            
            
            14,066Net
                proceeds from exercise of stock options and warrants
            
            
            9
            
            
            8,131Net
                cash provided by financing activities
            
            
            6,687
            
            
            22,197EFFECT
                OF EXCHANGE RATE CHANGES ON CASH FOR CONTINUING OPERATIONS
            
            
            (8
            )
            
            (192
            )**NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM CONTINUING
                OPERATIONS**
            
            
            (518
            )
            
            3,121CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            2,813
            
            
            1,704**CASH
                AND CASH EQUIVALENTS, END OF PERIOD**
            
            **$**
            **2,295**
            
            **$**
            **4,825**








3






SUPPLEMENTAL
                CASH FLOW INFORMATION:Interest
                paid during the period
            
            $
            401
            
            $
            13Supplemental
                disclosure of investing and financing activities:Unrealized
                gain (loss) on marketable securities
            
            
            (26
            )
            
            149Fair
                value of 258,620,948 shares issued to satisfy purchase price guarantee
                obligations
            
            
            12,721
            
            
            —Prepaid
                acquisition costs applied to purchase price
            
            
            —
            
            
            168Fair
                value of shares and notes receivable from Pickups Plus, Inc. acquired
                in
                exchange for Series C Convertible Preferred Stock
            
            
            —
            
            
            594Carrying
                value of promissory note and accrued interest paid in exchange for
                Series
                C Convertible Preferred Stock
            
            
            —
            
            
            (3,208
            )Fair
                value of shares issued to acquire CSI International, Inc., Mobot,
                Inc.,
                Sponge Ltd., Gavitec AG, 12Snap AG, and BSD Software, Inc.
            
            
            —
            
            
            46,964Change
                in net assets resulting from acquisitions of CSI International, Inc.,
                Mobot, Inc., Sponge Ltd., Gavitec AG, 12Snap AG, and BSD Software,
                Inc.
            
            
            —
            
            
            60,594Accretion
                of dividends on Series C Convertible Preferred Stock
            
            
            433
            
            
            137Fair
                value of outstanding warrants reclassified to liabilities
            
            
            —
            
            
            13,884Portion
                of change in fair value of outstanding warrants converted to liabilities
                recorded to paid-in capital
            
            
            —
            
            
            3,790Initial
                fair value of Series C Convertible Preferred Stock (host instrument
                only)
            
            
            —
            
            
            4,908Deferred
                stock-based financing costs associated with Series C Convertible
                Preferred
                Stock
            
            
            —
            
            
            3,198Difference
                between net proceeds and recorded fair value of Series C Convertible
                Preferred Stock
            
            
            —
            
            
            4,041Advance
                receivable from Mobot, Inc. forgiven upon acquisition
            
            
            —
            
            
            1,500





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




4


**NEOMEDIA
      TECHNOLOGIES, INC. AND SUBSIDIARIES**


**UNAUDITED
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**








**1.**
            **BASIS
                OF PRESENTATION AND NATURE OF BUSINESS
                OPERATIONS**





**Basis
      of Presentation**





The
      condensed consolidated financial statements include the financial statements
      of
      NeoMedia Technologies, Inc. and its wholly-owned subsidiaries (“NeoMedia” or the
“Company”). The accompanying unaudited condensed consolidated financial
      statements have been prepared in accordance with the instructions to Form 10-Q
      and do not include all of the information and footnotes required by accounting
      principles generally accepted in the United States of America for complete
      condensed consolidated financial statements. These condensed consolidated
      financial statements and related notes should be read in conjunction with the
      Company’s Form 10-K for the fiscal year ended December 31, 2006. In the opinion
      of management, these condensed consolidated financial statements reflect all
      adjustments which are of a normal recurring nature and which are necessary
      to
      present fairly the condensed consolidated financial position of NeoMedia as
      of
      March 31, 2007, the results of operations for the three month periods ended
      March 31, 2007 and 2006, and cash flows for the three month periods ended March
      31, 2007 and 2006. The results of operations for the three month period ended
      March 31, 2007 are not necessarily indicative of the results which may be
      expected for the entire fiscal year. All significant intercompany accounts
      and
      transactions have been eliminated in preparation of the condensed consolidated
      financial statements.





**Going
      Concern**





The
      accompanying condensed consolidated financial statements have been prepared
      in
      conformity with accounting principles generally accepted in the United States
      of
      America, which contemplate continuation of the Company as a going concern.
      Net
      loss for the three months ended March 31, 2007 was $11,499,000. Net cash used
      in
      operations for the three months ended March 31, 2007 was $3,634,000, and net
      cash used for discontinued operations was $1,609,000 (including operating,
      investing, and financing activities, as well as effect of exchange rates on
      cash
      for discontinued subsidiaries). NeoMedia also has an accumulated deficit of
      $171,461,000 and a working capital deficit of $66,452,000 as of March
      31, 2007 ,
      of
      which $25,949,000 relates to the fair value of derivative financial
      instruments .





During
      January 2007, the Company made a strategic decision to sell its 12Snap and
      Telecom Services businesses. During the year ended December 31, 2006, revenues
      from these businesses accounted for 91% of NeoMedia's consolidated revenues.
      In
      the event that the Company is successful in selling these businesses, revenue,
      gross margin, and operating expenses would decline materially relative to
      2006.





In
      addition, a s
      of
      March 31, 2007, NeoMedia owed $1,015,000 to the former shareholders of 12Snap
      AG
      relating to a purchase price guarantee obligation associated with NeoMedia’s
      acquisitions of 12Snap in February 2006. This amount was paid from the proceeds
      of the Company’s sale of 12Snap during April 2007 (see Note 3).





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





5


Should
      financing sources fail to materialize, management would seek alternate funding
      sources such as the sale of common and/or preferred stock, the issuance of
      debt,
      or the sale of its marketable assets. Management's plan is to secure adequate
      funding to bridge the commercialization of its core code-reading
      business.




NeoMedia
      plans to attempt to address its working capital deficiency by completing the
      proposed sales of the Micro Paint Repair and NeoMedia Telecom business units,
      and continuing to reduce its workforce and overhead expenses in non-critical
      areas. In addition, NeoMedia will attempt to generate additional revenue and
      profit from the launch of its core code-reading products and the value
      optimization of its patent portfolio.





In
      the
      event that these financing sources do not materialize, or that NeoMedia is
      unsuccessful in increasing its revenues and profits, NeoMedia will be forced
      to
      further reduce its costs, may be unable to repay its debt obligations as they
      become due, or respond to competitive pressures, any of which circumstances
      would have a material adverse effect on its business, prospects, financial
      condition and results of operations. Additionally, if these funding sources
      or
      increased revenues and profits do not materialize, and NeoMedia is unable to
      secure additional financing, NeoMedia could be forced to reduce or curtail
      its
      business operations unless it is able to engage in a merger or other corporate
      finance transaction with a better capitalized entity.





**Nature
      of Business Operations**





Prior
      to
      2006, NeoMedia was structured and evaluated by its Board of Directors and
      management as three distinct business units: NeoMedia Internet Switching
      Software (NISS), NeoMedia Micro Paint Repair (NMPR), and NeoMedia Consulting
      and
      Integration Services (NCIS).




During
      the first quarter of 2006, NeoMedia acquired new subsidiaries 12Snap AG
      (“12Snap”) of Munich, Sponge Ltd. (“Sponge”) of London, Gavitec AG of Aachen,
      Germany (“Gavitec”), Mobot, Inc. (“Mobot”) of Lexington, Massachusetts, and BSD
      Software, Inc. of Calgary, Canada (“BSD”), and wound down its NCIS business
      unit. As a result, during the year ended December 31, 2006, NeoMedia operated
      under the following three business units:




·
              NeoMedia
                  Mobile (NMM) - encompassing NeoMedia's physical-world-to-internet
                  and
                  mobile marketing technologies and
                  products;
 
 ·
              NeoMedia
                  Telecom Services (NTS) - encompassing the billing, clearinghouse
                  and
                  information management services of Triton Global Business Services,
                  the
                  operating subsidiary of BSD, acquired in March 2006;
                  and
 
 ·
              NeoMedia
                  Micro Paint Repair (NMPR) - encompassing the micro paint and auto
                  aftermarket accessories manufactured and distributed by
                  NeoMedia.


During
      August 2006, NeoMedia announced that it intended to sell its NMPR business.
      During the fourth quarter of 2006, NeoMedia divested of its Mobot and Sponge
      subsidiaries. During January 2007, NeoMedia made the strategic decision with
      respect to its corporate structure in 2007 and beyond, deciding to shed its
      remaining non-core 12Snap and NTS business units to focus on the area that
      management believes will deliver the most value - the core code-reading
      business. During April 2007, NeoMedia sold the 12Snap business.





As
      a
      result of the divestitures of Mobot and Sponge, and the proposed divestitures
      of
      NMPR and 12 Snap and NeoMedia Telecom Services, beginning in the first quarter
      of 2007 NeoMedia evaluated its business as one consolidated business, focusing
      on its core code-reading business and related intellectual
      property.





For
      purposes of these financial statements, NeoMedia Micro Paint Repair, NeoMedia
      Telecom Services, 12Snap, Sponge, and Mobot are considered discontinued
      operations as of March 31, 2007 and for the three month periods ended March
      31,
      2007 and 2006. NeoMedia Micro Paint Repair, NeoMedia Telecom Services, 12Snap,
      Sponge, and Mobot qualified as separate operating business units because they
      (i) engaged in business activities that earned revenues and incurred expenses,
      (ii) had operating results that were regularly reviewed by decision makers
      for
      the purposes of allocating resources to the segment, and (iii) had separate
      discreet financial information.





6


NeoMedia
      is a pioneer in mobile enterprise and marketing technology, bridging the
      physical and electronic world with innovative direct-to-mobile-Web technology
      solutions. NeoMedia's flagship qode® service links users to the wireless,
      electronic world. NeoMedia is headquartered in Fort Myers, Florida, with an
      office in Aachen, Germany. The qode® suite of easy-to-use, market-driven
      products and applications is based on a strong foundation of patented
      technology, comprising the qode® ( www.qode.com )
      platform, qode® reader and qode® window, all of which provide One Click to
      ContentTM connectivity for products, print, packaging and other physical objects
      to link directly to specific desired content on the mobile
      Internet.





**Reclassifications**





Certain
      amounts in the 2006 condensed consolidated financial statements have been
      reclassified to conform to the 2007 presentation, most notably, net sales were
      formerly reported as separate line items “ Technology
      license, service and products ,”
and
      “Micro Paint Repair Products and Services.” As a result of the winding down of
      the former NCIS business unit and the pending sale of the NMPR business unit,
      revenue from continuing operations now consists of license revenue and is being
      reported under the caption “Net sales.”





In
      addition, due to the Company’s decision to sell the Micro Paint Repair business
      unit, the completed divestitures of Mobot and Sponge during 2006, and the
      Company’s decision to sell 12Snap and NeoMedia Telecom Services in January 2007,
      results of operations from each of these units have been reclassified under
      the
      caption “Discontinued Operations” for all periods shown on the accompanying
      condensed consolidated statement of operations, and assets and liabilities
      relating to these units are combined into the captions “Assets held for sale”
and “Liabilities held for sale,” respectively, on the accompanying condensed
      consolidated balance sheet. Additionally, the statements of cash flows for
      the
      three months ended March 31, 2006 have been restated to exclude the cash flows
      of the discontinued business units.








**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING
                POLICIES**





The
      following significant accounting policies were not applicable as of the filing
      of its last annual report for the year ended December 31, 2006. For a complete
      discussion of the Company’s significant accounting policies, please refer to the
      Company’s annual report on Form 10-K for the fiscal year ended December 31,
      2006.





**Financial
      Accounting Standards Board Interpretation No. 48**





The
      Company adopted the provisions of Financial Accounting Standards Board ("FASB")
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an
      interpretation of FASB Statement No. 109” (“FIN 48”), on January 1, 2007. FIN 48
      clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise's financial statements in accordance with FASB Statement 109,
“Accounting for Income Taxes,” and prescribes a recognition threshold and
      measurement process for financial statement recognition and measurement of
      a tax
      position taken or expected to be taken in a tax return. FIN 48 also provides
      guidance on derecognition, classification, interest and penalties, accounting
      in
      interim periods, disclosure and transition.





Based
      on
      its evaluation, the Company has concluded that there are no significant
      uncertain tax positions requiring recognition in its financial statements.
      The
      Company’s evaluation was performed for the tax years ended December 31, 2003,
      2004, 2005 and 2006, the tax years which remain subject to examination by major
      tax jurisdictions as of March 31, 2007.





7


The
      Company may from time to time be assessed interest or penalties by major tax
      jurisdictions, although any such assessments historically have been minimal
      and
      immaterial to the Company’s financial results. In the event the Company has
      received an assessment for interest and/or penalties, it has been classified
      in
      the financial statements as interest expense.


**Statement
        of Financial Accounting Standards No. 155**
 
 The
        company adopted Statement of Financial Accounting number 155 “Accounting for
        Certain Hybrid Financial Instruments” (FAS 155) in the first quarter of 2007.
        The Company has adopted FAS 155 on an individual instrument basis and is
        currently applying FAS 155 to certain of it’s debt obligations. The Company will
        evaluate and determine on a case by case basis whether to apply FAS
        155.


**Revenue
      Recognition**





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


(1)
              Technology
                  license fees, including Intellectual Property licenses, represent
                  revenue
                  from the licensing of NeoMedia’s proprietary  software  tools
                  and  applications products.  NeoMedia licenses its 
                  development  tools and  application  products pursuant to
                  non-exclusive and  non-transferable  license agreements. 
                  The basis for license fee revenue recognition is substantially
                  governed by
                  American  Institute  of  Certified  Public 
                  Accountants  ("AICPA")  Statement of Position 97-2 "Software
                  Revenue  Recognition" ("SOP 97-2"), as amended, and Statement of
                  Position 98-9, Modification of SOP 97-2, “Software Revenue Recognition,
                  With Respect to Certain Transactions.”.  License revenue is
                  recognized if persuasive  evidence of an agreement 
                  exists,  delivery has occurred, pricing is fixed and determinable,
                  and collectibility is probable.  The Company defers revenue related
                  to license fees for which amounts have been collected but for which
                  revenue has not been recognized in accordance with the above, and
                  recognizes the revenue over the appropriate
                  period.
 
 (2)
              Technology
                  service and product revenue, which includes sales of software and
                  technology equipment and service fee is recognized  based on
                  guidance  provided in  SEC Staff  Accounting 
                  Bulletin  (“SAB”) No. 104,  "Revenue  Recognition  in
                  Financial Statements,"  as amended (SAB 104).  Software
                  and technology equipment resale revenue is
                  recognized when persuasive evidence of an arrangement exists, the
                  price to the customer is fixed and determinable, delivery of the
                  service
                  has occurred and collectibility is reasonably assured.
                  Service revenues including maintenance fees for
                  providing system updates for software products, user documentation
                  and
                  technical support are recognized over the life of
                  the contract. The Company’s subsidiaries, Mobot (sold during 2006),
                  and Gavitec follow this policy. The Company defers revenue related
                  to
                  technology service and product revenue for which amounts have been
                  invoiced and or collected but for which the requisite service has
                  not been
                  provided. Revenue is then recognized over the matching service
                  period.
 
 (3)
              Technology
                  service also includes mobile marketing services to its customers
                  which
                  mobile marketing projects are recognized after the completion of
                  the
                  project and accepted by the customer.  All response and messaging
                  based revenues are recognized at the time such responses are received
                  and
                  processed and the Company recognizes its premium messaging revenues
                  on a
                  net basis based on guidance provided in Emerging Issues Task Force
                  Issues
                  No. 99-19 (EITF 99-19), “Reporting Revenue Gross as Principal or Net as an
                  Agent” and No. 01-09 (EITF 01-09), “Accounting for Consideration Given by
                  a Vendor to a Customer.”  Consulting and management revenues and
                  revenues for periodic services are recognized as services are
                  performed.  NeoMedia uses  stand-alone  pricing to
                  determine an element's  vendor  specific  objective 
                  evidence  (“VSOE”) in order to allocate an arrangement  fee
                  amongst various pieces of a  multi-element  contract.  The
                  Company’s subsidiaries 12Snap and Sponge (sold during 2006) follow this
                  policy. Telecom revenues from NeoMedia’s subsidiary BSD are recognized at
                  the time that calls are accepted by the clearinghouse for billing
                  to
                  customers on a net basis, based on guidance in EITF 99-19. The
                  Company
                  defers revenue related to mobile marketing service fees for which
                  amounts
                  have been invoiced and/or collected but for which revenue has not
                  been
                  recognized. Revenue is then recognized over the matching service
                  period.
  8
 
 (4)
              Revenue
                  for licensing and exclusivity on NeoMedia’s Micro Paint Repair systems is
                  recognized equally over the term of the contract, which is currently
                  one
                  year.  A portion of the initial fee paid by the customer is allocated
                  to licensing, training costs and initial products sold with the
                  system.
                  Revenue is recognized upon completion of training and shipment
                  of the
                  products, provided there is VSOE in a multiple element arrangement. 
                  Ongoing product and service revenue is recognized as products are
                  shipped
                  and services performed.  The Company defers revenue related to micro
                  paint repair licensing for which amounts have been invoiced and/or
                  collected and revenue is then recognized over the estimated contract
                  period, which is currently one year.
 
 (5)
              Sales
                  taxes represent amounts collected on behalf of specific regulatory
                  agencies that require remittance on a specified date. These amounts
                  are
                  collected at the time of sales and are detailed on invoices provided
                  to
                  customers. In compliance with the Emerging Issues Task Force consensus
                  on
                  issue number 06-03 (EITF 06-03), NeoMedia accounts for sales taxes
                  on a
                  net basis.
 
 9




**3.**
            **ACQUISITIONS**





During
      the three months ended March 31, 2006, NeoMedia completed acquisitions of Mobot,
      Sponge, Gavitec, 12Snap, and BSD. During November 2006, December 2006, and
      April
      2007, NeoMedia divested of a substantial portion of its ownership in Sponge,
      Mobot, and 12Snap, respectively. NeoMedia is also in the process of attempting
      to sell its Micro Paint Repair business and Telecom Services business which
      is
      comprised of the operations acquired from BSD.





**Acquisition
      and Sale of Mobot**





On
      February 9, 2006, NeoMedia and Mobot (based in Lexington, Massachusetts) signed
      a definitive merger agreement, subject to closing conditions, under which
      NeoMedia acquired all of the outstanding shares of Mobot in exchange for
      $3,500,000 cash and $6,500,000 in stock, represented by 16,931,493 shares of
      NeoMedia common stock (2,604,845 of which were held in escrow for the purpose
      of
      securing the indemnification obligations outlined in the purchase agreement).
      On
      February 17, 2006, NeoMedia and Mobot completed the closing requirements and
      the
      acquisition became effective. In addition to cash and stock, at closing NeoMedia
      forgave notes payable totaling $1,500,000 due from Mobot. This amount is
      considered other additional consideration in the purchase price allocation.
      NeoMedia completed the acquisition of Mobot in an effort to gain entry into
      the
      rapidly evolving global mobile marketing industry.





Pursuant
      to the terms of the merger agreement, the number of shares of NeoMedia common
      stock that were issued as stock consideration was calculated using a share
      price
      of $0.3839, which was the volume-weighted average closing price of NeoMedia
      common stock for the ten days up to and including February 8, 2006. The merger
      agreement between NeoMedia and Mobot also contained a provision that, in the
      event that NeoMedia’s stock price at the time the consideration shares became
      saleable (either upon effectiveness of a registration statement containing
      the
      shares, or under Rule 144) were less than $0.3839, NeoMedia would be obligated
      to compensate Mobot shareholders in cash for the difference between the price
      at
      the time the shares became saleable and $0.3839.





The
      actual purchase price was based on cash paid, the fair value of NeoMedia stock
      around the date of the Mobot acquisition, and direct costs associated with
      the
      combination. The final purchase price was allocated as follows:


10





(Dollars
                inThousands)Value
                of 16,931,493 shares issued at $0.395 per share(1)
            
            $
            6,688Cash
                paid
            
            
            3,500Direct
                costs of acquisition
            
            
            8Advances
                to Mobot forgiven at acquisition
            
            
            1,500Total
                Fair Value of Purchase Price
            
            
            11,696Assets
                Purchased:Cash
                and cash equivalents
            
            $
            328Accounts
                receivable
            
            
            68Other
                current assets
            
            
            49Property,
                plant & equipment
            
            
            30Intangible
                assets
            
            
            13Customer
                contracts and relationships
            
            
            440Capitalized
                software platform
            
            
            4,200Copyrighted
                materials
            
            
            90Goodwill
            
            
            6,778Total
                Assets Purchased
            
            
            11,996Less
                Liabilities Assumed:Accounts
                payable
            
            $
            51Accrued
                liabilities
            
            
            132Deferred
                revenue
            
            
            117Total
                Liabilities Assumed
            
            
            300





(1)
            -
                Shares were valued using the average stock price for two days before
                and
                two days after the measurement date, as defined in SFAS 141 and EITF
                99-12





The
      combination was accounted for as a purchase business combination as defined
      by
      Statement of Financial Accounting Standards No. 141, Business Combinations.
      The
      allocation of the purchase price to the assets acquired and liabilities assumed
      was based on an independent valuation report obtained by the Company.





The
      values assigned to intangible assets are subject to amortization. The intangible
      assets were assigned the following lives for amortization purposes:





Estimated
                usefulIntangible
                asset
            life
                (in years)Customer
                contracts and relationships
            5Copyrighted
                materials
            5Capitalized
                software platform
            7





Goodwill
      consists of the excess of the purchase price paid over the identifiable net
      assets and liabilities acquired at fair value. Goodwill was determined using
      the
      residual method based on an independent appraisal of the assets and liabilities
      acquired in the transaction. Goodwill is tested for impairment as defined by
      Statement of Financial Accounting Standards No. 142, ”Goodwill and Other
      Intangible Assets.”





11


On
      December 6, 2006, NeoMedia and FMS Group, Inc. (“FMS”), a group consisting of
      former shareholders of Mobot, completed a transaction pursuant to which NeoMedia
      divested of its ownership interest in Mobot. The principal reasons for NeoMedia
      divesting of the Mobot business were: (i) a depressed NeoMedia stock price,
      which led to a large potential cash obligation stemming from the purchase price
      obligation clause in the original purchase agreement, (ii) the fact that the
      purchase price obligation would become due no later than February 17, 2007,
      and
      (iii) continued operating losses from the Mobot businesses putting strains
      on
      NeoMedia’s working capital.





The
      material terms of the transaction with FMS were as follows:




-
              NeoMedia
                  transferred 100% of its ownership interest in Mobot to FMS, and
                  in return
                  received 16,000 shares (18% ownership) of FMS, which will operate
                  the
                  Mobot business;
 -
              All
                  obligations under the original merger agreement, including the
                  purchase
                  price guarantee obligation, were terminated;
 -
              NeoMedia
                  contributed $67,000 cash to FMS at closing, and an additional $200,000
                  on
                  December 27, 2006;
 -
              NeoMedia
                  received 16,931 preference shares in FMS that can be redeemed to
                  reacquire
                  the 16,931,493 original consideration shares originally issued
                  to acquire
                  Mobot. Each preference share can be redeemed for 1,000 shares of
                  the
                  NeoMedia common stock at NeoMedia’s discretion within 15 months of the
                  closing of this transaction, for cash in the amount of 40% of the
                  then-current market value of the underlying NeoMedia shares. After
                  15
                  months, the preference shares can be redeemed upon a liquidation
                  event of
                  FMS, for either 1,000 shares of NeoMedia common stock each, or
                  for the
                  current cash equivalent of the shares, at FMS’
                  discretion;
 -
              NeoMedia
                  entered into a license agreement with Mobot, pursuant to which
                  NeoMedia
                  received a license to use the Mobot image recognition service for
                  barcode-related applications. The license is exclusive in the Americas,
                  Europe and Australia, restricted in Japan, Korea, and Singapore,
                  and
                  non-exclusive in other areas of the world. The exclusivity is subject
                  to
                  NeoMedia meeting certain minimum transaction volume requirements
                  or making
                  minimum cash payments; and
 -
              NeoMedia
                  entered into a mutual release with each of the former Mobot shareholders
                  in which the parties released each other from the terms of the
                  original
                  Mobot merger agreement, and the former Mobot shareholders consented
                  to the
                  release of the pending legal action against NeoMedia.


Due
      to
      NeoMedia’s depressed stock price, the purchase price obligation clause became
      highly probable beyond a reasonable doubt. NeoMedia’s inability to satisfy the
      pending obligation was the primary factor for the disposition of Mobot. The
      value of the purchase price obligation at the time of closing was $5,545,000.
      Concurrent with the disposition, NeoMedia reduced the fair value of the initial
      stock consideration by the amount of this contingency. At closing, NeoMedia
      recorded a loss on the sale of Mobot in the amount of $4,367,000, representing
      the difference between the fair value of the assets received in the transaction,
      and the carrying value of the assets at closing as follows:


12








(Dollarsin
                Thousands)Carrying
                value of asset group at closingTangible
                assets
            
            $
            518Intangible
                assets
            
            
            10,971Liabilities
            
            
            (324
            )Purchase
                price guarantee liability
            
            
            (5,545
            )Net
                carrying value of asset group
            
            
            5,620Fair
                value of proceeds receivedCash
                paid
            
            
            (67
            )Cash
                paid subsequent to closing but before December 31, 2006
            
            
            (200
            )Investment
                in Mobot common stock
            
            
            1,926Investment
                in Mobot special preference shares (put option)
            
            
            (406
            )Fair
                value of proceeds received
            
            
            1,253**Loss
                on disposal of Mobot**
            
            **$**
            **4,367**





The
      accompanying condensed consolidated statement of operations presented herein
      for
      the three months ended March 31, 2006, contains the results of operations for
      Mobot for the period from February 18, 2006, through March 31, 2006, under
      the
      caption “Loss from discontinued operations.” No results are reflected on the
      condensed consolidated statement of operations presented herein for the three
      months ended March 31, 2007, since Mobot was sold prior to the beginning of
      this
      period.




**Acquisition
      and Sale of Sponge**





On
      February 20, 2006, NeoMedia and Sponge (a London-based company) signed a
      definitive share purchase agreement, subject to closing conditions, under which
      NeoMedia acquired all of the outstanding shares of Sponge in exchange for
      $6,141,000 cash and £6,550,000 (approximately $13.1 million at the time of the
      agreement), represented by 33,097,135 shares of NeoMedia common stock (3,400,490
      of which were held in escrow for the purpose of securing the indemnification
      obligations outlined in the purchase agreement). The agreement also called
      for
      Sponge to earn an additional £2,500,000 (approximately $4.4 million) in the form
      of NeoMedia common stock if, during the two-year period beginning at closing,
      the Sponge business earned in excess of £1,300,000 (approximately $2.3 million)
      in net profits. On February 23, 2006, NeoMedia and Sponge completed the closing
      requirements and the acquisition became effective. Pursuant to the terms of
      the
      merger agreement, the number of shares of NeoMedia common stock to be issued
      as
      consideration was calculated using a share price of $0.384, which was the
      volume-weighted average closing price of NeoMedia common stock for the ten
      days
      up to and including February 8, 2006. In the event that NeoMedia’s stock price
      at the time the consideration shares became saleable (either upon effectiveness
      of a registration statement containing the shares, or under Rule 144) was less
      than $0.384, the purchase agreement called for NeoMedia to compensate Sponge
      shareholders in cash for the difference between the price at the time the shares
      became saleable and $0.384. NeoMedia completed the acquisition of Sponge in
      an
      effort to gain entry into the rapidly evolving global mobile marketing
      industry.




13


The
      actual purchase price was based on cash paid, the fair value of NeoMedia stock
      around the date of the Sponge acquisition, and direct costs associated with
      the
      combination. The final purchase price was allocated as follows:


(Dollars
                inThousands)Value
                of 33,097,135 shares issued at $0.395 per share(1)
            
            $
            13,073Cash
                paid
            
            
            6,141Direct
                costs of acquisition
            
            
            194Total
                Fair Value of Purchase Price
            
            
            19,408Assets
                Purchased:Cash
                and cash equivalents
            
            $
            177Accounts
                receivable
            
            
            617Other
                current assets
            
            
            35Property,
                plant & equipment
            
            
            53Customer
                contracts and relationships
            
            
            400Capitalized
                software platform
            
            
            1,300Brand
                name
            
            
            800Copyrighted
                materials
            
            
            50Goodwill
            
            
            16,692Total
                Assets Purchased
            
            
            20,124Less
                Liabilities Assumed:Accounts
                payable
            
            $
            190Accrued
                liabilities
            
            
            322Other
                current liabilities
            
            
            204Total
                Liabilities Assumed
            
            
            716





(1)
            -
                Shares were valued using the average stock price for two days before
                and
                two days after the measurement date, as defined in SFAS 141 and EITF
                99-12





The
      combination was accounted for as a purchase business combination as defined
      by
      Statement of Financial Accounting Standards No. 141, Business Combinations.
      The
      allocation of the purchase price to the assets acquired and liabilities assumed
      is based on an independent valuation report obtained by the Company.





The
      values assigned to intangible assets are subject to amortization. The intangible
      assets were assigned the following lives for amortization purposes:





Estimated
                usefulIntangible
                asset
            life
                (in years)Customer
                contracts and relationships
            5Copyrighted
                materials
            5Capitalized
                software platform
            7Brand
                name
            10





Goodwill
      consists of the excess of the purchase price paid over the identifiable net
      assets and liabilities acquired at fair value. Goodwill was determined using
      the
      residual method based on an independent appraisal of the assets and liabilities
      acquired in the transaction. Goodwill is tested for impairment as defined by
      Statement of Financial Accounting Standards No. 142, “Goodwill and Other
      Intangible Assets.”





14


On
      November 14, 2006, NeoMedia and Sponge signed a definitive share purchase and
      settlement agreement, pursuant to which NeoMedia divested of a material portion
      of its ownership interest in Sponge. The principal reasons for NeoMedia
      divesting of the Sponge business were: (i) a depressed NeoMedia stock price,
      which led to a large potential cash obligation stemming from the purchase price
      obligation clause in the original purchase agreement, (ii) the fact that the
      purchase price obligation would become due no later than February 23, 2007,
      and
      (iii) the return of the original consideration shares for
      retirement.


-
              NeoMedia
                  returned 92.5% of NeoMedia’s ownership interest in Sponge, retaining 7.5%
                  ownership of Sponge,
 -
              NeoMedia
                  relinquished its Board of Directors positions at Sponge,
 -
              the
                  33,097,135 shares of NeoMedia common stock that were issued as
                  consideration to acquire Sponge were returned to us and retired;
 -
              all
                  obligations under the original merger agreement, including the
                  purchase
                  price guarantee obligation, were terminated; and
 -
              Sponge
                  returned $100,000 cash (net of attorney fees) to NeoMedia at closing
                  and
                  $150,000 cash to NeoMedia on March 7,
                  2007.


Due
      to
      NeoMedia’s depressed stock price, the purchase price obligation clause became
      highly probable beyond a reasonable doubt. NeoMedia’s inability to satisfy the
      pending obligation was the primary factor for the disposition of Mobot. The
      value of the purchase price obligation at the time of closing was $10,088,000.
      Concurrent with the disposition, NeoMedia reduced the fair value of the initial
      stock consideration by the amount of this contingency. At closing, NeoMedia
      recorded a loss on the disposal of Sponge in the amount of $5,051,000,
      representing the difference between the fair value of the assets received in
      the
      transaction, and the carrying value of the assets at closing, as follows:





(Dollarsin
                Thousands)Carrying
                value of asset group at closingTangible
                assets
            
            $
            2,042Intangible
                assets
            
            
            19,091Liabilities
            
            
            (2,093
            )Purchase
                price guarantee liability
            
            
            (10,088
            )Net
                carrying value of asset group
            
            
            8,952Fair
                value of proceeds receivedCash
                received
            
            
            35Cash
                paid subsequent to December 31, 2006
            
            
            150Investment
                in Sponge common stock
            
            
            1,399Return
                of 33,097,135 shares of NeoMedia common stock
            
            
            2,317Fair
                value of proceeds received
            
            
            3,901**Loss
                on disposal of Sponge**
            
            **$**
            **5,051**





The
      accompanying condensed consolidated statement of operations presented herein
      for
      the three months ended March 31, 2006, contains the results of operations for
      Sponge for the period from February 24, 2006, through March 31, 2006 under
      the
      caption “Loss from discontinued operations.” No results are reflected on the
      condensed consolidated statement of operations presented herein for the three
      months ended March 31, 2007, since Sponge was sold prior to the beginning of
      this period.





15




**Acquisition
      of Gavitec**





On
      February 17, 2006, NeoMedia and Gavitec (based in Aachen, Germany) signed a
      definitive sale and purchase agreement, subject to closing conditions, under
      which NeoMedia acquired all of the outstanding shares of Gavitec in exchange
      for
      $1,800,000 cash and $5,200,000 common stock, represented by 13,660,511 shares
      of
      NeoMedia common stock (1,366,051 of which were held in escrow until December
      31,
      2006 for the purpose of securing the indemnification obligations outlined in
      the
      purchase agreement, and were subsequently released). Pursuant to the terms
      of
      the merger agreement, the number of shares of NeoMedia common stock to be issued
      as consideration was calculated using a share price of $0.389, which was the
      volume-weighted average closing price of NeoMedia common stock for the ten
      days
      up to and including February 16, 2006. On February 23, 2006, NeoMedia and
      Gavitec completed the closing requirements and the acquisition became effective.





Gavitec
      AG was founded in 1997 as a specialized provider and manufacturer of products
      and solutions for mobile marketing and mobile information technology. Using
      its
      software, Gavitec offers its clients standardized or individual solutions in
      the
      areas of mobile marketing, mobile ticketing, mobile couponing, and mobile
      payment systems. NeoMedia completed the acquisition of Gavitec in an effort
      to
      gain entry into the rapidly evolving global mobile marketing
      industry.





The
      actual purchase price was based on cash paid, the fair value of NeoMedia stock
      around the date of the Gavitec acquisition, and direct costs associated with
      the
      combination. The final purchase price has been allocated as
      follows:





(Dollars
                inThousands)Value
                of 13,660,511 shares issued at $0.386 per share(1)
            
            $
            5,273Cash
                paid
            
            
            1,800Direct
                costs of acquisition
            
            
            114Total
                Fair Value of Purchase Price
            
            
            7,187Assets
                Purchased:Cash
                and cash equivalents
            
            $
            74Accounts
                receivable
            
            
            173Inventory
            
            
            106Other
                current assets
            
            
            53Property,
                plant & equipment
            
            
            15Intangible
                assets
            
            
            3Capitalized
                software platform
            
            
            4,600Copyrighted
                materials
            
            
            50Goodwill
            
            
            3,418Total
                Assets Purchased
            
            
            8,492Less
                Liabilities Assumed:Accounts
                payable
            
            $
            113Accrued
                liabilities
            
            
            24Deferred
                revenue
            
            
            117Deferred
                tax liability
            
            
            706Other
                current liabilities
            
            
            244Total
                Liabilities Assumed
            
            
            1,204





(1)
            -
                Shares were valued using the average stock price for two days before
                and
                two days after the measurement date, as defined in SFAS 141 and EITF
                99-12





16


The
      combination was accounted for as a purchase business combination as defined
      by
      Statement of Financial Accounting Standards No. 141, Business Combinations.
      The
      allocation of the purchase price to the assets acquired and liabilities assumed
      is based on an independent report obtained by the Company. The allocation was
      subject to change resulting from the purchase price guarantee contingency
      described above.





