**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549





**FORM
      10 - Q**




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


**EXCHANGE
      ACT OF 1934**


****


**For
      the Quarterly Period Ended June 30, 2008**





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


**EXCHANGE
      ACT OF 1934**





**For
      the transition period from __________ to ____________**





**Commission
      File Number 0-21743**





**NeoMedia
      Technologies, Inc.**


(Exact
      Name of Issuer as Specified In Its Charter)





**Delaware**
            **36-3680347**(State
                or other jurisdiction of
            (I.R.S.
                Employerincorporation
                or organization)
            Identification
                No.)




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


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





**678-638-0460**


(Registrants’
      telephone number, including area code)





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





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





Large
      accelerated filer  ̈ Accelerated filer  ̈ Non-accelerated
      filer  ̈  Smaller
      Reporting Company x





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





The
      number of outstanding shares of the registrant’s Common Stock on August 13, 2008
      was 1,235,224,960.










**NeoMedia
      Technologies, Inc.**


**Form
      10-Q**


**For
      the Quarterly Period Ended June 30, 2008**


**Index**





Page**PART I Financial Information**
            **2**ITEM 1.
            Financial Statements
            2ITEM 2.
            Management’s Discussion and Analysis of Financial Condition and Results of Operations
            21ITEM 3.
            Quantitative and Qualitative Disclosures About Market Risk
            24ITEM 4T.
            Controls and Procedures
            25**PART II Other Information**
            **25**ITEM 1.
            Legal Proceedings
            25ITEM 1A.
            Risk Factors
            25ITEM 2.
            Unregistered Sales of Equity Securities and Use of Proceeds
            25ITEM 3.
            Default upon Senior Securities
            25ITEM 4.
            Submission of Matters to a Vote of Security Holders
            26ITEM 5.
            Other Information
            26ITEM 6.
            Exhibits
            26Signatures
            27









**FORWARD LOOKING STATEMENTS**





This
      Form
      10-Q contains “forward-looking statements” relating to NeoMedia Technologies,
      Inc, a Delaware corporation, which represent the Company’s current expectations
      or beliefs including, but not limited to, statements concerning the Company’s
      operations, performance, financial condition and growth. For this purpose,
      any
      statements contained in this Form 10-Q that are not statements of historical
      fact are forward-looking statements. Without limiting the generality of the
      foregoing, words such as “may”, “anticipation”, “intend”, “could”, “estimate”,
      or “continue” or the negative or other comparable terminology are intended to
      identify forward-looking statements. These statements by their nature involve
      substantial risks and uncertainties, such as credit losses, dependence on
      management and key personnel, variability of quarterly results, and the ability
      of the Company to continue its growth strategy and competition, certain of
      which
      are beyond the Company’s control. Should one or more of these risks or
      uncertainties materialize or should the underlying assumptions prove incorrect,
      actual outcomes and results could differ materially from those indicated in
      the
      forward-looking statements.





Any
      forward-looking statement speaks only as of the date on which such statement
      is
      made, and the Company undertakes no obligation to update any forward-looking
      statement or statements to reflect events or circumstances after the date on
      which such statement is made or to reflect the occurrence of unanticipated
      events. New factors emerge from time to time and it is not possible for
      management to predict all of such factors, nor can it assess the impact of
      each
      such factor on the business or the extent to which any factor, or combination
      of
      factors, may cause actual results to differ materially from those contained
      in
      any forward-looking statements.


1





**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)**





**June 30,**
            
            **December 31,******
            
            **2008**
            
            **2007**(unaudited)**ASSETS**Current
                assetsCash
                and cash equivalents
            
            $
            75
            
            $
            1,415Trade
                accounts receivable, net of allowance for doubtful accounts of $78
                and
                $78, respectively
            
            
            66
            
            
            58Other
                receivable
            
            
            4
            
            
            225Inventories,
                net of allowance for obsolete & slow-moving inventory of $87 and $80,
                respectively
            
            
            213
            
            
            198Investment
                in marketable securities
            
            
            -
            
            
            8Prepaid
                expenses and other current assets
            
            
            300
            
            
            188Assets
                held for sale
            
            
            -
            
            
            159Total
                current assets
            
            
            658
            
            
            2,251Property,
                equipment & leasehold improvements, net
            
            
            87
            
            
            85Goodwill
            
            
            3,418
            
            
            3,418Proprietary
                software
            
            
            3,077
            
            
            3,413Patents
                and other intangible assets
            
            
            2,475
            
            
            2,608Cash
                surrender value of life insurance policy
            
            
            747
            
            
            747Other
                long term assets
            
            
            631
            
            
            1,002**Total
                assets**
            
            **$**
            **11,093**
            
            **$**
            **13,524****LIABILITIES
                AND SHAREHOLDERS' DEFICIT**Current
                liabilitiesAccounts
                payable
            
            $
            114
            
            $
            322Accrued
                expenses
            
            
            6,732
            
            
            6,015Deferred
                revenues and customer prepayments
            
            
            583
            
            
            669Notes
                payable
            
            
            15
            
            
            44Accrued
                purchase price guarantee
            
            
            4,614
            
            
            4,549Deferred
                tax liability
            
            
            706
            
            
            706Derivative
                financial instruments
            
            
            25,659
            
            
            24,651Debentures
                payable
            
            
            7,500
            
            
            7,500Debentures
                payable at fair value
            
            
            23,331
            
            
            23,199Series
                C Convertible Preferred stock, $0.01 par value, 25,000,000 shares
                authorized, 22,000 shares issued, 19,674 shares
                outstanding
            
            
            19,674
            
            
            20,097Total
                liabilities
            
            
            88,928
            
            
            87,752Commitments
                and contingencies (note 10)Shareholders'
                deficitCommon
                stock, $0.01 par value, 5,000,000,000 shares authorized, 1,128,376,229
                and
                1,025,295,693 shares issued and 1,145,224,960 and 1,022,144,424 shares
                outstanding, respectively
            
            
            11,452
            
            
            10,221Additional
                paid in capital
            
            
            118,765
            
            
            118,427Accumulated
                deficit
            
            
            (207,168
            )
            
            (201,565
            )Accumulated
                other comprehensive loss
            
            
            (105
            )
            
            (532
            )Treasury
                stock, at cost, 201,230 shares
            
            
            (779
            )
            
            (779
            )Total
                shareholders' deficit
            
            
            (77,835
            )
            
            (74,228
            )**Total
                liabilities and shareholders’ deficit**
            
            **$**
            **11,093**
            
            **$**
            **13,524**





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


2


**NeoMedia
      Technologies, Inc. and Subsidiaries**


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


**(unaudited)**


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





For the six months endedJune 30,
            
            June 30,2008
            
            2007Revenues
            
            $
            471
            
            $
            1,023Cost
                of sales
            
            
            605
            
            
            687Gross
                Profit (Loss)
            
            
            (134
            )
            
            336Sales
                and marketing
            
            
            1,283
            
            
            1,402General
                and administrative
            
            
            2,573
            
            
            3,764Research
                and development
            
            
            1,217
            
            
            925Operating
                Profit (Loss)
            
            
            (5,207
            )
            
            (5,755
            )Gain
                on extinguishment of debt
            
            
            22
            
            
            253Interest
                income/(expense) due to fair value adjustment
            
            
            2
                ,709
            
            
            (464
            )Other
                interest income/(expense)-net
            
            
            (411
            )
            
            (2,191
            )(Loss)
                on sale of assets
            
            
            (84
            )
            
            (1
            )(Loss)
                from change in fair value of derivative financial
                instruments
            
            
            (2,343
            )
            
            (2,386
            )Net
                (loss) from continuing operations
            
            
            (5,313
            )
            
            (10,544
            )(Loss)
                from discontinued operations
            
            
            (291
            )
            
            (3,296
            )(Loss)
                from disposal of 12Snap
            
            
            -
            
            
            (257
            )(Loss)
                from discontinued operations
            
            
            (291
            )
            
            (3,553
            )Net
                (loss)
            
            
            (5,604
            )
            
            (14,097
            )Accretion
                of dividends on convertible preferred stock
            
            
            (798
            )
            
            (861
            )Net
                (loss) attributable to common shareholders
            
            $
            (6,402
            )
            $
            (14,958
            )Comprehensive
                (loss):Net
                income (loss)
            
            
            (5,604
            )
            
            (14,097
            )Other
                comprehensive lossUnrealized
                (loss) on marketable securities
            
            
            -
            
            
            (43
            )Foreign
                currency translation adjustment
            
            
            (14
            )
            
            105Comprehensive
                (loss)
            
            $
            (5,618
            )
            $
            (14,035
            )(Loss)
                per share, basic:Continuing
                operations
            
            $
            (0.00
            )
            $
            (0.01
            )Discontinued
                operations
            
            $
            (0.00
            )
            $
            (0.00
            )Net
                (loss) per share, basic
            
            $
            (0.00
            )
            $
            (0.01
            )Weighted
                average number of common shares used in per share calculation,
                basic
            
            
            1,081,308,224
            
            
            789,247,203





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


3


**NeoMedia
      Technologies, Inc. and Subsidiaries**


**Condensed
      Consolidated Statements of Cash Flows**


**(Unaudited)**


**(In
      Thousands)**




**For the six months ended****June 30, 2008**
            
            **June 30, 2007****CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                loss
            
            $
            (5,604
            )
            $
            (14,097
            )Adjustments
                to reconcile net loss to net cash used in operating activities from
                continuing operations:Loss
                from discontinued operations
            
            
            291
            
            
            3,553Depreciation
                and amortization
            
            
            539
            
            
            572Loss
                on sale of assets
            
            
            229
            
            
            -Change
                in fair value from revaluation of warrants and embedded conversion
                features
            
            
            2,343
            
            
            2,386Gain
                on early extinguishment of debt
            
            
            (22
            )
            
