**UNITED
        STATES SECURITIES AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **Form
        10-K**
 
 **ANNUAL
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**
 **SECURITIES
        EXCHANGE ACT OF 1934**
 
 **For
        the Fiscal Year Ended December 31, 2007**
 
 **Commission
        File Number 0-21743**
 
 **NeoMedia
        Technologies, Inc.** ****
 **(Exact
        name of registrant 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)
 
 **Securities
        Registered Under Section 12(b) of the Exchange Act:**
 
 **Common
        Stock, par value $.01 per share**
 
 Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act. Yes o    No
x
 
 Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or Section 15(d) of the Exchange
        Act.    Yes o    No
x
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
        during the preceding 12 months and (2) has been subject to such filing
        requirements for the past 90 days.
 Yes x No
        o
 
 Indicate
        by check mark if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K is not contained herein, and will not be contained, to the
        best
        of registrant’s knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-K or any amendment
        to this
        Form 10-K. o
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act.
 
 Large
        accelerated filer o           Accelerated
        filer o           Non-accelerated
        filer o  Smaller
        Reporting Company x
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).    Yes o    No
x
 
 Aggregate
        market value of the voting stock held by non-affiliates of the registrant
        as of
        June 30, 2007 based upon the closing price was approximately $31 million.
 
 The
        number of outstanding shares of the registrant’s Common Stock on February 29,
        2008 was 1,035,584,313.
  
  
 
 **Form
        10-K**
 **For
        the Year Ended December 31, 2007**
 **Index**
 
 **Table
        of Contents**
 
 Page**PART
                  I**
              
              **3**ITEM
                  1.
              Business
              3ITEM
                  1A.
              Risk
                  factors
              8ITEM
                  1B.
              Unresolved
                  staff comments
              18ITEM
                  2.
              Properties
              18ITEM
                  3.
              Legal
                  proceedings
              19ITEM
                  4.
              Submission
                  of matters to a vote of security holders
              19**PART
                  II**
              
              **19**ITEM
                  5.
              Market
                  for registrant's common equity, related stockholder matters and
                  issuer
                  purchases of equity securities
              19ITEM
                  6.
              Selected
                  financial data
              21ITEM
                  7.
              Management‘s
                  discussion and analysis of financial condition and results of
                  operations
              21ITEM
                  7A.
              Quantitative
                  and qualitative disclosures about market risk
              37ITEM
                  8.
              Financial
                  statements and supplementary data
              38Index
                  to consolidated Financial Statements
              38ITEM
                  9.
              Changes
                  in and disagreements with accountants on accounting and financial
                  disclosures
              86ITEM
                  9A(T).
              Controls
                  and Procedures
              86ITEM
                  9B.
              Other
                  information
              89**PART
                  III**
              
              **90**ITEM
                  10.
              Directors,
                  executive officers, and corporate governance
              90ITEM
                  11.
              Executive
                  compensation
              92ITEM
                  12.
              Security
                  ownership of certain beneficial owners and management
              97ITEM
                  13.
              Certain
                  relationships and related transactions
              98ITEM
                  14.
              Principal
                  accountant fees and services
              99**PART
                  IV**
              
              **100**ITEM
                  15.
              Exhibits
                  and Financial Statement Schedules
              100
  2
  **PART
        I**
 
 ***ITEM
                1.***
              ***Business***
 
 **Statements
        contained in this Form 10-K that are not purely historical are forward-looking
        statements and are being provided in reliance upon the “safe harbor” provisions
        of the Private Securities Litigation Reform Act of 1995. Words such as
“anticipates,” “expects,” “intends,” “plans,” "believes," "seeks," "estimates,"
        or similar expressions identify forward-looking statements. These
        forward-looking statements include but are not limited to statements regarding
        NeoMedia’s expectations of our future liquidity needs, our expectations
        regarding our future operating results including our planned increase in
        our
        revenue levels and the actions we expect to take in order to maintain our
        existing customers and expand our operations and customer base. All
        forward-looking statements are made as of the date hereof and are based on
        current management expectations and information available to us as of such
        date.
        We assume no obligation to update any forward-looking statement. It is important
        to note that actual results could differ materially from historical results
        or
        those contemplated in the forward-looking statements. Forward-looking statements
        involve a number of risks and uncertainties, and include risks associated
        with
        our target markets and risks pertaining to competition, other trend information
        and our ability to successfully enhance our operations. Factors that could
        cause
        actual results to differ materially include, but are not limited to, those
        identified in “Item 1A-Risk Factors” and in other of our filings with the
        Securities and Exchange Commission. All references to “NeoMedia” or the
“Company” in this Annual Report on Form 10-K mean NeoMedia Technologies, Inc., a
        Delaware corporation, and all entities owned or controlled by NeoMedia
        Technologies, Inc., except where it is made clear that the term only means
        the
        parent company. All tabular amounts are stated in thousands.**
  **Overview**
  NeoMedia
        (www.neom.com) provides internet advertising solutions using wireless
        technologies to connect traditional print and broadcast media companies to
        active mobile content. We accomplish this by turning “old-media” into
“new-media.” Using camera-enabled mobile phones, barcode-reading software
        (NeoReaderTM), 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.
  Our
        revenue is primarily derived from two sources: 1) license revenue relating
        to
        patents and internally-developed software and 2) hardware, software and service
        revenue related to mobile marketing campaign design and
        implementation.
  In
        February 2007, we added George G. O’Leary to our Board of Directors. In June
        2007 we hired William J. Hoffman as Chief Executive Officer and appointed
        him to
        our Board of Directors. Mr. Hoffman serves as our Chairman following the
        resignation of Charles W. Fritz, the founder and former Chairman of the
        Board.
  In
        September 2007, we announced plans to relocate our corporate headquarters.
        We
        completed our relocation to Atlanta as of December 1, 2007 in order to offer
        close contact to potential customers and easier access to international markets.
        We will continue to operate our Aachen, Germany office, where our Gavitec
        operations are based. Also in September 2007, we announced that Dr. Christian
        Steinborn, CEO of Gavitec, assumed the additional role of Chief Operating
        Officer of NeoMedia.
  3
  Our
        common stock is currently listed on the Over-the-Counter Bulletin Board under
        the symbol “NEOM”. Our principal executive offices are located at Two Concourse
        Parkway, Suite 500, Atlanta, Georgia 30328. Our telephone number is (678)
        638-0460 and our website is located at www.neom.com .
        Through
        this website, our Annual Reports on Form 10-K, Quarterly Reports on Form
        10-Q,
        Current Reports on Form 8-K and amendments to those reports are available
        free
        of charge as soon as reasonably practicable after they are filed with the
        U.S.
        Securities and Exchange Commission. The information contained on our website
        is
        not included in, or incorporated by reference into, this Annual Report on
        Form
        10-K.
  During
        January 2007, we made the strategic decision with respect to our corporate
        structure to shed our remaining non-core business units in order to focus
        our
        efforts on the area that our management believes will deliver the most value,
        our code-reading business and the related intellectual property. We had
        previously divested of our Sponge and Mobot business units during the fourth
        quarter of 2006, and following the strategic decisions made in January 2007,
        we
        sold the 12Snap business unit in April 2007, and we completed the sale of
        our
        Telecom Services business unit in October 2007. In August 2006, we had announced
        our intent to sell our Micro Paint Repair business unit, and that sale was
        completed in November 2007. As a consequence of the planned and completed
        divestitures, we evaluated our business as one consolidated business for
        the
        entire 2007 reporting year. These divestitures were integral to our turnaround
        plan and have allowed us to invest in our principal line of business – our
        code-reading business and the related intellectual property.
  The
        following business discussion will focus on our structure in 2007 with our
        code-reading business, including Gavitec, and the related intellectual property.
        As of December 31, 2007 we had two (2) active wholly-owned subsidiaries:
        Gavitec
        AG, incorporated in Germany, and NeoMedia Migration, Inc., incorporated in
        Delaware. In addition, there are several dormant subsidiaries which are listed
        in Exhibit 21.1.
  **Divestitures
        and Impairments**
  For
        each
        of the divestitures listed below, we have analyzed the applicable accounting
        literature found in the SEC Staff Accounting Bulletin (SAB) Topic 5E, Accounting
        Principles Board (APB) Opinion 29, APB 18, Statement of Financial Accounting
        Standards (FAS) 141, FAS 144, and Emerging Issues Task Force (EITF) Issue
        01-2,
        and determined that the criteria for reporting the disposal of the businesses
        and reporting of discontinued operations have been met.
  ***Micro
        Paint Repair Business Unit*** –
        On November 15, 2007, we completed the sale of Micro Paint Repair, excluding
        the
        assets of the Micro Paint Repair-US operations (which operated under the
        brand
        name “AutoXperience”). On November 30, 2007, we shut down the operations of
        AutoXperience.
  ***Telecom
        Services Business*** –
        On October 30, 2007, we completed the sale of Telecom Services.
  ***12Snap
        Business*** –
        On April 4, 2007, we completed the sale of 12Snap.
  ***Mobot
        Business*** –
        On December 6, 2006 we completed the sale of Mobot.
  ***Sponge
        Business*** –
        On November 14, 2006, we completed the sale of Sponge.
  **Products
        and Services**
  We provide
        a complete suite of software and hardware for reading and scanning 1-D and
        2-D
        barcodes in the mobile environment, and enabling amazing applications in
        mobile
        marketing, mobile couponing, mobile ticketing and mobile payment.
  4
  ·
              NeoReaderTM–code
                  scanning software that transforms your mobile phone into a universal
                  2D
                  code scanner and provides one-click access to mobile content. The
                  NeoReaderTMallows users to scan 2-D or 1-D barcodes from enabled product packages,
                  ad
                  campaigns, retail displays, publications, or any variety of medium.
                  Mobile
                  users are able to link directly to a specific web page, access
                  services,
                  retrieve real-time information, or place orders by bypassing long
                  URLs,
                  search engines, and avoiding cumbersome menus. NeoReaderTMfeatures our patented resolution technology with Gavitec’s ultra-small
                  footprint and platform-independent algorithms. This scanner provides
                  interoperability among 2-D codes in the market and operates on
                  a variety
                  of handsets.
  ·
              EXIO®–
                  an advanced and complete solution including printer, display, keypad
                  and
                  GSM/GPRS module. EXIO®reads and processes 2-D symbologies such as Data Matrix from mobile
                  phone
                  displays as well as printed 1-D barcodes. Utilizing a high-speed
                  Digital
                  Signal Processor (DSP) and a high-resolution camera, EXIO®automatically recognizes 2-D codes such as Data Matrix, sent as
                  MMS
                  (Multimedia Message Service), EMS (Enhanced Message Service) or
                  Picture
                  Message (Smart Message) to any compatible mobile
                  phone.
  ·
              MD-20 –
                  is a high-performance OEM code reader providing unparalleled flexibility
                  in scanning 2-D symbologies such as Data Matrix from mobile phone
                  displays
                  as well as printed 1-D barcodes. Because of its compact size, speed
                  and
                  flexibility, MD-20 is the ideal high-performance fixed-position
                  2-D code
                  reader for a wide range of applications where mobile code reading,
                  mobile
                  couponing, mobile ticketing and mobile marketing are required,
                  thus
                  enabling the phone to be used as the single universal mobile
                  device.
  ·
              Lavasphere –
                  comprising low-footprint algorithms, the Lavasphere technology
                  enables
                  mobile devices with integrated cameras to read Data Matrix codes
                  and a
                  variety of other 2-D symbologies as well as 1-D barcodes. Designed
                  to be
                  embedded directly into mobile devices, the Lavasphere technology
                  is
                  primarily targeted at mobile phone manufacturers and vendors ambitious
                  to
                  add extra value to their camera-enabled mobile devices and therefore
                  boost
                  their usability.
  ·
              Link
                  Manager – is a web-based tool for creating and linking codes and
                  keywords that act as the resolution service for its codes. The
                  program
                  allows users to link commercial codes (UPC, EAN, and ISBN), keywords
                  (words, phrases, brand names, etc.) and also supports custom codes.
                  The
                  manager program offers a customizable feature that uses rules to
                  deliver
                  content based on preferences including language, gender, age, and
                  location. Link Manager offers robust logging and reporting that
                  allows
                  users to receive results on code usage, handsets usage, and
                  frequency.
  ·
              Gavitec
                  MSS – Gavitec’s “Modular Solution Server” provides a full range of
                  services from concept development, product design, customized hardware
                  and
                  software components, to support, consulting and implementation.
                  MSS is a
                  completely stand-alone system supporting 3rdparty ticketing/couponing systems and databases as well as adding
                  all
                  missing components to existing mobile systems essential for the
                  successful
                  completion and fulfillment of mobile applications. Based on our
                  customers’
                  needs and requirements, we believe that we provide the best solution
                  –
  o
              Integrating
                  3rdparty ticketing and couponing
                  systems,
  o
              Providing
                  marketing database and our own coupon
                  system,
  o
              Encrypting
                  and sending codes to mobile phones,
  o
              Decrypting
                  and analyzing code contents,
  o
              Enabling
                  customer’s own coupon and ticket
                  configuration,
  o
              Supplying
                  statistics and information on mobile activities,
                  and
  o
              Implementing
                  and delivering customized hard and software
                  solutions.
  ·
              MaxiCode
                  Encoder – our MaxiCode Encoder creates symbols in the print stream of
                  choice, ranging from PC to midrange and mainframe platforms. MaxiCode
                  is a
                  2-D symbology which can encode about 100 characters of data in
                  an area of
                  one square inch. One of MaxiCode’s key features is that it can be located
                  and read at high speeds in a large field of view. Because of these
                  unique
                  features, it has been adopted as the standard symbology for high-speed
                  sorting by UPS.
  5
  ·
              PDF417 –
                  our Portable Date File 417 (PDF417) Encoder creates bar code print
                  streams
                  for desktop, mid-range and mainframe platforms. PDF417 is a high-capacity
                  2-D barcode capable of storing any binary or textual information.
                  Industry
                  applications for PDF417 include driver’s licenses, ID cards, EDI,
                  insurance cards and any other situation in which a large amount
                  of
                  machine-readable data must be printed in a small
                  area.
  ·
              WISP –
                  Wang Interchange Source Processor (WISP) is an integrated set of
                  utilities
                  that facilitates the complete migration of Wang VS COBOL applications
                  to
                  the open systems and internet-ready world of UNIX or Windows NT.
                  WISP
                  provides the added flexibility of maintaining source files on the
                  Wang VS
                  system and migrating them to the target system as
                  needed.
  **Sales,
        Marketing and Distribution Relationships**
  We
        have
        worked to establish a global network of direct salespeople, affiliates and
        business development personnel to market, upsell and cross-sell our suite
        of
        products and services. Our target markets cross a number of geographic regions
        including: the U.S., the U.K., Western Europe, the Middle East and Asia/Pacific.
  **Data
        Centers**
  As
        of
        December 31, 2007, we do not own any data centers. We have servers located
        in a
        data center in Miami where our network infrastructure is supported by an
        outside
        vendor.
  **Proprietary
        Technology**
  Many
        of
        the products we sell to our customers rely on hardware and software technologies
        provided to us by third parties under license. Certain of our products and
        services combine these third party technologies with technologies that are
        proprietary to us. Our proprietary technology may be protected by patent
        law,
        copyright law, trade secret law and other forms of intellectual property
        protection. Our proprietary technology includes technologies that enable
        us to
        automate a number of back-end functions and technologies that allow customers
        to
        order, change and manage their accounts easily without technical expertise.
        Some
        of our proprietary technologies are unique and may not legally be utilized
        by
        competitors without a license from us. Although we believe that our suite
        of
        proprietary technologies offers customers significant benefits, we do not
        believe that our proprietary technologies are sufficient to deter competitors
        from providing competing products and services.
  **International
        Revenue**
  Our
        international revenues totaled $1.3 million and $0.9 million for the years
        ended
        December 31, 2007 and 2006, respectively. International revenues are denominated
        and paid primarily in Euros and represent revenues from international customers
        generated and supported in Germany, where our Gavitec business unit is
        located.
  **Competition**
  We
        believe we have positioned ourselves to compete as a global leader in mobile
        marketing solutions. However, within the mobile marketing industry there
        are a
        number of competitors, many of which are just beginning to appear, who offer
        parts of the mobile marketing equation. In general, due to the relative
        immaturity of the mobile marketing industry, small players have sprung up
        offering very specialized products and services.
  6
  As
        the
        mobile marketing industry matures, we expect consolidation as industry leaders
        emerge. Moreover, we believe we are well positioned at the onset due to our
        intellectual property, including many patents, on which our products and
        services are based. We expect that our intellectual property will serve as
        a
        competitive advantage as this market matures.
  **Intellectual
        Property**
  We
        rely
        on a combination of laws (including patent, copyright, trademark, service
        mark
        and trade secret laws) and contractual restrictions to establish and protect
        proprietary rights in our services. As of December 31, 2007, we owned sixteen
        (16) issued U.S. patents and fourteen (14) patents issued by foreign
        governments. Our patents
        cover core concepts behind our techniques for linking the physical world
        to the
        electronic world. These patents cover various linkage methods including
        barcodes, RF/ID, Mag Stripe, Voice and other machine readable and keyed entry
        identifiers.
  We
        have
        licensed our patents to, or settled patent-related lawsuits with
        Digital:Convergence, A.T. Cross Company, Symbol Technologies, Brandkey Systems
        Corporation, Virgin Entertainment Group, and AirClic, Inc. We are in discussions
        with other companies with regard to the licensing of our patents. However,
        there
        can be no guarantee that any of these discussions will result in future
        revenues.
  We
        have
        ongoing relationships with several law firms specializing in intellectual
        property licensing and litigation. These firms assist us in seeking out
        potential licensees of our intellectual property portfolio, including any
        resulting litigation.
  We
        have
        entered into confidentiality and other agreements with our employees and
        contractors, including agreements in which the employees and contractors
        assign
        their rights in inventions to us. We have also entered into nondisclosure
        agreements with our suppliers, distributors and some customers in order to
        limit
        access to and disclosure of our proprietary information. Nonetheless, neither
        the intellectual property laws nor contractual arrangements, nor any of the
        other steps we have taken to protect our intellectual property can ensure
        that
        others will not use our technology, or that others will not develop similar
        technologies.
  We
        license, or lease from others, many technologies used in our services. We
        expect
        that we and our customers could be subject to third-party infringement claims
        as
        the number of competitors grows. Although we do not believe that our
        technologies or services infringe the proprietary rights of any third parties,
        we cannot ensure that third parties will not assert claims against us in
        the
        future or that these claims will not be successful.
  Periodically,
        we may be made aware that technology we have used in our operations may have
        infringed intellectual property rights held by others. We will evaluate all
        such
        claims and, if necessary and appropriate, seek to obtain licenses for the
        use of
        such technology. If we or our suppliers are unable to obtain licenses necessary
        to use intellectual property in our operations, we may be legally liable
        to the
        owner of such intellectual property. Moreover, even in those instances where
        we
        are justified in denying claims that we have infringed on the intellectual
        property rights of others, we may nonetheless be forced to defend or settle
        legal actions taken against us relating to allegedly protected technology,
        and
        such legal actions may require us to expend substantial funds. See “Item 1A Risk
        Factors – We may be unable to protect our intellectual property rights and
        may be liable for infringing the intellectual property rights of
        others.”
  **Government
        Regulation**
  Existing
        or future legislation could limit the growth or use of the internet, which
        would
        curtail our revenue growth. Statutes and regulations directly applicable
        to
        internet communications, commerce and advertising are becoming more prevalent.
        Congress has passed laws regarding children’s online privacy, copyrights and
        taxation. The law remains largely unsettled even in areas where there has
        been
        legislative action. It may take years to determine whether and how existing
        laws
        governing intellectual property, privacy, libel and taxation apply to the
        internet, e-commerce, m-commerce and online advertising. In addition, the
        growth
        and development of e-commerce may prompt calls for more stringent consumer
        protection laws, both in the United States and abroad.
  7
  Certain
        of our proprietary technology allow for the storage of demographic data from
        our
        users. In 2000, the European Union adopted a directive addressing data privacy
        that may limit the collection and use of certain information regarding internet
        users. This directive may limit our ability to collect and use information
        collected by our technology in certain European countries. In addition, the
        Federal Trade Commission and several state governments have investigated
        the use
        by certain internet companies of personal information. We could incur
        significant additional expenses if new regulations regarding the use of personal
        information are introduced or if our privacy practices are
        investigated.
  **Employees**
  As
        of
        December 31, 2007, we had twenty-five (25) employees, including twelve (12)
        employees located at our headquarters in Atlanta, Georgia, and thirteen (13)
        employees at our Aachen, Germany office. None of our employees are represented
        by a labor union or bound by a collective bargaining agreement. We believe
        that
        our employee relations are good.
  **Environmental
        Regulations**
  Some
        risks of costs and liabilities related to environmental matters were inherent
        in
        our discontinued operations, as with many similar businesses, and our operations
        are subject to certain federal, state, and local environmental regulatory
        requirements relating to environmental and waste management. In connection
        with
        our discontinued operations, we periodically generated and handled limited
        amounts of materials that were considered hazardous waste under applicable
        law.
        We contracted for the off-site disposal of these materials. We believe we
        have
        operated in compliance with applicable environmental regulations related
        to
        these materials as of December 31, 2007.
  ***ITEM
                1A.***
              ***Risk
                  factors***
 
 ***You
        should carefully consider the following factors and all other information
        contained in this Form 10-K before you make any investment decisions with
        respect to our securities. The risks and uncertainties described below may
        not
        be the only risks we face.***
 
 **Risks
        Related to Our Business**
  ***We
        have incurred losses since inception and could incur losses in the future,
        and
        we have a substantial accumulated deficit and a substantial working capital
        deficit, which means that we may not be able to continue
        operations.***
  We
        have
        incurred substantial operating losses since inception, and could continue
        to
        incur substantial losses for the foreseeable future. To succeed, we must
        develop
        new client and customer relationships and substantially increase our revenue
        derived from improved products and additional value-added services. We have
        expended, and to the extent we have available financing, we intend to continue
        to expend, substantial resources to develop and improve our products, increase
        our value-added services and to market our products and services. These
        development and marketing expenses must be incurred well in advance of the
        recognition of revenue. As a result, we may not be able to achieve or sustain
        profitability. A number of factors could increase our operating expenses,
        such
        as:
  ·
              adapting
                  corporate infrastructure and administrative resources to accommodate
                  additional customers and future
                  growth;
  8
  ·
              developing
                  products, distribution, marketing, and management for the
                  broadest-possible market;
  ·
              broadening
                  customer technical support
                  capabilities;
  ·
              developing
                  or acquiring new products and associated technical
                  infrastructure;
  ·
              developing
                  additional indirect distribution
                  partners;
  ·
              increased
                  costs from third party service
                  providers;
  ·
              improving
                  data security features; and
  ·
              legal
                  fees and settlements associated with litigation and
                  contingencies.
  To
        the
        extent that increases in operating expenses are not offset by increases in
        revenues, operating losses will increase.
  The
        accompanying consolidated financial statements have been prepared in conformity
        with accounting principles generally accepted in the United States of America,
        which contemplate our continuation as a going concern. Net loss for the years
        ended December 31, 2007 and 2006 was $40.6 million and $68.4 million,
        respectively. Net cash used for operations was $8.3 million and $9.6 million
        for
        the years ended December 31, 2007 and 2006, respectively. We also have an
        accumulated deficit of $201.6 million  and
        a
        working capital deficit of $85.5 million  as
        of
        December 31, 2007.
  We
        have
        an obligation as of December 31, 2007 of $4.5 million relating to purchase
        price
        guarantee associated with our acquisition of 12Snap.
  The
        items
        discussed above raise substantial doubts about our ability to continue as
        a
        going concern.
  ***We
        will need to raise additional funds to continue our operations.***
  We
        had
        cash balances of $1.4 million as of December 31, 2007. Additionally, during
        January 2008 we sold our remaining ten percent (10%) ownership interest in
        12Snap resulting in net cash to us of $0.8 million. In order to satisfy our
        obligations that are currently due and that will come due, and maintain our
        operations in the absence of a material increase in revenues, we will need
        to
        raise additional cash from outside sources.
  In
        the
        event that i) our stock price does not increase to levels where we can force
        exercise of enough of our outstanding warrants to generate material operating
        capital, ii) the market for our stock will not support the sale of shares
        underlying such warrants or other funding sources, or iii) we do not realize
        a
        material increase in revenue during the next twelve (12) months, we will
        have to
        seek additional cash sources.
  There
        can
        be no assurances that such funding sources will be available. If necessary
        funds
        are not available, our business and operations would be materially adversely
        affected and in such event, we would be forced to attempt to reduce costs
        and
        adjust our business plan, and could be forced to sell certain of our assets,
        including but not limited to, our remaining subsidiaries and curtail or cease
        our operations.
  ***Our
        management and Board of Directors may be unable to execute their plans to
        turn
        around the Company, grow our revenues and achieve profitability and positive
        cash flows.***
  In
        February 2007 we added George O’Leary to our Board of Directors. In June 2007,
        the previous CEO was replaced by William J. Hoffman as Chief Executive Officer,
        and since that time we have also added several key executives to our management
        team. If our new CEO is unable to attract and retain management to execute
        our
        plans, or if management and the Board of Directors are unable to execute
        those
        plans, then we may fail to grow our revenues, contain costs and achieve
        profitability and positive cash flows.
  9
  ***Because
        our historical financial information is not representative of our future
        results, investors and analysts will have difficulty analyzing our future
        earnings potential.***
  Because
        we have grown through acquisitions and our past operating results reflect
        the
        costs of integrating these acquisitions, as well as revenues from operations
        which have now been sold, historical results are not representative of future
        expected operating results. We have recognized very sizable charges and
        expenditures in the past for impairment charges and discontinued operations.
        Because these items are not recurring, it is more difficult for investors
        to
        predict future results.
  ***We
        have material weaknesses in our i*** ***nternal
        control over financial reporting that may prevent us from being able to
        accurately report our financial results or prevent fraud, which could harm
        our
        business and operating results.***
  Effective
        internal controls are necessary for us to provide reliable and accurate
        financial reports and prevent fraud. In addition, Section 404 under the
        Sarbanes-Oxley Act of 2002 requires that we  assess,
        and our independent registered public accounting firm attest to, the design
        and
        operating effectiveness of internal control over financial reporting. If
        we  cannot
        provide reliable and accurate financial reports and prevent fraud, our business
        and operating results could be harmed. We have in
        the
        past discovered, and may in the future discover, areas of our internal controls
        that need improvement. We have identified
        five (5) material weaknesses in our internal control as of December 31, 2007.
        These matters and our efforts regarding remediation of these matters, as
        well as
        efforts regarding internal controls generally are discussed in detail in
        Part
        II, Item 9A(T), Controls and Procedures, of this Annual Report on Form 10-K.
         However, as our  material
        weaknesses in our internal controls demonstrate, we  cannot
        be
        certain that the remedial measures we have taken to date will ensure that
        we  design,
        implement, and maintain adequate controls over our financial processes and
        reporting in the future. Additionally, since the requirements of Section
        404 are
        ongoing and apply for future years, we  cannot
        be
        certain that we or our independent registered public accounting firm will
        not
        identify additional deficiencies or material weaknesses in our internal controls
        in the future, in addition to those identified as of December 31, 2007.
        Remedying the material weaknesses that have been presently identified, and
        any
        additional deficiencies, significant deficiencies or material weaknesses
        that
        we  or
        our
        independent registered public accounting firm may identify in the future,
        could
        in the future require us  to
        incur
        significant costs, hire additional personnel, expend significant time and
        management resources or make other changes. Any delay or failure to design
        and
        implement new or improved controls, or difficulties encountered in their
        implementation or operation, could harm our operating results, cause
        us  to
        fail
        to meet our financial reporting obligations, or prevent us  from
        providing reliable and accurate financial reports or avoiding or detecting
        fraud. Disclosure of our  material
        weaknesses, any failure to remediate such material weaknesses in a timely
        fashion or having or maintaining ineffective internal controls could cause
        investors to lose confidence in our reported financial information, which
        could
        have a negative effect on the trading price of our  stock
        and
        our access to capital.
  ***We*** ***have guaranteed the value of stock issued in connection with prior-year mergers
        through the registration of the shares, which could result in a material
        cash
        liability.***
  Pursuant
        to the terms of the merger agreement with 12Snap, we were obligated to
        compensate the sellers in cash for the difference between the price at the
        time
        the shares become saleable and the price the shares were valued for purposes
        of
        the merger agreement. At the time the shares became saleable, such obligation
        amounted to $16.2 million.
  On
        March
        19, 2007, we issued 197,620,948 shares valued at $9.4 million as partial
        settlement of the $16.2 million obligation, leaving a balance of $6.8 million
        after the stock payment. Also during 2007, we made payments of $0.5 million
        and
        negotiated a reduction of $1.76 million in the obligation, leaving a balance
        at
        year-end of $4.5 million in purchase price guarantees, the entire balance
        of
        which is currently due and payable.
  10
  ***All*** ***of
        our assets are pledged to secure certain debt obligations, which we could
        fail
        to repay and could result in the foreclosure upon our
        assets.*** ******
  Pursuant
        to our secured convertible debentures issued to YA Global Investments, LP
        (fka
        Cornell Capital Partners LP and herewith “Yorkville”), in the principal amounts
        of $7.5 million, $5.0 million, $2.5 million and $1.8 million, dated March
        27,
        2007, August 24, 2006, December 29, 2006 and August 24, 2007, respectively,
        we
        were required to secure the convertible debentures’ repayment with substantially
        all of our  assets.
        In the event we are unable to repay the secured convertible debentures, we
        could
        lose all of our assets and be forced to cease our operations. As of December
        31,
        2006, we were in default of the Investor Registration Rights Agreement pursuant
        to the August 24, 2006 and December 29, 2006 Agreements and as a result,
        the
        full fair value of the secured convertible debentures are callable in the
        amount
        of $5 million and $2.5 million, respectively, and Yorkville could foreclose
        on
        our assets if we are unable to pay these amounts. Prior to the default, we
        were
        accreting dividends on the Series C convertible preferred stock, using the
        effective interest method, through periodic charges to additional paid in
        capital. Due to the default status, we accreted dividends to the full face
        value
        as of December 31, 2006 of the Series C convertible preferred stock, resulting
        in an additional charge of $18.2 million to net loss attributable to common
        shareholders for the year ended December 31, 2006. The Series C convertible
        preferred stock is now reported as demand debt in the current liabilities
        section of the balance sheet, pursuant to the guidance outlined in FAS
        150.
  ***There*** ***is
        limited information upon which investors can evaluate our business because
        the
        physical-world-to-internet market has existed for only a short period of
        time.***
  The
        physical-world-to-internet market in which we operate is a recently developed
        market. Further, we have conducted operations in this market only since March
        1996. Consequently, we have a relatively limited operating history upon which
        an
        investor may base an evaluation of our primary business and determine our
        prospects for achieving our intended business objectives. To date, we have
        had
        limited sales of our physical-world-to-internet products. We are prone to
        all of
        the risks inherent to the establishment of any new business venture, including
        unforeseen changes in our business plan. An investor should consider the
        likelihood of our future success to be highly speculative in light of our
        limited operating history in our primary market, as well as the limited
        resources, problems, expenses, risks, and complications frequently encountered
        by similarly situated companies in new and rapidly evolving markets, such
        as the
        physical-world-to-internet space. To address these risks, we must, among
        other
        things:
  ·
              maintain
                  and increase our client base;
 ·
              implement
                  and successfully execute our business and marketing
                  strategy;
 ·
              continue
                  to develop and upgrade our products;
 ·
              continually
                  update and improve service offerings and
                  features;
 ·
              respond
                  to industry and competitive developments;
                  and
 ·
              attract,
                  retain, and motivate qualified
                  personnel.
  We
        may
        not be successful in addressing these risks. If we are unable to do so, our
        business, prospects, financial condition, and results of operations would
        be
        materially and adversely affected.
  ***Our
        future success depends on the timely introduction of new products and the
        acceptance of these new products in the marketplace.***
  Rapid
        technological change and frequent new product introductions are typical for
        the
        markets we serve. Our future success will depend in large part on continuous,
        timely development and introduction of new products that address evolving
        market
        requirements. To the extent that we fail to introduce new and innovative
        products, we may lose market share to our competitors, which may be difficult
        to
        regain. Any inability, for technological or other reasons, to successfully
        develop and introduce new products could materially and adversely affect
        our
        business.
  11
  ***Our
        common stock is deemed to be*** ***“Penny
        Stock” which may make it more difficult for investors to sell their shares due
        to suitability requirements.***
  Our
        common stock is deemed to be “penny stock” as that term is defined in
        Rule 3a51-1 promulgated under the Securities Exchange Act of 1934, as
        amended. These requirements may reduce the potential market for our common
        stock
        by reducing the number of potential investors. This may make it more difficult
        for investors in our common stock to sell shares to third parties or to
        otherwise dispose of them. This could cause our stock price to decline. Penny
        stocks are stock:
  ·
              with
                  a price of less than $5.00 per share;
 ·
              that
                  are not traded on a “recognized” national
                  exchange;
 ·
              whose
                  prices are not quoted on the NASDAQ automated quotation system
                  (NASDAQ
                  listed stock must still have a price of not less than $5.00 per
                  share);
                  or
 ·
              in
                  issuers with net tangible assets less than $2 million (if the issuer
                  has
                  been in continuous operation for at least three years) or $10 million
                  (if in continuous operation for less than three years), or with
                  average
                  revenues of less than $6 million for the last three
                  years.
  Broker-dealers
        dealing in penny stocks are required to provide potential investors with
        a
        document disclosing the risks of penny stocks. Moreover, broker-dealers are
        required to determine whether an investment in a penny stock is a suitable
        investment for a prospective investor.
  ***Existing
        shareholders will experience significant dilution when certain investors
        convert their preferred stock to common stock, convert outstanding convertible
        debentures or when the investors exercise their warrants and receive common
        stock shares under the investment agreement with the
        investors.***
  The
        issuance of shares of common stock pursuant to the conversion of Series C
        convertible preferred stock, the conversion of convertible debentures or
        the
        exercise of warrants pursuant to our transactions with Yorkville will have
        a
        dilutive impact on our stockholders. As a result, our net income or loss
        per
        share could decrease in future periods, and the market price of our common
        stock
        could decline.  In addition, the lower our stock price is, the more shares
        of common stock we will have to issue pursuant to the conversion of preferred
        stock or the convertible debentures.  If our stock price is lower,
        then existing stockholders would experience greater dilution.
  ***Due*** ***to
        accounting treatment of certain convertible preferred stock and convertible
        debenture instruments issued by us, a fluctuation in our stock price could
        have
        a material impact on our results of operations.***
  During
        the year ended December 31, 2007, we recognized a loss in the amount of $7.6
        million resulting from adjustments recorded to reflect the change in fair
        value
        from revaluation of warrants and embedded conversion features in connection
        with
        our Series C convertible preferred stock and our convertible debentures.
        We will
        adjust the carrying value of our derivative instruments to market at each
        balance sheet date. As a result, we could experience significant fluctuations
        in
        our net income (loss) in future periods from such charges based on corresponding
        movement in our share price.
  12
  ***We
        are uncertain of the success of our mobile business and the failure of this
        business would negatively affect the price of our
        stock.***
  We
        provide products and services that provide a link from physical objects,
        including printed material, to the mobile internet. We can provide no assurance
        that:
  ·
              our
                  mobile business unit will ever achieve
                  profitability;
 ·
              our
                  current product offerings will not be adversely affected by the
                  focusing
                  of our resources on the physical-world-to-internet space;
                  or
 ·
              the
                  products we develop will obtain market
                  acceptance.
  In
        the
        event that our mobile business unit should never achieve profitability, that
        our
        current product offerings should so suffer, or that our products fail to
        obtain
        market acceptance, our business, prospects, financial condition, and results
        of
        operations would be materially adversely affected.
  ***A*** ***large
        percentage of our assets are intangible assets, which will have little or
        no
        value if our operations are unsuccessful.***
  At
        December 31, 2007, approximately seventy (70%) of our total assets used in
        continuing operations were intangible assets and goodwill, consisting primarily
        of rights related to our patents, other intellectual property, and excess
        of
        purchase price over fair market value paid for Gavitec. If our operations
        are
        unsuccessful, these assets will have little or no value, which would materially
        adversely affect the value of our stock and the ability of our stockholders
        to
        recoup their investments in our stock.
  We
        review
        our amortizable intangible assets for impairment when events or changes in
        circumstances indicate the carrying value may not be recoverable. Goodwill
        is
        required to be tested for impairment at least annually. We may be required
        to
        record a significant charge to earnings in our financial statements during
        the
        period in which any impairment of our goodwill or amortizable intangible
        assets
        is determined, resulting in an impact on results of operations.
  ***Certain*** ***of
        our emerging products and services have limited history and may not result
        in
        success.***
  To
        date,
        we have conducted limited marketing efforts directly relating to our emerging
        technology products, consisting primarily of the NeoReader TM suite of
        products, and certain products of Gavitec. Many of our marketing efforts
        with
        respect to these emerging technologies have been largely untested in the
        marketplace, and may not result in materially increased sales of these emerging
        products and services. To penetrate the emerging markets in which we
        compete, we expect that we will have to exert significant efforts to create
        awareness of, and demand for, our emerging products and services. To the
        extent
        funding is available, we intend to continue to expand our sales and marketing
        resources as the market continues to mature. Our failure to further develop
        our
        sales and marketing capabilities and successfully market our emerging products
        and services would have a material adverse effect on our business, prospects,
        financial condition, and results of operations.
  ***Our
        internally developed systems are inefficient and may put us at a competitive
        disadvantage.***
  We
        use
        internally developed technologies for a portion of our systems integration
        services, as well as the technologies required to interconnect our clients’ and
        customers’ physical-world-to-internet systems and hardware with our own. As we
        develop these systems in order to integrate disparate systems and hardware
        on a
        case-by-case basis, these systems are inefficient and require a significant
        amount of customization. Such client and customer-specific customization
        is time
        consuming and costly and may place us at a competitive disadvantage when
        compared to competitors with more efficient systems.
  13
  ***We
        could fail to attract or retain key personnel, which could have a materially
        adverse effect on our business.***
  Our
        future success will depend in large part on our ability to attract, train,
        and
        retain additional highly skilled executive level management, creative,
        technical, and sales personnel. Competition is intense for these types of
        personnel from other technology companies and more established organizations,
        many of which have significantly larger operations and greater financial,
        marketing, human, and other resources than we have. We may not be successful
        in
        attracting and retaining qualified personnel on a timely basis, on competitive
        terms, or at all. Our failure to attract and retain qualified personnel could
        have a material adverse effect on our business, prospects, financial condition,
        and results of operations.
  ***We
        may be unsuccessful in integrating our Gavitec acquisition with our current
        business, which could have a materially adverse effect on our
        business.***
  The
        success of the acquisition of Gavitec could depend on the ability of our
        executive management to integrate the business plan of Gavitec with our overall
        business plan. Failure to properly integrate the business could have a material
        adverse effect on the expected revenue and operations of the acquisition,
        as
        well as the expected return on investment for us. We acquired Gavitec during
        the
        first quarter of 2006, when we also acquired four other businesses – Mobot,
        Sponge, 12Snap and NeoMedia Telecom Services, each of which have been
        subsequently divested, less than two (2) years after acquisition. As a result
        of
        these divestitures, we have experienced a substantial decrease in revenues,
        operating losses and consolidated assets in the current year as compared
        to the
        prior year. For the year ended December 31, 2007, Gavitec accounted for
        approximately seventy-one percent (71%) of our consolidated revenues, and
        approximately one percent (1%) of our consolidated net loss. In addition,
        Gavitec assets represented approximately five percent (5%) of our consolidated
        assets as of December 31, 2007.
  ***We
        may be unable to protect our intellectual property rights and may be liable
        for
        infringing the intellectual property rights of others, which could have a
        materially adverse effect on our business.***
  Our
        success in the physical-world-to-internet market is dependent upon our
        proprietary technology, including patents and other intellectual property,
        and
        on the ability to protect proprietary technology and other intellectual property
        rights. In addition, we must conduct our operations without infringing on
        the
        proprietary rights of third parties. We also intend to rely upon unpatented
        trade secrets and the know-how and expertise of our employees, as well as
        our
        patents. To protect our proprietary technology and other intellectual property,
        we rely primarily on a combination of the protections provided by applicable
        patent, copyright, trademark, and trade secret laws as well as on
        confidentiality procedures and licensing arrangements. Although we believe
        that
        we have taken appropriate steps to protect our unpatented proprietary rights,
        including requiring that our employees and third parties who are granted
        access
        to our proprietary technology enter into confidentiality agreements, we can
        provide no assurance that these measures will be sufficient to protect our
        rights against third parties. Others may independently develop or otherwise
        acquire patented or unpatented technologies or products similar or superior
        to
        ours.
  We
        license from third parties certain software tools that are included in our
        services and products. If any of these licenses were terminated, we could
        be
        required to seek licenses for similar software from other third parties or
        develop these tools internally. We may not be able to obtain such licenses
        or
        develop such tools in a timely fashion, on acceptable terms, or at all.
        Companies participating in the software and internet technology industries
        are
        frequently involved in disputes relating to intellectual property. We may
        in the
        future be required to defend our intellectual property rights against
        infringement, duplication, discovery, and misappropriation by third parties
        or
        to defend against third party claims of infringement. Likewise, disputes
        may
        arise in the future with respect to ownership of technology developed by
        employees who were previously employed by other companies. Any such litigation
        or disputes could result in substantial costs to, and a diversion of resources
        by us. An adverse determination could subject us to significant liabilities
        to
        third parties, require us to seek licenses from, or pay royalties to, third
        parties, or require us to develop appropriate alternative technology. Some
        or
        all of these licenses may not be available to us on acceptable terms or at
        all,
        and we may be unable to develop alternate technology at an acceptable price
        or
        at all. Any of these events could have a material adverse effect on our
        business, prospects, financial condition, and results of
        operations.
  14
  ***We
        are exposed to product liability claims and an uninsured claim could have
        a
        material adverse effect on our business, prospects, financial condition,
        and
        results of operations, as well as the value of our
        stock.***
  Many
        of
        our projects are critical to the operations of our clients’ businesses. Any
        failure in a client’s information system could result in a claim for substantial
        damages against us, regardless of our responsibility for such failure. We
        could,
        therefore, be subject to claims in connection with the products and services
        that we sell. We currently maintain product liability insurance. There can
        be no
        assurance that:
  ·
              We
                  have contractually limited our liability for such claims adequately
                  or at
                  all; or
 ·
              We
                  would have sufficient resources to satisfy any liability resulting
                  from
                  any such claim.
  The
        successful assertion of one or more large claims against us could have a
        material adverse effect on our business, prospects, financial condition,
        and
        results of operations.
  ***We
        utilize data centers maintained by third parties, which could affect our
        ability
        to support our customers or financial performance.***
  Many
        of
        the network services and computer servers utilized by us in our provision
        of
        services to customers are housed in data centers owned by third-party vendors.
        In the future, we may house additional servers and hardware items in facilities
        owned or operated by other vendors.
  A
        disruption in the ability of one of these data centers to provide service
        to us
        could cause a disruption in service to our customers. A data center could
        be
        disrupted in its operations through a number of contingencies, including
        unauthorized access, computer viruses, accidental or intentional actions,
        electrical disruptions, and other extreme conditions. Although we believe
        we
        have taken adequate steps to protect our operations through our contractual
        arrangements with our data centers, we cannot eliminate the risk of a disruption
        in service resulting from the accidental or intentional disruption in service
        by
        a date center. Any significant disruption could cause significant harm to
        us,
        including a significant loss of customers. In addition, a data center could
        raise its prices or otherwise change its terms and conditions in a way that
        adversely affects our ability to support our customers or financial
        performance.
  ***We
        will not pay cash dividends and investors may have to sell their shares in
        order
        to realize their investment.***
  We
        have
        not paid any cash dividends on our common stock and do not intend to pay
        cash
        dividends in the foreseeable future. We intend to retain future earnings,
        if
        any, for reinvestment in the development and marketing of our products and
        services. As a result, investors may have to sell their shares of common
        stock
        to realize their investment.
  ***Some*** ***provisions
        of our certificate of incorporation and bylaws may deter takeover attempts,
        which may limit the opportunity of our stockholders to sell their shares
        at a
        premium to the then-current market price.***
  Some
        of
        the provisions of our Certificate of Incorporation and bylaws could make
        it more
        difficult for a third party to acquire us, even if doing so might be beneficial
        to our stockholders by providing them with the opportunity to sell their
        shares
        at a premium to the then-current market price. On December 10, 1999, our
        Board
        of Directors adopted a stockholders rights plan and declared a non-taxable
        dividend of one right to acquire our Series A Preferred Stock, par value
        $0.01
        per share, on each outstanding share of our common stock to stockholders
        of
        record on December 10, 1999 and each share of common stock issued thereafter
        until a pre-defined hostile takeover date. The stockholder rights plan was
        adopted as an anti-takeover measure, commonly referred to as a “poison pill”.
        The stockholder rights plan was designed to enable all stockholders not engaged
        in a hostile takeover attempt to receive fair and equal treatment in any
        proposed takeover of us and to guard against partial or two-tiered tender
        offers, open market accumulations, and other hostile tactics to gain control
        of
        us. The stockholders rights plan was not adopted in response to any effort
        to
        acquire control of us at the time of adoption. This stockholders rights plan
        may
        have the effect of rendering more difficult, delaying, discouraging, preventing,
        or rendering more costly an acquisition of us or a change in control of us.
        Certain of our principal stockholders, Charles W. Fritz, William E. Fritz
        and
        The Fritz Family Limited Partnership and their holdings were exempted from
        the
        triggering provisions of our “poison pill” plan, as a result of the fact that,
        as of the plan’s adoption, their holdings might have otherwise triggered the
“poison pill”.
  15
  In
        addition, our Certificate of Incorporation authorizes our Board of Directors
        to
        designate and issue preferred stock, in one or more series, the terms of
        which
        may be determined at the time of issuance by our Board of Directors, without
        further action by stockholders, and may include voting rights, including
        the
        right to vote as a series on particular matters, preferences as to dividends
        and
        liquidation, conversion, redemption rights, and sinking fund
        provisions.
  We
        are
        authorized to issue a total of 25 million shares of Preferred Stock, par
        value
        $0.01 per share. The issuance of any preferred stock could have a material
        adverse effect on the rights of holders of our common stock, and, therefore,
        could reduce the value of shares of our common stock. In addition, specific
        rights granted to future holders of preferred stock could be used to restrict
        our ability to merge with, or sell our assets to, a third party. The ability
        of
        our Board of Directors to issue preferred stock could have the effect of
        rendering more difficult, delaying, discouraging, preventing, or rendering
        more
        costly an acquisition of us or a change in our control.
  **Risks
        Relating To Our Industry**
  ***The*** ***security
        of the internet poses risks to the success of our entire
        business.***
  Concerns
        over the security of the internet and other electronic transactions, and
        the
        privacy of consumers and merchants, may inhibit the growth of the internet
        and
        other online services generally, especially as a means of conducting commercial
        transactions, which may have a material adverse effect on our
        physical-world-to-internet business.
  ***We
        will only be able to execute our physical-world-to-internet business plan
        if
        internet usage and electronic commerce continue to
        grow.***
  Our
        future revenues and any future profits are substantially dependent upon the
        widespread acceptance and use of the internet and camera devices on mobile
        telephones. If use of the internet and camera devices on mobile telephones
        does
        not continue to grow or grows more slowly than expected, or if the
        infrastructure for the internet and camera devices on mobile telephones does
        not
        effectively support the growth that may occur, or does not become a viable
        commercial marketplace, our physical-world-to-internet business, and therefore
        our business, prospects, financial condition, and results of operations,
        could
        be materially adversely affected. Rapid growth in the use of, and interest
        in,
        the internet and camera devices on mobile telephones is a recent phenomenon,
        and
        may not continue on a lasting basis. In addition, customers may not adopt,
        and
        continue to use mobile telephones as a medium of information retrieval or
        commerce. Demand and market acceptance for recently introduced services and
        products over the mobile internet are subject to a high level of uncertainty,
        and few services and products have generated profits. For us to be successful,
        consumers and businesses must be willing to accept and use novel and cost
        efficient ways of conducting business and exchanging information.
  16
  In
        addition, the public in general may not accept the use of the internet and
        camera devices on mobile telephones as a viable commercial or information
        marketplace for a number of reasons, including potentially inadequate
        development of the necessary network infrastructure or delayed development
        of
        enabling technologies and performance improvements. To the extent that mobile
        phone internet usage continues to experience significant growth in the number
        of
        users, their frequency of use, or in their bandwidth requirements, the
        infrastructure for the mobile internet may be unable to support the demands
        placed upon them. In addition, the mobile internet and mobile interactivity
        could lose its viability due to delays in the development or adoption of
        new
        standards and protocols required to handle increased levels of mobile internet
        activity, or due to increased governmental regulation. Significant issues
        concerning the commercial and informational use of the mobile internet, and
        online network technologies, including security, reliability, cost, ease
        of use,
        and quality of service, remain unresolved and may inhibit the growth of internet
        business solutions that utilize these technologies. Changes in, or insufficient
        availability of, telecommunications services to support the internet, the
        web or
        other online services also could result in slower response times and adversely
        affect usage of the internet, the web and other online networks generally
        and
        our physical-world-to-internet product and networks in particular.
  ***We
        may not be able to adapt as the internet,
        physical-world-to-*** ***internet,
        and customer demands continue to evolve.***
  We
        may
        not be able to adapt as the mobile internet and physical-world-to-internet
        markets and consumer demands continue to evolve. Our failure to respond in
        a
        timely manner to changing market conditions or client requirements would
        have a
        material adverse effect on our business, prospects, financial condition,
        and
        results of operations. The mobile internet and physical-world-to-internet
        markets are characterized by:
  ·
              rapid
                  technological change;
 ·
              changes
                  in user and customer requirements and
                  preferences;
 ·
              frequent
                  new product and service introductions embodying new technologies;
                  and
 ·
              the
                  emergence of new industry standards and practices that could render
                  proprietary technology and hardware and software infrastructure
                  obsolete.
  Our
        success will depend, in part, on our ability to:
  ·
              enhance
                  and improve the responsiveness and functionality of our products
                  and
                  services;
 ·
              license
                  or develop technologies useful in our business on a timely
                  basis;
 ·
              enhance
                  our existing services, and develop new services and technologies
                  that
                  address the increasingly sophisticated and varied needs of our
                  prospective
                  or current customers; and
 ·
              respond
                  to technological advances and emerging industry standards and practices
                  on
                  a cost-effective and timely basis.
  ***We
        may not be able to compete effectively in markets where our competitors have
        more resources.***
  While
        the
        market for physical-world-to-internet technology is relatively new, it is
        already highly competitive and characterized by an increasing number of entrants
        that have introduced or developed products and services similar to those
        offered
        by us. We believe that competition will intensify and increase in the near
        future. Our target market is rapidly evolving and is subject to continuous
        technological change. As a result, our competitors may be better positioned
        to
        address these developments or may react more favorably to these changes,
        which
        could have a material adverse effect on our business, prospects, financial
        condition, and results of operations.
  17
  Some
        of
        our competitors have longer operating histories, larger customer bases, longer
        relationships with clients, and significantly greater financial, technical,
        marketing, and public relations resources than we do. We may not successfully
        compete in any market in which we conduct or may conduct operations. We may
        not
        be able to penetrate markets or market our products as effectively as our
        better-funded more-established competitors.
  ***In*** ***the
        future, there could be government regulations and legal uncertainties which
        could harm our business.***
  Any
        new
        legislation or regulation, the application of laws and regulations from
        jurisdictions whose laws do not currently apply to our business, or the
        application of existing laws and regulations to the internet and other online
        services, could have a material adverse effect on our business, prospects,
        financial condition, and results of operations. Due to the increasing popularity
        and use of the internet, the web and other online services, federal, state,
        and
        local governments may adopt laws and regulations, or amend existing laws
        and
        regulations, with respect to the internet or other online services covering
        issues such as taxation, user privacy, pricing, content, copyrights,
        distribution, and characteristics and quality of products and services. The
        growth and development of the market for electronic commerce may prompt calls
        for more stringent consumer protection laws to impose additional burdens
        on
        companies conducting business online. The adoption of any additional laws
        or
        regulations may decrease the growth of the internet, the Web or other online
        services, which could, in turn, decrease the demand for our services and
        increase our cost of doing business, or otherwise have a material adverse
        effect
        on our business, prospects, financial condition, and results of operations.
        Moreover, the relevant governmental authorities have not resolved the
        applicability to the internet, the Web and other online services of existing
        laws in various jurisdictions governing issues such as property ownership
        and
        personal privacy and it may take time to resolve these issues
        definitively.
  Certain
        of our proprietary technology allow for the storage of demographic data from
        our
        users. In 2000, the European Union adopted a directive addressing data privacy
        that may limit the collection and use of certain information regarding internet
        users. This directive may limit our ability to collect and use information
        collected by our technology in certain European countries. In addition, the
        Federal Trade Commission and several state governments have investigated
        the use
        by certain internet companies of personal information. We could incur
        significant additional expenses if new regulations regarding the use of personal
        information are introduced or if our privacy practices are
        investigated.
  ***ITEM
                1B.***
              ***Unresolved
                  staff comments***
   None.
  ***ITEM
                2.***
              ***Properties***
   As
        of
        December 31, 2007, we had leases on three facilities, including our corporate
        headquarters in Atlanta, Georgia, our Gavitec office in Aachen, Germany,
        and a
        facility that previously housed the operations of AutoXperience in Fort Myers,
        Florida.
  Our
        principal executive, development and administrative office is located in
        Atlanta, Georgia. We occupy approximately 10,025 square feet under the terms
        of
        a written lease from an unaffiliated party which expires on September 29,
        2011,
        with monthly rent totaling approximately $11,250.
  Our
        Gavitec subsidiary is operated from a facility in Aachen, Germany, where
        approximately 4,400 square feet are leased under the terms of a written lease
        which expires on September 30, 2008, with monthly rent totaling approximately
        $6,000.
  18
  Our
        former AutoXperience operation in Fort Myers, Florida was housed in a leased
        facility of approximately 10,600 square feet under the terms of a written
        lease
        from an unaffiliated party that expired on February 28, 2008. The monthly
        rent
        was approximately $9,000. Because we ceased operations of the AutoXperience
        business unit on November 30, 2007, we did not renew this lease.
  ***ITEM
                3.***
              ***Legal
                  proceedings***
   We
        are
        involved in various legal actions arising in the normal course of business,
        both
        as claimant and defendant. While it is not possible to determine with certainty
        the outcome of these matters, it is the opinion of management 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.
        Discovery is ongoing.
 
