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, 2008





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
              incorporation or
      organization)
            (I.R.S.
      EmployerIdentification
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, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
accelerated filer o           Accelerated
filer o           Non-accelerated
filer oSmaller 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, 2008 based upon the closing price was approximately $3.4 million.





The
number of outstanding shares of the registrant’s Common Stock on April 1, 2009
was 1,696,581,883.


















NeoMedia
Technologies, Inc.


INDEX




PagePART
      IItem 1.
                        Business.
                        3Item 1A.
                        Risk
      Factors.
                        9Item 1B.
                        Unresolved
      Staff Comments.
                        17Item 2.
                        Properties.
                        17Item 3.
                        Legal
      Proceedings.
                        18Item 4.
                        Submission
      of Matters to a Vote of Security Holders.
                        19PART
      IIItem 5.
                        Market
      for Registrant’s Common Equity, Related Stockholder Matters
      andIssuer
      Purchases of Equity Securities.
                        19Item 6.
                        Selected
      Financial Data.
                        20Item 7.
                        Management’s
      Discussion and Analysis of Financial Condition and Results
    ofOperations.
                        20Item 7A.
                        Quantitative
      and Qualitative Disclosures about Market Risk.
                        32Item 8.
                        Financial
      Statements.
                        33Item 9.
                        Changes
      in and Disagreements with Accountants on Accounting and
      FinancialDisclosure.
                        74Item 9A.
                        Controls
      and Procedures.
                        74Item 9B.
                        Other
      Information.
                        76PART
      IIIItem 10.
                        Directors,
      Executive Officers and Corporate Governance.
                        77Item 11.
                        Executive
      Compensation.
                        80Item 12.
                        Security
      Ownership of Certain Beneficial Owners and Management andRelated
      Stockholder Matters.
                        84Item 13.
                        Certain
      Relationships and Related Transactions, and Director
      Independence.
                        86Item 14.
                        Principal
      Accountant Fees and Services.
                        86Part
      IVItem 15.
                        Exhibits
      and Financial Statement Schedules.
                        87SIGNATURES
                        
                        93




2




NeoMedia
Technologies, Inc.




PART
      I





ITEM
1. Business





In
this Annual Report on Form 10-K, unless otherwise indicated, the words “we,”
“us,” and “our” refer to NeoMedia Technologies, Inc. and all entities owned or
controlled by NeoMedia Technologies, Inc.  All references to
“NeoMedia” or the “Company” in this Annual Report 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.





Statements
contained in this Annual Report 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 our other filings with the U.S.
Securities and Exchange Commission.  All tabular amounts are stated in
thousands except shares and per share data. All amounts, herein, are stated in
U.S. Dollars unless otherwise noted.




Overview





NeoMedia
is harnessing the power of the mobile phone in a new and powerful way by
leveraging barcodes (printed symbols) as a seamless mechanism to link mobile
phone users to the power of the mobile internet.





With our
state-of-the art barcode reading technology, NeoMedia transforms mobile phones
with cameras into barcode scanners which provide instant access to mobile web
content whenever a barcode is scanned. A barcode makes any medium immediately
interactive – the code links an individual to the multimedia capability of the
mobile Web, anytime, anywhere. Combining this technology with advanced analytics
and reporting capabilities revolutionizes the way advertisers market to mobile
consumers.





NeoMedia
provides the infrastructure to make mobile barcode scanning and its associated
commerce easy, universal, and reliable – worldwide. Our barcode ecosystem
software tools include, NeoReader, which reads and transmits data from 1D and 2D
barcodes to its intended destination. Our Code Management (NeoSphere) and Code
Clearinghouse (NeoRouter) platforms create, connect, record, and transmit the
transactions embedded in the barcodes, like web-URLs, text messages (SMS), and
telephone calls, ubiquitously and reliably.





In order
to provide complete mobile marketing solutions, NeoMedia also offers barcode
scanning hardware that reads barcodes displayed on mobile phone screens.
NeoMedia provides infrastructure solutions to enable mobile ticketing and
couponing programs – including scanner hardware and system support software for
seamless implementation.





This
state-of-the art technology is supported by our impressive array of patents. In
addition, NeoMedia has an open standards philosophy designed to make integration
and use of the technology easy for handset manufacturers, mobile operators and
advertisers; and the user experience safe, reliable and interoperable for
consumers.




3




We
are  Delaware corporationa and were founded in 1989 and based in
Atlanta, Georgia, NeoMedia currently has 30 active patents spanning 13
countries, with 29 additional patents pending.




In 2006,
we began divesting our non-core businesses in order to focus our efforts on the
area that we believe will deliver the most value, our barcode ecosystem business
and the related intellectual property. On April 4, 2007, we sold our 12Snap
business unit and on October 30, 2007 we completed the sale of our Telecom
Services business. On November 15, 2007, we completed the sale of our Micro
Paint Repair business unit, 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.  These divestitures have been accounted for as
discontinued operations and our consolidated financial information presents the
net effect of these discontinued operations for all periods presented separate
from the results of our continuing operations. As a consequence of these
divestitures, we now evaluate our business as a single unit – our code-reading
business and the related intellectual property. 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.




During
2008 and early 2009 we have made significant changes to strengthen our
management team. In June 2008, Mr. Iain A. McCready became our Chief Executive
Officer and Chairman of our Board of Directors; in September 2008, Mr. Michael
W. Zima became our Chief Financial Officer and Secretary; in January 2009, Ms.
Laura Marriott became a member of our Board of Directors; and in March 2009 Mr.
Dean Wood became our Vice President - Business Development.




As of
December 31, 2008 we have two active wholly-owned subsidiaries: NeoMedia Europe,
AG, (formerly known as Gavitec, AG and hereinafter referred to as “NeoMedia
Europe”) incorporated in Germany, and NeoMedia Migration, Inc., incorporated in
Delaware.  In addition, there are several dormant subsidiaries which
are listed in Exhibit 21.1.




Products
and Services




We
provide a complete suite of software and hardware for processing 1D and 2D
barcodes in the mobile environment, and enabling applications in mobile
marketing, mobile couponing, mobile ticketing and mobile payment.




Our
barcode ecosystem products include; our software products designed to read 1D
and 2D barcodes using camera and web enabled wireless communications devices; to
create unique barcodes; to create and manage advertising campaigns using
barcodes; to act as a gateway managing activity between consumers and
advertisers; and to gather and interpret the results of advertising campaigns.
These products include:





·
            NeoReaderTM –
      a barcode scanning application that transforms mobile camera phones into
      universal barcode readers. Users simply launch the NeoReader application
      on their mobile phone, scan the barcode and are linked directly to a
      specific web page. There they can access real-time product or service
      information, download content or complete a mobile commerce transaction.
      Any product, magazine/newspaper, retail display or billboard with a 2D
      code provides direct access to the multimedia capability of the mobile
      web...anytime, anywhere. NeoReaderTM
      features our patented resolution technology with an ultra-small footprint
      and platform-independent algorithms.  This application provides
      interoperability among 2D codes in the market and operates on a variety of
      handsets.




·
            NeoReader
      Enterprise & Lavasphere Enterprise – software solutions for commercial
      applications where mobile phones are utilized to manage products through
      manufacturing or distribution channels. These applications equip mobile
      devices to read 1D & 2D barcodes with their built-in camera. The
      mobile phones become universal code readers, allowing users to “track and
      trace” products and services anytime,
anywhere




These
solutions are ideal tools for a variety of business applications including data
collection, logistics, price comparison, content linking, and accessing
information on the go. They provide the ability to capture lifecycle data for
products and services in real time and to share relevant data in a secure and
selective manner.




4




o
            NeoReader
      Enterprise: a standard solution utilizing our NeoReader technology to
      route transactions to a customer’s existing mobile web
      application


o
            Lavasphere
      Enterprise: a customized solution using LavaSphere code reading
      technologies for functions that are too complex to be handled by a mobile
      web application




·
            NeoSphere  -
      a web-based campaign management system that allows users (typically
      agencies & advertisers) to easily develop, launch & manage a
      mobile code campaign by delivering three critical
    components:




o
            Code
      Creation tools




o
            Campaign
      Management tools




o
            Reporting
      & Analytics




NeoSphere
offers a customizable feature that uses rules to deliver dynamic content to a
single code based on preferences like language, gender, age and
location.




·
            NeoMedia
      Code Routing Service – is used in conjunction with NeoSphere and includes
      an intelligent gateway configurable to support global interoperability and
      a code resolution server designed to retrieve and deliver any form of
      internet content to mobile phones worldwide.  Our Code
      Resolution Service uniquely
provides:




o
            Interoperability
      with other campaign management
systems




o
            Access
      to all bar code enabled handsets
worldwide




o
            Data
      tracking, collection, and monetization of each mobile
      transaction




·
            NeoMedia
      MSS –  MSS is a completely stand-alone system supporting
      third-party 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
      third-party ticketing and couponing
systems




o
            Providing
      marketing databases 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




Our
hardware products read, interpret and transmit barcodes and barcode information
to facilitate related transactions. These products include:





·
            EXIO
      II - introduced at the end of 2008, is a multi-application smart scanner
      for mobile couponing and ticketing applications. The cutting-edge
      technology of the EXIO II smart scanner allows customers to redeem mobile
      tickets and coupons making it easy and affordable to use creative new
      mobile marketing text messaging programs to track and reach customers.
      EXIO II is the evolution of EXIO® and combines all the advantages of EXIO®
      with improved reading capabilities and a programmable Linux platform that
      was developed based on customer feedback we received during our more that
      10 years of operation. The EXIO II is the ideal tool for one-to-one
      marketing applications and highly targeted customer campaigns. With its
      color LCD touch-screen and video playback capability, the EXIO II can be
      customized to display targeted content and brand messages. During 2008 and
      2007 we offered EXIO®, a complete solution including printer, display,
      keypad and GSM/GPRS module. EXIO® read and processed 2-D symbologies such
      as Data Matrix from mobile phone displays as well as printed 1D barcodes.
      Utilizing a high-speed Digital Signal Processor (DSP) and a
      high-resolution camera, EXIO® automatically recognizes 2D 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.