            (252
            )Stock-based
                compensation
            
            
            987
            
            
            1,661Interest
                (income) expense related to convertible debt
            
            
            (2,709
            )
            
            1,245Change
                in value of life insurance policies
            
            
            -
            
            
            (62
            )Changes
                in operating assets and liabilities:Receivables
            
            
            213
            
            
            (110
            )Inventories
            
            
            (14
            )
            
            (200
            )Prepaid
                expenses and other current assets
            
            
            82
            
            
            (84
            )Accounts
                payable and accrued expenses
            
            
            599
            
            
            471Deferred
                revenue and other current liabilities
            
            
            (86
            )
            
            (347
            )Cash
                used in operating activities of continuing operations
            
            
            (3,152
            )
            
            (5,264
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES**Expenditures
                for property, plant, and equipment
            
            
            (73
            )
            
            (15
            )Loans
                repaid from subsidiaries
            
            
            -
            
            
            1,334Proceeds
                from sale of investments
            
            
            751
            
            
            -Payment
                of purchase price guarantee obligations
            
            
            (14
            )
            
            (2,484
            )Acquisitions,
                net of cash acquired
            
            
            -
            
            
            1,100Amounts
                received (issued) under notes receivable
            
            
            -
            
            
            450Cash
                provided by (used in) investing activities of continuing operations
            
            
            664
            
            
            385**CASH
                FLOWS FROM FINANCING ACTIVITIES**Repayments
                of debt and capital lease obligations
            
            
            (29
            )
            
            -Borrowing
                under convertible debt instrument
            
            
            1,477
            
            
            5,663Net
                proceeds from exercise of stock options and warrants
            
            
            -
            
            
            17Cash
                provided by (used in) financing activities of continuing operations
            
            
            1,448
            
            
            5,680**Net
                cash (used in) provided by continuing operations**
            
            
            **(1,040**
            **)**
            
            **801**Effect
                of exchange rate changes on cash for continuing operations
            
            
            (14
            )
            
            90Net
                cash used in discontinued operationsOperating
                cash flows
            
            
            (286
            )
            
            (3,553
            )Investing
                cash flows
            
            
            -
            
            
            -Financing
                cash flows
            
            
            -
            
            
            -Total
                cash flows used in discontinued operations
            
            
            (286
            )
            
            (3,553
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            (1,340
            )
            
            (2,662
            )Cash
                and cash equivalents at beginning of period
            
            
            1,415
            
            
            2,813**Cash
                and cash equivalents at end of period**
            
            **$**
            **75**
            
            **$**
            **151**Supplemental
                cash flow information:Interest
                paid during the period
            
            $
            14
            
            $
            401Unrealized
                gain (loss) on marketable securities
            
            
            -
            
            
            (43
            )Fair
                value of shares issued to satisfy purchase price guarantee
                obligations
            
            
            -
            
            
            12,721Accretion
                of dividends on Series C Convertible Preferred Stock
            
            
            798
            
            
            433Series
                C Convertible Preferred Stock converted to common stock
            
            
            423
            
            
            -Deemed
                dividend on preferred stock conversions
            
            
            631
            
            
            -





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


4


**NeoMedia
      Technologies, Inc. and Subsidiaries**


**Notes
      to Condensed Consolidated Financial Statements**


***(Unaudited)***


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




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




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





***Going
      Concern*** –
The
      accompanying consolidated financial statements have been prepared in conformity
      with accounting principles generally accepted in the United States of America,
      which contemplate our continuation as a going concern. Our code-reading business
      has historically incurred net losses and losses from operations. Net loss from
      continuing operations for the six months ended June 30, 2008 and 2007 was $5
      million and $10.5 million, respectively. Net cash used for operations during
      the
      same periods was $3.2 million and $5.3 million. We also have an accumulated
      deficit of $207 million and a working capital deficit of $88 million as of
      June
      30, 2008. Although we have reduced cash outlays for payments associated with
      prior integration and discontinued operation liabilities, we will continue
      to
      have negative cash flows as we continue to execute on our business plan. The
      items discussed above raise substantial doubts about our ability to continue
      as
      a going concern. There can be no assurance that our continuing efforts to
      execute our business plan will be successful and if we will be able to continue
      as a going concern




We
      will
      require additional financing in order to execute our operating plan and continue
      as a going concern. We cannot predict whether this additional financing will
      be
      in the form of equity, debt, or another form. We may not be able to obtain
      the
      necessary additional capital on a timely basis, on acceptable terms, or at
      all.
      In any of these events, we may be unable to implement our current plans for
      expansion, repay our debt obligations as they become due or respond to
      competitive pressures, any of which circumstances would have a material adverse
      effect on our business, prospects, financial condition and results of
      operations. Should financing sources fail to materialize, our management would
      seek alternate funding sources such as the sale of common and/or preferred
      stock, the issuance of debt, or the sale of our marketable assets. Our
      management’s plan is to attempt to secure adequate funding to bridge the
      commercialization of our NeoReader TM business. If these financing sources or increased revenues and profits do not
      materialize, and we are unable to secure additional financing, we could be
      forced to further reduce or cease our business operations.




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




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




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




***Interim
      Unaudited Financial Information*** – The **** accompanying
      unaudited consolidated financial statements include our results of operations
      for the six months ended June 30, 2008 and 2007. These financial statements
      were
      prepared in conformity with accounting principles generally accepted in the
      United States of America (“U.S. GAAP”) for interim financial information. In
      management’s opinion, these statements include all adjustments necessary for a
      fair statement of the results of the interim periods shown. All adjustments
      are
      of a normal recurring nature unless otherwise disclosed. The net effect of
      discontinued operations is reported separately from the results of our
      continuing operations. Operating results for the six month periods ended June
      30, 2008 and 2007 are not necessarily indicative of the results that may be
      expected for the full fiscal year.




***Basis
      of Presentation*** – This
      report on Form 10-Q for the six months ended June 30, 2008 should be read in
      conjunction with our Annual Report on Form 10-K for the twelve months ended
      December 31, 2007. The financial statements include the accounts of NeoMedia
      Technologies, Inc. and its wholly owned subsidiaries. All significant
      inter-company balances and transactions have been eliminated. We operate as
      one
      reportable segment.




5




During
      the year ended December 31, 2006, we completed acquisitions of Mobot, Sponge,
      Gavitec, 12Snap, and BSD. During 2006, we also divested of a substantial portion
      of our ownership in both Mobot and Sponge. During 2007, we made the strategic
      decision to sell 12Snap and Telecom Services (consisting of the business
      acquired from BSD) and these divestitures were completed on April 4, 2007 and
      October 30, 2007, respectively. The consolidated statements of operations
      presented herein reflect the results of 12Snap and BSD from January 1, 2007
      through June 30, 2007 under the caption “Loss from discontinued operations”.
      Gavitec results are included in NeoMedia’s consolidated results from continuing
      operations for all periods presented.




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





***Basic
      and Diluted Income (Loss) Per Share*** –
Basic
      net income (loss) per share is computed by dividing net income (loss) by the
      weighted average number of shares of common stock outstanding during the period.
      During the six months ended June 30, 2008, we reported net loss per share,
      and
      as such basic and diluted loss per share were equivalent. We have excluded
      all
      outstanding stock options, warrants, convertible debt and convertible preferred
      stock from the calculation of diluted net loss per share because these
      securities are anti-dilutive for all periods presented.




In
      addition to net income (loss) per share, we have also reported per share amounts
      on the separate income statement components required by APB 30, “ *Reporting
      the Results of Operations*–*Reporting the Effects of Disposal of a
      Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
      Events and Transactions* ,”
as
      the
      disposal activities of our discontinued operations were initiated prior to
      our
      adoption of FAS 144. Because we have reported a loss from continuing operations
      for the six months ended June 30, 2008, the effect of potentially dilutive
      securities has been excluded from the calculation of per share amounts for
      that
      period.





Inventories,
      consisting of material, material overhead, labor and processing costs, are
      stated at the lower of cost (first-in, first-out) or market.




**Recent
      Accounting Pronouncements**




In
      May
      2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
      Insurance Contracts—an interpretation of FASB Statement No. 60” (“SFAS 163”).
      This Statement interprets Statement 60 and amends existing accounting
      pronouncements to clarify their application to the financial guarantee insurance
      contracts included within the scope of this Statement. SFAS 163 is not expected
      to have a material impact on the Company’s consolidated financial
      statements.




In
      May
      2008, the FASB issued SFAS No. 162 (“SFAS No. 162”), “The Hierarchy of
      Generally Accepted Accounting Principles.” This statement identifies the sources
      of accounting principles and the framework for selecting the principles to
      be
      used in the preparation of financial statements of nongovernmental entities
      that
      are presented in conformity with GAAP. While this statement formalizes the
      sources and hierarchy of GAAP within the authoritative accounting literature,
      it
      does not change the accounting principles that are already in place. This
      statement will be effective 60 days following the SEC’s approval of the Public
      Company Accounting Oversight Board amendments to AU Section 411, “The
      Meaning of Present Fairly in Conformity With Generally Accepted Accounting
      Principles.” SFAS No. 162 is not expected to have a material impact on the
      Company’s consolidated financial statements.





In
      April
      2008, the FASB issued FSP SFAS No. 142-3, *Determination
      of the Useful Life of Intangible Assets* (“FSP
      SFAS No. 142-3”). FSP SFAS No. 142-3 amends the factors that should be
      considered in developing renewal or extension assumptions used to determine
      the
      useful life of a recognized intangible asset under SFAS No. 142, *Goodwill
      and Other Intangible Assets* (“SFAS
      No. 142”). The intent of FSP SFAS No. 142-3 is to improve the consistency
      between the useful life of a recognized intangible asset under SFAS No. 142
      and
      the period of expected cash flows used to measure the fair value of the asset
      under SFAS No. 141(R) and other applicable accounting literature. FSP SFAS
      No. 142-3 is effective for financial statements issued for fiscal years
      beginning after December 15, 2008 and must be applied prospectively to
      intangible assets acquired after the effective date. The Company has not
      determined the impact, if any, of the adoption of FSP SFAS No. 142-3.