 ***ITEM
                4.***
              ***Submission
                  of matters to a vote of security
                  holders***
   None.
  **PART
        II**
 
 ***ITEM
                5.***
              ***Market
                  for registrant’s common equity, related stockholder matters and issuer
                  purchases of equity
                  securities***
   **Market
        Information**
  Our
        common shares trade on the Over-the-counter Bulletin Board (“OTCBB”) under the
        symbol “NEOM.” As of December 31, 2007, we had 1,022,144,424 common shares
        outstanding.
  The
        following table summarizes the high and low closing sales prices per share
        of
        the common stock for the periods indicated as reported on the Over-the-counter
        Bulletin Board:
  2007
              
              2006High
              
              Low
              
              High
              
              LowFirst
                  quarter
              
              $
              0.06
              
              $
              0.04
              
              $
              0.42
              
              $
              0.29Second
                  quarter
              
              $
              0.07
              
              $
              0.03
              
              $
              0.32
              
              $
              0.20Third
                  quarter
              
              $
              0.03
              
              $
              0.02
              
              $
              0.23
              
              $
              0.11Fourth
                  quarter
              
              $
              0.03
              
              $
              0.01
              
              $
              0.12
              
              $
              0.05
  19
 
 The
        following table presents certain information with respect to our equity
        compensation plans as of December 31, 2007:
 
 Number ofsecurities remainingNumber of securities
              
              
              
              available for futureto be issued
              
              Weighted-average
              
              issuance under equityupon exercise of
              
              exercise price of
              
              compensation plansoutstanding options,
              
              outstanding options,
              
              (excluding securitieswarrants and rights
              
              warrants and rights
              
              reflected in column (a))Plan Category
              
              (a)
              
              (b)
              
              (c)Equity
                  compensation plans approved by security holders
              
              
              115,511,747
              
              $
              0.05
              
              
              67,002,356Equity
                  compensation plans not approved by security holders
              
              
              -
              
              
              -
              
              
              -Total
              
              
              115,511,747
              
              $
              0.05
              
              
              67,002,356
  **Performance
        Graph**
  Not
        required for Smaller Reporting Company.
 
 **Recent
        Sales of Unregistered Securities** **;
        Use of Proceeds from Registered Securities**
  On
        December 17, 2007, we issued 820,313 shares of common stock to Corporate
        Resources, Inc. as partial payment against a placement fee incurred in filling
        a
        management position with us. The shares were valued at $0.016 per share,
        which
        was the fair value at the time of issuance.
  On
        October 2, 2007, we issued 264,753 shares of common stock to SKS Consulting
        of
        South Florida Corp. (“SKS”) as partial payment against the consulting agreement
        we have with SKS. The shares were valued at $0.019 per share, which was the
        fair
        value at the time of issuance.
  On
        July
        20, 2007, we issued 517,415 shares of common stock to SKS Consulting of South
        Florida Corp. (“SKS”) as partial payment against the consulting agreement we
        have with SKS. The shares were valued at $0.0251 per share, which was the
        fair
        value at the time of issuance.
  On
        March
        19, 2007, we issued 197,620,948 shares of common stock to the former 12Snap
        shareholders as partial payment against the purchase price protection clause
        of
        the original sale and purchase agreement between the former 12Snap shareholders
        and us. The shares were valued at $0.045 per share, which was the fair value
        at
        the time of issuance.
  On
        March
        1, 2007, we issued 61 million shares of common stock to the former Gavitec
        shareholders as partial payment against the purchase price protection clause
        of
        the original sale and purchase agreement between the former Gavitec shareholders
        and us. The shares were valued at $0.053 per share, which was the fair value
        at
        the time of issuance.
  We
        relied
        upon the exemption provided in Section 4(2) of the Securities Act and/or
        Rule
        506, which cover “transactions by an issuer not involving any public offering”
to issue securities discussed above without registration under the Securities
        Act. The certificates representing the securities issued displayed a restrictive
        legend to prevent transfer except in compliance with applicable laws, and
        our
        transfer agent was instructed not to permit transfers unless directed to
        do so
        by us, after approval by our legal counsel. We believe that the investors
        to
        whom securities were issued had such knowledge and experience in financial
        and
        business matters as to be capable of evaluating the merits and risks of the
        prospective investment. We also believe that the investors had access to
        the
        same type of information as would be contained in a registration
        statement.
  20
  **Holders
        of Record** ****
  On
        February 1, 2008 the closing price of our common stock as reported on the
        OTCBB
        was $0.0096 per share and there were approximately 11,650 shareholders of
        record. The number of record holders does not include beneficial owners of
        common stock whose shares are held in the names of banks, brokers, nominees
        or
        other fiduciaries.
  **Dividends**
  We
        have
        not declared or paid any cash dividends and do not foresee paying any cash
        dividends in the foreseeable future.
  ***ITEM
                6.***
              ***Selected
                  financial data***
   Not
        required for Smaller Reporting Company.
 
 ***ITEM
                7.***
              ***Management‘s
                  discussion and analysis of financial condition and results of
                  operations***
 
 **Overview**
  N eoMedia
        provides internet advertising solutions using wireless technologies to connect
        traditional print and broadcast media companies to active mobile content.
        Using
        camera-enabled mobile phones, barcode-reading software (NeoReader TM ),
        and an
        interoperable billing, clearing and settlement infrastructure
        (NeoServer-OMS/OMI), we embrace open standards, full interoperability, and
        are
        barcode symbology agnostic.
  Our
        mobile phone technology, NeoReader TM ,
        reads
        and transmits data from 1-D, and 2-D barcodes to its intended destination.
        Our
        Optical Messaging and Interchange platforms (OMS and OMI) create, connect,
        record, and transmit the transactions embedded in the 1-D and 2-D barcodes,
        like
        web-URLs, text messages (SMS), and telephone calls, ubiquitously and reliably.
        We provide the industrial and carrier-grade infrastructure to enable reliable,
        scalable, and billable commerce. To provide a robust high-performance
        infrastructure for the processing of optical codes, we extend our offering
        with
        the award winning Gavitec technology. Gavitec’s Mobile Ticketing and Couponing
        solutions allow users to enter information and opt-in to initiate mobile
        transactions.
  The
        Board
        of Directors recruited William J. Hoffman to join us as Chief Executive Officer
        and Chairman of the Board in June 2007. In addition to Mr. Hoffman, we added
        George O’Leary to our Board of Directors in February 2007. In late 2006, our
        senior management team began implementing a new strategic direction that
        focuses
        our resources on our code reading business and related intellectual property.
        One of the first steps of implementing this strategy was our decision to
        divest
        all non-core business units. Consequently, we sold our Sponge and Mobot business
        units during the fourth quarter of 2006, and we sold the 12Snap business
        unit in
        April 2007, we sold our Telecom Services business unit in October 2007, and
        sold
        our Micro Paint Repair business unit in November 2007.
  By
        shifting to a business model that focuses on our code-reading 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. A major goal of ours is to provide the industrial and carrier-grade
        infrastructure to enable reliable, scalable and billable commerce that is
        customer-focused and drives revenue growth.
  The
        proceeds received from the sale of our non-core business units have been
        used to
        continue with the development of our code-reading business.
 
 21
  **Critical
        Accounting Policies** **and Estimates**
  This
        discussion and analysis of financial condition and results of operations
        has
        been prepared by management based on our consolidated financial statements,
        which have been prepared in accordance with accounting principles generally
        accepted in the United States of America (“GAAP”). The preparation of these
        financial statements requires management to make estimates and judgments
        that
        affect the reported amounts of assets, liabilities, revenues, and expenses,
        and
        related disclosure of contingent assets and liabilities. On an ongoing basis,
        management evaluates our critical accounting policies and estimates, including
        those related to revenue recognition, valuation of accounts receivable,
        property, plant and equipment, long-lived assets, intangible assets, and
        contingencies. Estimates are based on historical experience and on various
        other
        assumptions believed to be reasonable under the circumstances, the results
        of
        which form the basis for making judgments about the carrying values of assets
        and liabilities that are not readily apparent from other sources.
  We
        consider the following accounting policies important in understanding the
        operating results and financial conditions of NeoMedia. These judgments and
        estimates affect the reported amounts of assets and liabilities and the reported
        amounts of revenues and expenses during the reporting periods.
  ·
              ***Intangible
                  Asset Valuation –***The
                  determination of the fair value of certain acquired assets and
                  liabilities
                  is subjective in nature and often involves the use of significant
                  estimates and assumptions. Determining the fair values and useful
                  lives of
                  intangible assets especially requires the exercise of judgment.
                  While
                  there are a number of different generally accepted valuation methods
                  to
                  estimate the value of intangible assets acquired, we primarily
                  use the
                  weighted-average probability method outlined in FAS 144, “*Accounting
                  for the Impairment or Disposal of Long-Lived Assets.*”
                  This method requires significant management judgment to forecast
                  the
                  future operating results used in the analysis. In addition, other
                  significant estimates are required such as residual growth rates
                  and
                  discount factors. The estimates we have used are consistent with
                  the plans
                  and estimates that we use to manage our business, based on available
                  historical information and industry averages. The judgments made
                  in
                  determining the estimated useful lives assigned to each class of
                  assets
                  acquired can also significantly affect our net operating
                  results.
  According
        to FAS 144, a long-lived asset should be tested for recoverability whenever
        events or changes in circumstances indicate that its carrying amount may
        not be
        recoverable. The following are examples of such events or changes in
        circumstances:
  o
              A
                  significant decrease in the market price of the
                  asset
  o
              A
                  significant adverse change in the extent or manner in which the
                  asset is
                  being used, or in its physical
                  condition
  o
              A
                  significant adverse change in legal factors or in the business
                  climate
                  that could affect the value of the asset, including an adverse
                  action or
                  assessment by a regulator
  o
              An
                  accumulation of costs significantly in excess of the amount originally
                  expected
  o
              A
                  current-period operating or cash flow loss combined with a history
                  of
                  operating or cash flow losses or a projection or forecast that
                  demonstrates continuing losses associated with the use of the
                  asset
  o
              A
                  current expectation that, more likely than not,****the
                  asset will be sold or otherwise disposed of significantly before
                  the end
                  of its previously estimated useful
                  life.
  We
        follow
        the two-step process outlined in FAS 144 for determining if an impairment
        charge
        should be taken: (1) the expected undiscounted cashflows from a particular
        asset
        or asset group are compared to the carrying value; if the expected undiscounted
        cashflows are greater than the carrying value, no impairment is taken, but
        if
        the expected undiscounted cashflows are less than the carrying value, then
        (2)
        an impairment charge is taken for the difference between the carrying value
        and
        the expected discounted cashflows. The assumptions used in developing expected
        cashflow estimates are similar to those used in developing other information
        used by us for budgeting and other forecasting purposes. In instances where
        a
        range of potential future cashflows is possible, we use a probability-weighted
        approach to weigh the likelihood of those possible outcomes. In such instances,
        we use a discount rate equal to the yield on zero-coupon treasury instruments
        with a life equal to expected life of the assets being tested.
  22
  ·
              ***Financial
                  Instruments and Concentrations of Credit Risk –***Our
                  financial instruments consist of cash and cash equivalents, accounts
                  receivable, accounts payable, accrued expenses, notes payable,
                  derivative
                  financial instruments, other current liabilities, convertible preferred
                  stock, and convertible debenture financing. We believe the carrying
                  values
                  of cash and cash equivalents, accounts receivable, accounts payable,
                  accrued expenses, notes payable, and other current liabilities
                  approximate
                  their fair values due to their short-term nature. The fair value
                  of
                  convertible preferred stock and convertible debentures is estimated
                  on
                  December 31, 2007 to be approximately $20 million and $30.7 million,
                  respectively.
  We
        generally do not use derivative financial instruments to hedge exposures
        to
        cash-flow risks or market-risks that may affect the fair values of our financial
        instruments. However, certain other financial instruments, such as warrants
        and
        embedded conversion features that are indexed to our common stock, are
        classified as liabilities when either (a) the holder possesses rights to
        net-cash settlement or (b) physical or net-share settlement is not within
        our
        control. In such instances, net-cash settlement is assumed for financial
        accounting and reporting, even when the terms of the underlying contracts
        do not
        provide for net-cash settlement. Derivative financial instruments arising
        from
        the issuance of convertible financial instruments are initially recorded,
        and
        continuously carried, at fair value.
  Determining
        the fair value of derivative financial instruments involves judgment and
        the use
        of certain relevant assumptions including, but not limited to, interest rate
        risk, credit risk, equivalent volatility and conversion/redemption privileges
        that are necessary to value these complex derivatives.
  The
        caption “Derivative Financial Instruments” consists of (i) the fair values
        associated with derivative features embedded in the Series C convertible
        preferred stock and certain convertible debentures, (ii) the fair values
        of the
        detachable warrants that were issued in connection with the preferred stock
        financing arrangement, and (iii) the fair value of detachable warrants that
        were
        outstanding prior to the issuance of the Series C Preferred Shares.
  We
        utilize various types of financing to fund our business needs, including
        convertible preferred stock, convertible debentures, and other instruments
        indexed to our own stock. The embedded conversion features utilized in these
        instruments require periodic measurement of the fair value of the derivative
        components. Pursuant to FAS 133 and EITF 00-19 we update the fair value of
        these
        derivative components at each reporting period.
  ·
              ***Revenue
                  Recognition –***We
                  derive revenues from the following sources:  (1) license
                  revenues relating to patents and internally-developed software,
                  and (2)
                  hardware, software, and service revenues related to mobile marketing
                  campaign design and implementation.
 
 o
              Technology
                  license fees, including Intellectual Property licenses, represent
                  revenue
                  from the licensing of our proprietary software tools and applications
                  products.  We license our development tools and application products
                  pursuant to non-exclusive and non-transferable license agreements. 
                  The basis for license fee revenue recognition is substantially
                  governed by
                  American Institute of Certified Public Accountants 
                  (“AICPA”)  Statement of Position 97-2 “*Software
                  Revenue  Recognition*”
                  (“SOP 97-2”), as amended, and Statement of Position 98-9, Modification of
                  SOP 97-2, “*Software
                  Revenue Recognition, With Respect to Certain Transactions*”. 
                  License revenue is recognized if persuasive evidence of an agreement
                  exists, delivery has occurred, pricing is fixed and determinable,
                  and
                  collectibility is probable.  We defer revenue related to license fees
                  for which amounts have been collected but for which revenue has
                  not been
                  recognized in accordance with the above, and recognize the revenue
                  over
                  the appropriate period.
  23
  o
              Technology
                  service and product revenue, which includes sales of software and
                  technology equipment and service fees is recognized based on
                  guidance provided in SAB 104, “*Revenue
                  Recognition in Financial Statements*”
                  as amended.  Software and technology equipment resale revenue is
                  recognized when persuasive evidence of an arrangement exists, the
                  price to the customer is fixed and determinable, delivery of the
                  service
                  has occurred and collectibility is reasonably assured. Service
                  revenues
                  including maintenance fees for providing system updates for software
                  products, user documentation and technical
                  support are recognized over the life of the contract.
                  Our subsidiary Gavitec follows this policy. We defer revenue related
                  to
                  technology service and product revenue for which amounts have been
                  invoiced and or collected but for which the requisite service has
                  not been
                  provided. Revenue is then recognized over the matching service
                  period.
  ·
              ***Valuation
                  of Accounts Receivable –***Judgment
                  is required when we assess the likelihood of ultimate realization
                  of
                  recorded accounts receivable, including assessing the likelihood
                  of
                  collection and the credit-worthiness of customers. If the financial
                  condition of our customers were to deteriorate or their operating
                  climate
                  were to change, resulting in an impairment of either their ability
                  or
                  willingness to make payments, an increase in the allowance for
                  doubtful
                  accounts would be required. Similarly, a change in the payment
                  behavior of
                  customers generally may require an adjustment in the calculation
                  of an
                  appropriate allowance. Each month we assess the collectibility
                  of specific
                  customer accounts, the aging of accounts receivable, our history
                  of bad
                  debts, and the general condition of the industry. If a major customer’s
                  credit worthiness deteriorates, or our customers’ actual defaults exceed
                  historical experience, our estimates could change and impact our
                  reported
                  results. We believe that the current allowance for doubtful accounts
                  receivable is adequate to cover the expected level of uncollectible
                  accounts receivable as of the balance sheet date. For the years
                  ended
                  December 31, 2007 and 2006, our bad debt expense was $78,000 and
                  $60,000,
                  respectively.
  ·
              ***Inventory –***Inventories
                  are stated at lower of cost (using the first-in, first-out method)
                  or
                  market. We continually evaluate the composition of our inventories
                  assessing slow-moving and ongoing products and maintain a reserve
                  for
                  slow-moving and obsolete inventory as well as related disposal
                  costs. As
                  of December 31, 2007 and 2006, we recorded a reserve for inventory
                  shrinkage and obsolescence of $80,000 and $53,000,
                  respectively.
  ·
              ***Stock-based
                  Compensation –***Effective
                  January 1, 2006, we record stock-based compensation in accordance
                  with FAS
                  123(R), “*Share-Based
                  Payment”,*which
                  requires measurement of all employee stock-based compensation awards
                  using
                  a fair-value method and the recording of such expense in the consolidated
                  financial statements. We apply the Black-Sholes-Merton option pricing
                  model and recognize compensation cost on a straight-line basis
                  over the
                  vesting periods for the awards. Inherent in this model are assumptions
                  related to expected stock-price volatility, option life, risk-free
                  interest rate and dividend yield.
  While
        the
        risk-free interest rate and dividend yield are less subjective assumptions,
        typically based on factual data derived from public sources, the expected
        stock-price volatility, forfeiture rate and option life assumptions require
        a
        greater level of judgment which make them critical accounting estimates.
        We use
        an expected stock-price volatility assumption that is based on historical
        volatilities of our stock, and estimate the forfeiture rates and option life
        based on historical data of prior options. Because these assumptions are
        based
        on historical information, actual future expenses may differ materially from
        the
        current estimates which are based on these assumptions.
  24
  ·
              ***Contingencies –***We
                  are subject to proceedings, lawsuits and other claims related to
                  lawsuits
                  and other regulatory proceedings that arise in the ordinary course
                  of
                  business. We are required to assess the likelihood of any adverse
                  judgments or outcomes of these matters as well as potential ranges
                  of
                  probable losses. A determination of the amount of the loss accrual
                  required, if any, for these contingencies, is made after careful
                  analysis
                  of each individual issue. We generally accrue attorney fees and
                  interest
                  in addition to an estimate of the expected liability. We consult
                  with
                  legal counsel and other experts where necessary to assess any
                  contingencies. The required accrual may change in the future due
                  to new
                  developments in each matter or changes in approach such as a change
                  in
                  settlement strategy in dealing with these
                  matters.
  ·
              ***Income
                  Tax Valuation Allowance –***Deferred******tax
                  assets are reduced by a valuation allowance when, in the opinion
                  of our
                  management, it is more likely than not that some portion or all
                  of the
                  deferred tax assets will not be recognized. We have recorded a
                  100%
                  valuation allowance as December 31, 2007 and
                  2006.
  ·
              ***Foreign
                  Currency Translation –***the U.S. dollar is the functional currency of our operations, except
                  for
                  our operations at Gavitec, which use the Euro as their functional
                  currency. Foreign currency transaction gains and losses are reflected
                  in
                  income. Translation gains and losses of our operations that do
                  not use the
                  U.S. dollar as the functional currency are included in the consolidated
                  balance sheets as “Accumulated other comprehensive income
                  (loss).”
  ·
              ***Income
                  taxes -***In
                  July 2006, the Financial Accounting Standard Board (“FASB”) issued FASB
                  Interpretation No. 48 (“FIN 48”), “*Accounting
                  for Uncertainty in Income Taxes*”.
                  FIN 48 clarifies the accounting for uncertainty in income taxes
                  recognized
                  in an enterprise’s financial statements in accordance with FAS No. 109,
                  “*Accounting
                  for Income Taxes*”.
                  FIN 48 requires a company to evaluate whether the tax position
                  taken by a
                  company will more likely than not be sustained upon examination
                  by the
                  appropriate taxing authority. It also provides guidance on how
                  a company
                  should measure the amount of benefit that the company is to recognize
                  in
                  its financial statements. FIN 48 also provides guidance on de-recognition,
                  classification, interest and penalties, accounting in interim periods,
                  disclosure and transition. FIN 48 is effective for fiscal years
                  beginning
                  after December 15, 2006. We adopted FIN 48 as of January 1, 2007.
                  The
                  impact of our reassessment of our tax positions in accordance with
                  FIN 48
                  did not have any impact on the result of operations, financial
                  condition
                  or liquidity. See Note 12, “Income Taxes” in “Notes to Consolidated
                  Financial Statements” for further discussion on the impact of FIN 48 on
                  our financial statements.
  **Discontinued
        Operations**
  Our
        consolidated financial information presents the net effect of discontinued
        operations for all periods presented separate from the results our continuing
        operations in accordance with SFAS 144.
  **AutoXperience**
  As
        of
        November 30, 2007, we discontinued the operations of AutoXperience, which
        was
        accounted for as discontinued operations in accordance with FAS 144. We retained
        all liabilities of AutoXperience, including, for example, liabilities for
        taxes
        arising prior to the closing of the business, employee termination and related
        expenses, and any contingent liabilities arising prior to the closing
        date.
  During
        the current year ended December 31, 2007, we recognized a loss of $0.9 million
        from discontinued operations related to AutoXperience. During the year ended
        December 31, 2006 we recognized a loss from operations of $2.3 million from
        discontinued operations related to AutoXperience.
  **NeoMedia
        Micro Paint Repair**
  On
        November 15, 2007, we entered into an Asset Purchase Agreement with Micro
        Paint
        Holdings Ltd. (“the Buyers”), pursuant to which the Buyers purchased from us all
        the assets of NeoMedia Micro Paint Repair, exclusive of the assets of
        AutoXperience. The assets sold were acquired in 2002 and were determined
        not to
        be part of our core business.
  25
  The
        total
        selling price for the assets was $2.2 million, of which $1.5 million cash
        and
        $0.2 million in stock of the Buyers was received at closing. The remaining
        purchase price of $0.5 million is held in escrow pending the settlement of
        post-closing items, which we anticipate will be settled by the end of the
        June
        2008. At September 2007, in accordance with FAS 144, we analyzed the
        undiscounted cashflows from the Micro Paint asset group compared to its carrying
        values, and determined that an impairment of $0.6 million was required in
        order
        for the remaining carrying value of the net assets to equal the anticipated
        sale
        proceeds. The entire write-down was applied to goodwill, leaving a balance
        of
        0.5 million in goodwill. At the time of the sale, we recognized a net loss
        of
        $0.5 million, net of transaction costs in connection with the sale, which
        was
        recorded as a loss on disposal of subsidiaries in the Consolidated Statement
        of
        Operations for the year ended December 31, 2007. The carrying amounts of
        assets
        and liabilities disposed of in relation to this sale totaled approximately
        $1.4
        million, consisting of $1.9 million in goodwill and other intangibles, net
        of
        amortization, $0.3 million of other assets, offset by $0.3 million of deferred
        revenue and $0.5 million in cumulative currency translation
        adjustments.
  **NeoMedia
        Telecom Services (“NTS”)**
  On
        October 30, 2007, we entered into an Asset Purchase Agreement with the former
        owners of NeoMedia Telecom Services, pursuant to which the former owners
        of
        NeoMedia Telecom Services purchased from us all the assets of NeoMedia Telecom
        Services. The assets sold were a part of the acquisition in February 2006,
        and
        were never fully integrated into our strategic plan due to a subsequent shortage
        of operating funds.
  The
        total
        selling price for the assets was $1.4 million, less costs of sale which included
        6,190,476 shares of NeoMedia stock valued at $130,000 issued as additional
        consideration to the buyer in the transaction. As a result of the sale, we
        recognized a net loss of $3.4 million, which was recorded as a loss on disposal
        of subsidiaries in the Consolidated Statement of Operations for the year
        ended
        December 31, 2007. The carrying amounts of assets and liabilities disposed
        of in
        relation to this sale totaled approximately $4.5 million, consisting of $5.1
        million of intangibles, net of amortization, $0.5 million in cumulative currency
        translation adjustments, offset by $1.1 million in other
        liabilities.
  **12Snap**
  On
        April
        4, 2007, we entered into an Asset Purchase Agreement with Bernd Michael (the
        “Buyer”), a private investor and former shareholder of 12Snap prior to our
        acquisition of 12Snap, pursuant to which the Buyer purchased from us 90%
        of the
        assets of 12Snap, and we retained a 10% ownership of 12Snap, subject to an
        option agreement pursuant to which we had the right to sell and Buyer has
        the
        right to acquire the remaining 10% stake held by us for a purchase price
        of $0.8
        million after December 31, 2007. We exercised this option on January 28,
        2008 as
        described in the “Subsequent Events” section of this Annual Report on Form 10-K.
        The assets sold were a part of the acquisition in February 2006, and were
        never
        fully integrated into our strategic plan due to a subsequent shortage of
        operating funds.
  At
        December 2006, in accordance with FAS 144, we analyzed the undiscounted
        cashflows from the 12Snap asset group compared to its carrying values, and
        determined that an impairment of $18.3 million was required in order for
        the
        remaining carrying value of the net assets to equal the anticipated sale
        proceeds. The entire write-down was applied to goodwill, leaving a balance
        of
        $0.1 million in goodwill. The impairment was originally recorded in continuing
        operations for the year ended December 31, 2006, and has been reclassified
        to a
        loss from operations of discontinued operations in the Consolidated
        Statement of Operations for the year ended December 31, 2006 presented
        herewith.
  26
  The
        total
        fair value of the proceeds received for the assets was $4.6 million, of which
        $1.0 million cash was paid directly to and applied to amounts owed to silent
        partners of 12Snap, $0.6 million cash was received by us, $1.8 million of
        guarantee purchase price obligations were waived, 7,750,857 shares of NeoMedia
        stock valued at $0.4 million was returned to us and retired, and we retained
        10%
        ownership interest in 12Snap valued at $0.8 million. As a result of the sale,
        we
        recognized a net loss of $2.7 million, net of transaction costs in connection
        with the sale, which was recorded as a loss on disposal of subsidiaries in
        the
        Consolidated Statement of Operations for the year ended December 31, 2007.
        The
        carrying amounts of assets and liabilities disposed of in relation to this
        sale
        totaled approximately $7.3 million, consisting of $5.8 million of intangibles,
        net of amortization and $1.5 million of other assets.
  **Mobot**
  On
        December 6, 2006, we entered into an Asset Purchase Agreement with FMS Group,
        Inc. (“FMS”), a group consisting of former shareholders of Mobot, pursuant to
        which FMS purchased from us all the assets of Mobot AG. The assets sold were
        a
        part of the February 2006 acquisitions, and were never fully integrated into
        our
        strategic plan due to a subsequent shortage of operating funds.
  The
        total
        fair value of the proceeds received for the assets was $1.2 million, represented
        by 16,931 preferred shares of FMS valued at $1.9 million, offset by cash
        paid by
        NeoMedia of $0.3 million and the value of an option of $0.4 million, whereby
        we
        can redeem each preferred share of FMS received for 1,000 shares of NeoMedia
        common stock within 15 months of the transaction. As a result of the sale,
        we
        recognized a net loss of $4.4 million, net of transaction costs in connection
        with the sale, which was recorded as a loss on disposal of subsidiaries in
        the
        Consolidated Statement of Operations for the year ended December 31, 2006.
        The
        carrying amounts of assets and liabilities disposed of in relation to this
        sale
        totaled approximately $5.6 million, consisting of $10.9 million of intangibles,
        net of amortization and $0.5 million of other assets, offset by $5.5 million
        in
        purchase price guarantee liability and $0.3 million in other
        liabilities.
  **Sponge**
  On
        November 14, 2006, we entered into an Asset Purchase Agreement with the former
        owners of Sponge AG pursuant to which the former owners of Sponge purchased
        from
        us all the assets of Sponge AG. The assets sold were a part of the February
        2006
        acquisitions, and were never fully integrated into our strategic plan due
        to a
        subsequent shortage of operating funds.
  The
        total
        fair value of the proceeds received for the assets was cash of $0.2 million,
        retained common stock of Sponge valued at $1.4 million and the return of
        NeoMedia stock valued at $2.3 million. As a result of the sale, we recognized
        a
        net loss of $5.0 million, net of transaction costs in connection with the
        sale,
        which was recorded as a loss on disposal of subsidiaries in the Consolidated
        Statement of Operations for the year ended December 31, 2006. The carrying
        amounts of assets and liabilities disposed of in relation to this sale totaled
        approximately $8.9 million, consisting of $19.0 million of intangibles, net
        of
        amortization and $2.0 million of other assets, offset by $10.0 million in
        purchase price guarantee liability and by $2.1 million of other
        liabilities.
 