5




·
            XELIA
      – introduced at the end of 2008, is a versatile desktop scanner that
      incorporates Honeywell Adaptus® Imaging Technology 5.0 to enable
      high-performance reading of 2D codes from mobile phone displays. Equipped
      with a high-speed Digital Signal Processor (DSP), XELIA automatically
      recognizes 2D codes sent as text messages (SMS, MMS or EMS) as well as
      printed 1D barcodes. It processes rapidly and with extreme accuracy. Its
      compact size and sleek design make XELIA ideal for counter-top use at a
      point-of-sale or service desk. It can also be used for sweepstakes, mobile
      advertising (tickets and coupons) and boarding passes.During 2008 and 2007
      we offered our modelMD-20 – 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.




Our
legacy software products include:




·
            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 at a
      number of well known businesses.




·
            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 are
focusing our current marketing and sales efforts on the Americas and
Europe. We believe our products and services can be marketed to potential
customers world-wide.




Data
Centers




As of
December 31, 2008, we do not own any data centers.  We have servers
located in a data center in Miami, Florida, 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.




6




International
Revenue




Our
international revenues totaled $0.7 million and $1.3 million for the years ended
December 31, 2008 and 2007, respectively.  International revenues are
denominated and paid primarily in Euros and represent revenues from
international customers.




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.




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, 2008, we have 30
active patents spanning 13 countries, with 29 additional patents pending. 
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.





On
February 17, 2009 we received a notice from the United States Patent and
Trademark Office that a reexamination certificate would be issued for our United
States Patent No. 6,199,048 (“the ‘048 Patent”).  The ‘048 Patent was under
reexamination at the request of third party Electronic Frontier Foundation, and
the Patent Office had subsequently ruled that the inventions as described in the
claims amended during the reexamination are patentable over the prior
art.





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.”




7




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.




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
April 1, 2009, we had 25 employees, including 11 employees managed from our
headquarters in Atlanta, Georgia, and 14 employees managed from our offices in
Würseln, Germany. 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 through the date of their
disposal and/or sale.




Research
and Development




We have
incurred $2.0 million and $1.9 million in research and development expenses
during the years ended December 31, 2008 and 2007, respectively. None of these
expenses were directly borne or reimbursed by our customers.





8




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;




·
            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
(“US GAAP”), which contemplate our continuation as a going
concern.  Net loss for the years ended December 31, 2008 and 2007 was
$8.0 million and $40.6 million, respectively. Net cash used for operations
was $6.7 million and $8.3 million for the years ended December 31,
2008 and 2007, respectively.  We also have an accumulated deficit of
$211.3 millionand
a working capital deficit of $68.2 millionas
of December 31, 2008.




We have a
continuing obligation as of December 31, 2008 of $4.6 million relating to a
purchase price guarantee associated with our prior acquisition of 12Snap, which
we sold on April 4, 2007.




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




We
do not have any commitments for capital, and we need to raise additional funds
in order to continue our operations.




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 during
2009.  There can be no assurances that such funding sources will be
available.




We had
cash balances of approximately $1.3 million as of December 31, 2008. On July 29,
2008 we entered into a Securities Purchase Agreement with YA Global Investments,
L.P., (“YA Global”) which provided for the sale of convertible debentures
to YA Global to fund our operations. On April 6, 2009 we amended that agreement
and completed the first amended closing under that amended agreement. This first
amended closing provided us with $0.5 million of additional funding. As of April
7, 2009 we had cash balances of approximately $0.7 million. The amended
agreement also provides YA Global with an option to provide us with up to an
additional $0.5 million in additional funding.  Should YA Global not
choose provide us with capital financing, as they have in the past; or we do not
find alternative sources of financing to fund our operations; or if we are
unable to generate significant product revenues, we only have sufficient funds
to sustain our current operations through April 30, 2009.




9




We have
warrant agreements outstanding which can provide for additional funding
depending upon the market value of our common stock. The market value of our
stock may not increase to levels where we can force the exercise of enough of
our outstanding warrants to generate material operating capital or support the
sale of shares underlying such warrants or other funding sources.




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 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, which could cause us to discontinue our operations.




During
2008 and early 2009 we have made significant changes to strengthen our
management team. In June 2008, Mr. Iain A. McCready became our Chief Executive
Officer and Chairman of our Board of Directors; in September 2008, Mr. Michael
W. Zima became our Chief Financial Officer and Secretary; in January 2009, Ms.
Laura Marriott became a Member of our Board of Directors; and in March 2009 Mr.
Dean Wood became our Vice President - Business Development. If our management
and Board of Directors are unable to attract and retain management to execute
our plans, then we may fail to grow our revenues, contain costs and achieve
profitability and positive cash flows.




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 disposed of other lines of business, our
past operating results reflect the costs of integrating these acquisitions, as
well as revenues from operations which have now been sold, and our 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 internal 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 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 material weaknesses in our
internal control as of December 31, 2008.  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.,
Controls and Procedures, of this Annual Report. 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, because the requirements of Section 404 are
ongoing and apply for future years, beginning in 2009, our auditors will be
required to attest to the adequacy of our assessment and 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, 2008. 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.




10




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 at which 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 due at December 31, 2007 of $4.5 million in purchase price guarantees,
the entire balance of which is currently due and payable. As of December 31,
2008, the balance due increased to $4.6 million and the parties to whom the
balance is due have not come forward to claim or otherwise resolve the balance
due.




All
of our assets are pledged to secure certain debt obligations, which if we fail
to repay, could result in the foreclosure upon our assets.




Pursuant
to our secured convertible debentures issued to YA Global, in the principal
amounts of $7.5 million, $5.0 million, $2.5 million, $1.8 million, $2.4 million,
$2.3 million and $0.5 million dated March 27, 2007, August 24, 2006, December
29, 2006, August 24, 2007, July 29, 2008, October 28, 2008 and April 6, 2009,
respectively, we were required to secure repayment of the convertible debentures
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.  Effective on December 31, 2008, we
received a waiver from YA Global, of several events of non-compliance related to
the debentures and related financial instruments. However, in the future we
could again become non-compliant with the provisions of those instruments and be
required to accrue the related penalties. On April 6, 2009, in connection with
the amendment of our SPA with YA Global we were granted additional waivers.
There can be no assurance that YA Global will continue to grant us waivers for
past, present or future events of non-compliance.




There
is limited information upon which investors can evaluate our business because
the physical-world-to-internet market rapidly changing and
developing.




The
physical-world-to-internet market in which we operate is a rapidly changing and
developed market.  Consequently, we have 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.




11




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.




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 YA Global 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 the 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 years ended December 31, 2008 and 2007, we recognized a loss in the amount
of $2.3 million and $7.6 million, respectively, 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 adjust the
carrying value of these 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 or credits, based on
movements 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, which could have a materially
adverse effect on our business.




At
December 31, 2008, approximately 74% 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 the excess of the
purchase price over the fair value of tangible assets acquired in our purchase
of NeoMedia Europe.  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.




Our
emerging products and services have limited history and may not result in
success, which could have a materially adverse effect on our
business.




To date,
we have conducted limited marketing efforts directly relating to our emerging
technology products.  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, which could have a materially adverse effect on our
business.




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 may require a
significant amount of customization. Additionally, changes to the underlying
operating systems used by our clients may cause us to expend resources to update
our systems in order to conform to new or upgraded operating systems. Such
client and customer-specific customization, or changes imposed by upgrades to
operating systems, 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 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.




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.




14




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 stockholders, who were our founders, 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”.




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.




15




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.




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;




16




·
            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.




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 allows 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, 2008, we had leases on two facilities, our corporate headquarters
in Atlanta, Georgia, and NeoMedia Europe’s office in Würseln, Germany.




17




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
$15,500.




NeoMedia
Europe is operated from a facility in Würseln, Germany, where
approximately 4,400 square feet are leased under the terms of a written lease
which expires on September 30, 2010, with monthly rent totaling approximately
$6,000.




ITEM 3. 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 are unlikely to have a
material adverse effect on our financial position or operating
results.







Electronic
Frontier Foundation- In October 2007, we received a communication from the United States
Patent and Trademark Office (USPTO) stating that a request by the Electronic
Frontier Foundation for Ex-Parte Reexamination of the ‘048 Patent had been
granted. The reexamination was terminated in favor of NeoMedia when the U.S.
Patent and Trademark office issued a Notice of Intent to Issue Ex Parte
Reexamination Certificate on February 17, 2009, which indicated allowability of
the pending claims of the ‘048 Patent.