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




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




6




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




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




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




**Note
      3**–**Discontinued Operations**




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




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




All
      costs
      related to the operations of Micro Paint Repair, Mobot, Sponge, 12Snap and
      Telecom Services are classified as discontinued operations for all periods
      presented in this Form 10-Q. Loss from the discontinued business units for
      the
      six months ended June 30, 2007 reflects direct operations of the Micro Paint
      Repair, 12Snap, and Telecom Services units. For the six months ended June 30,
      2008, we incurred wind-down expenses for Micro Paint Repair – US. For the six
      months ended June 30, 2008, we also set up a reserve for the remaining $0.3
      million due from the sale of Micro Paint Repair, because the funds have not
      been
      received as of the date of this filing, and legal efforts to secure the
      remaining payment due have been unsuccessful.




There
      is
      no tax expense or benefit to report as a result of our net operating loss carry
      forward tax position.




The
      following table presents a summary of results of our discontinued operations
      for
      the six months ended June 30, 2008 and 2007:





Micro Paint
              Repair
            
            12Snap
            
            Other
            
            TotalSix Months
                Ended June 30, 2008Net
                sales
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Income
                (Loss) from discontinued operations
            
            
            (291.2
            )
            
            -
            
            
            -
            
            
            (291.2
            )Six
                Months Ended June 30, 2007Net
                sales
            
            $
            716.0
            
            $
            2,621.0
            
            $
            814.0
            
            $
            4,151.0Income
                (Loss) from discontinued operations
            
            
            (1,209.0
            )
            
            (2,302.0
            )
            
            (42.0
            )
            
            (3,553.0
            )





7





**Note
      4 - Financing**




On
      February 17, 2006, the Company issued Series C Convertible Preferred Stock
      to YA
      Global Investments, L.P. (“YA Global”) and between August 24, 2006 and May 29,
      2008, has entered into seven Secured Convertible Debentures with YA Global.
      In
      addition, in connection with these debentures and preferred stock, the Company
      also issued common stock warrants to YA Global. As described in Note 11,
      subsequent to June 30, 2008, we have entered into, or expect to enter into,
      four
      additional convertible debentures with YA Global.





**Secured
      Convertible Debentures**





In
      2006
      and 2007, the Company issued four Secured Convertible Debentures to YA Global.
      During the quarter ended June 30, 2008, the Company issued three additional
      Secured Convertible Debentures to YA Global, dated April 11, 2008, May 16,
      2008
      and May 29, 2008, as follows:.





April 11,
              2008
            
            May 16,
              2008
            
            May 29,
              2008
            
            TotalFace
                Amount
            
            $
            390,000
            
            $
            500,000
            
            $
            790,000
            
            $
            1,680,000Net
                Proceeds
            
            $
            336,000
            
            $
            441,000
            
            $
            700,000
            
            $
            1,477,000Common
                shares indexed to debenture
            
            
            92,857,143
            
            
            227,272,727
            
            
            395,000,000
            
            
            715,129,870Common
                shares indexed to warrants
            
            
            —
            
            
            7,500,000
            
            
            50,000,000
            
            
            57,500,000Total
                common shares indexed
            
            
            92,857,143
            
            
            234,772,727
            
            
            445,000,000
            
            
            772,629,870





The
      underlying agreements for each of the seven debentures are essentially the
      same,
      except in regard to the interest rate, varying conversion prices per share,
      and
      the number of warrants that were issued in conjunction with each of the
      debentures. The table below summarizes the significant terms of each of the
      seven debentures outstanding at June 30, 2008.




The
      debentures are convertible into our common stock at the then effective
      conversion price, which varies relative to our trading stock price, as
      summarized in table below. The conversions are limited such that YA Global’s
      ownership of our common stock cannot exceed 4.99%. The convertible debentures
      provide anti-dilution protection such that, if at any time while the debentures
      are outstanding, we offer, sell or grant any option to purchase or offer, sell
      or grant any right to re-price our securities, or otherwise dispose of or issue
      any common stock or common stock equivalents, or 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), then, in such
      instance, the conversion price of the convertible debentures will be reduced
      to
      the lower price. Any such adjustment in the effective conversion price for
      the
      convertible debentures could significantly dilute existing
      investors.





All
      of
      the convertible debentures are secured according to the terms of a Security
      Pledge Agreement dated August 23, 2006, which was entered into in connection
      with the first convertible debenture with YA Global and which provides YA Global
      with a security interest in substantially all of our assets.





The
      April
      2008 and May 2008 debentures are included in the terms of an existing
      Registration Rights Agreement with YA Global dated August 24, 2007. That
      agreement 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 related warrants and (ii)
      maintain effectiveness of the registration statement. Failure to meet these
      requirements will require the Company to pay liquidating damages amounting
      to 2%
      per month of the principal amount of the debentures, not to exceed aggregate
      damages of $1,000,000.





In
      connection with the August 2006 and December 2006 convertible debentures, we
      also entered into a Registration Rights Agreement with YA Global that required
      us to file a registration statement with the SEC registering the resale of
      the
      shares of common stock issuable upon conversion of the debentures and the
      exercise of the warrants, and achieve and maintain effectiveness of the
      registration statement. Although the required registration statement was
      declared effective on November 5, 2007, we failed to meet the timely filing
      requirements, and accordingly were subject to liquidated damages amounting
      to 2%
      of the outstanding amount of the convertible debentures, not to exceed $1.3
      million. On March 27, 2007, we paid $0.5 million of liquidated damages from
      the
      proceeds of a new secured convertible debenture. The remaining $0.8 million
      of
      liquidated damages has been accrued. On March 27, 2007, we also paid from the
      proceeds of the new debenture $0.8 million of liquidated damages related to
      our
      failure to timely file the registration statement required in connection with
      the Series C preferred stock.




8




The
      convertible debentures contain various Events of Default, which could subject
      us
      to penalties, damages, and liabilities as specified in the agreements. Such
      Events include:





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





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





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





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





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





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





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





In
      addition, the debentures require that:





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





·
            Without
                YA Global’s consent, we cannot:





o
            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,





o
            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,





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





o
            file
                any registration statements on Form
                S-8.





As
      of
      June 30, 2008, the significant terms of the seven convertible debentures are
      as
      follows:




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





9





April 11, 2008
            
            May 16, 2008
            
            May 29, 2008
            
            Total of all
              financingsPrincipal
                amount
            
            $
            390,000
            
            $
            500,000
            
            $
            790,000
            
            $
            18,413,651Fees
                paid
            
            
            (54,000
            )
            
            (59,000
            )
            
            (90,000
            )
            
            (1,453,864
            )Accrued
                interest on prior obligations paid
            
            
            -
            
            
            -
            
            
            -
            
            
            (365,972
            )Liquidated
                damages on prior obligations paid
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,311,814
            )Net
                proceeds to Company
            
            $
            336,000
            
            $
            441,000
            
            $
            700,000
            
            $
            15,282,001Interest
                rate
            
            
            15
            %
            
            15
            %
            
            15
            %Maturity
                date (2 years)
            
            
            4/11/2010
            
            
            5/16/2010
            
            
            5/29/2010Number
                of warrants issued
            
            
            -
            
            
            7,500,000
            
            
            50,000,000
            
            
            474,500,000Exercise
                price of warrants
            
            
            -
            
            
            0.0175
            
            
            0.01Warrants
                expire (7 years)
            
            
            -
            
            
            5/16/2015
            
            
            5/29/2015Convertible
                into our common stock at the lower of:Fixed
                conversion price per share
            
            $
            0.015
            
            $
            0.015
            
            $
            0.01or
                percent of the lowest closing bid price
            
            
            80
            
            
            80
            
            
            80of
                lowest volume weighted average price preceding conversion
            
            
            10
                days
            
            
            10
                days
            
            
            10
                daysRegistration
                rights agreement:File
                registration with SEC within
            
            
            30
                days
            
            
            30days
            
            
            30
                daysachieve
                effectiveness of registration statement with SEC within
            
            
            90
                days
            
            
            90
                days
            
            
            90
                daysLiquidated
                damages for failure to meet filing or effectiveness
                requirements
            
            
            2%
                of principal, per month
            
            
            2%
                of principal, per month
            
            
            2%
                of principal,per
                monthSecurity
                pledged as collateral
            
            
            substantially
                all of our assets
            
            
            substantially
                all of our assets
            
            
            substantially
                all of our assets




10




**Series
      C Convertible Preferred Stock**




On
      February 17, 2006, we issued 22,000 shares of $1,000 Series C 8% convertible
      preferred stock to YA Global. The Series C convertible preferred stock is
      convertible into our common stock at the lower of $0.02 per share, or 97% of
      the
      lowest closing bid price of the common stock for the 30 trading days immediately
      preceding the conversion date. The fixed conversion price was reset from $0.50
      to $0.02 on August 24, 2007, as an inducement to YA Global to enter into an
      additional financing arrangement with us at that time. The conversions are
      limited such that YA Global’s ownership of the Company cannot exceed 4.99%. The
      Series C convertible preferred stock has voting rights on an “as converted”
basis, meaning YA Global 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
      of
      June 30, 2008, YA Global has converted 2,326 shares of the original 22,000
      shares of Series C preferred stock, leaving 19,674 shares outstanding, as
      follows:




Date Converted
            
            Series C Shares
              Converted
            
            Common Shares
              Issued11/29/06
            
            
            378
            
            
            6,631,57906/19/07
            
            
            245
            
            
            8,781,36208/16/07
            
            
            500
            
            
            25,773,19610/24/07
            
            
            600
            
            
            45,801,52710/31/07
            
            
            180
            
            
            13,740,45802/19/08
            
            
            78
            
            
            10,000,00003/10/08
            
            
            16
            
            
            2,500,00003/17/08
            
            
            32
            
            
            10,000,00003/25/08
            
            
            32
            
            
            10,000,00004/01/08
            
            
            64
            
            
            10,000,00005/06/08
            
            
            15.5
            
            
            5,000,00005/09/08
            
            
            15
            
            
            5,000,00005/22/08
            
            
            11
            
            
            5,000,00005/30/08
            
            
            44
            
            
            20,000,00006/12/08
            
            
            52.5
            
            
            25,000,00006/23/08
            
            
            21
            
            
            10,000,00006/30/08
            
            
            42
            
            
            20,000,000Total
            
            
            2,326
            
            
            233,228,122




The
      Series C convertible preferred stock provides anti-dilution protection such
      that, if at any time while the Series C preferred stock is outstanding, we
      offer, sell or grant any option to purchase or offer, sell or grant any right
      to
      re-price our securities, or otherwise dispose of or issue any common stock
      or
      common stock equivalents, or 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), then, in such instance, the conversion
      price for the convertible preferred stock will be reduced to the lower price.
      Any such adjustment in the effective conversion price for the convertible
      preferred shares could significantly dilute existing investors.