The
      values assigned to intangible assets are subject to amortization. The intangible
      assets were assigned the following lives for amortization purposes:





Estimated
                usefulIntangible
                asset
            life
                (in years)Copyrighted
                materials
            5Capitalized
                software platform
            7Brand
                name
            10





Goodwill
      consists of the excess of the purchase price paid over the identifiable net
      assets and liabilities acquired at fair value. Goodwill was determined using
      the
      residual method based on an independent appraisal of the assets and liabilities
      acquired in the transaction. Goodwill is tested for impairment as defined by
      Statement of Financial Accounting Standards No. 142, ”Goodwill and Other
      Intangible Assets.” An additional amount of $706,000 was allocated to goodwill
      of Gavitec related to the deferred tax liability associated with the intangible
      assets in excess of Gavitec’s net operating loss carry forward deferred tax
      asset.





In
      the
      event that NeoMedia’s stock price at the time the consideration shares became
      saleable (either upon effectiveness of a registration statement containing
      the
      shares, or under Rule 144) was less than $0.389, NeoMedia was obligated to
      compensate Gavitec shareholders in cash for the difference between the price
      at
      the time the shares became saleable and $0.389. On January 23, 2007, NeoMedia
      entered into an agreement with the former shareholders of Gavitec, whereby
      this
      purchase price obligation was to be satisfied through the payment by NeoMedia
      of
      (i) $1,800,000 in cash, payable no later than February 28, 2007 (subsequently
      extended to March 31, 2007), and (ii) 61,000,000 shares of NeoMedia common
      stock
      to be issued no later than February 28, 2007. NeoMedia also agreed to pay
      interest accrued on the purchase price in the amount of $481,000 and reimburse
      $100,000 of costs related to the acquisition to the primary former shareholder
      of Gavitec no later than February 28, 2007. NeoMedia issued the shares and
      made
      cash payments of $2,113,000 during March 2007. Accordingly, as of March 31,
      2006, the balance on the accrual was $268,000, representing the remaining
      interest payments which are to be made during 2007.





The
      accompanying consolidated statement of operations presented herein for the
      three
      months ended March 31, 2007, contains the results of operations for Gavitec
      for
      the entire period. The accompanying consolidated statement of operations
      presented herein for the three months ended March 31, 2006, contains the results
      of operations for Gavitec for the period from February 24, 2006, through March
      31, 2006. Pro-forma results of operations for the three months ended March
      31,
      2006 are presented at the end of this Note 3.




**Acquisition
      of 12Snap**





On
      February 10, 2006, NeoMedia and 12Snap signed a definitive sale and purchase
      agreement, subject to closing conditions, under which NeoMedia acquired all
      of
      the outstanding shares of 12Snap in exchange for $2,500,000 cash and $19,500,000
      common stock, represented by 49,294,581 shares of NeoMedia common stock. On
      February 28, 2006, NeoMedia and 12Snap completed the closing requirements and
      the acquisition became effective. Pursuant to the terms of the merger agreement,
      the number of shares of NeoMedia common stock to be issued as consideration
      was
      calculated using a share price of $0.3956, which was the volume-weighted average
      closing price of NeoMedia common stock for the ten days up to and including
      February 9, 2006.




17


12Snap
      AG
      is headquartered in Munich, Germany, with branches in Düsseldorf, New York,
      London, Milan, Stockholm and Vienna. 12Snap combines the know-how in mobile
      applications, mobile loyalty and mobile marketing. In the mobile marketing
      space, 12Snap creates and implements national and pan-European mobile marketing
      campaigns for international brands; its mobile loyalty business unit offers
      customer loyalty programs for companies and brands, and its mobile applications
      business unit is the center for development and software. NeoMedia completed
      the
      acquisition of 12Snap in an effort to gain entry into the rapidly evolving
      global mobile marketing industry.





The
      actual purchase price was based on cash paid, the fair value of NeoMedia stock
      around the date of the 12Snap acquisition, and direct costs associated with
      the
      combination. The final purchase price has been allocated as
      follows:


(Dollars
                inThousands)Value
                of 49,294,581 shares issued at $0.394 per share(1)
            
            $
            19,422Cash
                paid
            
            
            2,500Direct
                costs of acquisition
            
            
            114Total
                Fair Value of Purchase Price
            
            
            22,036Assets
                Purchased:Cash
                and cash equivalents
            
            $
            465Investment
                in marketable securities
            
            
            951Accounts
                receivable
            
            
            2,683Other
                current assets
            
            
            554Property,
                plant & equipment
            
            
            224Intangible
                assets
            
            
            93Customer
                contracts and relationships
            
            
            400Capitalized
                software platform
            
            
            4,400Brand
                name
            
            
            1,600Copyrighted
                materials
            
            
            50Goodwill
            
            
            18,390Total
                Assets Purchased
            
            
            29,810Less
                Liabilities Assumed:Accounts
                payable
            
            $
            977Accrued
                liabilities
            
            
            989Deferred
                revenue
            
            
            1,434Other
                current liabilities
            
            
            225Notes
                payable
            
            
            4,149Total
                Liabilities Assumed
            
            
            7,774





(1)
            -
                Shares were valued using the average stock price for two days before
                and
                two days after the measurement date, as defined in SFAS 141 and EITF
                99-12




The
      combination was accounted for as a purchase business combination as defined
      by
      Statement of Financial Accounting Standards No. 141, Business Combinations.
      The
      allocation of the purchase price to the assets acquired and liabilities assumed
      is based on an independent valuation report obtained by the Company. The
      allocation is subject to change resulting from the purchase price guarantee
      contingency described above.





18


The
      values assigned to intangible assets are subject to amortization. The intangible
      assets were assigned the following lives for amortization purposes:


Estimated
                usefulIntangible
                asset
            life
                (in years)Customer
                contracts and relationships
            5Copyrighted
                materials
            5Capitalized
                software platform
            7Brand
                name
            10





Goodwill
      consists of the excess of the purchase price paid over the identifiable net
      assets and liabilities acquired at fair value. Goodwill was determined using
      the
      residual method based on an independent appraisal of the assets and liabilities
      acquired in the transaction. Goodwill is tested for impairment as defined by
      Statement of Financial Accounting Standards No. 142, ”Goodwill and Other
      Intangible Assets.”





During
      the first quarter of 2007, NeoMedia initiated an action plan to sell its 12Snap
      business. During the three months ended March 31, 2007, and the year ended
      December 31, 2006, NeoMedia recorded impairment charges of $2,467,000 and
      $18,327,000, respectively, to adjust the carrying value of the 12Snap asset
      group to the expected net proceeds from the sale of the assets. Prior to the
      impairment charge, the asset group consisted primarily of goodwill and other
      intangible assets recorded upon purchase of 12Snap by NeoMedia during the first
      quarter of 2006. In connection with its decision to sell the 12Snap business
      in
      the first quarter of 2007, NeoMedia revised its expected cashflow to reflect
      the
      estimated net cash proceeds that the Company anticipates receiving in a sale
      transaction. The operations of 12Snap are classified as discontinued operations
      during the three months ended March 31, 2007 and 2006. The criteria for
      discontinued operations classification were met during the three months ended
      March 31, 2007. (See Note 4)





Pursuant
      to the terms of the original purchase agreement, in the event that NeoMedia’s
      stock price at the time the consideration shares became saleable (either upon
      effectiveness of a registration statement containing the shares, or under Rule
      144) was less than $0.3956, NeoMedia was obligated to compensate 12Snap
      shareholders in cash for the difference between the price at the time the shares
      became saleable and $0.3956. On February 22, 2007, the shares became eligible
      for resale under Rule 144. The actual calculated purchase price obligation
      to
      NeoMedia based on the volume weighted average closing price of NeoMedia stock
      for the ten days up to and including February 22, 2007 was $16,233,000. Because
      the amount of the purchase price guarantee became measurable and highly probable
      of occurrence beyond a reasonable doubt, as of December 31, 2006, NeoMedia
      reduced the fair value of the initial stock consideration by the amount of
      the
      contingency. During the three months ended March 31, 2007, NeoMedia issued
      197,620,948 shares of its common stock in satisfaction of a portion of the
      purchase price obligation totaling $9,427,000, and made cash payments against
      the liability totaling $259,000. The balance on the purchase price obligation
      as
      of March 31, 2007 was $6,547,000, of which $1,760,000 is presented as
      liabilities held for sale. During April 2007, NeoMedia made additional cash
      payments of $75,000 and further reduced the balance through the forgiveness
      of
      $1,758,000 of obligation in connection with the sale of 12Snap. The Company
      is
      currently negotiating payment terms for the balance of the obligation.





On
      April
      4, 2007, NeoMedia reached an agreement with Bernd Michael (the “Buyer”), a
      private investor and former shareholder of 12Snap prior to NeoMedia’s
      acquisition of 12Snap, pursuant to which the Buyer acquired from NeoMedia 90%
      of
      the shares of 12Snap, subject to the following material terms and
      conditions:




·
              $1,100,000
                  was paid in cash at closing, of which $1,015,000 was applied toward
                  amounts owed to silent partners of
                  12Snap
  ·
              $500,000
                  was placed into an escrow account for 90 days to secure warranty
                  claims;
  ·
              The
                  Buyer waived his portion of the purchase price guarantee obligation
                  in the
                  amount of $880,000;
  19
  ·
              The
                  Buyer returned to NeoMedia 2,525,818 NeoMedia shares previously
                  issued to
                  Buyer;
  ·
              12Snap
                  management waived their portion of the purchase price guarantee
                  obligation
                  in the amount of $880,000;
  ·
              12Snap
                  management returned to NeoMedia 5,225,039 shares of NeoMedia common
                  stock
                  previously issued to 12Snap
                  management;
  ·
              NeoMedia
                  will retain a 10% ownership in 12Snap, subject to an option agreement
                  pursuant to which NeoMedia has the right to sell and Buyer has
                  the right
                  to acquire the remaining 10% stake held by NeoMedia for a purchase
                  price
                  of $750,000 after December 31, 2007;
                  and
  ·
              12Snap
                  and NeoMedia will execute a cooperation agreement pursuant to which
                  12snap
                  will remain NeoMedia preferred partner and enjoy most favored prices,
                  and
                  12snap will perform certain research and development functions
                  for
                  NeoMedia.


The
      accompanying condensed consolidated statement of operations presented herein
      for
      the three months ended March 31, 2007 reflects the results of operations for
      12Snap for the entire period under the caption “Loss from discontinued
      operations.” The accompanying condensed consolidated statement of operations
      presented herein for the three months ended March 31, 2006 reflects the results
      of operations for 12Snap for the period from February 24, 2006, through March
      31, 2006 under the caption “Loss from discontinued operations.”




**Acquisition
      of BSD**





On
      March
      21, 2006, NeoMedia completed its acquisition of BSD Software, Inc. of Calgary,
      Alberta, Canada, for 7,123,698 shares of NeoMedia common stock. Pursuant to
      the
      terms of the merger agreement, the number of shares of NeoMedia common stock
      to
      be issued as consideration was calculated using a share price of $0.3467, which
      was the volume-weighted average closing price of NeoMedia common stock for
      the
      five days preceding March 21, 2006. BSD owns 90% of the outstanding shares
      of
      Triton Global Business Services, Inc., a provider of live and automated operator
      calling services and e-business support, including billing, clearinghouse and
      information management services, to companies in the telecommunications
      industry.





NeoMedia
      completed the acquisition of BSD for the purpose of increasing its revenue
      and
      profit through establishment of a Telecom Services business unit, as well as
      gaining access to the Canadian telecom industry in order to penetrate that
      market with the products of the NeoMedia Mobile division.





The
      actual purchase price was based on cash paid, the fair value of NeoMedia stock
      around the date of the BSD acquisition, and direct costs associated with the
      combination. The purchase price has been allocated as follows:


20




(Dollars
                inThousands)Value
                of 7,123,698 shares issued at $0.352 per share(1)
            
            $
            2,508Direct
                costs of acquisition
            
            
            7Total
                Fair Value of Purchase Price
            
            
            2,515Assets
                Purchased:Cash
                and cash equivalents
            
            $
            55Accounts
                receivable
            
            
            1,733Other
                current assets
            
            
            13Property,
                plant & equipment
            
            
            61Customer
                contracts and relationships
            
            
            1,300Copyrighted
                materials
            
            
            130Goodwill
            
            
            4,402Total
                Assets Purchased
            
            
            7,694Less
                Liabilities Assumed:Accounts
                payable
            
            $
            2,424Accrued
                liabilities
            
            
            1,224Notes
                payable
            
            
            1,531Total
                Liabilities Assumed
            
            
            5,179





(1)
            -
                Shares were valued using the average stock price for two days before
                and
                two days after the measurement date, as defined in SFAS 141 and EITF
                99-12





The
      combination was accounted for as a purchase business combination as defined
      by
      Statement of Financial Accounting Standards No. 141, Business Combinations.
      The
      allocation of the purchase price to the assets acquired and liabilities assumed
      is based on an independent valuation report obtained by the Company.





The
      values assigned to intangible assets are subject to amortization. The intangible
      assets were assigned the following lives for amortization purposes:





Estimated
                usefulIntangible
                asset
            life
                (in years)Customer
                contracts and relationships
            5Copyrighted
                materials
            5





Goodwill
      consists of the excess of the purchase price paid over the identifiable net
      assets and liabilities acquired at fair value. Goodwill was determined using
      the
      residual method based on an independent appraisal of the assets and liabilities
      acquired in the transaction. Goodwill is tested for impairment as defined by
      Statement of Financial Accounting Standards No. 142, ”Goodwill and Other
      Intangible Assets.”





During
      the first quarter of 2007, NeoMedia initiated an action plan to sell this
      business. The operations of this business are classified as discontinued
      operations during the three months ended March 31, 2007 and 2006. The criteria
      for discontinued operations classification were met during the three months
      ended March 31, 2007. (See Note 4)





21


The
      accompanying condensed consolidated statement of operations presented herein
      for
      the three months ended March 31, 2007 reflects the results of operations for
      BSD
      for the entire period under the caption “Loss from discontinued operations.” The
      accompanying condensed consolidated statement of operations presented herein
      for
      the three months ended March 31, 2006 reflects the results of operations for
      BSD
      for the period from March 22, 2006, through March 31, 2006 under the caption
      “Loss from discontinued operations.”





**Pro
      Forma Financial Information (Unaudited)**





Pro-forma
      results of operations as if NeoMedia was combined with Gavitec as of January
      1,
      2006 are as follows:


**Loss**
            
            **Weighted****Loss**
            
            **per
                Share**
            
            **Average****Total**
            
            **from**
            
            **from**
            
            **Common****Net**
            
            **Continuing**
            
            **Continuing**
            
            **Shares****Sales**
            
            **Operations**
            
            **Operations**
            
            **Outstanding**NeoMedia
            $404
            
            ($263)
            
            $0.00
            
            527,991,819Gavitec
            122
            
            (239)Pro
                forma adjustments
            (33)
            (A)
            110
            (A)
            $0.00
            (A)(B)
            67,200,319
            (B)Pro
                forma combined
            $493
            
            ($392)
            
            $0.00
            
            595,192,138


_________________





**Basis
      of Presentation** :
      NeoMedia
      acquired Mobot, Sponge, Gavitec, 12Snap, and BSD during the three months ended
      March 31, 2006. During November and December 2006, NeoMedia divested of Mobot
      and Sponge. During April 2007, NeoMedia divested of 12Snap. During the first
      quarter of 2007, NeoMedia decided to sell its Telecom Services business,
      comprised of the operations of BSD. Because the results of BSD, 12Snap, Mobot,
      and Sponge have already been removed from NeoMedia's continuing operations
      and
      classified as discontinued operations for the three months ended March 31,
      2006,
      these entities have not been included in the pro forma results shown above.
      However, the pro forma shares issued as consideration for the acquisitions
      of
      Gavitec, 12Snap, and BSD are reflected in the pro forma loss per share and
      weighted average common shares outstanding. The pro forma shares issued as
      consideration for the acquisitions of Mobot and Sponge, and NeoMedia shares
      returned in the sale of Sponge, are not reflected in the pro forma weighted
      average common shares outstanding, since for pro forma purposes the acquisition
      and disposal transactions are assumed to have occurred on January 1, 2006.
      Since
      the results of Gavitec were included in NeoMedia’s consolidated financial
      results for the entire three month period ended March 31, 2007, separate pro
      forma results are not shown above for this period.





(A)
      -
      Adjustment is to reflect operations of Gavitec from February 23, 2006 (closing
      date of acquisition) through March 31, 2006, and to reflect amortization of
      Gavitec intangible assets for the period January 1, 2006 through February 23,
      2006. Results of operations for Gavitec from February 23, 2006 through March
      31,
      2006 are included in NeoMedia's operations for the three months ended March
      31,
      2006.





(B)
      -
      Adjustment for shares that would have been issued in connection with the
      acquisitions of Gavitec, 12Snap, and BSD if they had occurred on January 1,
      2006. The adjustment between the reported and the pro forma number of weighted
      average shares outstanding is caused by (i) the weighting of the pro forma
      shares for the three months ended March 31, 2006, whereas in the reported number
      the shares were only outstanding from the closing date of each acquisition
      through March 31, 2006, and (ii) the number of pro forma shares being higher
      than the actual shares issued due to a lower stock price on the pro forma date
      of issuance than the actual date of issuance. Using the stock price around
      January 1, 2006, the pro forma number of shares that would have been issued
      was:





**Gavitec**
            
            **12Snap**
            
            **BSD**
            
            **Total**Total
                stock consideration
            
            $
            5,400,000
            
            $
            19,500,000
            
            $
            2,279,263
            
            $
            27,179,263Stock
                price on pro forma acquisition date
            
            $
            0.290
            
            $
            0.290
            
            $
            0.290Pro
                forma number of consideration shares
            
            
            18,620,690
            
            
            67,241,379
            
            
            7,859,527
            
            
            93,721,596








22




**Tax
      Implications of Acquisitions**





For
      income tax purposes, amounts assigned to particular assets acquired and
      liabilities assumed in the business combinations are different than amounts
      used
      for financial reporting. The differences in assigned values for financial
      reporting and tax purposes result in temporary differences. In applying SFAS
      109, “Accounting for Income Taxes”, the Company is required to recognize the tax
      effect of these temporary differences and, accordingly, a deferred tax liability
      has been recognized. The Company determined that its pre-existing and
      acquired deferred tax assets, and those acquired, including those subject to
      limitations, were more likely than not to be realized to offset the deferred
      tax
      liability. The reduction in the valuation allowance resulting in an asset was
      used to offset the deferred tax liability arising from the business
      combinations, pursuant to SFAS 109.





In
      addition, the acquisitions of Sponge, Gavitec, 12Snap, and BSD involve a change
      of control of foreign entities, and as a result any net operating loss
      carryforward in existence prior to the acquisition may have limited or no use
      for NeoMedia.





**Intangible
      Assets**





As
      of
      March 31, 2007, NeoMedia had intangible assets used in its continuing operations
      with original historical cost as follows:


(US
                dollars in thousands)**Gavitec**
            
            **Other**
            
            **Total**Proprietary
                Software
            
            $
            4,600
            
            $
            763
            
            $
            5,363Copyrighted
                Materials
            
            
            58
            
            
            ---
            
            
            58Patents
            
            
            ---
            
            
            4,888
            
            
            4,888**Total**
            
            **$**
            **4,658**
            
            **$**
            **5,651**
            
            **$**
            **10,309**





As
      of
      March 31, 2007, a ccumulated
      amortization on NeoMedia's intangible assets used
      in
      its continuing operations was:


(US
                dollars in thousands)**Gavitec**
            
            **Other**
            
            **Total**Proprietary
                Software
            
            $
            722
            
            $
            690
            
            $
            1,412Copyrighted
                Materials
            
            
            11
            
            
            ---
            
            
            11Patents
            
            
            ---
            
            
            2,124
            
            
            2,124**Total**
            
            **$**
            **733**
            
            **$**
            **2,814**
            
            **$**
            **3,547**








As
      of
      March 31, 2007, t he
      carrying value of NeoMedia's intangible assets used
      in
      its continuing operations was:


(US
                dollars in thousands)**Gavitec**
            
            **Other**
            
            **Total**Proprietary
                Software
            
            $
            3,878
            
            $
            73
            
            $
            3,951Copyrighted
                Materials
            
            
            47
            
            
            ---
            
            
            47Patents
            
            
            ---
            
            
            2,764
            
            
            2,764**Total**
            
            **$**
            **3,925**
            
            **$**
            **2,837**
            
            **$**
            **6,762**





23


Estimated
      future amortization expense on NeoMedia’s intangible assets is expected to
      be:





(US
                dollars in thousands)**Proprietary
                Software**
            
            **Copyrighted
                Materials**
            
            **Patents**
            
            **Total**2007
                (remaining 9 months)
            
            $
            510
            
            $
            7
            
            $
            224
            
            $
            7412008
            
            
            662
            
            
            10
            
            
            295
            
            
            9672009
            
            
            631
            
            
            10
            
            
            284
            
            
            9252010
            
            
            629
            
            
            10
            
            
            264
            
            
            9032011
            
            
            629
            
            
            2
            
            
            170
            
            
            801Thereafter
            
            
            890
            
            
            8
            
            
            1,527
            
            
            2,425**Total**
            
            **$**
            **3,951**
            
            **$**
            **47**
            
            **$**
            **2,764**
            
            **$**
            **6,762**





It
      is
      important to note that actual amortization expense could differ materially
      from
      the table due to subjective factors such as changes in assumptions of useful
      lives or impairment charges. The weighted average remaining life for the
      intangible assets was approximately 9.6 years as of March 31, 2007.





As
      of
      March 31, 2007, the following intangible assets relating to discontinued
      operations were included in “Assets held for sale” on the accompanying
      consolidated balance sheet:





(US
                dollars in thousands)**12snap**
            
            **BSD**
            
            **Micro
                Paint**
            
            **Total**Customer
                Contracts, net
            
            $
            193
            
            $
            1,083
            
            $
            54
            
            $
            1,330Proprietary
                Software, net
            
            
            2,332
            
            
            ---
            
            
            7
            
            
            2,339Brand
                Name, net
            
            
            850
            
            
            ---
            
            
            ---
            
            
            850Copyrighted
                Materials, net
            
            
            24
            
            
            108
            
            
            23
            
            
            155Patents,
                net
            
            
            ---
            
            
            ---
            
            
            1,318
            
            
            1,318Goodwill,
                net
            
            
            ---
            
            
            4,402
            
            
            1,068
            
            
            5,470**Total**
            
            **$**
            **3,399**
            
            **$**
            **5,593**
            
            **$**
            **2,470**
            
            **$**
            **11,462**





**Goodwill**





As
      of
      March 31, 2007, goodwill consisted of $3,418,000 associated with NeoMedia’s
      acquisition of Gavitec. As of March 31, 2007, NeoMedia also had recorded
      goodwill in the amount of $1,068,000 and $4,402,000 relating to its Micro Paint
      Repair and Telecom Services businesses, respectively, that are held for sale.
      These amounts are included in “Assets held for sale” on the accompanying
      consolidated balance sheet.





24


**4.**
            **DISCONTINUED
                OPERATIONS AND ASSETS AND LIABILITIES HELD FOR
                SALE**





**Micro
      Paint Repair Business Unit**





During
      August 2006, NeoMedia decided to sell its Micro Paint Repair business unit.
      The
      Company is currently in the process of negotiating with potential buyers with
      respect to the sale.





NeoMedia
      has analyzed the pertinent facts of the proposed transaction with respect to
      the
      criteria outlined in SFAS 144, and has determined that all of the criteria
      have
      been met and continue to be met. Accordingly, NeoMedia is reporting the
      operating results of the MPR business unit as Discontinued Operations, and
      the
      assets and liabilities as Held for Sale for all periods presented in this
      filing. Assets Held for Sale are not depreciated or amortized.





**Sponge
      and Mobot Businesses**





In
      the
      fourth quarter of 2006, NeoMedia disposed of two subsidiaries, Sponge and Mobot.
      All assets and liabilities associated with these two subsidiaries were disposed
      in the sale and removed from NeoMedia’s consolidated balance sheet. In
      accordance with SFAS 144, NeoMedia is reporting the operating results of these
      two subsidiaries as Discontinued Operations for all periods presented in this
      filing. NeoMedia has analyzed the applicable accounting literature found in
      the
      SEC Staff Accounting Bulletin (SAB) Topic 5E, Accounting Principles Board (APB)
      Opinion 29, APB 18, Statement of Financial Accounting Standards (SFAS) 141,
      SFAS
      144, and Emerging Issues Task Force (EITF) issue 01-2, and determined that
      the
      criteria for reporting the disposal of a business and reporting of discontinued
      operations have been met.








**12Snap
      Business**





In
      January 2007, NeoMedia management determined that it would focus on its core
      code-reading business in North America, the UK, mainland Europe, and China.
      In
      conjunction with this direction, the Company decided to sell its 12Snap business
      unit. On April 4, 2007, NeoMedia completed the sale of 12Snap. NeoMedia has
      analyzed the pertinent facts of the proposed transaction with respect to the
      criteria outlined in SFAS 144, and has determined that all of the criteria
      were
      met as of March 31, 2007 and continue to be met. Accordingly, NeoMedia is
      reporting the operating results of the 12Snap business unit as Discontinued
      Operations, and the assets and liabilities as Held for Sale for all periods
      presented in this filing. Assets Held for Sale are not depreciated or amortized.
      The disposal transaction will be reflected in NeoMedia’s financial statements
      for its fiscal quarter ended June 30, 2007.





**Telecom
      Services Business**





In
      connection with its January 2007 decision to focus on its core code-reading
      business, the Company also decided to sell the NeoMedia Telecom Services
      business unit. NeoMedia has analyzed the pertinent facts of the proposed
      transaction with respect to the criteria outlined in SFAS 144, and has
      determined that all of the criteria were met as of March 31, 2007 and continue
      to be met. Accordingly, NeoMedia is reporting the operating results of the
      NeoMedia Telecom Services business unit as Discontinued Operations, and the
      assets and liabilities as Held for Sale for all periods presented in this
      filing. Assets Held for Sale are not depreciated or amortized.





25


The
      operating results of the Micro Paint Repair, Sponge, Mobot, 12Snap, and Telecom
      Services businesses classified as discontinued operations are shown in the
      following table. These results include a gain on extinguishment of debt realized
      by Telecom Services in the amount of $257,000, and an impairment charge to
      reduce 12Snap assets to their fair market value in the amount of $2,467,000
      in
      the three months ended March 31, 2007. There is not any tax expense or benefit
      to report due to NeoMedia’s net operating loss carry forward tax position.





**Three
                months ended March 31, 2007****Micro**
            
            **Telecom****Paint
                Repair**
            
            **Services**
            
            **12Snap**
            
            **Mobot**
            
            **Sponge**
            
            **Total****Net
                Sales**
            
            $
            326
            
            $
            302
            
            $
            2,621
            
            $
            ----
            
            $
            ---
            
            $
            3,249**Loss
                from discontinued operations**
            
            $
            (591
            )
            $
            (3
            )
            $
            (1,954
            )
            $
            (11
            )
            $
            (15
            )
            $
            (2,574
            )


**Three
                months ended March 31, 2006****Micro**
            
            **Telecom****Paint
                Repair**
            
            **Services**
            
            **12Snap**
            
            **Mobot**
            
            **Sponge**
            
            **Total****Net
                Sales**
            
            $
            377
            
            $
            27
            
            $
            896
            
            $
            57
            
            $
            291
            
            $
            1,648**Loss
                from discontinued operations**
            
            $
            (451
            )
            $
            (429
            )
            $
            (56
            )
            $
            (282
            )
            $
            49
            
            $
            (1,169
            )




26


The
      assets and liabilities of the Micro Paint Repair, 12Snap, and Telecom Services
      businesses classified as held for sale are shown in the following table. There
      are no assets or liabilities associated with the Sponge or Mobot subsidiaries
      as
      of the balance sheet dates of March 31, 2007 or 2006.




**As
                of March 31, 2007****Micro**
            
            **Telecom****Paint
                Repair**
            
            **Services**
            
            **12Snap**
            
            **Total****ASSETS**Current
                assets:Cash
                & Cash Equivalents
            
            $
            68
            
            $
            14
            
            $
            824
            
            $
            906Trade
                Accounts Receivable, net
            
            
            223
            
            
            1,727
            
            
            820
            
            
            2,770Inventory
            
            
            236
            
            
            ---
            
            
            ---
            
            
            236Prepaid
                expenses and other current assets
            
            
            49
            
            
            12
            
            
            380
            
            
            441**Total
                Current Assets**
            
            
            576
            
            
            1,753
            
            
            2,024
            
            
            4,353Leasehold
                improvements and property and equipment, net
            
            
            139
            
            
            40
            
            
            180
            
            
            359Goodwill
                and other intangible assets, net
            
            
            2,470
            
            
            5,593
            
            
            3,399
            
            
            11,462**Total
                Assets Held for Sale**
            
            **$**
            **3,185**
            
            **$**
            **7,386**
            
            **$**
            **5,603**
            
            **$**
            **16,174****LIABILITIES**Current
                Liabilities:Accounts
                Payable
            
            $
            88
            
            $
            1,656
            
            $
            525
            
            $
            2,269Accrued
                expenses
            
            
            24
            
            
            4
            
            
            2,099
            
            
            2,127Taxes
                Payable
            
            
            10
            
            
            1,023
            
            
            ---
            
            
            1,033Deferred
                revenue & Other
            
            
            329
            
            
            69
            
            
            1,584
            
            
            1,982**Total
                Liabilities Held for Sale**
            
            **$**
            **451**
            
            **$**
            **2,752**
            
            **$**
            **4,208**
            
            **$**
            **7,411**




27





**As
                of December 31, 2006****Micro**
            
            **Telecom****Paint
                Repair**
            
            **Services**
            
            **12Snap**
            
            **Total****ASSETS**Current
                assets:Cash
                & cash equivalents
            
            $
            81
            
            $
            72
            
            $
            721
            
            $
            874Trade
                accounts receivable, net
            
            
            196
            
            
            1,577
            
            
            1,842
            
            
            3,615Inventory
            
            
            154
            
            
            ---
            
            
            ---
            
            
            154Investment
                in marketable securities
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---Prepaid
                expenses and other current assets
            
            
            36
            
            
            12
            
            
            407
            
            
            455**Total
                Current Assets**
            
            
            467
            
            
            1,661
            
            
            2,970
            
            
            5,098Leasehold
                improvements and property and equipment, net
            
            
            135
            
            
            48
            
            
            200
            
            
            383Goodwill
                and other intangible assets, net
            
            
            2,470
            
            
            5,593
            
            
            5,876
            
            
            13,939Other
                long term assets
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---**Total
                Assets Held for Sale**
            
            **$**
            **3,072**
            
            **$**
            **7,302**
            
            **$**
            **9,046**
            
            **$**
            **19,420****LIABILITIES**Current
                Liabilities:Accounts
                payable
            
            $
            25
            
            $
            1,854
            
            $
            640
            
            $
            2,519Accrued
                expenses
            
            
            22
            
            
            6
            
            
            2,144
            
            
            2,172Taxes
                payable
            
            
            8
            
            
            1,037
            
            
            ---
            
            
            1,045Deferred
                revenue & other
            
            
            352
            
            
            73
            
            
            4,096
            
            
            4,521**Total
                Liabilities Held for Sale**
            
            **$**
            **407**
            
            **$**
            **2,970**
            
            **$**
            **6,880**
            
            **$**
            **10,257**





Inventory
      included in assets held for sale is as follows:





March
                31,
            
            December
                31,2007
            
            2006Raw
                materials
            
            $
            130
            
            $
            90Work-in-process
            
            
            ---
            
            
            ---Finished
                goods
            
            
            106
            
            
            64**Total**
            
            **$**
            **236**
            
            **$**
            **154**





Results
      of operations for all discontinued business units are included in the line
      item
      entitled “Loss from discontinued operations” on the accompanying consolidated
      statement of operations for all periods presented. Balance sheet items for
      all
      discontinued business units are included in the line items entitled “Assets held
      for sale” and “Liabilities held for sale” on the accompanying consolidated
      balance sheet for all periods presented. As a result, pro forma results of
      operations as if the sale of each entity had occurred at the beginning of the
      period reported, and pro forma balance sheets as if the sale of each entity
      had
      occurred at the balance sheet dates presented, are not shown separately in
      this
      footnote.





As
      of
      March 31, 2007, NeoMedia also had recorded goodwill in the amount of $1,068,000
      and $4,402,000 relating to its Micro Paint Repair and Telecom Services
      businesses, respectively, that are held for sale. These amounts are included
      in
“Assets held for sale” on the accompanying consolidated balance
      sheet.


28




**5.**
            **FINANCING**





**Series
      C Convertible Preferred Stock**





The
      Company entered into a Securities Purchase Agreement, dated February 17, 2006
      (the “Agreement”) with Cornell Capital Partners LP, an accredited investor (the
“Purchaser”). Pursuant to the Agreement, the Purchaser agreed to purchase 8%
      cumulative Series C convertible preferred stock to be fully converted three
      (3)
      years from the date of issuance in the aggregate amount of $22,000,000. Net
      consideration from this arrangement amounted to $17,854,000, comprised of cash
      of $14,066,000, marketable securities with a calculated fair value of $579,000
      and a purchase value of $2,000,000, and the extinguishment of $3,209,000 of
      preexisting indebtedness. In addition, the Purchaser withheld $2,725,000
      commitment and structuring fees from the gross proceeds. The Agreement also
      provided for the issuance to the Purchaser, at no additional cost to the
      Purchaser, warrants to purchase shares of the Company's common stock. The
      Agreement also called for the Purchaser to acquire an additional $5,000,000
      of
      Series C convertible preferred stock on the date a registration statement filed
      by the Company was declared effective by the U.S. Securities and Exchange
      Commission. In connection with the Agreement, the Company also entered into
      a
      registration rights agreement with the Purchaser that required the Company
      to
      (i) file a registration statement with the SEC registering the resale of the
      shares of common stock issuable upon conversion of the preferred stock and
      the
      exercise of the warrants, (ii) achieve effectiveness by December 1, 2006, and
      (iii) maintain effectiveness of the registration statement. NeoMedia failed
      to
      meet these requirements, accordingly the Company is subject to liquidated
      damages amounting to 1% of the outstanding amount of Series C preferred stock
      per month, not to exceed $1,200,000.





At
      any
      time from the closing date until February 17, 2009, the Purchaser has the right
      to convert the preferred stock, in whole or in part, into common stock of the
      Company at the then effective conversion price, which varies relative to the
      Company’s trading stock price, as follows: The lower of $0.50 per share, or 97%
      of the lowest closing bid price (as reported by Bloomberg) of the common stock
      for the 30 trading days immediately preceding the conversion date. The
      conversions are limited such that the holder cannot exceed 4.99% ownership,
      unless the holders waive their right to such limitation. The limitation will
      terminate under any event of default.