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 had 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 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. Currently the case has been stayed due to the reexamination
of the ‘048 Patent (see Electronic Frontier Foundation, above). Based on the
USPTO’s recent Notice of Intent to Issue Ex Parte Reexamination Certificate, we
have provided the court with a joint summary status of the case.  We are
now awaiting a status hearing date.





Rothschild Trust
Holdings, LLC– On September 19, 2008, we were served a complaint by
Rothschild Trust Holding, LLC alleging we owed royalty payments for the use of
certain patents. On February 25, 2009 we filed an answer to the complaint, and
no discovery has taken place to date. We believe the complaint is without
merit.





Scanbuy and
Marshall Feature Recognition, LLC – On or around December 19, 2008, we
received a complaint filed in the Eastern District of Texas by Scanbuy and
Marshall Feature Recognition, LLC (“MFR”) alleging infringement of certain
patents. On January 8, 2009, we filed an answer denying infringement and
asserting that the patents of Scanbuy and MFR are invalid. We believe the
complaint is without merit.





Ephrian Saguy,
iPoint – media, plc. and iPoint – media, Ltd. – On or around March 5,
2008 we received a summons and notice that the plaintiffs had commenced a third
party action in the Magistrate Court in Tel-Aviv-Jaffa, Israel seeking damages
of approximately $2.2 million from us and YA Global for breach of contract and
unjust enrichment related to services provided by iPoint and investment by us
and YA Global. We have entered into an assignment agreement with YA Global and
have retained legal counsel in Israel to represent us. At this time we are
unable to determine a probable outcome in this matter.





Federal Aviation
Administration- On November 25, 2008 we settled the outstanding claim in
this matter for $7,500.




18





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.OB”. As of December 31, 2008, we had 1,371,904,960 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:




2008
                                        
                                        
                                        2007High
                                        
                                        
                                        Low
                                        
                                        
                                        High
                                        
                                        
                                        LowFirst
      quarter
                                        
                                        $
                                        0.0130
                                        
                                        
                                        $
                                        0.0065
                                        
                                        
                                        $
                                        0.0600
                                        
                                        
                                        $
                                        0.0400Second
      quarter
                                        
                                        $
                                        0.0075
                                        
                                        
                                        $
                                        0.0020
                                        
                                        
                                        $
                                        0.0700
                                        
                                        
                                        $
                                        0.0300Third
      quarter
                                        
                                        $
                                        0.0109
                                        
                                        
                                        $
                                        0.0020
                                        
                                        
                                        $
                                        0.0300
                                        
                                        
                                        $
                                        0.0200Fourth
      quarter
                                        
                                        $
                                        0.0030
                                        
                                        
                                        $
                                        0.0011
                                        
                                        
                                        $
                                        0.0300
                                        
                                        
                                        $
                                        0.0100





The
following table presents certain information with respect to our equity
compensation plans as of December 31, 2008:




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 plansapproved
      by security holders
                                  
                                  
                                  99,736,856
                                  
                                  
                                  $
                                  0.02
                                  
                                  
                                  
                                  112,287,295Equity
      compensation plansnot
      approved by security holders
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Total
                                  
                                  
                                  99,736,856
                                  
                                  
                                  $
                                  0.02
                                  
                                  
                                  
                                  112,287,295




We have
five stock option plans, the 2005 Stock Option Plan (the “2005 Plan”), the 2003
Stock Option Plan (the “2003 Plan”), 2003 Stock Incentive Plan (the “2003
Incentive Plan”), the 2002 Stock Option Plan (the “2002 Plan”), the 1998 Stock
Option Plan (the “1998 Plan”), collectively referred to as the “Option
Plans”.  Options issued under these Option Plans have a term of 10
years.  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 would be issued from our authorized and unissued shares.




Performance
Graph




Not
required for smaller reporting company.




19





Recent
Sales of Unregistered Securities; Use of Proceeds from Registered
Securities




On
January 21, 2008 we issued 216,465 shares of our common stock to SKS Consulting
of South Florida, Corp. (“SKS”) as partial payment for consulting services
provided by Mr. George G. O’Leary who is also a member of our Board of
Directors. The shares were valued at $0.011 per share, which was the fair value
at the time of issuance.




On
January 21, 2008 we issued 72,155 shares of our common stock to SKS as partial
payment for consulting services provided by Mr. Jay Bonk who is an employee of
SKS. The shares were valued at $0.011 per share, which was the fair value at the
time of issuance.




On April
17, 2008 we issued 218,937 shares of our common stock to SKS as partial payment
for consulting services provided by Mr. George G. O’Leary who is also a member
of our Board of Directors. Because the fair value of the shares was less than
their par value, the shares were valued at their par value of $0.01 per
share.




On April
17, 2008 we issued 72,979 shares of our common stock to SKS as partial payment
for consulting services provided by Mr. Jay Bonk who is an employee of SKS.
Because the fair value of the shares was less than their par value, the shares
were valued at their par value of $0.01 per share.




On
December 16, 2008, we issued 1,680,000 shares of common stock to Telegraph Hill
Group, LLC as partial payment for the advisory board services of Managing
Partner, Mr. Clarence Wesley.  Because the fair value of the shares
was less than their par value, the shares were valued at their par value of
$0.01 per share.




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.




Holders




On April
1, 2009 the closing price of our common stock as reported on the OTCBB was
$0.0321 per share and there were approximately 13,300 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 ofOperations





Overview





NeoMedia
provides the infrastructure to make mobile barcode scanning and its associated
commerce easy, universal, and reliable – worldwide. Our barcode ecosystem
products including mobile barcode reading software, NeoReader, reads and
transmits data from 1D and 2D barcodes to its intended destination. Our Code
Management (NeoSphere) and Code Clearinghouse (NeoRouter) platforms create,
connect, record, and transmit the transactions embedded in the barcodes, like
web-URLs, text messages (SMS), and telephone calls, ubiquitously and
reliably.





In order
to provide complete mobile marketing solutions, NeoMedia also offers barcode
scanning hardware that reads barcodes displayed on mobile phone screens.
NeoMedia provides infrastructure solutions to enable mobile ticketing and
couponing programs – including scanner hardware and system support software for
seamless implementation.




20




This technology
is supported by our patents. In addition, NeoMedia has an open standards
philosophy designed to make integration and use of the technology easy for
handset manufacturers, mobile operators and advertisers; and the user experience
safe, reliable and interoperable for consumers.




In 2006,
we began divesting our non-core businesses in order to focus our efforts on the
area that we believe will deliver the most value - our code-reading business and
the related intellectual property. In the fourth quarter of 2006, we disposed of
two subsidiaries, Mobot and Sponge. During April 2007, we sold the 12Snap
business unit and in October 2007, we completed the sale of our Telecom Services
business.  In November 2007, we sold our Micro Paint Repair business
unit.  As a consequence of these divestitures, we evaluated our
continuing business as one consolidated business for the entire 2007 reporting
year.  These divestitures were integral to our turnaround plan and 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.  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.




During
2008 and early 2009 we have made significant changes to strengthen our
management team. In June 2008, Mr. Iain A. McCready became our Chief Executive
Officer and Chairman of our Board of Directors; in September 2008, Mr. Michael
W. Zima became our Chief Financial Officer and Secretary; in January 2009, Ms.
Laura Marriott became a Member our Board of Directors; and in March 2009 Mr.
Dean Wood became our Vice President - Business Development.




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 US 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, derivative liabilities 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. 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.




21




·
            Derivative
      Financial Instruments – 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 financial instruments, such as warrants and the embedded
      conversion features of our convertible preferred stock and convertible
      debentures, which 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 purposes, even when the terms of the
      underlying contracts do not provide for net-cash
      settlement.  Derivative financial instruments are initially
      recorded, and continuously carried, at fair
  value.




Determining
the fair value of these complex 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.  The use of different assumptions
could have a material effect on the estimated fair value amounts.




For
certain of our convertible debentures, we have elected not to separately account
for the embedded conversion feature as a derivative instrument but to account
for the entire hybrid instrument at fair value in accordance with FAS 155
“Accounting for Certain Hybrid Financial Instruments”.  For the
remaining convertible debentures and our convertible preferred stock, the
underlying instruments are carried at amortized cost and the embedded conversion
feature is accounted for separately at fair value in accordance with FAS 133
“Accounting for Derivative Instruments and Hedging Activities” and EITF Issues
00-19 “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock”  and 07-5 “Determining
Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own
Stock”.




·
            Financial
      Instruments and Concentrations 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, cash surrender value of life insurance policy,
      accounts payable, accrued expenses, notes payable, and other current
      liabilities approximate their fair values due to their short-term nature.
      Our convertible preferred stock and convertible debentures are either
      recognized as hybrid financial instruments and carried at fair value in
      accordance with FAS 155 or are carried at amortized cost, with separate
      recognition of the fair value of any embedded derivative instrument
      liabilities, including the conversion feature.  At December 31,
      2008, the face value of debentures carried at amortized cost exceeded
      their carrying amount by approximately $1.1 million. At December 31, 2008
      the face value of debentures carried at fair value exceeded their carrying
      amount by approximately 9.0
million.




·
            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 collectability is
      reasonably assured.  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 criteria, and recognize that
      revenue when the criteria are met.




22




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 collectability 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.
      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 collectability
      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,
      2008 and 2007, our bad debt recovery was $58,000 and expense was $78,000,
      respectively.