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




Under
      the
      Series C Agreement, YA Global also received Series A, B and C warrants to
      purchase 20 million, 25 million, and 30 million shares of our common stock.
      The
      warrants, which are exercisable separately, originally had exercise prices
      of
      $0.50, $0.40 and $0.35, respectively, per share, subject to adjustment,
      including anti-dilution protection similar to that described above. As an
      inducement to YA Global to enter into subsequent financing arrangements with
      us,
      the exercise prices of these warrants were reduced on December 29, 2006 to
      $0.04
      per share and were again reduced on August 24, 2007 to $0.02 per share, subject
      to all the original terms and conditions of the respective warrant agreements.
      The warrants have a five-year contractual life. We can force exercise of the
      warrants if the closing bid price of our common stock is more than $0.10 greater
      than the exercise price of the warrants for 15 consecutive trading
      days.




11




**Warrants**




As
      described above, YA Global holds warrants to purchase shares of our common
      stock
      that were issued in connection with the convertible debentures and the Series
      C
      convertible preferred stock. As discussed above, the exercise prices of warrants
      held by YA Global have been adjusted from time to time as an inducement for
      YA
      Global to enter into subsequent financing arrangements. At June 30, 2008, the
      warrants issued to YA Global, none of which have been exercised, were as
      follows:





Original Issue Date
            
            Shares Underlying
              Warrant
            
            Original
              Exercise Price
            
            Restated Exercise
              Price December
              29, 2006
            
            Restated Exercise
              Price August 24,
              2006February
                17, 2006
            
            
            20,000,000
            
            $
            0.50
            
            $
            0.04
            
            $
            0.02February
                17, 2006
            
            
            25,000,000
            
            
            0.40
            
            
            0.04
            
            
            0.02February
                17, 2006
            
            
            30,000,000
            
            
            0.35
            
            
            0.04
            
            
            0.02August
                24, 2006
            
            
            25,000,000
            
            
            0.15
            
            
            0.04
            
            
            0.02August
                24, 2006
            
            
            50,000,000
            
            
            0.25
            
            
            0.04
            
            
            0.02August
                24, 2006
            
            
            50,000,000
            
            
            0.20
            
            
            0.04
            
            
            0.02August
                24, 2006
            
            
            50,000,000
            
            
            0.05
            
            
            n/a
            
            
            0.02December
                29, 2006
            
            
            42,000,000
            
            
            0.06
            
            
            n/a
            
            
            0.02March
                27, 2007
            
            
            125,000,000
            
            
            0.04
            
            
            n/a
            
            
            0.02August
                24, 2007
            
            
            75,000,000
            
            
            0.02
            
            
            n/a
            
            
            n/aMay
                16, 2008
            
            
            7,500,000
            
            
            0.0175
            
            
            n/a
            
            
            n/aMay
                29, 2008
            
            
            50,000,000
            
            
            0.01
            
            
            n/a
            
            
            n/aTotal
            
            
            549,500,000





**Default
      and Other Considerations**





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




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




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





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





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





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




**Fair
      Value Considerations**




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




12




Beginning
      in 2007, each new financing arrangement is evaluated, on an
      instrument-by-instrument basis, under FAS 155, ‘ *Accounting
      for Certain Hybrid Financial Instruments an amendment of FASB Statements No.
      133
      and 140* ’,
      which
      permits fair value re-measurement for any hybrid financial instrument that
      contains an embedded derivative that otherwise would require bifurcation. During
      the evaluation of the March 2007 Debenture, August 2007 Debenture, April 2008
      Debenture and May 2008 Debentures, we determined that (i) the hybrid debt
      instrument embodied certain derivative features whose risks and rewards were
      not
      clearly and closely related to the risks and rewards of the host debt instrument
      and (ii) warrants issued in connection with the March 2007 Debenture, August
      2007 Debenture and May 2008 Debentures did not meet all of the established
      criteria for equity classification. Additionally, the March 2007 Debenture,
      August 2007, April 2008 and May 2008 Debentures extended a right to the holder
      to accelerate repayment of the debt (default put) and each contains cash
      penalties upon the occurrence of certain contingent events. The default put
      may
      be triggered by certain events that are not related to the debt characteristics
      of the debentures and those events are not within our control. As permitted
      by
      FAS 155, we have elected not to bifurcate the embedded derivatives in the March
      2007 Debenture, August 2007 Debenture, April 2008 Debenture or the May 2008
      Debentures and accordingly these convertible instruments are being carried
      in
      their entirety at their fair values, with the changes in the fair value of
      the
      secured convertible debentures charged or credited to income each
      period..





The
      warrants issued to YA Global in connection with the Series C preferred stock
      and
      in connection with the convertible debentures do not meet all of the established
      criteria for equity classification provided in EITF 00-19 and, accordingly,
      are
      recorded as derivative liabilities at fair value. In addition, certain other
      warrants issued by the Company do not meet the criteria for equity
      classification and are also carried as derivative liabilities. Changes in the
      fair value of the warrants are charged or credited to income each
      period.





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





**Initial
      Accounting for New Debentures**





As
      discussed above, for the April 11, 2008, May 16, 2008 and May 29, 2008
      convertible debentures, we elected not to bifurcate the embedded derivatives
      and
      accordingly, in accordance with FAS 155, these convertible instruments are
      being
      carried in their entirety at their fair values. In connection with the May
      16,
      2008 and May 29, 2008 convertible debentures, YA Global received 7,500,000
      and
      50,000,000 common stock warrants. The warrants were 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 inception of the financing
      arrangements are as follows:





May 16, 2008
            
            May 29, 2008Indexed
                shares
            
            
            7,500,000
            
            
            50,000,000Exercise
                price
            
            $
            0.0175
            
            $
            0.01Effective
                exercise price
            
            $
            0.0030
            
            $
            0.0030Term
                (years)
            
            
            7
                years
            
            
            7
                yearsVolatility
            
            
            152
            %
            
            152
            %Risk
                free rate
            
            
            3.43
            %
            
            3.68
            %





The
      results of the anti-dilution protection resulted in an effective exercise price
      which was lower than the stated exercise price.





At
      inception, a summary of the allocation of the components of the new debenture
      transactions was as follows:





April 11,
              2008
            
            May 16,
              2008
            
            May 29,
              2008
            
            TotalConvertible
                debenture, at fair value
            
            $
            637,270
            
            $
            813,631
            
            $
            1,389,544
            
            $
            2,840,445Warrant
                derivative liability
            
            
            —
            
            
            21,750
            
            
            145,000
            
            
            166,750Day-one
                derivative loss
            
            
            (247,270
            )
            
            (335,381
            )
            
            (744,544
            )
            
            (1,327,195
            )Total
                gross proceeds
            
            $
            390,000
            
            $
            500,000
            
            $
            790,000
            
            $
            1,680,000





13




The
      fair
      value of the debentures and warrants at inception was greater than the proceeds
      received, which resulted in a day-one derivative loss.





**Current
      Period Accounting Considerations and Valuations**




Warrants





Freestanding
      derivative instruments, consisting of warrants that were issued in connection
      with the Series C preferred stock and the convertible debentures as well as
      certain other warrants, are valued using the Black-Scholes-Merton valuation
      methodology because that model embodies all of the relevant assumptions that
      address the features underlying these instruments. Significant assumptions
      used
      in this model as of June 30, 2008 are as follows:




Series C
              Convertible
              Preferred
              Stock
            
            August 2006
              Debenture
            
            December
              2006
              Debenture
            
            March 2007
              Debenture
            
            August
              2007
              Debenture
            
            May 16,
              2008
              Debenture
            
            May 29,
              2008
              Debenture
            
            
            
            TotalHolder
            
            
            YA Global
            
            
            YA
                Global
            
            
            YA
                Global
            
            
            YA
                Global
            
            
            YA
                Global
            
            
            YA
                Global
            
            
            YA
                Global
            
            
            OtherInstrument
            
            
            Warrants
            
            
            Warrants
            
            
            Warrants
            
            
            Warrants
            
            
            Warrants
            
            
            Warrants
            
            
            Warrants
            
            
            WarrantsExercise
                price
            
            $
            0.02
            
            $
            0.0015
            
            $
            0.0015
            
            $
            0.0015
            
            $
            0.0015
            
            $
            0.0175
            
            $
            0.01
            
            $
            0.01
                - 3.45Remaining
                term (years)
            
            
            2.64
            
            
            3.15
            
            
            3.5
            
            
            3.74
            
            
            4.15
            
            
            6.88
            
            
            6.92
            
            
            .27
                - 2.88Volatility
            
            
            173
            %
            
            120
            %
            
            119
            %
            
            121
            %
            
            119
            %
            
            153
            %
            
            153
            %
            
            131%-331
            %Risk-free
                rate
            
            
            2.91
            %
            
            2.91
            %
            
            2.91
            %
            
            2.91
            %
            
            3.34
            %
            
            3.61
            %
            
            3.61
            %
            
            1.60%
                2.91
            %Number
                of warrants
            
            
            75,000,000
            
            
            175,000,000
            
            
            42,000,000
            
            
            125,000,000
            
            
            75,000,000
            
            
            7,500,000
            
            
            50,000,000
            
            
            17,471,000
            
            
            566,971,000





Embedded
      Derivative Instruments – Series C Preferred Stock and August and December 2006
      Convertible Debentures





Embedded
      derivative financial instruments arising from the convertible instruments
      consist of multiple individual features that were embedded in each instrument.
      For each convertible instrument, we evaluated all significant features and,
      as
      required under current accounting standards, aggregated the components into
      one
      compound derivative financial instrument for financial reporting purposes.
      For
      financings recorded in accordance with FAS 133, the compound embedded derivative
      instruments are valued using the Flexible Monte Carlo methodology because that
      model embodies certain relevant assumptions (including, but not limited to,
      interest rate risk, credit risk, and conversion/redemption privileges) that
      are
      necessary to value these complex derivatives.