 **Results
        of Continuing Operations**
 
 Our
        consolidated financial information presents the net effect of discontinued
        operations separate from the results our continuing operations. Historical
        financial information has been reclassified to consistently separate and
        present
        the results of discontinued operations, and the discussion and analysis that
        follow generally focuses on continuing operations. The following table sets
        forth, for the periods indicated, certain data derived from our consolidated
        statements of operations as a percentage of revenues.
  27
 Years Ended December 31,2007
                
                2006(in thousands)
                
                
                
                (in thousands)Net
                    sales
                
                $
                1,864
                
                
                100.0
                %
                $
                1,605
                
                
                100.0
                %Cost
                    of sales
                
                
                1,431
                
                
                76.8
                %
                
                1,285
                
                
                80.1
                %Gross
                    profit
                
                
                433
                
                
                23.2
                %
                
                320
                
                
                19.9
                %Sales
                    and marketing expenses
                
                
                2,582
                
                
                138.5
                %
                
                5,193
                
                
                323.6
                %General
                    and administrative expenses
                
                
                7,082
                
                
                379.9
                %
                
                7,475
                
                
                465.7
                %Research
                    and development costs
                
                
                1,857
                
                
                99.6
                %
                
                2,264
                
                
                141.1
                %Impairment
                    Charge
                
                
                3,065
                
                
                164.4
                %
                
                379
                
                
                23.6
                %**OPERATING
                    LOSS**
                
                
                (14,153
                )
                
                -759.3
                %
                
                (14,991
                )
                
                -934.0
                %Gain
                    (loss) on extinguishment of debt
                
                
                347
                
                
                18.6
                %
                
                (1,879
                )
                
                -117.1
                %Interest
                    income (expense), net
                
                
                (10,458
                )
                
                -561.1
                %
                
                (10,182
                )
                
                -634.4
                %Write-off
                    of deferred equity financing costs
                
                
                -
                
                
                0.0
                %
                
                (13,256
                )
                
                -825.9
                %Gain
                    on sale of marketable securities
                
                
                -
                
                
                0.0
                %
                
                1,103
                
                
                68.7
                %Gain
                    from change in fair value of derivative financial
                    instruments
                
                
                (7,640
                )
                
                -409.9
                %
                
                12,677
                
                
                789.8
                %Repricing
                    of warrants related to financing transactions
                
                
                -
                
                
                0.0
                %
                
                (3,537
                )
                
                -220.4
                %LOSS
                    FROM CONTINUING OPERATIONS
                
                
                (31,904
                )
                
                -1711.6
                %
                
                (30,065
                )
                
                -1873.2
                %Loss
                    per share from continuing operations - basic and diluted
                
                
                ($0.03
                )
                
                
                
                
                ($0.05
                )
  The
        loss
        from continuing operations for the year ended December 31, 2007 was $31.9
        million, or negative $0.03 per share basic and diluted, on revenues of $1.8
        million. This compares to a loss from continuing operations for the year
        ended
        December 31, 2006 of $29.1 million, or negative $0.05 per share basic and
        diluted, on revenues of $1.6 million.
 
 **Revenues**
  Years Ended December 31,2007
              
              2006(in thousands)Legacy
                  product revenue
              
              $
              456
              
              $
              423Patent
                  licensing
              
              
              85
              
              
              185Hardware
                  sales
              
              
              593
              
              
              684Lavasphere
                  revenue
              
              
              494
              
              
              32Other
                  revenue
              
              
              236
              
              
              281Total
                  net sales
              
              $
              1,864
              
              $
              1,605
  **Year
        Ended December 31, 2007 Compared To the Year Ended December 31,
        2006**
  ***Net
        sales.*** ** Total
        net
        sales for the year ended December 31, 2007 were $1.9 million, which represented
        an increase of $0.3 million, or 16.1%, from $1.6 million for the year ended
        December 31, 2006. Net sales from our Gavitec subsidiary were $1.3 million
        and
        $0.9 million for the years ended December 31, 2007 and 2006, respectively.
        Net
        sales for Gavitec increased by $0.4 million due primarily to revenue received
        from incremental orders for customized software development during the year.
        Net
        sales from legacy products and patent licensing were $0.6 million and $0.7
        million for the years ended December 31, 2007 and 2006,
        respectively.
  ***Cost
        of sales.*** ** Cost
        of
        sales were $1.4 million for the year ended December 31, 2007 compared to
        $1.3
        million for the year ended December 31, 2006, an increase of $0.1 million,
        or
        11.4%.  Cost of sales for Gavitec were $0.4 million in both years ended
        December 31, 2007 and 2006, and amortization related to the proprietary software
        of Gavitec was $0.7 million and $0.5 million for the years ended December
        31,
        2007 and 2006, respectively. Additional costs from our NeoReader TM and
        legacy software products were $0.3 million and $0.4 million for the years
        ended
        December 31, 2007 and 2006, respectively.
  28
  ***Gross
        profit.*** Gross profit was $0.4 million for the year ended December 31, 2007 an increase
        of $0.1 million, or 35.3%, compared with gross profit of $0.3 million for
        the
        year ended December 31, 2006.  Current year gross profit is comprised of
        $0.9 million operational gross profit from Gavitec and $0.2 million gross
        profit
        from our NeoReader TM and
        other legacy software products, offset by amortization costs of $0.7 million
        of
        intangible assets relating to the proprietary software of Gavitec.
  ***Sales
        and marketing.*** ** Sales
        and
        marketing expenses were $2.6 million for the year ended December 31, 2007,
        compared to $5.2 million for the year ended December 31, 2006, a decrease
        of
        $2.6 million or 50.3%. Gavitec sales and marketing expenses were $0.5 million
        and $0.6 million for the years ended December 31, 2007 and 2006, respectively.
        Stock based compensation expense allocated to sales and marketing departments
        was $0.9 million and $1.3 million for the years ended December 31, 2007 and
        2006, respectively, and sales and marketing expense for our
        NeoReader TM and
        legacy software products was $1.2 million and $3.3 million for the years
        ended
        December 31, 2007 and 2006, respectively. Gavitec sales and marketing expenses
        remained consistent year over year, while the sales and marketing expenses
        for
        2007 related to our NeoReader and legacy software products decreased by $2.1
        million compared to the prior year due to scaling back our sales and marketing
        efforts while reorganizing our business strategy to focus on our core
        technology.
  ***General
        and administrative.*** General
        and administrative expenses decreased by $0.4 million, or 5.3%, to $7.1 million
        for the year ended December 31, 2007, compared to $7.5 million for the year
        ended December 31, 2006. For the years ended December 31, 2007 and 2006,
        stock
        based compensation expense was $1.6, accounting, professional, and legal
        services were $2.6 million and $2.8 million, labor and labor related expenses
        were $1.6 million and $1.9 million, office, facility and insurance expense
        was
        $1.0 million and $0.9 million, depreciation was $0.1 million and $0.08 million
        and general and administrative expenses at Gavitec were $0.2 million and
        $0.3
        million. Accounting fees decreased by $0.2 million in the current year because
        most of the cost of implementing Sarbanes-Oxley was expensed in the prior
        year,
        however our complex structure kept our audit and accounting fees at a high
        level. Labor costs decreased in the current year by $0.3 million primarily
        due
        to reduced staffing associated with our alignment with the new business
        strategy.
  Included
        within general and administrative are expenses related to our executives,
        human
        resources, finance and accounting, legal and information
        technologies.
  ***Research
        and development.*** ** During
        the year ended December 31, 2007, expenses for research and development were
        $1.9 million, a decrease of $0.4 million or 18.0% compared to $2.3 million
        for
        the year ended December 31, 2006. For the years ended December 31, 2007 and
        2006, Gavitec R&D costs were $0.9 million and $0.5 million, stock based
        compensation allocated to R&D was $0.4 million for both years, and R&D
        costs related to NeoReader TM products
        was $0.6 million and $1.4 million. Gavitec’s R&D spend was increased by $0.3
        million due to further development of the hardware platform and increased
        support of handset porting for the NeoReader TM product.
  ***Impairment
        Charge.*** ** During
        the years ended December 31, 2007 and 2006, we incurred charges of $3.1 million
        and $0.4 million, respectively, to write down long-term investments to their
        estimated net realizable value.
  ***Gain
        (loss) on extinguishment of debt.*** ** Gain
        on
        extinguishment of debt was $0.3 million during the year ended December 31,
        2007
        compared with a loss on extinguishment of debt of $1.9 million for the year
        ended December 31, 2006, an increase of $2.2 million or 118.5%. In connection
        with the Series C preferred stock issued and sold to Yorkville, we recognized
        $0.1 million gain on extinguishment of debt and $1.9 million loss on
        extinguishment of debt for the years ended December 31, 2007 and 2006,
        respectively. Additionally, in 2007 we recognized a gain on extinguishment
        of
        debt of $0.2 million related to the limitation of a previous claim from a
        Gavitec vendor.
  29
  ***Interest
        income (expense).*** ** Interest
        expense increased by $0.3 million, or 2.7%, to $10.5 million for the year
        ended
        December 31, 2007 from $10.2 for the year ended December 31, 2006. Interest
        income (expense) consists of interest charges related to convertible debentures,
        interest accrued for creditors as part of financed purchases, past due balances
        and notes payable, net of interest earned on cash equivalent investments. 
For the years ended December 31, 2007 and 2006, we incurred charges to write
        up
        convertible debentures to their redemption value of $10.3 million and $7.5
        million, accruals for liquidated damages related to the Series C convertible
        preferred stock and a convertible debenture were $0 and $1.9 million, and
        other
        interest charges were $0.2 and $0.8 million, respectively.
  ***Write-off
        of deferred equity financing costs*** **.** During
        the year ended December 31, 2006, we incurred a charge of $13.3 million to
        write
        off deferred equity financing costs related to the Standby Equity Distribution
        Agreement (the “2005 SEDA”).
  ***Gain
        on sale of marketable securities.*** ** During
        the year ended December 31, 2006, we recognized a gain of $1.1 million relating
        to our sale of shares of iPoint-media.
  ***Gain/loss
        on embedded conversion features of derivative financial
        instruments.*** ** Loss
        from
        embedded conversion features of derivative financial instruments was $7.6
        million for the year ended December 31, 2007, compared to a gain of $12.7
        million for the year ended December 31, 2006, representing a decrease of
        $20.3
        million or 160.3%. These gains and losses are associated with our 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 balance sheets included in this Annual Report
        on
        Form 10-K *.* The loss
        or gain reflects the increase or the reduction in value of the derivative
        liability and embedded conversion features from the inception of each financing
        to the respective balance sheet date.
  ***Warrant
        repricing expense.*** ** We
        recorded a charge resulting from repricing of warrants in the amount of $3.5
        million for the year ended December 31, 2006.  The charge relates to
        certain warrants that were repriced in connection with convertible debenture
        financings in August and December 2006.
  ***Loss
        from operations of discontinued operations*** **.** For the years ended December 31, 2007 and 2006, we recognized a loss from
        discontinued operations of $2.1 million and $28.9 million, respectively.
        The
        operations of NMPR, 12Snap, Telecom Services, Sponge and Mobot have been
        classified as discontinued operations for all periods reported in this Annual
        Report on Form 10-K, and they have all been disposed of as of the filing
        date.
  ***Loss
        on disposal of subsidiaries.*** ** During
        the year ended December 31, 2007, we recognized a loss on the disposal of
        our
        12Snap, Telecom Services, and Micro Paint Repair subsidiaries in the amount
        of
        $6.6 million, representing the difference between the fair value of
        consideration received (as it was a better indicator of fair value) and the
        carrying value immediately prior to sale. During the year ended December
        31,
        2006, we recognized a loss on the disposal of our Sponge and Mobot
        subsidiaries in the amount of $9.4 million, representing the difference between
        the fair value of consideration received (as it was a better indicator of
        fair
        value) and the carrying value immediately prior to sale.
  30




**Liquidity
      and Capital Resources**





Years
                Ended December 31,2007
            
            2006Cash
                and cash equivalents
            
            $
            $1,415
            
            $
            2,813Net
                cash used in operating activities
            
            
            (8,268
            )
            
            (9,634
            )Net
                cash used in investing activities
            
            
            (371
            )
            
            (16,214
            )Net
                cash provided by financing activities
            
            
            7,283
            
            
            27,276Effect
              of exchange rate changes on cash from continuing operations
            
            
            (42
            )
            
            (319
            )Net
                (decrease) increase in cash
            
            $
            (1,398
            )
            $
            1,109





**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. Net loss for the years
      ended December 31, 2007 and 2006 was $40.6 million and $68.4 million,
      respectively. Net cash used for operations was $8.3 million and $9.6 million
      for
      the years ended December 31, 2007 and 2006, respectively. We also have an
      accumulated deficit of $201.6 million  and
      a
      working capital deficit of $85.5 million  as
      of
      December 31, 2007.




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




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




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




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




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




**2007
      Summary**




During
      the year ended December 31, 2007, we funded our liquidity requirements through
      a
      combination of cash resources, including borrowing under convertible debt
      instruments and notes payable, and the proceeds related to the sale of our
      non-core subsidiaries.




As
      of
      December 31, 2007, we had $1.4 million in cash and cash equivalents, a reduction
      of $1.4 million from the $2.8 million balance as of December 31,
      2006.




Cash
      used
      in operating activities during the year ended December 31, 2007 was $8.3
      million. Cash used in investing activities was $0.3 million. Cash provided
      by
      financing activities was $7.2 million resulting from $8.2 million from borrowing
      under notes payable and convertible debt instruments, offset by $1.0 million
      in
      repayments on notes payable and convertible debt instruments.




31




**2006
      Summary**




During
      the year ended December 31, 2006, we funded our liquidity requirements by
      borrowing under notes payable and convertible debt instruments and with the
      sale
      of non-core subsidiaries.




Cash
      used
      in operations during the year ended December 31, 2006 was $9.6 million. Cash
      used in investing activities was $16.2 million, including $17.1 million paid
      to
      acquire CSI International, Mobot, Sponge, Gavitec and 12Snap, and $0.5 million
      advanced to HipCricket in the form of promissory notes, offset by $1.5 million
      in proceeds received from the sale of marketable securities.




Cash
      provided by financing activities during 2006 was $27.2 million, including $21.3
      million from the sale of Series C convertible stock and convertible debentures,
      $8.4 million from the exercise of stock options and warrants, $0.2 million
      from
      the sale of our common stock, primarily under the 2003 SEDA, offset by $2.7
      million in repayment of notes payable and convertible debt
      instruments.




**Recent
      Events**




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




Yorkville
      converted 100 shares, 25 shares, 50 shares and 50 shares of Series C preferred
      stock on February 19, 2008, March 10, 2008, March 17, 2008 and March 25,
      2008, respectively. In exchange for the Series C preferred stock, we issued
      10 million, 2.5 million, 5 million and 5 million shares of common stock,
      respectively.




As
      of
      December 31, 2007, we had a working capital deficiency of $85.5 million, of
      which $24.7 million relates to the fair value of derivative financial
      instruments. We intend to attempt to address our working capital deficiency
      as
      described in “Sources of Cash and Projected Cash Requirements”
herein.





**Significant
      Liquidity Events**





**12Snap
      Purchase Price Obligation**




As
      of
      December 31, 2007, we had a recorded liability of $4.5 million relating to
      purchase price guarantee obligations associated with our acquisition of 12Snap.
      Pursuant to the terms of the acquisition, in the event that our stock price
      at
      the time the consideration shares issued in connection with the acquisition
      of
      12Snap became saleable (either upon effectiveness of a registration statement
      containing the shares, or under Rule 144) was less than the contractual price
      ($0.3956), we were obligated to compensate the sellers in cash for the
      difference between the price at the time the shares become saleable and the
      relevant contractual price. The shares became saleable during the first quarter
      of 2007. As of December 31, 2006, these liabilities were imminent and incurred
      beyond a reasonable doubt. As a result, we accrued the amount payable under
      these obligations of $16.2 million to 12Snap shareholders.




During
      the first quarter of 2007, we issued 197,620,948 shares of our common stock
      in
      satisfaction of $9.4 million of the 12Snap purchase price guarantee amount.
      The
      remaining balance on the purchase price obligation after this issuance was
      $6.8
      million. As part of the sale of 12Snap back to the original owners in April
      2007, we negotiated a reduction of $1.8 million of this guarantee amount.
      Additionally, we paid $0.5 million during the year ended December 31, 2007
      to further reduce this obligation to its present balance of $4.5 million, the
      entire balance of which is currently due and payable.




32




**Silent
      Partners**




Prior
      to
      the acquisition of 12Snap by us, 12Snap entered into silent partnership debt
      arrangements with principal and interest totaling $4.8 million. The partnership
      agreements were scheduled to terminate on December 31, 2008 and 2009. However,
      due to the acquisition of all shares of 12Snap by us, an early termination
      was
      agreed on for the silent partnership agreements. Those silent partnerships
      terminated as of February 28, 2006 with the acquisition of 12Snap by us. We
      made
      payments toward the outstanding principal of $1.0 million and $2.7 million
      during the years ended December 2007 and 2006, respectively. The remaining
      balance of approximately $1.1 million was settled as part of the sale to the
      original owners of 12Snap on April 4, 2007.




**China
      Order**




During
      the fourth quarter of 2005 and first quarter of 2006, we shipped and invoiced
      $0.8 million of Micro Paint Repair products to Automart, a Chinese company,
      for
      which payment has not been received. The accounts receivable related to this
      transaction were fully reserved during the year ended December 31, 2006.
      Recognition of revenue on this transaction was deferred since this is a new
      customer in a new territory; we will recognize revenue for these shipments
      only
      if payment is received. In the absence of payment, we will not recoup our cost
      of goods sold which has already been paid. In our continuing collection efforts,
      we have found that Automart has subsequently become a party to a joint venture
      with Deep Field Technologies, an organization that owns 95% of the joint
      venture, and which was formerly listed on the OTCBB but is now
      delisted.





**Sources
      of Cash and Projected Cash Requirements**




We
      intend
      to attempt to fund our growth and working capital deficiencies from the
      following sources during 2008 and beyond:




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




***Exercise
      of options and warrants.*** Yorkville currently holds warrants to purchase up to 502 million shares of
      our
      common stock at an exercise price of $0.02 per share. We can
      force exercise of the warrants if the closing bid price of our stock is more
      than $0.10 greater than the exercise price of any of the warrants for 15
      consecutive trading days. It
      is
      important to note that the warrants held by Yorkville contain a provision
      that, if we are in default of the warrant agreement, the holder can perform
      a “cashless” exercise of the warrants and in lieu of making payment of the
      exercise price in cash, elect instead to have shares withheld as consideration
      for the exercise price. In the event of such a “cashless” exercise, we would not
      receive any cash proceeds upon the exercise of such warrants. As of December
      31,
      2007, we were not in default of any of the provisions of the warrant
      agreement.




In
      addition, certain outstanding employee stock options are in-the-money and could
      be exercised at the holders’ discretion from time to time. As of December 31,
      2007, we had 115,511,747 outstanding employee stock options, of which 23.9
      million were vested and in-the-money based on the closing price on December
      31,
      2007 of $0.012 per share. Total potential proceeds from exercise of all
      in-the-money options are approximately $0.2 million.




33




***Convertible
      debentures.*** In
      addition, pursuant to security agreements between us and Yorkville signed in
      connection with the convertible debentures, Yorkville has a security interest
      in
      all of our assets. As of December 31, 2006, we were in default of the Investor
      Registration Agreement pursuant to the August 24, 2006 and December 29, 2006
      Agreements, and as a result, the full fair value of the secured convertible
      debentures is callable in the amount of $5 million and $2.5 million,
      respectively, and Yorkville could foreclose on our assets if we are unable
      to
      pay these amounts. Such covenants could severely harm our ability to raise
      additional funds from sources other than Yorkville, and would likely result
      in a
      higher cost of capital in the event funding were secured.




Additionally,
      pursuant to the terms of the investment agreement between us and Yorkville
      signed in connection with the Series C convertible preferred stock sale, we
      cannot




·
            enter
                into any debt arrangements in which it is the
                borrower,




·
            grant
                any security interest in any of our assets,
                or




·
            grant
                any security below market price.




We
      have
      incurred both cash and non-cash costs associated with the financing arrangements
      with Yorkville, as follows:




·
            In
                connection with the $1.6 million convertible debenture in August
                2007, we
                issued 75 million warrants to Yorkville with an exercise price of
                $0.02
                per share. We also paid cash fees of $0.2 million from the
                proceeds.




·
            In
                connection with the $7.5 million convertible debenture in March 2007,
                we
                issued 125 million warrants to Yorkville with an exercise price of
                $0.04
                per share. We also paid cash fees of $0.8 million from the
                proceeds.




·
            In
                connection with the $2.5 million convertible debenture in December
                2006,
                we issued 42 million warrants to Yorkville with an exercise price
                of $0.04
                per share, and repriced an additional 210 million warrants held by
                Yorkville that had been issued in connection with previous financings.
                We
                also paid cash fees of $0.3 million from the
                proceeds.




·
            In
                connection with the $5 million convertible debenture in August 2006,
                we
                issued 175 million warrants to Yorkville with exercise prices between
                $0.05 and $0.25 (which were subsequently repriced in December 2006),
                and
                repriced 85 million warrants that had been issued in connection with
                a
                previous financing (which were subsequently further repriced in December
                2006).




·
            In
                connection with the $27.0 million Series C convertible preferred
                stock
                sale in February 2006, we incurred the following
                costs:




o
            Yorkville
                held back a $2.7 million cash fee from the proceeds of the
                sale,




o
            we
                issued 75 million warrants to Yorkville with exercise prices between
                $0.35
                and $0.50, which were subsequently repriced,
                and




o
            we
                issued 2 million warrants with an exercise price of $0.328 to another
                party for structuring and consulting fees associated with the
                sale.




·
            In
                connection with the 2005 SEDA, we incurred the following
                costs:




34




o
            we
                issued 75 million warrants to Yorkville with an exercise price of
                $0.20,
                10 million of which were subsequently repriced to $0.04 in connection
                with
                the convertible debenture financings in August 2006 and December
                2006,
                and




o
            we
                issued 4 million warrants with an exercise price of $0.227 to another
                party for structuring and consulting fees associated with the 2005
                SEDA.




o
            The
                fair value of these warrants in the amount of $13.3 million was initially
                recorded as deferred financing fees but was written off during the
                year
                ended December 31, 2006.





In
      the
      event that (i) our stock price does not increase to levels where it can force
      exercise of enough of our outstanding warrants to generate material operating
      capital, (ii) the market for our stock will not support the sale of shares
      underlying such warrants or other funding sources, or (iii) we do not realize
      a
      material increase in revenue during the next 12 months, we will have to seek
      additional cash sources. There can be no assurances that such funding sources
      will be available. If necessary funds are not available, our business and
      operations would be materially adversely affected and in such event, we would
      attempt to reduce costs and adjust our business plan, and could be forced to
      sell certain of our assets, including our remaining subsidiaries.





**Contractual
      Obligations**




We
      are
      party to various commitments and contingencies, such as:




·
            We
                and our subsidiaries lease office facilities and certain office and
                computer equipment under various operating
                leases,


·
                We
                    are party to various payment arrangements with our vendors that
                    call for
                    fixed payments on past due
                    liabilities,


·
                We
                    are party to various consulting agreements that carry payment
                    obligations
                    into future years,


·
                We
                    hold notes payable to certain vendors that mature at various
                    dates in the
                    future,


·
                We
                    issued Series C convertible preferred shares with face value
                    of $22
                    million and convertible debentures with a face value of $16.5
                    million that
                    are subject to conversion at future
                    dates.





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





2008
            
            2009
            
            2010
            
            2011
            
            2012
            
            Thereafter
            
            Total(in
                thousands)Operating
                leases
            
            $
            209
            
            $
            183
            
            $
            193
            
            $
            113
            
            $
            0
            
            $
            0
            
            $
            698Vendor
                and consulting agreements
            
            
            864
            
            
            427
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            1,291Notes
                payable
            
            
            44
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            44Subsidiary
                acquisition commitments
            
            
            4,549
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            4,549Convertible
                debentures
            
            
            30,699
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            30,699Series
                C Convertible Preferred Stock
            
            
            20,097
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            20,097Total
            
            $
            56,462
            
            $
            610
            
            $
            193
            
            $
            113
            
            $
            0
            
            $
            0
            
            $
            57,378




As
      of
      December 31, 2007, we had a recorded liability of $4.5 million relating to
      purchase price guarantee obligations associated with our acquisition of 12Snap.
      Pursuant to the terms of the acquisition, in the event that our stock price
      at
      the time the consideration shares issued in connection with the acquisition
      of
      12Snap became saleable (either upon effectiveness of a registration statement
      containing the shares, or under Rule 144) was less than the contractual price
      ($0.3956), we were obligated to compensate the sellers in cash for the
      difference between the price at the time the shares become saleable and the
      relevant contractual price. The shares became saleable during the first quarter
      of 2007. As of December 31, 2006, these liabilities were imminent and incurred
      beyond a reasonable doubt. As a result, we accrued the amount payable under
      these obligations of $16.2 million to the 12Snap shareholders.




35




During
      the first quarter of 2007, we issued 197,620,948 shares of our common stock
      in
      satisfaction of $9.4 million of the 12Snap purchase price guarantee amount.
      The
      remaining balance on the purchase price obligation after this issuance was
      $6.8
      million. As part of the sale of 12Snap back to the original owners in April
      2007, we negotiated a reduction of $1.8 million of this guarantee amount.
      Additionally, we have paid $0.5 million during the year ended December 31,
      2007
      to further reduce this obligation to its present balance of $4.5 million, the
      entire balance which is currently due and payable.




**Recently
      Issued Accounting** **Standards**




In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), “ *Business
      Combinations”* (“FAS 141R”). FAS 141R establishes principles and requirements for how
      an acquirer recognizes and measures in its financial statements the identifiable
      assets acquired, the liabilities assumed, any noncontrolling interest in the
      acquiree and the goodwill acquired. FAS 141R also establishes disclosure
      requirements to enable the evaluation of the nature and financial effects of
      the
      business combination. This statement is effective for us beginning
      January 1, 2009. We are currently evaluating the potential impact of the
      adoption of FAS 141R on our consolidated financial position, results of
      operations or cash flows.




In
      December 2007, the FASB also issued SFAS No. 160, “ *Noncontrolling
      Interests In Consolidated Financial Statements – An Amendment of Accounting
      Research Bulletin No. 51* ,”,
      the
      provisions of which are effective for periods beginning after December 15,
      2008. This statement requires an entity to classify noncontrolling interests
      in
      subsidiaries as a separate component of equity. Additionally, transactions
      between an entity and noncontrolling interests are required to be treated as
      equity transactions. We are currently evaluating the impact of this statement
      on
      our financial statements.




In
      February 2007, the FASB issued SFAS No. 159, “ *The
      Fair Value Option for Financial Assets and Financial Liabilities- including
      an
      Amendment of FASB Statement No. 115”* (“FAS
      159”), which allows an entity to choose to measure certain financial instruments
      and liabilities at fair value. Subsequent measurements for the financial
      instruments and liabilities an entity elects to fair value will be recognized
      in
      earnings. FAS 159 also establishes additional disclosure requirements.
      FAS 159 is effective for us beginning January 1, 2008.  We are
      currently evaluating the potential impact of the adoption of FAS 159 on our
      consolidated financial position, results of operations or cash
      flows.




In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 157, “ *Fair
      Value Measurements”* (“FAS
      157”) *,* which
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles, and expands disclosures about fair
      value measurements. FAS 157 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. FAS 157 is
      effective for fiscal years beginning after November 15, 2007. However, on
      December 14, 2007, the FASB issued proposed FSP FAS 157-b which would
      delay the effective date of FAS 157 for all nonfinancial assets and
      nonfinancial liabilities, except those that are recognized or disclosed at
      fair
      value in the financial statements on a recurring basis (at least annually).
      This
      proposed FSP partially defers the effective date of Statement 157 to fiscal
      years beginning after November 15, 2008, and interim periods within those
      fiscal years for items within the scope of this FSP. Effective for 2008, we
      will
      adopt FAS 157 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 will not have a material impact on our consolidated
      financial position, results of operations or cash flows.




36




In
      July
      2006, the Financial Accounting Standard Board (FASB) issued FASB Interpretation
      No. 48 (FIN 48), “ *Accounting
      for Uncertainty in Income Taxes* ”.
      FIN 48
      clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise’s financial statements in accordance with SFAS No. 109, “ *Accounting
      for Income Taxes* ”.
      FIN 48
      requires a company to evaluate whether the tax position taken by a company
      will
      more likely than not be sustained upon examination by the appropriate taxing
      authority. It also provides guidance on how a company should measure the amount
      of benefit that the company is to recognize in its financial statements. FIN
      48
      also provides guidance on de-recognition, classification, interest and
      penalties, accounting in interim periods, disclosure and transition. FIN 48
      is
      effective for fiscal years beginning after December 15, 2006.




We
      adopted FIN 48 as of January 1, 2007. As a result of the implementation of
      FIN
      48, we have concluded that we have not taken any uncertain tax positions on
      any
      of our open income tax returns filed through the period ended December 31,
      2006
      that would materially distort our financial statements. Our methods of
      accounting are based on established income tax principles approved in the
      Internal Revenue Code (IRC) and are properly calculated and reflected within
      our
      income tax returns. In addition, we have filed income tax returns in all
      applicable jurisdictions in which we had material nexus warranting an income
      tax
      return filing.




We
      reassess the validity of our conclusions regarding uncertain income tax
      positions on a quarterly basis to determine if facts or circumstances have
      arisen that might cause us to change our judgment regarding the likelihood
      of a
      tax position's sustainability under audit. The impact of this reassessment
      for
      the year ended December 31, 2007 did not have any impact on our results of
      operations, financial condition or liquidity.




**Off-Balance
      Sheet Arrangements**




We
      are
      not currently engaged in the use of off-balance sheet derivative financial
      instruments, to hedge or partially hedge interest rate exposure nor do we
      maintain any other off-balance sheet arrangements for the purpose of credit
      enhancement, hedging transactions, or other financial or investment
      purposes.




***ITEM
              7A.***
            ***Quantitative
                and qualitative disclosures about market
                risk***




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




***Interest
      Rate Risk.*** Because
      our debt is primarily tied to borrowing rates in the United States, changes
      in
      U.S. interest rates would affect the interest paid on our borrowings and/or
      earned on our cash and cash equivalents. Based on our overall interest rate
      exposure at December 31, 2007, a near-term change in interest rates, based
      on
      historical small movements, would not materially effect our operations or the
      fair value of interest rate sensitive instruments. Our current debt instruments
      have fixed interest rates and terms and, therefore, a significant change in
      interest rates would not have a material adverse effect on our financial
      position or results of operations; however, changes in interest rates may
      increase our cost of borrowing in the future.




***Investment
      Risk.*** As
      of December 31, 2007, we do not have material amounts invested in other
      public or privately-held companies and therefore there is minimal associated
      investment risk with our investment portfolio.




***Foreign
      Currency Risk.*** We
      conduct business internationally in two currencies, and as such, are exposed
      to
      adverse movements in foreign currency exchange rates. Our exposure to foreign
      exchange rate fluctuations arise in part from: (1) translation of the
      financial results of our Gavitec subsidiary into U.S. dollars in
      consolidation; (2) the re-measurement of non-functional currency assets,
      liabilities and intercompany balances into U.S. dollars for financial
      reporting purposes; and (3) non-U.S. dollar denominated sales to
      foreign customers. Historically, neither fluctuations in foreign exchange rates
      nor changes in foreign economic conditions have had a significant impact on
      our
      financial condition or results of operations. Foreign exchange rate fluctuations
      did not have a material impact on our financial results for the years ended
      December 31, 2007 and 2006.




37




***ITEM
              8.***
            *****Financial
                statements and supplementary
                data***


Index
        to
        Consolidated Financial Statements


PageReports
                of Independent Registered Public Accounting Firms
            
            
            39Consolidated
                Financial Statements:Consolidated
                Statements of Operations and Comprehensive Loss for the Years Ended
                December 31, 2007 and 2006
            
            
            41Consolidated
                Balance Sheet as of December 31, 2007 and 2006
            
            
            42Consolidated
                Statements of Shareholders’ Equity (Deficit) for the Years Ended December
                31, 2007 and 2006
            
            
            43Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2007 and
                2006
            
            
            44Notes
                to Consolidated Financial Statements
            
            
            45




38




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRM**




To
      the
      Board of Directors and Shareholders of NeoMedia
      Technologies, Inc. :




We
      have
      audited the accompanying consolidated balance sheet of NeoMedia Technologies,
      Inc. (the “Company”), as of December 31, 2007, and the related consolidated
      statements of operations and comprehensive loss, stockholders’ deficit and cash
      flows for the year then ended. These financial statements are the responsibility
      of the Company's management. Our responsibility is to express an opinion on
      these financial statements based on our audit.




We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States of America). Those standards require
      that we plan and perform the audit to obtain reasonable assurance about whether
      the financial statements are free of material misstatement. The Company is
      not
      required to have, nor were we engaged to perform, an audit of its internal
      control over financial reporting. Our audit included consideration of internal
      control over financial reporting as a basis for designing audit procedures
      that
      are appropriate in the circumstances, but not for the purpose of expressing
      an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit includes examining,
      on a test basis, evidence supporting the amounts and disclosures in the
      financial statements. An audit also includes assessing the accounting principles
      used and significant estimates made by management, as well as evaluating the
      overall financial statement presentation. We believe that our audit provides
      a
      reasonable basis for our opinion.




In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of the Company as of December 31,
      2007, and the results of its operations and its cash flows for the year then
      ended, in conformity with accounting principles generally accepted in the United
      States of America.




The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As discussed in Note 1 to such
      financial statements, the Company has suffered recurring losses from operations
      and has ongoing requirements for additional capital investment. These factors
      raise substantial doubt about the Company’s ability to continue as a going
      concern. Management’s plans in regard to these matters are also described in
      Note 1. The consolidated financial statements do not include any adjustments
      that might result from the outcome of this uncertainty.




/s/
      Kingery & Crouse, P.A




Tampa,
      FL


March 27,
      2008




39


**Report
      of Independent Registered Public Accounting Firm**





Board
      of
      Directors and Shareholders


NeoMedia
      Technologies, Inc.