·
            Inventory –Inventories are stated at the 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, 2008 and 2007, we recorded a reserve
      for inventory shrinkage and obsolescence of $81,000 and $80,000,
      respectively.




·
            Stock-based
      Compensation –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-Scholes-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.




Although
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.




·
            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 –Deferredtax
      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 realized. We have recorded a 100%
      valuation allowance as December 31, 2008 and
  2007.




23




·
            Foreign
      Currency Translation – the U.S. dollar is the functional currency
      of our operations, except for our operations at NeoMedia Europe, which use
      the Euro as their functional currency.  Foreign currency
      transaction gains and losses are reflected in income. Translation gains
      and losses arising from translating the financial statements of NeoMedia
      Europe into U.S. dollars for reporting purposes are included in
      “Accumulated other comprehensive income
(loss).”




Discontinued
Operations




Our
consolidated financial information presents the net effect of discontinued
operations for all periods presented separate from the results of our continuing
operations in accordance with FAS 144 “Accounting for the Impairment or Disposal
of Long-Lived Assets”.




AutoXperience




As of
November 30, 2007, we discontinued the operations of
AutoXperience.  We retained all liabilities of AutoXperience,
including 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.  As of December 31, 2008, these
liabilities have been substantially settled.




During
the year ended December 31, 2007, we recognized a loss of $0.9 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. (“Buyers”), pursuant to which Buyers purchased from us all the
assets of NeoMedia Micro Paint Repair, exclusive of the assets of
AutoXperience.




The total
selling price for the assets was $2.2 million, of which $1.5 million in cash and
$0.2 million in stock of Buyers was received at closing.  The
remaining purchase price of $0.5 million was held in escrow pending the
settlement of post-closing items. The escrow amount was partially settled in
2008 as an accommodation for several post closing items including an allowance
for damaged inventory related to the sale. However, $0.2 million was determined
to be uncollectible and reserved in 2008. This reserve was included in our loss
from discontinued operations for the year ended December 31, 2008. At September
30, 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. During the year ended December 31,
2008 we recognized a loss from discontinued operations of $258,000 for various
incidental and wind-down expenses related to NeoMedia Micro Paint
Repair.




On
November 25, 2008 we settled a claim brought by the Federal Aviation
Administration related to a spillage of a small quantity of MPR’s products in
2007 for $7,500. This settlement was included in our loss from discontinued
operations in 2008.




NeoMedia
Telecom Services




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 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.




24




12Snap




On April
4, 2007, we entered into an Asset Purchase Agreement with Bernd Michael, a
private investor and former shareholder of 12Snap prior to our acquisition of
12Snap, pursuant to which Mr. Michael 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 Mr. Michael had 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 and
realized these proceeds on January 28, 2008.




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 a group of
former shareholders 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 a 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.  During the year ended
December 31, 2008 we recognized a loss from discontinued operations of $65,000
for various incidental and wind-down expenses related to 12 Snap. At December
31, 2008, we have a continuing purchase price obligation of $4.6 million related
to our original purchase of 12Snap.





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.


Year
      Ended December 31,2008
                                
                                
                                2007(in
      thousands)
                                
                                
                                (in
      thousands)Net
      sales
                                
                                $
                                1,046
                                
                                
                                $
                                1,864Cost
      of sales
                                
                                
                                1,257
                                
                                
                                
                                1,431Gross
      profit (deficit)
                                
                                
                                (211
                                )
                                
                                
                                433Sales
      and marketing expenses
                                
                                
                                2,177
                                
                                
                                
                                2,582General
      and administrative expenses
                                
                                
                                5,406
                                
                                
                                
                                7,082Research
      and development costs
                                
                                
                                1,997
                                
                                
                                
                                1,857Impairment
      charge
                                
                                
                                271
                                
                                
                                
                                3,065Operating
      loss
                                
                                
                                (10,062
                                )
                                
                                
                                (14,153
                                )Gain
      on extinguishment of debt
                                
                                
                                2,405
                                
                                
                                
                                347Gain
      (loss) from change in fair value of hybrid financial
      instruments
                                
                                
                                3,562
                                
                                
                                
                                (7,824
                                )Loss
      from change in fair value of derivative financial
    instruments
                                
                                
                                (2,339
                                )
                                
                                
                                (7,640
                                )Other
      interest expense, net
                                
                                
                                (1,262
                                )
                                
                                
                                (2,634
                                )Loss
      from continuing operations
                                
                                $
                                (7,696
                                )
                                
                                $
                                (31,904
                                )Loss
      per share from continuing operations,basic
      and diluted
                                
                                $
                                (0.01
                                )
                                
                                $
                                (0.03
                                )





25





The loss
from continuing operations for the year ended December 31, 2008 was $7.7
million, or $0.01 per share basic and diluted, on revenues of $1.0
million.  This compares to a loss from continuing operations for the
year ended December 31, 2007 of $31.9 million, or $0.03 per share basic and
diluted, on revenues of $1.9 million.





Revenues




Year
      Ended December 31,2008
                                      
                                      
                                      2007(in
      thousands)Hardware
      sales
                                      
                                      $
                                      320
                                      
                                      
                                      $
                                      593Lavasphere
      revenue
                                      
                                      
                                      153
                                      
                                      
                                      
                                      494Patent
      licensing
                                      
                                      
                                      52
                                      
                                      
                                      
                                      85Legacy
      product revenue
                                      
                                      
                                      345
                                      
                                      
                                      
                                      456Other
      revenue
                                      
                                      
                                      176
                                      
                                      
                                      
                                      236Total
      net sales
                                      
                                      $
                                      1,046
                                      
                                      
                                      $
                                      1,864





Year
Ended December 31, 2008 Compared With the Year Ended December 31,
2007




Net
Sales.Total revenues for the
year ended December 31, 2008 were $1.0 million, which represented a decrease of
0.8 million, or 43.9%, from $1.9 million for the year ended December 31,
2007.The decrease in our revenues was primarily due to our focus on development
and rollout of our products and services to support the emerging barcode
ecosystem which is being defined by bodies such as the Open Mobile Alliance,
Ltd. (the “OMA”), the Global System for Mobile Communications Association (the
“GSMA”) and the Cellular Telephone Industries Association (the “CTIA”). We
believe this focus will deliver the most value in the future. Hardware sales
were also affected by decreased sales of our older products in anticipation of
the new and improved product lines introduced late in 2008. This anticipation of
our new hardware products also reduced selling prices as we sold the remaining
supplies of older models. Lavasphere revenue, which tends to be project based,
decreased due to decreases in client specific software development. Legacy
product revenues declined consistent with the lifecycle of these
products.




Cost of
Sales.Cost
of sales was $1.3 million for the year ended December 31, 2008 compared with
$1.4 million for the year ended December 31, 2007, a decrease of $0.1 million,
or 12.2%.  Cost of sales for NeoMedia Europe, related to our hardware
products, was $0.3 million and $0.4 million in the years ended December 31, 2008
and 2007, respectively. Amortization costs related to our patents, and the
proprietary software of NeoMedia Europe were $1.0 million and $0.7 million for
the years ended December 31, 2008 and 2007, respectively.




Sales and
Marketing.Sales and marketing expenses were $2.2 million for the year ended
December 31, 2008, compared with $2.6 million for the year ended December 31,
2007, a decrease of $0.4 million or 15.7%. Sales and marketing expenses
declined due to scaling back our sales and marketing efforts while reorganizing
our business strategy to focus on our core technology. Stock based compensation
expense allocated to sales and marketing activities was $0.8 million and $0.9
million for the years ended December 31, 2008 and 2007,
respectively,




General and
Administrative.General and administrative expenses include
expenses related to our executives, human resources, finance and accounting,
legal and information technologies. General and administrative expenses were
$5.4 million for the year ended December 31, 2008, compared with $7.1 million
for the year ended December 31, 2007, a decrease of $1.7 million or 23.7%.
Expenses decreased as a result of decreased staffing and reductions in the
compensation levels of the remaining employees consistent with the
reorganization of our business strategy and the reduction in our professional
fees consistent with the simplifying of our operations as a result of the
disposals of our subsidiaries. For the years ended December 31, 2008 and 2007,
stock based compensation expense allocated to general and administrative
expenses was $0.8 and $1.6 million, respectively.




Research and
Development.During the year ended
December 31, 2008, expenses for research and development were $2.0 million for
the year ended December 31, 2008, compared with $1.9 million for the year ended
December 31, 2007, an increase of $0.1 million or 7.5%. Research and development
increased slightly as we pushed to complete the development of our upgraded
hardware products and complete our barcode ecosystem products. For the
years ended December 31, 2008 and 2007, stock based compensation expense
allocated to research and development expenses was $0.2 and $0.4 million,
respectively.




26




Impairment
Charge.During the years ended
December 31, 2008 and 2007, we incurred charges of $0.3 million and $3.1
million, respectively, to write down long-term investments to their estimated
net realizable value. In 2008 we determined that our remaining investment in
Micro Paint Repair was unrecoverable, and was fully reserved. In 2007 we
determined that our investments related to former subsidiaries disposed of in
2007 and early 2008 were not recoverable and these were fully
reserved.




Loss from
Operations.In 2008, our loss from
operations was reduced to $10.1 million, from $14.2 million in 2007. This
improvement of $4.1 million was primarily the result of reductions in our
general and administrative expenses of $1.6 million and impairment charges of
$2.9 million, offset by a reduction in our gross profit margin of $0.6
million.