Assumptions
      used as of June 30, 2008 included exercise estimates/behaviors and the following
      other significant estimates:





Series
                C
              Convertible
              Preferred
                Stock
            
            August
                2006
              Debenture
            
            December
                2006
              DebentureConversion
                prices
            
            $
            0.0021
            
            $
            0.0015
            
            $
            0.0015Remaining
                terms (years)
            
            
            0.64
            
            
            0.17
            
            
            0.50Equivalent
                volatility
            
            
            176
            %
            
            207
            %
            
            211
            %Equivalent
                interest-risk adjusted rate
            
            
            9.45
            %
            
            10.00
            %
            
            11.58
            %Equivalent
                credit-risk adjusted yield rate
            
            
            74.6
            %
            
            40.67
            %
            
            41.03
            %





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.





14





Hybrid
      Financial Instruments Carried at Fair Value – 2007 and 2008 Convertible
      Debentures





The
      March
      2007, August 2007, April 11, 2008, May 16, 2008 and May 29, 2008 convertible
      debentures are recorded in accordance with FAS 155 and the entire hybrid
      instrument was initially recorded at fair value, with subsequent changes in
      fair
      value recognized in earnings. These financial instruments were valued using
      the
      common stock equivalent approach.  The common stock equivalent was
      calculated using the shares indexed to the financial instruments valued at
      the
      market price of our stock and the present value of the coupon.




**Current
      Period Valuations**




For
      the
      Series C Convertible Preferred Stock and the August 2006 and December 2006
      debentures, due to our previous default position with respect to these
      instruments, the carrying value of each instrument in effect as of December
      31,
      2006 was written up to its full face value during the fourth quarter of 2006.
      For these instruments, the embedded derivative instrument, primarily the
      conversion feature, has been separated and accounted for as a derivative
      instrument liability, as discussed above. This derivative instrument liability
      is marked to market each reporting period.





The
      March
      2007 Debenture, August 2007 Debenture, April 2008 Debenture and the May 2008
      Debentures were each initially recorded at their full fair value pursuant to
      FAS
      155. That fair value is marked-to-market each reporting period, with any changes
      in the fair value charged or credited to income.





The
      face
      value or fair value, as appropriate, of each instrument as of June 30, 2008
      and
      December 31, 2007 was:





June 30, 2008
            
            Face value
            
            Fair value
            
            Total(in thousands)Series C Convertible Preferred Stock
            
            $
            19,674
            
            $
            —
            
            $
            19,674August 2006 debenture
            
            
            5,000
            
            
            —
            
            
            5,000December 2006
                debenture
            
            
            2,500
            
            
            —
            
            
            2,500March
                2007 debenture
            
            
            —
            
            
            16,741
            
            
            16,741August
                2007 debenture
            
            
            —
            
            
            3,950
            
            
            3,950April
                2008 debenture
            
            
            —
            
            
            618
            
            
            618May
                16 ,2008 debenture
            
            
            —
            
            
            785
            
            
            785May
                29, 2008 debenture
            
            
            —
            
            
            1,236
            
            
            1,236Total
            
            $
            7,500
            
            $
            23,330
            
            $
            30,830





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





We
      adopted the provisions of FAS 157 as of January 1, 2008, with respect to
      financial instruments. As required by FAS 157, assets and liabilities measured
      at fair value are classified in their entirety based on the lowest level of
      input that is significant to their fair value measurement. Our derivative
      financial instruments which are required to be measured at fair value on a
      recurring basis under FAS 155 or FAS 133 as of June 30, 2008 are all measured
      at
      fair value using Level 3 inputs. Level 3 inputs are unobservable inputs that
      are
      supported by little or no market activity and that are significant to the fair
      value of the assets or liabilities.





15




The
      following tabular presentation reflects the components of derivative financial
      instruments related to convertible financial instruments in the liability
      section on our balance sheet at June 30, 2008:





Common Stock
              Warrants
            
            Embedded Conversion
              Feature
            
            TotalSeries
                C Convertible Preferred Stock
            
            $
            150,000
            
            $
            12,288,000
            
            $
            12,438,000August
                24, 2006 Debenture
            
            
            420,000
            
            
            8,000,000
            
            
            8,420,000December
                29, 2006 Debenture
            
            
            105,000
            
            
            4,000,000
            
            
            4,105,000March
                27, 2007 Debenture
            
            
            313,000
            
            
            n/a
            
            
            313,000August
                24, 2007 Debenture
            
            
            195,000
            
            
            n/a
            
            
            195,000April
                11, 2008 Debenture
            
            
            -
            
            
            n/a
            
            
            -May
                16, 2008 Debenture
            
            
            22,000
            
            
            n/a
            
            
            22,000May
                29, 2008 Debenture
            
            
            145,000
            
            
            n/a
            
            
            145,000Other
                instruments
            
            
            5,000
            
            
            20,000
            
            
            25,000Total
            
            $
            1,355,000
            
            $
            24,308,000
            
            $
            25,663,000





For
      the
      March 2007, August 2007, April 2008 and May 2008 debentures, the embedded
      conversion feature is effectively embodied in the fair value of those
      instruments.





The
      following table reflects the number of common shares into which the convertible
      instruments and warrants are convertible or exercisable at June 30,
      2008:





Common Stock
              Warrants
            
            Embedded Conversion
              Feature
            
            TotalSeries
                C Convertible Preferred Stock
            
            
            75,000,000
            
            
            11,171,183,000
            
            
            11,246,183,000August
                24, 2006 Debenture
            
            
            175,000,000
            
            
            3,333,333,000
            
            
            3,508,333,000December
                29, 2006 Debenture
            
            
            42,000,000
            
            
            1,666,667,000
            
            
            1,708,667,000March
                27, 2007 Debenture
            
            
            125,000,000
            
            
            4,972,434,000
            
            
            5,097,434,000August
                24, 2007 Debenture
            
            
            75,000,000
            
            
            1,183,333,000
            
            
            1,258,333,000April
                11, 2008 Debenture
            
            
            -
            
            
            169,565,000
            
            
            169,565,000May
                16, 2008 Debenture
            
            
            7,500,000
            
            
            217,391,000
            
            
            224,891,000May
                29, 2008 Debenture
            
            
            50,000,000
            
            
            343,478,000
            
            
            393,478,000Other
                warrants
            
            
            17,471,000
            
            
            -
            
            
            17,471,000Total
            
            
            566,971,000
            
            
            23,057,384,000
            
            
            23,624,355,000





The
      terms
      of the embedded conversion features in the convertible instruments presented
      above provide for variable conversion rates that are indexed to our trading
      common stock price. As a result, the number of indexed shares is subject to
      continuous fluctuation. For presentation purposes, the number of shares of
      common stock into which the embedded conversion feature in the Series C
      convertible stock was convertible as of June 30, 2008 was calculated as the
      face
      value plus assumed dividends (if declared), divided by 97% of the lowest closing
      bid price for the 30 trading days preceding June 30, 2008. The number of shares
      of common stock into which the embedded conversion feature in the convertible
      debentures was convertible as of June 30, 2008 was calculated as the face value
      of each instrument divided by the lower of $0.01 or 50% of the average closing
      market price of our common stock for the 10 days prior to June 30,
      2008.





Changes
      in the fair value of convertible instruments that are carried at fair value
      (the
      March 2007 Debenture, August 2007 Debenture, April 2008 Debenture and May 2008
      Debentures) and changes in the fair values of derivative instrument liabilities
      (including warrants and the bifurcated embedded derivative features of
      convertible instruments not carried at fair value) are reported as “Gain (loss)
      on derivative financial instruments” in the accompanying consolidated statement
      of operations, as follows:





Six months ended June 30,(in thousands)
            
            2008
            
            2007Series
                C Convertible Preferred Stock
            
            $
            (4,028
            )
            $
            (756
            )August
                24, 2006 debenture
            
            
            1,237
            
            
            5,796December
                29, 2006 debenture
            
            
            277
            
            
            297March
                27, 2007 debenture
            
            
            3,006
            
            
            (7,892
            )August
                24, 2007 debenture
            
            
            1,088
            
            
            -April
                11, 2008 debenture
            
            
            (228
            )
            
            -May
                16, 2008 debenture
            
            
            (307
            )
            
            -May
                29, 2008 debenture
            
            
            (591
            )
            
            -Other
                derivative instruments
            
            
            20
            
            
            -Total
            
            $
            475
            
            $
            (2,555
            )





16





The
      following represents a reconciliation of the changes in fair value of financial
      instruments measured at fair value on a recurring basis using significant
      unobservable inputs (Level 3) during the first half of 2008:




(in
                thousands)
            
            2008Beginning
                balance: Derivative financial instruments
            
            $
            47,769Total
                gains (losses)
            
            
            (475
            )Transfers
                in/out of Level 3
            
            
            (21,597
            )Ending
                balance
            
            $
            25,697





Gains
      and
      losses included in earnings are reported on the Consolidated Statements of
      Operations and Comprehensive Loss in “(Gain) loss from change in fair value of
      derivative financial instruments” for warrants and embedded conversion features
      and in Interest expense (income) for financial instruments recorded at fair
      value under FAS 155.