On
      November 29, 2006, the Purchaser exercised the conversion of 378 shares of
      the
      Series C convertible preferred stock for 6,631,579 shares of NeoMedia’s common
      stock, leaving a balance of 21,622 shares of Series C convertible preferred
      stock outstanding.





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




Under
      the
      Series C Agreement, the Purchaser also received “A” warrants, “B” warrants and
“C” warrants to purchase 20,000,000, 25,000,000, and 30,000,000 shares of
      NeoMedia’s common stock, respectively, exercisable in three separate traunches
      at a price of $0.50, $0.40 and $0.35, respectively, per share, subject to
      adjustment, included under anti-dilution protection similar to that described
      above .
      As an
      inducement to enter into subsequent financing arrangements related to Cornell
      Debentures, the warrants were repriced on December 29, 2006 to $0.04 per share,
      subject to all the original terms and conditions of the respective warrant
      agreements. The Company recorded an additional warrant liability of $250,000
      related to the repricing. The warrants have a five-year contractual life.
      NeoMedia can force exercise of the warrants if the closing bid price of NeoMedia
      stock is more than $0.10 greater than the exercise price of any of the warrants
      for 15 consecutive trading days. It
      is
      important to note that the warrants held by Cornell Capital Partners contain
      a
      provision that, if at the time of exercise, NeoMedia is in default of the
      warrant agreement, the holder can perform a “cashless” exercise of the warrants
      and in lieu of making payment of the exercise price in cash, elect instead
      to
      withhold shares as consideration for the exercise price. In the event of such
      a
“cashless” exercise, NeoMedia would not receive any cash proceeds upon the
      exercise of such warrants. NeoMedia is currently in default of the Investor
      Registration Rights Agreement entered into on February 17, 2006, in connection
      with the Series C
      convertible preferred stock ,
      which
      called for a registration statement containing the shares underlying the
      Series C
      convertible preferred stock to be
      filed by June 1, 2006 and declared effective by December 1, 2006. Such a default
      of the Investor Registration Rights Agreement constitutes an event of default
      under the warrant agreements issued in connection with the Series C
      convertible preferred stock .
      As a
      result, Cornell Capital Partners currently has the right to exercise on a
      cashless basis 75,000,000 of the warrants they hold that were issued in
      connection with the Series C
      convertible preferred stock .





29


The
      8%
      cumulative Series C convertible preferred stock contains consequences in case
      of
      default. Events of default which could subject the Company to penalties,
      damages, and liabilities as specified in the Agreement include:


·
              Any
                  case or action of bankruptcy or insolvency commenced by the Company
                  or any
                  subsidiary, against the Company or adjudicated by a court against
                  the
                  Company for the benefit of
                  creditors;
  ·
              Any
                  default in its obligations under a mortgage or debt in excess of
                  $100,000;
  ·
              Any
                  cessation in the eligibility of the Company’s stock to be quoted on a
                  trading market;
  ·
              Failure
                  to timely file the registration statement covering the shares related to
                  the conversion option, or failure to make the registration statement
                  effective timely (NeoMedia is in default of this
                  provision);
  ·
              Any
                  lapse in the effectiveness of the registration statement covering
                  the
                  shares related to the conversion option, the warrants as described
                  and
                  transacted in the securities purchase agreement and accompanying
                  documents;
  ·
              Any
                  failure to deliver certificates within the specified time;
                  and
  ·
              Any
                  failure, by the Company, to pay in full the amount of cash due
                  pursuant to
                  a buy-in or failure to pay any amounts owed on account on account
                  of an
                  event of default within 10 days of the date
                  due.
  Other
        provisions included in the Agreement include the following:
  ·
              The
                  8% cumulative Series C convertible preferred stock is convertible
                  into
                  common stock, at the option of the Purchaser, at any time after
                  the
                  effective date;
  ·
              Conversions
                  can be made in increments and from time to
                  time;
  ·
              The
                  8% cumulative Series C convertible preferred stock has voting rights
                  on an
                  “as converted” basis, meaning the Purchaser is entitled to vote the number
                  of shares of common stock into which the 8% cumulative Series C
                  convertible preferred stock was convertible as of the record date
                  for a
                  meeting of shareholders;
  ·
              As
                  promptly as practicable after any conversion date and subject to
                  an
                  effective registration statement or an exemption from registration,
                  the
                  Company shall cause its transfer agent to deliver a certificate
                  representing the converted shares, free of any legends and trading
                  restrictions for the number of shares
                  converted;
  30
  ·
              The
                  Company will reserve and keep available authorized and unissued
                  registered
                  shares available to be issued upon
                  conversion;
  ·
              Purchaser
                  will not be responsible for any transfer taxes relative to issuance
                  of
                  shares;
  ·
              If
                  the Company offers, sells or grants stock at an effective per share
                  price
                  less than the then Conversion Price, then the Conversion Price
                  shall be
                  reduced to equal the effective conversion, exchange or purchase
                  price for
                  such common stock or common stock
                  equivalents;
  Due
        to
        the current default status, the Purchaser has certain material additional
        rights
        in this financing arrangement that did not exist prior to default.
        Specifically,
 
 ·
              The
                  full fair value of the Series C convertible preferred stock is
                  now
                  callable in the amount of
                  $21,657,000;
  ·
              The
                  warrants can be exercised on a cashless basis as described
                  above;
  ·
              The
                  requirement for the Purchaser to maintain an ownership interest
                  in
                  NeoMedia of less than 4.99% is
                  waived;
  ·
              NeoMedia
                  is responsible for liquidated damages as described
                  above.
  In
        addition, the accounting for the Series C convertible preferred stock reflects
        certain specific accounting rules and regulations that are applicable under
        the
        default provision:
 
 ·
              Prior
                  to the default, NeoMedia was accreting dividends on the Series
                  C
                  convertible preferred stock, using the effective interest method,
                  through
                  periodic charges to additional paid in capital. Due to the default
                  status,
                  NeoMedia accreted dividends to the full fair value of the Series
                  C
                  convertible preferred stock during the fourth quarter of
                  2006.
  ·
              The
                  Series C convertible preferred stock is now reported as demand
                  debt in the
                  current liabilities section of the balance sheet, pursuant to the
                  guidance
                  outlined in SFAS 150.




At
      the
      inception date of February 17, 2006, a summary of the allocation of the
      components of the transaction was as follows:





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


____________________




(1)
              The
                  discount to the face value of the 8% cumulative Series C convertible
                  preferred stock that resulted from the allocation along with deferred
                  costs was being accreted through periodic charges to additional
                  paid-in
                  capital using the effective interest method, prior to the accretion
                  to
                  full fair value due to NeoMedia’s being in default of the registration
                  rights agreement
 
 (2)
              The
                  Company issued additional warrants to purchase aggregate 75,000,000
                  shares
                  of common stock in connection with the 8% cumulative Series C convertible
                  preferred stock. The Company also issued 2,000,000 warrants (valued
                  at
                  $447,000) as financing fees.
 
 (3)
              The
                  financing arrangement settled face value $3,209,000 of preexisting
                  indebtedness. The debt extinguishment loss was calculated as the
                  amount
                  that the fair value of securities issued (using a relative fair
                  value
                  basis) exceeded the Company’s carrying
                  value.
  31


In
      accordance with Statement of Financial Accounting Standards No. 133,
‘Accounting for Derivative Instruments and Hedging Activities’,
      (“FASB 133”), the Company determined that the conversion feature of the
      Series C convertible preferred stock met the criteria of an embedded derivative
      and therefore the conversion feature of the Series C convertible preferred
      stock
      needed to be bifurcated and accounted for as a derivative. The Series C
      convertible preferred stock does not meet the definition of “conventional
      convertible debt” because the number of shares which may be issued upon the
      conversion of the Series C convertible preferred stock is not fixed.
      Furthermore, there is no cap on the number of shares that could be issued upon
      conversion. Therefore, the conversion feature fails to qualify for equity
      classification under EITF 00-19, and must be accounted for as a derivative
      liability.





The
      carrying value of the 8% cumulative Series C convertible preferred stock
      amounted to $21,657,000 at March 31, 2007. The face value of Series C
      convertible preferred stock at March 31, 2007 was also $21,657,000 as the
      instrument was written up to full fair value during the fourth quarter of 2006
      due to NeoMedia’s current default position. Derivative financial instruments
      arising from the issuance of Series C convertible preferred stock are initially
      recorded and continuously carried at fair value. Upon conversion of any
      derivative financial instrument, the change in fair value from the previous
      reporting date to the date of conversion is recorded to income (loss), and
      then
      the carrying value is recorded to paid-in capital, provided all other criteria
      for equity classification are met. The following tabular presentation reflects
      the components of derivative financial instruments related to the Series C
      convertible preferred stock on the Company’s balance sheet at March 31,
      2007:





**(Assets)
                Liabilities:**
            
            **March
                31, 2007**Common
                stock warrants
            
            $
            2,700,000Embedded
                conversion feature
            
            
            2,908,000Other
                warrants(1)
            
            
            782,000$
            6,390,000


____________________


(1)
              The
                  fair values of certain other derivative financial instruments (warrants)
                  that existed at the time of the issuance of Series C convertible
                  preferred
                  stock were reclassified from stockholders’ equity to liabilities when, in
                  connection with the issuance of Series C convertible preferred
                  stock, the
                  Company no longer controlled its ability to share-settle these
                  instruments. These derivative financial instruments had fair values
                  of
                  $14,331,000, $977,000 and $782,000 on February 17, 2006, December
                  31,
                  2006, and March 31, 2007, respectively. The decrease in fair value
                  of
                  these other derivative financial instruments resulted from a decrease
                  in
                  NeoMedia’s share price between February 17, 2006, December 31, 2006, and
                  March 31, 2007. The change in fair value is reported as “Gain on
                  derivative financial instruments” on the condensed consolidated statement
                  of operations during each period. These warrants will be reclassified
                  to
                  stockholders’ equity when the Company reacquires the ability to
                  share-settle the instruments.
 
 32


The
      following tabular presentation reflects the number of common shares into which
      the aforementioned derivative financial instruments are convertible or
      exercisable into at March 31, 2007:





**Shares
                of**
              **common
                stock**Common
                stock warrants
            
            
            75,000,000Embedded
                conversion feature(1)
            
            
            607,422,165Other
                warrants
            
            
            33,325,000715,747,165


____________________


(1)
              The
                  terms of the embedded conversion features in the Series C convertible
                  preferred stock provide for variable conversion rates that are
                  indexed to
                  the Company’s trading common stock price. As a result, the number of
                  indexed shares is subject to continuous fluctuation. For presentation
                  purposes, the number of shares of common stock into which the embedded
                  conversion feature was convertible as of March 31, 2007 was calculated
                  as
                  the face value of $21,622,000 plus assumed dividends of $1,946,000
                  if
                  declared, divided by 97% of the lowest closing bid price for the
                  30
                  trading days preceding March 31, 2007, which was $0.04 per share.




As
      of
      March 31, 2007 cumulative dividends earned but not declared in excess of the
      carrying value are $1,946,000.





Derivative
      income associated with adjustments recorded to reflect the aforementioned
      derivatives at fair value amounted to $2,828,000 and $4,768,000 during the
      three
      months ended March 31, 2007 and 2006, respectively. These amounts are reported
      as “Gain on derivative financial instruments” in the accompanying condensed
      consolidated statement of operations.





Fair
      value considerations for derivative financial instruments :





Freestanding
      derivative instruments, consisting of warrants that arose from the financing
      and
      those reclassified as described above are valued using the Black-Scholes-Merton
      valuation methodology because that model embodies all of the relevant
      assumptions that address the features underlying these instruments. Significant
      assumptions included in this model as of March 31, 2007 are as
      follows:





**Three
                months ended March 31, 2007**
            
            **Three
                months ended March 31, 2006****Cornell**
            
            
            
            **Cornell****Capital**
            
            
            
            **Capital**Holder
            **Partners**
            
            **Other**
            
            **Partners**
            
            **Other**Instrument
            Warrants
            
            Warrants
            
            Warrants
            
            WarrantsExercise
                price
            $0.04
            
            $0.01
                - $3.45
            
            $0.35
                - $0.50
            
            $0.01
                - $3.45Term
                (years)
            3.88
            
            0.2
                - 3.88
            
            4.88
            
            1.0
                - 4.88Volatility
            107.81%-131.04%
            
            115.73%-131.04%
            
            70.80%
            
            52.56%
                -70.80%Risk-free
                rate
            4.54%
            
            4.54%
            
            3.65%
            
            3.65%





Embedded
      derivative financial instruments, arising from the Series C convertible
      preferred stock, consist of multiple individual features that were embedded
      in
      the instrument. The Company evaluated all significant features of the
      instruments as required under current accounting standards and aggregated such
      instruments into one compound derivative financial instrument for financial
      reporting purposes. The compound embedded derivative instruments are valued
      using the Flexible Monte Carlo methodology because that model embodies certain
      relevant assumptions (including, but not limited to, interest rate risk, credit
      risk, and conversion/redemption privileges) that are necessary to value these
      complex derivatives.





33


Assumptions
      included exercise estimates/behaviors and the following other significant
      estimates:


**Three
                months ended March 31,****Instrument**
            **2007**
            
            **2006**Conversion
                prices
            $0.04
            
            $0.95
                - $1.29Remaining
                terms (years)
            1.88
            
            2.88Equivalent
                volatility
            117.69%-119.64%
            
            52.56%
                - 56.47%Equivalent
                interest-risk adjusted rate
            4.54%
                - 14.26%
            
            8.17%
                - 8.58%Equivalent
                credit-risk adjusted yield rate
            62.50%
            
            14.50%




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





**$5
      Million Secured Convertible Debenture - August 2006**





The
      Company entered into a Securities Purchase Agreement, dated August 24, 2006,
      (the “Agreement”) with Cornell Capital Partners LP, an accredited investor (the
“Purchaser”). Pursuant to the Agreement, the Purchaser agreed to purchase 10%
      secured convertible debentures maturing two years from the date of issuance
      in
      the aggregate amount of $5,000,000. The Agreement also provided for the issuance
      to the Purchaser, at no additional cost to the Purchaser, warrants to purchase
      shares of the Company's common stock. In connection with the Agreement, the
      Company also entered into a registration rights agreement with the Purchaser
      that required the Company to (i) file a registration statement with the SEC
      registering the resale of the shares of common stock issuable upon conversion
      of
      the convertible debenture and the exercise of the warrants, (ii) achieve
      effectiveness within a stated period and (iii) maintain effectiveness of the
      registration statement. Failure to meet these requirements will require the
      Company to incur liquidated damages amounting to 2% of the principal per month,
      but in no event shall consideration paid as liquidated damages exceed
      $1,000,000. The debentures are secured by substantially all of the Company’s
      assets.





At
      any
      time from the closing date until August 24, 2008, the Purchaser has the right
      to
      convert the convertible debenture into common stock of the Company at the then
      effective conversion price, which varies relative to the Company’s trading stock
      price, as follows: $0.15 per share, or 90% of the lowest closing bid price
      (as
      reported by Bloomberg) of the common stock for the 30 trading days immediately
      preceding the conversion date. The conversion was limited such that the holder
      cannot exceed 4.99% ownership, unless the holders waive their right to such
      limitation. The limitation will terminate under any event of default.





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




34


Under
      the
      Agreement, the Purchaser also received “A” warrants, “B” warrants, “C” warrants
      and “D” warrants to purchase an aggregate of up to 175,000,000 shares of common
      stock, exercisable in four separate traunches at a price of $0.15, $0.25, $0.20
      and $0.05 respectively per share, subject to adjustment, included under
      anti-dilution protection similar to that described above .
      As an
      inducement to enter into a subsequent financing arrangement with the Purchaser,
      the warrants were repriced on December 29, 2006 to $0.04 per share, subject
      to
      all the original terms and conditions of the respective warrant agreements.
      The
      Company recorded an additional warrant liability of $452,000 related to this
      repricing. The warrants have a five-year contractual life. NeoMedia can force
      exercise of the warrants if the closing bid price of NeoMedia stock is more
      than
      $0.10 greater than the exercise price of any of the warrants for 15 consecutive
      trading days. It
      is
      important to note that the warrants held by Cornell Capital Partners contain
      a
      provision that, if at the time of exercise, NeoMedia is in default of the
      warrant agreement, the holder can perform a “cashless” exercise of the warrants
      and in lieu of making payment of the exercise price in cash, elect instead
      to
      withhold shares as consideration for the exercise price. In the event of such
      a
“cashless” exercise, NeoMedia would not receive any cash proceeds upon the
      exercise of such warrants. NeoMedia is currently in default of the Investor
      Registration Rights Agreement entered into on August 24, 2006, in connection
      with the secured convertible debenture, which called for a registration
      statement containing the shares underlying the secured convertible debenture
      to
      be declared effective by November 22, 2006. Such a default of the Investor
      Registration Rights Agreement constitutes an event of default under the warrant
      agreements issued in connection with the secured convertible debenture. As
      a
      result, Cornell Capital Partners currently has the right to exercise on a
      cashless basis 175,000,000 of the warrants they hold that were issued in
      connection with the secured convertible debenture.





The
      convertible debenture contains consequences in case of default. Events of
      default which could subject the Company to penalties, liabilities, and
      foreclosure upon the assets of the Company as specified in the Agreement
      include:




·
              Any
                  case or action of bankruptcy or insolvency commenced by the Company
                  or any
                  subsidiary, against the Company or adjudicated by a court against
                  the
                  Company for the benefit of
                  creditors;
  ·
              Any
                  default in its obligations under a mortgage or debt in excess of
                  $100,000;
  ·
              Any
                  cessation in the eligibility of the Company’s stock to be quoted on a
                  trading market;
  ·
              Failure
                  to timely file the registration statement covering the shares related
                  to
                  the conversion option, or failure to make the registration statement
                  effective timely. NeoMedia is currently in default of this
                  provision;
  ·
              Any
                  lapse in the effectiveness of the registration statement covering
                  the
                  shares related to the conversion option, the warrants as described
                  and
                  transacted in the securities purchase agreement and accompanying
                  documents;
  ·
              Any
                  failure to deliver certificates within the specified time;
                  and
  ·
              Any
                  failure, by the Company, to pay in full the amount of cash due
                  pursuant to
                  a buy-in or failure to pay any amounts owed on account on account
                  of an
                  event of default within 3 days of the date
                  due.
  Other
        provisions included in the Agreement include the following:
  ·
              The
                  convertible debenture is convertible into common stock, at the
                  option of
                  the Purchaser, at any time after the effective
                  date;
  ·
              As
                  promptly as practicable after any conversion date, and subject
                  to an
                  effective registration statement or an exemption from registration
                  the
                  Company shall cause its transfer agent to deliver a certificate
                  representing the converted shares, free of any legends and trading
                  restrictions for the number of shares
                  converted;
  ·
              The
                  Company will reserve and keep available authorized and unissued
                  registered
                  shares available to be issued upon
                  conversion;
  ·
              Purchaser
                  will not be responsible for any transfer taxes relative to issuance
                  of
                  shares;
  35
  ·
              If
                  the Company offers, sells or grants stock at an effective per share
                  price
                  less than the then Conversion Price, then the Conversion Price
                  shall be
                  reduced to equal the effective conversion, exchange or purchase
                  price for
                  such common stock or common stock equivalents;
  ·
              Pursuant
                  to the terms of the convertible debenture agreement between NeoMedia
                  and
                  Cornell signed in connection with the convertible debenture sale,
                  without
                  Cornell’s consent NeoMedia cannot
  -
              issue
                  or sell any shares of Common Stock or preferred stock without
                  consideration or for consideration per share less than the closing
                  bid
                  price immediately prior to its issuance,
  -
              issue
                  or sell any preferred stock, warrant, option, right, contract,
                  call, or
                  other security or instrument granting the holder thereof the right
                  to
                  acquire common stock for consideration per share less than the
                  closing bid
                  price immediately prior to its issuance,
  -
              enter
                  into any security instrument granting the holder a security interest
                  in
                  any of its assets of,or
  -
              file
                  any registration statements on Form S-8.
  ·
              Pursuant
                  to a security agreement between NeoMedia and the Purchaser signed
                  in
                  connection with the convertible debenture, the Purchaser has a
                  security
                  interest in all of NeoMedia’s assets.
  NeoMedia
        is currently in default of the Investor Registration Rights Agreement entered
        into on August 24, 2006, in connection with the secured convertible debenture,
        because the registration statement to register the shares underlying the
        secured
        convertible debenture was not declared effective by the specified date. Due
        to
        the current default status, the Purchaser has certain material additional
        rights
        in this financing arrangement that did not previously exist.
        Specifically,
 
 ·
              The
                  full fair value of the secured convertible debenture is now callable
                  in
                  the amount of $5,000,000;
  ·
              The
                  warrants can be exercised on a cashless basis as described
                  above;
  ·
              NeoMedia
                  is responsible for liquidated damages; NeoMedia has accrued $999,000
                  as
                  the expected fair value of liquidated damages relating to the secured
                  convertible debenture as of March 31, 2007, and paid $490,000 of
                  the
                  accrued liquidated damages as of March 31, 2007;
  ·
              The
                  requirement for the Purchaser to maintain an ownership interest
                  in
                  NeoMedia of less than 4.99% is
                  terminated;
  The
        accounting for the secured convertible debenture reflects certain specific
        accounting rules and regulations that are applicable under the default
        provision:
 
 ·
              Prior
                  to the default, NeoMedia was accreting the debt discount on the
                  secured
                  convertible debenture, using the effective interest method, through
                  periodic charges to interest expense. Due to the default status,
                  during
                  the fourth quarter of NeoMedia accreted debt discount to the full
                  fair
                  value of the secured convertible
                  debenture.
  ·
              The
                  secured convertible debenture is reported as debt in the current
                  liabilities section of the balance sheet rather than long term
                  because the
                  debenture is callable as demand debt due to the
                  default.
  36




At
      the
      inception date of August 24, 2006, a summary of the allocation of the components
      of the transaction was as follows:





**Instrument:**Convertible
                debenture(1)
            
            $
            ---Common
                stock warrants(2)
            
            
            18,507,000Embedded
                conversion feature
            
            
            970,000Derivative
                loss
            
            
            (14,477,000
            )Total
                gross proceeds
            
            $
            5,000,000


____________________


(1)
              There
                  were insufficient proceeds to allocate amounts to the host debentures.
                  Accordingly, for purposes of application of the effective interest
                  method,
                  the company applied the 1% convention which provides for recognition
                  of 1%
                  of the future value as amortization in the first period.
 (2)
              The
                  Company issued warrants to purchase aggregate 175,000,000 shares
                  of common
                  stock in connection with the convertible debenture, as described
                  above.


In
      accordance with Statement of Financial Accounting Standards No. 133,
‘Accounting for Derivative Instruments and Hedging Activities’,
      (“FASB 133”), the Company determined that the conversion feature of the
      debenture met the criteria of an embedded derivative and therefore the
      conversion feature of the debenture needed to be bifurcated and accounted for
      as
      a derivative. The debenture does not meet the definition of “conventional
      convertible debt” because the number of shares which may be issued upon the
      conversion of the debenture is not fixed. Furthermore, there is no cap on the
      number of shares that could be issued upon conversion. Therefore, the conversion
      feature fails to qualify for equity classification under EITF 00-19, and
      must be accounted for as a derivative liability.





Due
      to
      NeoMedia’s current default position, during the fourth quarter of 2006 the
      debenture was written up to the full face value of $5,000,000, which was also
      the carrying value of the convertible debenture as of March 31, 2007. Derivative
      financial instruments arising from the issuance of convertible debentures are
      initially recorded, and continuously carried, at fair values. Upon conversion
      of
      any derivative financial instrument, the change in fair value from the previous
      reporting date to the date of conversion is recorded to income (loss), and
      then
      the carrying value is recorded to paid-in capital, provided all other criteria
      for equity classification are met. The following tabular presentation reflects
      the components of the derivative financial instruments related to this
      convertible debenture:





**(Assets)
                Liabilities:**
            
            **March
                31, 2007**Common
                stock warrants
            
            $
            7,207,000Embedded
                conversion feature
            
            
            2,528,000$
            9,735,000





The
      following tabular presentation reflects the number of common shares into which
      the aforementioned derivative financial instruments are convertible into at
      March 31, 2007:





**Shares
                of**
              **common
                stock**Common
                stock warrants
            
            
            175,000,000Embedded
                conversion feature(1)
            
            
            138,888,889313,888,889


____________________


(1)
              The
                  terms of the embedded conversion features in the convertible debenture
                  provide for variable conversion rates that are indexed to the Company’s
                  trading common stock price. As a result, the number of indexed
                  shares is
                  subject to continuous fluctuation. For presentation purposes, the
                  number
                  of shares of common stock into which the embedded conversion feature
                  was
                  convertible as of March 31, 2007 was calculated as the face value
                  of
                  $5,000,000, divided by 90% of the lowest closing bid price for
                  the 30
                  trading days preceding March 31, 2007.




37


Derivative
      income for the three months ended March 31, 2007 and 2006 associated with
      adjustments recorded to reflect the aforementioned derivatives at fair value
      amounted to $2,206,000 and $0, respectively, and is reported as “Gain on
      derivative financial instruments” in the accompanying consolidated statement of
      operations.





Fair
      value considerations for derivative financial instruments :





Freestanding
      derivative instruments, consisting of warrants that arose from the financing
      are
      valued using the Black-Scholes-Merton valuation methodology because that model
      embodies all of the relevant assumptions that address the features underlying
      these instruments. Significant assumptions included in this model as of March
      31, 2007 are as follows:





Holder
            Cornell
                Capital PartnersInstrument
            WarrantsExercise
                price
            $0.04
                - $0.05Remaining
                Term (years)
            4.4Volatility
            158.45%Risk-free
                rate
            4.54%








Embedded
      derivative financial instruments, arising from the convertible debenture,
      consist of multiple individual features that were embedded in the instrument.
      The Company evaluated all significant features of the instruments as required
      under current accounting standards, and aggregated such instruments into one
      compound derivative financial instrument for financial reporting purposes.
      The
      compound embedded derivative instruments are valued using the Flexible Monte
      Carlo methodology because that model embodies certain relevant assumptions
      (including, but not limited to, interest rate risk, credit risk, and
      conversion/redemption privileges) that are necessary to value these complex
      derivatives.





Assumptions
      included exercise estimates/behaviors and the following other significant
      estimates:





**Instrument:**
            **Features**Conversion
                prices
            $0.036Remaining
                terms (years)
            1.4Equivalent
                volatility
            116.93%Equivalent
                interest-risk adjusted rate
            12.11%Equivalent
                credit-risk adjusted yield rate
            34.23%





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





**$2.5
      Million Secured Convertible Debenture - December 2006**





The
      Company entered into a Securities Purchase Agreement, dated December 29, 2006,
      (the “Agreement”) with Cornell Capital Partners LP, an accredited investor (the
“Purchaser”). Pursuant to the Agreement, the Purchaser agreed to purchase 10%
      secured convertible debentures maturing two years from the date of issuance
      in
      the aggregate amount of $2,500,000. NeoMedia received cash proceeds from the
      transaction of $2,230,000 net of $270,000 fees paid to the Purchaser. The
      Agreement also provided for the issuance to the Purchaser, at no additional
      cost
      to the Purchaser, warrants to purchase shares of the Company's common stock.
      In
      connection with the Agreement, the Company also entered into a registration
      rights agreement with the Purchaser that requires the Company to (i) file a
      registration statement with the SEC registering the resale of the shares of
      common stock issuable upon conversion of the convertible debenture and the
      exercise of the warrants by May 31, 2007, (ii) achieve effectiveness within
      90
      days of filing, and (iii) maintain effectiveness of the registration statement.
      Failure to meet these requirements will require the Company to incur liquidated
      damages amounting to 2% of the principal per month, but in no event shall
      consideration paid as liquidated damages exceed $500,000.





38


The
      Debentures are secured according to the terms of a pledge and security agreement
      dated August 23, 2006 and entered into in connection with a previous $5 million
      secured convertible debenture with the Purchaser, pursuant to which the Company
      agreed to provide to Purchaser a security interest in its assets to secure
      the
      Company's obligations under the financing transaction.





At
      any
      time from the closing date until December 29, 2008, the Purchaser has the right
      to convert the convertible debenture into common stock of the Company at the
      then effective conversion price, which varies relative to the Company’s trading
      stock price, as follows: $0.06 per share, or 90% of the lowest closing bid
      price
      (as reported by Bloomberg) of the common stock for the 30 trading days
      immediately preceding the conversion date. The conversion is limited such that
      the holder cannot exceed 4.99% ownership, unless the holders waive their right
      to such limitation. The limitation will terminate under any event of default.





The
      convertible debenture, at the option of the holder, affords the Purchaser
      anti-dilution protection should, at any time while the convertible debenture
      is
      outstanding, the Company offer, sell or grant any option to purchase or offer,
      sell or grant any right to re-price its securities, or otherwise dispose of
      or
      issue any common stock or common stock equivalents, entitle any person to
      acquire shares of common stock at an effective price per share less than the
      then effective conversion price (excluding employee stock options), as
      calculated by the formula described above; then, in such instance, the
      conversion price for the convertible debenture shall be reduced to the lower
      price.




Under
      the
      terms of the agreement, the Purchaser also received warrants to purchase an
      aggregate of up to 42,000,000 shares of common stock. The warrants are
      exercisable at a price of $0.06 per share, subject to adjustment, included
      under
      anti-dilution protection similar to that described above .
      The
      warrants have a five-year contractual life. NeoMedia can force exercise of
      the
      warrants if the closing bid price of NeoMedia stock is more than $0.10 greater
      than the exercise price of any of the warrants for 15 consecutive trading days. It
      is
      important to note that the warrants held by Cornell Capital Partners contain
      a
      provision that, if at the time of exercise, NeoMedia is in default of the
      warrant agreement, the holder can perform a “cashless” exercise of the warrants
      and in lieu of making payment of the exercise price in cash, elect instead
      to
      withhold shares as consideration for the exercise price. In the event of such
      a
“cashless” exercise, NeoMedia would not receive any cash proceeds upon the
      exercise of such warrants. NeoMedia is currently in default of the Investor
      Registration Rights Agreement entered into on December 29, 2006, in connection
      with the secured convertible debenture. Such a default of the Investor
      Registration Rights Agreement constitutes an event of default under the warrant
      agreements issued in connection with the secured convertible debenture. As
      a
      result, Cornell Capital Partners currently has the right to exercise on a
      cashless basis the 42,000,000 of warrants they hold that were issued in
      connection with the secured convertible debenture.





The
      convertible debenture contains consequences in case of default. Events of
      default which could subject the Company to penalties, liabilities, and
      foreclosure upon the assets of the Company as specified in the Agreement
      include:


·
              Any
                  case or action of bankruptcy or insolvency commenced by the Company
                  or any
                  subsidiary, against the Company or adjudicated by a court against
                  the
                  Company for the benefit of
                  creditors;
  ·
              Any
                  default in its obligations under a mortgage or debt in excess of
                  $100,000;
  ·
              Any
                  cessation in the eligibility of the Company’s stock to be quoted on a
                  trading market;
  ·
              Failure
                  to timely file the registration statement covering the shares related
                  to
                  the conversion option, or failure to make the registration statement
                  effective timely;
  39
  ·
              Any
                  lapse in the effectiveness of the registration statement covering
                  the
                  shares related to the conversion option, the warrants as described
                  and
                  transacted in the securities purchase agreement and accompanying
                  documents;
  ·
              Any
                  failure to deliver certificates within the specified time;
                  and
  ·
              Any
                  failure, by the Company, to pay in full the amount of cash due
                  pursuant to
                  a buy-in or failure to pay any amounts owed on account on account
                  of an
                  event of default within 3 days of the date
                  due.
  Other
        provisions included in the Agreement include the following:
  ·
              The
                  convertible debenture is convertible into common stock, at the
                  option of
                  the Purchaser, at any time after the effective
                  date;
  ·
              As
                  promptly as practicable after any conversion date, and subject
                  to an
                  effective registration statement or an exemption from registration
                  the
                  Company shall cause its transfer agent to deliver a certificate
                  representing the converted shares, free of any legends and trading
                  restrictions for the number of shares
                  converted;
  ·
              The
                  Company will reserve and keep available authorized and unissued
                  registered
                  shares available to be issued upon
                  conversion;
  ·
              Purchaser
                  will not be responsible for any transfer taxes relative to issuance
                  of
                  shares;
  ·
              If
                  the Company offers, sells or grants stock at an effective per share
                  price
                  less than the then Conversion Price, then the Conversion Price
                  shall be
                  reduced to equal the effective conversion, exchange or purchase
                  price for
                  such common stock or common stock equivalents;
  ·
              Pursuant
                  to the terms of the convertible debenture agreement between NeoMedia
                  and
                  Cornell signed in connection with the convertible debenture sale,
                  without
                  Cornell’s consent NeoMedia cannot
  -
              issue
                  or sell any shares of Common Stock or preferred stock without
                  consideration or for consideration per share less than the closing
                  bid
                  price immediately prior to its issuance,
  -
              issue
                  or sell any preferred stock, warrant, option, right, contract,
                  call, or
                  other security or instrument granting the holder thereof the right
                  to
                  acquire common stock for consideration per share less than the
                  closing bid
                  price immediately prior to its issuance,
  -
              enter
                  into any security instrument granting the holder a security interest
                  in
                  any of its assets of,or
  -
              file
                  any registration statements on Form S-8.
  ·
              In
                  addition, pursuant to a security agreement between NeoMedia and
                  the
                  Purchaser signed in connection with the convertible debenture,
                  the
                  Purchaser has a security interest in all of NeoMedia’s assets.
 NeoMedia
          is currently in default of the Investor Registration Rights Agreement entered
          into on December 29, 2006, in connection with the secured convertible debenture,
          because the registration statement to register the shares underlying the
          secured
          convertible debenture issued on August 24, 2006 was not declared effective
          by
          the specified date. Due to the current default status, the Purchaser has
          certain
          material additional rights in this financing arrangement that did not previously
          exist. Specifically,
  40
 
 ·
                The
                    full fair value of the secured convertible debenture is now callable
                    in
                    the amount of $2,500,000;
  ·
                The
                    warrants can be exercised on a cashless basis as described
                    above;
  ·
                NeoMedia
                    is responsible for liquidated damages of 2% of the principal
                    up to a
                    maximum of $500,000;
  ·
                The
                    requirement for the Purchaser to maintain an ownership interest
                    in
                    NeoMedia of less than 5% is
                    terminated;
  The
          accounting for the secured convertible debenture reflects certain specific
          accounting rules and regulations that are applicable under the default
          provision:
 
 ·
                NeoMedia
                    incurred a charge to income from continuing operations at the
                    time of the
                    issuance of this secured convertible debenture to recognize the
                    liability
                    of the debenture at redemption value by fully writing off the
                    debt
                    discount.
  ·
                The
                    secured convertible debenture is reported as debt in the current
                    liabilities section of the balance sheet rather than long term,
                    because
                    the debenture is callable as demand debt due to the
                    default.
  41


At
      the
      inception date of December 29, 2006, a summary of the allocation of the
      components of the transaction is as follows:




**Instrument:**Convertible
                debenture
            
            $
            2,500,000Common
                stock warrants(1)
            
            
            2,159,000Embedded
                conversion feature
            
            
            1,579,000Derivative
                loss
            
            
            (1,238,000
            )Interest
                expense(2)
            
            
            (2,770,000
            )Total
                gross proceeds
            
            $
            2,230,000


____________________


(1)
              The
                  Company issued warrants to purchase aggregate 42,000,000 shares
                  of common
                  stock in connection with the convertible debenture, as described
                  above.
 (2)
              Due
                  to the default status, the debentures were accreted up to the full
                  fair
                  value of $2,500,000 at inception and the financing costs of $270,000
                  were
                  expensed to interest expense.