Gain on
Extinguishment of Debt.Gain on extinguishment
of debt was $2.4 million and $0.3 million during the years ended December 31,
2008 and 2007, respectively. As of December 31, 2008, we obtained a waiver from
YA Global, waiving all outstanding events of non-compliance or default related
to our Series C convertible preferred stock and convertible
debentures.  The waiver effectively eliminated default interest and
liquidated damages due related to certain of the instruments and, as a result,
reduced our future anticipated cash flows related to those
instruments.  Because that reduction exceeded the threshold prescribed
by EITF Issue 96-19 “Debtor's Accounting for a Modification or Exchange of Debt
Instruments”, the modification of the amounts due under these instruments was
accounted for as an extinguishment.  The gain on extinguishment of
$0.3 million in 2007 was primarily related to the settlement of a claim with a
former vendor.




Gain (Loss) from
Change in Fair Value of Hybrid Financial Instruments. We carry certain of
our convertible debentures at fair value, in accordance with FAS 155 and do not
separately account for the embedded conversion feature.  The change in
the fair value of these liabilities includes changes in the value of the
interest due under these instruments, as well as changes in the fair value of
the common stock underlying the instruments.  In 2008, our liability
related to these hybrid instruments declined, primarily as a result of the
decline in the value of our common stock, and we recorded a gain of $3.6
million.  In 2007, we recognized a loss of $7.8 million, as the fair
value of the liability increased.




Other Interest
Expense, net.Other
interest expense was $1.3 million and $2.6 million during the years ended
December 31, 2008 and 2007, respectively.Other
interest expense consists of interest charges related to convertible debentures
that are not carried at fair value under FAS 155, interest accrued for creditors
as part of financed purchases, past due balances and notes payable, net of
interest earned on cash equivalent investments and a waiver of previously
accrued liquidation damages related to certain registration rights
agreements.




Loss from Change
in Value of Derivative Financial Instruments.For our Series C
convertible preferred stock, and certain of our convertible debentures, we
account for the embedded conversion feature separately as a derivative financial
instrument.  We carry these derivative financial instruments, together
with our outstanding common stock warrants that were issued in connection with
the preferred stock and our debentures, at fair value.  The loss
related to changes in the fair value of these derivative financial instruments
was $2.3 million and $7.6 million for the years ended December 31, 2008 and
2007, respectively.




Loss from
Continuing Operations.As a result of the
above, our loss from continuing operations was reduced to $7.7 million in 2008,
from $31.9 million in 2007.  This improvement of $24.2 million
reflects the $4.1 million improvement in our loss from operations and a
reduction in our losses and other costs related to our financing and related
derivative instruments of $20.1 million.




Loss from
Discontinued Operations.  The operations of MPR,
12Snap, Telecom Services, Sponge and Mobot, all of which were disposed of in
2007, have been classified as discontinued operations for all periods presented
in this Annual Report on Form 10-K. For the years ended December 31, 2008 and
2007, we recognized losses from these discontinued operations of $0.3 million
and $2.1 million, respectively. In 2008 our losses consisted primarily of a
reserve to write down the uncollectable portion of an escrow account related to
MRR and other incidental expenses to wind-down these businesses.




27




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 MPR subsidiaries in the amount of $6.6 million, representing the
difference between the fair value of the consideration received (as it was a
better indicator of fair value) and the carrying value immediately prior to
sale.




Liquidity and Capital Resources




Year
      Ended December 31,2008
                            
                            
                            2007(in
      thousands)Cash
      and cash equivalents
                            
                            $
                            1,259
                            
                            
                            $
                            1,415Net
      cash used in operating activities
                            
                            $
                            (6,678
                            )
                            
                            $
                            (8,268
                            )Net
      cash provided by (used in) investing activities
                            
                            
                            631
                            
                            
                            
                            (371
                            )Net
      cash provided by financing activities
                            
                            
                            5,786
                            
                            
                            
                            7,283Effect
      of exchange rate changes on cash from continuing
operations
                            
                            
                            105
                            
                            
                            
                            (42
                            )Net
      decrease in cash
                            
                            $
                            (156
                            )
                            
                            $
                            (1,398
                            )




Going
Concern




We have
historically incurred net losses and losses from operations and we expect that
we will continue to have negative cash flows as we implement our business
plan.  There can be no assurance that our continuing efforts to
execute our business plan will be successful and that we will be able to
continue as a going concern. The accompanying consolidated financial statements
have been prepared in conformity with US GAAP, which contemplate our
continuation as a going concern.  Net loss for the years ended
December 31, 2008 and 2007 was $8.0 million and $40.6 million, respectively and
net cash used by operations during the same years was $6.7 million and $8.3
million, respectively.  We also have an accumulated deficit of $211.3
millionand a working
capital deficit of $68.2 millionas of December 31, 2008.
We also have a continuing obligation as of December 31, 2008 of $4.6 million
relating to a purchase price guarantee associated with our prior acquisition of
12Snap (which we subsequently sold).




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




We
currently do not have sufficient cash to sustain operations for the next twelve
months.  We will require additional financing in order to execute our
operating plan and continue as a going concern.  Our management’s plan
is to secure adequate funding to bridge the commercialization of our barcode
ecosystem business. We cannot predict whether this additional financing will be
in the form of equity, debt, or another form and we may not be able to obtain
the necessary additional capital on a timely basis, on acceptable terms, or at
all.  In the event that these financing sources do not materialize, or
that we are unsuccessful in increasing our revenues and profits, we may be
unable to implement our current plans for expansion, repay our debt obligations
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. We do not have any commitments
for funding. Should YA Global not choose provide us with capital financing, as
they have in the past; or we do not find alternative sources of financing to
fund our operations; or if we are unable to generate significant product
revenues, we only have sufficient funds to sustain our current operations
through April 30, 2009.




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




28




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.




2008
Summary




During
the year ended December 31, 2008, 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, 2008, we had $1.3 million in cash and cash equivalents, a reduction
of $0.1 million from the $1.4 million balance as of December 31,
2007.




Cash used
by operating activities during the year ended December 31, 2008 was $6.7
million.  Cash provided by investing activities was $0.6
million.  Cash provided by financing activities was $5.8 million.
resulting from convertible debt instruments.




Recent
Events




On
February 17, 2009, we received notice of a favorable determination from the
reexamination of the ‘048 Patent. This ruling strengthens our position in
pending litigation and in negotiations with potential customers and parties
which may be perceived as infringing on our patents and related
technology.




During
the first quarter of 2009, we have billed revenues for our first paid barcode
ecosystem advertising campaigns. We received a favorable response from the
agencies / brands who were our customers in these campaigns and are in the
process of developing additional campaigns with these and other
customers.




On March
2, 2009, we hired a full time Vice President - Business Development to drive our
sales process forward and to realize the potential of our barcode ecosystem
product line.




On March
24 and 25, 2009, the share price of our common stock had increased to the extent
that two former employees who were holding unexpired and vested stock options
were able to exercise a portion of their options. These exercises resulted in
cash proceeds to us of approximately of $0.1 million.




On March
31, 2009 we implemented a plan to reduce our costs. These steps included
lay-offs of several positions; the conversion of certain full-time positions to
part-time or contractor status; reductions in salaries and in the fees paid to
our Board of Directors; the indefinite deferral of all bonus payments; the
implementation of additional controls on travel costs; and the elimination of
certain other costs.




On April
6, 2009, we issued debentures to YA Global in connection with the First Amended
Third Closing of the July 29, 2008 Securities Purchase Agreement with YA Global.
This provided us with $0.5 million of additional funding. As of April 7, 2009 we
had cash balances of approximately $0.7 million. YA Global has an option to
provide us with up to an additional $0.5 million in additional funding on May 1,
2009.





Significant
Liquidity Events




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 Mr. Michael 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.




29




Saleof Debentures toYA
Global.  On July 29, 2008, we entered into a Securities
Purchase Agreement (“SPA”) in the amount of $8,650,000 with YA Global. Under the
SPA, YA Global agreed to purchase secured convertible debentures, subject to our
meeting certain milestones, which were designed to fund the Company’s
business plan to bring our products to market over approximately an 18 month
period of time. The first debenture under the SPA was issued on July 29, 2008,
in the amount of $2.325 million, and the second debenture under the SPA was
issued on October 28, 2008, also in the amount of $2.325 million.





On April
6, 2009 the SPA was amended. The Amendment Agreement revised YA Global’s funding
commitment to $0.5 million, payable upon closing,  plus an option to
fund an additional $0.5 million on May 1, 2009, at the sole discretion of YA
Global.




Limitations and
Obligations Imposed in Connection with Convertible Debentures.Pursuant
to security agreements between us and YA Global signed in connection with the
convertible debentures, YA Global  has a security interest in all of
our assets. Additionally, pursuant to the terms of the investment agreement
between us and YA Global signed in connection with the Series C convertible
preferred stock sale, we cannot




·
            enter
      into any debt arrangements in which YA Global is not the
      borrower,




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




·
            grant
      any security below market price.