The
      fair
      value of derivative financial instrument liabilities recorded as of June 30,
      2008 and December 31, 2007 was:




(in thousands)
            
            June 30, 2008
            
            December 31, 2007Warrants and
                embedded conversion features in preferred stock
            
            $
            12,438
            
            $
            8,410Warrants
                and embedded conversion features in certain debentures
            
            
            13,200
            
            
            16,136Other
                warrants
            
            
            5
            
            
            26Fair
                value of future payment obligation
            
            
            -
            
            
            -Special
                preference stock of Mobot
            
            
            20
            
            
            79Total
                derivative financial instruments
            
            $
            25,663
            
            $
            24,651




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




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




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




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




17




**Note
      6 – Stock-Based Compensation**




**Equity-Based
      Compensation Plans**




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




The
      2005
      Plan provides for the grant of up to 60 million shares of common stock. As
      of
      June 30, 2008, we have not registered the shares underlying the options in
      the
      2005 Plan, and as a result, no options have been issued and all 60 million
      options remain available for issuance under the 2005 Plan, once registration
      has
      been effected.




The
      2003
      Plan provides for the grant of up to 150 million non-qualified stock options.
      As
      of June 30, 2008, options to purchase 4.6 million shares of common stock
      remained available for issuance under the 2003 Plan.




The
      2002
      Plan provides for the grant of up to 10 million non-qualified stock options.
      As
      of June 30, 2008, options to purchase 20,000 shares of common stock remained
      available for issuance under the 2002 Plan.




The
      1998
      Plan provided for the grant of options to purchase up to 8 million shares of
      our
      common stock. Effective March 27, 2008, the 1998 Plan expired.




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




Total
      options issued during the six months ended June 30, 2008 were 32,314,263
      compared with 28,773,500 issued during the six months ended June 30, 2007.
      For
      the six months ended June 30, 2008 and 2007, stock-based compensation expense
      recorded in the statement of operations was $987,000 and $2,716,000,
      respectively. There were no options exercised during the six months ended June
      30, 2008.





We
      used
      the following assumptions for grants during the six months ended June 30, 2008
      and 2007:




Six months ended June 30,2008
            
            2007Volatility Range
            
            
            88%-120%
            
            
            96%-115%Expected
                dividends
            
            
            0
            
            
            0Expected
                term (in years)
            
            
            3
            
            
            3Risk-free
                rate
            
            
            4.35%
            
            
            4.35%




Estimated
      income tax benefits recognized during the six months ended June 30, 2008 and
      2007 were offset by a valuation allowance since realization was not reasonably
      assured. FAS 123(R) requires the cash flows resulting from the tax benefits
      resulting from tax deductions in excess of the compensation cost recognized
      for
      those options (excess tax benefits) to be classified as financing cash flows.
      We
      will use this presentation if and when we have exhausted our tax loss
      carryforward.




**Note
      7 – Accrued Liabilities**




Accrued
      liabilities consist of the following as of June 30, 2008 and December 31,
      2007:





(in thousands)
            
            June 30, 2008
            
            December 31, 2007Accrued
                legal and accounting costs
            
            
            79
            
            
            358Accruals
                for disputed services
            
            
            1,336
            
            
            1,336Accrued
                operating expenses
            
            
            2,548
            
            
            2,184Payroll
                related accruals
            
            
            347
            
            
            121Accrued
                interest & liquidated damages
            
            
            2,422
            
            
            2,016Total
            
            $
            6,732
            
            $
            6,015




Additionally,
      we have accrued $4.6 million relating to a purchase price guarantee obligation
      in connection with our acquisition of 12Snap which is not included in the totals
      above.




18




**Note
      8 – Income Taxes**




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




We
      are
      subject to U.S. federal income tax as well as income tax of multiple states
      and
      foreign jurisdictions. With few exceptions, we are no longer subject to U.S,
      federal, state and local, or foreign income tax examinations by tax authorities
      for years prior to 1999. As of June 30, 2008, there are no notifications of
      any
      pending audits from any jurisdiction.




Our
      continuing practice is to recognize interest and penalties related to uncertain
      tax positions in other expense (income). As of January 1, 2008 and for the
      six
      months ended June 30, 2008, we did not have any interest or penalty expense
      or
      accruals related to uncertain tax positions.




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




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




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




**Note
      9 –****Contingencies**




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




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




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




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




**Federal
      Aviation Administration** –
On
      April 22, 2008, the Company received a notice of proposed civil penalty from
      the
      Federal Aviation Administration (FAA) related to an air bill shipment processed
      by one of the Company’s business units which has been discontinued. The
      potential penalty will be from a minimum of $5,750 up to a maximum of
      $1,150,000. The Company has accrued the minimum fine related to this action
      in
      the amount of $5,750, which is the amount the Company expects will be assessed.
      Resolution of the incident with the FAA is pending.




**Note
      10 – Geographic Reporting**




As
      of
      June 30, 2008, we were structured and evaluated by our Board of Directors and
      management as one business unit encompassing NeoReader TM ,
      legacy
      licensing, and hardware product lines; in prior years, these product lines
      were
      reported as part of the NeoMedia Mobile business unit. Our operations are
      managed as one global unit out of Atlanta, Georgia and Aachen,
      Germany.




19




Consolidated
      net sales and net loss from continuing operations for the six months ended
      June
      30, 2008 and 2007, and the identifiable assets as of June 30, 2008 and December
      31, 2007 by geographic area were as follows:





Six Months Ended June 30,2008
            
            2007(in
                thousands)Net Sales(1):United
                States
            
            $
            207
            
            $
            303Germany
            
            
            264
            
            
            720$
            471
            
            $
            1,023Net
                Loss from Continuing Operations(1):United
                States
            
            $
            (4,027
            )
            
            ($10,636
            )Germany
            
            
            (1,006
            )
            
            92$
            (5,033
            )
            
            ($
                10,544
            )Identifiable
                Assets(1)
            
            
            June
                30, 2008
            
            
            December
                31, 2007United
                States
            
            $
            10,689
            
            $
            12,875Germany
            
            
            404
            
            
            649$
            11,093
            
            $
            13,524




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




**Note
      11**–**Sub****sequent
      Events**




**Preferred
      Stock conversions**




On
      July
      14 and July 22, 2008, YA Global converted 21 shares and 22 shares, respectively,
      of Series C preferred stock into 10 million shares and 10 million shares,
      respectively, of common stock.




**Convertible
      Debentures**




**$137,750
      Secured Convertible Debenture**– On
      July
      10, 2008, we issued and sold a secured convertible debenture (the “July 10
      debenture”) to YA Global, in the principal amount of $137,750. The July 10
      debenture matures, unless extended by the holder in accordance with the terms
      of
      the debenture, on July 10, 2010, and accrues interest at the rate of 15%, which
      is payable quarterly in arrears beginning September 1, 2008. The debenture
      is
      secured by substantially all of our assets. YA Global has the right to convert
      any portion of the outstanding and unpaid principal and accrued interest thereon
      into fully-paid and nonassessable shares of our common stock at a price equal
      to
      the lesser of $0.01 or 80% of the lowest volume weighted average price of our
      common stock during the 10 trading days immediately preceding each conversion
      date. The conversion is limited such that YA Global’s ownership of our common
      stock cannot exceed 4.99%, unless they waive their right to such limitation.
      The
      limitation will terminate under any event of default. In connection with the
      July 10 debenture, YA Global retained fees of $14,000, resulting in net proceeds
      to us of $123,750.




**$8,650,000
      Securities Purchase Agreement**– On
      July
      29, 2008, we entered into a Securities Purchase Agreement (the “July 29 SPA”)
      with YA Global, an accredited investor in the principal amount of
      $8,650,000.  The July 29 SPA provides for the amount to be drawn through
      three separate secured convertible debentures (the “debentures”) in the amounts
      of $2,325,000, $2,325,000, and $4,000,000 respectively. The first debenture
      was
      issued on July 29, 2008. Upon the achievement of certain milestones, the
      remaining two debentures are scheduled to be issued on October 29, 2008 and
      January 2, 2009, respectively. The debentures mature, unless extended by the
      holder in accordance with the terms of the debenture, two years from the issue
      dates, and accrue interest at the rate of 14%, which is payable at the maturity
      dates.  The debentures are secured by substantially all of our
      assets.  At any time after the debentures are issued, YA Global has the
      right to convert any portion of the outstanding and unpaid principal and accrued
      interest thereon into fully-paid and nonassessable shares of our common stock
      at
      a price equal to the lesser of $0.02 or 95% of the lowest volume weighted
      average price of our common stock during the 10 trading days immediately
      preceding each conversion date.  The conversion is limited such that YA
      Global’s ownership of our common stock cannot exceed 4.99%, unless they waive
      their right to such limitation.  The limitation will terminate under any
      event of default.  In connection with the debenture issued on July 29,
      2008, YA Global retained fees of $240,000, resulting in net proceeds to us
      of
      $2,085,000. In conjunction with the July 29 SPA we also issued warrants to
      YA
      Global to purchase 100,000,000, 100,000,000, 125,000,000, and 125,000,000 shares
      of our common stock at exercise prices of $0.02, $0.04, $0.05, and $0.075,
      respectively




20




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




**Special
      Note About Forward-Looking Statements**





Certain
      statements in Management’s Discussion and Analysis (“MD&A”), other than
      purely historical information, including estimates, projections, statements
      relating to our business plans, objectives, and expected operating results,
      and
      the assumptions upon which those statements are based, are “forward-looking
      statements” within the meaning of the Private Securities Litigation Reform Act
      of 1995, Section 27A of the Securities Act of 1933 and Section 21E of
      the Securities Exchange Act of 1934. These forward-looking statements generally
      are identified by the words “believe,” “project,” “expect,” “anticipate,”
“estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,”
“will be,” “will continue,” “will likely result,” and similar expressions.
      Forward-looking statements are based on current expectations and assumptions
      that are subject to risks and uncertainties, which may cause actual results
      to
      differ materially from the forward-looking statements. For a detailed discussion
      of risks and uncertainties that could cause actual results and events to differ
      materially from such forward looking statements, please refer to the section
      titled “Risk Factors” in the Company’s 2007 Form 10-K filed on March 28, 2008.
      We undertake no obligation to update or revise publicly any forward-looking
      statements, whether as a result of new information, future events, or
      otherwise.