We
      have
      audited the accompanying consolidated balance sheet of NeoMedia Technologies,
      Inc. as of December 31, 2006 and the related consolidated statements of
      operations and other comprehensive loss, stockholders' deficit and cash flows
      for the year then ended. These financial statements are the responsibility
      of
      the Company's management. Our responsibility is to express an opinion on these
      financial statements based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audit provides a
      reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of the Company as of
 December 31, 2006 and the results of their operations and their cash flows
      for the year then ended, in conformity with accounting principles generally
      accepted in the United States.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As discussed in Note 1 to the
      consolidated financial statements, the Company’s significant operating losses,
      negative cash flows from operations and working capital deficit raise
      substantial doubt about its ability to continue as a going concern. Management's
      plans regarding these matters are also described in Note 1. The consolidated
      financial statements do not include any adjustments that might result from
      the
      outcome of this uncertainty.




/s/
      Stonefield Josephson, Inc.


Los
      Angeles, California


April
      2,
      2007




40




**NeoMedia
      Technologies, Inc. and Subsidiaries**


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


**(in
      thousands, except share and per share data)**





**Years
                Ended December 31,****2007**
            
            **2006**Net
                sales
            
            $
            1,864
            
            $
            1,605Cost
                of sales
            
            
            1,431
            
            
            1,285Gross
                profit
            
            
            433
            
            
            320Sales
                and marketing expenses
            
            
            2,582
            
            
            5,193General
                and administrative expenses
            
            
            7,082
            
            
            7,475Research
                and development costs
            
            
            1,857
            
            
            2,264Impairment
                charge
            
            
            3,065
            
            
            379**OPERATING
                LOSS**
            
            
            (14,153
            )
            
            (14,991
            )Gain
                (loss) on extinguishment of debt
            
            
            347
            
            
            (1,879
            )Interest
                income (expense), net
            
            
            (10,458
            )
            
            (10,182
            )Write-off
                of deferred equity financing costs
            
            
            -
            
            
            (13,256
            )Gain
                on sale of marketable securities
            
            
            -
            
            
            1,103Gain
                (loss) from change in fair value of derivative financial
                instruments
            
            
            (7,640
            )
            
            12,677Repricing
                of warrants related to financing transactions
            
            
            -
            
            
            (3,537
            )**LOSS
                FROM CONTINUING OPERATIONS BEFORE INCOME TAXES**
            
            
            **(31,904**
            **)**
            
            **(30,065**
            **)****DISCONTINUED
                OPERATIONS (Note 4)**Loss
                from operations of discontinued operations
            
            
            (2,121
            )
            
            (28,923
            )Loss
                on disposal of subsidiaries
            
            
            (6,610
            )
            
            (9,418
            )**LOSS
                FROM DISCONTINUED OPERATIONS**
            
            
            (8,731
            )
            
            (38,341
            )**NET
                LOSS**
            
            
            **(40,635**
            **)**
            
            **(68,406**
            **)******Accretion
                of dividends on convertible preferred stock
            
            
            (1,696
            )
            
            (20,324
            )******NET
                LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS**
            
            
            **(42,331**
            **)**
            
            **(88,730**
            **)******Comprehensive
                Loss:Net
                loss
            
            
            (40,635
            )
            
            (68,406
            )Other
                comprehensive loss:Unrealized
                loss on marketable securities
            
            
            (195
            )
            
            (247
            )Foreign
                currency translation adjustment
            
            
            373
            
            
            (286
            )**COMPREHENSIVE
                LOSS**
            
            **$**
            **(40,457**
            **)**
            **$**
            **(68,939**
            **)******Loss
                per share from continuing operations - basic and diluted
            
            $
            (0.03
            )
            $
            (0.05
            )Loss
                per share from discontinued operations - basic and diluted
            
            $
            (0.01
            )
            $
            (0.06
            )Net
                loss per share - basic and diluted
            
            $
            (0.04
            )
            $
            (0.11
            )Loss
                per share attributable to common shareholders - basic and
                diluted
            
            $
            (0.04
            )
            $
            (0.14
            )Weighted
                average number of common shares—basic and diluted
            
            
            1,023,816,862
            
            
            613,560,070





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




41




**NeoMedia
      Technologies, Inc. and Subsidiaries**


**Consolidated
      Balance Sheets**


**(in
      thousands, except share data)**





**December 31,**
            
            **December 31,****2007**
            
            **2006****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            1,415
            
            $
            2,813Trade
                accounts receivable, net of allowance for doubtful accounts of $78
                and
                $69, respectively
            
            
            58
            
            
            187Other
                receivables
            
            
            225
            
            
            550Inventories,
                net of allowance for obsolete & slow-moving inventory of $80 and $53
                respectively
            
            
            198
            
            
            80Investment
                in marketable securities
            
            
            8
            
            
            57Prepaid
                expenses and other current assets
            
            
            188
            
            
            102Assets
                held for sale
            
            
            159
            
            
            19,420Total
                current assets
            
            
            2,251
            
            
            23,209Property,
                equipment and leasehold improvements, net
            
            
            85
            
            
            191Goodwill
            
            
            3,418
            
            
            3,418Proprietary
                software, net
            
            
            3,413
            
            
            4,138Patents
                and other intangible assets, net
            
            
            2,608
            
            
            2,881Cash
                surrender value of life insurance policy
            
            
            747
            
            
            863Other
                long-term assets
            
            
            1,002
            
            
            3,425**Total
                assets**
            
            $
            13,524
            
            $
            38,125**LIABILITIES
                AND SHAREHOLDERS’ DEFICIT**Current
                liabilities:Accounts
                payable
            
            $
            309
            
            $
            2,442Liabilities
                held for sale
            
            
            13
            
            
            10,257Taxes
                payable
            
            
            -
            
            
            5Accrued
                expenses
            
            
            6,015
            
            
            4,016Deferred
                revenues and customer prepayments
            
            
            669
            
            
            575Notes
                payable
            
            
            44
            
            
            15Accrued
                purchase price guarantee
            
            
            4,549
            
            
            19,667Deferred
                tax liability
            
            
            706
            
            
            706Derivative
                financial instruments
            
            
            24,651
            
            
            25,417Debentures
                payable
            
            
            30,699
            
            
            7,500Series
                C convertible preferred stock, $0.01 par value, 25,000,000 shares
                authorized, 22,000 issued, 20,097 shares outstanding, liquidation
                value of
                $20,097
            
            
            20,097
            
            
            21,657**Total
                liabilities**
            
            
            87,752
            
            
            92,257Commitments
                and contingencies (Note 14)Shareholders’
                deficit:Common
                  stock, $0.01 par value, 5,000,000,000 shares authorized, 1,025,295,693
                  and639,233,173
                  shares issued and 1,022,144,424 and 637,591,747 outstanding,
                  respectively
            
            
            10,221
            
            
            6,376Additional
                paid-in capital
            
            
            118,427
            
            
            101,911Accumulated
                deficit
            
            
            (201,565
            )
            
            (160,930
            )Accumulated
                other comprehensive loss
            
            
            (532
            )
            
            (710
            )Treasury
                stock, at cost, 201,230 shares of common stock
            
            
            (779
            )
            
            (779
            )Total
                shareholders’ deficit
            
            
            (74,228
            )
            
            (54,132
            )**Total
                liabilities and shareholders’ deficit**
            
            $
            13,524
            
            $
            38,125




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





42


**NeoMedia
      Technologies, Inc. and Subsidiaries** **`**


**Consolidated
      Statements of Shareholders’ Equity (Deficit)**


**(In
      thousands, except share data)**


**Common Stock**
              
              **Deferred**
              
              **Deferred**
              
              **Accumulated**
              
              
              
              **Treasury
                  Stock****Shares**
              
              **Amount**
              
              **Additional**
                **Paid-in**
                **Capital**
              
              **Stock**
                **Compensa-**
                **tion**
              
              **Equity**
                **Financing**
                **Costs**
              
              **Other**
                **Comprehen-**
                **sive Loss**
              
              **Accumulated**
                **Deficit**
              
              **Shares**
              
              **Amount**
              
              **Total**
                **Shareholders'**
                **Equity (Deficit)****Balance,
                  December 31, 2005**
              
              
              **467,601,717**
              
              **$**
              **4,676**
              
              **$**
              **106,456**
              
              **$**
              **(169**
              **)**
              **$**
              **(13,256**
              **)**
              **$**
              **(177**
              **)**
              **$**
              **(92,524**
              **)**
              
              **201,230**
              
              **$**
              **(779**
              **)**
              **$**
              **4,227**Shares
                  issued to Yorkville under SEDA
              
              
              751,880
              
              
              8
              
              
              201
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              209Shares
                  issued to Yorkville upon conversion of Series C convertible preferred
                  stock
              
              
              6,631,579
              
              
              66
              
              
              441
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              507Exercise
                  of stock options
              
              
              2,930,975
              
              
              29
              
              
              325
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              354Exercise
                  of stock warrants including derivative liability
                  reclassification
              
              
              49,000,000
              
              
              490
              
              
              8,970
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              9,460Stock
                  based compensation expense
              
              
              18,431,522
              
              
              184
              
              
              6,851
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              7,035Fair
                  value of shares issued to pay liabilities
              
              
              5,233,791
              
              
              53
              
              
              1,155
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,208Fair
                  value of shares issued to acquire Mobot, Inc., Gavitec AG, 12Snap
                  AG,
                  Sponge Ltd., and BSD Software, Inc.
              
              
              120,107,418
              
              
              1,201
              
              
              45,764
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              46,965Reduction
                  of value of original consideration shares for value of make whole
                  provision
              
              
              -
              
              
              -
              
              
              (35,848
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (35,848
              )Fair
                  value of shares returned to the Company in connection with sale
                  of
                  Sponge
              
              
              (33,097,135
              )
              
              (331
              )
              
              (1,986
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,317
              )Fair
                  value of derivative liabilities established at inception of Series
                  C
                  Convertible preferred financing
              
              
              -
              
              
              -
              
              
              (10,094
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (10,094
              )Accrual
                  of dividends on Series C Convertible Preferred Stock
              
              
              -
              
              
              -
              
              
              (20,324
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (20,324
              )Change
                  in Deferred Stock Compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              169
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              169Write
                  off of deferred financing cost associated with $100 million
                  SEDA
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              13,256
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              13,256Comprehensive
                  loss - foreign currency translation adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (286
              )
              
              -
              
              
              -
              
              
              -
              
              
              (286
              )Comprehensive
                  loss - unrealized loss on marketable securities
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (247
              )
              
              -
              
              
              -
              
              
              -
              
              
              (247
              )Net
                  Loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (68,406
              )
              
              -
              
              
              -
              
              
              (68,406
              )**Balance,
                  December 31, 2006**
              
              
              **637,591,747**
              
              **$**
              **6,376**
              
              **$**
              **101,911**
              
              **$**
              **0**
              
              **$**
              **0**
              
              **$**
              **(710**
              **)**
              **$**
              **(160,930**
              **)**
              
              **201,230**
              
              **$**
              **(779**
              **)**
              **$**
              **(54,132**
              **)**Adjustment
                  of prior year accrual of dividends on Series C Convertible Preferred
                  Stock
              
              
              -
              
              
              -
              
              
              34
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              34Shares
                  issued to Yorkville upon conversion of Series C convertible preferred
                  stock
              
              
              94,096,543
              
              
              941
              
              
              1,606
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,547Exercise
                  of stock options
              
              
              1,639,444
              
              
              16
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              16Stock
                  based compensation expense
              
              
              2,901,438
              
              
              29
              
              
              4,626
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              4,655Fair
                  value of shares issued to pay liabilities
              
              
              28,854,685
              
              
              289
              
              
              411
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              700Fair
                  value of shares issued under make whole provisions for Gavitec
&
                  12Snap
              
              
              258,620,948
              
              
              2,586
              
              
              10,135
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              12,721Fair
                  value of shares returned to the Company in connection with sale
                  of
                  12Snap
              
              
              (7,750,857
              )
              
              (78
              )
              
              (364
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (442
              )Fair
                  value of shares issued under disposition agreement of Micro Paint
                  Repair
              
              
              6,190,476
              
              
              62
              
              
              68
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              130Comprehensive
                  loss - foreign currency translation adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              373
              
              
              -
              
              
              -
              
              
              -
              
              
              373Comprehensive
                  loss - unrealized loss on marketable securities
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (195
              )
              
              -
              
              
              -
              
              
              -
              
              
              (195
              )Net
                  Loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (40,635
              )
              
              -
              
              
              -
              
              
              (40,635
              )**Balance,
                  December 31, 2007**
              
              
              **1,022,144,424**
              
              **$**
              **10,221**
              
              **$**
              **118,427**
              
              **$**
              **0**
              
              **$**
              **0**
              
              **$**
              **(532**
              **)**
              **$**
              **(201,565**
              **)**
              
              **201,230**
              
              **$**
              **(779**
              **)**
              **$**
              **(74,228**
              **)**




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




43




**NeoMedia
      Technologies, Inc. and Subsidiaries**


**Consolidated
      Statements of Cash Flows**


**(In
      Thousands)**





**Years Ended December 31,****2007**
            
            **2006**Cash
                Flows from Operating Activities:Loss
                from continuing operations
            
            $
            (31,904
            )
            $
            (30,065
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            1,141
            
            
            1,092Impairment
                charge
            
            
            3,065
            
            
            379(Gain)/loss
                on early extinguishment of debt
            
            
            (347
            )
            
            1,858Change
                in fair value from revaluation of warrants and embedded conversion
                features
            
            
            7,640
            
            
            (9,140
            )Write-off
                of deferred equity financing costs
            
            
            -
            
            
            13,526Stock-based
                compensation expense
            
            
            2,993
            
            
            5,384Interest
                expense related to convertible debt
            
            
            8,605
            
            
            7,558Decrease/
                (increase) in value of life insurance policies
            
            
            116
            
            
            (94
            )Gain
                on sale of marketable securities
            
            
            -
            
            
            (1,103
            )Changes
                in operating assets and liabilitiesTrade
                and other accounts receivable
            
            
            609
            
            
            (707
            )Inventories
            
            
            (118
            )
            
            (78
            )Prepaid
                expenses and other current assets
            
            
            (471
            )
            
            19Accounts
                payable and accrued liabilities
            
            
            309
            
            
            763Deferred
                revenue and other current liabilities
            
            
            94
            
            
            974Net
                cash used in operating activities
            
            
            (8,268
            )
            
            (9,634
            )Cash
                Flows from Investing Activities:Cash
                received from sale of (paid to acquire) CSI International, Inc.,
                Mobot,
                Inc., Sponge Ltd., Gavitec AG, and 12Snap AG, net of cash
                acquired
            
            
            1,100
            
            
            (17,112
            )Acquisition
                of property and equipment
            
            
            (15
            )
            
            (176
            )Acquisition
                of patents and other intangible assets
            
            
            (30
            )
            
            -Proceeds
                from sale of marketable securities
            
            
            -
            
            
            1,574Advances
                to discontinued subsidiaries Micro Paint Repair, 12Snap, Telecom
                Services,
                Mobot, and Sponge
            
            
            163
            
            
            -Acquisition
                related costs
            
            
            -
            
            
            -Payment
                of purchase price guarantee obligations
            
            
            (2,260
            )
            
            -Amounts
                received (issued) under notes receivable
            
            
            671
            
            
            (500
            )Net
                cash used in investing activities
            
            
            (371
            )
            
            (16,214
            )Cash
                Flows from Financing Activities:Borrowing
                under notes payable and convertible debt instruments, net of fees
                of $981
                in 2007 and $0 in 2006
            
            
            8,253
            
            
            7,230Repayments
                on notes payable and convertible debt instruments
            
            
            (986
            )
            
            (2,674
            )Net
                proceeds from issuance of common stock, net of issuance costs of
                $24 in
                2006
            
            
            -
            
            
            210Net
                proceeds from issuance of Series C convertible preferred stock, net
                of
                issuance costs of $2,725 in 2006
            
            
            -
            
            
            14,066Net
                proceeds from exercise of stock options and warrants
            
            
            16
            
            
            8,444Net
                cash provided by financing activities
            
            
            7,283
            
            
            27,276Effect
                of exchange rate changes on cash for continuing operations
            
            
            (42
            )
            
            (319
            )**Net
                Increase (Decrease) in cash and cash equivalents from continuing
                operations**
            
            
            (1,398
            )
            
            1,109Cash
                and cash equivalents, beginning of period
            
            
            2,813
            
            
            1,704**Cash
                and cash equivalents, end of period**
            
            **$**
            **1,415**
            
            **$**
            **2,813**Supplemental
                cash flow information:Interest
                paid during the period
            
            $
            638
            
            $
            68Supplemental
                disclosure of investing and financing activities:Unrealized
                gain (loss) on marketable securities
            
            
            (195
            )
            
            (247
            )Fair
                value of shares issued to satisfy purchase price guarantee
                obligations
            
            
            12,721
            
            
            -Fair
                value of shares issued to satisfy debt guarantee
                obligation
            
            
            700
            
            
            -Prepaid
                acquisition costs applied to purchase price
            
            
            -
            
            
            168Fair
                value of shares and notes receivable from Pickups Plus, Inc. acquired
                in
                exchange for Series C Convertible Preferred Stock
            
            
            -
            
            
            594Carrying
                value of promissory note and accrued interest paid in exchange for
                Series
                C Convertible Preferred Stock
            
            
            
            
            
            (3,208
            )Fair
                value of shares issued to acquire CSI International, Inc., Mobot,
                Inc.,
                Sponge Ltd., Gavitec AG, 12Snap AG, and BSD Software, Inc.
            
            
            -
            
            
            46,965Change
                in net assets resulting from acquisitions of CSI International, Inc.,
                Mobot, Inc., Sponge Ltd., Gavitec AG, 12Snap AG, and BSD Software,
                Inc.
            
            
            -
            
            
            62,240Accretion
                of dividends on Series C Convertible Preferred Stock
            
            
            1,696
            
            
            20,324Fair
                value of outstanding warrants reclassified to liabilities
            
            
            -
            
            
            13,884Portion
                exercise of warrants accounted for as derivatives
            
            
            -
            
            
            3,790Initial
                fair value of Series C Convertible Preferred Stock (host instrument
                only)
            
            
            -
            
            
            4,908Deferred
                stock-based financing costs associated with Series C Convertible
                Preferred
                Stock
            
            
            -
            
            
            3,198Difference
                between net proceeds and recorded fair value of Series C Convertible
                Preferred Stock
            
            
            -
            
            
            4,041Advance
                receivable from Mobot, Inc. forgiven upon acquisition
            
            
            -
            
            
            1,500Series
                C Convertible Preferred Stock converted to common stock
            
            
            2,547
            
            
            507Accrual
                of purchase price guarantee provisions associated with acquisitions
                of
                12Snap, Gavitec, Sponge, and Mobot
            
            
            -
            
            
            21,427




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




44


**NeoMedia
      Technologies, Inc.**


**Notes
      to consolidated financial statements**





**1.****General**




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




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




***Going
      concern*** –
      Our code-reading business has historically incurred net losses and losses from
      operations. We have reduced cash outlays for payments associated with prior
      integration and discontinued operation liabilities. We will continue to have
      negative cash flows as we continue to execute on our business plan. There can
      be
      no assurance that our continuing efforts to execute our business plan will
      be
      successful and if we will be able to continue as a going concern. We will
      require additional capital, which may not be available on suitable terms. The
      accompanying consolidated financial statements have been prepared in conformity
      with accounting principles generally accepted in the United States of America,
      which contemplate our continuation as a going concern. Net loss for the years
      ended December 31, 2007 and 2006 was $40.6 million and $68.4 million,
      respectively. Net cash used for operations during the same years was $8.3
      million and $9.6 million. We also have an accumulated deficit of $201.6
      million  and
      a
      working capital deficit of $85.5 million  as
      of
      December 31, 2007.




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




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




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




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




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


45




**2.****Summary
      of significant accounting policies**




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




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




***Revenue
      recognition*** –
      We derive revenues from two sources:  (1) license revenues relating to
      patents and internally-developed software, and (2) hardware, software, and
      service revenues related to mobile marketing campaign design and
      implementation.




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




(2)
            Technology
                service and product revenue, which includes sales of software and
                technology equipment and service fees is recognized based on
                guidance provided in  SAB 104,  “*Revenue 
                Recognition  in Financial Statements*,”
                as amended.  Software and technology equipment resale
                revenue is recognized when persuasive evidence of an arrangement
                exists, the price to the customer is fixed and determinable, delivery
                of
                the service has occurred and collectibility is reasonably assured.
                Service
                revenues including maintenance fees for providing system updates for
                software products, user documentation and technical
                support are recognized over the life of
                the contract.  Our subsidiary, Gavitec, follows this policy. We
                defer revenue related to technology service and product revenue for
                which
                amounts have been invoiced and or collected but for which the requisite
                service has not been provided. Revenue is then recognized over the
                matching service period.




***Basic
      and diluted income (loss) per share*** –
      Basic net loss per share is computed by dividing net loss by the weighted
      average number of shares of common stock outstanding during the period. During
      the years ended December 31, 2007 and 2006, we reported net loss per share,
      and
      as such basic and diluted loss per share were equivalent. We have excluded
      all
      outstanding stock options, warrants, convertible debt and convertible preferred
      stock from the calculation of diluted net loss per share because these
      securities are anti-dilutive for all years presented. The shares excluded from
      the calculation of diluted net loss per share are detailed in the table
      below:





As
                of December 31,2007
            
            2006Outstanding
                Stock Options
            
            
            115,511,747
            
            
            105,822,455Outstanding
                Warrants
            
            
            514,825,000
            
            
            316,325,000Convertible
                debt(1)
            
            
            3,170,695,000
            
            
            166,667,000Convertible
                preferred stock(1)
            
            
            2,166,031,000
            
            
            477,022,000





(1)
            Assumes
                conversion at December 31, 2007 and
                2006.


46




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 all periods presented, the effect of potentially dilutive securities has
      been excluded from the calculation of per share amounts for those
      periods.




***Comprehensive
      income*** –
      We report comprehensive income in accordance with FAS 130, “ *Reporting
      Comprehensive Income* .”
This
      statement requires the disclosure of accumulated other comprehensive income
      or
      loss (excluding net income or loss) as a separate component of shareholders’
equity.




***Financial
      instruments and concentration of credit risk*** – Our
      financial instruments consist of cash and cash equivalents, accounts receivable,
      cash surrender value of life insurance policy, accounts payable, accrued
      expenses, notes payable, derivative financial instruments, other current
      liabilities, convertible preferred stock, and convertible debenture financing.
      We believe the carrying values of cash and cash equivalents, accounts
      receivable, accounts payable, accrued expenses, notes payable, and other current
      liabilities approximate their fair values due to their short-term nature. The
      fair value of convertible preferred stock and convertible debentures is
      estimated on December 31, 2007 to be approximately $20 million and $30.7
      million, respectively. The
      reported fair values do not take into consideration potential taxes or other
      expenses that would be incurred in an actual settlement.




Cash
      equivalents include highly liquid short-term investments with original
      maturities of three months or less, readily convertible to known amounts of
      cash. We invest our cash with highly rated financial institutions and perform
      periodic evaluations of the credit standing of these financial institutions.
      Our
      policies limit the concentration of credit exposure by restricting investments
      with any single obligor, instrument, or geographic area.




Our
      policies limit the concentration of accounts receivable credit exposure by
      requiring the majority of customers to prepay their renewal licenses prior
      to
      initiating services.




We
      generally do not use derivative financial instruments to hedge exposures to
      cash-flow risks or market-risks that may affect the fair values of our financial
      instruments. However, certain other financial instruments, such as warrants
      and
      embedded conversion features that are indexed to our common stock, are
      classified as liabilities when either (a) the holder possesses rights to
      net-cash settlement or (b) physical or net-share settlement is not within our
      control. In such instances, net-cash settlement is assumed for financial
      accounting and reporting, even when the terms of the underlying contracts do
      not
      provide for net-cash settlement. Derivative financial instruments arising from
      the issuance of convertible financial instruments are initially recorded, and
      continuously carried, at fair value.




Determining
      the fair value of derivative financial instruments involves judgment and the
      use
      of certain relevant assumptions including, but not limited to, interest rate
      risk, credit risk, equivalent volatility and conversion/redemption privileges
      that are necessary to value these complex derivatives. The use of different
      assumptions could have a material effect on the estimated fair value
      amounts.




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




We
      utilize various types of financing to fund our business needs, including
      convertible preferred stock, convertible debentures, and other instruments
      indexed to our own stock. The embedded conversion features utilized in these
      instruments require periodic measurement of the fair value of the derivative
      components. Pursuant to FAS 133 and EITF 00-19 we update the fair value of
      these
      derivative components at each reporting period.


47




***Goodwill***– In
      accordance with FAS 142, “ *Goodwill
      and Other Intangible Assets* ,”
      goodwill is no longer amortized, but is tested for impairment, at least
      annually, using the quoted market price of our stock as an indicator of fair
      value. If impairment of carrying value based on the calculated fair value
      exists, we measure the impairment through the use of discounted cash flows.
      Goodwill consists of the excess of the purchase price paid for Gavitec over
      the
      identifiable net assets and liabilities acquired at fair value. Goodwill was
      determined using the residual method based on an independent appraisal of the
      assets and liabilities acquired in the transaction.




***Other
      intangible assets*** –
      Intangible assets acquired as part of a business combination are accounted
      for
      in accordance with FAS 141, “ *Business
      Combinations* ,”
and
      are recognized apart from goodwill if the intangible asset arises from
      contractual or other legal rights or the asset is capable of being separated
      from the acquired enterprise. Intangible assets are reviewed for impairment
      by
      applying the recognition and measurement provisions of FAS 142, which compare
      the carrying amount of the intangible asset to its fair value. If the carrying
      amount exceeds fair value, an impairment loss is recognized. Intangible assets
      are amortized, using the straight-line method, over the estimate of their period
      of benefit of five to seventeen years. Other intangible assets consist of
      patents, customer contracts, copyrighted material, acquired software products,
      and brand names which are amortized straight-line over the expected life of
      each
      asset. The estimated service lives of other intangible assets are as
      follows:





Capitalized
                patents
            5
                -
                17 yearsCustomer
                contracts
            5
                yearsCopyrighted
                materials
            5
                yearsAcquired
                software products
            7
                yearsBrand
                names
            10
                years




***Evaluation
      of Long-Lived Assets*** –
      We periodically perform impairment tests on each of our intangible assets,
      which
      include goodwill, capitalized patent costs, customer base and trademarks, and
      capitalized and purchased software costs. In doing so, we evaluate the carrying
      value of each intangible asset with respect to several factors, including
      historical revenue generated from each intangible asset, application of the
      assets in our current business plan, and projected cashflow to be derived from
      the asset.




The
      determination of the fair value of certain acquired assets and liabilities
      is
      subjective in nature and often involves the use of significant estimates and
      assumptions. Determining the fair values and useful lives of intangible assets
      especially requires the exercise of judgment. Where practicable, we will obtain
      an independent valuation of intangible assets, and place reliance on such
      valuation. Then on an ongoing basis, we use the weighted-average probability
      method outlined in FAS 144 to estimate the fair value. This method requires
      significant management judgment to forecast the future operating results used
      in
      the analysis. In addition, other significant estimates are required such as
      residual growth rates and discount factors. The estimates we have used are
      consistent with the plans and estimates that we use to manage our business,
      based on available historical information and industry averages. The judgments
      made in determining the estimated useful lives assigned to each class of assets
      acquired can also significantly affect our net operating results.




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




·
            A
                significant decrease in the market price of the
                asset


·
            A
                significant adverse change in the extent or manner in which the asset
                is
                being used, or in its physical condition


·
            A
                significant adverse change in legal factors or in the business climate
                that could affect the value of the asset, including an adverse action
                or
                assessment by a regulator


·
            An
                accumulation of costs significantly in excess of the amount originally
                expected


48




·
            A
                current-period operating or cash flow loss combined with a history
                of
                operating or cash flow losses or a projection or forecast that
                demonstrates continuing losses associated with the use of the
                asset


·
            A
                current expectation that, more likely than not,****the
                asset will be sold or otherwise disposed of significantly before
                the end
                of its previously estimated useful
                life.




We
      follow
      the two-step process outlined in FAS 144 for determining if an impairment charge
      should be taken: (1) the expected undiscounted cashflows from a particular
      asset
      or asset group are compared to the carrying value; if the expected undiscounted
      cashflows are greater than the carrying value, no impairment is taken, but
      if
      the expected undiscounted cashflows are less than the carrying value, then
      (2)
      an impairment charge is taken for the difference between the carrying value
      and
      the expected discounted cashflows. The assumptions used in developing expected
      cashflow estimates are similar to those used in developing other information
      used by us for budgeting and other forecasting purposes. In instances where
      a
      range of potential future cashflows is possible, we use a probability-weighted
      approach to weigh the likelihood of those possible outcomes. For purposes of
      discounting cashflows we use a discount rate equal to the yield on a zero-coupon
      US Treasury instrument with a life equal to the expected life of the intangible
      asset or asset group being tested.




We
      recognized an impairment charge of $3.1 million during the year ended December
      31, 2007, as a result of writing the carrying value of long-term investments
      to
      their net realizable value.




***Property,
      plant and equipment*** –
      Property, plant and equipment, including software, are stated at cost less
      accumulated depreciation and amortization. The straight-line depreciation method
      is used for property, plant, and equipment over the estimate of their useful
      lives. Changes in technology or changes in the intended use of property, plant,
      and equipment may cause the estimated period of use or the value of these assets
      to change. Long-lived assets are reviewed for impairment whenever events or
      changes in circumstances indicate that their carrying amounts may not be
      recoverable. Estimates and assumptions used in both setting depreciable lives
      and testing for recoverability require management judgment. Leasehold
      improvements are amortized over the shorter of the lease term or the estimated
      useful life of the improvement. Gains and losses related to the retirement
      or
      disposal of fixed assets are recognized in the period in which the transaction
      occurred. The cost of normal maintenance and repairs is charged to operations
      as
      incurred.  Material expenditures, which increase the life of an asset, are
      capitalized and depreciated over the estimated remaining life of the asset.
      The
      estimated service lives of property and equipment are as follows:





Leasehold
                improvements
            3
                yearsFurniture
                and fixtures
            7
                yearsComputer
                equipment
            3
                -
                5 years




***Derivative
      Financial Instruments***– We
      utilize various types of financing to fund our business needs, including
      convertible preferred stock, convertible debentures, and other instruments
      indexed to our own stock. The embedded conversion features utilized in these
      instruments require periodic measurement of the fair value of the derivative
      components. Pursuant to FAS 133 and EITF 00-19 we update the fair value of
      these
      derivative components at each reporting period through a charge to
      income.




***Fair-valued
      Financial Instruments***– Some of
      our debentures are fair valued in their entirety due to our previous default
      on
      registration requirements for the underlying securities. Pursuant to FAS 155,
      we
      update the fair value of the March 2007 and the August 2007 debentures at each
      reporting period through a charge to income. See Note 6 for further information
      regarding the accounting treatment of our financing instruments.




***Accounts
      Receivable*** –
      We report accounts receivable at net realizable value. Our terms of sale provide
      the basis for when accounts become delinquent or past due. We provide an
      allowance for doubtful accounts equal to the estimated uncollectible
      amounts.  Our estimate is based on historical collection experience and a
      review of the current status of accounts receivable.  Receivables are
      generally charged off and sent to a collections agency after ninety days past
      due, unless we believe that collection is reasonably assured. It is at least
      reasonably possible that our estimate of the allowance for doubtful accounts
      will change in the near-term. At December 31, 2007 and 2006, the allowance
      for
      doubtful accounts was $78,000 and $69,000, respectively.


49




***Inventories***– Inventories are stated at the lower of cost or market and were comprised of
      barcode-reading equipment at our Gavitec location. Cost is determined using
      the
      first-in, first-out method. The following table summarizes the components of
      our
      inventory as of December 31, 2007 and 2006, including the reserve for
      slow-moving and obsolete machines.





As
                of December 31,2007
            
            2006****Raw
                material
            
            $
            59
            
            $
            37Finished
                goods
            
            
            218
            
            
            70Work
                in process
            
            
            1
            
            
            25Total
            
            $
            278
            
            $
            133Less:
                reserve for slow-moving and obsolete inventory
            
            
            (80
            )
            
            (53
            )Total
                Inventory, net of reserves
            
            $
            198
            
            $
            80




***Shipping
      and Handling Costs*** –
      Shipping and handling costs are passed through to our customers, and are
      recorded as revenue with the associated costs recorded as cost of goods
      sold.




***Research
      and Development*** –
      Costs associated with the planning and designing phase of software development,
      including coding and testing activities, and related overhead, necessary to
      establish technological feasibility of our internally-developed software
      products, are classified as research and development and expensed as
      incurred.




***Stock
      Based Compensation*** –
      Effective January 1, 2006, we adopted FAS 123R. This statement replaces FAS
      123,
“ *Accounting
      for Stock-Based Compensation”* ,
      and
      supersedes APB 25, “ *Accounting
      for Stock Issued to Employees* ”.
      FAS
      123R requires that all stock-based compensation be recognized as an expense
      in
      the financial statements and that such cost be measured at the grant date fair
      value of the award. This statement was adopted using the modified prospective
      method of applications, which requires us to recognize compensation expense
      on a
      prospective basis. Therefore, prior period financial statements have not been
      restated. Under this method, in addition to reflecting compensation expense
      for
      new share-based awards, expense is also recognized to reflect the remaining
      expense associated with awards that had not vested at the date we adopted FAS
      123R. FAS 123R also requires that excess tax benefits (none for us in the
      current period due to tax losses) related to stock option exercises be reflected
      as financing cash inflows instead of operating cash inflows.




With
      the
      adoption of FAS 123R, we record the fair value of stock-based compensation
      awards as an expense. In order to determine the fair value of stock option
      on
      the date of grant, we use the Black-Scholes-Menton option-pricing model.
      Inherent in this model are assumptions related to expected stock-price
      volatility, option life, risk-free interest rate and dividend yield. Although
      the risk-free interest rates and dividend yield are less subjective assumptions,
      typically based on factual data derived from public sources, the expected
      stock-price volatility, forfeiture rate and option life assumptions require
      a
      greater level of judgment which make them critical accounting
      estimates.




We
      use an
      expected stock-price volatility assumption that is based on historical
      volatilities of the underlying stock which is obtained from public data sources.
      With regard to the weighted-average option life and forfeiture rate assumptions,
      we consider the behavior of past grants.




***Income
      Taxes*** –
      We account for income taxes under the provisions of FAS 109, “ *Accounting
      for Income Taxes* ”,
      which
      requires recognition of deferred tax liabilities and assets for the expected
      future tax consequences of events that have been included in the financial
      statement or tax returns. Under this method, deferred tax liabilities and assets
      are determined based on the difference between the financial statement and
      tax
      basis of assets and liabilities using enacted tax rates in effect for the year
      in which the difference is expected to reverse. Deferred tax assets are reduced
      by a valuation allowance when, in the opinion of management, it is more likely
      than not that some portion or all of the deferred tax assets will not be
      recognized. We have recorded a 100% valuation allowance as of December 31,
      2007
      and 2006.


50




Beginning
      January 1, 2007, we adopted FASB Interpretation No. 48, “ *Accounting
      for Uncertainty in Income Taxes—an interpretation of FASB Statement No.
      109* ”
(“FIN
      48”). The Interpretation prescribes a recognition threshold and a measurement
      attribute for the financial statement recognition and measurement of tax
      positions taken or expected to be taken in a tax return. For those benefits
      to
      be recognized, a tax position must be more-likely-than-not to be sustained
      upon
      examination by taxing authorities. The amount recognized is measured as the
      largest amount of benefit that is greater than 50 percent likely of being
      realized upon ultimate settlement. See Note 12 to our Consolidated Financial
      Statements for discussions of our implementation of FIN 48.




***Translation
      of Foreign Currency*** –
      The U.S. dollar is the functional currency of our operations, except for our
      operations at Gavitec, which use the Euro as their functional currency. Foreign
      currency transaction gains and losses are reflected in income. Translation
      gains
      and losses of our operations that do not use the U.S. dollar as the functional
      currency are included in the consolidated balance sheets as “Accumulated other
      comprehensive income (loss).”




***Reclassifications and
      other***– Due to
      the completed divestitures of 12Snap, Telecom Services, and Micro Paint Repair
      during 2007, and Mobot and Sponge during 2006, results of operations from these
      units have been reclassified under the caption “Discontinued Operations” for all
      periods shown in the accompanying consolidated statement of operations, and
      assets and liabilities relating to these business units are combined into the
      captions “Assets held for sale” and “Liabilities held for sale,” respectively,
      in the accompanying consolidated balance sheets.




As
      previously disclosed in our Form 10-Q for the
      second and third quarters of 2007, we recognized an immaterial adjustment to
      the
      2006 period since the adjustment, if recorded in 2007, would have been material.
      The effect of this adjustment reduced liabilities and stockholders deficit
      by
      $402,000, and increased net loss by $968,000. There was no impact to loss per
      share amounts.




**3.
      ACQUISITIONS**




During
      the year ended December 31, 2006, we completed acquisitions of Mobot, Sponge,
      Gavitec, 12Snap, and BSD. During the same period, we also divested of a
      substantial portion of our ownership in both Mobot and Sponge. Additionally,
      during January 2007, we made the strategic decision to sell the 12Snap and
      Telecom Services (consisting of the business acquired from BSD)
      businesses.




***Acquisition
      and Sale of Mobot*** –
      On February 9, 2006, we signed a definitive merger agreement with Mobot (based
      in Lexington, Massachusetts), subject to closing conditions, under which we
      acquired all of the outstanding shares of Mobot in exchange for $3.5 million
      cash and $6.5 million in stock, represented by 16,931,493 shares our common
      stock (2,604,845 of which were held in escrow for the purpose of securing the
      indemnification obligations outlined in the purchase agreement). On February
      17,
      2006, we completed the closing requirements of the Mobot acquisition and the
      acquisition became effective. In addition to cash and stock, at closing we
      forgave notes payable totaling $1.5 million due from Mobot. This amount is
      considered other additional consideration in the purchase price allocation.
      We
      completed the acquisition of Mobot in an effort to gain entry into the rapidly
      evolving global mobile marketing industry.