During
2007 and 2008, and through April 6, 2009, we have issued convertible debentures
with an aggregate face amount of $16.7 million to YA Global and we have incurred
both cash and non-cash costs associated with those financing arrangements. We
issued to YA Global an aggregate of 707,500,000 warrants and paid cash fees to
them from the proceeds of the debentures of approximately $1.7
million.  In addition, approximately $1.7 million of the proceeds were
used to settle interest and liquidated damages outstanding related to existing
obligations to YA Global.





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 our 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. We do not have any commitments for funding. 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 and reduce or cease our
operations.





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 convertible debentures with outstanding face values of $23.2
      million that are subject to conversion at future
  dates.





30




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




2009
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          2010
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          2011
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          2012
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          2013
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          Thereafter
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          Total(in
      thousands)Operating
      leases
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          264
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          249
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          129
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          3
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          645Vendor
      and consultingagreements
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          253
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          30
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          283Notes
      payable
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          50
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          50Subsidiary
      acquisitioncommitments
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          4,614
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          4,614Convertible
      debentures
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          9,234
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          13,967
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          23,201Total
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          14,415
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          14,246
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          129
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          3
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          28,793


As of
December 31, 2008, we had a continuing liability of $4.6 million relating to a
purchase price guarantee obligation associated with our original acquisition of
12Snap (which entity we have subsequently disposed of).  If our stock
price, at the time the shares we issued for the acquisition of 12Snap were
registered for sale or otherwise became saleable, 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 and at December 31, 2006, we accrued the amount payable
under this obligation of $16.2 million.  During the first quarter of
2007, we issued 197,620,948 shares of our common stock in satisfaction of $9.4
million of the purchase price guarantee obligation, leaving a remaining
obligation of $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 in this
guarantee obligation.  Additionally, we paid $0.5 million during the
year ended December 31, 2007 to further reduce this obligation to $4.5 million.
During 2008, we have not made any additional payments but have accrued interest
on the obligation, resulting in a balance at December 31, 2008 of $4.6
million.




Recently
Issued Accounting Standards





In
September 2006, the Financial Accounting Standards Board, (the “FASB”) issued
FAS No. 157, “Fair Value Measurements”.  FAS 157 provides a new single
authoritative definition of fair value and provides enhanced guidance for
measuring the fair value of assets and liabilities and requires additional
disclosures related to the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value, and the
effect of fair value measurements on earnings.  FAS 157 became
effective for the Company as of January 1, 2008 for financial assets and
financial liabilities within its scope and it did not have a material impact on
our consolidated financial statements.  In February 2008, the FASB
issued FASB Staff Position No. FAS 157-2 “Effective Date of FASB Statement No.
157” (“FSP FAS 157-2”) which defers the effective date of FAS 157 for all
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), to fiscal years beginning after November 15, 2008 and
interim periods within those fiscal years for items within the scope of FSP FAS
157-2.  The Company is currently assessing the impact, if any, of FAS
157 and FSP FAS 157-2 for non-financial assets and non-financial liabilities on
its consolidated financial statements.





In
February 2007, the FASB issued FAS No. 159 “The Fair Value Option for Financial
Assets and Financial Liabilities”.  FAS 159 provides companies with an
option to irrevocably elect to measure certain financial assets and financial
liabilities at fair value on an instrument-by-instrument basis with the
resulting changes in fair value recorded in earnings.  The objective
of FAS 159 is to reduce both the complexity in accounting for financial
instruments and the volatility in earnings caused by using different measurement
attributes for financial assets and financial liabilities.  FAS 159
became effective for the Company as of January 1, 2008. The Company has not
elected to apply the fair value option to any of its financial assets or
financial liabilities, other than certain of the Company’s convertible debenture
obligations, which are carried at fair value in accordance with FAS
155.





In
December 2007, the FASB issued FAS No. 141(R) (Revised 2007), “Business
Combinations”.  FAS 141(R) establishes principles and requirements for
how the acquirer in a business combination (i) recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any non-controlling interest in the acquire, (ii) recognizes and measures
the goodwill acquired in the business combination or a gain from a bargain
purchase, and (iii) determines what information to disclose to enable users of
the financial statements to evaluate the nature and financial effects of the
business combination.  FAS No. 141(R) became effective for the Company
on January 1, 2009.  The impact of the standard on the Company’s
financial position and results of operations will depend on whether any
acquisitions are consummated after the standard became effective.




31




In
December 2007, the FASB issued FAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51.”  FAS
160 requires all entities to report non-controlling (minority) interests in
subsidiaries as equity in the consolidated financial statements. This Statement
became effective for the Company as of January 1, 2009 and will not have any
effect on the Company’s financial statements.




In
March 2008, the FASB issued FAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities,”. This statement requires enhanced
disclosures about an entity’s derivative and hedging activities. These
disclosures include how and why an entity uses derivative instruments, how
derivative instruments and related hedged items are accounted for under existing
accounting pronouncements and related interpretations and how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance and cash flows. FAS 161 is effective for financial
statements issued for years beginning after November 15, 2008. We do not
expect that FAS 161 will have any significant effect on our consolidated
financial statement disclosures.





In May
2008, the FASB issued FAS No. 162 “The Hierarchy of Generally Accepted
Accounting Principles.” This statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of non-governmental entities that are
presented in conformity with GAAP.  Although this statement formalizes
the sources and hierarchy of US GAAP within the authoritative accounting
literature, it does not change the accounting principles that are already in
place.  FAS 162 had no affect on the Company’s financial
statements.





In May
2008, the FASB issued FAS No. 163, “Accounting for Financial Guarantee Insurance
Contracts, an interpretation of FASB Statement No. 60”. FAS 163, which is
effective for fiscal years beginning after December 15, 2008, is not expected to
have any effect on our financial statements.




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 effects 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 could 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, 2008, a near-term change in interest rates, based on historical small
movements, would not materially affect 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, 2008, 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 NeoMedia Europe
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.




32




ITEM 8.  Financial
Statements


Index to
Consolidated Financial Statements





PageReport
      of Independent Registered Public Accounting Firm
              
              34Consolidated
      Balance Sheets at December 31, 2008 and 2007
              
              35Consolidated
      Statements of Operations and Comprehensive Loss for the years ended
      December 31, 2008 and 2007
              
              36Consolidated
      Statements of Shareholders’ Equity (Deficit) for the years ended
      December 31, 2008  and 2007
              
              37Consolidated
      Statements of Cash Flows for the years ended December 31, 2008 and
      2007
              
              38Notes
      to Consolidated Financial Statements
              
              39





33




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 sheets of NeoMedia Technologies,
Inc. (the “Company”), as of December 31, 2008 and 2007, and the related
consolidated statements of operations and comprehensive loss,
shareholders’ equity (deficit) and cash flows for the years 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 audits.




We
conducted our audits 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 audits 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 audits provide 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, 2008
and 2007, and the results of its operations and its cash flows for the years
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 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


April 14,
2009




34




NeoMedia
Technologies, Inc. and Subsidiaries


Consolidated
Balance Sheets




(in
thousands, except share data)




December
      31,
                                        
                                        
                                        December
      31,2008
                                        
                                        
                                        2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                                        
                                        $
                                        1,259
                                        
                                        
                                        $
                                        1,415Trade
      accounts receivable, net of allowance for doubtfulaccounts
      of $0 and $78, respectively
                                        
                                        
                                        102
                                        
                                        
                                        
                                        58Other
      receivables
                                        
                                        
                                        -
                                        
                                        
                                        
                                        225Inventories,
      net of allowance for obsolete & slow-movinginventory
      of $81 and $80 respectively
                                        
                                        
                                        117
                                        
                                        
                                        
                                        198Prepaid
      expenses and other current assets
                                        
                                        
                                        544
                                        
                                        
                                        
                                        196Assets
      held for sale
                                        
                                        
                                        -
                                        
                                        
                                        
                                        159Total
      current assets
                                        
                                        
                                        2,022
                                        
                                        
                                        
                                        2,251Property,
      equipment and leasehold improvements, net
                                        
                                        
                                        79
                                        
                                        
                                        
                                        85Goodwill
                                        
                                        
                                        3,418
                                        
                                        
                                        
                                        3,418Proprietary
      software, net
                                        
                                        
                                        2,738
                                        
                                        
                                        
                                        3,413Patents
      and other intangible assets, net
                                        
                                        
                                        2,293
                                        
                                        
                                        
                                        2,608Cash
      surrender value of life insurance policies
                                        
                                        
                                        508
                                        
                                        
                                        
                                        747Other
      long-term assets
                                        
                                        
                                        430
                                        
                                        
                                        
                                        1,002Total
      assets
                                        
                                        $
                                        11,488
                                        
                                        
                                        $
                                        13,524LIABILITIES
      AND SHAREHOLDERS’ DEFICITCurrent
      liabilities:Accounts
      payable
                                        
                                        $
                                        134
                                        
                                        
                                        $
                                        309Liabilities
      held for sale
                                        
                                        
                                        -
                                        
                                        
                                        
                                        13Taxes
      payable
                                        
                                        
                                        7
                                        
                                        
                                        
                                        -Accrued
      expenses
                                        
                                        
                                        5,787
                                        
                                        
                                        
                                        6,015Deferred
      revenues and customer prepayments
                                        
                                        
                                        403
                                        
                                        
                                        
                                        669Notes
      payable
                                        
                                        
                                        50
                                        
                                        
                                        
                                        44Accrued
      purchase price guarantee
                                        
                                        
                                        4,614
                                        
                                        
                                        