In
      accordance with Statement of Financial Accounting Standards No. 133,
‘Accounting for Derivative Instruments and Hedging Activities’,
      (“FASB 133”), the Company determined that the conversion feature of the
      debenture met the criteria of an embedded derivative and therefore the
      conversion feature of the debenture needed to be bifurcated and accounted for
      as
      a derivative. The debenture does not meet the definition of “conventional
      convertible debt” because the number of shares which may be issued upon the
      conversion of the debenture is not fixed. Furthermore, there is no cap on the
      number of shares that could be issued upon conversion. Therefore, the conversion
      feature fails to qualify for equity classification under EITF 00-19, and
      must be accounted for as a derivative liability.





The
      following tabular presentation reflects the number of common shares into which
      the aforementioned derivative financial instruments are indexed March 31,
      2007:





**Shares
                of**
              **common
                stock**Common
                stock warrants
            
            
            42,000,000Embedded
                conversion feature(1)
            
            
            69,444,444111,444,444




(1)
              The
                  terms of the embedded conversion features in the convertible debenture
                  provide for variable conversion rates that are indexed to the Company’s
                  trading common stock price. As a result, the number of indexed
                  shares is
                  subject to continuous fluctuation. For presentation purposes, the
                  number
                  of shares of common stock into which the embedded conversion feature
                  was
                  convertible as of March 31, 2007 was calculated as the face value
                  of
                  $2,500,000, divided by 90% of the lowest closing bid price for
                  the 30
                  trading days preceding March 31, 2007.


Derivative
      loss for the three months ended March 31, 2007 and 2006 associated with
      adjustments recorded to reflect the aforementioned derivatives at fair value
      amounted to $101,000 and $0, respectively, and is reported as “Gain on embedded
      conversion features of derivative financial instruments” in the accompanying
      consolidated statement of operations.





Fair
      value considerations for derivative financial instruments :





Freestanding
      derivative instruments, consisting of warrants that arose from the financing
      are
      valued using the Black-Scholes-Merton valuation methodology because that model
      embodies all of the relevant assumptions that address the features underlying
      these instruments. Significant assumptions included in this model as of March
      31, 2007 are as follows:


42




Holder
            Cornell
                Capital PartnersInstrument
            WarrantsExercise
                price
            $0.06Remaining
                Term (years)
            4.75Volatility
            158.45%Risk-free
                rate
            4.54%




Embedded
      derivative financial instruments, arising from the convertible debenture,
      consist of multiple individual features that were embedded in the instrument.
      The Company evaluated all significant features of the hybrid instruments and,
      where required under current accounting standards, bifurcated features for
      separate report classification. These features were aggregated into one compound
      derivative financial instrument for financial reporting purposes. The compound
      embedded derivative instruments are valued using the Flexible Monte Carlo
      methodology because that model embodies certain relevant assumptions (including,
      but not limited to, interest rate risk, credit risk, and conversion/redemption
      privileges) that are necessary to value these complex derivatives.





Assumptions
      included exercise estimates/behaviors and the following other significant
      estimates:





Instrument:
            FeaturesConversion
                prices
            $0.036Remaining
                terms (years)
            1.75Equivalent
                volatility
            118.76%Equivalent
                interest-risk adjusted rate
            13.83%Equivalent
                credit-risk adjusted yield rate
            35.08%





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





**$7.5
      Million Secured Convertible Debenture - March 2007**





The
      Company entered into a Securities Purchase Agreement, dated March 27, 2007,
      (the
“Agreement”) with Cornell Capital Partners LP, an accredited investor (the
“Purchaser”). Pursuant to the Agreement, the Purchaser agreed to purchase 13%
      secured convertible debentures maturing two years from the date of issuance
      in
      the aggregate amount of $7,459,000. NeoMedia received cash proceeds from the
      transaction of $5,000,000, net of $781,000 fees paid to the Purchaser, and
      $1,678,000 payment of accrued interest and liquidated damages related to
      previous financings with Purchaser. The Agreement also provided for the issuance
      to the Purchaser, at no additional cost to the Purchaser, warrants to purchase
      shares of the Company's common stock. In connection with the Agreement, the
      Company also entered into a registration rights agreement with the Purchaser
      that requires the Company to (i) file a registration statement with the SEC
      registering the resale of the shares of common stock issuable upon conversion
      of
      the convertible debenture and the exercise of the warrants within 30 days of
      receipt of a request for filing from the Purchaser, (ii) achieve effectiveness
      within 120 days of receipt of a request for filing from the Purchaser, and
      (iii)
      maintain effectiveness of the registration statement. Failure to meet these
      requirements will require the Company to incur liquidated damages amounting
      to
      2% of the principal per month, but in no event shall consideration paid as
      liquidated damages exceed $1,790,000.





The
      Debentures are secured according to the terms of a pledge and security agreement
      dated August 24, 2006 and entered into in connection with a previous $5 million
      secured convertible debenture with the Purchaser, pursuant to which the Company
      agreed to provide to Purchaser a security interest in its assets to secure
      the
      Company's obligations under the financing transaction. The Debentures are
      additionally secured by a patent security agreement entered into on March 27,
      2007.





43


At
      any
      time from the closing date until March 27, 2009, the Purchaser has the right
      to
      convert the convertible debenture into common stock of the Company at the then
      effective conversion price, which varies relative to the Company’s trading stock
      price, as follows: $0.05 per share, or 90% of the lowest closing bid price
      (as
      reported by Bloomberg) of the common stock for the 30 trading days immediately
      preceding the conversion date. The conversion is limited such that the holder
      cannot exceed 4.99% ownership, unless the holders waive their right to such
      limitation. The limitation will terminate under any event of default.





The
      convertible debenture, at the option of the holder, affords the Purchaser
      anti-dilution protection should, at any time while the convertible debenture
      is
      outstanding, the Company offer, sell or grant any option to purchase or offer,
      sell or grant any right to re-price its securities, or otherwise dispose of
      or
      issue any common stock or common stock equivalents, entitle any person to
      acquire shares of common stock at an effective price per share less than the
      then effective conversion price (excluding employee stock options), as
      calculated by the formula described above; then, in such instance, the
      conversion price for the convertible debenture shall be reduced to the lower
      price.




Under
      the
      terms of the agreement, the Purchaser also received warrants to purchase an
      aggregate of up to 125,000,000 shares of common stock. The warrants are
      exercisable at a price of $0.04 per share, subject to adjustment, included
      under
      anti-dilution protection similar to that described above .
      The
      warrants have a five-year contractual life. The warrants do not contain a forced
      exercise attribute similar to previously issued warrants. It
      is
      important to note that the warrants contain a provision that, if at the
      time of exercise, NeoMedia is in default of the warrant agreement, the holder
      can perform a “cashless” exercise of the warrants and in lieu of making payment
      of the exercise price in cash, elect instead to withhold shares as consideration
      for the exercise price. In the event of such a “cashless” exercise, NeoMedia
      would not receive any cash proceeds upon the exercise of such warrants. NeoMedia
      is currently in default of the Investor Registration Rights Agreement entered
      into on March 27, 2007, due to a pre-existing default on its previous financing
      arrangements with the Buyer. Such a default of the Investor Registration Rights
      Agreement constitutes an event of default under the warrant agreements issued
      in
      connection with the secured convertible debenture. As a result, Cornell Capital
      Partners currently has the right to exercise on a cashless basis the 125,000,000
      of warrants they hold that were issued in connection with the secured
      convertible debenture.





The
      convertible debenture contains consequences in case of default. Events of
      default which could subject the Company to penalties, liabilities, and
      foreclosure upon the assets of the Company as specified in the Agreement
      include:


·
              Any
                  case or action of bankruptcy or insolvency commenced by the Company
                  or any
                  subsidiary, against the Company or adjudicated by a court against
                  the
                  Company for the benefit of
                  creditors;
  ·
              Any
                  default in its obligations under a mortgage or debt in excess of
                  $100,000;
  ·
              Any
                  cessation in the eligibility of the Company’s stock to be quoted on a
                  trading market;
  ·
              Failure
                  to timely file the registration statement covering the shares related
                  to
                  the conversion option, or failure to make the registration statement
                  effective timely;
  ·
              Any
                  lapse in the effectiveness of the registration statement covering
                  the
                  shares related to the conversion option, the warrants as described
                  and
                  transacted in the securities purchase agreement and accompanying
                  documents;
  ·
              Any
                  failure to deliver certificates within the specified time;
                  and
  44
  ·
              Any
                  failure, by the Company, to pay in full the amount of cash due
                  pursuant to
                  a buy-in or failure to pay any amounts owed on account on account
                  of an
                  event of default within 3 days of the date
                  due.
  Other
        provisions included in the Agreement include the following:
  ·
              The
                  convertible debenture is convertible into common stock, at the
                  option of
                  the Purchaser, at any time after the effective
                  date;
  ·
              As
                  promptly as practicable after any conversion date, and subject
                  to an
                  effective registration statement or an exemption from registration
                  the
                  Company shall cause its transfer agent to deliver a certificate
                  representing the converted shares, free of any legends and trading
                  restrictions for the number of shares
                  converted;
  ·
              The
                  Company will reserve and keep available authorized and unissued
                  registered
                  shares available to be issued upon
                  conversion;
  ·
              Purchaser
                  will not be responsible for any transfer taxes relative to issuance
                  of
                  shares;
  ·
              If
                  the Company offers, sells or grants stock at an effective per share
                  price
                  less than the then Conversion Price, then the Conversion Price
                  shall be
                  reduced to equal the effective conversion, exchange or purchase
                  price for
                  such common stock or common stock equivalents;
  ·
              Pursuant
                  to the terms of the convertible debenture agreement between NeoMedia
                  and
                  Cornell signed in connection with the convertible debenture sale,
                  without
                  Cornell’s consent NeoMedia cannot
  -
              issue
                  or sell any shares of Common Stock or preferred stock without
                  consideration or for consideration per share less than the closing
                  bid
                  price immediately prior to its issuance,
  -
              issue
                  or sell any preferred stock, warrant, option, right, contract,
                  call, or
                  other security or instrument granting the holder thereof the right
                  to
                  acquire common stock for consideration per share less than the
                  closing bid
                  price immediately prior to its issuance,
  -
              enter
                  into any security instrument granting the holder a security interest
                  in
                  any of its assets of,or
  -
              file
                  any registration statements on Form S-8.
  ·
              In
                  addition, pursuant to a security agreement between NeoMedia and
                  the
                  Purchaser signed in connection with the convertible debenture,
                  the
                  Purchaser has a security interest in all of NeoMedia’s assets.
  NeoMedia
        is currently in default of the Investor Registration Rights Agreement entered
        into on March 27, 2007, in connection with the secured convertible debenture,
        because the registration statement to register the shares underlying the
        secured
        convertible debenture issued on August 24, 2006 was not declared effective
        by
        the specified date. Due to the current default status, the Purchaser has
        certain
        material additional rights in this financing arrangement that did not previously
        exist. Specifically,
 
 ·
              The
                  full fair value of the secured convertible debenture is now callable
                  in
                  the amount of $7,459,000;
  ·
              The
                  warrants can be exercised on a cashless basis as described
                  above;
  45
  ·
              NeoMedia
                  is responsible for liquidated damages of 2% of the principal per
                  month up
                  to a maximum of $1,790,000;
  ·
              The
                  requirement for the Purchaser to maintain an ownership interest
                  in
                  NeoMedia of less than 5% is
                  terminated;
  The
        accounting for the secured convertible debenture reflects certain specific
        accounting rules and regulations that are applicable under the default
        provision:
 
 ·
              NeoMedia
                  incurred a charge to income from continuing operations at the time
                  of the
                  issuance of this secured convertible debenture to recognize the
                  liability
                  of the debenture at redemption value by fully writing off the debt
                  discount.
  ·
              The
                  secured convertible debenture is reported as debt in the current
                  liabilities section of the balance sheet rather than long term,
                  because
                  the debenture is callable as demand debt due to the
                  default.
  46


At
      the
      inception date of March 27, 2007, a summary of the allocation of the components
      of the transaction is as follows:




**Instrument:**Convertible
                debenture
            
            $
            10,836,000Common
                stock warrants(1)
            
            
            5,638,000Payment
                of liquidating damages(2)
            
            
            (1,312,000
            )Payment
                of interest due(3)
            
            
            (366,000
            )Derivative
                loss
            
            
            (9,015,000
            )Interest
                expense(4)
            
            
            (781,000
            )Total
                gross proceeds
            
            $
            5,000,000


____________________


(1)
              The
                  Company issued warrants to purchase aggregate 125,000,000 shares
                  of common
                  stock in connection with the convertible debenture, as described
                  above.
 (2)
              Liquidating
                  damages arising from the February 2006 preferred financing arrangement
                  and
                  the August 2006 debenture financing arrangement were paid from
                  the
                  proceeds of this debenture arrangement in the amount of
                  $1,312,000.
 (3)
              Interest
                  payments of $366,000 toward the August 2006 and December 2006 debenture
                  financings were made from the proceeds of this debenture
                  arrangement.
 (4)
              Due
                  to the default status, the financing costs of $781,000 were expensed
                  to
                  interest expense.
  The
        Company evaluated the terms and features of the common stock and warrants
        under
        FAS 155 “Accounting for Certain Hybrid Financial Instruments an amendment of
        FASB Statements No. 133 and 140” which permits fair value re-measurement for any
        hybrid financial instrument that contains an embedded derivative that otherwise
        would require bifurcation. During the evaluation, the Company determined
        (i) the
        hybrid debt instrument embodied certain derivative features that were not
        clearly and closely related to the host debt instrument and, (ii) the warrants
        did not meet all of the established criteria for equity classification.
        Additionally, the secured convertible debenture extended a right to the holder
        to accelerate repayment of the debt (default put) and contains cash penalties
        upon the occurrence of certain contingent events. In order for contingently
        exercisable call and puts to be considered clearly and closely related, they
        can
        be indexed only to interest rates or credit risk, not another factor that
        does
        not possess the same risk as debt. Since the default put is indexed to other
        than interest rates or credit risk and it may be triggered upon events that
        are
        not within our control, is not deemed to be clearly and closely related to
        the
        host debt instrument. The warrants did not meet all of the established criteria
        for equity classification provided in EITF 00-19.
 
 The
        Company evaluates each financing arrangement for the applicability of FAS
        155 on
        a case by case basis. The Company applied FAS 155 to the March 2007 $7.5
        million
        debenture financing arrangement.
 
 The
        above
        instruments are being carried at their respective fair values with the changes
        in the fair value of the secured convertible debenture and related derivatives
        recorded in the statement of operations.
 
 The
        following tabular presentation reflects the number of common shares into
        which
        the aforementioned derivative financial instruments are indexed March 31,
        2007:
 
 **Shares
                  of**
                **common
                  stock**Common
                  stock warrants
              
              
              125,000,000Embedded
                  conversion feature(1)
              
              
              206,668,080331,668,080
 
 (1)
              The
                  terms of the embedded conversion features in the convertible debenture
                  provide for variable conversion rates that are indexed to the Company’s
                  trading common stock price. As a result, the number of indexed
                  shares is
                  subject to continuous fluctuation. For presentation purposes, the
                  number
                  of shares of common stock into which the embedded conversion feature
                  was
                  convertible as of March 31, 2007 was calculated as the face value
                  of
                  $7,459,000, divided by 90% of the lowest closing bid price for
                  the 30
                  trading days preceding March 31, 2007.
 
 47
 Derivative
        loss for the three months ended March 31, 2007 and 2006 associated with
        adjustments recorded to reflect the aforementioned derivatives at fair value
        amounted to $8,640,000 and $0, respectively, and is reported as “Gain on
        embedded conversion features of derivative financial instruments” in the
        accompanying consolidated statement of operations.
 
 Fair
        value considerations for derivative financial instruments :
 
 Freestanding
        derivative instruments, consisting of warrants that arose from the financing
        are
        valued using the Black-Scholes-Merton valuation methodology because that
        model
        embodies all of the relevant assumptions that address the features underlying
        these instruments. Significant assumptions included in this model as of March
        31, 2007 are as follows:
 
 Holder
              Cornell
                  Capital PartnersInstrument
              WarrantsExercise
                  price
              $0.04Remaining
                  Term (years)
              5.00Volatility
              158.45%Risk-free
                  rate
              4.54%
 
 Embedded
        derivative financial instruments, arising from the convertible debenture,
        consist of multiple individual features that were embedded in the instrument.
        The Company evaluated all significant features of the hybrid instruments
        and,
        where required under current accounting standards, bifurcated features for
        separate report classification. These features were aggregated into one compound
        derivative financial instrument for financial reporting purposes. The compound
        embedded derivative instruments are valued using the Flexible Monte Carlo
        methodology because that model embodies certain relevant assumptions (including,
        but not limited to, interest rate risk, credit risk, and conversion/redemption
        privileges) that are necessary to value these complex derivatives.
 
 Assumptions
        included exercise estimates/behaviors and the following other significant
        estimates:
 
 Instrument:
              FeaturesConversion
                  prices
              $0.036Remaining
                  terms (years)
              2.00Equivalent
                  volatility
              123.41%-123.49%Equivalent
                  interest-risk adjusted rate
              9.31%-9.32%Equivalent
                  credit-risk adjusted yield rate
              16.63%-16.66%
 
 Equivalent
        amounts reflect the net results of multiple modeling simulations that the
        Monte
        Carlo Simulation methodology applies to underlying assumptions. The assumptions
        included in the Monte Carlo Simulation calculation are highly subjective
        and
        subject to interpretation.
 
 The
        fair
        value of derivative financial instruments recorded as of March 31, 2007
        (unaudited) and December 31, 2006 respectively was:
 
 Warrants
                  and embedded conversion features in preferred stock
              
              $
              6,390
              
              $
              9,217Warrants
                  and embedded conversion features in debentures
              
              
              18,634
              
              
              15,679Fair
                  value of future payment obligation
              
              
              620
              
              
              564Special
                  preference stock of Mobot
              
              
              305
              
              
              359Total
                  derivative financial instruments
              
              **$**
              **25,949**
              
              **$**
              **25,819**
  48
 **Standby
        Equity Distribution Agreements with Cornell**
 
 On
        October 27, 2003, NeoMedia and Cornell Capital Partners (“Cornell”) entered into
        a $20 million Standby Equity Distribution Agreement (the “2003 SEDA”). The
        agreement provided for a maximum “draw” of $280,000 per week, not to exceed
        $840,000 in any 30-day period, and Cornell was obligated to purchase up to
        $20
        million of the Company’s common stock over a two-year period. The SEDA became
        effective during January 2004, and expired after a two-year term in January
        2006. During the three months ended March 31, 2007 and 2006, NeoMedia sold
        shares of its common stock to Cornell pursuant to the 2003 SEDA as
        follows:
 
 **Three
                  Months Ended March 31,****2007**
              
              **2006**Number
                  of shares sold to Cornell
              
              
              ---
              
              
              751,880Gross
                  Proceeds from sale of shares to Cornell
              
              $
              ---
              
              $
              234,000Less:
                  discounts and fees*
              
              
              ---
              
              
              (24,000
              )Net
                  Proceeds from sale of shares to Cornell
              
              $
              ---
              
              $
              210,000
 
 *
        Pursuant to the terms of the 2003 SEDA, stock was valued at 98% of the lowest
        closing bid price during the week it was sold.
 
 49
 
 **6.**
              **INVESTMENT
                  IN MARKETABLE SECURITIES AND OTHER LONG-TERM
                  ASSETS**
 
 On
        February 25, 2005, NeoMedia invested $250,000 in exchange for 8,333,333 shares
        of Pickups Plus, Inc (“PUPS”) restricted common stock. On February 17, 2006, as
        a component of net proceeds from the issuance of 8% Series C convertible
        preferred stock, NeoMedia received marketable securities with a fair value
        of
        $579,000, of which, $200,000 represented 20,000,000 shares of PUPS common
        stock
        and $379,000 in notes designated as held to maturity. PUPS is
        a
        franchiser of retail automotive parts and accessories stores catering to
        the
        light truck market, and also provides new vehicle preparation, environmental
        protection packages, detailing and reconditioning products and services.
        In
        accordance with Statements
        of Financial Accounting Standards No. 115, “Accounting for Certain Investments
        in Debt and Equity Securities,” the investment in PUPS is being recorded as
        available-for-sale securities and reported at fair value. Accordingly,
        unrealized gains and losses on the equity securities are reflected in the
        condensed consolidated statement of operations and comprehensive income (loss).
        Investment in marketable securities consist of the fair market value of the
        PUPS
        common stock of $31,000 as of March 31, 2007.
 
 Other
        long term assets and investments consist of the following as of March 31,
        2007:
 
 **As
                  of March 31, 2007****Cost**
              
              **Unrealized**
                **Holding
                  Gains**
                **(Losses)**
              
              **Impairment**
                **Amount**
                **Realized**
              
              **Carrying**
                **Value**Held
                  to maturity, notes receivable PUPS
              
              $
              379,000
              
              $
              ---
              
              
              ($379,000
              )
              $
              ---Investment
                  in Mobot
              
              
              1,926,000
              
              
              ---
              
              
              ---
              
              
              1,926,000Investment
                  in Sponge
              
              
              1,399,000
              
              
              ---
              
              
              ---
              
              
              1,399,000Total
              
              $
              3,704,000
              
              $
              ---
              
              
              ($379,000
              )
              $
              3,325,000
 
 Held
        to
        maturity securities consist of four notes receivable from PUPS with a face
        value
        of $1,611,000 and a fair value of $0. NeoMedia incurred an impairment charge
        in
        the fourth quarter of 2006 to reduce the carrying value of the notes receivable
        to their expected realizable value. The notes are delinquent and accrue interest
        at rates between 12 - 24%. NeoMedia has not recorded any interest since the
        Company is using the cost recovery method.
 
 Investment
        in Mobot consists of shares of FMS Group, representing NeoMedia’s 18% ownership
        of FMS Group, which currently operates the Mobot business.
 
 Investment
        in Sponge consists of shares of Sponge, representing NeoMedia’s 7.5% ownership
        of Sponge.
  50
 **7.**
              **FINANCIAL
                  INSTRUMENTS**
  The
        carrying amount of the Company's cash equivalents, accounts receivable, prepaid
        expenses, other current assets, cash surrender value of life insurance policy,
        accounts payable and accrued expenses, accrued salaries and benefits, and
        payable to merchants approximates their estimated fair values due to the
        short-term maturities of those financial instruments.
 
 Rates
        currently available to the Company for debt with similar terms and remaining
        maturities are used to estimate fair value of existing debt.
  It
        is not
        practicable to estimate the fair value of the Company’s investment of 250,000
        shares of preferred stock of Intactis Software, Inc ., because
        of the lack of quoted market prices and the inability to estimate fair value
        without incurring excessive costs. During 2005, NeoMedia recorded an impairment
        of the carrying value of its investment in Intactis of $250,000, reducing
        the
        net carrying value to $0.
  For
        all
        available-for-sale investment securities, the carrying values represent fair
        value of the securities and unrealized gain (losses) that are other than
        temporary are recognized as other comprehensive income (loss). NeoMedia does
        not
        hold these securities for speculative or trading purposes (See Note 6).
  **8.**
              **COMPUTATION
                  OF NET INCOME (LOSS) PER
                  SHARE**
 
 Basic
        net
        loss per share is computed by dividing net loss by the weighted average number
        of shares of common stock outstanding during the period. During the three
        months
        ended March 31, 2007 and 2006, the Company reported net loss per share, and
        as
        such basic and diluted loss per share were equivalent. The Company has excluded
        all outstanding stock options, warrants and convertible securities from the
        calculation of diluted net loss per share because these securities are
        anti-dilutive for all years presented. The shares excluded from the calculation
        of diluted net loss per share are detailed in the table below:
 
 **Three
                  Months Ended March 31,****2007**
              
              **2006**Outstanding
                  stock options
              
              
              106,978,761
              
              
              124,005,799Outstanding
                  warrants
              
              
              441,325,000
              
              
              108,325,000Series
                C Convertible Preferred Stock*
              
              
              607,422,165
              
              
              66,707,095Convertible
                Debt*
              
              
              415,001,413
              
              
              ---
  *Quantity
        of shares indexed to financing agreements.
  51
 **9.**
              **STOCK
                  BASED COMPENSATION**
 
 **Equity-based
        Compensation Plans**
 
 Effective
        March 27, 1998, NeoMedia adopted the 1998 Stock Option Plan making available
        for
        grant to employees of NeoMedia options to purchase up to 8,000,000 shares
        of
        NeoMedia's common stock. The stock option committee of the Board of Directors
        has the authority to determine to whom options will be granted, the number
        of
        options, the related term, and exercise price. The option exercise price
        may be
        less than the fair market value per share of NeoMedia's common stock on the
        date
        of grant. Options generally vest 20% upon grant and 20% per year thereafter.
        The
        options expire ten years from the date of grant. As of March 31, 2007, options
        to purchase 145,450 shares of common stock remained available for issuance
        under
        the 1998 Stock Option Plan.
 
 Effective
        June 6, 2002, NeoMedia adopted its 2002 Stock Option Plan. The 2002 Stock
        Option
        Plan provides for authority for the stock option committee of the Board of
        Directors to grant non-qualified stock options with respect to a maximum
        of
        10,000,000 shares of common stock. The option exercise price may be less
        than
        the fair market value per share of NeoMedia's common stock on the date of
        grant,
        and may be granted with any vesting schedule as approved by the stock option
        committee. As of March 31, 2007, options to purchase 20,000 shares of common
        stock remained available for issuance under the 2002 Stock Option
        Plan.
 
 Effective
        September 24, 2003, NeoMedia adopted its 2003 Stock Option Plan. The 2003
        Stock
        Option Plan provides for authority for the Board of Directors to the grant
        non-qualified stock options with respect to a maximum of 150,000,000 shares
        of
        common stock. The option exercise price may be less than the fair market
        value
        per share of NeoMedia's common stock on the date of grant, and may be granted
        with any vesting schedule as approved by the stock option committee. As of
        March
        31, 2007, options to purchase 106,957,765 shares of common stock remained
        available for issuance under the 2003 Stock Option Plan.
 
 Effective
        December 16, 2005, NeoMedia adopted its 2005 Stock Option Plan. The 2005
        Stock
        Option Plan provides for authority for the Board of Directors to the grant
        non-qualified stock options with respect to a maximum of 60,000,000 shares
        of
        common stock. The option exercise price may be less than the fair market
        value
        per share of NeoMedia's common stock on the date of grant, and may be granted
        with any vesting schedule as approved by the stock option committee. As of
        March
        31, 2007, NeoMedia has not registered the 60,000,000 shares underlying the
        options in the 2005 Stock Option Plan, and as a result options to purchase
        all
        60,000,000 shares of common stock remained available for issuance under the
        2005
        Stock Option Plan.
 
 Effective
        October 31, 2003, NeoMedia adopted the 2003 Stock Incentive Plan. Under the
        terms of the 2003 Stock Incentive Plan, NeoMedia has set aside up to 30 million
        shares of common stock to be issued to pay compensation and other expenses
        related to employees, former employees, consultants, and non-employee directors.
        As of March 31, 2007, 1,632,815 shares of common stock remained available
        for
        issuance under the 2003 Stock Incentive Plan.
  **Stock
        Option Repricing - February 2007**
 
 On
        February 1, 2007, NeoMedia instituted a stock option repricing plan as a
        retention tool to align its employees with the new vision of NeoMedia. Under
        the
        Plan, NeoMedia repriced 50,148,750 stock options held by current employees,
        contractors, and directors.
 
 Options
        for employees of NeoMedia’s ongoing operations were repriced as follows: (i)
        options that were vested as of February 1, 2007, were repriced to $0.045
        per
        share, which was the last sale price on February 1, 2007, (ii) options that
        are
        scheduled to vest during the remainder of 2007 were repriced to $0.075, (iii)
        options that vest during 2008 were repriced to $0.125, and (iv) options that
        vest during 2009 were repriced to $0.175. Options will continue to vest on
        their
        regular schedule, which generally is 25% upon grant and 25% on each subsequent
        anniversary date.
 The
        Company also repriced options for outside directors as follows: options with
        an
        exercise price below $0.24 were repriced to $0.045, and options with an exercise
        price $0.24 or higher were repriced to $0.075.
 
 52
 In
        addition, the Company repriced options held by employees of its held for sale
        Micro Paint repair and Telecom Services businesses, such that all vested
        options
        were repriced to $0.045 per share, and all unvested options will vest upon
        sale
        of the respective business unit at an exercise price of $0.075 per share,
        with a
        12-month period to exercise.
 
 NeoMedia
        accounted for the repricing of stock options in accordance with FASB Statement
        No. 123, Accounting for Stock-Based Compensation (“Statement 123(R)”). NeoMedia
        calculated the fair value of the modified and the repriced options using
        the
        original terms and the modified terms as of the repricing date, and recorded
        the
        incremental cost of the modified option over the original option as additional
        compensation cost. Costs related to fully vested options including accelerated
        vesting were expensed immediately and the costs related to unvested stock
        options will be recognized over the remaining vesting period of the option. Unrecognized
        compensation expense relating to the original option grant will continue
        to be
        recognized as if the repricing had not occurred.
 
 In
        connection with the option repricing, NeoMedia recognized additional stock
        based
        compensation expense as follows:
 
 **Three
                  months ended****March
                  31,****2007**
              
              **2006**Stock
                  option repricing expense allocated to:
              
              (in
                  thousands)Sales
                  and marketing expense
              
              $
              110
              
              $
              ---General
                  and administrative expense
              
              
              115
              
              
              ---Research
                  and development expense
              
              
              64
              
              
              ---Total
                  stock option repricing expense included in continuing
                  operations
              
              
              289
              
              
              ---Plus:
                  stock option repricing expense included in discontinued
                  operations
              
              
              355
              
              
              ---Total
                  stock option repricing expense reflected in net loss
              
              **$**
              **644**
              
              **$**
              **---**
 
 The
        weighted-average grant-date fair value of options repriced on February 1,
        2007,
        using the options’ modified terms, was $0.03. As of March 31, 2007, there was
        $474,000 of total unrecognized compensation cost related to nonvested options
        repriced on February 1, 2007. That cost is expected to be recognized over
        a
        weighted-average period of 0.8 years.
 
 **Stock
        Incentive Plan**
 
 Under
        the
        shareholder-approved 2003 Stock Incentive Plan, NeoMedia has set aside up
        to
        30,000,000 shares of common stock to be issued to pay compensation and other
        expenses related to employees, former employees, consultants, and non-employee
        directors. During the three months ended March 31, 2007 and 2006, NeoMedia
        issued shares from the 2003 Stock Incentive Plan as follows:
 
 **Three
                  Months Ended March 31,****2007**
              
              **2006**(in
                  thousands)Shares
                  issued under 2003 Stock Incentive Plan
              
              
              92,593
              
              
              52,632Aggregate
                  grant date fair value of shares issued
              
              $
              5,000
              
              $
              16,000Expense
                  recognized
              
              $
              5,000
              
              $
              16,000
 
 53
 **Adoption
        of FASB Statement No. 123**
 
 Prior
        to
        January 1, 2006, NeoMedia accounted for its stock option plans under the
        recognition and measurement provisions of APB Opinion No. 25, Accounting
        for
        Stock Issued to Employees, and related Interpretations, as permitted by
        Statement 123(R). No stock-based employee compensation cost was recognized
        in
        the statement of operations for the fiscal years or interim periods ended
        prior
        to December 31, 2005, as all options granted under those plans had an exercise
        price equal to the market value of the underlying common stock on the date
        of
        grant. Effective January 1, 2006, NeoMedia adopted the fair value recognition
        provisions of Statement 123(R), using the modified-prospective-transition
        method. Under that transition method, compensation cost recognized in 2006
        includes: (a) compensation cost for all share-based payments granted prior
        to,
        but not yet vested as of January 1, 2006, based on the grant date fair value
        estimated in accordance with the original provisions of Statement 123, and
        (b)
        compensation cost for all share-based payments granted subsequent to January
        1,
        2006, based on the grant-date fair value estimated in accordance with the
        provisions of Statement 123(R). Results for prior periods were not
        restated.
 
 Total
        stock based compensation recognized during three month periods ended March
        31,
        2007 and 2006, inclusive of expense associated with the option repricing
        and
        stock incentive plan described above, was:
 
 **Three
                  months ended****March
                  31,****2007**
              
              **2006**Stock
                  based compensation allocated to:
              
              (in
                  thousands)Sales
                  and marketing expense
              
              $
              345
              
              $
              429General
                  and administrative expense
              
              
              388
              
              
              350Research
                  and development expense
              
              
              157
              
              
              129Total
                  stock based compensation included in continuing operations
              
              
              890
              
              
              908Plus:
                  stock based compensation included in discontinued
                  operations
              
              
              538
              
              
              621Total
                  stock based compensation expense reflected in net loss
              
              **$**
              **1,428**
              
              **$**
              **1,529**
 
 Estimated
        income tax benefits recognized during the year ended December 31, 2006 were
        offset by a valuation allowance since realization was not reasonably assured.
        Prior to the adoption of Statement 123(R), it was NeoMedia’s policy to present
        all tax benefits of deductions resulting from the exercise of stock options
        as
        operating cash flows in its statement of cash flows, however, due to NeoMedia’s
        tax loss carryforward, any such benefits were always fully offset by a valuation
        allowance. Statement 123(R) requires the cash flows resulting from the tax
        benefits resulting from tax deductions in excess of the compensation cost
        recognized for those options (excess tax benefits) to be classified as financing
        cash flows. NeoMedia will use this presentation if and when it has exhausted
        its
        tax loss carryforward.
 