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




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


51





(Dollars
                in
              Thousands)Value
                of 16,931,493 shares issued at $0.395 per share(1)
            
            $
            6,688Cash
                paid (net of cash acquired of $328)
            
            
            3,172Direct
                costs of acquisition
            
            
            8Advances
                to Mobot forgiven at acquisition
            
            
            1,500Total
                Fair Value of Purchase Price
            
            $
            11,368Assets
                Purchased:Accounts
                receivable
            
            $
            68Other
                current assets
            
            
            49Property,
                plant & equipment
            
            
            30Intangible
                assets
            
            
            13Customer
                contracts and relationships
            
            
            440Capitalized
                software platform
            
            
            4,200Copyrighted
                materials
            
            
            90Goodwill
            
            
            6,778Total
                Assets Purchased
            
            $
            11,668Less
                Liabilities Assumed:Accounts
                payable
            
            $
            51Accrued
                liabilities
            
            
            132Deferred
                revenue
            
            
            117Total
                Liabilities Assumed
            
            $
            300







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




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




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





Estimated
                useful
              life
                (in years)Intangible
                assetCustomer
                contracts and relationships
            5Copyrighted
                materials
            5Capitalized
                software platform
            7




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




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


52




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




·
            We
                transferred 100% of our ownership interest in Mobot to FMS, and in
                return
                received 16,000 common shares (18% ownership) of FMS, which will
                operate
                the Mobot business;


·
            All
                obligations under the original merger agreement, including the purchase
                price guarantee obligation, were
                terminated;


·
            We
                contributed $67,000 cash to FMS at closing, and an additional $0.2
                million
                on December 27, 2006;


·
            We
                received 16,931 preference shares in FMS that can be redeemed to
                reacquire
                the 16,931,493 original consideration shares originally issued to
                acquire
                Mobot. Each preference share can be redeemed for 1,000 shares of
                our
                common stock at our discretion within 15 months (on or before March
                4,
                2008) of the closing of this transaction, for cash in the amount
                of 40% of
                the then-current market value of our underlying shares. We did not
                redeem these shares due to the cost of redemption. The preference
                shares can still be redeemed upon a liquidation event of FMS,
                for either 1,000 shares of our common stock each, or for the current
                cash
                equivalent of the shares, at FMS’
discretion;


·
            We
                entered into a license agreement with Mobot, pursuant to which we
                received
                a license to use the Mobot image recognition service for barcode-related
                applications. The license is exclusive in the Americas, Europe and
                Australia, restricted in Japan, Korea, and Singapore, and non-exclusive
                in
                other areas of the world. The exclusivity is subject to our meeting
                certain minimum transaction volume requirements or making minimum
                cash
                payments; and


·
            We
                entered into a mutual release with each of the former Mobot shareholders
                in which the parties released each other from the terms of the original
                Mobot merger agreement, and the former Mobot shareholders consented
                to the
                release of the pending legal action against
                us.




Due
      to
      our depressed stock price, the purchase price obligation clause became highly
      probable beyond a reasonable doubt. Our inability to satisfy the pending
      obligation was the primary factor for the disposition of Mobot. The value of
      the
      purchase price obligation at the time of closing was $5.5 million. Concurrent
      with the disposition, we reduced the fair value of the initial stock
      consideration by the amount of this contingency. At closing, we recorded a
      loss
      on the sale of Mobot in the amount of $4.4 million, representing the difference
      between the fair value of the assets received in the transaction, and the
      carrying value of the assets at closing as follows:





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




The
      accompanying consolidated statements of operations presented herein for the
      year
      ended December 31, 2006, contain the results of operations for Mobot
      reclassified to discontinued operations for the period of ownership beginning
      on
      February 17, 2006 through the sale date of December 6, 2006.


53




***Acquisition
      and Sale of Sponge*** –
      On February 20, 2006, we signed a definitive share purchase agreement with
      Sponge (a London-based company), subject to closing conditions, under which
      we
      acquired all of the outstanding shares of Sponge in exchange for $6.1 million
      cash and £6.6 million (approximately $13.1 million at the time of the
      agreement), represented by 33.1 million shares of our common stock (3.4 million
      of which were held in escrow for the purpose of securing the indemnification
      obligations outlined in the purchase agreement). The agreement also called
      for
      the former shareholders of Sponge to receive an additional £2.5 million
      (approximately $4.4 million) in the form of our common stock if, during the
      two-year period beginning at closing, the Sponge business earned in excess
      of
£1.3 million (approximately $2.3 million) in net profits. On February 23, 2006,
      we completed the closing requirements for the Sponge acquisition and the
      acquisition became effective. Pursuant to the terms of the merger agreement,
      the
      number of shares of our common stock to be issued as consideration was
      calculated using a share price of $0.384, which was the volume-weighted average
      closing price of our common stock for the ten days up to and including February
      8, 2006. In the event that our stock price at the time the consideration shares
      were saleable (either upon effectiveness of a registration statement containing
      the shares, or under Rule 144) was less than $0.384, the purchase agreement
      called for us to compensate Sponge shareholders in cash for the difference
      between the price at the time the shares become saleable and $0.384. We
      completed the acquisition of Sponge in an effort to gain entry into the rapidly
      evolving global mobile marketing industry.




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


(Dollars
                in
              Thousands)Value
                of 33,097,135 shares issued at $0.395 per share(1)
            
            $
            13,073Cash
                paid (net of cash acquired of $177)
            
            
            5,964Direct
                costs of acquisition
            
            
            194Total
                Fair Value of Purchase Price
            
            $
            19,231Assets
                Purchased:Accounts
                receivable
            
            $
            617Other
                current assets
            
            
            35Property,
                plant & equipment
            
            
            53Customer
                contracts and relationships
            
            
            400Capitalized
                software platform
            
            
            1,300Brand
                name
            
            
            800Copyrighted
                materials
            
            
            50Goodwill
            
            
            16,692Total
                Assets Purchased
            
            $
            19,947Less
                Liabilities Assumed:Accounts
                payable
            
            $
            190Accrued
                liabilities
            
            
            322Other
                current liabilities
            
            
            204Total
                Liabilities Assumed
            
            $
            716







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




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


54




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





Estimated
                useful
              life
                (in years)Intangible
                assetCustomer
                contracts and relationships
            5Copyrighted
                materials
            5Capitalized
                software platform
            7Brand
                name
            10




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




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




·
            We
                returned 92.5% of our ownership interest in Sponge, retaining 7.5%
                ownership of Sponge,




·
            We
                relinquished our board of directors’ positions at
                Sponge,




·
            The
                33.1 million shares of our common stock that were issued as consideration
                to acquire Sponge were returned to us and
                retired;




·
            All
                obligations under the original merger agreement, including the purchase
                price guarantee obligation, were terminated;
                and




·
            Sponge
                returned $0.1 million cash (net of attorney fees) to us at closing
                and
                $0.2 million cash to us on March 7,
                2007.




Due
      to
      our depressed stock price, the purchase price obligation clause became highly
      probable beyond a reasonable doubt. Our inability to satisfy the pending
      obligation was the primary factor for the disposition of Sponge. The value
      of
      the purchase price obligation at the time of closing was $10.1 million.
      Concurrent with the disposition, we reduced the fair value of the initial stock
      consideration by the amount of this contingency. At closing, we recorded a
      loss
      on the disposal of Sponge in the amount of $5.1 million, representing the
      difference between the fair value of the assets received in the transaction,
      and
      the carrying value of the assets at closing, as follows:





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




The
      accompanying consolidated statements of operations presented herein for the
      year
      ended December 31, 2006, contain the results of operations for Sponge
      reclassified to discontinued operations for the period of ownership beginning
      on
      February 23, 2006 through the sale date of November 14, 2006.


55




***Acquisition
      of Gavitec*** –
      On February 17, 2006, we signed a definitive sale and purchase agreement with
      Gavitec (based in Aachen, Germany), subject to closing conditions, under which
      we acquired all of the outstanding shares of Gavitec in exchange for $1.8
      million cash and $5.2 million common stock, represented by 13,660,511 shares
      of
      our common stock (1,366,051 of which were held in escrow until December 31,
      2006
      for the purpose of securing the indemnification obligations outlined in the
      purchase agreement, and were subsequently released). Pursuant to the terms
      of
      the merger agreement, the number of shares of our common stock to be issued
      as
      consideration was calculated using a share price of $0.389, which was the
      volume-weighted average closing price of our common stock for the ten days
      up to
      and including February 16, 2006. On February 23, 2006, we completed the closing
      requirements of the Gavitec acquisition and the acquisition became
      effective.




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




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


(Dollars
                in
              Thousands)Value
                of 13,660,511 shares issued at $0.386 per share(1)
            
            $
            5,273Cash
                paid (net of cash acquired of $74)
            
            
            1,726Direct
                costs of acquisition
            
            
            114Total
                Fair Value of Purchase Price
            
            $
            7,113Assets
                Purchased:Accounts
                receivable
            
            $
            173Inventory
            
            
            106Other
                current assets
            
            
            53Property,
                plant & equipment
            
            
            15Intangible
                assets
            
            
            3Capitalized
                software platform
            
            
            4,600Copyrighted
                materials
            
            
            50Goodwill
            
            
            3,418Total
                Assets Purchased
            
            $
            8,418Less
                Liabilities Assumed:Accounts
                payable
            
            $
            113Accrued
                liabilities
            
            
            24Deferred
                revenue
            
            
            117Deferred
                tax liability
            
            
            706Other
                current liabilities
            
            
            345Total
                Liabilities Assumed
            
            $
            1,305







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


56




The
      combination was accounted for as a purchase business combination as defined
      by
      FAS 141, Business Combinations. The allocation of the purchase price to the
      assets acquired and liabilities assumed was based on an independent report
      obtained by us.




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





Estimated
                useful
              life
                (in years)Intangible
                assetCopyrighted
                materials
            5Capitalized
                software platform
            7Brand
                name
            10




Goodwill
      consists of the excess of the purchase price paid over the identifiable net
      assets and liabilities acquired at fair value. Goodwill was determined using
      the
      residual method based on an independent appraisal of the assets and liabilities
      acquired in the transaction. Goodwill is tested for impairment as defined by
      Statement of Financial Accounting Standards No. 142, “Goodwill and Other
      Intangible Assets.” An additional amount of $0.7 million was allocated to
      goodwill of Gavitec related to the deferred tax liability associated with the
      intangible assets in excess of Gavitec’s net operating loss carry forward
      deferred tax asset.




In
      the
      event that our stock price at the time the consideration shares were saleable
      (either upon effectiveness of a registration statement containing the shares,
      or
      under Rule 144) was less than $0.389, we were obligated to compensate Gavitec
      shareholders in cash for the difference between the price at the time the shares
      become saleable and $0.389. On January 23, 2007, we entered into an agreement
      with the former shareholders of Gavitec, whereby this purchase price obligation
      was satisfied through the payment by us of (i) $1.8 million in cash, paid on
      March 29, 2007, and (ii) 61 million shares of our common stock. We also agreed
      to pay interest accrued on the purchase price in the amount of $0.2 million
      and
      reimburse $0.1 million of costs related to the acquisition to the primary former
      shareholder of Gavitec. After our payments of cash and stock in the first
      quarter of 2007, the purchase price obligation was calculated to be $5.2
      million. Accordingly, as of December 31, 2006, we reduced the fair value of
      the
      initial stock consideration by the amount of this contingency.




The
      accompanying consolidated statements of operations presented herein for the
      years ended December 31, 2007 and 2006, contain the results of operations for
      Gavitec for the period from February 24, 2006 through December 31, 2006, and
      for
      the entire year of 2007 in continuing operations.




***Acquisition
      and Sale of 12Snap*** –
      On February 10, 2006, we signed a definitive sale and purchase agreement with
      12Snap, subject to closing conditions, under which we acquired all of the
      outstanding shares of 12Snap in exchange for $2.5 million cash and $19.5 million
      common stock, represented by 49,294,581 shares of our common stock. On February
      28, 2006, we completed the closing requirements of the 12Snap acquisition and
      the acquisition became effective. Pursuant to the terms of the merger agreement,
      the number of shares of our common stock to be issued as consideration was
      calculated using a share price of $0.3956, which was the volume-weighted average
      closing price of our common stock for the ten days up to and including February
      9, 2006. We
      completed the acquisition of 12Snap in an effort to gain entry into the rapidly
      evolving global mobile marketing industry.


57






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


(Dollars
                inThousands)Value
                of 49,294,581 shares issued at $0.394 per share(1)
            
            $
            19,422Cash
                paid (net of cash acquired of $465)
            
            
            2,035Direct
                costs of acquisition
            
            
            114Total
                Fair Value of Purchase Price
            
            $
            21,571Assets
                Purchased:Investment
                in marketable securities
            
            $
            951Accounts
                receivable
            
            
            2,683Other
                current assets
            
            
            554Property,
                plant & equipment
            
            
            224Intangible
                assets
            
            
            93Customer
                contracts and relationships
            
            
            400Capitalized
                software platform
            
            
            4,400Brand
                name
            
            
            1,600Copyrighted
                materials
            
            
            50Goodwill
            
            
            18,390Total
                Assets Purchased
            
            $
            29,345Less
                Liabilities Assumed:Accounts
                payable
            
            $
            977Accrued
                liabilities
            
            
            989Deferred
                revenue
            
            
            1,434Other
                current liabilities
            
            
            225Notes
                payable
            
            
            4,149Total
                Liabilities Assumed
            
            $
            7,774





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




The
      combination was accounted for as a purchase business combination as defined
      by
      FAS 141, Business Combinations. The allocation of the purchase price to the
      assets acquired and liabilities assumed is based on an independent valuation
      report obtained by us.




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


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




58




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




On
      April
      3, 2007, we signed a definitive share purchase and settlement agreement with
      Bernd M. Michael, pursuant to which we divested of a material portion of our
      ownership interest in 12Snap. The principal reasons for our divestiture of
      the
      12Snap business were: (i) our depressed stock price, which led to a large
      potential cash obligation stemming from the purchase price obligation clause
      in
      the original purchase agreement, (ii) the fact that the purchase price
      obligation would become due no later than February 22, 2007, and (iii) the
      return of the original consideration shares for retirement. The following is
      a
      summary of the sale agreement:




·
            $1.1
                million cash was paid at closing, and $0.5 million was placed in
                an escrow
                account for 90 days to secure warranty claims; substantially all
                of this
                cash was concurrently used to settle prior agreements with the silent
                partners of the initial purchase
                transaction,




·
            The
                purchase price guarantee obligations in the amount of $1.76 million
                were
                waived,




·
            The
                7,750,857 shares of our common stock that were issued as consideration
                to
                acquire 12Snap were returned to us and retired;
                and




·
            We
                retained a 10% ownership in 12Snap, subject to an option agreement
                pursuant to which we had the right to sell and Buyer has the right
                to
                acquire the remaining 10% stake held by us for a purchase price of
                $0.8
                million after December 31, 2007.




Due
      to
      our depressed stock price, the purchase price obligation clause became highly
      probable beyond a reasonable doubt. Our inability to satisfy the pending
      obligation was the primary factor for the disposition of 12Snap. The value
      of
      the purchase price obligation at the time of closing was $16.2 million.
      Concurrent with the disposition, we reduced the fair value of the initial stock
      consideration by the amount of this contingency. We recorded impairment charges
      of $2.5 million in the first quarter of 2007 to adjust the carrying value of
      12Snap’s assets to the final fair market value. We realized a loss on the
      disposal of 12Snap in the amount of $0.3 million during the second quarter
      of
      2007.




During
      the first quarter of 2007, we recorded an impairment charge of $2.5 million
      to
      adjust the carrying value of the 12Snap asset group to the actual net proceeds
      from the sale of the assets. Prior to the impairment charge, the asset group
      consisted primarily of goodwill and other intangible assets recorded upon
      purchase of 12Snap by us during the first quarter of 2006. The accompanying
      consolidated statements of operations presented herein for the years ended
      December 31, 2007 and 2006, contain the results of operations for 12Snap in
      discontinued operations.




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




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


59




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


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





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




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




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




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




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




During
      the first quarter of 2007, we initiated an action plan to sell the Telecom
      business unit. Consequently, the operations of this business were classified
      as
      discontinued operations from January 1, 2007 through the date of sale on October
      30, 2007.


60




On
      October 30, 2007, we completed the sale of Triton to Greywolf Entertainment,
      Inc., pursuant to which we divested of all of our ownership interest in Triton.
      The principal reasons for our divestiture of the Triton business were to realign
      our management focus on the core business strategy and to eliminate cash drain
      from the non-core business units. The following is a summary of the sale
      agreement:




·
            $1.35
                million cash was paid at closing,
                and




·
            We
                issued 6.2 million shares of common stock with a fair value of $0.1
                million to the principal shareholder and CEO of the Buyer as a commission
                on the sale.




During
      the third quarter of 2007, we recorded an impairment charge of $3.4 million
      to
      adjust the carrying value of the Telecom Services asset group to the actual
      net
      proceeds from the sale of the assets. Prior to the impairment charge, the asset
      group consisted primarily of goodwill and other intangible assets recorded
      upon
      purchase of BSD by us during the first quarter of 2006. The accompanying
      consolidated statements of operations presented herein for the years ended
      December 31, 2007 and 2006, contain the results of operations for Telecom
      services in discontinued operations.




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




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




***Letter
      of Intent to Acquire HipCricket*** - On
      August 24, 2006, we terminated a non-binding letter of intent to acquire
      HipCricket, Inc. (“HipCricket”), due to an inability of the parties to come to
      terms on a definitive purchase price. On February 16, 2006, we signed the letter
      of intent with HipCricket, under which we intended to acquire all of the
      outstanding shares of Hip Cricket in exchange for $0.5 million cash and $4.0
      million of our common stock, subject to due diligence and signing of a mutually
      agreeable definitive purchase agreement by both parties.




In
      addition to signing the letter of intent, we loaned HipCricket the principal
      amount of $0.5 million in the form of (a) a promissory note, dated February
      16,
      2006, in the amount of $0.25 million and (b) a promissory note, dated March
      20, 2006, in the amount of $0.25 million. The notes accrued interest at a rate
      of 8% per annum. The notes were to be applied toward the cash portion of the
      purchase price upon signing of a definitive purchase agreement for the
      acquisition of all of the outstanding shares of HipCricket by us, as
      contemplated in the letter of intent. On February 28, 2007, we reached an
      agreement with HipCricket pursuant to which HipCricket agreed to repay the
      amounts owing under the note in cash over the period of one year. HipCricket
      paid $0.3 million on March 2, 2007 and paid the note in full on July 27, 2007
      by
      remitting the final $0.2 million plus interest accrued on the note. In
      consideration of the early payment, we forgave $24,000 in interest income that
      we would have earned with the original payment schedule through February
      2008.





**4.
      Discontinued operations and assets and liabilities held for
      sale**




***MPR,
      12Snap & Telecom Services*** - During
      August 2006, we decided to sell our Micro Paint Repair business unit; this
      sale
      was completed on November 15, 2007. During the first quarter of 2007, we also
      decided to sell our remaining non-core business units, including 12Snap and
      Telecom Services. Our sale of 12Snap was completed in April 2007, and our sale
      of Telecom Services was completed in October 2007. The results of operations
      of
      these business units have been reclassified to discontinued operations for
      all
      periods contained in this Form 10-K. The assets and liabilities of these
      operations are classified as Held For Sale. Assets Held for Sale are not
      depreciated or amortized.


61




***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. We reviewed the pertinent facts related to the above dispositions
      with respect to the criteria outlined in FAS 144 and other applicable literature
      and concluded that they should be accounted for as discontinued operations.
      The
      assets and liabilities of these operations are classified as Held For Sale.
      Assets Held for Sale are not depreciated or amortized.




**Discontinued
      Operations**




The
      operating results of the Micro Paint Repair business unit, Sponge, Mobot, 12Snap
      and Telecom subsidiaries classified as discontinued operations are indicated
      in
      the following table. There is no tax expense or benefit to report due to our
      net
      operating loss carry forward tax position.




The
      following table presents a summary of results of our discontinued operations
      for
      the years ended December 31, 2007 and 2006:


Micro
              Paint
              Repair
            
            Mobot
            
            Sponge
            
            12Snap
            
            Telecom
              Service
            
            Total2007Net
                sales
            
            $
            1,200
            
            $
            -
            
            $
            -
            
            $
            2,621
            
            $
            1,550
            
            $
            5,371Cost
                of sales
            
            
            1,518
            
            
            -
            
            
            -
            
            
            361
            
            
            479
            
            
            2,358Gross
                profit
            
            
            (318
            )
            
            -
            
            
            -
            
            
            2,260
            
            
            1,071
            
            
            3,013Sales
                and marketing expenses
            
            
            784
            
            
            30
            
            
            58
            
            
            1,181
            
            
            343
            
            
            2,396General
                and administrative expenses
            
            
            702
            
            
            -
            
            
            1
            
            
            434
            
            
            1,008
            
            
            2,145Research
                and development costs
            
            
            171
            
            
            15
            
            
            -
            
            
            407
            
            
            -
            
            
            593Loss
                from operations of discontinued business
            
            
            ($1,975
            )
            
            ($45
            )
            
            ($59
            )
            $
            238
            
            
            ($280
            )
            
            ($2,121
            )Loss
                on disposal of business
            
            
            (457
            )
            
            -
            
            
            -
            
            
            (2,724
            )
            
            (3,429
            )
            
            (6,610
            )Loss
                from discontinued operations
            
            
            ($2,432
            )
            
            ($45
            )
            
            ($59
            )
            
            ($2,486
            )
            
            ($3,709
            )
            
            ($8,731
            )2006Net
                sales
            
            $
            1,547
            
            $
            436
            
            $
            1,036
            
            $
            7,333
            
            $
            1,371
            
            $
            11,723Cost
                of sales
            
            
            1,912
            
            
            591
            
            
            397
            
            
            2,578
            
            
            -
            
            
            5,478Gross
                profit
            
            
            (365
            )
            
            (155
            )
            
            639
            
            
            4,755
            
            
            1,371
            
            
            6,245Sales
                and marketing expenses
            
            
            1,194
            
            
            725
            
            
            1,028
            
            
            4,053
            
            
            993
            
            
            7,993General
                and administrative expenses
            
            
            1,192
            
            
            198
            
            
            740
            
            
            3,270
            
            
            1,380
            
            
            6,780Research
                and development costs
            
            
            245
            
            
            565
            
            
            -
            
            
            1,258
            
            
            -
            
            
            2,068Impairment
                charge
            
            
            -
            
            
            -
            
            
            -
            
            
            18,327
            
            
            -
            
            
            18,327Loss
                from operations of discontinued business
            
            
            ($2,996
            )
            
            ($1,643
            )
            
            ($1,129
            )
            
            (22,153
            )
            
            ($1,002
            )
            
            ($28,923
            )Loss
                on disposal of business
            
            
            -
            
            
            (4,367
            )
            
            (5,051
            )
            
            -
            
            
            -
            
            
            (9,418
            )Loss
                from discontinued operations
            
            
            ($2,996
            )
            
            ($6,010
            )
            
            ($6,180
            )
            
            ($22,153
            )
            
            ($1,002
            )
            
            ($38,341
            )




The
      Assets and Liabilities Held for Sale as of December 31, 2007 and 2006 are
      presented below:


2007
            
            Micro
              Paint
              Repair
            
            Mobot
            
            Sponge
            
            12Snap
            
            Telecom
              Service
            
            Total**ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            58
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            58Trade
                accounts receivable, net
            
            
            26
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            26Inventories
                of finished goods
            
            
            14
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            14Prepaid
                expenses and other current assets
            
            
            5
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            5Total
                current assets
            
            
            103
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            103Leasehold
                improvements & property and equipment, net
            
            
            46
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            46Other
                long-term assets
            
            
            10
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            10**Total
                assets held for sale**
            
            **$**
            **159**
            
            **$**
            **-**
            
            **$**
            **-**
            
            **$**
            **-**
            
            **$**
            **-**
            
            **$**
            **159****LIABILITIES**Current
                liabilities:Accounts
                payable
            
            $
            7
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            7Taxes
                payable
            
            
            6
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            6**Total
                liabilities held for sale**
            
            **$**
            **13**
            
            **$**
            **-**
            
            **$**
            **-**
            
            **$**
            **-**
            
            **$**
            **-**
            
            **$**
            **13**




62




2006
            
            
            Micro
              Paint
              Repair
            
            
            Mobot
            
            
            Sponge
            
            
            12Snap
            
            
            Telecom
                Service
            
            
            Total**ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            81
            
            $
            -
            
            $
            -
            
            $
            721
            
            $
            72
            
            $
            874Trade
                accounts receivable, net
            
            
            196
            
            
            -
            
            
            -
            
            
            1,842
            
            
            1,577
            
            
            3,615Inventories,
                net of allowance
            
            
            154
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            154Prepaid
                expenses and other current assets
            
            
            36
            
            
            -
            
            
            -
            
            
            407
            
            
            12
            
            
            455Total
                current assets
            
            
            467
            
            
            
            
            
            
            
            
            2,970
            
            
            1,661
            
            
            5,098Leasehold
                improvements & property and equipment, net
            
            
            135
            
            
            -
            
            
            -
            
            
            200
            
            
            48
            
            
            383Goodwill
                and other intangible assets, net
            
            
            2,470
            
            
            -
            
            
            -
            
            
            5,876
            
            
            5,593
            
            
            13,939**Total
                assets held for sale**
            
            **$**
            **3,072**
            
            **$**
            **-**
            
            **$**
            **-**
            
            **$**
            **9,046**
            
            **$**
            **7,302**
            
            **$**
            **19,420****LIABILITIES**Current
                liabilities:Accounts
                payable
            
            $
            25
            
            $
            -
            
            $
            -
            
            $
            640
            
            $
            1,854
            
            $
            2,519Taxes
                payable
            
            
            8
            
            
            -
            
            
            -
            
            
            -
            
            
            1,037
            
            
            1,045Accrued
                expenses
            
            
            22
            
            
            -
            
            
            -
            
            
            384
            
            
            6
            
            
            412Accrued
                purchase price guarantee
            
            
            -
            
            
            -
            
            
            -
            
            
            1,760
            
            
            -
            
            
            1,760Notes
                payable
            
            
            -
            
            
            -
            
            
            -
            
            
            2,108
            
            
            73
            
            
            2,181Deferred
                revenues and other
            
            
            352
            
            
            -
            
            
            -
            
            
            1,988
            
            
            -
            
            
            2,340**Total
                liabilities held for sale**
            
            **$**
            **407**
            
            **$**
            **-**
            
            **$**
            **-**
            
            **$**
            **6,880**
            
            **$**
            **2,970**
            
            **$**
            **10,257**Inventory
                included in assets held for sale as of December 31, 2006 is as
                follows:Raw
                materials
            
            $
            89
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            89Finished
                goods
            
            
            65
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            65Total
            
            **$**
            **154**
            
            **$**
            **-**
            
            **$**
            **-**
            
            **$**
            **-**
            
            **$**
            **-**
            
            **$**
            **154**




63




**5.**  **Preferred
      stock**




We
      are
      authorized to issue 25 million shares of preferred stock, par value $0.01 per
      share. We may issue preferred stock in one or more series and having the rights,
      privileges, and limitations, including voting rights, conversion rights,
      liquidation preferences, dividend rights and preferences and redemption rights,
      as may, from time to time, be determined by our Board of Directors. Preferred
      stock may be issued in the future in connection with acquisitions, financings,
      or other matters, as our Board of Directors deems appropriate. In the event
      that
      we determine to issue any shares of preferred stock, a certificate of
      designation containing the rights, privileges, and limitations of this series
      of
      preferred stock shall be filed with the Secretary of State of the State of
      Delaware. The effect of this preferred stock designation power is that our
      Board
      of Directors alone, subject to Federal securities laws, applicable blue sky
      laws, and Delaware law, may be able to authorize the issuance of preferred
      stock
      which could have the effect of delaying, deferring, or preventing a change
      in
      control of our company without further action by our stockholders, and may
      adversely affect the voting and other rights of the holders of our common stock.
      The issuance of preferred stock with voting and conversion rights may also
      adversely affect the voting power of the holders of our common stock, including
      the loss of voting control to others.




***Series
      A Preferred Stock.*** During
      December 1999, our Board of Directors approved a Certificate of Resolutions
      Designating Rights and Preferences of Preferred Stock, filed with the Secretary
      of State of the State of Delaware on December 20, 1999. By this approval and
      filing, 200,000 shares of Series A Preferred Stock were designated. Series
      A
      Preferred carries the following rights:




·
            The
                right to receive mandatory cash dividends equal to the greater of
                $0.001
                per share or 100 times the amount of all dividends (cash or non-cash,
                other than dividends of shares of common stock) paid to holders of
                the
                common stock, which dividend is payable 30 days after the conclusion
                of
                each calendar quarter and immediately following the declaration of
                a
                dividend on common stock;




·
            One
                hundred votes per share of Series A Preferred on each matter submitted
                to
                a vote of our stockholders;




·
            The
                right to elect two directors at any meeting at which directors are
                to be
                elected, and to fill any vacancy on our Board of Directors previously
                filled by a director appointed by the Series A Preferred
                holders;




·
            The
                right to receive an amount, in preference to the holders of common
                stock,
                equal to the amount per share payable to holders of common stock,
                plus all
                accrued and unpaid dividends, and following payment of 1/100th of
                this
                liquidation preference to the holders of each share of common stock,
                an
                additional amount per share equal to 100 times the per share amount
                paid
                to the holders of common stock;




·
            The
                right to exchange each share of Series A Preferred for 100 times
                the
                consideration received per share of common stock in connection with
                any
                merger, consolidation, combination or other transaction in which
                shares of
                common stock are exchanged for or converted into cash, securities
                or other
                property; and




·
            The
                right to be redeemed in accordance with our stockholders rights
                plan.




While
      accrued mandatory dividends are unpaid, we may not declare or pay dividends
      or
      distributions on, or redeem, repurchase or reacquire, shares of any class or
      series of junior or parity stock.




The
      Series A Preferred was created in connection with our stockholders rights plan.
      No shares of Series A Preferred were outstanding as of December 31,
      2007.




***Series
      A Convertible Preferred Stock.*** On
      June
      19, 2001, our Board of Directors approved a Certificate of Designations to
      create 500,000 shares of a Class of Series A Convertible Preferred Stock, which
      was filed with the Secretary of State of the State of Delaware on June 20,
      2001.
      By this approval and filing, 47,511 shares are designated as Series A
      Convertible Preferred Stock and remain to be issued. Our Series A Convertible
      Preferred Stock, par value $0.01 per share, has the following
      rights:


·
                Series
                    A Convertible Preferred is convertible into shares of common
                    stock at a
                    one-to-one ratio, subject to proportional adjustments in the
                    event of
                    stock splits or combinations, and dividends or distributions
                    of shares of
                    common stock, at the option of the holder; shares are subject
                    to automatic
                    conversion as determined in each agreement relating to the purchase
                    of
                    shares of Series A Convertible
                    Preferred;


64




·
            Each
                share of Series A Convertible Preferred is entitled to receive a
                liquidation preference equal to the original purchase price of such
                share
                in the event of liquidation, dissolution, or winding
                up;




·
            Upon
                merger or consolidation, or the sale, lease or other conveyance of
                all or
                substantially all of our assets, shares of Series A Convertible Preferred
                are automatically convertible into the number of shares of stock
                or other
                securities or property (including cash) to which the common stock
                into
                which it is convertible would have been entitled;
                and




·
            Shares
                of Series A Convertible Preferred are entitled to one vote per share,
                and
                vote together with holders of common
                stock.




As
      of
      December 31, 2007, there were no shares of Series A Convertible Preferred
      outstanding.




***Series
      B Convertible Redeemable Preferred Stock.*** On
      January 16, 2002, our Board of Directors approved a Certificate of Designation,
      Preferences, Rights and Limitations of Series B 12% Convertible Redeemable
      Preferred Stock, which was filed with the Secretary of State of the State of
      Delaware on February 28, 2002. By this approval and filing, 100,000 shares
      were
      designated as Series B 12% Convertible Redeemable Preferred Stock. Our Series
      B
      12% Convertible Redeemable Preferred Stock, par value $0.01 per share, has
      the
      following rights:




·
            Series
                B Preferred shares accrue dividends at a rate of 12% per annum, or
                $1.20
                per share, between the date of issuance and the first anniversary
                of
                issuance;




·
            Series
                B Preferred is redeemed to the maximum extent permitted by law (based
                on
                funds legally available for redemption) at a price per share of $15.00,
                plus accrued dividends (a total of $16.20 per share) on the first
                anniversary of issuance;




·
            Series
                B Preferred receive proceeds of $12.00 per share upon our liquidation,
                dissolution or winding up;




·
            To
                the extent not redeemed on the first anniversary of issuance, Series
                B
                Preferred is automatically convertible into the then existing general
                class of common stock on the first anniversary of issuance at a price
                equal to $16.20 divided by the greater of $0.20 and the lowest
                publicly-sold share price during the 90 day period preceding the
                conversion date, but in no event more than 19.9% of our outstanding
                capital stock as of the date immediately prior to
                conversion.




·
            Upon
                merger or consolidation, or the sale, lease or other conveyance of
                all or
                substantially all of our assets, shares of Series B Preferred are
                automatically convertible into the number of shares of stock or other
                securities or property (including cash) to which the common stock
                into
                which it is convertible would have been entitled;
                and




·
            Shares
                of Series B Preferred are entitled to one vote per share and vote
                with
                common stock, except where the proposed action would adversely affect
                the
                Series B Preferred or where the non-waivable provisions of applicable
                law
                mandate that the Series B Preferred vote separately, in which case
                Series
                B Preferred vote separately as a class, with one vote per
                share.




No
      shares
      of the Series B Convertible Redeemable Preferred Stock have been issued or
      are
      currently outstanding.


65




***Series
      C Convertible Preferred Stock.*** On
      February 22, 2006, we filed with the Secretary of State of the State of Delaware
      a Certificate of Designation of Series C Convertible Redeemable Preferred Stock.
      By the approval and filing, 27,000 shares were designated as Series C
      Convertible Preferred Stock. Our Series C Convertible Preferred Stock, par
      value
      $0.01 per share, have the following rights:




·
            Series
                C Convertible Preferred shares accrue dividends at a rate of 8% per
                annum;




·
            Series
                C Convertible Preferred receive proceeds of $1,000 per share upon
                our
                liquidation, dissolution or winding
                up;




·
            Each
                share of Series C Convertible Preferred shares shall be convertible,
                at
                the option of the holder, into shares of our common stock at the
                lesser
                of (i) $0.50 or (ii) 97% of the lowest closing bid price of
                our common stock for the thirty trading days immediately preceding
                the
                date of conversion; and




·
            At
                the Option of the Holders, if there are outstanding Series C Convertible
                Preferred shares on February 17, 2009, each share of Series C Preferred
                stock shall convert into shares of common stock at the Conversion
                Price
                then in effect on February 17, 2009;
                and




·
            Series
                C Convertible Preferred shares have voting rights on an as converted
                basis
                with the common stock.




As
      of
      December 31, 2007, 20,097 shares of Series C Convertible Preferred Stock are
      issued and outstanding. We have no present agreements relating to or requiring
      the designation or issuance of additional shares of preferred stock.




**6.
      Financing**




We
      have
      entered into a series of Securities Purchase Agreements with Yorkville, as
      follows:


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







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




66




**Current
      Period Accounting Considerations**




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




Face
                value
            
            Fair
                value
            
            Total2007
            
            (in
                thousands)Series
                C Convertible Preferred Stock
            
            $
            20,097
            
            
            
            
            $
            20,097August
                2006 debenture
            
            $
            5,000
            
            
            
            
            $
            5,000December
                2006 debenture
            
            
            2,500
            
            
            
            
            
            2,500March
                2007 debenture
            
            
            
            
            
            18,798
            
            
            18,798August
                2007 debenture
            
            
            
            
            
            4,401
            
            
            4,401$
            7,500
            
            $
            23,199
            
            $
            30,699




Face
                  value
              
              Fair
                  value
              
              Total2006
              
              (in
                  thousands)Series
                  C Convertible Preferred Stock
              
              $
              21,657
              
              
              
              
              $
              21,657August
                  2006 debenture
              
              $
              5,000
              
              
              
              
              $
              5,000December
                  2006 debenture
              
              
              2,500
              
              
              
              
              
              2,500$
              7,500
              
              $
              0
              
              $
              7,500


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




The
      following tabular presentation reflects the components of derivative financial
      instruments related to convertible financial instruments on our balance sheet
      at
      December 31, 2007:




Series
                CConvertible
            
            August
            
            December
            
            March
            
            August
            
            
            
            OtherPreferred
            
            2006
            
            2006
            
            2007
            
            2007
            
            Other
            
            PreferredStock
            
            Debenture
            
            Debenture
            
            Debenture
            
            Debenture
            
            Warrants(1)
            
            Stock(1)
            
            Total(in
                thousands)Liabilities:Common
                stock warrants
            
            $
            480
            
            $
            1,733
            
            $
            420
            
            $
            1,263
            
            $
            833
            
            
            26
            
            
            -
            
            $
            4,755Embedded
                conversion feature(2)
            
            
            7,930
            
            
            7,925
            
            
            3,962
            
            
            n/a
            
            
            n/a
            
            
            -
            
            
            79
            
            
            19,896$
            8,410
            
            $
            9,658
            
            $
            4,382
            
            $
            1,263
            
            $
            833
            
            $
            26
            
            $
            79
            
            $
            24,651









(1)The
                fair values of certain other derivative financial instruments (warrants)
                that existed at the time of the issuance of Series C convertible
                preferred
                stock were reclassified from stockholders’ equity to liabilities when, in
                connection with the issuance of Series C convertible preferred stock,
                we
                no longer controlled our ability to share-settle these instruments.
                These
                derivative financial instruments had fair values of $14.3 million,
                $0.97
                million and $0.026 million on February 17, 2006, December 31, 2006,
                and
                December 31, 2007, respectively. The decrease in fair value of these
                other
                derivative financial instruments resulted primarily from a decrease
                in our
                share price between February 17, 2006, December 31, 2006, and December
                31,
                2007. The change in fair value is reported as “Gain on derivative
                financial instruments” on the condensed consolidated statement of
                operations during each period. These warrants will be reclassified
                to
                stockholders’ equity when we reacquire the ability to share-settle the
                instruments.
              
              (2)For
                the March 2007 and August 2007 debentures, the embedded conversion
                feature
                is effectively embodied in the fair value of those
                instruments.




67




The
      following table reflects the number of common shares into which the convertible
      instruments and warrants are convertible or exercisable at December 31,
      2007:




Series
                CConvertible
            
            August
            
            December
            
            March
            
            AugustPreferred
            
            2006
            
            2006
            
            2007
            
            2007
            
            OtherStock
            
            Debenture
            
            Debenture
            
            Debenture
            
            Debenture
            
            Warrants(in
                thousands)Common
                stock warrants
            
            
            75,000
            
            
            175,000
            
            
            42,000
            
            
            125,000
            
            
            75,000
            
            
            22,825Embedded
                conversion feature(1)
            
            
            2,166,031
            
            
            943,396
            
            
            471,698
            
            
            1,420,695
            
            
            334,906
            
            
            0Total
            
            
            2,241,031
            
            
            1,118,396
            
            
            513,698
            
            
            1,545,695
            
            
            409,906
            
            
            22,825







(1)The terms of the embedded conversion features in the convertible
                instruments presented above provide for variable conversion rates
                that are
                indexed to our trading common stock price. As a result, the number
                of
                indexed shares is subject to continuous fluctuation. For presentation
                purposes, the number of shares of common stock into which the embedded
                conversion feature in the Series C convertible stock was convertible
                as of
                December 31, 2007 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 December 31, 2007. The number of shares of
                common
                stock into which the embedded conversion feature in the convertible
                debentures was convertible as of December 31, 2007 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
                December 31, 2007.