**Overview** ****




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




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




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




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




**MANAGEMENT
      CHANGES**




Effective
      May 22, 2008, Mr. William Hoffman resigned his position as Chief Executive
      Officer and Chairman of the Board of Directors of the Company. In connection
      with Mr. Hoffman’s resignation, on June 3, 2008 the Company and Mr. Hoffman
      consummated a Settlement Agreement and Release whereby the parties agreed to
      terminate Mr. Hoffman’s June 18, 2007 employment agreement.




Effective
      May 22, 2008, Mr. Frank Pazera resigned his position as Chief Financial Officer
      of the Company. In connection with Mr. Pazera’s resignation, on June 2, 2008 the
      Company and Mr. Pazera entered into a Settlement Agreement and Release whereby
      the parties agreed to terminate Mr. Pazera’s January 1, 2008 employment
      agreement.




Effective
      May 22, 2008, the Board of Directors of the Company appointed Iain A. McCready
      to serve as Chief Executive Officer and Chairman of the Board of Directors
      of
      the Company. On June 10, 2008, the Company entered into an employment agreement
      with Mr. McCready, for an initial term of employment of two years (commencing
      on
      May 29, 2008), unless earlier terminated as provided under the
      agreement.




On
      June
      2, 2008, the Board of Directors of the Company appointed J. Scott Womble to
      serve as the Company’s Chief Financial Officer, effective May 22, 2008. Mr.
      Womble had previously served as NeoMedia’s Interim CFO and Corporate
      Controller.




On
      June
      11, 2008, Dr. Christian Steinborn resigned as Chief Operating Officer of the
      Company. Dr. Steinborn continues to serve as CEO (Vorstand) of Gavitec AG,
      a
      wholly owned subsidiary of the Company.





21





**Results
      of Continuing Operations**




**Comparison
      of the Six Months Ended June 30, 2008 and June 30, 2007**




The
      loss
      from continuing operations decreased $5.3 million, or 52% to
      $5.2 million for the six months ended June 30, 2008 from a net loss of
      $10.5 million for the six months ended June 30, 2007. This decrease is primarily
      due to a gain from change in fair value of our derivative financial instruments,
      decreased stock-based compensation and decreased general and administrative
      costs during the current period compared with the prior period.




**Revenues.** Total
      revenues decreased $0.5 million, or 50%, to $0.5 million for the six
      months ended June 30, 2008 from $1 million for the six months ended June
      30, 2007. The revenue decrease was primarily due to management’s focus on
      developing new opportunities for NeoReader TM technology, which we believe will deliver the most value in the
      future.





**Increase(decrease)****For the Six Months Ended June 30,**
            
            **2008 to 2007****2008**
            
            **2007**
            
            $
            
            %(in
                thousands)Hardware
                sales – Gavitec
            
            $
            149
            
            $
            285
            
            $
            (136
            )
            
            (48
            %)Lavasphere
                revenue – Gavitec
            
            
            39
            
            
            373
            
            
            (334
            )
            
            (90
            %)Legacy
                product revenue
            
            
            168
            
            
            250
            
            
            (82
            )
            
            (33
            %)Patent
                licensing
            
            
            39
            
            
            49
            
            
            (10
            )
            
            (20
            %)Other
                revenue
            
            
            76
            
            
            66
            
            
            10
            
            
            15
            %**Total
                revenue**
            
            $
            471
            
            $
            1,023
            
            $
            (552
            )
            
            (54
            %)




Hardware
      sales at Gavitec were $149,000 and $285,000 for the six months ended June 30,
      2008 and 2007, respectively. Lavasphere revenue, which tends to be
      project-oriented, was $39,000 for the current period and $373,000 in the prior
      period. Legacy product revenue declined in the current period to $168,000 from
      $250,000 in the prior period due to our focus on our new business strategy
      to
      develop NeoReader TM business
      applications. .




**Operating
      Costs and Expenses**




A
      summary
      of key operating costs and expenses is presented below:





**For
                the Six Months Ended June 30,****2008**
            
            **2007**(in
                thousands)Sales
                and marketing
            
            $
            1,283
            
            $
            1.402General
                and administrative
            
            
            2,573
            
            
            3,764Research
                and development
            
            
            1,217
            
            
            925Gain
                (loss) on extinguishment of debt
            
            
            22
            
            
            253Interest
                (expense)/income, net
            
            
            2,299
            
            
            (2,655
            )Gain
                (loss) from change in fair value of derivative financial
                instruments
            
            
            (2,
                343
            )
            
            (2,386
            )




**Sales
      and Marketing.** Sales
      and marketing expenses were $1.3 and $1.4 million for the six months ended
      June 30, 2008 and 2007, respectively. This decrease of approximately $0.1
      million, or 7%, is primarily due to decreased stock based compensation expense
      and a reduction in outside professional services of $221,000.




**General
      and Administrative.** General
      and administrative expenses were $2.6 million and $3.8 million for the
      six months ended June 30, 2008 and 2007, respectively. The decrease of
      $1.2 million, or 32%, is primarily attributable to a reduction of
      $1.4 million in audit and legal fees, partially offset by a one time charge
      of $254,000 for severance payable to the former CEO and CFO. Gavitec’s general
      and administrative costs increased $100,000 from the six months ended June
      30,
      2007 as compared with the six months ended June 30, 2008, due to an increase
      in
      headcount.




**Research
      and Development.** Research
      and development expenses were $1.2 million and $0.9 million for the six month
      periods ended June 30, 2008 and 2007, respectively. Although stock compensation
      decreased from the six months ended June 30, 2007 as compared with the six
      months ended June 30, 2008, personnel related expenses increased during the
      same
      time period, as well as non-capitalized equipment and software. Additionally,
      Gavitec’s research and developments costs increased $165,000 over the same time
      period. The increase in research and development costs overall were attributable
      to bringing our mobile phone technology to market.




**Interest
      (Income)/Expense** *.* Interest
      (income)/expense consists primarily of interest charges or gains related to
      convertible debentures, combined with other interest accrued for creditors
      as
      part of financed purchases, past due balances, and notes payable, net of
      interest earned on cash equivalent investments. Net interest income was $2.3
      million for the six months ended June 30, 2008 compared to net interest expense
      of $2.7 million for the six months ended June 30, 2007. The $5.0 million
      difference resulted from favorable fair value adjustments of our convertible
      debt in accordance with the FAS 155 provisions that we use to account for the
      financial instruments.




22




**(Gain)/Loss
      on Derivative Financial Instruments** *.* Loss
      on
      derivative financial instruments was $2.3 million for the six months ended
      June
      30, 2008, compared with a loss of $2.4 million for the six months ended June
      30,
      2007, a change of $0.1 million or 5%.  The derivative gains and losses are
      associated with our convertible preferred stock and convertible debenture
      financing.  Certain derivatives and embedded conversion features were
      created at the time of each offering and are recorded at fair value on the
      accompanying balance sheet *.* The
      gains
      (losses) represent the reduction (appreciation) in value of the derivatives
      and
      embedded conversion features from the beginning of each reporting period
      presented to the end of the period, resulting primarily from the changes in
      our
      stock price during the reporting period. The fair value of the derivative
      financial instruments at each measurement date correlates to our stock price
      at
      the same date. As a result, our net loss varies significantly from our cash
      flow
      from operations during the six months ended June 30, 2008 and 2007. In future
      periods, our loss could fluctuate dramatically from quarter to quarter if our
      stock price is significantly different from the stock price at the end of the
      previous measurement period. Because we cannot guarantee that we have enough
      authorized shares to net share settle the convertible instruments, the change
      in
      fair value of derivative instruments will be recorded to our statement of
      operations each reporting period until the convertible instruments are fully
      converted.




**Results
      of Discontinued Operations**




In
      fiscal
      2006 and 2007 we discontinued the operations of our Mobot, Sponge, 12Snap,
      Telecom Services and Micro Paint Repair businesses, which were accounted for
      as
      discontinued operations in accordance with SEC Staff Accounting Topic 5E,
      Accounting Principles Board (APB) Opinion 29, APB 18, Statement of Financial
      Accounting Standards (FAS) 141, FAS 144, and Emerging Issues Task Force Issue
      01-2. A loss of $291,000 was recognized for the six months ended June 30, 2008,
      which was primarily attributable to wind-down expenses associated with Micro
      Paint Repair-US operations. For the six months ended June 30, 2007, we
      recognized a loss of $3.6 million for discontinued operations, which included
      a
      charge of $2.5 million for impairment of intangible assets related to our prior
      acquisition of 12Snap, other operating costs of $2.8 million and stock
      compensation expense of $0.5 million that were partially offset by revenues
      related to the discontinued operations during the period of $3.2
      million.




**Liquidity
      and Capital Resources**




As
      of
      June 30, 2008, we had $75,000 in cash and cash equivalents as noted on our
      consolidated balance sheet and statement of cash flows. This is a decrease
      of
      $1.3 million or 95% compared with a total of $1.4 million as of
      December 31, 2007.