                                        4,549Deferred
      tax liability
                                        
                                        
                                        706
                                        
                                        
                                        
                                        706Derivative
      financial instruments - warrants
                                        
                                        
                                        1,189
                                        
                                        
                                        
                                        4,834Derivative
      financial instruments - debentures payable
                                        
                                        
                                        26,256
                                        
                                        
                                        
                                        19,817Debentures
      payable at amortized cost
                                        
                                        
                                        11,227
                                        
                                        
                                        
                                        7,500Debentures
      payable at fair value
                                        
                                        
                                        19,892
                                        
                                        
                                        
                                        23,199Series
      C convertible preferred stock, $0.01 par value, 30,000shares
      authorized, 20,097 shares issued and outstanding,liquidation
      value of $20,097
                                        
                                        
                                        -
                                        
                                        
                                        
                                        20,097Total
      current liabilities
                                        
                                        
                                        70,265
                                        
                                        
                                        
                                        87,752Commitments
      and contingencies (Note 13)Series
      C convertible preferred stock, $0.01 par value, 30,000shares
      authorized, 19,144 shares issued and outstanding,liquidation
      value of $19,144
                                        
                                        
                                        19,144
                                        
                                        
                                        
                                        -Shareholders’
      deficit:Common
      stock, $0.01 par value, 5,000,000,000 shares authorized, 1,375,056,229
      and1,025,295,693
      shares issued and 1,371,904,960 and 1,022,144,424
    outstanding,respectively
                                        
                                        
                                        13,719
                                        
                                        
                                        
                                        10,221Additional
      paid-in capital
                                        
                                        
                                        120,430
                                        
                                        
                                        
                                        118,427Accumulated
      deficit
                                        
                                        
                                        (211,305
                                        )
                                        
                                        
                                        (201,565
                                        )Accumulated
      other comprehensive loss
                                        
                                        
                                        14
                                        
                                        
                                        
                                        (532
                                        )Treasury
      stock, at cost, 201,230 shares of common stock
                                        
                                        
                                        (779
                                        )
                                        
                                        
                                        (779
                                        )Total
      shareholders’ deficit
                                        
                                        
                                        (77,921
                                        )
                                        
                                        
                                        (74,228
                                        )Total
      liabilities and shareholders’ deficit
                                        
                                        $
                                        11,488
                                        
                                        
                                        $
                                        13,524




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




35




NeoMedia
Technologies, Inc. and Subsidiaries


Consolidated
Statements of Operations and Comprehensive Loss


(in
thousands, except share and per share data)




Year
      Ended December 31,2008
                                        
                                        
                                        2007Net
      sales
                                        
                                        $
                                        1,046
                                        
                                        
                                        $
                                        1,864Cost
      of sales
                                        
                                        
                                        1,257
                                        
                                        
                                        
                                        1,431Gross
      profit (deficit)
                                        
                                        
                                        (211
                                        )
                                        
                                        
                                        433Sales
      and marketing expenses
                                        
                                        
                                        2,177
                                        
                                        
                                        
                                        2,582General
      and administrative expenses
                                        
                                        
                                        5,406
                                        
                                        
                                        
                                        7,082Research
      and development costs
                                        
                                        
                                        1,997
                                        
                                        
                                        
                                        1,857Impairment
      charge
                                        
                                        
                                        271
                                        
                                        
                                        
                                        3,065OPERATING
      LOSS
                                        
                                        
                                        (10,062
                                        )
                                        
                                        
                                        (14,153
                                        )Gain
      on extinguishment of debt
                                        
                                        
                                        2,405
                                        
                                        
                                        
                                        347Gain
      (loss) from change in fair value of hybrid financial
      instruments
                                        
                                        
                                        3,562
                                        
                                        
                                        
                                        (7,824
                                        )Loss
      from change in fair value of derivative financial
    instruments
                                        
                                        
                                        (2,339
                                        )
                                        
                                        
                                        (7,640
                                        )Other
      interest expense, net
                                        
                                        
                                        (1,262
                                        )
                                        
                                        
                                        (2,634
                                        )LOSS
      FROM CONTINUING OPERATIONS
                                        
                                        
                                        (7,696
                                        )
                                        
                                        
                                        (31,904
                                        )DISCONTINUED
      OPERATIONS (Note 3)Loss
      from operations of discontinued operations
                                        
                                        
                                        (323
                                        )
                                        
                                        
                                        (2,121
                                        )Loss
      on disposal of subsidiaries
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (6,610
                                        )LOSS
      FROM DISCONTINUED OPERATIONS
                                        
                                        
                                        (323
                                        )
                                        
                                        
                                        (8,731
                                        )NET
      LOSS
                                        
                                        
                                        (8,019
                                        )
                                        
                                        
                                        (40,635
                                        )Dividends
      on convertible preferred stock
                                        
                                        
                                        (1,571
                                        )
                                        
                                        
                                        (1,696
                                        )NET
      LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
                                        
                                        
                                        (9,590
                                        )
                                        
                                        
                                        (42,331
                                        )Comprehensive
      Loss:Net
      loss
                                        
                                        
                                        (8,019
                                        )
                                        
                                        
                                        (40,635
                                        )Other
      comprehensive loss:Marketable
      securities
                                        
                                        
                                        442
                                        
                                        
                                        
                                        (195
                                        )Foreign
      currency translation adjustment
                                        
                                        
                                        104
                                        
                                        
                                        
                                        373COMPREHENSIVE
      LOSS
                                        
                                        $
                                        (7,473
                                        )
                                        
                                        $
                                        (40,457
                                        )Loss
      per share from continuing operations - basic and diluted
                                        
                                        $
                                        (0.01
                                        )
                                        
                                        $
                                        (0.03
                                        )Loss
      per share from discontinued operations - basic and diluted
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        (0.01
                                        )Net
      loss per share - basic and diluted
                                        
                                        $
                                        (0.01
                                        )
                                        
                                        $
                                        (0.04
                                        )Loss
      per share attributable to common shareholders - basic and
      diluted
                                        
                                        $
                                        (0.01
                                        )
                                        
                                        $
                                        (0.04
                                        )Weighted
      average number of common shares--basic and diluted
                                        
                                        
                                        1,167,856,338
                                        
                                        
                                        
                                        1,023,816,862




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




36




NeoMedia
Technologies, Inc. and Subsidiaries`


Consolidated Statements of Shareholders’
Equity (Deficit)


(In
thousands, except share data)




Common
      Stock
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              Treasury
      StockShares
                                                                                              
                                                                                              
                                                                                              Amount
                                                                                              
                                                                                              
                                                                                              Additional
      Paid-in Capital
                                                                                              
                                                                                              
                                                                                              Accumulated
      Other Compre-hensive Income (Loss)
                                                                                              
                                                                                              
                                                                                              Accumulated
      Deficit
                                                                                              
                                                                                              
                                                                                              Shares
                                                                                              
                                                                                              
                                                                                              Amount
                                                                                              
                                                                                              
                                                                                              Total
      Shareholders' Equity (Deficit)Balance,
      December 31, 2006
                                                                                              
                                                                                              
                                                                                              637,591,747
                                                                                              
                                                                                              
                                                                                              $
                                                                                              6,376
                                                                                              
                                                                                              
                                                                                              $
                                                                                              101,911
                                                                                              
                                                                                              
                                                                                              $
                                                                                              (710
                                                                                              )
                                                                                              
                                                                                              $
                                                                                              (160,930
                                                                                              )
                                                                                              
                                                                                              
                                                                                              201,230
                                                                                              
                                                                                              
                                                                                              $
                                                                                              (779
                                                                                              )
                                                                                              
                                                                                              $
                                                                                              (54,132
                                                                                              )Adjustment  of
      prior year accrual of dividendson
      Series C Convertible Preferred Stock
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              34
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              34Shares
      issued upon conversionof
      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 wholeprovisions
      for NeoMedia Europe & 12Snap
                                                                                              
                                                                                              
                                                                                              258,620,948
                                                                                              
                                                                                              
                                                                                              
                                                                                              2,586
                                                                                              
                                                                                              
                                                                                              
                                                                                              10,135
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              12,721Fair
      value of shares returned to the Companyin
      connection with sale of 12Snap
                                                                                              
                                                                                              
                                                                                              (7,750,857
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (78
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (364
                                                                                              )
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              (442
                                                                                              )Fair
      value of shares issued under dispositionagreement
      of Micro Paint Repair
                                                                                              
                                                                                              
                                                                                              6,190,476
                                                                                              
                                                                                              
                                                                                              
                                                                                              62
                                                                                              
                                                                                              
                                                                                              
                                                                                              68
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              130Comprehensive
      loss - foreign currencytranslation
      adjustment
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              373
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              373Comprehensive
      loss - unrealized losson
      marketable securities
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              (195
                                                                                              )
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              (195
                                                                                              )Net
      Loss
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              (40,635
                                                                                              )
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              (40,635
                                                                                              )Balance,
      December 31, 2007
                                                                                              
                                                                                              
                                                                                              1,022,144,424
                                                                                              
                                                                                              
                                                                                              $
                                                                                              10,221
                                                                                              
                                                                                              
                                                                                              $
                                                                                              118,427
                                                                                              
                                                                                              
                                                                                              $
                                                                                              (532
                                                                                              )
                                                                                              
                                                                                              $
                                                                                              (201,565
                                                                                              )
                                                                                              