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




Year
                ended December 31,2007
            
            2006(in
                thousands)Series
                C Convertible Preferred Stock
            
            
            ($447
            )
            $
            18,853August
                2006 debenture
            
            
            2,284
            
            
            (6,941
            )December
                2006 debenture
            
            
            (645
            )
            
            (1,238
            )March
                2007 debenture
            
            
            (4,641
            )
            
            -August
                2007 debenture
            
            
            (3,796
            )
            
            -Other
                derivative instruments
            
            
            (395
            )
            
            2,003($7,640
            )
            $
            12,677




The
      fair
      value of derivative financial instrument liabilities recorded as of December
      31,
      2007 and December 31, 2006 was:


Year
                ended December 31,2007
            
            2006(in
                thousands)Warrants
                and embedded conversion features in preferred stock
            
            $
            8,410
            
            $
            8,815Warrants
                and embedded conversion features in certain debentures
            
            
            16,136
            
            
            15,679Other
                warrants
            
            
            26
            
            
            -Fair
                value of future payment obligation
            
            
            -
            
            
            564Special
                preference stock of Mobot
            
            
            79
            
            
            359Total
                derivative financial instruments
            
            $
            24,651
            
            $
            25,417




68




**Fair
      value considerations for derivative financial instruments:**




Freestanding
      derivative instruments, consisting of warrants that were issued in connection
      with the financings, are valued using the Black-Scholes-Merton valuation
      methodology because that model embodies all of the relevant assumptions that
      address the features underlying these instruments. Significant assumptions
      used
      in this model as of December 31, 2007 are as follows:




Series
                CConvertible
            August
            December
            March
            AugustPreferred
            2006
            2006
            2007
            2007Stock
            Debenture
            Debenture
            Debenture
            Debenture
            Other
            TotalHolder
            Yorkville
            Yorkville
            Yorkville
            Yorkville
            Yorkville
            OtherInstrument
            Warrants
            Warrants
            Warrants
            Warrants
            Warrants
            WarrantsExercise
                price
            $0.02
            $0.01
            $0.01
            $0.01
            $0.01
            $
                0.01 - $3.45Remaining
                term (years)
            3.13
            3.67
            4
            4.25
            4.67
            .02
                - 3.13Volatility
            93%
            110%
            107%
            108%
            160%
            90%-172%Risk-free
                rate
            3.07%
            3.07%
            3.45%
            3.07%
            3.45%
            2.76% - 3.45%Number
                of warrants
            75,000,000
            175,000,000
            42,000,000
            125,000,000
            75,000,000
            22,825,000
            514,825,000




Embedded
      derivative financial instruments arising from the convertible instruments
      consist of multiple individual features that were embedded in each instrument.
      For each convertible instrument, we evaluated all significant features and,
      as
      required under current accounting standards, aggregated the components into
      one
      compound derivative financial instrument for financial reporting purposes.
      For
      financings recorded in accordance with FAS 133, the compound embedded derivative
      instruments are valued using the Flexible Monte Carlo methodology because that
      model embodies certain relevant assumptions (including, but not limited to,
      interest rate risk, credit risk, and conversion/redemption privileges) that
      are
      necessary to value these complex derivatives. For financings recorded in
      accordance with FAS 155, the entire hybrid instrument is initially recorded
      at
      fair value and subsequent changes in fair value are recognized in
      earnings.




Assumptions
      used as of December 31, 2007 in valuing derivative instruments embedded in
      financings recorded in accordance with FAS 133 included exercise
      estimates/behaviors and the following other significant estimates:




Series
                CConvertible
            August
            DecemberPreferred
            2006
            2006Stock
            Debenture
            DebentureConversion
                prices
            $0.011
            $0.0053
            $0.0053Remaining
                terms (years)
            1.13
            0.67
            1.00Equivalent
                volatility
            213.03%
            159.84%
            155.04%Equivalent
                interest-risk adjusted rate
            9.00%
            11.21%
            11.21%Equivalent
                credit-risk adjusted yield rate
            71.00%
            40.67%
            36.83%




Significant
      assumptions included as of December 31, 2006 are as follows:




Holder
              **Cornell
                  Capital Partners**
              ****
              **Other**Instrument
              Warrants
              
              WarrantsExercise
                  price
              $0.04
              
              $0.01
                  - $3.45Term
                  (years)
              4.13
              
              0.5
                  - 4.13Volatility
              158.89%
                  - 165.86%
              
              158.89%
                    - 165.86%Risk-free
                  rate
              3.65%
              
              3.65%


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.  69


Financial
        instruments recorded at fair value under FAS 155 were valued using the common
        stock equivalent approach. The common stock equivalent was calculated using
        the
        shares indexed to the financial instruments valued at the market rate of
        our
        stock and the present value of the coupon.




As
      of
      December 31, 2006, we were in default of the Investor Registration Rights
      Agreement pursuant to the August 24, 2006 and the December 29, 2006 Agreements,
      because the registration statement to register the shares underlying the secured
      convertible debenture issued on August 24, 2006 was not declared effective
      by
      the specified date. Due to the then-default status, Yorkville had certain
      material additional rights in these financing arrangements that did not
      previously exist. Specifically,




·
            The
                full fair value of the secured convertible debentures was callable
                in the
                amount of $5,000,000 and $2,500,000,
                respectively;




·
            The
                warrants could be exercised on a cashless
                basis;




·
            We
                were responsible for liquidated damages of 2% of the principal up
                to a
                maximum of $0.5 million on each
                debenture;




·
            The
                requirement for Yorkville to maintain an ownership interest in us
                of less
                than 5% was terminated;




Our
      accounting for the secured convertible debentures was updated to take into
      account certain specific accounting rules and regulations that were applicable
      under the default provisions as of December 31, 2006.




·
            We
                incurred a charge to income from continuing operations at the time
                of the
                issuance of the December 29, 2006 secured convertible debenture to
                recognize the liability of the debenture at redemption value by fully
                writing off the debt discount.




·
            Prior
                to the default, we were accreting the debt discount on the August
                24, 2006
                secured convertible debenture, using the effective interest method,
                through periodic charges to interest expense. Due to the default
                status,
                we accreted debt discount to the full fair value of the secured
                convertible debenture as of December 31, 2006, resulting in an additional
                charge to income from continuing operations of $4.8 million for the
                year
                ended December 31, 2006.




·
            Both
                of these secured convertible debentures are now reported as debt
                in the
                current liabilities section of the balance sheet rather than long
                term,
                because the debentures are callable as demand debt due to the
                default.




The
      following table summarizes the allocation of the components of these instruments
      on their respective inception dates:


August 24,
            
            December 29,2006
            
            2006Instrument:
            
            
            (in thousands
            )
            
            (in thousands
            )Convertible
                debenture
            
            $
            -(1)
            
            $
            2,500Common
                stock warrants(2)
            
            
            18,507
            
            
            2,159Embedded
                conversion feature
            
            
            970
            
            
            1,579Derivative
                loss
            
            
            (14,477
            )
            
            (1,238
            )Interest
                expense(3)
            
            
            -
            
            
            (2,770
            )Total
                net proceeds
            
            $
            5,000
            
            $
            2,230





(1)
            There
                were insufficient proceeds to allocate amounts to the August 24,
                2006
                debenture. For purposes of application of the effective interest
                method,
                an initial carrying value of 1% of the full amount of the debenture
                was
                assumed.





70




(2)
            We
                issued warrants to purchase 175 million (August 24, 2006) and 42
                million
                (December 29, 2006) shares of common stock in connection with the
                convertible debenture.




(3)
            Due
                to the prior default status, the December 29, 2006 debentures were
                accreted up to the full face value of $2.5 million at inception and
                the
                financing costs of $0.3 million were expensed to interest expense.
                As a
                result of the prior default, we recorded total charges to income
                in the
                amount of $4.0 million, which is more than the face value of the
                debenture
                of $2.5 million.




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




Due
      to
      our default position as of December 31, 2006, the August 24, 2006 debenture
      was
      written up to the full face value of $5.0 million as of December 31, 2006,
      which
      was the carrying value of the convertible debenture as of that date. Derivative
      financial instruments arising from the issuance of a convertible debenture
      are
      initially recorded, and continuously carried, at fair values. Upon conversion
      of
      any derivative financial instrument, the change in fair value from the previous
      reporting date to the date of conversion is recorded to income (loss), and
      then
      the carrying value is recorded to paid-in capital, provided we meet all other
      criteria for equity classification.




**Series
      C Convertible Preferred Stock**




We
      entered into a Securities Purchase Agreement, dated February 17, 2006 (the
      “Agreement”) with Yorkville. Pursuant to the Agreement, Yorkville agreed to
      purchase $22.0 million 8% cumulative Series C convertible preferred stock
      convertible over a period of three years from the date of issuance. Net proceeds
      received amounted to $17.9 million, comprised of cash of $14.0 million,
      marketable securities with a calculated fair value of $0.6 million and a
      purchase value of $2.0 million, and the extinguishment of $3.2 million of
      preexisting indebtedness. In addition, Yorkville withheld $2.7 million
      commitment and structuring fees from the gross proceeds. The Agreement also
      provided for the issuance to Yorkville of warrants to purchase shares of our
      common stock. The Agreement also called for Yorkville to acquire an additional
      $5.0 million of Series C convertible preferred stock on the date a registration
      statement filed by us was declared effective by the U.S. Securities and Exchange
      Commission. In connection with the Agreement, we also entered into a
      registration rights agreement with Yorkville that required us to (i) file a
      registration statement with the SEC registering the resale of the shares of
      common stock issuable upon conversion of the preferred stock and the exercise
      of
      the warrants, (ii) achieve effectiveness by December 1, 2006, and (iii) maintain
      effectiveness of the registration statement. We failed to meet these
      requirements; accordingly we 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.




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




The
      following table summarizes the conversions Yorkville has exercised under this
      agreement:




Date
            
            Series C Shares
            
            Common SharesIssued
            
            Converted
            
            Issued11/28/2006
            
            
            378
            
            
            6,631,57906/19/2007
            
            
            245
            
            
            8,781,36208/16/2007
            
            
            500
            
            
            25,773,19610/24/2007
            
            
            600
            
            
            45,801,52710/31/2007
            
            
            180
            
            
            13,740,458Total
            
            
            1,903
            
            
            100,728,122




71




The
      remaining outstanding balance of Series C convertible preferred stock is 20,097
      shares as of December 31, 2007.




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




Under
      the
      Series C Agreement, Yorkville also received “A” warrants, “B” warrants and “C”
warrants to purchase 20 million, 25 million, and 30 million shares of our common
      stock, respectively, exercisable in three separate tranches at a price of $0.50,
      $0.40 and $0.35, respectively, per share, subject to adjustment, included under
      anti-dilution protection similar to that described above .
      As an
      inducement to enter into subsequent financing arrangements with Yorkville,
      the
      warrants were repriced on December 29, 2006 to $0.04 per share, subject to
      all
      the original terms and conditions of the respective warrant agreements,
      resulting in a charge to income of $0.7 million. The warrants have a five-year
      contractual life. We can force exercise of the warrants if the closing bid
      price
      of our stock is more than $0.10 greater than the exercise price of any of the
      warrants for 15 consecutive trading days. It
      is
      important to note that the warrants held by Yorkville contain a provision
      that, if at the time of exercise, we are in default of the warrant
      agreement, the holder can perform a “cashless” exercise of the warrants and in
      lieu of making payment of the exercise price in cash, elect instead to have
      shares withheld as consideration for the exercise price. In the event of such
      a
“cashless” exercise, we would not receive any cash proceeds upon the exercise of
      such warrants. As of December 31, 2007, we are not in default of any of the
      provisions in the Investor Registration Rights Agreement entered into on
      February 17, 2006.




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




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




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




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




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




Other
      provisions included in the Agreement include the following:




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




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




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




72




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




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




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




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




As
      of
      December 31, 2006, we were in default of the registration rights agreement,
      and
      accordingly the accounting for the Series C convertible preferred stock was
      updated to take into account certain specific accounting rules and regulations
      that are now 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 as of December 31, 2006
                of the
                Series C convertible preferred stock, resulting in an additional
                charge of
                $18.2 million to net loss attributable to common shareholders for
                the year
                ended December 31, 2006.




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




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





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







(1)
            The
                discount to the face value of the 8% cumulative Series C convertible
                preferred stock that resulted from the allocation along with deferred
                costs was being accreted through periodic charges to additional paid-in
                capital using the effective interest method, prior to the accretion
                to
                full face value due to our being in default as of December 31, 2006
                of the
                registration rights agreement




(2)
            We
                issued warrants to purchase 75 million shares of common stock in
                connection with the 8% cumulative Series C convertible preferred
                stock. We
                also issued 2 million warrants (valued at $0.4 million) as financing
                fees.




(3)
            The
                financing arrangement settled face value $3.2 million of preexisting
                indebtedness. The debt extinguishment loss was calculated as the
                amount
                that the fair value of securities issued (using a relative fair value
                basis) exceeded our carrying value.




In
      accordance with FAS 133, ‘ *Accounting
      for Derivative Instruments and Hedging Activities* ’,
      we
      determined that the conversion feature of the Series C convertible preferred
      stock met the criteria of an embedded derivative. The Series C convertible
      preferred stock has certain characteristics, primarily redemption if certain
      events of default occur, that make it more akin to a debt instrument, rather
      than an equity instrument. Furthermore, the Series C convertible preferred
      stock
      does not meet the definition of “conventional convertible debt” because the
      number of shares which may be issued upon the conversion of the Series C
      convertible preferred stock is not fixed. Furthermore, there is no cap on the
      number of shares that could be issued upon conversion. Therefore, the conversion
      feature fails to qualify for equity classification under EITF 00-19, and
      must be accounted for as a derivative liability.




73




The
      carrying value of the 8% cumulative Series C convertible preferred stock
      amounted to $20.1 million and $21.6 million at December 31, 2007 and 2006,
      respectively. The face value of Series C convertible preferred stock is the
      same
      as the carrying value since the instrument was written up to full fair value
      due
      to our default position as of December 31, 2006. Derivative financial
      instruments arising from the issuance of Series C convertible preferred stock
      are initially recorded and continuously carried at fair values. Upon conversion
      of any derivative financial instrument, the change in fair value from the
      previous reporting date to the date of conversion is recorded to income (loss),
      and then the carrying value is recorded to paid-in capital, provided all other
      criteria for equity classification are met.





**Standby
      Equity Distribution Agreements with** **Yorkville**




On
      October 27, 2003, we entered into a $20 million Standby Equity Distribution
      Agreement (the “2003 SEDA”) with Yorkville. The agreement provided for a maximum
“draw” of $0.3 million per week, not to exceed $0.8 million in any 30-day
      period, and Yorkville was obligated to purchase up to $20 million of our common
      stock over a two-year period. The SEDA became effective during January 2004,
      and
      expired after a two-year term in January 2006. During the years ended December
      31, 2007 and 2006, we sold shares of our common stock to Yorkville pursuant
      to
      the 2003 SEDA as follows:





Years ended December 31,2007
            
            2006(in thousands)Number
                of shares sold to Yorkville
            
            
            -
            
            
            751.9Gross
                Proceeds from sale of shares
            
            $
            -
            
            $
            234Less:
                discounts and fees*
            
            
            -
            
            
            (24
            )Net
                Proceeds from sale of shares
            
            $
            -
            
            $
            210







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




On
      March
      30, 2005, we entered into the 2005 SEDA with Yorkville under which Yorkville
      agreed to purchase up to $100 million of our common stock over a two-year
      period, with the timing and amount of the purchase at our discretion. The
      maximum amount of each purchase would be $2.0 million, with a minimum of five
      business days between advances. The shares would be valued at 98% of the lowest
      closing bid price during the five-day period following the delivery of a notice
      of purchase by us, and we would pay 5% of the gross proceeds of each purchase
      to
      Yorkville. Based on our current market capitalization and other outstanding
      securities, we do not believe that the 2005 SEDA is currently a viable source
      of
      financing.




As
      a
      commitment fee for Yorkville to enter into the 2005 SEDA, we issued 50 million
      warrants to Yorkville with an exercise price of $0.20 per share for a term
      of
      three years, and also paid a cash commitment fee of $1 million. During the
      nine
      months ended September 30, 2006, Yorkville exercised 40 million of the warrants,
      generating cash proceeds of $8 million to us. During August 2006, in connection
      with the Convertible Debenture, we repriced the remaining 10 million warrants
      to
      an exercise price of $0.10 per share. We also issued 4 million warrants with
      an
      exercise price of $0.227 to a consultant as a fee in connection with the 2005
      SEDA, which have not been exercised. We recorded the $13.3 million fair value
      of
      the warrants to “Deferred equity financing costs” at inception. This amount was
      written off during the three months ended September 30, 2006 because we believe
      that we can no longer consider the SEDA a viable financing source due to the
      utilization of the preferred stock financing and the debenture
      financing.




74




**Promissory
      Note Payable to** **Yorkville**




On
      March
      30, 2005, we borrowed from Yorkville the principal amount of $10 million before
      discounts and fees in the form of a secured promissory note. Yorkville withheld
      structuring and escrow fees of $68,000 related to the note. The note was
      originally scheduled to be repaid at a rate of $1.1 million per month commencing
      May 1, 2005, which was subsequently changed to $0.84 million per month,
      continuing until principal and interest were paid in full. The note accrued
      interest at a rate of 8% per annum on any unpaid principal. In connection with
      the note, we entered into a security agreement with Yorkville under which the
      note was secured by all of our assets other than our patents and patent
      applications. During the period from March 30, 2005 through January 9, 2006,
      we
      made payments against the principal totaling $7.2 million. On February 17,
      2006,
      we retired the balance of the principal in the amount of $2.8 million, plus
      accrued interest of $0.4 million, from the proceeds of the Series C convertible
      preferred financing arrangement with Yorkville. In connection with the payment
      and issuance of the Series C convertible preferred stock, we recognized a loss
      on extinguishment of debt of $1.96 million during the year ended December 31,
      2006.




**7.****Property
      and equipment**




As
      of
      December 31, 2007 and 2006, property and equipment consisted of the
      following:





As of December 31,2007
            
            2006(US dollars in thousands)Furniture
                and fixtures
            
            $
            287
            
            $
            426Equipment
            
            
            374
            
            
            862Autos
            
            
            17
            
            
            17Leasehold
                improvements
            
            
            2
            
            
            74Total
            
            $
            680
            
            $
            1,379Less:
                Accumulated depreciation
            
            
            (595
            )
            
            (1,188
            )**Total
                property and equipment, net**
            
            **$**
            **85**
            
            **$**
            **191**




Depreciation
      expense was $103,500 and $95,300 for the years ended December 31, 2007 and
      2006,
      respectively.




**8.****Goodwill
      and other intangible assets**




As
      of
      December 31, 2007, and 2006, we had goodwill of $3.4 million related to our
      purchase of Gavitec. Goodwill consists of the excess of the purchase price
      paid
      over the identifiable net assets and liabilities acquired at fair
      value.




The
      following table summarizes the other intangible assets activity and balances
      for
      the years ended December 31, 2007 and 2006:




Patents
            
            Copyrighted
                Materials
            
            Subtotal -
                  Patents and
                  Other
                  Intangibles
            
            Proprietary
                Software
            
            Total
                Intangibles
                and
                Proprietary
                Software(in
                thousands)Beginning
                Balance, December 31, 2005
            
            $
            3,133
            
            $
            0
            
            $
            3,133
            
            $
            140
            
            $
            3,273Additions
            
            
            12
            
            
            42
            
            
            54
            
            
            4,050
            
            
            4,104Amortization
            
            
            (306
            )
            
            -
            
            
            (306
            )
            
            (52
            )
            
            (358
            )Ending
                balance, December 31, 2006
            
            $
            2,839
            
            $
            42
            
            $
            2,881
            
            $
            4,138
            
            $
            7,019Additions
            
            
            37
            
            
            -
            
            
            37
            
            
            -
            
            
            37Amortization
            
            
            (300
            )
            
            (10
            )
            
            (310
            )
            
            (725
            )
            
            (1,035
            )Ending
                balance, December 31, 2007
            
            $
            2,576
            
            $
            32
            
            $
            2,608
            
            $
            3,413
            
            $
            6,021Weighted-average
                remaining amortization period (years)
            
            
            9.9
            
            
            2.2
            
            
            
            
            
            5.0





75




As
      of
      December 31, 2007, we estimate future amortization expense of intangible assets
      for the next five years to be (in thousands):





2008
            
            $
            9652009
            
            
            9542010
            
            
            9342011
            
            
            9062012
            
            
            146




**9****.****Investments
      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 is being recorded as available-for-sale securities and
      reported at fair value. Accordingly, unrealized gains and losses on the equity
      securities are reflected in the condensed consolidated statement of operations
      and comprehensive income (loss). During the year ended December 31, 2007, we
      recorded $0.2 million unrealized loss related to the PUPS stock in accumulated
      other comprehensive loss.




We
      hold
      four notes receivable from PUPS with a face value of $1.6 million and a fair
      value of $0. We incurred an impairment charge in the 4th quarter of 2006 to
      write the notes receivable down to their expected realizable value. The notes
      are delinquent and accrued interest at rates between 12 - 24% prior to the
      impairment. We have not recorded any interest income because we are using the
      cost recovery method.




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 (and 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.




**10.****Valuation
      accounts**




We
      extend
      credit to our customers as determined on an individual basis and have recorded
      an allowance for doubtful accounts as shown in the table below, which also
      reflects the activity for the allowance accounts for the years ended December
      31, 2007 and 2006:




As of December 31,2007
            
            2006Beginning
                balance
            
            $
            (69
            )
            $
            (14
            )Bad
                debt expense
            
            
            (78
            )
            
            (60
            )Write-off
                of uncollectible accounts
            
            
            69
            
            
            4Ending
                balance
            
            $
            (78
            )
            $
            (69
            )




76




The
      following table summarizes our inventory reserves as of December 31, 2007 and
      2006:




As of December 31,2007
            
            2006Beginning
                balance
            
            $
            (53
            )
            $
            0Provision
            
            
            (27
            )
            
            (53
            )Charge-off
            
            
            -
            
            
            -Ending
                balance
            
            $
            (80
            )
            $
            (53
            )




**11.
      Comprehensive loss**




Comprehensive
      loss consists of net income (loss) and other gains and losses affecting
      shareholders’ investment that, under accounting principles generally accepted in
      the United States, are excluded from net income. The following table summarizes
      the balances and activity by component of other comprehensive loss as of
      December 31, 2007 and 2006:





As of December 31,2007
            
            2006(in thousands)Beginning
                balance:Unrealized
                gain/(loss) on marketable securities
            
            
            (393
            )
            
            (146
            )Foreign
                currency translation adjustment
            
            
            (317
            )
            
            (31
            )Annual
                Activity:Unrealized
                gain/(loss) on marketable securities
            
            
            (49
            )
            
            (247
            )Foreign
                currency translation adjustment
            
            
            227
            
            
            (286
            )Ending
                balance
            
            
            (532
            )
            
            (710
            )




**12.****Income
      taxes**




For
      the
      years ended December 31, 200 7
      and
      2006, the components of income tax expense were as follows:




2007
            
            2006(in thousands)Current
            
            $
            -
            
            $
            -Deferred
            
            
            -
            
            
            -Foreign
            
            
            -
            
            
            -Income
                tax expense (benefit)
            
            $
            -
            
            $
            -




As
      of
      December 31, 2007 and 2006, the types of temporary differences between the
      tax
      basis of assets and liabilities and their financial reporting amounts which
      gave
      rise to deferred taxes, and their tax effects were as follows:




77




2007
            
            2006(in thousands)Net
                operating loss carryforwards (NOL)
            
            $
            49,726
            
            $
            39,967Capital
                loss
            
            
            3,677
            
            
            3,689Write-off
                of long-lived assets
            
            
            9,801
            
            
            3,012Amortization
                of intangibles
            
            
            (509
            )
            
            -Stock
                options compensation
            
            
            1,717
            
            
            1,930Capitalized
                software development costs and fixed assets
            
            
            1
            
            
            709Deferred
                revenue
            
            
            100
            
            
            236Alternative
                minimum tax credit carryforward
            
            
            45
            
            
            45Provisions
                for doubtful accounts
            
            
            (343
            )
            
            38Accruals
            
            
            2,483
            
            
            -Impairment
                loss
            
            
            2,668
            
            
            -Derivative
                gain/loss
            
            
            (596
            )
            
            -Gain
                on sale of marketable securities
            
            
            209
            
            
            -Interest
                expense
            
            
            7,114
            
            
            -**Total
                deferred tax assets**
            
            
            76,093
            
            
            49,626Valuation
                allowance
            
            
            (76,093
            )
            
            (49,626
            )**Net
                deferred tax asset**
            
            $
            0
            
            $
            0




Due
      to
      the uncertainty of the utilization and recoverability of the loss carry forwards
      and other deferred tax assets, we
      have
      reserved for the deferred tax assets through a valuation allowance, as it is
      more likely than not that the deferred tax assets will not be
      realizable




For
      the
      years ended December 31, 2007 and 2006, the income tax benefit differed from
      the
      amount computed by applying the statutory federal rate of 34% as
      follows:




As of December 31,2007
            
            2006(in thousands)Benefit
                at federal statutory rate
            
            $
            (13,279
            )
            $
            (22,929
            )State
                income taxes, net of federal
            
            
            (1,547
            )
            
            (2,671
            )Permanent
                and other, net
            
            
            (11,641
            )
            
            13,358Decrease/(increase)
                in valuation allowance
            
            $
            (26,467
            )
            $
            (12,242
            )




As
      of
      December 31, 200 7,
      we had
      net operating loss carry forwards for federal tax purposes totaling
      approximately $125.6 million which may be used to offset future taxable income,
      or, if unused, expire between 2011 and 2027 and a capital loss carry forward
      of
      $9.3 million. As a result of certain of our equity activities, we anticipate
      that the annual usage of our pre-1998 net operating loss carry forwards should
      be further restricted pursuant to the provisions of Section 382 of the Internal
      Revenue Code.




In
      addition to the above, the subsidiaries we owned during the years ended December
      31, 2007 and 2006 which had foreign operations are not included with our
      consolidated income tax noted above. These subsidiaries have income tax expense
      as follows:




As of December 31,2007
            
            2006(in thousands)12Snap
            
            
            n/a
            
            $
            -Gavitec
            
            
            -
            
            
            -Triton
            
            
            n/a
            
            
            -Total
            
            $
            -
            
            $
            -




Gavitec
      has net
      operating loss carry forwards that are estimated to be as follows:




78




As of December 31,2007
            
            2006(in
                thousands)Gavitec
            
            $
            2,697
            
            $
            2,277




Gavitec
      has estimated deferred tax assets and liabilities, not included in our
      consolidated deferred tax assets stated above, that are fully offset with a
      valuation allowance as indicated in the following table. Due to the uncertainty
      of the utilization and recoverability of the loss carry forwards and other
      deferred tax assets, we have reserved for the deferred tax assets through a
      valuation allowance, as it is more likely than not that the deferred tax assets
      will not be realizable.





2007
            
            2006(in thousands)Net
                operating loss carry forward
            
            $
            (281
            )
            $
            706Intangible
                assets
            
            
            -
            
            
            (706
            )Total
            
            
            (281
            )
            
            -Less
                valuation allowance
            
            
            281
            
            
            -Net
                deferred tax asset
            
            $
            -
            
            $
            -




In
      July
      2006, the Financial Accounting Standard Board (FASB) issued FASB Interpretation
      No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes”. FIN 48
      clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise’s financial statements in accordance with SFAS No. 109, “Accounting
      for Income Taxes”. FIN 48 requires a company to evaluate whether the tax
      position taken by a company will more likely than not be sustained upon
      examination by the appropriate taxing authority. It also provides guidance
      on
      how a company should measure the amount of benefit that the company is to
      recognize in its financial statements. FIN 48 also provides guidance on
      de-recognition, classification, interest and penalties, accounting in interim
      periods, disclosure and transition. FIN 48 is effective for fiscal years
      beginning after December 15, 2006.




We
      adopted FIN 48 as of January 1, 2007. As a result of the implementation of
      FIN
      48, we have concluded that we have not taken any uncertain tax positions on
      any
      of our open income tax returns filed through the period ended December 31,
      2006
      that would materially distort our financial statements. Our methods of
      accounting are based on established income tax principles approved in the
      Internal Revenue Code (IRC) and are properly calculated and reflected within
      our
      income tax returns. In addition, we have filed income tax returns in all
      applicable jurisdictions in which we had material nexus warranting an income
      tax
      return filing.




We
      re-assess the validity of our conclusions regarding uncertain income tax
      positions on a quarterly basis to determine if facts or circumstances have
      arisen that might cause us to change our judgment regarding the likelihood
      of a
      tax position's sustainability under audit. The impact of this reassessment
      for
      the year ended December 31, 2007 did not have any impact on our results of
      operations, financial condition or liquidity.




**13.****Transactions
      with related parties**




During
      the fourth quarter of 2005 and first quarter of 2006, we shipped and invoiced
      $0.8 million of Micro Paint Repair products to Automart, Inc., a Chinese
      company. In the third quarter of 2006, we established a reserve for bad debt
      against the open accounts receivable, and wrote off the deferred revenue and
      deferred costs, incurring a net charge to our statement of operations of $0.7
      million. In our continuing collection efforts, we have found that Automart
      has
      subsequently become a party to a joint venture with Deep Field Technologies,
      an
      organization that owns 95% of the joint venture, and which was formerly listed
      on the OTCBB but is now delisted. We will recognize revenue on these shipments
      if and when collectibility is reasonably assured. David A. Dodge, our former
      Chief Financial Officer, is a member of the board of directors of Automart,
      and
      Kevin Hunter, our former Chief Scientist, was a member of the advisory board
      for
      Automart at the time of the transaction.




79




In
      December 2006, we entered into a twenty-five month consulting agreement with
      SKS
      Consulting of South Florida Corp. (“SKS”) whereby we pay SKS $1,000 per day
      worked on our behalf and 60,000 warrants per month for services rendered by
      George O’Leary and Jay Bonk. In payment of this agreement, we paid SKS $211,500
      and issued stock valued at $13,513 to Mr. O’Leary and stock valued at $4,504 to
      Mr. Bonk during 2007. Mr. O’Leary is on our Board of Directors.




**14.****Commitments
      and contingencies**




We
      lease
      our office facilities and certain office and computer equipment under various
      operating leases. These leases provide for minimum rents and generally include
      options to renew for additional periods. We have incurred rent expense from
      continuing operations as follows:




For the years ended December 31,2007
            
            2006**(in
                thousands)**Office
                and facility rent
            
            $
            334
            
            $
            652




We
      are
      party to various commitments and contingencies, such as:




·
            We
                and our subsidiaries lease office facilities, certain office and
                computer
                equipment, and vehicles under various operating
                leases;




·
            We
                are party to various consulting agreements that carry payment obligations
                into future years;




·
            We
                have obligations for purchase price guarantees remaining from the
                acquisition of 12Snap;




·
            We
                issued Series C convertible preferred shares with a face value of
                $20.1
                million and convertible debentures with a face value of $7.5 million
                that
                are subject to conversion at future
                dates.




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





2008
            
            2009
            
            2010
            
            2011
            
            2012
            
            Thereafter
            
            TotalOperating
                leases
            
            $
            209
            
            $
            183
            
            $
            193
            
            $
            113
            
            $
            0
            
            $
            0
            
            $
            698Vendor
                and consulting agreements
            
            
            864
            
            
            427
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,291Notes
                payable
            
            
            44
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            44Subsidiary
                acquisition commitments
            
            
            4,529
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            4,529Convertible
                debentures
            
            
            30,699
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            30,699Series
                C Convertible Preferred Stock
            
            
            20,097
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            20,097Total
            
            $
            56,462
            
            $
            610
            
            $
            193
            
            $
            113
            
            $
            0
            
            $
            0
            
            $
            57,378




80




On
      June
      15, 2006, we issued 3,721,698 shares of our common stock as an initial payment
      against debt and accrued interest owed to Wayside Solutions, Inc. (“Wayside”), a
      corporation that had provided financing to BSD prior to our acquisition of
      BSD.
      Prior to the acquisition, we reached an agreement with Wayside to pay the
      outstanding debt due to Wayside subsequent to completion of the acquisition.
      The
      agreement contained a make whole provision that called for additional shares
      to
      be issued in the event the value of the original shares at the time of
      registration was less than the value at the time they were issued. We issued
      28.8 million shares with a fair value of $0.7 million on August 16, 2007 in
      settlement of this obligation.




We
      also
      have employment agreements with our CEO and our CFO which are not reflected
      in
      the table above. Following are the details of each agreement:




William
      Hoffman is employed under the terms of an Employment Agreement dated June 18,
      2007, whereby if he is terminated without cause or due to a change in control,
      he is entitled to 18 months salary, currently valued at $375,000, and
      accelerated vesting of one-half of any remaining unvested portion of the initial
      option grant of 20 million options. If Mr. Hoffman resigns his employment with
      us for good reason, he is entitled to eighteen months salary per his Employment
      Agreement. Mr. Hoffman's initial option grant vested 25% on the date of grant,
      with the remainder vesting in equal monthly installments over 48
      months.




Frank
      Pazera is employed under the terms of an Employment Agreement dated January
      1,
      2008, whereby if he is terminated without cause or due to a change in control,
      he is entitled to 18 months salary, currently valued at $300,000, and
      accelerated vesting of one-half of any remaining unvested portion of the initial
      option grant of 5 million options. If Mr. Pazera resigns his employment with
      us
      for good reason, he is entitled to six months salary, currently valued at
      $100,000, per his Employment Agreement. Mr. Pazera's initial option grant vested
      25% on the date of grant, with the remainder vesting in equal monthly
      installments over 48 months.




**Legal
      Proceedings**




We
      are
      involved in various legal actions arising in the normal course of business,
      both
      as claimant and defendant. Although it is not possible to determine with
      certainty the outcome of these matters, it is the opinion of management that
      the
      eventual resolution 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.
      Discovery is ongoing.




**15.****Retirement
      plan**




We
      sponsor a 401(k) retirement plan in which substantially all of our employees
      are
      eligible to participate. Each year, participants may contribute from 1% to
      100%
      of their pretax annual compensation as defined by the Plan, up to limits
      established by the IRS regulations. All amounts contributed by participants
      and
      earnings on these contributions are fully vested at all times. The plan provides
      for matching and discretionary contributions by us, although no such
      contributions to the plan have been made to date.




**16.**  **Stock
      based compensation**




We
      have
      five 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”), the 1998 Stock Option Plan (the “1998 Plan”), and the 1996 Stock Option
      Plan (the “1996 Plan”), collectively referred to as the “Option Plans”. Options
      issued under these Option Plans have an option term of 10 years. Exercise prices
      of options issued under the Option Plans may be less than the fair market value
      per share of our common stock on the date of grant. Options may be granted
      with
      any vesting schedule as approved by the stock option committee, but generally
      the vesting periods range from 0 to 5 years. Common shares required to be issued
      upon the exercise of stock options and warrants would be issued from our
      authorized and unissued shares.




81




On
      December 16, 2005, the stock option committee of our Board of Directors approved
      the 2005 Plan. We reserved 60 million shares of common stock on December 16,
      2005 for issuance under the 2005 Plan. As of December 31, 2007, we have not
      registered the 60 million shares underlying the options in the 2005 Plan, and
      as
      a result all 60 million options remain available for issuance under the 2005
      Plan.




On
      September 24, 2003, we adopted our 2003 Plan. The 2003 Plan provides authority
      to our stock option committee to grant up to 150 million non-qualified stock
      options. As of December 31, 2007, options to purchase 6.3 million shares of
      common stock remained available for issuance under the 2003 Plan.




On
      June
      6, 2002, we adopted our 2002 Plan. The 2002 Plan provides for authority for
      the
      stock option committee of our Board of Directors to grant 10 million
      non-qualified stock options. As of December 31, 2007, options to purchase 20,000
      shares of common stock remained available for issuance under the 2002
      Plan.




On
      March
      27, 1998, we adopted the 1998 Plan, providing for authority of the stock option
      committee of our Board of Directors to grant options to purchase up to 8 million
      shares of our common stock. As of December 31, 2007, options to purchase 165,450
      shares of common stock remained available for issuance under the 1998
      Plan.




On
      February 1, 1996, we adopted the 1996 Plan, providing 1.5 million shares of
      our
      common stock to be available for grant under the Plan. A total of 1,046,048
      shares were issued upon the exercise of options granted under the 1996 Stock
      Option Plan from its inception through December 31, 2006. Effective on February
      1, 2006, the 1996 Plan expired.




We
      also
      have one stock incentive plan, the 2003 Stock Incentive Plan (the “2003
      Incentive Plan”). On October 31, 2003, the 2003 Incentive Plan was approved by
      the stock option committee. 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 December 31, 2007, 426,451 shares of common stock
      remain available for issuance under the 2003 Stock Incentive Plan.




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




The
      fair
      value of stock-based awards was estimated using the Black-Scholes-Merton model
      with the following weighted-average assumptions:




Years ended December 31,2007
            
            2006Volatility
            
            
            96 - 115%
            
            
            56 - 117%Expected
                dividends
            
            
            -
            
            
            -Expected
                term (in years)
            
            
            3
            
            
            3Risk-free
                rate
            
            
            4.35%
            
            
            4.35%




As
      of
      December 31, 2007, we had approximately 66.9 million shares of common stock
      reserved for future issuance under our stock option plans and stock incentive
      plan.




82




A
      summary
      of the transactions during the twelve months ended December 31, 2007 with
      respect to our stock option plans follows:




Weighted-AverageWeighted-
            
            
            
            Contractual LifeAverage
            
            Aggregate
            
            RemainingShares
            
            Exercice Price
            
            Intrinsic Value
            
            in Years(In
              thousands)
            
            
            
            (In thousands)Outstanding
                at January 1, 2007
            
            
            105,822
            
            $
            0.20Granted
                (exclusive of option repricing)
            
            
            42,328
            
            $
            0.03Exercised
            
            
            (1,639
            )
            $
            0.01Forfeited
                (exclusive of option repricing)
            
            
            (31,000
            )
            $
            0.25Original
                options forfeited in connection with option repricing
            
            
            (50,149
            )
            
            -Modified
                options granted in connection with option repricing
            
            
            50,149
            
            
            -Outstanding
                at December 31, 2007
            
            
            115,511
            
            $
            0.08
            
            $
            29
            
            
            7.7Exercisable
                at December 31, 2007
            
            
            84,725
            
            $
            0.06
            
            $
            24
            
            
            7.0




A summary of the transactions during the twelve months
      ended
      December 31, 2006 with respect to our stock option plans follows:






Weight-AverageWeighted-
            
            
            
            Contractual
                  LifeAverage
            
            Aggregate
            
            RemainingShares
            
            Exercise
                  Price
            
            Intrinsic
                  Value
            
            in
                  Years(In
                  thousands)
            
            
            
            (In
                thousands)Outstanding
                at January 1, 2006
            
            
            100,041
            
            $
            0.18Granted
            
            
            28,297
            
            $
            0.33Exercised
            
            
            (2,931
            )
            $
            0.12Forfeited
            
            
            (19,585
            )
            $
            0.29Outstanding
                at December 31, 2006
            
            
            105,822
            
            $
            0.20
            
            $
            1,125
            
            
            7.3Exercisable
                at December 31, 2006
            
            
            77,920
            
            $
            0.17
            
            $
            1,125
            
            
            6.7




During
      the year ended December 31, 2007, a total of 1,639,444 options, with an
      intrinsic value of $77,316 were exercised, compared to an intrinsic value of
      $450,139 for the 2,930,975 options exercised during the year ended December
      31,
      2006. A summary of the status of our non-vested options as of December 31,
      2007,
      and changes during the year ended December 31, 2007 is presented
      below:




WeightedAverageGrant DateNonvested
                Shares
            
            Shares
            
            Fair Value(in thousands)Nonvested
                at January 1, 2007
            
            
            27,902
            
            $
            0.30Granted
            
            
            35,664
            
            $
            0.02Vested
            
            
            14,453
            
            $
            0.46Forfeited
            
            
            (18,327
            )
            $
            0.17Nonvested
                at December 31, 2007
            
            
            30,786
            
            $
            0.03




Total
      stock-based compensation expense is attributable to the granting of and the
      remaining requisite service periods of stock options previously granted.
      Compensation expense attributable to net stock-based compensation for the year
      ended December 31, 2007 was $4.7 million. As of December 31, 2007, the total
      unrecognized compensation cost related to non-vested stock awards was $2.8
      million net of expected forfeitures and the related weighted-average period
      over
      which it is expected to be recognized is approximately 1.4 years.