 The
        weighted-average grant-date fair value of options granted during the three
        months ended March 31, 2007 and 2006 was $0.25 and $0.11, respectively. The
        total intrinsic value of options exercised during the three months ended
        March
        31, 2007 and 2006 was $33,000 and $156,000, respectively. Total cash received
        from options exercised was $9,000 and $131,000, respectively, for the three
        months ended March 31, 2007 and 2006. As of March 31, 2007, there was $4,877,000
        of total unrecognized compensation cost related to nonvested share-based
        compensation arrangements granted under the Plans. That cost is expected
        to be
        recognized over a weighted-average period of 1.2 years.
 54
 
 NeoMedia
        used the following assumptions for grants during the three months ended March
        31, 2007 and 2006:
 
 **Three
                  Months ended March 31,****2007**
              
              **2006**Volatility
              115.05%
              
              56.00%Expected
                  dividends
              ---
              
              ---Expected
                  term (in years)
              3
              
              3Risk-free
                  rate
              4.35%
              
              4.35%
 
 **Subsequent
        Stock Based Compensation Events**
  On
        April
        12, 2007, NeoMedia entered into an agreement with Thornhill Capital LLC
        (“Thornhill”), an independent consultant, pursuant to which NeoMedia agreed to
        reprice up to 10,000,000 warrants held by Thornhill upon achievement of certain
        performance conditions. Upon signing of the agreement, which calls for the
        termination of any obligations due from NeoMedia to Thornhill under the terms
        of
        a previous consulting agreement between the parties and Thornhill’s commitment
        to assist with the development
        of the China market for NeoMedia’s technology products , 2,000,000
        warrants were repriced from $0.227 to $0.048, 1,000,000 warrants were repriced
        from $0.11 to $0.048, and 500,000 warrants were repriced from $0.11 to $0.048.
        In addition, the following warrants could be subject to future repricing
        if
        certain milestones are met: (i) 2,000,000 warrants will be repriced from
        $0.227
        to $0.048 upon
        execution of a contract outlining mutually agreed payment terms for amounts
        owed
        to NeoMedia by Automart, a customer of NeoMedia’s Micro Paint Repair business
        unit, (ii) 3,500,000
        warrants will be repriced from $0.328 to $0.048 upon receipt of payment by
        NeoMedia from Automart, (iii) 500,000
        warrants will be repriced from
        $0.11 to $0.048 o n
        October
        12, 2007 if Thornhill is still assisting with the development of the China
        market, and (iv) 500,000 warrants will be repriced from
        $0.11 to $0.048 on
        April
        12, 2008 if Thornhill is still assisting with the development of the China
        market.
  On
        April
        12, 2007, NeoMedia entered into an agreement with two independent consultants,
        pursuant to which NeoMedia issued 830,000 fully vested shares of common stock
        from its 2003 Stock Incentive Plan in exchange for Edgar consulting, printing,
        and filing services to be performed over the next two years.
  55
 
 **10.**
              **SEGMENT
                  REPORTING**
  As
        of
        March 31, 2007, NeoMedia was structured and evaluated by its Board of Directors
        and management as one operating unit, comprised of the Company’s core
        code-reading technology and related intellectual property. NeoMedia is
        headquartered in Ft. Myers, Florida, and operates principally in the United
        States, and in Europe through its office in Aachen, Germany.
 
 Following
        its acquisitions of Mobot, Sponge, Gavitec, 12Snap, and BSD during the first
        quarter of 2006, NeoMedia operated as three business segments: NeoMedia Mobile,
        NeoMedia Micro Paint Repair, and NeoMedia Telecom Services. During August
        2006,
        NeoMedia made the strategic decision to sell the Micro Paint Repair business.
        During November and December 2006, NeoMedia sold Mobot and Sponge. During
        the
        first quarter of 2007, NeoMedia decided to sell 12Snap and Telecom Services,
        and
        re-focus its resources on its core code-reading business. As a result of
        the
        re-focus, NeoMedia is evaluated as, and will report as, one operating segment
        during 2007.
 
 Consolidated
        net sales and net loss from continuing operations for the three month periods
        ended March 31, 2007 and 2006, and identifiable assets as of March 31, 2007
        by
        geographic area were as follows:
 
 (dollars
                  in thousands)**Three
                  Months Ended****March
                  31,****2007**
              
              **2006****Net
                  Sales:**United
                  States
              
              $
              176
              
              $
              166Germany
              
              
              223
              
              
              33Total
              
              $
              399
              
              
              199**Net
                  Loss from Continuing Operations:**United
                  States
              
              
              ($8,780
              )
              
              ($29
              )Germany
              
              
              (145
              )
              
              ($119
              )Total
              
              
              ($8,925
              )
              
              ($148
              )**Identifiable
                  Assets**United
                  States(1)
              
              $
              13,072Germany
              
              
              4,433Total
              
              $
              17,505
 _______________________
 
 (1)
              Segment
                  reporting excludes Micro Paint Repair, Mobot, Sponge, 12Snap and
                  Telecom
                  Services business units which are classified as discontinued operations
                  during the three months ended March 31, 2007 and 2006, and the
                  related
                  assets and liabilities held for sale.
  Operating
        costs included in one segment may benefit other segments, and therefore these
        segments are not designed to measure operating income or loss directly related
        to the products included in each segment.
 
 During
        August 2006, NeoMedia announced that it was selling its NMPR business. During
        the fourth quarter of 2006, NeoMedia divested of its Mobot and Sponge
        subsidiaries. During January 2007, NeoMedia made the strategic decision with
        respect to its corporate structure in 2007 and beyond, deciding to shed its
        remaining non-core 12Snap and NTS business units to focus on the area that
        management believes will deliver the most value - the core code-reading
        business. During April 2007, NeoMedia sold the 12Snap business.
 
 56
 As
        a
        result of the divestitures of 12Snap, Mobot and Sponge, and the proposed
        divestitures of NMPR and NeoMedia Telecom Services, beginning in the first
        quarter of 2007 NeoMedia evaluated its business as one consolidated business,
        focusing on its core code-reading business and related intellectual property.
        Results of these operations are included in discontinued operations in the
        financial statements presented herein. Since all results from continuing
        operations are included in one business segment, NeoMedia is not presenting
        continuing operations by segment for the periods presented herein.
 
 **11.**
              **INVENTORY**
 
 Inventories
        for continuing operations, consisting of material, material overhead, labor
        and
        processing costs, are stated at the lower of cost (first-in, first-out) or
        market and consist of the following at March 31, 2007 (unaudited) and December
        31, 2006:
 
 **March
                  31, 2007**
              
              **December
                  31, 2006**Raw
                  materials
              
              $
              ---
              
              $
              ---Work-in-process
              
              
              ---
              
              
              ---Finished
                  goods
              
              
              123
              
              
              80**Total**
              
              **$**
              **123**
              
              **$**
              **80**
 
 **12.**
              **ACCRUED
                  LIABILITIES**
 
 Accrued
        liabilities for continuing operations consist of the following as of March
        31,
        2007 (unaudited) and December 31, 2006:
 
 **March
                  31, 2007**
              
              **December
                  31, 2006**Accruals
                  related to silent partner agreements
              
              $
              268
              
              $
              213Accrued
                  legal and accounting costs
              
              
              455
              
              
              179Accruals
                  for disputed services
              
              
              794
              
              
              794Accrued
                  operating expenses
              
              
              666
              
              
              728Payroll
                  related accruals
              
              
              9
              
              
              9Accrued
                  liquidated damages
              
              
              1,075
              
              
              2,093Total
              
              $
              3,267
              
              $
              4,016
 
 
 **13.**
              **COMMITMENTS
                  AND CONTINGENCIES**
 
 NeoMedia
        is party to various commitments and contingencies, such as:
 
 ·
              NeoMedia
                  leases its office facilities and certain office and computer equipment
                  under various operating leases which provide for minimum rents
                  and
                  generally include options to renew for additional
                  periods;
 ·
              NeoMedia
                  and its subsidiaries lease office facilities and certain office
                  and
                  computer equipment under various operating
                  leases;
 ·
              NeoMedia
                  is party to various payment arrangements with its vendors that
                  call for
                  fixed payments on past due
                  liabilities;
 ·
              NeoMedia
                  is party to various consulting agreements that carry payment obligations
                  into future years;
 ·
              NeoMedia
                  issued Series C convertible preferred shares with face value of
                  $21,657,000 and convertible debentures with a face value of $14,958,000
                  that are subject to conversion at future dates, plus the accrued
                  expected
                  value of liquidated damages of $1,075,000 relating to these convertible
                  instruments;
  57
  ·
              On
                  June 15, 2006, the Company issued 3,721,698 shares of its common
                  stock as
                  an initial payment against debt and accrued interest owed to Wayside
                  Solutions, Inc. (“Wayside”), a corporation that had provided financing to
                  BSD prior to the acquisition of BSD by the Company. Prior to the
                  acquisition, the Company reached an agreement with Wayside to pay
                  the
                  outstanding debt due to Wayside subsequent to completion of the
                  acquisition. The shares contain a make-whole provision that calls
                  for
                  additional shares to be issued in the event the value of the original
                  shares at the time of registration is less than the value at the
                  time they
                  were issued; and
 ·
              NeoMedia
                  has accrued the amount of $4,787,000 relating to a purchase price
                  guarantee obligation in connection with its acquisition of
                  12Snap.
 
 The
        following table sets forth NeoMedia’s future minimum payments due under
        operating leases, vendor and consulting agreements, convertible stock
        agreements, and debt agreements from the Company’s continuing
        operations:
 
 (US
                  dollars in thousands)**Series
                  C****Vendor
                  &**
              
              **Subsidiary**
              
              
              
              **Convertible****Operating**
              
              **Consulting**
              
              **Acquisition**
              
              **Convertible**
              
              **Preferred****Leases**
              
              **Agreements**
              
              **Commitments**
              
              **Debentures**
              
              **Stock**
              
              **Total**2007
                  (remaining nine months)
              
              $
              243
              
              $
              148
              
              $
              5,055
              
              $
              18,336
              
              
              21,657
              
              $
              45,4392008
              
              
              188
              
              
              94
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              2822009
              
              
              11
              
              
              10
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              212010
              
              
              3
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              32011
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              ---Thereafter
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              ---**Total**
              
              **$**
              **445**
              
              **$**
              **252**
              
              **$**
              **5,055**
              
              **$**
              **18,336**
              
              **$**
              **21,657**
              
              **$**
              **45,745**
 
 In
        addition, as of March 31, 2007, NeoMedia had future obligations relating
        to its
        discontinued Micro Paint Repair, 12Snap, and Telecom Services businesses
        totaling $3,179,000, most of which is expected to be assumed by the buyers
        upon
        the anticipated sale of each business unit. With the sale of 12Snap on April
        4,
        2007, $2,223,000 of these commitments were transferred to the buyer of 12Snap.
 
 **Legal
        Proceedings**
 
 The
        Company is involved in various legal actions arising in the normal course
        of
        business, both as claimant and defendant. While it is not possible to determine
        with certainty the outcome of these matters, it is possible that the eventual
        resolution of the following legal actions could have a material adverse effect
        on the Company’s financial position or operating results.
 **Scanbuy,
        Inc.**
  On
        January 23, 2004, NeoMedia filed suit against Scanbuy, Inc. (“Scanbuy”) in the
        Northern District of Illinois, claiming that Scanbuy has manufactured, or
        has
        manufactured for it, and has used, or actively induced others to use, technology
        which allows customers to use a built-in UPC bar code scanner to scan individual
        items and access information, thereby infringing NeoMedia’s patents.  The
        complaint stated that on information and belief, Scanbuy had actual and
        constructive notice of the existence of the patents-in-suit, and, despite
        such
        notice, failed to cease and desist their acts of infringement, and continue
        to
        engage in acts of infringement of the patents-in-suit.  On April 15, 2004,
        the court dismissed the suits against Scanbuy for lack of personal
        jurisdiction.
 
 58
 On
        April
        20, 2004, NeoMedia re-filed its suit against Scanbuy in the Southern District
        of
        New York alleging patent infringement. Scanbuy filed its answer on June 2,
        2004.
        NeoMedia filed its answer and affirmative defenses on July 23, 2004. On January
        20, 2007, the court dismissed Scanbuy's request for a summary judgment.
        Discovery is ongoing.
  **14.**
              **OTHER**
 
 **Liabilities
        related to silent partnership arrangements**
 
 As
        of
        March 31, 2007, NeoMedia owed approximately $1 million relating to silent
        partner debtholders of 12Snap. Concurrent with the sale of 12Snap on April
        4,
        2007, the silent partners were paid in full.
  **Debt
        of NeoMedia Telecom Services**
 
 On
        June
        15, 2006, the Company issued 3,721,698 shares of its common stock as an initial
        payment against debt and accrued interest owed to Wayside Solutions, Inc.
        (“Wayside”), a corporation that had provided financing to BSD prior to the
        acquisition of to BSD by the Company. Prior to the acquisition, the Company
        reached an agreement with Wayside to pay the outstanding debt due to Wayside
        subsequent to completion of the acquisition. The shares contain a make-whole
        provision that calls for additional shares to be issued in the event the
        value
        of the original shares at the time of registration is less than the value
        at the
        time they were issued.
  **15.**
              **SUBSEQUENT
                  EVENTS**
 
 **Sale
        of 12Snap - April 2007**
 
 On
        February 28, 2006, NeoMedia acquired all of the outstanding shares of 12Snap
        in
        exchange for $2,500,000 cash and $19,500,000 common stock, represented by
        49,294,581 shares of NeoMedia common stock. Pursuant to the terms of the
        merger
        agreement, the number of shares of NeoMedia common stock to be issued as
        consideration was calculated using a share price of $0.3956, which was the
        volume-weighted average closing price of NeoMedia common stock for the ten
        days
        up to and including February 9, 2006. Pursuant to the terms of the sale and
        purchase agreement, in the event that NeoMedia’s stock price at the time the
        consideration shares became saleable (either upon effectiveness of a
        registration statement containing the shares, or under Rule 144) was less
        than
        $0.3956, NeoMedia was obligated to compensate 12Snap shareholders in cash
        for
        the difference between the price at the time the shares became saleable and
        $0.3956. On February 22, 2007, the shares became eligible for resale under
        Rule
        144. The actual calculated purchase price obligation to NeoMedia based on
        the
        volume weighted average closing price of NeoMedia stock for the ten days
        up to
        and including February 22, 2007 was $16,233,000.
 On
        April
        4, 2007, NeoMedia entered into a material definitive agreement with Bernd
        M.
        Michael (the “Buyer”), a private investor and former shareholder of 12Snap prior
        to NeoMedia’s acquisition of 12Snap, pursuant to which the Buyer purchased from
        NeoMedia 90% of the shares of 12Snap, subject to the following material terms
        and conditions:
  ·
              $1,100,000
                  was paid in cash at closing, of which $1,015,000 was applied toward
                  amounts owed to silent partners of
                  12Snap
  ·
              $500,000
                  was placed into an escrow account for 90 days to secure warranty
                  claims;
  59
  ·
              The
                  Buyer waived his portion of the purchase price guarantee obligation
                  in the
                  amount of $880,000;
  ·
              The
                  Buyer returned to NeoMedia 2,525,818 NeoMedia shares previously
                  issued to
                  Buyer;
  ·
              12Snap
                  management waived their portion of the purchase price guarantee
                  obligation
                  in the amount of $880,000;
  ·
              12Snap
                  management returned to NeoMedia 5,225,039 shares of NeoMedia common
                  stock
                  previously issued to 12Snap
                  management;
  ·
              NeoMedia
                  will retain a 10% ownership in 12Snap, subject to an option agreement
                  pursuant to which NeoMedia has the right to sell and Buyer has
                  the right
                  to acquire the remaining 10% stake held by NeoMedia for a purchase
                  price
                  of $750,000 after December 31, 2007;
                  and
  ·
              12Snap
                  and NeoMedia will execute a cooperation agreement pursuant to which
                  12snap
                  will remain NeoMedia preferred partner and enjoy most favored prices,
                  and
                  12snap will perform certain research and development functions
                  for
                  NeoMedia.
  **Other
        Events**
 
 During
        April 2007, Announce Mobile, Inc. chose the qode® two-dimensional (2D) barcoding
        platform for the creation of its Hip2D mobile content solution. With Hip2D,
        companies can create mobile coupons, interactive products such as movie trailers
        or music samples to a DVD or CD, scavenger hunts or other detailed product
        information. The Hip2D platform combines the 2D code with a custom WAP portal
        or
        mobile storefront, providing businesses with the ability to deliver interactive
        content to consumers.
 
 On
        April
        17, 2007, NeoMedia named Jay Bonk, who has been working for the company on
        a
        consulting basis, as interim Executive Vice President of Sales and Marketing.
        Bonk replaces Roger Pavane. A longtime sales executive with Motorola, Bonk’s
        experience includes 22 years with Motorola, including stints as Vice President
        of Business Development and Vice President of Global Sales and Marketing.
 60
 
 **ITEM
        2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF
        OPERATIONS**
 
 **Corporate
        Structure**
 
 During
        2006, with its acquisitions of Gavitec,
        Mobot, 12Snap, and Sponge ,
        NeoMedia implemented an aggressive growth strategy aimed at penetrating the
        rapidly evolving mobile marketing industry, and capturing a significant portion
        of early adopting marketers to drive high volumes of
        physical-world-to-mobile-internet traffic through the NeoMedia engine.
 
 The
        majority of the consideration issued to acquire Gavitec, Mobot, 12Snap, and
        Sponge consisted of shares of NeoMedia common stock, the value of which was
        guaranteed, in cash, to the recipients by NeoMedia from the time of issuance
        through the time the shares were registered for resale (either upon
        effectiveness of a registration statement containing the shares, or under
        Rule
        144). As a result of NeoMedia’s declining share price from the first quarter
        through the end of 2006, the purchase price guarantee obligations relating
        to
        these acquisitions became far greater than NeoMedia could reasonably satisfy
        with cash. Primarily as a result of the pending purchase price guarantee
        obligations, during the fourth quarter of 2006 NeoMedia divested of the majority
        of Sponge and Mobot back to their original owners, with the respective purchase
        price guarantee obligations being terminated as part of each transaction.
        Additionally, during the first quarter of 2007, NeoMedia satisfied its purchase
        price guarantee obligation to the former shareholders of Gavitec, and satisfied
        approximately 71% of the 12Snap purchase price guarantee obligation.
 
 During
        August 2006, NeoMedia announced that it intended to sell its Micro Paint
        Repair
        business. During January 2007, the Company decided to attempt to sell its
        remaining 12Snap and Telecom Services non-core business units in the most
        profitable, timely and viable manner possible. 12Snap was sold during April
        2007. NeoMedia plans to use the strategic equity earned through the sale
        of
        these assets in 2007 to reduce its current burn rate, help the Company move
        closer to profitability, and provide financial stability by the end of 2007
        and
        become profitable by the first quarter of 2008. Most importantly, the shedding
        of NeoMedia’s non-core assets affords the Company the ability to focus all its
        resources on its core business initiatives. Management realizes the challenges
        that the Company faces in the global application of its technology, and can
        now
        present qode® to the industry and the public in a more systematic and focused
        approach, marketing it as “the next phase of the Internet” and the wireless Web.
 
 The
        Company continues to focus on becoming the worldwide leader in linking the
        physical world to the mobile internet. Management believes that the decision
        to
        sell the non-core assets has led to a more focused vision for moving the
        Company
        forward and creating shareholder value, focusing on the core code-reading
        business and related intellectual property in North America, the UK, mainland
        Europe and China.
 
 **The
        Core Business**
 
 NeoMedia
        has made significant inroads into the burgeoning mobile marketing industry
        and
        ran many successful physical-world-to-mobile-web campaigns over the past
        several
        months.
 
 In
        North
        America, qode® technology has been trialed and implemented across a wide variety
        of products and industries, including:
 
 ·
              During
                  April 2007, Announce Mobile, Inc. chose the qode® two-dimensional (2D)
                  barcoding platform for the creation of its Hip2D mobile content
                  solution.
                  With Hip2D, companies can create mobile coupons, interactive products
                  such
                  as movie trailers or music samples to a DVD or CD, scavenger hunts
                  or
                  other detailed product information. The Hip2D platform combines
                  the 2D
                  code with a custom WAP portal or mobile storefront, providing businesses
                  with the ability to deliver interactive content to consumers.
 ·
              NeoMedia
                  signed an agreement with Javien Digital Payment solutions under
                  which
                  Javien will incorporate the NeoMedia qode® platform into its Total
                  Commerce SolutionTM allowing for a complete billing, couponing and content
                  product acquisition and resolution offering. NeoMedia will earn
                  $0.05 per
                  click and expects each transaction to generate up to four
                  clicks.
  61
  ·
              qode®
                  was featured in an interactive textbook published by Prentice Hall,
                  in
                  which students can link to mobile online content through the qode® reader
                  on their mobile phones.
 ·
              ONE
                  water, the ethical water brand, featured codes on 5 million of
                  its water
                  bottles that link to the mobile internet via qode® starting in December,
                  when the first shipments of more than 5 million bottles bearing
                  qode®. The
                  bottles were sold at more than 4,000 retail outlets throughout
                  the United
                  Kingdom.
 ·
              NeoMedia
                  is partnered with News Group Newspapers, and its market-leading
                  Sunday
                  newspaper, theNews
                  of the World*®*,
                  to use****qode**®**in
                  the United Kingdom to bring television clips of English Premier
                  League
                  soccer to its readers via their mobile
                  phones.
 
 In
        Europe, Gavitec also designed, implemented, and ran multiple mobile marketing
        solutions:
 
 ·
              Gavitec
                  was contracted by AWK Aussenwerbung GmbH, Germany’s second-largest outdoor
                  advertising company, to develop a mobile order-management and control
                  system using Gavitec technology.
 ·
              Gavitecpartnered
                  with solution provider TopSolutions to equip Lusomundo, Portugal's
                  leading
                  cinema chain, with admission terminals for mobile tickets that
                  allow
                  movie-goers to obtain tickets through a cash-free Web-based transaction,
                  and receive an electronic ticket as an SMS on their mobile
                  phones.
 ·
              Gavitec
                  ran or participated in other campaigns during 2006 with customers
                  such as
                  McDonald’s Portugal, Amnesty International, Malaysian Railways,
                  World Soccer Games 2006, EMT (Empresa Malagueña de Transportes,
                  a Spanish public transport provider), Ströer, and Bitburger
                  beer.
 
 NeoMedia
        also made significant inroads into Asia during the past year, as
        follows:
 
 ·
              Gavitec
                  signed an exclusive license agreement with mobile marketing specialist
                  Omniprime, pursuant to which Omniprime will sell mobile couponing
                  and
                  ticketing applications in the Philippines using Gavitec’s
                  technology.
 ·
              NeoMedia
                  contracted with five large Chinese insurance companies to adapt
                  qode® to
                  enable millions of policy holders in China to use their cell phones
                  to
                  link directly to their insurance company's Mobile Internet
                  site
 ·
              During
                  January 2007, NeoMedia signed a performance-based agency agreement
                  with
                  NexMobil LLC, pursuant to which NexMobil will sell qode® products and
                  services in the Middle East, India, Korea, and Pakistan.
 
 Building
        on the deals already completed, NeoMedia will focus on targeting manufacturers
        within the media and enterprise space, including newspapers, publishers,
        real
        estate, physical world advertisers, and beverage producers to design their
        products to become more interactive. NeoMedia envisions a future in which
        consumers routinely “qode® it” when they want more information on a product or
        service. NeoMedia’s goals include hiring a new sales force, while penetrating
        three verticals with at least six major customers. Another major goal is
        to
        partner with at least three major carriers or manufacturers (North American,
        UK
        and mainland European) who will embed, adopt and commit to utilize every
        feature
        qode® has to offer.
 
 NeoMedia
        is also making strides to create a global standard for the wireless Web.
        NeoMedia co-hosted a high-level meeting in London during February 2007 with
        some
        of the world’s leading technology firms to begin to define and document this
        important standards-based initiative. NeoMedia believes the outcome of the
        meeting was extremely positive and expects, along with its numerous innovative
        partners, to continue to play an active role in the standardization of the
        physical-world-to-web initiative. One of NeoMedia’s key initiatives is to
        evaluate and optimize the value of its and its partners’ collective intellectual
        property relating to this space.
 
 62
 NeoMedia
        has numerous issued patents with others in process and is continuing to seek
        to
        optimize the value of its intellectual property portfolio around in the world.
        On January 20, 2007, Judge John E. Sprizzo dismissed Scanbuy's request for
        a
        summary judgment in the Company’s patent infringement case against Scanbuy.
        While the case is not over yet, NeoMedia continues to remain confident in
        the
        final outcome.
 
 In
        terms
        of new leadership, the Company expects to name a permanent CEO during 2007.
        In
        addition, in April 2007 the Company announced that Jay A. Bonk was named
        Interim
        Executive Vice President of Sales and Marketing, replacing Roger Pavane.
        Mr.
        Bonk brings 22 year experience with Motorola, Inc., most recently as Vice
        President of Business Development and Vice President of Sales and Marketing.
 
 Effect
        of
        Discontinued Operations on Net Loss and Financial Position
 
 Assets
        and liabilities of the Micro Paint Repair, 12Snap, and Telecom Services
        businesses classified as held for sale are shown in the following table.
        There
        are no assets or liabilities associated with the Sponge or Mobot subsidiaries
        as
        of the balance sheet dates of March 31, 2007 or 2006.
 
 **Micro**
              
              **Telecom****Paint
                  Repair**
              
              **Services**
              
              **12Snap**
              
              **Total****As
                  of March 31, 2007**Total
                  Assets Held for Sale
              
              $
              3,185
              
              $
              7,386
              
              $
              5,603
              
              $
              16,174Total
                  Liabilities Held for Sale
              
              
              451
              
              
              2,752
              
              
              4,208
              
              
              7,411**As
                  of December 31, 2006**Total
                  Assets Held for Sale
              
              $
              3,072
              
              $
              7,302
              
              $
              9,046
              
              $
              19,420Total
                  Liabilities Held for Sale
              
              
              407
              
              
              2,970
              
              
              6,880
              
              
              10,257
 
 
 The
        operating results of the Micro Paint Repair, Sponge, Mobot, 12Snap, and Telecom
        Services businesses classified as discontinued operations are shown in the
        following table. There is not any tax expense or benefit to report due to
        NeoMedia’s net operating loss carry forward tax position.
 
 (dollars
                  in thousands)
              
              **Micro****Paint**
              
              **Telecom****Repair**
              
              **Services**
              
              **12Snap**
              
              **Mobot**
              
              **Sponge**
              
              **Total****Three
                  months ended March 31, 2007**Net
                  Sales
              
              $
              326
              
              $
              302
              
              $
              2,621
              
              $
              ---
              
              $
              ---
              
              $
              3,249Net
                  Income / (Loss)
              
              
              (591
              )
              
              (3
              )
              
              (1,954
              )
              
              (11
              )
              
              (15
              )
              
              (2,574
              )**Three
                  months ended March 31, 2006**Net
                  Sales
              
              $
              377
              
              $
              27
              
              $
              896
              
              $
              57
              
              $
              291
              
              $
              1,648Net
                  Income / (Loss)
              
              
              (451
              )
              
              (429
              )
              
              (56
              )
              
              (282
              )
              
              49
              
              
              (1,169
              )
 
 Depreciation
        and amortization costs suspended on assets held for sale for the three months
        ended March 31, 2007 are:
 
 (dollars
                  in thousands)
              
              **Micro****Paint**
              
              **Telecom****Repair**
              
              **Services**
              
              **12Snap**
              
              **Total**Suspended
                  depreciation
              
              $
              69
              
              $
              72
              
              $
              220
              
              $
              361




63
  **Stock
        Option Repricing**
 
 On
        February 1, 2007, NeoMedia instituted a stock option repricing plan as a
        retention tool to align its employees with the new vision of NeoMedia. Under
        the
        plan, NeoMedia repriced 50,148,750 stock options held by current employees,
        contractors, and directors.
 
 Options
        for employees of NeoMedia’s ongoing operations were repriced as follows: (i)
        options that were vested as of February 1, 2007, were repriced to $0.045
        per
        share, which was the last sale price on February 1, 2007, (ii) options that
        are
        scheduled to vest during the remainder of 2007 were repriced to $0.075, (iii)
        options that vest during 2008 were repriced to $0.125, and (iv) options that
        vest during 2009 were repriced to $0.175. Options will continue to vest on
        their
        regular schedule, which generally is 25% upon grant and 25% on each subsequent
        anniversary date. The Company also repriced options for outside directors
        as
        follows: options with an exercise price below $0.24 were repriced to $0.045,
        and
        options with an exercise price $0.24 or higher were repriced to $0.075.
 
 In
        addition, the Company repriced options held by employees of its held for
        sale
        Micro Paint repair and Telecom Services businesses, such that all vested
        options
        were repriced to $0.045 per share, and all unvested options will vest upon
        sale
        of the respective business unit at an exercise price of $0.075 per share,
        with a
        12-month period to exercise.
 
 The
        weighted-average grant-date fair value of options repriced on February 1,
        2007,
        using the options’ modified terms, was $0.03. As of March 31, 2007, there was
        $474,000 of total unrecognized compensation cost related to nonvested options
        repriced on February 1, 2007. That cost is expected to be recognized over
        a
        weighted-average period of 0.8 years.
 
 **Stock-Based
        Compensation**
  NeoMedia
        adopted Statement of Financial Accounting Standards No. 123 (“SFAS 123R”)
        on January 1, 2006, using the modified-prospective transition method for
        stock option grants and restricted stock issued after January 1, 2006. As a
        result, the unamortized compensation expense from stock options granted prior
        to
        January 1, 2006 is not included in the statement of operations. SFAS 123R
        requires all share-based payments to employees to be recognized in the income
        statement based on their fair values. Under the modified-prospective transition
        method, compensation cost recognized for the year ended December 31, 2006
        includes: (a) vesting of compensation cost for all share-based payments
        granted, but not yet vested as of January 1, 2006 based on the grant-date
        fair value estimated in accordance with the original provisions of SFAS 123R,
        and (b) compensation cost for all share-based payments granted subsequent
        to January 1, 2006, based on the grant-date fair value estimated in
        accordance with the provisions of SFAS 123R. Such amounts are reduced
        by NeoMedia’s estimate of forfeitures of all unvested awards.
  SFAS
        123R
        requires share-based payments to employees to be measured at fair value.
        However, the valuation of employee stock options is an inherently subjective
        process, since market values are generally not available for long-term,
        non-transferable employee stock options. Accordingly, an option pricing model
        is
        utilized to derive an estimated fair value. NeoMedia uses the
        Black-Scholes-Merton pricing model in order to calculate the estimated fair
        value for its stock options.
 
 Total
        stock based compensation recognized in continuing operations during three
        month
        periods ended March 31, 2007 and 2006, was $891,000 and $895,000, respectively.
        In addition, loss from discontinued operations included $538,000 and $621,000
        of
        stock based compensation expense during the three months ended March 31,
        2007
        and 2006, respectively. Approximately 42% and 68% of the stock-based
        compensation expense recorded during the three months ended March 31, 2007
        and
        2006, respectively, relates to the continued vesting of stock options that
        were
        granted prior to January 1, 2006. As of March 31, 2007, there was $4,877,000
        of
        total unrecognized compensation cost related to nonvested share-based
        compensation arrangements granted under the Plans. That cost is expected
        to be
        recognized over a weighted-average period of 1.2 years.
 
 64
  **Accounting
        Treatment of Series C Convertible Preferred Stock and Convertible
        Debenture**
 
 NeoMedia
        recognized a gain (loss) on derivative financial instruments
        of ($3,508,000) and $4,768,000 during the three months ended March 31, 2007
        and 2006, respectively. The gains are due to the change in fair value of
        derivative financial instruments resulting from a decrease in NeoMedia's
        stock
        price during the reporting period. The fair value of the derivative financial
        instruments at each measurement date correlates to NeoMedia's stock price
        at the
        same date. As a result, NeoMedia's net loss varies significantly from its
        cash
        flow from operations during the three months ended March 31, 2007 and 2006.
        In
        future periods, NeoMedia's loss could fluctuate dramatically from quarter
        to
        quarter if its stock price is significantly different from the stock price
        at
        the end of the previous measurement period. Because NeoMedia cannot guarantee
        that it has enough authorized shares to net share settle the Series C
        convertible preferred stock, the change in fair value of derivative instruments
        will be recorded to NeoMedia's statement of operations each reporting period
        until the Series C convertible preferred stock is fully converted.
 
 **Related
        Party Transaction**
 
 During
        the fourth quarter of 2005 and first quarter of 2006, NeoMedia shipped and
        invoiced $759,000 of Micro Paint Repair products to Automart, Inc. In the
        third
        quarter of 2006, NeoMedia established a reserve for bad debt against the
        open
        accounts receivable, and wrote off the deferred revenue and deferred costs,
        incurring a net charge to its statement of operations of $653,000. NeoMedia
        will
        recognize revenue on these shipments if and when collectibility is reasonably
        assured. David A. Dodge, NeoMedia’s Chief Financial Officer, and Kevin Hunter,
        NeoMedia’s Chief Scientist, are each members of the board of directors of
        Automart, a publicly traded company trading in the Over-the-counter Bulletin
        Board.
 
 **Critical
        Accounting Policies**
 
 The
        United States Securities and Exchange Commission (the “SEC”) issued Financial
        Reporting Release No. 60, “ *Cautionary
        Advice Regarding Disclosure About Critical Accounting Policies* ”
(“FRR
        60”), suggesting companies provide additional disclosure and commentary on their
        most critical accounting policies. In FRR 60, the SEC defined the most critical
        accounting policies as the ones that are most important to the portrayal
        of a
        company’s financial condition and operating results, and require management to
        make its most difficult and subjective judgments, often as a result of the
        need
        to make estimates of matters that are inherently uncertain. Based on this
        definition, NeoMedia’s most critical accounting policies include: intangible
        asset valuation, which affects amortization and impairment of goodwill and
        other
        intangibles; financial instruments and concentrations of credit risk, which
        affects gains and losses from derivative financial instruments; allowance
        for
        doubtful accounts; inventory valuation, which affects cost of sales and gross
        margin; stock based compensation; estimate of litigation-based liability;
        and
        revenue recognition. NeoMedia also has other key accounting policies, such
        as
        policies for revenue recognition, including the deferral of a portion of
        revenues on sales to distributors, allowance for doubtful accounts, and
        stock-based compensation. The methods, estimates and judgments NeoMedia uses
        in
        applying these most critical accounting policies have a significant impact
        on
        the results it reports in its consolidated financial statements.
 
 *Intangible
        Asset Valuation.* The
        determination of the fair value of certain acquired assets and liabilities
        is
        subjective in nature and often involves the use of significant estimates
        and
        assumptions. Determining the fair values and useful lives of intangible assets
        especially requires the exercise of judgment. While there are a number of
        different generally accepted valuation methods to estimate the value of
        intangible assets acquired, NeoMedia primarily uses the weighted-average
        probability method outlined in SFAS 144. This method requires significant
        management judgment to forecast the future operating results used in the
        analysis. In addition, other significant estimates are required such as residual
        growth rates and discount factors. The estimates NeoMedia has used are
        consistent with the plans and estimates that NeoMedia uses to manage its
        business, based on available historical information and industry averages.
        The
        judgments made in determining the estimated useful lives assigned to each
        class
        of assets acquired can also significantly affect NeoMedia’s net operating
        results.
 
 65
 According
        to SFAS 144, a long-lived asset should be tested for recoverability whenever
        events or changes in circumstances indicate that its carrying amount may
        not be
        recoverable. The following are examples of such events or changes in
        circumstances:
  -
              A
                  significant decrease in the market price of the
                  asset
 -
              A
                  significant adverse change in the extent or manner in which the
                  asset is
                  being used, or in its physical
                  condition
 -
              A
                  significant adverse change in legal factors or in the business
                  climate
                  that could affect the value of the asset, including an adverse
                  action or
                  assessment by a regulator
 -
              An
                  accumulation of costs significantly in excess of the amount originally
                  expected
 -
              A
                  current-period operating or cash flow loss combined with a history
                  of
                  operating or cash flow losses or a projection or forecast that
                  demonstrates continuing losses associated with the use of the
                  asset
 -
              A
                  current expectation that, more likely than not,****the
                  asset will be sold or otherwise disposed of significantly before
                  the end
                  of its previously estimated useful life
 
 NeoMedia
        follows the two-step process outlined in SFAS 144 for determining if an
        impairment charge should be taken: (1) the expected undiscounted cashflows
        from
        a particular asset or asset group are compared to the carrying value; if
        the
        expected undiscounted cashflows are greater than the carrying value, no
        impairment is taken, but if the expected undiscounted cashflows are less
        than
        the carrying value, then (2) an impairment charge is taken for the difference
        between the carrying value and the expected discounted cashflows. The
        assumptions used in developing expected cashflow estimates are similar to
        those
        used in developing other information used by NeoMedia for budgeting and other
        forecasting purposes. In instances where a range of potential future cashflows
        is possible, NeoMedia uses a probability-weighted approach to weigh the
        likelihood of those possible outcomes. In such instances, NeoMedia uses a
        discount rate equal to the yield on 0-coupon treasury instrument with a life
        equal to expected life of the assets being tested.
 