On
      a
      comparative basis, cash used by operating activities of continuing operations
      decreased $2.1 million to $3.2 million for the six months ended June
      30, 2008 compared with $5.3 million of cash used by operating activities
      for the period ended June 30, 2007. The decrease in cash used by continuing
      operations is primarily due to reduced audit and legal fees and lower personnel
      cost due to a reduced headcount.




Cash
      provided by investing activities increased by $0.3 million to $0.7 million
      for
      the six months ended June 30, 2008 compared with $0.4 million of cash used
      in
      investing activities for the period ended June 30, 2007. This increase was
      primarily due the sale of our remaining ownership of 12Snap, which resulted
      in
      net proceeds to us of $0.8 million, combined with cash and other assets in
      the
      amount of $0.3 million retained by us from Micro Paint Repair-US after the
      operation was shut down, reflecting a partial settlement of intercompany loans,
      offset by expenditures of $73,000 for computer equipment, and, $65,000 of
      interest paid on purchase price guarantee obligations. For the six months ended
      June 30, 2007, we paid purchase price guarantee obligations in the amount of
      $2.5 million offset by $0.5 million cash received in repayment of a note
      receivable and cash and other assets in the amount of $0.9 million retained
      by
      us from subsidiaries disposed during the period, resulting in a net use of
      cash
      by investing activities of $1.0 million.




Cash
      provided by financing activities was $1.5 million for the six months ended
      June
      30, 2008 compared with $5.7 million cash provided by financing activities for
      the six months ended June 30, 2007. Cash used in discontinued operations
      (12Snap, MicroPaint Repair, Telecom Services) was $0.3 million and $3.6 million
      for the six months ended June 30, 2008 and 2007, respectively, representing
      a
      decrease of $3.3 million for the current period. The decrease reflects the
      reduced costs incurred for the discontinued operations subsequent to their
      disposal.




As
      of
      June 30, 2008, we have a working capital deficiency of $88 million, of which
      $25.6 million relates to the fair value of derivative financial instruments,
      and
      $50.5 million relates to the carrying value of debentures and convertible
      preferred stock that are convertible into shares of our common
      stock.




23




**Significant
      Liquidity Events**




**Going
      Concern**




The
      accompanying consolidated financial statements have been prepared in conformity
      with accounting principles generally accepted in the United States of America,
      which contemplate continuation of the Company as a going concern. Net loss
      for
      the six months ended June 30, 2008 was $5.6 million compared with a net loss
      of
      $14.1 million for the six months ended June 30, 2007. Net cash used for
      operations was $3.2 million and $5.3 million, for the six months ended June
      30,
      2008 and 2007, respectively. We also have an accumulated deficit of $207.2
      million and a working capital deficit of $88 million as of June 30, 2008. We
      also have an obligation as of June 30, 2008 of $4.6 million relating to a
      purchase price guarantee associated with our acquisition of 12Snap.




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




On
      July
      29, 2008, we entered
      into a Securities Purchase Agreement (“SPA”) in the amount of $8,650,000 with YA
      Global Investments, LP (“YA Global”), an accredited investor .
      Under
      the SPA, YA Global will buy three secured convertible debentures, subject to
      our
      meeting certain milestones, which are designed to fund the Company’s business
      plan to bring our products to market over approximately the next one and one
      half years. The first debenture under the SPA was issued on July 29, 2008,
      in
      the amount of $2.325 million.




In
      the
      event that we are unsuccessful in bringing our product to market, or that we
      are
      unsuccessful in increasing our revenues and profits, we will be forced to
      further reduce our costs and may be unable to repay our debt obligations as
      they
      become due, or respond to competitive pressures, any of which circumstances
      would have a material adverse effect on our business, prospects, financial
      condition and results of operations.




**Sources
      of Cash and Projected Cash Requirements**





As
      of
      June 30, 2008, our cash balances were $75,000. However, we believe that the
      Securities Purchase Agreement issued July 29, 2008 in the amount of $8,650,000
      will accelerate implementation of NeoMedia’s aggressive go-to-market plans under
      new CEO, Iain A. McCready. These plans will focus on providing mobile barcode
      scanning infrastructure to carriers, NeoReader scanning software to handset
      manufacturers and code implementation products to the advertising community.




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




Additionally,
      pursuant to the terms of the investment agreement between us and YA Global
      signed in connection with the Series C Convertible Preferred Stock sale, we
      cannot (i) enter into any debt arrangements in which we are the
      borrower, (ii) grant any security interest in any of our assets, or (iii) grant
      any security below market price.




**Related
      Party Transactions**




For
      the
      three month period ended June 30, 2008, we paid SKS Consulting a total of $4,500
      for professional services provided by George O’Leary in conjunction with our
      previously disclosed consulting agreement. Mr. O’Leary is on our Board of
      Directors.




**Critical
      Accounting Policies and Estimates**




There
      have been no material changes to our critical accounting policies and estimates
      from the information provided in Item 2, “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations,” included in our
      Annual Report on Form 10-K for the fiscal year ended December 31,
      2007.




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




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




24




**ITEM 4T.
      Controls and Procedures**




**Disclosure
      Controls and Procedures.** Our
      management, with the participation of our Chief Executive Officer and Chief
      Financial Officer, has evaluated the effectiveness of our disclosure controls
      and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
      the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the
      end of the period covered by this report.




These
      controls are designed to ensure that information required to be disclosed in
      the
      reports we file or submit pursuant to the Securities Exchange Act of 1934 is
      recorded, processed, summarized and reported within the time periods specified
      in the rules and forms of the Securities and Exchange Commission, and that
      such
      information is accumulated and communicated to our management, including our
      CEO
      and CFO, as appropriate, to allow timely decisions regarding required
      disclosure.




Based
      on
      this evaluation, our CEO and CFO concluded that our disclosure controls and
      procedures were not effective as of June 30, 2008, at the reasonable assurance
      level, because of the material weaknesses described in Item 9A of our Annual
      Report on Form 10−K for the fiscal year ended December 31, 2007, which we are
      still in the process of remediating. Please see “Management’s Report on Internal
      Control over Financial Reporting” in Item 9A of the 2007 Form 10−K for a full
      description of these weaknesses.




Notwithstanding
      the material weaknesses described in Item 9A of the Form 10−K for the fiscal
      year ended December 31, 2007, we believe that our consolidated financial
      statements presented in this Quarterly Report on Form 10−Q fairly present, in
      all material respects, our financial position, results of operations, and cash
      flows for all periods presented herein.




**Inherent
      Limitations**




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




**Changes
      in Internal Control over Financial Reporting.** There
      were no changes in the Company’s internal control over financial reporting
      during the second quarter of 2008, which were identified in conjunction with
      management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15
      under the Exchange Act, that have materially affected, or are reasonably likely
      to materially affect, the Company’s internal control over financial
      reporting.





**PART
      II - OTHER INFORMATION**




**ITEM
      1. Legal Proceedings**




There
      have been no material developments relating to certain pending legal
      proceedings. For a description of pending legal proceedings, see Note 12 –
Contingencies, to the Consolidated Financial Statements.




**ITEM
      1A. Risk Factors**




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




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




None




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




None.




25




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




None.




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




None.




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


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





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




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




On
      April
      17, 2008, NeoMedia filed a report on Form 8-K with respect to Items 1.01 and
      3.02, reporting that it had entered into a secured convertible debenture
      financing arrangement with YA Global Investments, L.P. in the principal amount
      of $390,000.





On
      May
      22, 2008, NeoMedia filed a report on Form 8-K with respect to Items 1.01 and
      3.02, reporting that it had entered into a secured convertible debenture
      financing arrangement with YA Global Investments, L.P. in the principal amount
      of $500,000.





On
      May
      29, 2008, NeoMedia filed a report on Form 8-K with respect to Items 5.02,
      disclosing that Iain A. McCready, 46, replaced William J. Hoffman as the Chief
      Executive Officer of NeoMedia.





On
      June
      5, 2008, NeoMedia filed a report on Form 8-K with respect to Items 1.01 and
      3.02
      and 5.02, reporting that (i) it had entered into a secured convertible debenture
      financing arrangement with YA Global Investments, L.P. in the principal amount
      of $790,000, (ii) Frank J. Pazera resigned his position as Vice President and
      Chief Financial Officer, effective May 22, 2008, (iii) Mr. Pazera would be
      replaced by J. Scott Womble, who had previously held the positions of NeoMedia’s
      Interim CFO and Controller, (iv) it had entered into severance and release
      agreements with Mr. William J. Hoffman and Mr. Frank J. Pazera.





On
      June
      16, 2008, NeoMedia filed a report on Form 8-K with respect to Items 1.01 and
      3.02 and 5.02, disclosing that (i) it had entered into an employment contract
      and compensation agreement with Iain A. McCready in the capacity of CEO, (ii)
      Mr. Christian Steinborn resigned as the Company’s Chief Operating Officer
      effective June 11, 2008, and would continue to serve as the CEO of the Company’s
      subsidiary Gavitec.





On
      July
      16, 2008, NeoMedia filed a report on Form 8-K with respect to Items 1.01 and
      3.02, reporting that it had entered into a secured convertible debenture
      financing arrangement with YA Global Investments, L.P. in the principal amount
      of $137,750.





On
      August
      4, 2008, NeoMedia filed a report on Form 8-K with respect to Items 1.01 and
      3.02, reporting that it had entered into a Securities Purchase Agreement (SPA)
      with YA Global Investments, L.P. (“Yorkville”), in the amount of $8,650,000,
      whereby Yorkville will provide financing to NeoMedia through three secured
      convertible debentures, with the first such instrument issued and funded on
      July
      29, 2008.




26


**SIGNATURES**





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





**NEOMEDIA
                TECHNOLOGIES, INC.**(Registrant)Dated:August
                14, 2008
            */s/
                Iain McCready*Iain
                McCreadyChief
                Executive Officer*/s/
                J. Scott Womble*J.
                Scott WombleChief
                Financial Officer & Principal Accounting
                Officer


27