83




The
      following table summarizes information about our stock options outstanding
      as of
      December 31, 2007:





Options Outstanding
            
            Options ExercisableRange of Exercise Prices
            
            Number of
              Shares
            
            Weighted-
              Average
              Remaining
              Life
            
            Weighted-
              Average
              Exercise Price
            
            Number of
              Shares
            
            Weighted-
              Average
              Exercise Price(in thousands)
            
            (in years)
            
            
            
            (in thousands)$0.01
                to $0.10
            
            
            102,392
            
            
            5.0
            
            $
            0.03
            
            
            72,953
            
            $
            0.04$0.11
                to $0.20
            
            
            6,010
            
            
            2.9
            
            $
            0.12
            
            
            4,663
            
            $
            0.12$0.21
                to $0.30
            
            
            5,000
            
            
            1.0
            
            $
            0.24
            
            
            5,000
            
            $
            0.24$0.31
                to $0.40
            
            
            2,109
            
            
            1.0
            
            $
            0.33
            
            
            2,109
            
            $
            0.33$0.01
                to $0.40
            
            
            115,511
            
            
            4.7
            
            $
            0.05
            
            
            84,725
            
            $
            0.06




The
      following table summarizes information about our stock incentive plan for the
      years ended December 31, 2007 and 2006:




Year ended December 31,2007
            
            2006(in thousands)Shares
                issued under 2003 Stock Incentive Plan
            
            
            1,299
            
            
            18,432Aggregate
                grant date fair value of shares issued
            
            $
            73
            
            $
            2,211Expense
                recognized
            
            $
            73
            
            $
            2,244




**Warrants** ****




The
      following table summarizes information about our warrant activity for the years
      ended December 31, 2007 and 2006:





Years ended December 31,2007
            
            2006(in thousands)Warrants
                outstanding - beginning balance
            
            
            316,325
            
            
            71,375Warrants
                issued
            
            
            200,000
            
            
            294,000Warrants
                exercised
            
            
            -
            
            
            (49,000
            )Warrants
                expired
            
            
            (1,500
            )
            
            (50
            )Warrants
                outstanding - ending balance
            
            
            514,825
            
            
            316,325




The
      following table summarizes information about warrants outstanding at
      December 31, 2007, all of which are exercisable:




Weighted AverageWarrants
            
            RemainingExercise Prices
            
            Outstanding
            
            Contractual Life(In thousands)
            
            (In years)$0.010
            
            
            2,500
            
            
            0.5$0.020
            
            
            502,000
            
            
            3.8$0.030
            
            
            50
            
            
            0.0$0.048
            
            
            3,500
            
            
            1.8$0.102
            
            
            100
            
            
            1.2$0.110
            
            
            2,500
            
            
            1.2$0.227
            
            
            2,000
            
            
            2.2$0.328
            
            
            2,000
            
            
            1.0$3.450
            
            
            175
            
            
            1.3$0.01
                to $3.45
            
            
            514,825
            
            
            3.8





84




Refer
      to
      Note 6 for discussion of warrants issued to Yorkville during 2007. The
      exercise price of all warrants outstanding to Yorkville as of August 24, 2007
      was repriced as an inducement for Yorkville to enter into a financing
      arrangement with us on that date.




On
      February 14, 2006, we issued 2 million warrants with an exercise price of $0.328
      and a term of five years to an unrelated third party as a fee for negotiating
      and structuring the Series C convertible preferred stock sale.




During
      March 2005, in connection with the signing of the 2005 SEDA, we issued 50
      million warrants to Yorkville with an exercise price of $0.20 per share, and
      4
      million warrants with an exercise price of $0.229 to an independent third party
      as a fee for negotiating and structuring the SEDA. We charged the fair value
      of
      the warrants of $12.3 million to “Deferred equity financing costs.” 40 million
      warrants were exercised in the first quarter of 2006, generating $8.0 million
      cash proceeds to us.




**17.****Segment
      and geographical information**




As
      of
      December 31, 2007, 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 (“NMM”) business unit. Our operations
      are managed as one global unit out of Atlanta, Georgia and Aachen,
      Germany.




Consolidated
      net sales and net loss from continuing operations for the years ended December
      31, 2007 and 2006, and the identifiable assets as of December 31, 2007 and
      2006
      by geographic area were as follows:




Year Ended December 31,2007
            
            2006(in thousands)Net
                Sales(1):United
                States
            
            $
            547
            
            $
            651Germany
            
            
            1,317
            
            
            954$
            1,864
            
            $
            1,605Net
                Loss from Continuing Operations(1):United
                States
            
            $
            (31,484
            )
            $
            (29,517
            )Germany
            
            
            (420
            )
            
            (548
            )$
            (31,904
            )
            $
            (30,065
            )




As of December 31,2007
            
            2006Identifiable
                Assets(1)United
                States
            
            $
            12,875
            
            $
            37,551Germany
            
            
            649
            
            
            574$
            13,524
            
            $
            38,125







(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 are reported as Held For
      Sale.




85




**18.****Common
      stock**




Holders
      of common stock are entitled to one vote for each share held of record on each
      matter submitted to a vote of shareholders. Holders of the common stock do
      not
      have cumulative voting rights, which means that the holders of more than one
      half of our outstanding shares of common stock, subject to the rights of the
      holders of preferred stock, can elect all of our directors, if they choose
      to do
      so. In this event, the holders of the remaining shares of common stock would
      not
      be able to elect any directors. Subject to the prior rights of any class or
      series of preferred stock which may from time to time be outstanding, if any,
      holders of common stock are entitled to receive ratably, dividends when, as,
      and
      if declared by our Board of Directors out of funds legally available for that
      purpose and, upon our liquidation, dissolution, or winding up, are entitled
      to
      share ratably in all assets remaining after payment of liabilities and payment
      of accrued dividends and liquidation preferences on the preferred stock, if
      any.
      Holders of common stock have no preemptive rights and have no rights to convert
      their common stock into any other securities. The outstanding common stock
      is
      duly authorized and validly issued, fully-paid, and nonassessable. Except as
      otherwise required by Delaware law, and subject to the rights of the holders
      of
      preferred stock, all stockholder action is taken by the vote of a majority
      of
      the outstanding shares of common stock present at a meeting of stockholders
      at
      which a quorum consisting of a majority of the outstanding shares of common
      stock is present in person or proxy.




On
      June
      28, 2006, our shareholders voted to increase the number of shares of authorized
      common stock, par value $0.01 per share, from one billion to five
      billion.




**19.****Subsequent
      events**




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




Yorkville
      converted 100 shares, 25 shares, 50 shares and 50 shares of Series C
      preferred stock on February 19, 2008, March 10, 2008, March 17, 2008 and
      March 25, 2008, respectively. In exchange for the Series C preferred stock,
      we
      issued 10 million, 2.5 million, 5 million and 5 million shares of common
      stock, respectively.




***ITEM
              9.***
            ***Changes
                in and disagreements with accountants on accounting and financial
                disclosures***




None.




***Item
              9A (T).***
            ***Controls
                and Procedures***




**a)
      Evaluation of Disclosure Controls and Procedures**




We
      are
      required to maintain disclosure controls and procedures that are designed to
      ensure that information required to be disclosed in our reports under the
      Securities Exchange Act of 1934, as amended (Exchange Act), is recorded,
      processed, summarized and reported within the time periods specified in the
      Commission’s rules and forms, and that such information is accumulated and
      communicated to our management, including our Chief Executive Officer (CEO)
      and
      Chief Financial Officer (CFO) as appropriate, to allow timely decisions
      regarding required disclosure.




In
      connection with the preparation of this Form 10-K for the year ended
      December 31, 2007, our management, under the supervision of the CEO and
      CFO, conducted an evaluation of disclosure controls and procedures. A control
      system, no matter how well conceived and operated, can provide only reasonable,
      not absolute, assurance that the objectives of the control systems are met.
      Based on that evaluation, our CEO and CFO concluded that our disclosure controls
      and procedures were not effective at a reasonable assurance level as of
      December 31, 2007 due to the material weaknesses discussed below. Because
      the material weaknesses described below have not been remediated as of the
      filing date of this Form 10-K, our CEO and CFO conclude that our disclosure
      controls and procedures are not effective as of the filing date of this
      Form 10-K.




86




**b)
      Management’s Annual Report on Internal Control over Financial
      Reporting**




Management
      is responsible for establishing and maintaining adequate internal control
      structure and procedures over financial reporting (as defined in
      Rules 13a-15(e) and 15d-15(e)) under the Exchange Act. Our management
      conducted an assessment of the effectiveness of our internal control over
      financial reporting as of December 31, 2007 based on the framework set
      forth in Internal Control — Integrated Framework issued by the Committee of
      Sponsoring Organizations of the Treadway Commission (COSO). Internal control
      over financial reporting cannot provide absolute assurance of achieving
      financial reporting objectives because of its inherent limitations. Internal
      control over financial reporting is a process that involves human diligence
      and
      compliance and is subject to lapses in judgment and breakdowns resulting from
      human failures. Because of such limitations, there is a risk that material
      misstatements may not be prevented or detected on a timely basis by internal
      control over financial reporting. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.




A
      material weakness in internal control over financial reporting is defined by
      the
      Public Company Accounting Oversight Board’s Audit Standard No.5 as  a
      deficiency, or a combination of deficiencies, in internal control over financial
      reporting, such that there is a reasonable possibility **** that
      a
      material misstatement of the company's annual or interim financial statements
      will not be prevented or detected on a timely basis. A significant deficiency
      is
      a deficiency, or a combination of deficiencies, in internal control over
      financial reporting that is less severe than a material weakness, yet important
      enough to merit attention by those responsible for oversight of our financial
      reporting .




Our
      management’s evaluation also included assessing the effectiveness of internal
      controls over financial reporting at Gavitec AG, which was acquired on February
      23, 2006. For our management’s assessment of internal controls over financial
      reporting as of December 31, 2006, management excluded
      the entity based upon the SEC’s “Management’s Report On Internal Control Over
      Financial Reporting and Certification of Disclosure in Exchange Act Periodic
      Reports, Frequently Asked Question #3 (revised October 6, 2004)”.




Our
      management identified the following material weaknesses as of December 31,
      2007 to our internal control over financial reporting:





Entity
      Level Controls:





·
            Our
                senior management did not establish and maintain a proper tone as
                to
                internal control over financial reporting. Specifically, our senior
                management was unable, due to time and resource constraints, to promptly
                address control weaknesses brought to their attention throughout
                this and
                the previous year’s audit;




·
            We
                do not have a financial expert on the Audit Committee, which is currently
                comprised of only one member of the Board. The lack of a financial
                expert
                on the Audit Committee, combined with the complexity of certain financial
                transactions we engage in, raises the risk of a potential material
                misstatement to occur and go undetected in the financial
                statements;




·
            We,
                through our senior management, failed to maintain formalized accounting
                policies and procedures. Once implemented, the polices and procedures
                should provide guidance to accounting personnel in the proper treatment
                and recording of financial transactions, as well as proper internal
                controls over financial reporting.




User
      Access General Controls:




·
            Our
                senior management did not maintain sufficient controls related to
                the
                establishing, maintaining, and assigning of user access security
                levels in
                the accounting software package used to initiate, process, record,
                and
                report financial transactions and financial statements. Specifically,
                controls were not designed and in place to ensure that access to
                certain
                financial applications was adequately restricted to only employees
                requiring access to complete their job
                functions;




·
            We
                failed to maintain proper spreadsheet controls at our Gavitec location.
                Specifically, critical spreadsheets are password protected and reside
                on a
                protected drive, but additional controls, such as critical cell formula
                testing and locking, logic testing, and input control are missing.
                Additionally, the Gavitec location did not have the excel policy
                adopted
                last year at our headquarters.




87




Because
      of the material weaknesses, our CEO and CFO concluded that we did not maintain
      effective internal control over financial reporting at a reasonable assurance
      level as of December 31, 2007 or at the date of this filing.




**c)
      Remediation**




In
      connection with the material weakness noted in management’s report as of
      December 31, 2006, management would like to report the following material
      weaknesses have been remediated:




·
            We
                have hired a new CFO, corporate controller, and two new staff accountants,
                who are deemed sufficiently qualified accounting personnel with the
                appropriate level of knowledge, experience and training in the application
                of GAAP and other financial reporting requirements. Additionally,
                complex
                transactions are outsourced for GAAP compliance to a third party
                “expert.”




·
            Our
                Board of Directors, at the request of our CFO, adopted and implemented
                a
                company-wide risk assessment program. New procedures were communicated
                to
                appropriate personnel, and we have taken steps to ensure compliance
                with
                the program.




·
            We
                have obtained, reviewed and obtained acknowledgment from our employees
                regarding the Code of Conduct. New employees hired in 2007 were also
                subject to this requirement.




·
            We
                have revised and distributed effective information technology policies
                and
                procedures, which addresses financial reporting risks associated
                with the
                IT function.




·
            Our
                senior management has adopted stronger controls over data back up
                and off
                site storage process. The data back up tapes are verified as successful,
                and are stored offsite in a safe
                environment.




·
            We
                have adopted and maintained a Company-wide anti-fraud program over
                the
                initiating and processing of financial transactions, as well as other
                Company-wide procedures which may have an impact on internal controls
                over
                financial reporting.




·
            We
                maintain, through a review performed by our Controller and CFO, effective
                controls over the recording of recurring and non-recurring journal
                entries. All journal entries are subject to supervisory review and
                approval of journal entries for the recording of all financial
                transactions.




·
            We
                maintain effective controls over the income tax provision, including
                deferred tax assets and net operating loss carry-forwards related
                to
                foreign acquisitions completed in 2006. Controls are also now deemed
                effective in the analysis of certain account balances, such as goodwill,
                which were previously impacted as a result of the control
                failure.




·
            We
                maintain adequate controls over the accuracy, presentation and disclosure
                in recording revenue. Controls are currently in place to ensure that
                revenue transactions are analyzed for appropriate presentation and
                disclosure for recognition of
                revenue.




The
      continued remediation of the material weaknesses described above is among our
      highest priorities. Our Audit Committee will continually assess the progress
      and
      sufficiency of these initiatives and make adjustments as and when necessary.
      As
      of the date of this report, our management believes that our efforts, when
      completed, will remediate the material weaknesses in internal control over
      financial reporting as described above. However, our management and our Audit
      Committee do not expect that our disclosure controls and procedures or internal
      control over financial reporting will prevent all errors or all instances of
      fraud. A control system, no matter how well designed and operated, can provide
      only reasonable, not absolute, assurance that the control system’s objectives
      will be met. 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 gaps and instances of fraud have been detected. These inherent
      limitations include the realities that judgments in decision-making can be
      faulty, and that breakdowns can occur because of simple errors or mistakes.
      Controls can also be circumvented by the individual acts of some persons, by
      collusion of two or more people, or by management override of the controls.
      The
      design of any system of controls is based in part upon certain assumptions
      about
      the likelihood of future events, and any design may not succeed in achieving
      its
      stated goals under all potential future conditions.




88




Except
      as
      disclosed above, there were no changes in our internal control over financial
      reporting that occurred during our last fiscal quarter that have materially
      affected, or are reasonably likely to materially affect, our internal control
      over financial reporting.




This
      Annual Report does not include an attestation report of our registered public
      accounting firm regarding internal control over financial reporting.
      Management’s report was not subject to attestation by our registered public
      accounting firm pursuant to temporary rules of the U.S. Securities and Exchange
      Commission that permits us to provide only management’s report in this Annual
      Report.




**d)
      Subsequent Changes in Internal Control over Financial
      Reporting**




Except
      as
      disclosed above, there were no changes in our internal control over financial
      reporting that occurred during our last fiscal quarter that have materially
      affected, or are reasonably likely to materially affect, our internal control
      over financial reporting.


***ITEM
                  9B.***
                ***Other
                    information***


None.





89


**PART
      III**




***ITEM
              10.***
            ***Directors,
                executive officers, and corporate
                governance***




**Directors
      and Executive Officers**




As
      of
      February 16, 2008, our directors and executive officers were:




**Name**
            **Age**
            **Position**William
                J. Hoffman
            46
            Chief
                Executive Officer andChairman of the BoardChristian
                Steinborn
            38
            Chief
                Operating OfficerFrank
                J. Pazera
            47
            Chief
                Financial OfficerJames
                J. Keil
            80
            DirectorGeorge
                G. O’Leary
            45
            Director




The
      following is certain summary information with respect to our directors and
      executive officers:




***William
      J. Hoffman, Jr.*** joined
      us on June 18, 2007 as our Chief Executive Officer. Prior to joining NeoMedia,
      Mr. Hoffman was the CEO and co-founder of Uniqua Technologies, Inc, where he
      led
      the company to establish the first business-to-business mobile virtual network
      operator (MVNO) in the United States using GSM technology. Uniqua also provides
      enterprise mobile commerce and data solutions to businesses. He co-founded
      Vectorlink Communications Corporation, a subsidiary of Uniqua, which provides
      licensed and unlicensed broadband and telephony services to government,
      business, and consumers in Texas.




Prior
      to
      this, Mr. Hoffman was President and CEO for mBlox, Inc., the world’s largest
      wireless transaction processing network, from 2002 to 2004. There he focused
      on
      reorganizing, restructuring, and then rapidly growing the business to over
      180
      countries. His responsibilities included capital structure, Board, organization,
      strategy, and execution of the firm’s business plan. He was instrumental in
      developing partnerships with more than 500 wireless operators around the globe
      including Vodafone®, T-Mobile®, Verizon® and Cingular®, and achieving a $75
      million annual run-rate in 18 months time for the world’s largest provider of
      messaging infrastructure.




Before
      joining mBlox, Mr. Hoffman served at the pleasure of numerous large private
      equity firms who employed his skills to repair and rebuild substantial telephony
      and global wireless businesses in their portfolios. His successes include
      Advanced Telcom Group, Nuvox, Krone, and MobileSys, Inc. From 1997 to 2000,
      Mr.
      Hoffman served as an officer of Dobson Communications Corporation (NASDAQ:
      DCEL)
      and the president and chief operating officer of Logix Communications
      Enterprises, a business-to-business integrated voice and data service provider
      for which he led the spin off from Dobson.




Mr.
      Hoffman was Intermedia Communications Division Vice President-Florida from
      1995
      to 1997, where he grew the company's fiber-optic network and oversaw the
      creation of the largest competitive local phone and data service provider in
      Florida. From 1987 to 1995 Mr. Hoffman worked in numerous positions in sales,
      marketing and management at Sprint's Business Services Unit. He was a Captain
      in
      the U.S. Army in Europe working in military intelligence from 1983 to 1987.
      Mr.
      Hoffman holds a B.S. in Electrical Engineering from Auburn
      University.




***Christian
      Steinborn*** joined
      us upon the acquisition of Gavitec on February 17, 2006, where he had been
      serving as a Member of the Executive Board since January 2004 and his
      responsibilities included operations, opening the market for new innovative
      products, total turnover and results, strategy, reporting and IP coverage.
      Prior
      to his election to the Executive Board, Dr. Steinborn held the responsibilities
      of Head of Business Development and Sales Worldwide at Gavitec for three years.
      He was promoted to our Chief Operating Officer on September 26, 2007 with the
      expanded role of global sales and operations for NeoMedia in addition to his
      ongoing responsibilities at Gavitec. Prior to joining Gavitec, Dr. Steinborn
      was
      employed at Scantech BV as Director of Operations, and at Lufthansa in an
      internship. Dr. Steinborn started his career in a family-owned construction
      company in Bad Neuenahr, Germany, working for six years in business strategy
      and
      loyalty development. Dr. Steinborn studied psychology and law at the University
      of Bonn and has a PhD in Banking Operations Law and an International MBA from
      the NIMBAS Graduate School of Management in Utrecht, the Netherlands and
      Bradford, UK.




90




***Frank
      J. Pazera*** joined
      us on October 19, 2007 as our Chief Financial Officer. Prior to joining us,
      Mr.
      Pazera was a partner in the Atlanta office of Tatum LLC, the largest executive
      services firm in the United States., and held CFO positions in both publicly
      traded and privately held technology companies. Mr. Pazera began his career
      at
      Arthur Andersen & Co. More recently, Mr. Pazera was Interim Chief Executive
      Officer of Covista Communications, Inc. where he also previously served as
      Chief
      Financial Officer and Treasurer. Mr. Pazera has also held Senior Financial
      Executive positions at Airgate PCS, Inc., Network One, MCI Telecommunications
      and Turner Broadcasting, among others. Mr. Pazera holds a BBA in Accounting
      from
      the University of Wisconsin, Milwaukee and an MBA from the Goizueta Business
      School at Emory University, Atlanta.




***James
      J. Keil*** has been
      a Director of NeoMedia since August 6, 1996. Mr. Keil currently is a member
      of
      the Compensation Committee, the Stock Option Committee and the Audit Committee.
      He is founder and President of Keil & Keil Associates, a business and
      marketing consulting firm located in Washington, D.C., specializing in
      marketing, sales, document application strategies, recruiting and electronic
      commerce projects. Prior to forming Keil & Keil Associates in 1990, Mr. Keil
      worked for 38 years at IBM Corporation and Xerox Corporation in various
      marketing, sales and senior executive positions. From 1989-1995, Mr. Keil was
      on
      the board of directors of Elixir Technologies Corporation (a non-public
      corporation), and from 1990-1992 was the Chairman of its Board of Directors.
      From 1992-1996, Mr. Keil served on the board of directors of Document Sciences
      Corporation. Mr. Keil holds a B.S. degree from the University of Dayton and
      did
      Masters level studies at the Harvard Business School and the University of
      Chicago in 1961/62.




***George
      G. O’Leary*** was
      named to our board of directors in February 2007, and is currently the President
      of SKS Consulting of South Florida Corp. Prior to assuming his duties with
      us,
      he was and still is a consultant to NeoGenomics (OTCBB:NGNM) and was acting
      Chief Operating Officer from October 2004 to April 2005 were he helped the
      turn-around of that organization. He is currently a member the board of
      directors of NeoGenomics Inc. and ISONICS Corporation, both of which are public
      companies. Prior to becoming an officer of NeoGenomics, Mr. O’Leary was the
      President and CFO of Jet Partners, LLC from 2002 to 2004. From 1996 to 2000,
      Mr.
      O’Leary was CEO and President of Communication Resources Incorporated (CRI).
      Prior to CRI, Mr. O’Leary was Vice President of Operations of Cablevision
      Industries, where he ran $125 million of business for this major cable operator
      until it was sold to Time Warner.




**Election
      of Directors and Officers**




Directors
      are elected at each annual meeting of shareholders and hold office until the
      next succeeding annual meeting and the election and qualification of their
      respective successors. Officers are elected annually by our Board of Directors
      and hold office at the discretion of our Board of Directors. Our By-Laws permit
      our Board of Directors to fill any vacancy and such director may serve until
      the
      next annual meeting of shareholders and the due election and qualification
      of
      his successor.




**Committees
      of our Board of Directors**




Our
      Board
      of Directors have an Audit Committee, a Compensation Committee and a Stock
      Option Committee; there is not a standing Nominating Committee.




v
            **Audit
                Committee –**The
                purpose of the Audit Committee is to provide assistance to our Board
                of
                Directors in fulfilling their oversight responsibilities relating
                to our
                consolidated financial statements and financial reporting process
                and
                internal controls in consultation with our independent registered
                public
                accountants and internal auditors. The Audit Committee is also responsible
                for ensuring that the independent registered public accountants submit
                a
                formal written statement to us regarding relationships and services
                which
                may affect the auditors’ objectivity and independence. During 2007,
                members of the Audit Committee were non-employee directors James
                J. Keil
                and A. Hayes Barclay. Mr. Barclay resigned from our Board of Directors
                on
                July 11, 2007; and as a result, Mr. Keil now serves as the sole member
                of
                our Audit Committee. Due to financial constraints, we do not currently
                have an Audit Committee financial expert serving on our Audit
                Committee.




91




v
            **Compensation
                Committee –**The
                Compensation Committee is responsible for recommending compensation
                and
                benefits for our executive officers to our Board of Directors and
                for
                administering our Incentive Plan for our management. Outside directors
                James J. Keil and A. Hayes Barclay were members of our Compensation
                Committee during 2007. Upon Mr. Barclay’s resignation, George O’Leary was
                appointed to the Compensation
                Committee.




v
            **Stock
                Option Committee –**The
                Stock Option Committee has responsibility for administering our stock
                option plans. During 2007, the committee was comprised of non-employee
                directors James J. Keil and A. Hayes Barclay. Subsequent to Mr. Barclay’s
                resignation, Mr. O’Leary was appointed to the Stock Option
                Committee.





***Director
      Compensation*** –
      Outside directors are currently compensated through a combination of cash and
      stock options. For
      independent Directors, our compensation policy for the year ended December
      31,
      2007 was as follows:




$1,000
      for each Board of Director meeting attended in person;


$500
      for
      each telephonic meeting attended;


$500
      for
      each Committee meeting attended (whether in person or telephonic); subject
      to


A
      maximum
      amount compensated per day of $1,000.




On
      February 2, 2007, we appointed George O’Leary to our board of directors. Mr.
      O’Leary is currently the President of SKS Consulting of South Florida Corp. and
      is working with us under a two year consulting agreement. Due to our payments
      under the consulting contract with SKS, we did not pay Mr. O’Leary any
      Director’s fees during the year ended December 31, 2007.




**Code
      of Ethics**




We
      have
      adopted a code of ethics, as required by the rules of the SEC (included by
      reference hereto). This code of ethics applies to all of our directors, officers
      and employees. The code of ethics, and any amendments to, or waivers from,
      the
      code of ethics, is available in print, at no charge, to any shareholder who
      requests such information.




**Section
      16(a) Beneficial Ownership Reporting Compliance**




Section
      16(a) of the Exchange Act requires our officers and directors, and persons
      who
      own more than ten percent of a registered class of our equity securities, to
      file reports of ownership and changes in ownership with the Securities and
      Exchange Commission. Officers, directors and greater than ten-percent
      shareholders are required by SEC regulation to furnish us with copies of all
      Section 16(a) forms they file.




Based
      solely on a review of the copies of such forms furnished to us, we believe
      that
      during the year ended December 31, 2007 all officers, directors and ten percent
      beneficial owners who were subject to the provisions of Section 16(a) complied
      with all of the filing requirements during the year.




***ITEM
              11.***
            ***E******xecutive
                compensation***




**Compensation
      Discussion and Analysis**




This
      compensation discussion and analysis is designed to explain our policies and
      considerations used for determining compensation structure for our principal
      executive officer, principal financial officer, and other executive officers
      (collectively, “the Named Executive Officers”). Detailed quantitative
      disclosures of named executive officer compensation, equity awards, and equity
      positions relative to the Named Executive Officers follow this compensation
      discussion and analysis .
      The
      purpose of the compensation
      discussion and analysis is
      to put
      into context such compensation disclosures, and to present a qualitative
      discussion of our compensation matters through the eyes of
      management.




***Objectives
      of compensation structure*** –
      We operate in an emerging and highly competitive industry. The primary objective
      of our executive compensation structure is to attract, motivate, and retain
      executives who drive our success and industry leadership, and thus create
      shareholder value. We seek to align our executives’ compensation with
      performance goals that will create shareholder value through the creation of
      sales, net income, and increased stock price.




92




***What
      the programs are designed to reward*** –
      The executive compensation structure is designed to reward executives for both
      near-term individual performance and long-term Company performance. Individual
      performance is generally evaluated through the completion of periodic
      performance reviews. Long-term Company performance goals are measured primarily
      through financial indicators such as stock price, sales, and net
      income.




***Elements
      of compensation*** –
      The components of the compensation program for executive officers are as
      follows:




v
            ***Base
                Salary*****–**Base
                salaries are determined based on a variety of factors, including
                the
                executive’s scope of responsibilities, an assessment of similar roles at
                other companies, and a comparison of salaries paid to peers within
                the
                Company. Base salaries are set at levels that allow us to attract
                and
                retain executive employees that will enable us to deliver on our
                business
                goals. Base salaries are reviewed from time to time in connection
                with
                performance reviews and may be adjusted after considering performance
                along with the factors noted above. The Compensation Committee is
                responsible for setting and adjusting salaries of the Named Executive
                Officers. The Compensation Committee currently consists of James
                J. Keil,
                an independent director, and George O’Leary, an outside director, who is
                compensated through a consulting agreement with
                us.




v
            ***Stock-based
                Compensation****–*Under our stock option plans, executives, employees, consultants
                and
                directors are eligible to receive stock option awards from time to
                time as
                determined by the Stock Option Committee, which currently consists
                of
                directors James J. Keil, and George O’Leary. A stock option award is a
                right to acquire shares of our common stock at a fixed exercise price
                that
                is generally equal to the stock price on the date of grant. Stock
                option
                awards can vest based on the passage of time, or based on achievement
                of
                specific performance goals. Historically, we have primarily issued
                options
                to executives with time-based vesting, generally 25% upon grant and
                25% on
                each subsequent anniversary date. The stock option awards guidelines
                vary
                by the level of responsibility of the executive. In 2007, new performance
                based options were granted to certain executives that are tied to
                achievement of revenue and profit goals during the next four fiscal
                years.




Additionally,
      we have a stock incentive plan under which unrestricted share-based awards
      are
      granted at the discretion of the Compensation Committee, or the Board as a
      whole. These shares have historically been used to compensate non-executive
      employees and consultants, and we do not have any plan to issue any such new
      shares to executives during 2008.




v
            ***Bonus***–
                We did not have a formal incentive plan for management in place for
                the
                years ended December 31, 2006, and therefore did not pay bonuses
                for that
                year. During 2007, we adopted an incentive plan for William Hoffman,
                who
                joined us mid-year as our CEO. Mr. Hoffman’s bonus for 2007 was determined
                by the Board of Directors at the time of his hire, and was based
                on the
                achievement of Revenue, Operating Profit, and Operating Metric objectives
                for the remainder of 2007. The Board reviewed the objectives subsequent
                to
                year-end and determined that Mr. Hoffman had met his objectives for
                the
                year ended December 31, 2007, and his bonus was paid out in March,
                2007.




The
      incentive plan for the year ending December 31, 2008 has been expanded to
      include an incentive element for all employees of the Company and is based
      upon
      the attainment of certain corporate and/or individual performance goals during
      each quarter throughout the year. The incentive for Named Executive Officers
      and
      the management team of the Company is based upon specific revenue and net income
      goals for 2008 and beyond. The incentive plan is designed to provide additional
      incentive to our executive management to achieve these growth and profitability
      goals.




Performance
      goals under the Incentive Plan are determined by the Compensation Committee
      for
      both Company and/or the employee's individual performance prior to the beginning
      of each quarter and year. If performance goals are attained, eligible employees
      are entitled to an award based upon a specified percentage of their base salary
      and in some cases may be eligible for performance-based equity awards in
      addition to cash bonus awards. Historically, the primary performance goals
      have
      been financial metrics, specifically our net income.




93




v
            ***Benefits****–*During
                the year ended December 31, 2007, our executives were eligible for
                the
                same level and offering of benefits made available to other employees,
                including health insurance, and a non-matching 401(k)
                Plan.




***Why
      we choose to pay each element*** –
      We operate in an emerging market, and have historically reported net operating
      losses on a year over year basis. As a result, executive compensation packages
      tend to be weighted more heavily with stock-based rather than cash-based
      compensation, since our cost of capital is relatively high. We believe that
      stock based compensation aligns the interest of our executives and employees
      with the goals of our shareholders, which is to drive shareholder value,
      primarily through increased stock price.




***How
      we determine the amount*** –
      We rely primarily on publicly available data to help benchmark levels of base
      salary, target annual incentives, and stock-based and other long-term
      incentives. The Compensation Committee and Stock Option Committee determine
      the
      executive’s appropriate salaries and stock-based awards based on available
      information, along with financial considerations such as our liquidity and
      the
      impact to shareholder dilution.




***How
      each element fits into our overall compensation
      objectives*** –
      The overall goal of our compensation plan is to attract and retain skilled
      executives who will drive shareholder value. We believe our executives’
competitive base salaries are competitive enough to attract viable leaders
      committed to our vision. We believe that our stock based compensation plans
      align the goals of our executives with those of our shareholders.





NeoMedia
      Technologies, Inc.


Compensation
      Committee





James
      J.
      Keil (Chairman)


George
      O’Leary




**Executive
      Compensation**




The
      following table sets forth certain information with respect to the compensation
      paid to persons serving as our principal executive officer during the last
      completed fiscal year, the person serving as our principal operating officer
      during the last completed fiscal, and person serving as our principal financial
      officer during the last completed fiscal year (collectively, "the Name of the
      Executive Officers") during the years ended December 31, 2007 and 2006. We
      did
      not employ any additional executive officers as of December 31,
      2007.




**Option****Name and**
            
            
            
            **Salary**
            
            **Bonus**
            
            **Awards****(1)**
            
            **Total****Principal Position**
            
            **Year**
            
            **($)**
            
            **($)**
            
            **($)**
            
            **($)**William
                Hoffman
            
            2007
            
            $
            140,223
            
            $
            68,800
            
            $
            312,717
            
            $
            521,740Chief Executive OfficerChristian
                Steinborn
            
            2007
            
            $
            246,794
            
            
            -
            
            $
            12,029
            
            $
            258,823Chief Operating OfficerFrank
                Pazera
            
            2007
            
            $
            56,122
            
            
            -
            
            
            -
            
            $
            56,122Chief Financial OfficerCharles
                W. Fritz(2)
            
            2007
            
            $
            106,545
            
            
            -
            
            
            -
            
            $
            106,545Interim President and CEO
            
            2006
            
            $
            206,334
            
            
            -
            
            
            -
            
            $
            206,334David
                A. Dodge(3)
            
            2007
            
            $
            84,732
            
            
            -
            
            
            -
            
            $
            84,732Vice President and CFO
            
            2006
            
            $
            144,295
            
            
            -
            
            
            -
            
            $
            144,295Scott
                Womble(4)
            
            2007
            
            $
            122,332
            
            $
            18,000
            
            
            -
            
            $
            140,332Interim Chief Financial Officer




94





(1) Dollar
      value of option awards is based on grant date fair value computed in accordance
      with FAS 123R; reader should refer to footnote 15 to the accompanying financial
      statements for detailed description of the assumptions used to calculate fair
      value.




(2) Charles
      W. Fritz resigned as our Chairman of the Board on October 15, 2007.




(3) David A.
      Dodge resigned as our Vice President and CFO on June 30, 2007.




(4) Scott
      Womble resigned as our Interim CFO on December 14, 2007.




**Grants
      of Plan-based Awards**




None.




**Outstanding
      Equity Awards at Fiscal Year-end**




The
      following table sets forth certain information relative to outstanding option
      awards held by the Named Executive Officers (there are no stock awards
      outstanding) as of December 31, 2007:


**Option Awards****Equity Incentive Plan****Number of Securities**
                
                **Awards: Number of****Underlying**
                
                **Securities Underlying**
                
                **Option****Unexercised Options**
                
                **Unexercised**
                
                **Exercise**
                
                **Option****Exercisable**
                
                **Unexercisable**
                
                **Unearned Options**
                
                **Price**
                
                **Expiration****Name**
                
                **(#)**
                
                **(#)**
                
                **(#)**
                
                **($)**
                
                **Date**William
                    Hoffman
                
                
                7,072,917
                
                
                12,927,083
                (1)
                
                -
                
                $
                0.035
                
                
                06/10/17Christian
                    Steinborn
                
                
                100,000
                (2)
                
                -
                
                
                -
                
                $
                0.045
                
                
                02/23/16100,000
                (2)
                
                -
                
                
                -
                
                $
                0.075
                
                
                02/23/16-
                
                
                100,000
                (2),
                    (3)
                
                -
                
                $
                0.125
                
                
                02/23/16-
                
                
                100,000
                (2),
                    (3)
                
                -
                
                $
                0.175
                
                
                02/23/16-
                
                
                -
                
                
                2,000,000
                (4)
                $
                0.047
                
                
                02/15/17-
                
                
                400,000
                (5)
                
                -
                
                $
                0.011
                
                
                12/19/17-
                
                
                400,000
                (5)
                
                -
                
                $
                0.011
                
                
                12/19/17-
                
                
                400,000
                (5)
                
                -
                
                $
                0.011
                
                
                12/19/17-
                
                
                400,000
                (5)
                
                -
                
                $
                0.011
                
                
                12/19/17-
                
                
                -
                
                
                400,000
                (6)
                $
                0.011
                
                
                12/19/17-
                
                
                -
                
                
                400,000
                (6)
                $
                0.011
                
                
                12/19/17-
                
                
                -
                
                
                400,000
                (6)
                $
                0.011
                
                
                12/19/17-
                
                
                -
                
                
                400,000
                (6)
                $
                0.011
                
                
                12/19/17Charles
                    W. Fritz
                
                
                10,000,000
                
                
                -
                
                
                -
                
                $
                0.010
                
                
                10/19/133,000,000
                (2)
                
                -
                
                
                -
                
                $
                0.045
                
                
                03/08/141,000,000
                (2)
                
                -
                
                
                -
                
                $
                0.075
                
                
                03/08/142,000,000
                (2)
                
                -
                
                
                -
                
                $
                0.045
                
                
                02/08/151,000,000
                (2)
                
                -
                
                
                -
                
                $
                0.075
                
                
                02/08/151,000,000
                (2)
                
                -
                
                
                -
                
                $
                0.125
                
                
                02/08/151,000,000
                (2)
                
                -
                
                
                -
                
                $
                0.045
                
                
                12/16/15500,000
                (2)
                
                -
                
                
                -
                
                $
                0.075
                
                
                12/16/15500,000
                (2)
                
                -
                
                
                -
                
                $
                0.125
                
                
                12/16/15David
                    A. Dodge
                
                
                1,600,000
                
                
                -
                
                
                -
                
                $
                0.010
                
                
                10/19/131,500,000
                (2)
                
                -
                
                
                -
                
                $
                0.045
                
                
                03/08/14500,000
                (2)
                
                -
                
                
                -
                
                $
                0.075
                
                
                03/08/141,250,000
                (2)
                
                -
                
                
                -
                
                $
                0.045
                
                
                02/08/15625,000
                (2)
                
                -
                
                
                -
                
                $
                0.075
                
                
                02/08/151,000,000
                (2)
                
                -
                
                
                -
                
                $
                0.045
                
                
                12/16/15Scott
                    Womble
                
                
                17,500
                (2)
                
                -
                
                
                -
                
                $
                0.045
                
                
                06/19/1617,500
                (2)
                
                -
                
                
                -
                
                $
                0.075
                
                
                06/19/16-
                
                
                17,500
                (2),
                    (7)
                
                -
                
                $
                0.125
                
                
                06/19/16-
                
                
                17,500
                (2),
                    (7)
                
                -
                
                $
                0.175
                
                
                06/19/16







(1) 5,000,000 of Mr. Hoffman's options vested immediately upon grant on June 11,
      2007, and the remainder vest on a monthly basis over four years.