 *Financial
        Instruments and Concentrations of Credit Risk.* The
        Company’s financial instruments consist of cash and cash equivalents, accounts
        receivable, accounts payable, accrued expenses, notes payable, derivative
        financial instruments, other current liabilities, convertible preferred stock,
        and convertible debenture financing. Management believes the carrying values
        of
        cash and cash equivalents, accounts receivable, accounts payable, accrued
        expenses, notes payable, and other current liabilities approximate their
        fair
        values due to their short-term nature. The fair value of convertible preferred
        stock and convertible debentures is estimated on March 31, 2007 to be
        approximately $21,657,000 and $18,336,000, respectively.
 
 The
        Company generally does not use derivative financial instruments to hedge
        exposures to cash-flow risks or market-risks that may affect the fair values
        of
        its financial instruments. However, certain other financial instruments,
        such as
        warrants and embedded conversion features that are indexed to the Company’s
        common stock, are classified as liabilities when either (a) the holder possesses
        rights to net-cash settlement or (b) physical or net-share settlement is
        not
        within the control of the Company. In such instances, net-cash settlement
        is
        assumed for financial accounting and reporting, even when the terms of the
        underlying contracts do not provide for net-cash settlement. Such financial
        instruments are initially recorded at fair value and subsequently adjusted
        to
        fair value at the close of each reporting period.
 
 The
        caption “Derivative Financial Instruments” consists of (i) the fair values
        associated with derivative features embedded in the Series C convertible
        preferred stock, (ii) the fair values of the detachable warrants that were
        issued in connection with the preferred stock financing arrangement, and
        (iii)
        the fair value of detachable warrants that were outstanding prior to the
        issuance of the Series C Preferred Shares.
 
 The
        Company utilizes various types of financing to fund its business needs,
        including convertible preferred stock, convertible debentures, and other
        instruments indexed to the Company’s own stock. The embedded conversion features
        utilized in these instruments require periodic measurement of the fair value
        of
        the derivative components. Pursuant to FAS 133, FAS 155, and EITF 00-19 NeoMedia
        updates the fair value of these derivative components at each reporting
        period.
 
 66
 *Allowance
        for Doubtful Accounts.* NeoMedia
        maintains an allowance for doubtful accounts for estimated losses resulting
        from
        the inability of its customers to make required payments. Allowance for doubtful
        accounts is based on NeoMedia’s assessment of the collectibility of specific
        customer accounts, the aging of accounts receivable, NeoMedia’s history of bad
        debts, and the general condition of the industry. If a major customer’s credit
        worthiness deteriorates, or NeoMedia’s customers’ actual defaults exceed
        historical experience, NeoMedia’s estimates could change and impact its reported
        results.
 
 *Inventory.* Inventories are stated at lower of cost (using the first-in, first-out method)
        or market. NeoMedia continually evaluates the composition of its inventories
        assessing slow-moving and ongoing products and maintains a reserve for
        slow-moving and obsolete inventory as well as related disposal
        costs.
 
 *Stock-based
        Compensation* .
        Beginning January 1, 2006, NeoMedia began to account for stock-based
        compensation in accordance with SFAS No. 123(R), *Share-Based
        Payment* .
        Under
        the fair value recognition provisions of this statement, share-based
        compensation cost is measured at the grant date based on the value of the
        award
        and is recognized as expense over the vesting period. Determining the fair
        value
        of share-based awards at the grant date requires judgment, including estimating
        expected dividends. In addition, judgment is also required in estimating
        the
        amount of share-based awards that are expected to be forfeited. If actual
        results differ significantly from these estimates, stock-based compensation
        expense and NeoMedia’s results of operations could be materially impacted.
        Stock-based compensation expense is calculated using the Black Scholes option
        pricing model on the date of grant. This option valuation model requires
        input
        of highly subjective assumptions. Because NeoMedia’s employee stock options have
        characteristics significantly different from those of traded options, and
        because changes in the subjective input assumptions can materially affect
        the
        fair value estimate, in management's opinion, the existing model does not
        necessarily provide a reliable single measure of fair value of its employee
        stock options.
 
 *Estimate
        of Litigation-based Liability* .
        From
        time to time, NeoMedia is defendant in certain litigation in the ordinary
        course
        of business (see the section entitled “Legal Proceedings”). NeoMedia accrues
        liabilities relating to these lawsuits on a case-by-case basis. NeoMedia
        generally accrues attorney fees and interest in addition to the liability
        being
        sought. Liabilities are adjusted on a regular basis as new information becomes
        available. NeoMedia consults with its attorneys to determine the viability
        of an
        expected outcome. The actual amount paid to settle a case could differ
        materially from the amount accrued.
 
 *Revenue
        Recognition.* NeoMedia derives  revenues from the following  sources:  (1)
        license revenues relating to patents and internally-developed software, (2)
        hardware, software, and service revenues related to mobile marketing campaign
        design and implementation, and (3) sale of its proprietary Micro Paint Repair
        solution.
 
 (1)
              Technology
                  license fees, including Intellectual Property licenses, represent
                  revenue
                  from the licensing of NeoMedia’s proprietary  software  tools
                  and  applications products.  NeoMedia licenses its 
                  development  tools and  application  products pursuant to
                  non-exclusive and  non-transferable  license agreements. 
                  The basis for license fee revenue recognition is substantially
                  governed by
                  American  Institute  of  Certified  Public 
                  Accountants  ("AICPA")  Statement of Position 97-2 "Software
                  Revenue  Recognition" ("SOP 97-2"), as amended, and Statement of
                  Position 98-9, Modification of SOP 97-2, “Software Revenue Recognition,
                  With Respect to Certain Transactions.”.  License revenue is
                  recognized if persuasive  evidence of an agreement 
                  exists,  delivery has occurred, pricing is fixed and determinable,
                  and collectibility is probable.  The Company defers revenue related
                  to license fees for which amounts have been collected but for which
                  revenue has not been recognized in accordance with the above, and
                  recognizes the revenue over the appropriate
                  period.
  67
 
 (2)
              Technology
                  service and product revenue, which includes sales of software and
                  technology equipment and service fee is recognized  based on
                  guidance  provided in  SEC Staff  Accounting 
                  Bulletin  (“SAB”) No. 104,  "Revenue  Recognition  in
                  Financial Statements,"  as amended (SAB 104).  Software
                  and technology equipment resale revenue is
                  recognized when persuasive evidence of an arrangement exists, the
                  price to the customer is fixed and determinable, delivery of the
                  service
                  has occurred and collectibility is reasonably assured.
                  Service revenues including maintenance fees for
                  providing system updates for software products, user documentation
                  and
                  technical support are recognized over the life of
                  the contract. The Company’s subsidiaries, Mobot (sold during 2006),
                  and Gavitec follow this policy. The Company defers revenue related
                  to
                  technology service and product revenue for which amounts have been
                  invoiced and or collected but for which the requisite service has
                  not been
                  provided. Revenue is then recognized over the matching service
                  period.
 
 (3)
              Technology
                  service also includes mobile marketing services to its customers
                  which
                  mobile marketing projects are recognized after the completion of
                  the
                  project and accepted by the customer.  All response and messaging
                  based revenues are recognized at the time such responses are received
                  and
                  processed and the Company recognizes its premium messaging revenues
                  on a
                  net basis based on guidance provided in Emerging Issues Task Force
                  Issues
                  No. 99-19 (EITF 99-19), “Reporting Revenue Gross as Principal or Net as an
                  Agent” and No. 01-09 (EITF 01-09), “Accounting for Consideration Given by
                  a Vendor to a Customer.”  Consulting and management revenues and
                  revenues for periodic services are recognized as services are
                  performed.  NeoMedia uses  stand-alone  pricing to
                  determine an element's  vendor  specific  objective 
                  evidence  (“VSOE”) in order to allocate an arrangement  fee
                  amongst various pieces of a  multi-element  contract.  The
                  Company’s subsidiaries 12Snap and Sponge (sold during 2006) follow this
                  policy. Telecom revenues from NeoMedia’s subsidiary BSD are recognized at
                  the time that calls are accepted by the clearinghouse for billing
                  to
                  customers on a net basis, based on guidance in EITF 99-19. The
                  Company
                  defers revenue related to mobile marketing service fees for which
                  amounts
                  have been invoiced and/or collected but for which revenue has not
                  been
                  recognized. Revenue is then recognized over the matching service
                  period.
 
 (4)
              Revenue
                  for licensing and exclusivity on NeoMedia’s Micro Paint Repair systems is
                  recognized equally over the term of the contract, which is currently
                  one
                  year.  A portion of the initial fee paid by the customer is allocated
                  to licensing, training costs and initial products sold with the
                  system.
                  Revenue is recognized upon completion of training and shipment
                  of the
                  products, provided there is VSOE in a multiple element arrangement. 
                  Ongoing product and service revenue is recognized as products are
                  shipped
                  and services performed.  The Company defers revenue related to micro
                  paint repair licensing for which amounts have been invoiced and/or
                  collected and revenue is then recognized over the estimated contract
                  period, which is currently one year.
 
 (5)
              Sales
                  taxes represent amounts collected on behalf of specific regulatory
                  agencies that require remittance on a specified date. These amounts
                  are
                  collected at the time of sales and are detailed on invoices provided
                  to
                  customers. In compliance with the Emerging Issues Task Force consensus
                  on
                  issue number 06-03 (EITF 06-03), NeoMedia accounts for sales taxes
                  on a
                  net basis.
  *Income
        Tax Valuation Allowance.* Deferred
        tax assets are reduced by a valuation allowance when, in the opinion of
        management, it is more likely than not that some portion or all of the deferred
        tax assets will not be recognized. The Company has recorded a 100% valuation
        allowance as March 31, 2007 and December 31, 2006.
 
 *Foreign
        Currency Translation.* **** The
        local
        currency has been primarily used as the functional currency throughout the
        world. Translation gains and losses of those operations that use local currency
        as the functional currency are included in the consolidated balance sheets
        as
“Accumulated other comprehensive income (loss).” Where the U.S. dollar is used
        as the functional currency, foreign currency gains and losses are reflected
        in
        income.
 
 68
 *Financial
        Accounting Standards Board Interpretation No. 48.*
 The
        Company adopted the provisions of Financial Accounting Standards Board ("FASB")
        Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an
        interpretation of FASB Statement No. 109” (“FIN 48”), on January 1, 2007. FIN 48
        clarifies the accounting for uncertainty in income taxes recognized in an
        enterprise's financial statements in accordance with FASB Statement 109,
        “Accounting for Income Taxes,” and prescribes a recognition threshold and
        measurement process for financial statement recognition and measurement of
        a tax
        position taken or expected to be taken in a tax return. FIN 48 also provides
        guidance on derecognition, classification, interest and penalties, accounting
        in
        interim periods, disclosure and transition.
 
 Based
        on
        its evaluation, the Company has concluded that there are no significant
        uncertain tax positions requiring recognition in its financial statements.
        The
        Company’s evaluation was performed for the tax years ended December 31, 2003,
        2004, 2005 and 2006, the tax years which remain subject to examination by
        major
        tax jurisdictions as of March 31, 2007.
 
 The
        Company may from time to time be assessed interest or penalties by major
        tax
        jurisdictions, although any such assessments historically have been minimal
        and
        immaterial to the Company’s financial results. In the event the Company has
        received an assessment for interest and/or penalties, it has been classified
        in
        the financial statements as interest expense.
 *Statement
          of Financial Accounting Standards No. 155*
 The
          company adopted Statement of Financial Accounting number 155 “Accounting for
          Certain Hybrid Financial Instruments” (FAS 155) in the first quarter of 2007.
          The Company has adopted FAS 155 on an individual instrument basis and is
          currently applying FAS 155 to certain of it’s debt obligations. The Company will
          evaluate and determine on a case by case basis whether to apply FAS
          155.
  **Effect
        Of Recently Issued Accounting Pronouncements**
  In
        February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
        Financial Instruments” (FAS 155). This Statement amends FASB Statements No. 133,
        Accounting for Derivative Instruments and Hedging Activities, and No. 140,
        Accounting for Transfers and Servicing of Financial Assets and Extinguishments
        of Liabilities. This Statement resolves issues addressed in Statement 133
        Implementation Issue No. D1, "Application of Statement 133 to Beneficial
        Interests in Securitized Financial Assets."
 This
        Statement:
 
 a.
              Permits
                  fair value remeasurement for any hybrid financial instrument that
                  contains
                  an embedded derivative that otherwise would require
                  bifurcation
 b.
              Clarifies
                  which interest-only strips and principal-only strips are not subject
                  to
                  the requirements of Statement 133
 c.
              Establishes
                  a requirement to evaluate interests in securitized financial assets
                  to
                  identify interests that are freestanding derivatives or that are
                  hybrid
                  financial instruments that contain an embedded derivative requiring
                  bifurcation
 d.
              Clarifies
                  that concentrations of credit risk in the form of subordination
                  are not
                  embedded derivatives
 e.
              Amends
                  Statement 140 to eliminate the prohibition on a qualifying special-purpose
                  entity from holding a derivative financial instrument that pertains
                  to a
                  beneficial interest other than another derivative financial
                  instrument.
 
 FAS
        155
        is effective for fiscal years beginning after September 15, 2006. The Company
        has adopted FAS 155 on an individual instrument basis and is currently applying
        FAS 155 to certain of it’s debt obligations. The Company will evaluate and
        determine on a case by case basis whether to apply FAS 155.
 
 In
        June
        2006, the FASB issued FASB Interpretation (FIN) No. 48, “Accounting for
        Uncertainty in Income Taxes,” that provides guidance on the accounting for
        uncertainty in income taxes recognized in financial statements. The
        interpretation was adopted by the Company on January 1, 2007. The Company
        has
        adopted FIN 48 as of January 1, 2007. The adoption of FIN 48 did not have
        any
        material effect on the Company’s financial position, results of operations or
        cash flows.
 
 69
 In
        September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This
        Statement defines fair value, establishes a framework for measuring fair
        value
        in generally accepted accounting principles (“GAAP”), and expands disclosures
        about fair value measurements. This Statement applies under other accounting
        pronouncements that require or permit fair value measurements, the Board
        having
        previously concluded in those accounting pronouncements that fair value is
        the
        relevant measurement attribute. Accordingly, this Statement does not require
        any
        new fair value measurements. However, for some entities, the application
        of this
        Statement will change current practice. This statement is effective for fiscal
        years beginning after November 15, 2007. The Company may adopt this statement
        for its 2007 fiscal year. The Company is currently evaluating the impact
        of
        adopting this statement; however, the Company does not expect the adoption
        of
        this provision to have a material effect on its financial position, results
        of
        operations or cash flows.
 
 In
        September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
        Accounting Bulletin No. 108 (“SAB 108”), *Financial
        Statements - Considering the Effects of Prior Year Misstatements when
        Quantifying Misstatements in Current Year Financial
        Statements.”* SAB 108
        provides guidance on how prior year misstatements should be taken into
        consideration when quantifying misstatements in current year financial
        statements for purposes of determining whether the current year’s financial
        statements are materially misstated. SAB 108 provides that once a current
        year
        misstatement has been quantified, the guidance in SAB No. 99, *Financial
        Statements - Materiality* ,
        should
        be applied to determine whether the misstatement is material and should result
        in an adjustment to the financial statements. Under certain circumstances,
        prior
        year financial statements will not have to be restated and the effects of
        initially applying SAB 108 on prior years will be recorded as a cumulative
        effect adjustment to beginning Retained Earnings on January 1, 2006, with
        disclosure of the items included in the cumulative effect. NeoMedia will
        apply
        the provisions of SAB 108 with the preparation of NeoMedia’s annual financial
        statements for the calendar year ending December 31, 2006. The application
        of the provisions of SAB 108 did not have a material impact on the Company’s
        financial statements for the three months ending March 31, 2007.
 
 In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities”. The objective of this statement is
        to improve financial reporting by providing entities with the opportunity
        to
        mitigate volatility in reported earnings caused by measuring related assets
        and
        liabilities differently without having to apply complex hedge accounting
        provisions. This statement is expected by the Board to expand the use of
        fair
        value measurement, which is consistent with the Board’s long-term measurement
        objectives for accounting for financial instruments. This statement is effective
        for fiscal years beginning after November 15, 2007. The Company may adopt
        this
        statement for its 2007 fiscal year. The Company is currently evaluating the
        impact of adopting this statement; however, the Company does not expect the
        adoption of this provision to have a material effect on its financial position,
        results of operations or cash flows.
  70
 
 **Results
        of Operations for the Three Months Ended March 31, 2007 As Compared to the
        Three
        Months Ended March 31, 2006**
 
 *Net
        sales.* Total
        net
        sales for the three months ended March 31, 2007 were $399,000, which represented
        a $200,000, or 101%, increase from $199,000 for the three months ended March
        31,
        2006.  This increase resulted from $190,000 increased net sales in 2007
        from Gavitec, which was acquired on February 23, 2006 and only included in
        NeoMedia’s results for approximately half of the three months ended March 31,
        2006, combined with an increase of $10,000 in net sales from the Company’s
        underlying business represented by qode® and intellectual property licensing.
 
 *Cost
        of sales.* Cost
        of
        sales were $313,000 for the three months ended March 31, 2007 compared to
        $131,000 for the three months ended March 31, 2006, an increase of $182,000,
        or
        139%.  This increase resulted from (i) $19,000 increased product and
        service related cost of sales from Gavitec which was acquired during the
        first
        quarter of 2006 and only reflected in NeoMedia’s results for a portion of that
        operating period, and (ii) amortization of $85,000 of intangible assets relating
        to the acquisition of Gavitec, and (iii) higher cost of sales of $78,000
        from
        the Company’s underlying business represented by qode® and NeoMedia’s legacy
        software products and the Company’s wound down Consulting and Integration
        Services business.
 
 *Gross
        profit.* Gross profit was $86,000 for the three months ended March 31, 2007, an increase
        of $18,000, or 26%, compared with gross profit of $68,000 for the three months
        ended March 31, 2006.  This increase resulted from (i) $171,000 increased
        operational gross profit from Gavitec, offset by (ii) decreased gross profit
        of
        $68,000 from the Company’s underlying business represented by qode®, NeoMedia’s
        legacy software products, and (iii) amortization of $85,000 of intangible
        assets
        relating to the acquisition of Gavitec.
 
 *Sales
        and marketing.* Sales
        and
        marketing expenses were $859,000 for the three months ended March 31, 2007,
        compared to $1,194,000 for the three months ended March 31, 2006, a decrease
        of
        $335,000 or 28%.  This decrease resulted from (i) lower sales and marketing
        expense in the Company’s underlying business represented by qode® and NeoMedia’s
        legacy software products of $262,000 in 2007 relative to 2006, (ii) lower
        stock
        based compensation expense allocated to sales and marketing in 2007 of $84,000,
        offset by (iii) higher sales and marketing expenses of $11,000 from Gavitec,
        which was acquired during the first quarter of 2006.
 
 *General
        and administrative.* General
        and administrative expenses increased by $1,093,000, or 81%, to $2,440,000
        for
        the three months ended March 31, 2007, compared to $1,347,000 for the three
        months ended March 31, 2006. The increase resulted from (i) higher accounting,
        professional, and legal services of $1,054,000 due to Company’s implementation
        of Sarbanes Oxley, higher audit fees resulting from a more complex reporting
        structure and transactions, actual and threatened lawsuits, and registration
        statements, and (ii) general and administrative expenses of $39,000 from
        Gavitec, which was acquired during the first quarter of 2006.
 
 *Research
        and development.* During
        the three months ended March 31, 2007, NeoMedia charged to expense $506,000
        of
        research and development costs, an increase of $21,000 or 4% compared to
        $485,000 for the three months ended March 31, 2006.  The increase resulted
        from (i) higher research and development expenses of $158,000 from Gavitec,
        which was acquired during the first quarter of 2006, and (ii) higher stock
        based
        compensation expense allocated to research and development of $28,000, offset
        by
        (iii) lower research and development expense related to qode® products of
        $165,000.
 
 *Gain
        (loss) on extinguishment of debt.* During
        the three months ended March 31, 2006, NeoMedia recorded a loss on
        extinguishment of debt in the amount of $1,964,000, resulting from debt retired
        in connection with the Series C preferred stock issued and sold to Cornell
        on
        February 17, 2007. ** A
        loss
        was incurred on the surrender  of a certain promissory note to Cornell
        Capital Partners (“Cornell”)dated March 30, 2006 in connection with the
        preferred stock sale. No such charge was recognized during the three months
        ended March 31, 2007.
 
 71
 *Interest
        income (expense).* Interest
        income (expense) consists primarily of interest charges related to convertible
        debentures, interest accrued for creditors as part of financed purchases,
        past
        due balances, and notes payable, net of interest earned on cash equivalent
        investments.  Interest expense increased by $1,704,000, or 28,400%, to
        $1,698,000 for the three months ended March 31, 2007, from interest income
        of
        $6,000 for the three months ended March 31, 2006. The increase resulted from
        (i)
        a charge to expense the costs of obtaining the debenture financing in March
        2007
        of $781,000, (ii) $500,000 of interest expense and liquidated damages related
        to
        the Company’s convertible financing arrangements, and (iii) $417,000 of other
        interest expense.
 
 *Gain
        (loss) on embedded conversion features of derivative financial
        instruments.* Gain
        (loss) from embedded conversion features of derivative financial instruments
        was
        $(3,508,000) for the three months ended March 31, 2007, compared with $4,768,000
        for the three months ended March 31, 2006, a decrease of $8,276,000 or
        174%.  The gains and losses are associated with the preferred stock sale on
        February 17, 2006, and the convertible debenture financings dated August
        24,
        2006, December 29, 2006 and March 27, 2007.  Certain derivatives and
        embedded conversion features were created at the time of each offering and
        are
        recorded at fair value on the accompanying balance sheet *.* The
        gains
        (losses) represent the reduction in value of the derivatives and embedded
        conversion features from the beginning of each reporting period presented
        to the
        end of the period, and are due almost entirely to a reduction
        (appreciation) in NeoMedia’s stock price during each period.
 
 *Loss
        from discontinued business units* . 
        During 2006, NeoMedia entered into a letter of intent to sell its NeoMedia
        Micro
        Paint Repair (“NMPR”), and sold its Mobot and Sponge businesses. During the
        first quarter of 2007, NeoMedia made the strategic decision to sell its 12Snap
        and Telecom Services businesses. Accordingly, NeoMedia has classified the
        operations of NMPR, Mobot, Sponge, 12Snap and Telecom Services as discontinued
        operations. Loss from the discontinued business units in 2007 represents
        direct
        operations of the NMPR, 12Snap, and Telecom Services units for the three
        months
        ended March 31, 2007. Loss from the discontinued business units in 2006
        represents direct operations of NMPR for the three months ended March 31,
        2006,
        and direct operations of Mobot, Sponge, 12Snap and Telecom Services from
        their
        respective acquisition dates (February 17, 2006 for Mobot, February 23, 2006
        for
        Sponge, February 28, 2006 for 12Snap, and March 21, 2006 for Telecom Services)
        through March 31, 2006.
 
 The
        net
        loss from the NMPR business unit for the three months ended March 31, 2007
        was
        $591,000, an increase of $140,000 or 31% from the loss of $451,000 for the
        three
        months ended March 31, 2006. The increased loss is due to the fixed overhead
        costs related to increased stock based compensation of $188,000 in 2007
        associated primarily with the stock option repricing program, offset by $48,000
        increased operational profits. The net loss from the 12Snap business for
        the
        three months ended March 31, 2007 was $1,954,000, an increase of $1,898,000
        or
        3,389% from the loss of $56,000 for the period from February 28, 2006 through
        March 31, 2006. The increase loss results primarily from an impairment charge
        in
        the amount of $2,467,000 during the three months ended March 31, 2007 to
        adjust
        the carrying value of 12Snap assets to the fair value of assets received
        in the
        sale on April 4, 2007, offset by an increase to the operational income of
        12Snap
        of $569,000 in 2007 as compared with 2006. The net loss from the Telecom
        Services business for the three months ended March 31, 2007 was $3,000, a
        decrease of $426,000 or 100% from the loss of $429,000 for the period from
        March
        21, 2006 through March 31, 2006. The decrease results primarily from a decrease
        in stock based compensation expense of $334,000 in 2007 relative to 2006.
 
 *Net
        loss* . 
        The net loss for the three months ended March 31, 2007 was $11,499,000, which
        represented a $10,182,000, or 773% increase from a $1,317,000 loss for the
        three
        months ended March 31, 2006.  This increased net loss resulted from (i) a
        loss resulting from the change in fair value of embedded conversion features
        associated with the Series C preferred stock, warrants, and convertible
        debenture in the amount of $3,508,000 in the three months ended March 31,
        2007
        compared with a gain of $4,768,000 in the same period in 2006, (ii) a $3,576,000
        charge to interest expense during the three months ended March 31, 2007 to
        adjust the carrying value of the March 2007 convertible debenture financing
        to
        its face value due to the Company’s default position, (iii) an impairment charge
        of $2,467,000 to adjust the carrying value of 12Snap assets to the fair value
        of
        assets received in the sale on April 4, 2007, (iv) increased losses of
        $1,062,000 in the three months ended March 31,2007 compared with the same
        period
        in 2006 from the underlying business represented by qode®, NeoMedia’s legacy
        software products, and corporate administration including audit and legal
        fees,
        (v) the accrual of liquidated damages and interest charges in the amount
        of
        $500,000 relating to the convertible financings during 2007, (vi) increased
        losses from the discontinued business units 12Snap, increased operational
        losses
        of $122,000 from Gavitec in the three months ended March 31, 2007 compared
        to
        the same period in 2006, as Gavitec operations were reflected in NeoMedia’s
        consolidated operations for only approximately half of the three months ended
        March 31, 2006, offset by (vii) decreased losses from discontinued operations
        12Snap, Telecom Services, and Micro Paint Repair of $1,062,000, and (viii)
        a
        loss on the extinguishment of debt of $1,964,000 during the three months
        ended
        March 31, 2006 with no corresponding charge in the same period in 2007.
 
 72
 *Known
        trends, demands, commitments, or uncertainties.* During
        August 2006, NeoMedia announced that it intended to sell its Micro Paint
        Repair
        business unit. During the fourth quarter of 2006, NeoMedia divested of Mobot
        and
        Sponge, wholly owned subsidiaries acquired during the first quarter of 2006.
        Also, during the first quarter of 2007, NeoMedia announced its intent to
        sell
        additional subsidiaries NeoMedia Telecom and 12Snap. NeoMedia sold 12Snap
        on
        April 4, 2007. As a result, NeoMedia expects its sales, cost of sales, gross
        profit, operating expenses, and net loss over the next 12 months to more
        closely
        resemble the result presented herein, than results presented in the Company’s
        Forms 10-Q filed during 2006.
  **Liquidity
        and Capital Resources**
 
 **Current
        Period Activity**
 
 *Net
        cash from operations.* Net cash
        used in continuing operating activities (net of cash used from operations
        of
        discontinued business unit) was $3,634,000 and $1,957,000 for the three months
        ended March 31, 2007 and 2006, respectively, an increase of $1,677,000, or
        86%.
        The increase resulted from payment of accrued liquidated damages and interest
        of
        $1,678,000 from the proceeds of the March 2007 convertible debenture, offset
        by
        lower cash used in ongoing operations of $1,000.
 
 *Net
        cash used in investing.* NeoMedia’s net cash flow used in investing activities (net of cash used in
        investing of discontinued business unit) for the three months ended March
        31,
        2007 and 2006, was $3,563,000 and $16,927,000, respectively, a decrease of
        $13,364,000 or 79%. The decrease resulted from (i) the investment of $13,867,000
        in the acquisitions of Mobot, Sponge, Gavitec and 12Snap during the three
        months
        ended March 31, 2006, (ii) reduced advances to discontinued subsidiaries
        of
        $829,000 in the three months ended March 31, 2007 as compared with the same
        period in 2006, and (iii) collection of notes receivable of $450,000 in the
        three months ended March 31, 2007, as compared to amounts advanced in the
        same
        period in 2006 of $500,000, and (iv) reduced acquisition related costs and
        lower
        acquisitions of fixed assets and software of $90,000, offset by (v) payments
        of
        purchase price obligations relating to Gavitec and 12Snap of $2,372,000.
 
 *Net
        cash provided by financing activities* .
        Net
        cash provided by financing activities was $6,687,000 and $22,197,000 for
        the
        three months ended March 31, 2007 and 2006, respectively, a decrease of
        $15,510,000 or 232%. NeoMedia received $6,678,000 proceeds form the sale
        of
        convertible debentures in March 2007, and $14,066,000 from the sale of Series
        C
        convertible stock during the three months ended March 31, 2006. NeoMedia
        received $9,000 and $8,131,000 from the exercise of stock options and warrants
        during the three months ended March 31, 2007 and 2006, respectively.
 
 *Net
        cash used in discontinued operations* .
        Net
        cash used in the Company’s discontinued Micro Paint Repair operations for the
        three months ended March 31, 2007 was $324,000, of which $322,000 was used
        in
        operations, $4,000 was used in investing activities, and $2,000 was generated
        as
        a result of the effect of exchange rates on cash. Net cash used in the Company’s
        discontinued Micro Paint Repair operations for the three months ended March
        31,
        2006 was $836,000, of which $824,000 was used in operations, $17,000 was used in
        investing activities, and $5,000 was generated as a result of the effect
        of
        exchange rates on cash.
 
 73
 Net
        cash
        used in the Company’s discontinued 12Snap operations for the three months ended
        March 31, 2007 was $981,000, of which $136,000 was generated from operations,
        $1,125,000 was used in financing activities to repay silent partner debt,
        and
        $8,000 was generated as a result of the effect of exchange rates on cash.
        Net
        cash used in the Company’s discontinued 12Snap operations for the three months
        ended March 31, 2006 was $1,713,000, of which $346,000 was generated from
        operations, $13,000 was used in investing activities, $2,036,000 was used
        in
        financing activities to repay silent partner debt, and $10,000 was used as
        a
        result of the effect of exchange rates on cash.
 
 Net
        cash
        used in the Company’s discontinued Telecom Services operations for the three
        months ended March 31, 2007 was $304,000, of which $291,000 was used in
        operations, and $13,000 was used as a result of the effect of exchange rates
        on
        cash. Net cash used in the Company’s discontinued Telecom Services operations
        for the three months ended March 31, 2006 was $72,000, of which $42,000 was
        used
        in operations, $5,000 was used in financing activities to repay notes payable,
        and $25,000 was used as a result of the effect of exchange rates on
        cash.
 
 Net
        cash
        used in the Company’s discontinued Mobot operations for the three months ended
        March 31, 2006 was $135,000, of which $122,000 was used in operations, and
        $13,000 was used in investing activities. Since this business was sold during
        2006, there was no effect on cash during the three months ended March 31,
        2007.
 
 Net
        cash
        generated by the Company’s discontinued Sponge operations for the three months
        ended March 31, 2006 was $13,000, all of which was generated from operating
        activities. Since this business was sold during 2006, there was no effect
        on
        cash during the three months ended March 31, 2007.
 
 
 As
        of
        March 31, 2007, NeoMedia has a working capital deficiency of $66,452,000,
        of
        which $25,949,000 relates to the fair value of derivative financial instruments.
        NeoMedia intends to fund its working capital deficiency as described in “Sources
        of Cash and Projected Cash Requirements”.
  **Significant
        Liquidity Events**
  **Sale
        of 12Snap - March 2007**
  On
        April
        4, 2007, NeoMedia entered into a material definitive agreement with Bernd
        M.
        Michael (the “Buyer”), a private investor and former shareholder of 12Snap prior
        to NeoMedia’s acquisition of 12Snap, pursuant to which the Buyer purchased from
        NeoMedia 90% of the shares of 12Snap, subject to the following material terms
        and conditions:
  ·
              $1,100,000
                  was paid in cash at closing, of which $1,015,000 was applied toward
                  amounts owed to silent partners of
                  12Snap;
  ·
              $500,000
                  was placed into an escrow account for 90 days to secure warranty
                  claims;
  ·
              The
                  Buyer waived his portion of the purchase price guarantee obligation
                  in the
                  amount of $880,000;
  ·
              The
                  Buyer returned to NeoMedia 2,525,818 NeoMedia shares previously
                  issued to
                  Buyer;
  ·
              12Snap
                  management waived their portion of the purchase price guarantee
                  obligation
                  in the amount of $880,000;
  ·
              12Snap
                  management returned to NeoMedia 5,225,039 shares of NeoMedia common
                  stock
                  previously issued to 12Snap
                  management;
  ·
              NeoMedia
                  will retain a 10% ownership in 12Snap, subject to an option agreement
                  pursuant to which NeoMedia has the right to sell and Buyer has
                  the right
                  to acquire the remaining 10% stake held by NeoMedia for a purchase
                  price
                  of $750,000 after December 31, 2007;
                  and
  ·
              12Snap
                  and NeoMedia will execute a cooperation agreement pursuant to which
                  12Snap
                  will remain NeoMedia preferred partner and enjoy most favored prices,
                  and
                  12Snap will perform certain research and development functions
                  for
                  NeoMedia.
  74
 **$7.5
        Million Convertible Debenture - March 2007**
  NeoMedia
        entered into a Securities Purchase Agreement, dated March 27, 2007, with
        Cornell
        Capital Partners (the “March Debenture Agreement”). Pursuant to the March
        Debenture Agreement, Cornell Capital Partners agreed to purchase 13% secured
        convertible debentures maturing two years from the date of issuance in the
        aggregate amount of $7,459,000. The March Debenture Agreement also provided
        for
        the issuance to the purchasers, at no additional cost to the purchasers,
        warrants to purchase 125,000,000 shares of NeoMedia common stock at an exercise
        price of $0.04 per share. In connection with the March Debenture Agreement,
        NeoMedia also entered into a registration rights agreement with the purchasers
        that requires the Company to (i) file a registration statement with the SEC
        registering the resale of the shares of common stock issuable upon conversion
        of
        the convertible debenture and the exercise of the warrants within 30 days
        of
        receiving a written notice from the purchasers requesting filing, (ii) achieve
        effectiveness of the registration statement within 120 days of receiving
        a
        notice to file the registration statement and (iii) maintain effectiveness
        of
        the registration statement for the life of the agreement. Failure to meet
        these
        requirements will require the Company to incur liquidating damages amounting
        to
        2% of the principal per month. The debentures are secured by substantially
        all
        of the Company’s assets.
 
 At
        any
        time from the closing date until December 29, 2008, the purchasers have the
        right to convert the convertible debenture into NeoMedia common stock at
        the
        then effective conversion price, which varies relative to NeoMedia’s trading
        stock price, as follows: The lower of $0.05 per share, or 90% of the lowest
        closing bid price (as reported by Bloomberg) of the common stock for the
        30
        trading days immediately preceding the conversion date. The conversion is
        limited such that the holder cannot exceed 4.99% ownership, unless the holders
        waive their right to such limitation. The limitation will terminate under
        any
        event of default.
 
 In
        connection with the March Debenture Agreement, NeoMedia applied $1,312,000
        of
        the gross proceeds toward payment of liquidated damages accrued on previous
        convertible instruments payable to the purchaser, and $366,000 toward accrued
        interest on previous convertible debentures. Cornell Capital Partners also
        retained fees of $781,000, resulting in net proceeds to the Company of
        $5,000,000.
 
 **Gavitec
        and 12Snap Purchase Price Obligation**
 
 As
        of
        December 31, 2006, NeoMedia had recorded liabilities of $16,233,000 and
        $5,194,000 relating to purchase price guarantee obligations associated with
        its
        acquisitions of 12Snap and Gavitec, respectively. Pursuant to the terms of
        each
        acquisition, in the event that NeoMedia’s stock price at the time the
        consideration shares issued in connection with the acquisitions of Mobot,
        Sponge, Gavitec, and 12Snap became saleable (either upon effectiveness of
        a
        registration statement containing the shares, or under Rule 144) was less
        than
        the contractual price (between $0.3839 and $0.3956), NeoMedia is obligated
        to
        compensate the sellers in cash for the difference between the price at the
        time
        the shares became saleable and the relevant contractual price. The shares
        became
        saleable during the first quarter of 2007.
 
 On
        January 23, 2007, NeoMedia entered into an agreement with the former
        shareholders of Gavitec, whereby this purchase price obligation is to be
        satisfied through the payment by NeoMedia of (i) $1,800,000 in cash, payable
        no
        later than February 28, 2007 (subsequently extended to March 31, 2007), and
        (ii)
        61,000,000 shares of NeoMedia common stock to be issued no later than February
        28, 2007. NeoMedia also agreed to pay interest accrued on the purchase price
        in
        the amount of $481,000 and reimburse $100,000 of costs related to the
        acquisition to the primary former shareholder of Gavitec no later than February
        28, 2007. NeoMedia issued the shares and made cash payments of $2,113,000
        during
        March 2007. Accordingly, as of March 31, 2007, the balance on the accrual
        was
        $268,000, representing the remaining interest payments.
 
 During
        the three months ended March 31, 2007, NeoMedia issued 197,620,948 shares
        of its
        common stock in satisfaction of a portion of the 12Snap purchase price
        obligation totaling $9,427,000, and made cash payments against the liability
        totaling $259,000. The balance on the purchase price obligation as of March
        31,
        2007 was $6,806,000. During April 2007, NeoMedia made additional cash payments
        of $75,000 and further reduced the balance through the termination of $1,758,000
        of obligation in connection with the sale of 12Snap. The Company is currently
        negotiating payment terms for the balance of the obligation.
 
 75
 **Silent
        Partners**
 
 Prior
        to
        the acquisition of 12Snap by NeoMedia, 12Snap entered into silent partnership
        debt arrangements with principal and interest totaling $4.8 million. The
        partnership agreements were scheduled to terminate on December 31, 2008 and
        2009. However, due to the acquisition of all shares of 12Snap by NeoMedia,
        an
        early termination was agreed on for the silent partnership agreements. Those
        silent partnerships terminated as of February 28, 2006 with the acquisition
        of
        12Snap by NeoMedia. NeoMedia made payments toward the outstanding principal
        of
        $2.1 million and $0.6 million during March 2006 and December 2006, respectively.
        The balance as of December 31, 2006 relating to silent partners was $2.1
        million. NeoMedia made additional payments of $1.0 million during February
        2007,
        and the remaining balance of $1.1 million was paid from the proceeds of the
        sale
        of 12Snap in April 2007.
 
 **China
        Order**
 
 During
        the fourth quarter of 2005 and first quarter of 2006, NeoMedia shipped and
        invoiced $757,000 of Micro Paint Repair products to Automart for which payment
        has not been received. The accounts receivable related to this transaction
        have
        been fully reserved. Recognition of revenue on this transaction has been
        deferred since this is a new customer in a new territory. If and when payment
        is
        made, NeoMedia expects to recognize revenue for these shipments, and would
        also
        receive a material cash infusion. In the absence of payment, NeoMedia would
        not
        recognize revenue related to these products and would not recoup its cost
        of
        goods sold which have already been paid. If not collected, these assets could
        be
        sold in connection with the proposed sale of the NMPR business unit.
  **Sources
        of Cash and Projected Cash Requirements**
 
 NeoMedia
        intends to fund its growth and working capital deficiencies from the following
        sources during 2007 and beyond:
 
 *$7.5
        million convertible debenture - March 2007.* On March
        27, 2007, the Company sold convertible debentures with a face value of $7.5
        million to Cornell Capital Partners. Net proceeds to the Company were $5
        million, of which $2.1 million was used to pay the cash portion of the Gavitec
        purchase price obligation. The Company expects to use the funds to bridge
        to the
        sale of its non-core business units, and to the extent applicable, to pay
        outstanding liabilities associated with its acquisitions.
 
 *Sale
        of non-core business units.* During
        August 2006, NeoMedia announced its intent to sell its Micro Paint Repair
        business unit. Additionally, during January 2007, the Company decided to
        sell
        wholly-owned subsidiaries 12Snap and NeoMedia Telecom Services. During April
        2007, NeoMedia completed the sale of 12Snap. The cash portion of the sale
        price
        was $1.6 million, of which $1.1 million was used to pay balances owed to
        silent
        partners of 12Snap, and $0.5 million was placed into escrow for 90 days to
        satisfy any warranty claims. Any cash proceeds realized from the sale of
        these
        non-core business units will be used to fund the operations of NeoMedia’s core
        code reading business, consisting of qode®, Gavitec, and the related
        intellectual property. Pursuant to the terms of the latest convertible debenture
        financing completed in March 2007, NeoMedia is obligated to contribute a
        minimum
        of 50% of the proceeds from the sale of any of its non-core assets toward
        repayment of the March 2007 convertible debenture.
 
 *Exercise
        of options and warrants.* One of
        the Company’s shareholders, Cornell Capital Partners, currently holds warrants
        to purchase up to 427,000,000 shares of Company common stock at exercise
        prices
        between $0.04 and $0.06 per share. NeoMedia
        can force exercise of the warrants if the closing bid price of NeoMedia stock
        is
        more than $0.10 greater than the exercise price of any of the warrants for
        15
        consecutive trading days. It
        is
        important to note that the warrants held by Cornell Capital Partners contain
        a
        provision that, if NeoMedia is in default of the warrant agreement, the
        holder can perform a “cashless” exercise of the warrants and in lieu of making
        payment of the exercise price in cash, elect instead to withhold shares as
        consideration for the exercise price. In the event of such a “cashless”
exercise, NeoMedia would not receive any cash proceeds upon the exercise
        of such
        warrants. NeoMedia is currently in default of: the Investor Registration
        Rights
        Agreement entered into on February 17, 2006, in connection with the
        Series C
        convertible preferred stock ,
        which
        called for a registration statement containing the shares underlying the
        secured
        convertible debentures to be filed by June 1, 2006; and the Investor
        Registration Rights Agreement entered into on August 24, 2006 in connection
        with
        the secured convertible debentures, which called for the shares underlying
        the
        secured convertible debentures to be registered by November 22, 2006. Such
        a
        default of the Investor Registration Rights Agreements constitutes an event
        of
        default under the warrant agreements. As a result, Cornell Capital Partners
        currently has the right to exercise on a cashless basis 250,000,000 of the
        warrants they hold, and NeoMedia may not receive any cash proceeds from such
        exercises.
 
 76
 In
        addition, certain outstanding employee stock options are in-the-money and
        could
        be exercised at the holders’ discretion from time to time. As of March 31, 2007,
        NeoMedia had 106,978,761 outstanding employee stock options, of which 25,600,000
        were in-the-money based on the closing price on March 31, 2007 of $0.045
        per
        share. Total potential proceeds to the Company from exercise of all in-the-money
        options are $896,000. On February 1, 2007, NeoMedia instituted a stock option
        repricing plan as a retention tool to align its employees with the new vision
        of
        NeoMedia. Under the Plan, NeoMedia repriced 50,148,750 stock options held
        by
        current employees, contractors, and directors. Options for employees of
        NeoMedia’s ongoing operations were repriced as follows: (i) options that were
        vested as of February 1, 2007, were repriced to $0.045 per share, which was
        the
        last sale price on February 1, 2007, (ii) options that are scheduled to vest
        during the remainder of 2007 were repriced to $0.075, (iii) options that
        vest
        during 2008 were repriced to $0.125, and (iv) options that vest during 2009
        were
        repriced to $0.175. Options will continue to vest on their regular schedule,
        which generally is 25% upon grant and 25% on each subsequent anniversary
        date.
        The Company also repriced options for outside directors as follows: options
        with
        an exercise price below $0.24 were repriced to $0.045, and options with an
        exercise price $0.24 or higher were repriced to $0.075. In addition, the
        Company
        repriced options held by employees of its held for sale Micro Paint Repair
        and
        Telecom Services businesses, such that all vested options were repriced to
        $0.045 per share, and all unvested options will vest upon sale of the respective
        business unit at an exercise price of $0.075 per share, with a 12-month period
        to exercise. NeoMedia expects that additional funds could be realized upon
        exercise of such repriced options.
 
 *$100
        Million SEDA.* On March
        30, 2005, NeoMedia and Cornell Capital Partners entered into a Standby Equity
        Distribution Agreement (the “2005 SEDA”) under which Cornell Capital Partners
        agreed to purchase up to $100 million of NeoMedia’s common stock over a two-year
        period, with the timing and amount of the purchase at NeoMedia’s discretion. The
        maximum amount of each purchase would be $2,000,000 with a minimum of five
        business days between advances. Based on NeoMedia’s current market
        capitalization and other outstanding securities, NeoMedia does not believe
        that
        the 2005 SEDA is currently a viable source of financing.
 
 NeoMedia’s
        reliance on Cornell Capital Partners (“Cornell”) as its primary financing source
        has certain ramifications that could affect future liquidity and business
        operations. For example, pursuant to the terms of the convertible debenture
        agreements between NeoMedia and Cornell signed in connection with the
        convertible debenture sales, without Cornell’s consent NeoMedia cannot
        (i ) issue
        or sell any shares of common stock or preferred stock without consideration
        or
        for consideration per share less than the closing bid price immediately prior
        to
        its issuance, (ii) issue or sell any preferred stock, warrant, option,
        right, contract, call, or other security or instrument granting the holder
        thereof the right to acquire common stock for consideration per share less
        than
        the closing bid price immediately prior to its issuance, (iii)
        enter into any security instrument granting the holder a security interest
        in
        any of its assets of, or
        (iv) file any
        registration statements on Form S-8. In addition, pursuant to security
        agreements between NeoMedia and Cornell signed in connection with the
        convertible debentures, Cornell has a security interest in all of NeoMedia’s
        assets. Such covenants could severely harm NeoMedia’s ability to raise
        additional funds from sources other than Cornell, and would likely result
        in a
        higher cost of capital in the event funding were secured.
 
 77
 Additionally,
        pursuant to the terms of the investment agreement between NeoMedia and Cornell
        signed in connection with the Series C convertible preferred stock sale,
        NeoMedia cannot (i) enter into any debt arrangements in which it is the
        borrower, (ii) grant any security interest in any of its assets, or (iii)
        grant
        any security below market price.
 
 NeoMedia
        has incurred both cash and non-cash costs associated with the financing
        arrangements with Cornell Capital Partners, as follows:
 
 ·
              In
                  connection with the $7.5 million convertible debenture in March
                  2007,
                  NeoMedia issued 125,000,000 warrants to Cornell with an exercise
                  price of
                  $0.04 per share. NeoMedia also paid cash fees of $781,000 from
                  the
                  proceeds.
 
 ·
              In
                  connection with the $2.5 million convertible debenture in December
                  2006,
                  NeoMedia issued 42,000,000 warrants to Cornell with an exercise
                  price of
                  $0.04 per share, and repriced an additional 210,000,000 warrants
                  held by
                  Cornell Capital Partners that had been issued in connection with
                  previous
                  financings. NeoMedia also paid cash fees of $270,000 from the proceeds.
 
 ·
              In
                  connection with the $5 million convertible debenture in August
                  2006,
                  NeoMedia issued 175,000,000 warrants to Cornell with exercise prices
                  between $0.05 and $0.25 (which were subsequently repriced in December
                  2006), and repriced 85,000,000 warrants that had been issued in
                  connection
                  with a previous financing (which were subsequently further repriced
                  in
                  December 2006).
 
 ·
              In
                  connection with the $27 million Series C convertible preferred
                  stock sale
                  in February 2006, NeoMedia incurred the following costs: (i) Cornell
                  held
                  back a $2,700,000 cash fee from the proceeds of the sale, (ii)
                  NeoMedia
                  issued 75 million warrants to Cornell with exercise prices between
                  $0.35
                  and $0.50, which were subsequently repriced, and (iii) NeoMedia
                  issued
                  2,000,000 warrants with an exercise price of $0.328 to another
                  party for
                  structuring and consulting fees associated with the sale.
 
 ·
              In
                  connection with the 2005 SEDA entered into in March 2005, NeoMedia
                  incurred the following costs: (i) NeoMedia issued 75,000,000 warrants
                  to
                  Cornell with an exercise price of $0.20, 10,000,000 of which were
                  subsequently repriced to $0.04 in connection with the convertible
                  debenture financings in August 2006 and December 2006, and (ii)
                  NeoMedia
                  issued 4,000,000 warrants with an exercise price of $0.227 to another
                  party for structuring and consulting fees associated with the 2005
                  SEDA.
                  The fair value of these warrants in the amount of $13,256,000 was
                  written
                  off during the year ended December 31, 2006.
  NeoMedia’s
        cash flow used in operations was $3,634,000 (net of cash used in operations
        of
        discontinued 12Snap, Telecom Services, and Micro Paint Repair business units
        of
        $477,000) for the three months ended March 31, 2007. In the event that (i)
        NeoMedia is unsuccessful in divesting of its remaining Micro Paint Repair
        and
        Telecom Services business units in a timely fashion, (ii) NeoMedia’s stock price
        does not increase to levels where it can force exercise of enough of its
        outstanding warrants to generate material operating capital, (iii) the market
        for NeoMedia’s stock will not support the sale of shares underlying such
        warrants or other funding sources, or (iv) NeoMedia does not realize a material
        increase in revenue during the next 12 months, NeoMedia will have to seek
        additional cash sources. There can be no assurances that such funding sources
        will be available. If necessary funds are not available, NeoMedia’s business and
        operations would be materially adversely affected and in such event, NeoMedia
        would attempt to reduce costs and adjust its business plan, and could be
        forced
        to sell certain of its assets, including its subsidiaries.
  78
 **Contractual
        Obligations**
 
 NeoMedia
        is party to various commitments and contingencies, such as:
 
 ·
              NeoMedia
                  leases its office facilities and certain office and computer equipment
                  under various operating leases which provide for minimum rents
                  and
                  generally include options to renew for additional
                  periods;
 ·
              NeoMedia
                  and its subsidiaries lease office facilities and certain office
                  and
                  computer equipment under various operating
                  leases;
 ·
              NeoMedia
                  is party to various payment arrangements with its vendors that
                  call for
                  fixed payments on past due
                  liabilities;
 ·
              NeoMedia
                  is party to various consulting agreements that carry payment obligations
                  into future years;
 ·
              NeoMedia
                  issued Series C convertible preferred shares with face value of
                  $21,567,000 and convertible debentures with a face value of $14,958,000
                  that are subject to conversion at future dates, plus the expected
                  value of
                  liquidated damages accrued in the amount of $1,075,000 relating
                  to these
                  convertible instruments;
 ·
              On
                  June 15, 2006, the Company issued 3,721,698 shares of its common
                  stock as
                  an initial payment against debt and accrued interest owed to Wayside
                  Solutions, Inc. (“Wayside”), a corporation that had provided financing to
                  BSD prior to the acquisition of BSD by the Company. Prior to the
                  acquisition, the Company reached an agreement with Wayside to pay
                  the
                  outstanding debt due to Wayside subsequent to completion of the
                  acquisition. The shares contain a make-whole provision that calls
                  for
                  additional shares to be issued in the event the value of the original
                  shares at the time of registration is less than the value at the
                  time they
                  were issued; and
 ·
              NeoMedia
                  has accrued the amount of $4,787,000 relating to a purchase price
                  guarantee obligation in connection with its acquisition of
                  12Snap.
 
 The
        following table sets forth NeoMedia’s future minimum payments due under
        operating leases, vendor and consulting agreements, convertible stock
        agreements, and debt agreements:
 
 (US
                  dollars in thousands)**Series
                  C****Vendor
                  &**
              
              **Subsidiary**
              
              
              
              **Convertible****Operating**
              
              **Consulting**
              
              **Acquisition**
              
              **Convertible**
              
              **Preferred****Leases**
              
              **Agreements**
              
              **Commitments**
              
              **Debentures**
              
              **Stock**
              
              **Total**2007
                  (remaining nine months)
              
              $
              243
              
              $
              148
              
              $
              5,055
              
              $
              16,898
              
              
              21,657
              
              $
              44,0012008
              
              
              188
              
              
              94
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              2822009
              
              
              11
              
              
              10
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              212010
              
              
              3
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              32011
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              ---Thereafter
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              ---**Total**
              
              **$**
              **445**
              
              **$**
              **252**
              
              **$**
              **5,055**
              
              **$**
              **16,898**
              
              **$**
              **21,657**
              
              **$**
              **44,307**
 
 In
        addition, as of March 31, 2007, NeoMedia had future obligations relating
        to its
        discontinued Micro Paint Repair, 12Snap, and Telecom Services businesses
        totaling $3,179,000, most of which is expected to be assumed by the buyers
        upon
        the anticipated sale of each business unit. With the sale of 12Snap on April
        4,
        2007, $2,223,000 of these commitments were transferred to the buyer of 12Snap.
 
 79
  **Going
        Concern**
  The
        accompanying consolidated financial statements have been prepared in conformity
        with accounting principles generally accepted in the United States of America,
        which contemplate continuation of the Company as a going concern. Net loss
        for
        the three months ended March 31, 2007 and 2006 was $11,499,000 and $1,317,000,
        respectively. Net cash used for operations $3,634,000 and $1,957,000,
        respectively. NeoMedia also has an accumulated deficit of $171,461,000 and
        a
        working capital deficit of $66,452,000 as of March 31, 2007. Additionally,
        as of
        March 31, 2007, NeoMedia had recorded a liability of $6,547,000 relating
        to
        purchase price guarantee obligations associated with its acquisitions of
        12Snap,
        of which $1,760,000 is classified as liabilities held for sale.
 
 The
        items
        discussed above raise substantial doubts about the Company’s ability to continue
        as a going concern.
 
 If
        the
        Company’s financial resources are insufficient, the Company may require
        additional financing in order to execute its operating plan and continue
        as a
        going concern. The Company cannot predict whether this additional financing
        will
        be in the form of equity, debt, or another form. The Company may not be able
        to
        obtain the necessary additional capital on a timely basis, on acceptable
        terms,
        or at all. In any of these events, the Company may be unable to implement
        its
        current plans for expansion, repay its debt obligations as they become due
        or
        respond to competitive pressures, any of which circumstances would have a
        material adverse effect on its business, prospects, financial condition and
        results of operations. The financial statements do not include any adjustments
        relating to the recoverability and reclassification of recorded asset amounts
        or
        amounts and reclassification of liabilities that might be necessary, should
        the
        Company be unable to continue as a going concern.
 
 Should
        financing sources fail to materialize, management would seek alternate funding
        sources such as the sale of common and/or preferred stock, the issuance of
        debt,
        or the sale of its marketable assets. Management’s plan is to secure adequate
        funding to bridge the commercialization of its core code-reading business.
 
 NeoMedia
        plans to attempt to address its working capital deficiency through the proposed
        sales of the Micro Paint Repair and Telecom Services business units, and
        continuing to reduce its workforce and overhead expenses in non-critical
        areas.
        In addition, NeoMedia will attempt to generate additional revenue and profit
        from the launch of its core code-reading products and the value optimization
        of
        its patent portfolio.
 
 In
        the
        event that these financing sources do not materialize, or that NeoMedia is
        unsuccessful in increasing its revenues and profits, NeoMedia will be forced
        to
        further reduce its costs, may be unable to repay its debt obligations as
        they
        become due, or respond to competitive pressures, any of which circumstances
        would have a material adverse effect on its business, prospects, financial
        condition and results of operations. Additionally, if these funding sources
        or
        increased revenues and profits do not materialize, and NeoMedia is unable
        to
        secure additional financing, NeoMedia could be forced to reduce or curtail
        its
        business operations unless it is able to engage in a merger or other corporate
        finance transaction with a better capitalized entity.
 
 80
  
 **ITEM
        3.** **QUANTITATIVE
        AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK** **.**
 
 The
        Company is exposed to market risks associated with interest rates, investments,
        and currency movements on non-U.S. dollar denominated assets and liabilities.
        The Company assesses these risks on a regular basis. There have been no
        significant changes in the Company’s market risk since it filed its Annual
        Report on Form 10-K on April 3, 2007.
 
 **ITEM
        4. CONTROLS AND PROCEDURES**
 
 **Evaluation
        of Disclosure Controls and Procedures**
 
 NeoMedia
        maintains disclosure controls and procedures, as defined in rules 13a-15(e)
        and
        15d-15(e) under the Securities and Exchange Act of 1934, as amended. These
        controls are designed to ensure that information required to be disclosed
        in the
        reports NeoMedia files or submits pursuant to the Securities and Exchange
        Act of
        1934 is recorded, processed, summarized and reported within the time periods
        specified in the rules and forms of the Securities and Exchange Commission,
        and
        that such information is accumulated and communicated to our management,
        including our Chief Executive Officer (“CEO”) and Chief Financial Officer
        (“CFO”), as appropriate, to allow timely decisions regarding required
        disclosure. In designing and evaluating NeoMedia’s disclosure controls and
        procedures, management recognizes disclosure controls and procedures, no
        matter
        how well designed and operated, can only provide reasonable assurance of
        achieving the desired control objectives, and in reaching a reasonable level
        of
        assurance, management necessarily is required to apply judgment in evaluating
        the cost-benefit relationship of possible controls and procedures.
 
 NeoMedia
        carried out an evaluation, under the supervision and with the participation
        of
        its management, including the CEO and CFO, of the effectiveness of the design
        and operation of our disclosure controls and procedures as of the end of
        the
        period covered by this Quarterly Report on Form 10−Q. Based on this evaluation,
        the CEO and CFO concluded that NeoMedia’s disclosure controls and procedures
        were not effective as of March 31, 2007, at the reasonable assurance level,
        because of the material weaknesses described in Item 9A of NeoMedia’s Annual
        Report on Form 10−K for the fiscal year ended December 31, 2006, which NeoMedia
        is still in the process of remediating. Please see “Management’s Report on
        Internal Control over Financial Reporting” in Item 9A of the 2006 Form 10−K for
        a full description of these weaknesses.
 
 Notwithstanding
        the material weaknesses described in Item 9A of the Form 10−K for the fiscal
        year ended December 31, 2006, NeoMedia believes that its condensed consolidated
        financial statements presented in this Quarterly Report on Form 10−Q fairly
        present, in all material respects, NeoMedia’s financial position, results of
        operations, and cash flows for all periods presented herein.
 
 **Changes
        in Internal Control Over Financial Reporting**
 
 There
        have been no changes to NeoMedia’s internal control over financial reporting
        during the quarter ended March 31, 2007 that have materially affected, or
        are
        reasonably likely to materially affect, NeoMedia’s internal control over
        financial reporting.
 
 **Management’s
        Remediation Efforts**
 
 As
        of the
        date of this filing, NeoMedia has taken or is currently taking the following
        steps to strengthen its internal control over financial reporting.
        Notwithstanding such efforts, the material weaknesses described in Item 9A
        of
        NeoMedia’s Form 10−K for the fiscal year ended December 31, 2006, will not be
        considered remediated until the new controls operate for a sufficient period
        of
        time and are tested (in accordance with the requirements of Section 404 of
        the
        Sarbanes-Oxley Act) to enable management to conclude that the controls are
        operating effectively.
 
 1.
              Control
                  environment over bank accounts. As disclosed in NeoMedia’s December 31,
                  2006 Form 10-K, on January 9, 2007, management strengthened these
                  controls
                  by updating all appropriate bank signature cards, and by requiring
                  two
                  authorized signatures to maintenance employees who are authorized
                  to input
                  and verify wire transfers.
  81
 
 2.
              Review
                  and approval of general ledger journal entries. As disclosed in
                  our
                  December 31, 2006 Form 10-K, on January 31, 2007, all journal entries
                  are
                  being reviewed and approved by the appropriate level of management
                  prior
                  to being input into the general
                  ledger.
 
 Management
        is currently addressing each of the material weaknesses in internal control
        over
        financial reporting cited in NeoMedia’s 2006 Form 10−K and is committed to
        remediating them as expeditiously as possible. Management will devote
        significant time and resources to the remediation effort.
 
 
 82
 **PART
        II -- OTHER INFORMATION**
 
 **ITEM
        1. LEGAL PROCEEDINGS**
 
 The
        Company is involved in various legal actions arising in the normal course
        of
        business, both as claimant and defendant. While it is not possible to determine
        with certainty the outcome of these matters, it is the opinion of management
        that the eventual resolution of the following legal actions could have a
        material adverse effect on the Company’s financial position or operating
        results. The following outlined legal proceedings for which the potential
        outcome could be in excess of $50,000.
  **Scanbuy,
        Inc.**
  On
        January 23, 2004, NeoMedia filed suit against Scanbuy, Inc. (“Scanbuy”) in the
        Northern District of Illinois, claiming that Scanbuy has manufactured, or
        has
        manufactured for it, and has used, or actively induced others to use, technology
        which allows customers to use a built-in UPC bar code scanner to scan individual
        items and access information, thereby infringing NeoMedia’s patents.  The
        complaint stated that on information and belief, Scanbuy had actual and
        constructive notice of the existence of the patents-in-suit, and, despite
        such
        notice, failed to cease and desist their acts of infringement, and continue
        to
        engage in acts of infringement of the patents-in-suit.  On April 15, 2004,
        the court dismissed the suits against Scanbuy for lack of personal
        jurisdiction.
 
 On
        April
        20, 2004, NeoMedia re-filed its suit against Scanbuy in the Southern District
        of
        New York alleging patent infringement. Scanbuy filed its answer on June 2,
        2004.
        NeoMedia filed its answer and affirmative defenses on July 23, 2004. On January
        20, 2007, the court dismissed Scanbuy's request for a summary judgment.
        Discovery is ongoing.
  83
 **ITEM
        1A. RISK FACTORS**
 
 **Risks
        Related to NeoMedia's Business**
  **NeoMedia
        Has Historically Lost Money And Losses May Continue**
  NeoMedia
        has incurred substantial operating losses since inception, and could continue
        to
        incur substantial losses for the foreseeable future. NeoMedia reported net
        losses of $11,499,000, $1,317,000, $67,438,000, $9,147,000 and $7,230,000
        for
        the three months ended March 31, 2007 and 2006(unaudited), and the years
        ended
        December 31, 2006, 2005 and 2004, respectively. NeoMedia's accumulated losses
        were $171,461,000, $159,962,000 and $92,524,000 as of March 31, 2007 and
        December 31, 2006 and 2005, respectively. As of March 31, 2007(unaudited)
        and
        December 31, 2006 and 2005, NeoMedia had a working capital deficit of
        $66,452,000, $69,450,000 and $2,065,000, respectively. NeoMedia had
        stockholders' equity/(deficit) of $(51,912,000), $(54,534,000) and $4,227,000
        as
        of March 31, 2007(unaudited) and December 31, 2006 and 2005, respectively.
        NeoMedia generated revenues from continuing operations of $399,000, $199,000,
        $10,309,000, $877,000, and $973,000 for the three months ended March 31,
        2007
        and 2006(unaudited), and the years ended December 31, 2006, 2005 and 2004,
        respectively. In addition, during the three months ended March 31, 2007 and
        2006(unaudited), and the years ended December 31, 2006, 2005 and 2004, NeoMedia
        recorded negative cash flows from continuing operations of $ 3,634 ,000,
        $1,957,000, $9,958,000, $4,883,000, and $3,937,000, respectively. To succeed,
        NeoMedia must develop new client and customer relationships and substantially
        increase its revenue derived from improved products and additional value-added
        services. NeoMedia has expended, and to the extent it has available financing,
        NeoMedia intends to continue to expend, substantial resources to develop
        and
        improve its products, increase its value-added services and to market its
        products and services. These development and marketing expenses must be incurred
        well in advance of the recognition of revenue. As a result, NeoMedia may
        not be
        able to achieve or sustain profitability.
  **NeoMedia's
        Independent Registered Public Accounting Firm Have Added Going Concern Language
        To Their Reports On NeoMedia's Consolidated Financial Statements, Which Means
        That NeoMedia May Not Be Able To Continue Operations**
  The
        report of Stonefield Josephson, Inc., NeoMedia's independent registered public
        accounting firm, with respect to NeoMedia's consolidated financial statements
        and the related notes for the years ended December 31, 2006, 2005 and 2004,
        indicates that, at the date of their reports, NeoMedia had suffered significant
        recurring losses from operations and its working capital deficit raised
        substantial doubt about its ability to continue as a going concern. NeoMedia's
        consolidated financial statements do not include any adjustments that might
        result from this uncertainty.
  **NeoMedia
        Will Need to Raise Additional Funds to Continue Its
        Operations**
 
 NeoMedia
        had cash balances in continuing operations of $2,295,000 and $2,813,000 as
        of
        March 31, 2007 and December 31, 2006, respectively. Additionally, during
        March
        2007(unaudited) NeoMedia sold convertible debentures resulting in net
        funding to the Company of $5,000,000. NeoMedia could receive additional cash
        at
        future dates from the following sources: (i) sale of its non-core business
        units
        NeoMedia Micro Paint Repair and NeoMedia Telecom Services, (ii) from the
        exercise of stock options, to the extent that the exercise price of such
        stock
        options is less than the market price of NeoMedia's common stock, and (iii)
        from
        the exercise of stock warrants, to the extent that the warrants become
        registered for resale and the exercise price of such stock warrants is less
        than
        the market price of NeoMedia's common stock at the time of exercise, and
        to the
        extent that the holder of such warrants does not elect to perform a “cashless”
exercise, in which case NeoMedia would not receive any cash proceeds from
        the
        exercise. However, none of these events is contractually obligated. In order
        to
        satisfy its obligations that are currently due and that will come due, and
        maintain its operations in the absence of a material increase in revenues,
        NeoMedia will need to either generate cash from the sale of its non-core
        businesses, or raise additional cash from outside sources. The most likely
        source of cash in the short term is from the sale of the Micro Paint Repair
        and/or Telecom Services business unit.
  84
 In
        the
        event that (i) NeoMedia is unsuccessful in divesting of its remaining non-core
        business units in a timely fashion, (ii) NeoMedia's stock price does not
        increase to levels where it can force exercise of enough of its outstanding
        warrants to generate material operating capital, (iii) the market for NeoMedia's
        stock will not support the sale of shares underlying such warrants or other
        funding sources, or (iv) NeoMedia does not realize a material increase in
        revenue during the next 12 months, NeoMedia will have to seek additional
        cash
        sources. There can be no assurances that such funding sources will be available.
        If necessary funds are not available, NeoMedia's business and operations
        would
        be materially adversely affected and in such event, NeoMedia would be forced
        to
        attempt to reduce costs and adjust its business plan, and could be forced
        to
        sell certain of its assets.
 
 **If
        NeoMedia Fails to Remediate the Material Weaknesses in Its Internal Control
        over
        Financial Reporting, NeoMedia May Be Unable to Accurately Report Its Financial
        Results or Prevent Fraud which Could Result in a Loss of Investor Confidence
        in
        NeoMedia’s Financial Reports and Have an Adverse Effect on NeoMedia’s Business,
        Operating Results, and Stock Price**
 
 Management
        has assessed the effectiveness of NeoMedia’s internal
        control over financial reporting as of December 31, 2006, using the framework
        issued by the Committee of Sponsoring Organizations of the Treadway Commission
        (COSO criteria). Based on its assessment of the design and related testing
        of NeoMedia’s internal
        controls over financial reporting, management concluded that NeoMedia did
        not
        maintain effective internal controls over financial reporting. Based on the
        COSO
        criteria, management identified certain control deficiencies that represent
        material weaknesses. A material weakness is a control deficiency, or combination
        of control deficiencies, that results in more than a remote likelihood that
        a
        material misstatement of the annual or interim financial statements will
        not be
        prevented or detected. The material weaknesses in NeoMedia’s controls
        over financial reporting identified as of December 31, 2006, as well as certain
        remediation efforts, are more fully disclosed under Item 9A “Controls and
        Procedures” of NeoMedia’s 2006
        Form
        10−K. As of March 31, 2007, management has fully remediated three of the control
        deficiencies identified in NeoMedia’s 2006
        Form
        10−K. Management is currently dedicating staffing and other resources to
        remediate the remaining control deficiencies.
  **NeoMedia
        Has Guaranteed The Value Of Stock Issued In Connection With Recent Mergers
        Through The Registration Of The Shares, Which Could Result In A Material
        Cash
        Liability**
  Pursuant
        to the terms of the original purchase agreement, in the event that NeoMedia’s
        stock price at the time the consideration shares are saleable (either upon
        effectiveness of a registration statement containing the shares, or under
        Rule
        144) was less than $0.3956, NeoMedia was obligated to compensate 12Snap
        shareholders in cash for the difference between the price at the time the
        shares
        became saleable and $0.3956. On February 22, 2007, the shares became eligible
        for resale under Rule 144. The actual calculated purchase price obligation
        to
        NeoMedia based on the volume weighted average closing price of NeoMedia stock
        for the ten days up to and including February 22, 2007 was $16,233,000. Because
        the amount of the purchase price guarantee became measurable and highly probable
        of occurrence beyond a reasonable doubt, as of December 31, 2006, NeoMedia
        reduced the fair value of the initial stock consideration by the amount of
        the
        contingency. During the three months ended March 31, 2007, NeoMedia issued
        197,620,948 shares of its common stock in satisfaction of a portion of the
        purchase price obligation totaling $9,427,000, and made cash payments against
        the liability totaling $259,000. The balance on the purchase price obligation
        as
        of March 31, 2007 was $6,806,000. NeoMedia does not currently have sufficient
        cash resources to meet this obligation.
  **All
        Of The Company's Assets Are Pledged To Secure Certain Debt Obligations, Which
        The Company Could Fail To Repay**
  Pursuant
        to secured convertible debentures, dated as of March 27, 2007, August 24,
        2006
        and December 29, 2006, in the principal amount of $7,459,000, $5,000,000
        and
        $2,500,000, respectively, issued to Cornell Capital Partners, the Company
        was
        required to secure such secured convertible debentures' repayment with
        substantially all of its assets. In the event the Company is unable to repay
        the
        secured convertible debentures, it could lose all of its assets and be forced
        to
        cease its operations. If the Company is found to be in default under the
        debentures, the full principal amount of the debentures, together with interest
        and other amounts owing, may become immediately due and payable. As of March
        31,
        2007, the Company was in default of a covenant contained in the financing
        agreements due to the Company's pending registration statement to register
        the
        underlying shares of the convertible instruments not becoming effective by
        the
        specified date. NeoMedia is also in default of Series C convertible preferred
        stock with a face value of $22,000,000. As a result of the default, the holder
        of the securities could redeem the convertible debentures and preferred stock
        for cash at their discretion. Additionally, as a result of the default, Cornell
        Capital Partners currently has the right to exercise on a cashless basis
        335,000,000 of the warrants they hold, and NeoMedia may not receive any cash
        proceeds from such exercises.
  85
 **There
        Is Limited Information Upon Which Investors Can Evaluate NeoMedia's Business
        Because The Physical-World-To-Internet Market Has Existed For Only A Short
        Period Of Time**
  The
        physical-world-to-Internet market in which NeoMedia operates is a recently
        developed market. Further, NeoMedia has conducted operations in this market
        only
        since March 1996. Consequently, NeoMedia has a relatively limited operating
        history upon which an investor may base an evaluation of NeoMedia's primary
        business and determine NeoMedia's prospects for achieving its intended business
        objectives. To date, NeoMedia has had limited sales of its
        physical-world-to-Internet products. NeoMedia is prone to all of the risks
        inherent to the establishment of any new business venture, including unforeseen
        changes in its business plan. An investor should consider the likelihood
        of
        NeoMedia's future success to be highly speculative in light of its limited
        operating history in its primary market, as well as the limited resources,
        problems, expenses, risks, and complications frequently encountered by similarly
        situated companies in new and rapidly evolving markets, such as the
        physical-world-to-Internet space. To address these risks, NeoMedia must,
        among
        other things:
 
 ·
              maintain
                  and increase its client base;
 ·
              implement
                  and successfully execute its business and marketing
                  strategy;
 ·
              continue
                  to develop and upgrade its
                  products;
 ·
              continually
                  update and improve service offerings and
                  features;
 ·
              respond
                  to industry and competitive developments;
                  and
 ·
              attract,
                  retain, and motivate qualified
                  personnel.
 