95








(1)
      5,000,000 of Mr. Hoffman's options vested immediately upon grant on June 11,
      2007, and the remainder vest on a monthly basis over four years.




(2)
      Effective February 1, 2007, options held by NeoMedia employees, including Mr.
      Fritz, Mr. Dodge, Dr. Steinborn and Mr. Womble were repriced as follows: all
      vested options were repriced to $0.045 per share; all unvested options vesting
      during 2007 were repriced to $0.075; all unvested options vesting during 2008
      were repriced to $0.125; and all unvested options vesting during 2009 were
      repriced to $0.175.




(3)
      100,000 options vested on February 23, 2008 and 100,000 vest on February 23,
      2009.




(4)
      500,000 performance-based options vested on February 16, 2008 depending on
      achievement of performance plan for 2007, and 500,000 vest on each subsequent
      anniversary for three years depending on achievement of performance plans for
      the previous year.




(5)
      400,000 options vest on December 20, 2008, 400,000 options vest on December
      20,
      2009, 400,000 options vest on December 20, 2010, and 400,000 options vest on
      December 20, 2011.




(6)
      400,000 performance-options vest on February 15, 2009 depending on achievement
      of performance objectives for 2008, and 400,000 options vest on each subsequent
      February 15th for three years depending on achievement of performance objectives
      for the previous year.




(7)
      Mr. Womble resigned as NeoMedia's Assistant Controller on February 15, 2008
      forfeiting as of that date 17,500 options scheduled to vest on June 20, 2008
      and
      17,500 options scheduled to vest on June 20, 2009.




**Option
      Exercises and Stock Vested**




None.




**Pension
      Benefits**




None.




**Change
      in Control Agreements**




We
      are
      currently party to the following employment agreements with our CEO and our
      CFO:




William
      Hoffman is employed under the terms of an Employment Agreement dated June 18,
      2007, whereby if he is terminated without cause or due to a change in control,
      he is entitled to 18 months' salary, currently valued at $375,000, and
      accelerated vesting of one-half of any remaining unvested portion of the initial
      option grant of 20 million options. If Mr. Hoffman resigns his employment with
      us for good reason, he is entitled to eighteen months' salary per his Employment
      Agreement. Mr. Hoffman's initial option grant vested 25% on the date of grant,
      with the remainder vesting in equal monthly installments over 48
      months.




Frank
      Pazera is employed under the terms of an Employment Agreement dated January
      1,
      2008, whereby if he is terminated without cause or due to a change in control,
      he is entitled to 18 months' salary, currently valued at $300,000, and
      accelerated vesting of one-half of any remaining unvested portion of the initial
      option grant of 5 million options. If Mr. Pazera resigns his employment with
      us
      for good reason, he is entitled to six months' salary, currently valued at
      $100,000, per his Employment Agreement. Mr. Pazera's initial option grant vested
      25% on the date of grant, with the remainder vesting in equal monthly
      installments over 48 months.




**Director
      Compensation**




The
      following table sets forth certain information relative to compensation paid
      to
      outside directors for the year ended December 31, 2007:




**Fees**
            
            
            
            
            
            **(c)****Earned
                or**
            
            **(a)**
            
            **(1),
                (b)**
            
            **All
                other****Paid
                in**
            
            **Stock**
            
            **Option**
            
            **Compen-****Cash**
            
            **Awards**
            
            **Awards**
            
            **sation**
            
            **Total****Name**
            
            **($)**
            
            **($)**
            
            **($)**
            
            **($)**
            
            **($)**James
                J. Keil(2)
            
            $
            23,500
            
            
            -
            
            
            -
            
            
            -
            
            $
            23,500A.
                Hayes Barclay(3)
            
            $
            4,000
            
            
            -
            
            
            -
            
            
            -
            
            $
            4,000George
                O'Leary(4)
                (5) (6)
            
            
            -
            
            $
            18,017
            
            $
            7,005
            
            $
            2,061
            
            $
            27,083









(1)
            All
                options held by outside directors are fully
                vested.




(2)
            As
                of December 31, 2007, James J. Keil held 1,500,000 options with an
                exercise price of $0.045 and 1,000,000 options with an exercise price
                of
                $0.075. Effective February 1, 2007, options held by Mr. Keil were
                repriced
                as follows: all options with an exercise price less than $0.24 were
                repriced to $0.045, and all options with an exercise price greater
                than
                $0.24 were repriced to $0.075.




96




(3)
            A.
                Hayes Barclay resigned from our Board on July 11,
                2007.




(4)
            George
                O'Leary did not receive any compensation as a director of the Company
                during 2007, but did receive consulting fees under an agreement between
                SKS Consulting of South Florida Corp. (SKS) and NeoMedia dated December
                1,
                2006 of $212,000. For further information, see Item 13 - Certain
                relationships and related
                transactions.




(5)
            Under
                the consulting agreement between SKS and NeoMedia, Mr. O'Leary also
                receives the following equity-based
                compensation:




(a)
            60,000
                shares of restricted stock per month from December 2006 - December
                2008
                (on an anti-dilutive basis),




(b)
            60,000
                options per month for the period December 2006 - December 2008 with
                a
                price of $0.04 per share, and




(c)
            up
                to 500,000 incentive-based options with a price of $0.10 per
                share.




(6)
            In
                payment of the SKS contract, 25% of the equity-based items are issued
                to
                Jay Bonk, an employee of SKS.




**Compensation
      Committee Interlocks and Insider Participation**




From
      January 1, 2007 through July 11, 2007, the members of the Compensation Committee
      were James J. Keil and A. Hayes Barclay, both independent directors. Mr. Barclay
      resigned from the Board of Directors and the Compensation Committee on July
      11,
      2007 and was replaced by George O’Leary. Mr. O’Leary was not considered an
      independent director during 2007 due to a consulting agreement between SKS
      Consulting of South Florida Corp., for which he serves as President, and
      NeoMedia. Beginning January 1, 2008, Mr. O’Leary’s compensation with us was
      changed from a consulting agreement to that of an independent
      director.




During
      fiscal year 2007, none of our executive officers served on the compensation
      committee (or its equivalent) or board of directors of another entity whose
      executive officer(s) served on our Compensation Committee or Board of
      Directors.




**Compensation
      Committee Report**




The
      Compensation Committee has reviewed and discussed with management the
      Compensation Discussion and Analysis presented in Item 11 of this Annual Report
      on Form 10-K. Based on such review and discussion, the Compensation Committee
      has recommended to our Board of Directors that the Compensation Discussion
      and
      Analysis be included in this Annual Report on Form 10-K.




James
      J.
      Keil (Chairman)


George
      O’Leary





**Ethical
      Behavior**




We
      have
      adopted a code of ethics, as required by the rules of the SEC (attached as
      exhibit 14.1 hereto). This code of ethics applies to all of our directors,
      officers and employees. The code of ethics, and any amendments to, or waivers
      from, the code of ethics, is available in print, at no charge, to any
      shareholder who requests such information.




***ITEM
      12. Security ownership of certain beneficial owners and
      management***




The
      following table sets forth certain information regarding beneficial ownership
      of
      our common stock as of December 31, 2007, (i) by each of our directors, (ii)
      by
      each of our Named Executive Officers, (iii) by all of our executive officers
      and
      directors as a group, and (iv) by each person or entity known by us to own
      beneficially more than five percent of our common stock.




97


**Amount
                  and****Nature
                  of****Beneficial**
              
              **Percent of****Class**
              
              **Name and Address of Beneficial Owner****(1)**
              
              **Ownership (2)**
              
              **Class(2)********Directors
                  and Named Executive Officers**Common
                  Stock
              
              
              William
                  J. Hoffman(2)
                  (3)
              
              
              7,697,917
              
              
              *Common
                  Stock
              
              
              Christian
                  Steinborn(2)
                  (4)
              
              
              800,000
              
              
              *Common
                  Stock
              
              
              James
                  J. Keil(2)
                  (5)
              
              
              5,442,619
              
              
              *Common
                  Stock
              
              
              George
                  G. O'Leary(2)
                  (6)
              
              
              1,764,547
              
              
              *Officers
                  and Directors as a Group (4 Persons)(9)
              
              
              15,705,083
              
              
              1.5
              %**Other
                  Beneficial Owners**Common
                  Stock
              
              
              William
                  Fritz(2)
                  (7)
              
              
              49,610,944
              
              
              4.8
              %Common
                  Stock
              
              
              Charles
                  W. Fritz(2)
                  (8)
              
              
              29,640,766
              
              
              2.8
              %Total
              
              
              79,251,710
              
              
              7.6
              %







*
      Indicates less than 1%.




(1) Address
      of the referenced individual is c/o NeoMedia Technologies, Inc., Two Concourse
      Parkway, Suite 500, Atlanta, GA, 30328.




(2) Applicable percentage of ownership is based on 1,022,144,424 shares of common
      stock outstanding as of December 31, 2007, together with securities exercisable
      or convertible into shares of common stock within 60 days of December 31, 2007,
      for each stockholder. Beneficial ownership is determined in accordance with
      the
      rules of the Securities and Exchange Commission and generally includes voting
      or
      investment power with respect to securities. Shares of common stock subject
      to
      securities exercisable or convertible into shares of common stock that are
      currently exercisable or exercisable within 60 days of December 31, 2007, are
      deemed to be beneficially owned by the person holding such securities for the
      purpose of computing the percentage of ownership of such person, but are not
      treated as outstanding for the purpose of computing the percentage ownership
      of
      any other person.




(3) William
      J. Hoffman is our Chief Executive Officer. Ownership includes 7,697,917 shares
      of common stock issuable upon exercise of stock options that are exercisable
      within 60 days of December 31, 2007.




(4) Christian Steinborn is our Chief Operating Officer. Ownership includes 800,000
      shares of common stock issuable upon exercise of stock options that are
      exercisable within 60 days of December 31, 2007.




(5) James J.
      Keil is a member of our Board of Directors. Ownership includes 2,500,000 shares
      of common stock issuable upon exercise of stock options that are exercisable
      within 60 days of December 31, 2007, and 2,442,619 shares owned by Mr. Keil
      directly.




(6) George
      O'Leary is a member of our Board of Directors. Ownership includes 586,626 shares
      owned by SKS Consulting of South Florida Corp, a company that Mr. O'Leary
      currently serves as President, and 195,542 shares owned by Jay Bonk, an employee
      of SKS Consulting of South Florida Corp., 736,784 shares of common stock
      issuable upon exercise of stock options that are exercisable within 60 days
      of
      December 31, 2007, and 245,595 shares of common stock issuable upon exercise
      of
      stock options in the name of Jay Bonk that are exercisable within 60 days of
      December 31, 2007.




(7) William
      E. Fritz, a former member of our Board of Directors, and his wife, Edna Fritz,
      are the general partners of the Fritz Family Limited Partnership and therefore
      each are deemed to be the beneficial owners of the 1,511,742 shares held in
      the
      Fritz Family Partnership. As trustee of each of the Chandler R. Fritz 1994
      Trust, Charles W. Fritz 1994 Trust, and the Debra F. Schiafone 1994 Trust,
      William E. Fritz is deemed to be the beneficial owner of the 165,467 shares
      of
      our stock held in these trusts. Additionally, Mr. Fritz is deemed to own:
      45,433,735 shares held directly by Mr. Fritz or his spouse, 2,500,000 shares
      to
      be issued upon the exercise of warrants held by Mr. Fritz or his spouse. Address
      of the referenced individual is 3134 Dahlia Way, Naples, FL 34105.




(8) Charles
      W. Fritz is our founder and former Chairman of the Board of Directors. Shares
      beneficially owned include 100 shares owned by each of Mr. Fritz’s four children
      for an aggregate of 400 shares, 20,000,000 shares of common stock issuable
      upon
      exercise of stock options held by Mr. Fritz that are exercisable within 60
      days
      of December 31, 2007, 8,097,397 shares of common stock owned by Mr. Charles
      W.
      Fritz directly, and 1,542,969 shares of common stock held by the CW/LA II Family
      Limited Partnership, a family limited partnership for the benefit of Mr. Fritz’s
      family.




(9) Includes
      an aggregate of 11,480,296 options to purchase shares of common stock that
      are
      exercisable within 60 days of December 31, 2007 and 3,224,787 shares owned
      directly by our named executive officers and directors.




***ITEM
      13. Certain relationships and related transactions,******and Director Independence***




During
      the fourth quarter of 2005 and first quarter of 2006, we shipped and invoiced
      $0.8 million of Micro Paint Repair products to Automart, Inc., a Chinese
      company. In the third quarter of 2006, we established a reserve for bad debt
      against the open accounts receivable, and wrote off the deferred revenue and
      deferred costs, incurring a net charge to our statement of operations of $0.7
      million. We will recognize revenue on these shipments only if payment is
      received. In the absence of payment, we will not recoup our cost of goods sold
      which has already been paid. In our continuing collection efforts, we have
      found
      that Automart has subsequently become a party to a joint venture with Deep
      Field
      Technologies, an organization that owns 95% of the joint venture, and which
      was
      formerly listed on the OTCBB but is now delisted. David A. Dodge, our former
      Chief Financial Officer, is a member of the board of directors of Automart,
      and
      Kevin Hunter, our former Chief Scientist, was a member of the advisory board
      for
      Automart at the time of the transaction.




98




In
      December 2006, we entered into a twenty-five month consulting agreement with
      SKS
      Consulting of South Florida Corp. (“SKS”) whereby we pay SKS $1,000 per day
      worked on our behalf and 60,000 warrants per month for services rendered by
      George O’Leary and Jay Bonk. In payment of this agreement, we paid SKS $211,500
      and issued stock valued at $13,513 to Mr. O’Leary and stock valued at $4,504 to
      Mr. Bonk during 2007. Mr. O’Leary is on our Board of Directors.




The
      following Director is independent:   James
      J.
      Keil.




The
      following Director is not independent: George
      G.
      O’Leary.




***ITEM
      14.******Principal
      accountant fees and services***




**Audit
      Fees**




The
      aggregate fees billed by Kingery and Crouse, our current independent auditors,
      for the audit of our annual consolidated financial statements for the year
      ended
      December 31, 2007 and for the review of the third quarter financial statements
      for the quarter ended September 30, 2007 were $160,000.




The
      aggregate fees billed by Stonefield Josephson, Inc., our prior independent
      auditors, for the audit of our annual consolidated financial statements and
      reviews of quarterly financial statements for the year ended December 31, 2006
      were $1,706,000. The aggregate fees billed by Stonefield Josephson, Inc. for
      the
      reviews of quarterly financial statements for the quarters ended March 31 and
      June 30, 2007 were $163,000.




**Audit-related
      Fees**




The
      aggregate fees billed by Kingery and Crouse, our current independent auditors,
      for assurance and related services for the year ended December 31, 2007 was
      $0.




The
        aggregate fees billed by Stonefield Josephson, Inc., for other products and
        services, primarily related to consents issued in connection with registration
        statements, during the years ended December 31, 2007 and 2006 were $90,000
        and
        $93,000, respectively.




The
      aggregate fees billed by Stonefield Josephson, Inc., our prior independent
      auditors, for assurance and related services for the years ended December 31,
      2007 and 2006 were $0 and $0, respectively.




**Tax
      Fees**




The
      aggregate fees billed by BDO Seidman LLP, our current principal accountants
      for
      tax compliance, advice, and planning, was $8,500 for the year ended December 31,
      2007.




The
      aggregate fees billed by Wiltshire, Whitley, Richardson & English, our prior
      principal accountants for tax compliance, advice, and planning, were $32,000
      for
      the year ended December 31, 2006.




**All
      Other Fees**




The
      aggregate fees billed by Kingery and Crouse, for other products and services,
      primarily related to review of prior filings and workpapers to transition from
      the prior auditors during the year ended December 31, 2007 were
      $2,000.




The
      aggregate fees billed by APP DE, for other products and services, primarily
      related to compilation and payroll services for our Gavitec business unit,
      during the year ended December 31, 2007 were $40,000.




**Audit
      Committee Pre-approval**




The
      Audit
      Committee of our Board of Directors approves all non-audit services provided
      by
      our primary accountants.




99


**PART
        IV**
 
 ***ITEM
        15.******Exhibits
        and financial statement schedules***
  (a)
        Financial Statements and Schedules
  The
        financial statements are set forth under Item 8 of this Annual Report on
        Form 10-K. Financial statement schedules have been omitted since they are
        either
        not required, not applicable, or the information is otherwise
        included.
  (b)  Exhibits
 
 **Exhibit**
              
              
              
              **Filed**
              
              
              
              
              
              **Filing****Number**
              
              **Description**
              
              **Herewith**
              
              **Form**
              
              **Exhibit**
              
              **Date**3.1
              
              Articles
                  of Incorporation of Dev-Tech Associates, Inc. and amendment
                  thereto
              
              
              
              SB-2
              
              3.1
              
              11/25/963.2
              
              Bylaws
                  of DevSys, Inc.
              
              
              
              SB-2
              
              3.2
              
              11/25/963.3
              
              Restated
                  Certificate of Incorporation of DevSys, Inc.
              
              
              
              SB-2
              
              3.3
              
              11/25/963.4
              
              By-laws
                  of DevSys, Inc.
              
              
              
              SB-2
              
              3.4
              
              11/25/963.5
              
              Articles
                  of Merger and Agreement and Plan of Merger of DevSys, Inc and Dev-Tech
                  Associates, Inc.
              
              
              
              SB-2
              
              3.5
              
              11/25/963.6
              
              Certificate
                  of Merger of Dev-Tech Associates, Inc. into DevSys, Inc.
              
              
              
              SB-2
              
              3.6
              
              11/25/963.7
              
              Articles
                  of Incorporation of Dev-Tech Migration, Inc. and amendment
                  thereto
              
              
              
              SB-2
              
              3.7
              
              11/25/963.8
              
              By-laws
                  of Dev-Tech Migration, Inc.
              
              
              
              SB-2
              
              3.8
              
              11/25/963.9
              
              Restated
                  Certificate of Incorporation of DevSys Migration, Inc.
              
              
              
              SB-2
              
              3.90
              
              11/25/963.1
              
              Form
                  of By-laws of DevSys Migration, Inc.
              
              
              
              SB-2
              
              3.10
              
              11/25/963.11
              
              Form
                  of Agreement and Plan of Merger of Dev-Tech Migration, Inc. into
                  DevSys
                  Migration, Inc.
              
              
              
              SB-2
              
              3.11
              
              11/25/963.12
              
              Form
                  of Certificate of Merger of Dev-Tech Migration, Inc. into DevSys
                  Migration, Inc.
              
              
              
              SB-2
              
              3.12
              
              11/25/963.13
              
              Certificate
                  of Amendment to Certificate of Incorporation of DevSys, Inc. changing
                  our
                  name to NeoMedia Technologies, Inc.
              
              
              
              SB-2
              
              3.13
              
              11/25/963.14
              
              Form
                  of Certificate of Amendment to Certificate of Incorporation of
                  NeoMedia
                  Technologies, Inc. authorizing a reverse stock split
              
              
              
              SB-2
              
              3.14
              
              11/25/963.15
              
              Form
                  of Certificate of Amendment to Restated Certificate of Incorporation
                  of
                  NeoMedia Technologies, Inc. increasing authorized capital and creating
                  preferred stock
              
              
              
              SB-2
              
              3.15
              
              11/25/9610.1
              
              Second
                  Agreement and Amendment to Consulting Agreement between NeoMedia
                  and
                  Thornhill Capital, dated July 22, 2005
              
              
              
              S-3/A
              
              10.3
              
              1/30/0610.2
              
              Standby
                  Equity Distribution Agreement, dated March 30, 2005, between NeoMedia
                  and
                  Cornell Capital Partners
              
              
              
              8-K
              
              16.1
              
              4/1/0510.3
              
              Placement
                  Agent Agreement, dated March 30, 2005, between NeoMedia and Cornell
                  Capital Partners
              
              
              
              8-K
              
              16.2
              
              4/1/0510.4
              
              Escrow
                  Agreement, dated March 30, 2005, between NeoMedia and Cornell Capital
                  Partners
              
              
              
              8-K
              
              16.3
              
              4/1/0510.5
              
              Registration
                  Rights Agreement, dated March 30, 2005, between NeoMedia and Cornell
                  Capital Partners
              
              
              
              8-K
              
              16.4
              
              4/1/0510.6
              
              Promissory
                  Note, dated March 30, 2005, between NeoMedia and Cornell Capital
                  Partners
              
              
              
              8-K
              
              16.5
              
              4/1/0510.7
              
              Security
                  Agreement, dated March 30, 2005, between NeoMedia and Cornell Capital
                  Partners
              
              
              
              8-K
              
              16.5
              
              4/1/0510.8
              
              Warrant
                  dated March 30, 2005, granted by NeoMedia to Thornhill Capital
                  LLC
              
              
              
              S-3/A
              
              10.12
              
              7/18/05
  100
 
 **Exhibit**
              
              
              
              **Filed**
              
              
              
              
              
              **Filing****Number**
              
              **Description**
              
              **Herewith**
              
              **Form**
              
              **Exhibit**
              
              **Date**10.9
              
              Warrant
                  dated March 30, 2005, granted by NeoMedia to Cornell Capital Partners
                  LP
              
              
              
              S-3/A
              
              10.13
              
              7/18/0510.10
              
              Definitive
                  Merger Agreement between NeoMedia and Mobot
              
              
              
              8-K
              
              16.10
              
              2/10/0610.11
              
              Definitive
                  Sale and Purchase Agreement between NeoMedia and 12Snap
              
              
              
              8-K
              
              16.10
              
              2/14/0610.12
              
              Definitive
                  Sale and Purchase Agreement between NeoMedia and Gavitec
              
              
              
              8-K
              
              16.10
              
              2/21/0610.13
              
              Definitive
                  Sale and Purchase Agreement between NeoMedia and Sponge
              
              
              
              8-K
              
              16.10
              
              2/22/0610.14
              
              Promissory
                  Note, dated October 18, 2004, between NeoMedia and Cornell Capital
                  Partners
              
              
              
              S-3/A
              
              10.26
              
              1/30/0610.15
              
              Investment
                  Agreement, dated February 17, 2006 between NeoMedia and Cornell
                  Capital
                  Partners
              
              
              
              8-K
              
              10.1
              
              2/21/0610.16
              
              Investor
                  Registration Rights Agreement, dated February 17, 2006 between
                  NeoMedia
                  and Cornell Capital Partners
              
              
              
              8-K
              
              10.2
              
              2/21/0610.17
              
              Irrevocable
                  Transfer Agent Instruction, dated February 17, 2006, by and among
                  NeoMedia, Cornell Capital Partners and American Stock Transfer
& Trust
                  Co.
              
              
              
              8-K
              
              10.3
              
              2/21/0610.18
              
              Warrant,
                  dated February 17, 2006
              
              
              
              8-K
              
              10.4
              
              2/21/0610.19
              
              Warrant,
                  dated February 17, 2006
              
              
              
              8-K
              
              10.5
              
              2/21/0610.20
              
              Warrant,
                  dated February 17, 2006
              
              
              
              8-K
              
              10.6
              
              2/21/0610.21
              
              Assignment
                  Agreement, dated February 17, 2006 by NeoMedia and Cornell Capital
                  Partners
              
              
              
              8-K
              
              10.7
              
              2/21/0610.22
              
              Assignment
                  of Common Stock, dated February 17, 2006 between NeoMedia and Cornell
                  Capital Partners
              
              
              
              8-K
              
              10.8
              
              2/21/0610.23
              
              Securities
                  Purchase Agreement, dated August 24, 2006, between the Company
                  and Cornell
                  Capital Partners, LP
              
              
              
              8-K
              
              10.1
              
              8/30/0610.24
              
              Investor
                  Registration Rights Agreement, dated August 24, 2006, between the
                  Company
                  and Cornell Capital Partners, LP
              
              
              
              8-K
              
              10.2
              
              8/30/0610.25
              
              Pledge
                  and Security Agreement, dated August 24, 2006, between the Company
                  and
                  Cornell Capital Partners, LP
              
              
              
              8-K
              
              10.30
              
              8/30/0610.26
              
              Secured
                  Convertible Debenture, dated August 24, 2006, issued by the Company
                  to
                  Cornell Capital Partners, LP
              
              
              
              8-K
              
              10.40
              
              8/30/0610.27
              
              Irrevocable
                  Transfer Agent Instructions, dated August 24, 2006, by and among
                  the
                  Company, Cornell Capital Partners, LP and American Stock Transfer
&
                  Trust Co.
              
              
              
              8-K
              
              10.50
              
              8/30/0610.28
              
              A
                  Warrant, dated August 24, 2006
              
              
              
              8-K
              
              10.60
              
              8/30/0610.29
              
              B
                  Warrant, dated August 24, 2006
              
              
              
              8-K
              
              10.70
              
              8/30/0610.30
              
              C
                  Warrant, dated August 24, 2006
              
              
              
              8-K
              
              10.80
              
              8/30/0610.31
              
              D
                  Warrant, dated August 24, 2006
              
              
              
              8-K
              
              10.9
              
              8/30/0610.32
              
              Amendment
                  to Warrant No. CCP-002, dated August 24, 2006, between the Company
                  and
                  Cornell Capital Partners, LP
              
              
              
              8-K
              
              10.1
              
              8/30/0610.33
              
              Amendment
                  to “A” Warrant No. CCP-001, dated August 24, 2006, between the Company
                  and
                  Cornell Capital Partners, LP
              
              
              
              8-K
              
              10.11
              
              8/30/0610.34
              
              Amendment
                  to “B” Warrant No. CCP-002, dated August 24, 2006, between the Company
                  and
                  Cornell Capital Partners, LP
              
              
              
              8-K
              
              10.12
              
              8/30/0610.35
              
              Amendment
                  to “C” Warrant No. CCP-003, dated August 24, 2006, between the Company
                  and
                  Cornell Capital Partners, LP
              
              
              
              8-K
              
              10.13
              
              8/30/0610.36
              
              Letter
                  of intent amongst the Company, Global Emerging Markets, and Jose
                  Sada
              
              
              
              8-K
              
              16.1
              
              8/31/0610.37
              
              Termination
                  Agreement between NeoMedia Technologies, Inc, and Cornell Capital
                  Partners, LP
              
              
              
              S-3/A
              
              10.53
              
              1/30/0710.38
              
              Definitive
                  share purchase and settlement agreement between NeoMedia and Sponge,
                  dated
                  November 14, 2006
              
              
              
              8-K
              
              16.1
              
              11/20/0610.39
              
              Agreement
                  between NeoMedia and FMS
              
              
              
              8-K
              
              16.1
              
              12/7/06
  101
 
 **Exhibit**
              
              
              
              **Filed**
              
              
              
              
              
              **Filing****Number**
              
              **Description**
              
              **Herewith**
              
              **Form**
              
              **Exhibit**
              
              **Date**10.40
              
              Escrow
                  agreement amongst NeoMedia, Mobot, FMS, and Kirkpatrick and Lockhart
                  Nicholson Graham
              
              
              
              8-K
              
              16.2
              
              12/7/0610.41
              
              Description
                  of Special Preference Stock
              
              
              
              8-K
              
              16.3
              
              12/7/0610.42
              
              Promissory
                  note payable from NeoMedia to FMS
              
              
              
              8-K
              
              16.4
              
              12/7/0610.43
              
              License
                  agreement between NeoMedia and Mobot
              
              
              
              8-K
              
              16.50
              
              12/7/0610.44
              
              Securities
                  Purchase Agreement, dated December 29, 2006, between the Company
                  and
                  Cornell Capital Partners, LP
              
              
              
              8-K
              
              10.10
              
              1/8/0710.45
              
              Investor
                  Registration Rights Agreement, dated December 29, 2006, between
                  the
                  Company and Cornell Capital Partners, LP
              
              
              
              8-K
              
              10.20
              
              1/8/0710.46
              
              Secured
                  Convertible Debenture, dated December 29, 2006, issued by the Company
                  to
                  Cornell Capital Partners, LP
              
              
              
              8-K
              
              10.30
              
              1/8/0710.47
              
              Irrevocable
                  Transfer Agent Instructions, dated December 29, 2006, by and among
                  the
                  Company, Cornell Capital Partners, LP and American Stock Transfer
&
                  Trust Co.
              
              
              
              8-K
              
              10.40
              
              1/8/0710.48
              
              A
                  Warrant, dated December 29, 2006
              
              
              
              8-K
              
              10.50
              
              1/8/0710.49
              
              Amendment
                  to Warrant No. CCP-002, dated December 29, 2006, between the Company
                  and
                  Cornell Capital Partners, LP
              
              
              
              8-K
              
              10.6
              
              1/8/0710.50
              
              Amendment
                  to “A” Warrant No. CCP-001, dated December 29, 2006, between the Company
                  and Cornell Capital Partners, LP
              
              
              
              8-K
              
              10.7
              
              1/8/0710.51
              
              Amendment
                  to “B” Warrant No. CCP-002, dated December 29, 2006, between the Company
                  and Cornell Capital Partners, LP
              
              
              
              8-K
              
              10.8
              
              1/8/0710.52
              
              Amendment
                  to “C” Warrant No. CCP-003, dated December 29, 2006, between the Company
                  and Cornell Capital Partners, LP
              
              
              
              8-K
              
              10.9
              
              1/8/0710.53
              
              Amendment
                  to “A” Warrant No. CCP-001, dated December 29, 2006, between the Company
                  and Cornell Capital Partners, LP
              
              
              
              8-K
              
              10.1
              
              1/8/0710.54
              
              Amendment
                  to “B” Warrant No. CCP-001, dated December 29, 2006, between the Company
                  and Cornell Capital Partners, LP
              
              
              
              8-K
              
              10.11
              
              1/8/0710.55
              
              Amendment
                  to “C” Warrant No. CCP-001, dated December 29, 2006, between the Company
                  and Cornell Capital Partners, LP
              
              
              
              8-K
              
              10.12
              
              1/8/0710.56
              
              Securities
                  Purchase Agreement, dated December 29, 2006, between the Company
                  and
                  Cornell Capital Partners, LP
              
              
              
              8-K
              
              10.13
              
              1/8/0710.57
              
              Amendment
                  Agreement I to the Sale and Purchase Agreement between NeoMedia
                  and
                  certain former shareholders of Gavitec AG, dated January 23,
                  2007
              
              
              
              8-K
              
              10.1
              
              1/29/0710.58
              
              Consulting
                  Agreement between the Company and SKS Consulting of South Florida
                  Corp.
              
              
              
              8-K
              
              10.1
              
              2/6/0710.59
              
              Amendment
                  Agreement III to Sale and Purchase Agreement between NeoMedia and
                  certain
                  former shareholders of 12Snap AG, dated March 16, 2007
              
              
              
              8-K
              
              10.1
              
              3/22/0710.60
              
              Securities
                  Purchase Agreement between NeoMedia and Cornell Capital Partners
                  LP, dated
                  March 27, 2007
              
              
              
              8-K
              
              10.1
              
              3/27/0710.61
              
              Investor
                  Registration Rights Agreement between NeoMedia and Cornell Capital
                  Partners LP, dated March 27, 2007
              
              
              
              8-K
              
              10.2
              
              3/27/0710.62
              
              Secured
                  Convertible Debenture, issued by NeoMedia to Cornell Capital Partners,
                  LP,
                  dated March 27, 2007
              
              
              
              8-K
              
              10.3
              
              3/27/0710.63
              
              Irrevocable
                  Transfer Agent Instructions, by and among NeoMedia, Cornell Capital
                  Partners, LP and Worldwide Stock Transfer, dated March 27,
                  2007
              
              
              
              8-K
              
              10.4
              
              3/27/0710.64
              
              Warrant,
                  issued by NeoMedia to Cornell Capital Partners, LP, dated March
                  27,
                  2007
              
              
              
              8-K
              
              10.5
              
              3/27/0710.65
              
              Master
                  Amendment Agreement, by and between NeoMedia and Cornell Capital
                  Partners,
                  LP, dated March 27, 2007
              
              
              
              8-K
              
              10.6
              
              3/27/0710.67
              
              Security
                  Agreement, by and between NeoMedia and Cornell Capital Partners,
                  LP, dated
                  on or about August 24, 2006
              
              
              
              8-K
              
              10.7
              
              3/27/0710.68
              
              Security
                  Agreement, by and between NeoMedia and Cornell Capital Partners,
                  LP, dated
                  March 27,2007
              
              
              
              8-K
              
              10.8
              
              3/27/07
  102
 
 **Exhibit**
              
              
              
              **Filed**
              
              
              
              
              
              **Filing****Number**
              
              **Description**
              
              **Herewith**
              
              **Form**
              
              **Exhibit**
              
              **Date**10.69
              
              Security
                  Agreement (Patent), by and between NeoMedia and Cornell Capital
                  Partners,
                  LP, dated March 27, 2007
              
              
              
              8-K
              
              10.9
              
              3/27/0710.70
              
              Pledge
                  Shares Escrow Agreement, by and between NeoMedia and Cornell Capital
                  Partners, dated March 27, 2007
              
              
              
              8-K
              
              10.10
              
              3/27/0710.71
              
              Sale
                  and Purchase Agreement between NeoMedia and Bernd M.
                  Michael
              
              
              
              8-K
              
              10.1
              
              4/6/0710.72
              
              Completion
                  of Acquisition of Disposition of Assets of BSD Software
                  Inc.
              
              
              
              8-K/A
              
              10.1
              
              6/8/0710.73
              
              Full
                  and Final Settlement Agreement, dated August 14, 2007, by and between
                  NeoMedia, Wayside and Tesscourt
              
              
              
              8-K
              
              99.1
              
              8/17/0710.74
              
              Letter
                  of intent between NeoMedia Technologies, Inc. and Greywolf Entertainment,
                  Inc.
              
              
              
              8-K
              
              16.1
              
              8/21/0710.75
              
              Registration
                  Rights Agreement, by and between NeoMedia and YA Global Investments,
                  L.P.,
                  dated August 24, 2007
              
              
              
              8-K
              
              10.1
              
              8/30/0710.76
              
              Secured
                  Convertible Debenture, issued by NeoMedia to YA Global Investments,
                  dated
                  August 24, 2007
              
              
              
              8-K
              
              10.2
              
              8/30/0710.77
              
              Irrevocable
                  Transfer Agent Instructions, by and among NeoMedia, YA Global Investments,
                  L.P. and Worldwide Stock Transfer, LLC, dated August 24,
                  2007
              
              
              
              8-K
              
              10.3
              
              8/30/0710.78
              
              Warrant
                  issued by NeoMedia to YA Global Investments, L.P., dated August
                  24,
                  2007
              
              
              
              8-K
              
              10.4
              
              8/30/0710.79
              
              Repricing
                  Agreement, by and between NeoMedia and YA Global Investments, L.P.,
                  dated
                  August 24, 2007
              
              
              
              8-K
              
              10.5
              
              8/30/0710.80
              
              Security
                  Agreement, by and between NeoMedia and YA Global Investments, L.P.,
                  dated
                  August 24, 2007
              
              
              
              8-K
              
              10.6
              
              8/30/0710.81
              
              Security Agreement (Patent),
                  by and between NeoMedia and YA Global Investments, L.P., dated
                  August 24,
                  2007
              
              
              
              8-K
              
              10.7
              
              8/30/0710.82
              
              Sale
                  and Purchase Agreement between NeoMedia and Greywolf Entertainment,
                  Inc.,
                  dated October 26, 2007
              
              
              
              8-K
              
              10.1
              
              11/5/0710.83
              
              Definitive
                  purchase agreement between NeoMedia Technologies, Inc. and Micro
                  Paint
                  Holdings Limited, dated November 1, 2007.
              
              
              
              8-K
              
              10.1
              
              11/7/0710.84
              
              Distribution
                  agreement between NeoMedia Technologies, Inc. and Micro Paint Holdings
                  Limited, dated November 1, 2007.
              
              
              
              8-K
              
              16.1
              
              11/7/0710.85
              
              Sale
                  of the Assets of the Micro Paint Repair Business Unit.
              
              
              
              8-K
              
              10.1
              
              11/21/0710.86
              
              Share
                  Purchase and Transfer Agreement, dated January 31, 2008, by and
                  between
                  NeoMedia and Bernd Michael.
              
              
              
              8-K
              
              10.1
              
              2/8/0710.87
              
              Arbitration
                  Agreement, dated January 31, 2008, by and between NeoMedia and
                  Bernd
                  Michael.
              
              
              
              8-K
              
              10.1
              
              2/8/0710.88
              
              Employment
                  Agreement, dated January 1, 2008, by and between NeoMedia and Frank
                  Pazera, CFO
              
              X14
              
              Code
                  of Ethics
              
              
              
              10-K
              
              14.1
              
              4/3/0721
              
              Subsidiaries
                  of registrant
              
              X23.1
              
              Consent
                  of Kingery & Crouse, independent Registered Public Accounting Firm of
                  NeoMedia Technologies, Inc.
              
              X23.2
              
              Consent
                  of Stonefield Josephson, Inc., former independent Registered Public
                  Accounting Firm of NeoMedia Technologies, Inc.
              
              X
  103
 
 **Exhibit**
              
              
              
              **Filed**
              
              
              
              
              
              **Filing****Number**
              
              **Description**
              
              **Herewith**
              
              **Form**
              
              **Exhibit**
              
              **Date**31.1
              
              Certification
              
              X31.2
              
              Certification
              
              X32.1
              
              Certification
              
              X32.2
              
              Certification
              
              X
  104
  **SIGNATURES**
 
 In
        accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
        the
        Registrant has duly caused this report to be signed on our behalf by the
        undersigned, thereunto duly authorized.
 
 **NEOMEDIA
                  TECHNOLOGIES, INC.**Date:
                  March 27, 2008By:
              */s/
                  William J. Hoffman*William
                  J. HoffmanChief
                  Executive Officer*/s/
                  Frank J. Pazera*Frank
                  J. PazeraChief
                  Financial Officer
  In
        accordance with the requirements of the Securities Exchange Act of 1934,
        this
        report has been signed below by the following persons on behalf of the
        registrant and in the capacities indicated on April 2, 2007.
 
 **Signatures**
              
              **Title**
              
              **Date***/s/
                  William J. Hoffman*
              
              Chief
                  Executive Officer
              
              March
                  27, 2008William
                  J. Hoffman*/s/
                  Frank J. Pazera*
              
              Chief
                  Financial Officer
              
              March
                  27, 2008Frank
                  J. Pazera*/s/
                  James J. Keil*
              
              Director
              
              March
                  27, 2008James
                  J. Keil*/s/
                  George G. O’Leary*
              
              Director
              
              March
                  27, 2008George
                  G. O’Leary