 NeoMedia
        may not be successful in addressing these risks. If NeoMedia is unable to
        do so,
        its business, prospects, financial condition, and results of operations would
        be
        materially and adversely affected.
  **NeoMedia's
        Future Success Depends On The Timely Introduction Of New Products And The
        Acceptance Of These New Products In The Marketplace.**
 
 Rapid
        technological change and frequent new product introductions are typical for
        the
        markets NeoMedia serves. NeoMedia's future success will depend in large part
        on
        continuous, timely development and introduction of new products that address
        evolving market requirements. To the extent that NeoMedia fails to introduce
        new
        and innovative products, it may lose market share to its competitors, which
        may
        be difficult to regain. Any inability, for technological or other reasons,
        to
        successfully develop and introduce new products could materially and adversely
        affect NeoMedia's business.
  86
 **NeoMedia's
        Common Stock Is Deemed To Be “Penny Stock,” Which May Make It More Difficult For
        Investors To Sell Their Shares Due To Suitability
        Requirements**
  NeoMedia’s
        common stock is deemed to be “penny stock” as that term is defined in
        Rule 3a51-1 promulgated under the Securities Exchange Act of 1934, as
        amended. These requirements may reduce the potential market for NeoMedia’s
        common stock by reducing the number of potential investors. This may make
        it
        more difficult for investors in NeoMedia’s common stock to sell shares to third
        parties or to otherwise dispose of them. This could cause NeoMedia’s stock price
        to decline. Penny stocks are stock:
 
 ·
              with
                  a price of less than $5.00 per
                  share;
 ·
              that
                  are not traded on a “recognized” national exchange;
 ·
              whose
                  prices are not quoted on the NASDAQ automated quotation system
                  (NASDAQ
                  listed stock must still have a price of not less than $5.00 per
                  share); or
 ·
              in
                  issuers with net tangible assets less than $2 million (if the issuer
                  has
                  been in continuous operation for at least three years) or $10 million
                  (if in continuous operation for less than three years), or with
                  average
                  revenues of less than $6 million for the last three
                  years.
 
 Broker-dealers
        dealing in penny stocks are required to provide potential investors with
        a
        document disclosing the risks of penny stocks. Moreover, broker-dealers are
        required to determine whether an investment in a penny stock is a suitable
        investment for a prospective investor.
  **Existing
        Shareholders Will Experience Significant Dilution When Certain Investors
        Convert Their Preferred Stock to Common Stock, Convert Outstanding Convertible
        Debentures, Or When the Investors Exercise Their Warrants and Receive Common
        Stock Shares Under The Investment Agreement With The
        Investors**
 
 The
        issuance of shares of common stock pursuant to the conversion of Series C
        convertible preferred stock, the conversion of convertible debentures, or
        the
        exercise of warrants pursuant to NeoMedia's transactions with Cornell Capital
        Partners will have a dilutive impact on NeoMedia's stockholders. As a result,
        NeoMedia's net income or loss per share could decrease in future periods,
        and
        the market price of its common stock could decline.  In addition, the lower
        NeoMedia's stock price is, the more shares of common stock NeoMedia will
        have to
        issue pursuant to the conversion of preferred stock or the convertible
        debentures.  If NeoMedia's stock price is lower, then existing
        stockholders would experience greater dilution.
  **Due
        To The Accounting Treatment Of Certain Convertible Preferred Stock And
        Convertible Debenture Instruments Issued By NeoMedia, A Fluctuation In
        NeoMedia's Stock Price Could Have A Material Impact On NeoMedia's Results
        Of
        Operations**
  During
        the three months ended March 31, 2007 and 2006, and the year ended December
        31,
        2006, NeoMedia recognized (expense) income in the amount of $726,000,
        $4,768,000, and $13,645,000, respectively, resulting from adjustments recorded
        to reflect the change in fair value from revaluation of warrants and embedded
        conversion features in connection with its Series C convertible preferred
        shares
        and its convertible debentures. NeoMedia will adjust the carrying value of
        its
        derivative instruments to market at each balance sheet date. As a result,
        NeoMedia could experience significant fluctuations in its net income (loss)
        in
        future periods from such charges based on corresponding movement in NeoMedia's
        share price.
  **NeoMedia
        Is Uncertain Of The Success Of Its NeoMedia Mobile Business Unit And The
        Failure
        Of This Unit Would Negatively Affect The Price Of NeoMedia's
        Stock**
  NeoMedia
        provides products and services that provide a link from physical objects,
        including printed material, to the mobile Internet. NeoMedia can provide
        no
        assurance that:
 
 ·
              its
                  NeoMedia Mobile business unit will ever achieve
                  profitability;
 ·
              its
                  current product offerings will not be adversely affected by the
                  focusing
                  of its resources on the physical-world-to-Internet space;
                  or
 ·
              the
                  products NeoMedia develops will obtain market
                  acceptance.
  87
 In
        the
        event that the NeoMedia Mobile business unit should never achieve profitability,
        that NeoMedia’s current product offerings should so suffer, or that NeoMedia’s
        products fail to obtain market acceptance, NeoMedia’s business, prospects,
        financial condition, and results of operations would be materially adversely
        affected.
  **A
        Large Percentage Of NeoMedia's Assets Are Intangible Assets, Which Will Have
        Little Or No Value If NeoMedia's Operations Are
        Unsuccessful**
  At
        March
        31, 2007 and December 31, 2006 and 2005, approximately 29%, 27% and 39%,
        respectively, of NeoMedia's total assets were intangible assets and goodwill
        used in continuing operations, consisting primarily of rights related to
        NeoMedia's patents, other intellectual property, and excess of purchase price
        over fair market value paid for Gavitec. If NeoMedia's operations are
        unsuccessful, these assets will have little or no value, which would materially
        adversely affect the value of NeoMedia's stock and the ability of NeoMedia's
        stockholders to recoup their investments in NeoMedia's capital
        stock.
  NeoMedia
        reviews its amortizable intangible assets for impairment when events or changes
        in circumstances indicate the carrying value may not be recoverable. Goodwill
        is
        required to be tested for impairment at least annually. NeoMedia may be required
        to record a significant charge to earnings in its financial statements during
        the period in which any impairment of NeoMedia's goodwill or amortizable
        intangible assets is determined, resulting in an impact on results of
        operations.
  **Certain
        Of NeoMedia's Emerging Products And Services Have Limited History And May
        Not
        Result In Success**
  To
        date,
        NeoMedia has conducted limited marketing efforts directly relating to its
        emerging technology products, consisting primarily of the qode® suite of
        products, and certain products of recent acquisition of Gavitec. Many of
        NeoMedia's marketing efforts with respect to these emerging technologies
        have
        been largely untested in the marketplace, and may not result in materially
        increased sales of these emerging products and services. To penetrate the
        emerging markets in which it competes, NeoMedia expects that it will have
        to
        exert significant efforts to create awareness of, and demand for, its emerging
        products and services. To the extent funding is available, NeoMedia intends
        to
        continue to expand its sales and marketing resources as the market continues
        to
        mature. NeoMedia's failure to further develop its sales and marketing
        capabilities and successfully market its emerging products and services would
        have a material adverse effect on its business, prospects, financial condition,
        and results of operations.
  **NeoMedia's
        Internally Developed Systems Are Inefficient And May Put NeoMedia At A
        Competitive Disadvantage**
  NeoMedia
        uses internally developed technologies for a portion of its systems integration
        services, as well as the technologies required to interconnect its clients'
        and
        customers' physical-world-to-Internet systems and hardware with its own.
        As
        NeoMedia develops these systems in order to integrate disparate systems and
        hardware on a case-by-case basis, these systems are inefficient and require
        a
        significant amount of customization. Such client and customer-specific
        customization is time consuming and costly and may place NeoMedia at a
        competitive disadvantage when compared to competitors with more efficient
        systems.
  **NeoMedia
        Could Fail To Attract Or Retain Key Personnel**
  NeoMedia's
        future success will depend in large part on its ability to attract, train,
        and
        retain additional highly skilled executive level management, creative,
        technical, and sales personnel. Competition is intense for these types of
        personnel from other technology companies and more established organizations,
        many of which have significantly larger operations and greater financial,
        marketing, human, and other resources than NeoMedia has. NeoMedia may not
        be
        successful in attracting and retaining qualified personnel on a timely basis,
        on
        competitive terms, or at all. NeoMedia's failure to attract and retain qualified
        personnel could have a material adverse effect on its business, prospects,
        financial condition, and results of operations.
  88
 **NeoMedia
        Depends Upon Its Senior Management And Their Loss Or Unavailability Could
        Put
        NeoMedia At A Competitive Disadvantage**
  NeoMedia's
        success depends largely on the skills of certain key management and technical
        personnel, including Charles W. Fritz, NeoMedia's founder and Chairman of
        the
        Board of Directors and the interim Chief Executive Officer, David A. Dodge,
        NeoMedia's Chief Financial Officer, and Dr. Christian Steinborn, managing
        director of NeoMedia's Gavitec AG - mobile digit subsidiary in Germany and
        head
        of NeoMedia's mobile division in Europe and Asia. The loss of the services
        of
        these individuals could materially harm NeoMedia's business because of the
        cost
        and time necessary to replace and train a replacement. Such a loss would
        also
        divert management attention away from operational issues. NeoMedia does not
        presently maintain a key-man life insurance policy on any of these key
        individuals. During December 2006, Charles T. Jensen, NeoMedia's former
        President and Chief Executive Officer, Martin N. Copus, NeoMedia's former
        Chief
        Operating Officer and the head of its NeoMedia Mobile business unit, and
        William
        E. Fritz, outside director, each resigned their positions. During April 2007,
        Roger Pavane, Executive Vice President of Sales and Marketing, resigned his
        position.
  **NeoMedia
        May Be Unsuccessful In Integrating Its Gavitec Acquisition With Its Current
        Business**
  The
        success of the acquisition of Gavitec could depend on the ability of NeoMedia's
        executive management to integrate the business plan of Gavitec with NeoMedia's
        overall business plan. Failure to properly integrate the business could have
        a
        material adverse effect on the expected revenue and operations of the
        acquisition, as well as the expected return on investment for NeoMedia. During
        the first quarter of 2006, NeoMedia acquired three businesses, 12Snap, Mobot
        and
        Sponge, each of which has been sold as of the date of this filing. In addition,
        during February 2007 NeoMedia decided to attempt to sell its wholly owned
        subsidiary NeoMedia Telecom Services, which was acquired during the first
        quarter of 2006.
  **NeoMedia
        May Be Unable To Protect Its Intellectual Property Rights And May Be Liable
        For
        Infringing The Intellectual Property Rights Of Others**
  NeoMedia's
        success in the physical-world-to-Internet market is dependent upon its
        proprietary technology, including patents and other intellectual property,
        and
        on the ability to protect proprietary technology and other intellectual property
        rights. In addition, NeoMedia must conduct its operations without infringing
        on
        the proprietary rights of third parties. NeoMedia also intends to rely upon
        unpatented trade secrets and the know-how and expertise of its employees,
        as
        well as its patents. To protect its proprietary technology and other
        intellectual property, NeoMedia relies primarily on a combination of the
        protections provided by applicable patent, copyright, trademark, and trade
        secret laws as well as on confidentiality procedures and licensing arrangements.
        Although NeoMedia believes that it has taken appropriate steps to protect
        its
        unpatented proprietary rights, including requiring that its employees and
        third
        parties who are granted access to NeoMedia's proprietary technology enter
        into
        confidentiality agreements, NeoMedia can provide no assurance that these
        measures will be sufficient to protect its rights against third parties.
        Others
        may independently develop or otherwise acquire patented or unpatented
        technologies or products similar or superior to NeoMedia's.
  NeoMedia
        licenses from third parties certain software tools that are included in
        NeoMedia's services and products. If any of these licenses were terminated,
        NeoMedia could be required to seek licenses for similar software from other
        third parties or develop these tools internally. NeoMedia may not be able
        to
        obtain such licenses or develop such tools in a timely fashion, on acceptable
        terms, or at all. Companies participating in the software and Internet
        technology industries are frequently involved in disputes relating to
        intellectual property. NeoMedia may in the future be required to defend its
        intellectual property rights against infringement, duplication, discovery,
        and
        misappropriation by third parties or to defend against third party claims
        of
        infringement. Likewise, disputes may arise in the future with respect to
        ownership of technology developed by employees who were previously employed
        by
        other companies. Any such litigation or disputes could result in substantial
        costs to, and a diversion of effort by, NeoMedia. An adverse determination
        could
        subject NeoMedia to significant liabilities to third parties, require NeoMedia
        to seek licenses from, or pay royalties to, third parties, or require NeoMedia
        to develop appropriate alternative technology. Some or all of these licenses
        may
        not be available to NeoMedia on acceptable terms or at all, and NeoMedia
        may be
        unable to develop alternate technology at an acceptable price or at all.
        Any of
        these events could have a material adverse effect on NeoMedia's business,
        prospects, financial condition, and results of operations.
  89
 **NeoMedia
        Is Exposed To Product Liability Claims And An Uninsured Claim Could Have
        A
        Material Adverse Effect On NeoMedia's Business, Prospects, Financial Condition,
        And Results Of Operations, As Well As The Value Of NeoMedia's
        Stock**
  Many
        of
        NeoMedia’s projects are critical to the operations of its clients’ businesses.
        Any failure in a client’s information system could result in a claim for
        substantial damages against NeoMedia, regardless of NeoMedia’s responsibility
        for such failure. NeoMedia could, therefore, be subject to claims in connection
        with the products and services that it sells. NeoMedia currently maintains
        product liability insurance. There can be no assurance that:
  ·
              NeoMedia
                  has contractually limited its liability for such claims adequately
                  or at
                  all; or
 ·
              NeoMedia
                  would have sufficient resources to satisfy any liability resulting
                  from
                  any such claim.
  The
        successful assertion of one or more large claims against NeoMedia could have
        a
        material adverse effect on its business, prospects, financial condition,
        and
        results of operations.
  **NeoMedia
        Will Not Pay Cash Dividends And Investors May Have To Sell Their Shares In
        Order
        To Realize Their Investment**
  NeoMedia
        has not paid any cash dividends on its common stock and does not intend to
        pay
        cash dividends in the foreseeable future. NeoMedia intends to retain future
        earnings, if any, for reinvestment in the development and marketing of
        NeoMedia's products and services. As a result, investors may have to sell
        their
        shares of common stock to realize their investment.
  **Some
        Provisions Of NeoMedia's Certificate of Incorporation And bylaws May Deter
        Takeover Attempts, Which May Limit The Opportunity Of NeoMedia's Stockholders
        To
        Sell Their Shares At A Premium To The Then-Current Market
        Price**
  Some
        of
        the provisions of NeoMedia's Certificate of Incorporation and bylaws could
        make
        it more difficult for a third party to acquire NeoMedia, even if doing so
        might
        be beneficial to NeoMedia's stockholders by providing them with the opportunity
        to sell their shares at a premium to the then-current market price. On December
        10, 1999, NeoMedia's Board of Directors adopted a stockholders rights plan
        and
        declared a non-taxable dividend of one right to acquire Series A Preferred
        Stock
        of NeoMedia, par value $0.01 per share, on each outstanding share of NeoMedia's
        common stock to stockholders of record on December 10, 1999 and each share
        of
        common stock issued thereafter until a pre-defined hostile takeover date.
        The
        stockholder rights plan was adopted as an anti-takeover measure, commonly
        referred to as a “poison pill.” The stockholder rights plan was designed to
        enable all stockholders not engaged in a hostile takeover attempt to receive
        fair and equal treatment in any proposed takeover of NeoMedia and to guard
        against partial or two-tiered tender offers, open market accumulations, and
        other hostile tactics to gain control of NeoMedia. The stockholders rights
        plan
        was not adopted in response to any effort to acquire control of NeoMedia
        at the
        time of adoption. This stockholders rights plan may have the effect of rendering
        more difficult, delaying, discouraging, preventing, or rendering more costly
        an
        acquisition of NeoMedia or a change in control of NeoMedia. Certain of
        NeoMedia's directors, officers and principal stockholders, Charles W. Fritz,
        William E. Fritz and The Fritz Family Limited Partnership and their holdings
        were exempted from the triggering provisions of NeoMedia's “poison pill” plan,
        as a result of the fact that, as of the plan's adoption, their holdings might
        have otherwise triggered the “poison pill”.
  90
 In
        addition, NeoMedia's Certificate of Incorporation authorizes the Board of
        Directors to designate and issue preferred stock, in one or more series,
        the
        terms of which may be determined at the time of issuance by the Board of
        Directors, without further action by stockholders, and may include voting
        rights, including the right to vote as a series on particular matters,
        preferences as to dividends and liquidation, conversion, redemption rights,
        and
        sinking fund provisions.
  NeoMedia
        is authorized to issue a total of 25,000,000 shares of preferred stock, par
        value $0.01 per share. The issuance of any Preferred Stock could have a material
        adverse effect on the rights of holders of NeoMedia's common stock, and,
        therefore, could reduce the value of shares of NeoMedia's common stock. In
        addition, specific rights granted to future holders of Preferred Stock could
        be
        used to restrict NeoMedia's ability to merge with, or sell NeoMedia's assets
        to,
        a third party. The ability of the Board of Directors to issue Preferred Stock
        could have the effect of rendering more difficult, delaying, discouraging,
        preventing, or rendering more costly an acquisition of NeoMedia or a change
        in
        NeoMedia's control.
  
 91
 **Risks
        Relating To NeoMedia's Industry**
  **The
        Security Of The Internet Poses Risks To The Success Of NeoMedia's Entire
        Business**
  Concerns
        over the security of the Internet and other electronic transactions, and
        the
        privacy of consumers and merchants, may inhibit the growth of the Internet
        and
        other online services generally, especially as a means of conducting commercial
        transactions, which may have a material adverse effect on NeoMedia's
        physical-world-to-Internet business.
  **NeoMedia
        Will Only Be Able To Execute Its Physical-World-To-Internet Business Plan
        If
        Internet Usage and Electronic Commerce Continue To Grow**
  NeoMedia's
        future revenues and any future profits are substantially dependent upon the
        widespread acceptance and use of the Internet and camera devices on mobile
        telephones. If use of the Internet and camera devices on mobile telephones
        does
        not continue to grow or grows more slowly than expected, or if the
        infrastructure for the Internet and camera devices on mobile telephones does
        not
        effectively support the growth that may occur, or does not become a viable
        commercial marketplace, NeoMedia's physical-world-to-Internet business, and
        therefore NeoMedia's business, prospects, financial condition, and results
        of
        operations, could be materially adversely affected. Rapid growth in the use
        of,
        and interest in, the Internet and camera devices on mobile telephones is
        a
        recent phenomenon, and may not continue on a lasting basis. In addition,
        customers may not adopt, and continue to use mobile telephones as a medium
        of
        information retrieval or commerce. Demand and market acceptance for recently
        introduced services and products over the mobile Internet are subject to
        a high
        level of uncertainty, and few services and products have generated profits.
        For
        NeoMedia to be successful, consumers and businesses must be willing to accept
        and use novel and cost efficient ways of conducting business and exchanging
        information.
  In
        addition, the public in general may not accept the use of the Internet and
        camera devices on mobile telephones as a viable commercial or information
        marketplace for a number of reasons, including potentially inadequate
        development of the necessary network infrastructure or delayed development
        of
        enabling technologies and performance improvements. To the extent that mobile
        phone Internet usage continues to experience significant growth in the number
        of
        users, their frequency of use, or in their bandwidth requirements, the
        infrastructure for the mobile Internet may be unable to support the demands
        placed upon them. In addition, the mobile Internet and mobile interactivity
        could lose its viability due to delays in the development or adoption of
        new
        standards and protocols required to handle increased levels of mobile Internet
        activity, or due to increased governmental regulation. Significant issues
        concerning the commercial and informational use of the mobile Internet, and
        online networks technologies, including security, reliability, cost, ease
        of
        use, and quality of service, remain unresolved and may inhibit the growth
        of
        Internet business solutions that utilize these technologies. Changes in,
        or
        insufficient availability of, telecommunications services to support the
        Internet, the Web or other online services also could result in slower response
        times and adversely affect usage of the Internet, the Web and other online
        networks generally and NeoMedia's physical-world-to-Internet product and
        networks in particular.
  **NeoMedia
        May Not Be Able To Adapt As The Internet, Physical-World-To-Internet, And
        Customer Demands Continue To Evolve**
  NeoMedia
        may not be able to adapt as the mobile Internet and physical-world-to-Internet
        markets and consumer demands continue to evolve. NeoMedia’s failure to respond
        in a timely manner to changing market conditions or client requirements would
        have a material adverse effect on its business, prospects, financial condition,
        and results of operations. The mobile Internet and physical-world-to-Internet
        markets are characterized by:
 
 ·
              rapid
                  technological change;
 ·
              changes
                  in user and customer requirements and
                  preferences;
 ·
              frequent
                  new product and service introductions embodying new technologies;
                  and
 ·
              the
                  emergence of new industry standards and practices that could render
                  proprietary technology and hardware and software infrastructure
                  obsolete.
 
 92
 NeoMedia’s
        success will depend, in part, on its ability to:
 
 ·
              enhance
                  and improve the responsiveness and functionality of its products
                  and
                  services;
 ·
              license
                  or develop technologies useful in its business on a timely
                  basis;
 ·
              enhance
                  its existing services, and develop new services and technologies
                  that
                  address the increasingly sophisticated and varied needs of NeoMedia’s
                  prospective or current customers;
                  and
 ·
              respond
                  to technological advances and emerging industry standards and practices
                  on
                  a cost-effective and timely basis.
  **NeoMedia
        May Not Be Able To Compete Effectively In Markets Where Its Competitors Have
        More Resources**
  While
        the
        market for physical-world-to-Internet technology is relatively new, it is
        already highly competitive and characterized by an increasing number of entrants
        that have introduced or developed products and services similar to those
        offered
        by NeoMedia. NeoMedia believes that competition will intensify and increase
        in
        the near future. NeoMedia's target market is rapidly evolving and is subject
        to
        continuous technological change. As a result, NeoMedia's competitors may
        be
        better positioned to address these developments or may react more favorably
        to
        these changes, which could have a material adverse effect on NeoMedia's
        business, prospects, financial condition, and results of
        operations.
  Some
        of
        NeoMedia's competitors have longer operating histories, larger customer bases,
        longer relationships with clients, and significantly greater financial,
        technical, marketing, and public relations resources than NeoMedia. NeoMedia
        may
        not successfully compete in any market in which it conducts or may conduct
        operations. NeoMedia may not be able to penetrate markets or market its products
        as effectively as NeoMedia's better-funded more-established
        competitors.
  **In
        The Future There Could Be Government Regulations And Legal Uncertainties
        Which
        Could Harm NeoMedia's Business**
  Any
        new
        legislation or regulation, the application of laws and regulations from
        jurisdictions whose laws do not currently apply to NeoMedia's business, or
        the
        application of existing laws and regulations to the Internet and other online
        services, could have a material adverse effect on NeoMedia's business,
        prospects, financial condition, and results of operations. Due to the increasing
        popularity and use of the Internet, the Web and other online services, federal,
        state, and local governments may adopt laws and regulations, or amend existing
        laws and regulations, with respect to the Internet or other online services
        covering issues such as taxation, user privacy, pricing, content, copyrights,
        distribution, and characteristics and quality of products and services. The
        growth and development of the market for electronic commerce may prompt calls
        for more stringent consumer protection laws to impose additional burdens
        on
        companies conducting business online. The adoption of any additional laws
        or
        regulations may decrease the growth of the Internet, the Web or other online
        services, which could, in turn, decrease the demand for NeoMedia's services
        and
        increase NeoMedia's cost of doing business, or otherwise have a material
        adverse
        effect on NeoMedia's business, prospects, financial condition, and results
        of
        operations. Moreover, the relevant governmental authorities have not resolved
        the applicability to the Internet, the Web and other online services of existing
        laws in various jurisdictions governing issues such as property ownership
        and
        personal privacy and it may take time to resolve these issues
        definitively.
 
 93
 Certain
        of NeoMedia's proprietary technology allows for the storage of demographic
        data
        from NeoMedia's users. In 2000, the European Union adopted a directive
        addressing data privacy that may limit the collection and use of certain
        information regarding Internet users. This directive may limit NeoMedia's
        ability to collect and use information collected by NeoMedia's technology
        in
        certain European countries. In addition, the Federal Trade Commission and
        several state governments have investigated the use by certain Internet
        companies of personal information. NeoMedia could incur significant additional
        expenses if new regulations regarding the use of personal information are
        introduced or if NeoMedia's privacy practices are investigated.
   94
 **Item
        2. Unregistered Sales of Equity Securities and Use of Proceeds
        (** **a),
        (b), (c** **)
        and (** **d** **)**
  On
        March
        27, 2007, NeoMedia entered into a Securities Purchase Agreement with Cornell
        Capital Partners, pursuant to which Cornell Capital Partners agreed to purchase
        13% secured convertible debentures maturing two years from the date of issuance
        in the aggregate amount of $7,459,000. The March Debenture Agreement also
        provided for the issuance to the purchasers, at no additional cost to the
        purchasers, warrants to purchase 125,000,000 shares of NeoMedia common stock
        at
        an exercise price of $0.04 per share. In connection with the March Debenture
        Agreement, NeoMedia also entered into a registration rights agreement with
        the
        Purchasers that requires the Company to (i) file a registration statement
        with
        the SEC registering the resale of the shares of common stock issuable upon
        conversion of the convertible debenture and the exercise of the warrants
        within
        30 days of receiving a written notice from the purchasers requesting filing,
        (ii) achieve effectiveness within 120 days of receiving a notice to file
        the
        registration statement and (iii) maintain effectiveness of the registration
        statement. Failure to meet these requirements will require the Company to
        incur
        liquidating damages amounting to 2% of the principal per month. The debentures
        are secured by substantially all of the Company's assets.
 
 At
        any
        time from the closing date until December 29, 2008, the Purchasers have the
        right to convert the convertible debenture into NeoMedia common stock at
        the
        then effective conversion price, which varies relative to our trading stock
        price, as follows: The lower of $0.05 per share, or 90% of the lowest closing
        bid price (as reported by Bloomberg) of the common stock for the 30 trading
        days
        immediately preceding the conversion date. The conversion is limited such
        that
        the holder cannot exceed 4.99% ownership, unless the holders waive their
        right
        to such limitation. The limitation will terminate under any event of
        default.
 
 In
        connection with the March Debenture Agreement, NeoMedia applied $1,312,000
        of
        the gross proceeds toward payment of liquidated damages accrued on previous
        convertible instruments payable to the purchaser, and $366,000 toward accrued
        interest on previous convertible debentures. Cornell also retained fees of
        $781,000, resulting in net proceeds to the Company of $5,000,000.
 
 On
        March
        19, 2007, NeoMedia issued 197,620,948 shares of unregistered common stock
        to
        five separate parties in satisfaction of $9,427,000 purchase price guarantee
        obligation incurred in connection with the Company’s acquisition of 12Snap.
 
 On
        March
        1, 2007, NeoMedia issued 61,000,000 shares of unregistered common stock to
        eight
        separate parties in satisfaction of $3,294,000 purchase price guarantee
        obligation incurred in connection with the Company’s acquisition of Gavitec.
 
 The
        Company relied upon the exemption provided in Section 4(2) of the Securities
        Act
        and/or Rule 506, which cover “transactions by an issuer not involving any public
        offering,” to issue securities discussed above without registration under the
        Securities Act of 1933. The certificates representing the securities issued
        displayed a restrictive legend to prevent transfer except in compliance with
        applicable laws, and the Company's transfer agent was instructed not to permit
        transfers unless directed to do so by us, after approval by the Company's
        legal
        counsel. The Company believes that the investors to whom securities were
        issued
        had such knowledge and experience in financial and business matters as to
        be
        capable of evaluating the merits and risks of the prospective investment.
        The
        Company also believes that the investors had access to the same type of
        information as would be contained in a registration statement.
  
 95
 **Item
        3. Default upon Senior Securities**
  NeoMedia
        is currently in default of (i) the
        Investor Registration Rights Agreement entered into on February 17, 2006,
        in
        connection with the $22 million Series C Convertible preferred Stock Sale,
        (ii)
        the Investor Registration Rights Agreement entered into on August 24, 2006,
        in
        connection with the $5 million secured convertible debenture, (iii) the
        Investor Registration Rights Agreement entered into on December 29, 2006,
        in
        connection with the $2.5 million secured convertible debenture, and (iv)
        the
        Investor Registration Rights Agreement entered into on March 27, 2007, in
        connection with the $7.5 million secured convertible debenture. As a result,
        the
        Purchaser has certain rights with respect to the financing arrangements,
        specifically, (i) the full face value of each instrument is callable in the
        aggregate amount of $36,616,000, (ii) up to 325,000,000 warrants held by
        Purchaser with an exercise price of $0.04 can be exercised on a cashless
        basis,
        (iii) the requirement for the Purchasers to maintain an ownership interest
        in
        NeoMedia of less than 5% is waived, and (iv) NeoMedia is responsible for
        liquidated damages as required by each financing arrangement.
  **Item
        4. Submission of Matters to a Vote of Security Holders**
  None.
  **Item
        5. Other Information**
  None.
  96
 **Item
        6. Exhibits and reports on form 8-K**
  **(a)**  **Exhibits** **:**
  **Exhibit
                  No.**
              
              **Description**
              
              **Location**31.1
              
              Certification
                  by Chief Executive Officer pursuant to 15 U.S.C. Section 7241,
                  as adopted
                  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
              
              Provided
                  herewith31.2
              
              Certification
                  by Chief Financial Officer pursuant to 15 U.S.C. Section 7241,
                  as adopted
                  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
              
              Provided
                  herewith32.1
              
              Certification
                  by Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
              
              Provided
                  herewith32.2
              
              Certification
                  by Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
              
              Provided
                  herewith
 
  **(b)**
              **Reports
                  on Form 8-K****:**
  On
        April
        10, 2007, NeoMedia filed a report on Form 8-K with respect to Items 1.01,
        and
        2.01, disclosing that it had sold its subsidiary 12Snap.
 
 On
        April
        6, 2007, NeoMedia filed a report on Form 8-K with respect to Item 4.02,
        disclosing that financial statements issued in the Company’s Forms 10-Q for the
        three month period ended March 31, 2006, the three and six month periods
        ended
        June 30, 2006, and the three and nine month periods ended September 30, 2006,
        should no longer be relied upon because of an error in such financial
        statements.
 
 On
        April
        3, 2007, NeoMedia filed a report on Form 8-K with respect to Items 1.01 and
        3.02, disclosing that it had entered into a convertible debenture financing
        arrangement with Cornell capital Partners with a face value of $7,459,000.
 
 On
        March
        22, 2007, NeoMedia filed a report on Form 8-K with respect to Items 1.01
        and
        3.02, disclosing that it had issued 197,620,948 shares in satisfaction of
        accrued purchase price guarantee obligationin the amount of $9,427,000 relating
        to its acquisition of 12Snap.
 
 On
        February 6, 2007, NeoMedia filed a report on Form 8-K with respect to Items
        5.02
        and 8.01, disclosing that (i) it had named George G. O’Leary to its Board of
        Directors, replacing William E. Fritz, and (ii) it had instituted an option
        repricing plan for stock options held by employees, consultants and outside
        directors.
 
 On
        January 29, 2007, NeoMedia filed a report on Form 8-K with respect to Items
        1.01
        and 3.02, disclosing that it had entered into entered into an agreement with
        the
        former shareholders of Gavitec, whereby the parties agreed that the purchase
        price obligation related to the acquisition of Gavitec was to be satisfied
        through the payment by NeoMedia of $1,800,000 in cash and 61,000,000 shares
        of
        NeoMedia common stock. NeoMedia also agreed to pay interest accrued on the
        purchase price in the amount of $481,000 and reimburse $100,000 of costs
        related
        to the acquisition to the primary former shareholder of Gavitec no later
        than
        February 28, 2007.
 
 97
 On
        January 9, 2007, NeoMedia filed a report on Form 8-K with respect to Item
        8.01,
        disclosing that it had completed the sale of 12,875,609 ordinary shares of
        iPoint-media for net cash proceeds of $1,574,000, and that a
        previously-announced dividend of iPoint-media common stock would not be issued.
 
 On
        January 8, 2007, NeoMedia filed a report on Form 8-K with respect to Items
        1.01
        and 3.02, disclosing that it had entered into a convertible debenture financing
        arrangement with Cornell capital Partners with a face value of $2,500,000.
 
 
 98
 **SIGNATURES**
 
 In
        accordance with the requirements of the Securities Exchange Act of 1934,
        the
        Registrant has caused this report to be signed on its behalf by the undersigned,
        thereunto duly authorized.
 
 
 **NEOMEDIA
                  TECHNOLOGIES, INC.**RegistrantDate: May
                  10, 2007
              By:*/s/
                  Charles W. Fritz*Charles
                  W. Fritz, Interim Chief Executive OfficerDate: May
                  10, 2007
              By:*/s/
                  David A. Dodge*David
                  A. Dodge, Vice President,Chief
                  Financial Officer and Principal Accounting Officer
 
 99