                                                                                              
                                                                                              201,230
                                                                                              
                                                                                              
                                                                                              $
                                                                                              (779
                                                                                              )
                                                                                              
                                                                                              $
                                                                                              (74,228
                                                                                              )Shares
      issued upon conversionof
      Series C convertible preferred stock
                                                                                              
                                                                                              
                                                                                              347,500,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              3,475
                                                                                              
                                                                                              
                                                                                              
                                                                                              172
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              3,647Deemed
      Dividend on Conversionof
      Series C convertible preferred stock
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              (1,721
                                                                                              )
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              (1,721
                                                                                              )Stock
      based compensation expense
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,831
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,831Fair
      value of shares issued to pay liabilities
                                                                                              
                                                                                              
                                                                                              2,260,536
                                                                                              
                                                                                              
                                                                                              
                                                                                              23
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              23Comprehensive
      income - foreign currencytranslation
      adjustment
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              104
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              104Comprehensive
      income - realizedon
      marketable securities
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              442
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              442Net
      Loss
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              (8,019
                                                                                              )
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              (8,019
                                                                                              )Balance,
      December 31, 2008
                                                                                              
                                                                                              
                                                                                              1,371,904,960
                                                                                              
                                                                                              
                                                                                              $
                                                                                              13,719
                                                                                              
                                                                                              
                                                                                              $
                                                                                              120,430
                                                                                              
                                                                                              
                                                                                              $
                                                                                              14
                                                                                              
                                                                                              
                                                                                              $
                                                                                              (211,305
                                                                                              )
                                                                                              
                                                                                              
                                                                                              201,230
                                                                                              
                                                                                              
                                                                                              $
                                                                                              (779
                                                                                              )
                                                                                              
                                                                                              $
                                                                                              (77,921
                                                                                              )





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




37




NeoMedia
Technologies, Inc. and Subsidiaries


Consolidated Statements of Cash
Flows






Year
      Ended December 31,2008
                                                    
                                                    
                                                    2007Cash
      Flows from Operating Activities:Loss
      from continuing operations
                                                    
                                                    
                                                    (7,696
                                                    )
                                                    
                                                    
                                                    (31,904
                                                    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                                    
                                                    
                                                    1,083
                                                    
                                                    
                                                    
                                                    1,141Gain
      on sale of assets
                                                    
                                                    
                                                    (4
                                                    )
                                                    
                                                    
                                                    -Impairment
      charge
                                                    
                                                    
                                                    271
                                                    
                                                    
                                                    
                                                    3,065Gain
      on early extinguishment of debt
                                                    
                                                    
                                                    (2,405
                                                    )
                                                    
                                                    
                                                    (347
                                                    )Change
      in fair value from revaluation of warrants and embedded conversion
      features
                                                    
                                                    
                                                    2,339
                                                    
                                                    
                                                    
                                                    7,640Stock-based
      compensation expense
                                                    
                                                    
                                                    1,831
                                                    
                                                    
                                                    
                                                    2,993Interest
      expense related to convertible debt
                                                    
                                                    
                                                    (2,301
                                                    )
                                                    
                                                    
                                                    8,605Decrease
      in value of life insurance policies
                                                    
                                                    
                                                    239
                                                    
                                                    
                                                    
                                                    116Changes
      in operating assets and liabilitiesTrade
      and other accounts receivable
                                                    
                                                    
                                                    181
                                                    
                                                    
                                                    
                                                    609Inventories
                                                    
                                                    
                                                    81
                                                    
                                                    
                                                    
                                                    (118
                                                    )Prepaid
      expenses and other current assets
                                                    
                                                    
                                                    (189
                                                    )
                                                    
                                                    
                                                    (471
                                                    )Accounts
      payable and accrued liabilities
                                                    
                                                    
                                                    158
                                                    
                                                    
                                                    
                                                    309Deferred
      revenue and other current liabilities
                                                    
                                                    
                                                    (266
                                                    )
                                                    
                                                    
                                                    94Net
      cash used in operating activities
                                                    
                                                    
                                                    (6,678
                                                    )
                                                    
                                                    
                                                    (8,268
                                                    )Cash
      Flows from Investing Activities:Cash
      received from sale of (paid to acquire) CSI International, Inc., Mobot,
      Inc., Sponge Ltd.,NeoMedia
      Europe AG, and 12Snap AG, net of cash acquired
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    1,100Proceeds
      from sale of investments
                                                    
                                                    
                                                    751
                                                    
                                                    
                                                    
                                                    -Acquisition
      of property and equipment
                                                    
                                                    
                                                    (75
                                                    )
                                                    
                                                    
                                                    (15
                                                    )Acquisition
      of patents and other intangible assets
                                                    
                                                    
                                                    (12
                                                    )
                                                    
                                                    
                                                    (30
                                                    )Advances
      to discontinued subsidiaries Micro Paint Repair, 12Snap, Telecom Services,
      Mobot, and Sponge
                                                    
                                                    
                                                    (33
                                                    )
                                                    
                                                    
                                                    163Payment
      of purchase price guarantee obligations
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (2,260
                                                    )Amounts
      received (issued) under notes receivable
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    671Net
      cash used in investing activities
                                                    
                                                    
                                                    631
                                                    
                                                    
                                                    
                                                    (371
                                                    )Cash
      Flows from Financing Activities:Borrowing
      under notes payable and convertible debt instruments,net
      of fees of $681 in 2008 and $981 in 2007
                                                    
                                                    
                                                    5,786
                                                    
                                                    
                                                    
                                                    8,253Repayments
      on notes payable and convertible debt instruments
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (986
                                                    )Preferred
      stock conversions and deemed dividends on preferred
    conversion
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Net
      proceeds from exercise of stock options and warrants
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    16Net
      cash provided by financing activities
                                                    
                                                    
                                                    5,786
                                                    
                                                    
                                                    
                                                    7,283Effect
      of exchange rate changes on cash for continuing operations
                                                    
                                                    
                                                    105
                                                    
                                                    
                                                    
                                                    (42
                                                    )Net
      Increase (Decrease) in cash and cash equivalents from continuing
      operations
                                                    
                                                    
                                                    (156
                                                    )
                                                    
                                                    
                                                    (1,398
                                                    )Cash
      and cash equivalents, beginning of period
                                                    
                                                    
                                                    1,415
                                                    
                                                    
                                                    
                                                    2,813Cash
      and cash equivalents, end of period
                                                    
                                                    
                                                    1,259
                                                    
                                                    
                                                    
                                                    1,415Supplemental
      cash flow information:Interest
      paid during the period
                                                    
                                                    
                                                    35
                                                    
                                                    
                                                    
                                                    638Unrealized
      gain (loss) on marketable securities
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (195
                                                    )Fair
      value of shares issued to satisfy purchase price guarantee
      obligations
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    12,721Fair
      value of shares issued to satisfy debt guarantee
obligation
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    700Deemed
      dividend on Series C Convertible Preferred Stock
                                                    
                                                    
                                                    1,721
                                                    
                                                    
                                                    
                                                    1,696Series
      C Convertible Preferred Stock converted to common stock
                                                    
                                                    
                                                    3,647
                                                    
                                                    
                                                    
                                                    2,547




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




38




NeoMedia
Technologies, Inc.


Notes to Consolidated Financial
Statements




Note
1 - General





Business - NeoMedia utilizes
the mobile phone by leveraging barcodes (printed symbols) as a seamless
mechanism to link Brands, advertisers, carriers, retailers and consumers using
the power of the mobile internet.





With our
barcode ecosystem technology, NeoMedia transforms mobile phones with cameras
into barcode scanners which provide instant access to mobile web content
whenever a barcode is scanned. A barcode makes any medium immediately
interactive – the code links consumers to the multimedia capability of the
mobile Web. Combining this technology with analytics and reporting capabilities
improves the way advertisers market to mobile consumers.





NeoMedia
provides the infrastructure to facilitate mobile barcode scanning and its
associated commerce worldwide. Our mobile barcode ecosystem software reads and
transmits data from 1D and 2D barcodes to its intended destination. Our code
management and clearinghouse platforms create, connect, record, and transmit the
transactions embedded in the barcodes, like web-URLs, text messages (SMS), and
telephone calls, ubiquitously and reliably.





In order
to provide complete mobile marketing solutions, NeoMedia also offers barcode
scanning hardware that reads barcodes displayed on mobile phone screens.
NeoMedia provides infrastructure solutions to enable mobile ticketing and
couponing programs – including scanner hardware and system support software for
seamless implementation.





This
technology is supported by our patents. In addition, NeoMedia has an open
standards philosophy designed to make integration and use of the technology easy
for handset manufacturers, mobile operators and advertisers; and the consumer’s
experience safe, reliable and interoperable.




Going
Concern – We have historically incurred net losses and losses from
operations and we expect that we will continue to have negative cash flows as we
implement our business plan.  There can be no assurance that our
continuing efforts to execute our business plan will be successful and that we
will be able to continue as a going concern. The accompanying consolidated
financial statements have been prepared in conformity with accounting principals
generally accepted in the United States of America (“US GAAP”), which
contemplate our continuation as a going concern.  Net loss for the
years ended December 31, 2008 and 2007 was $8.0 million and $40.6 million,
respectively and net cash used by operations during the same years was
$6.7 million and $8.3 million, respectively.  We have an
accumulated deficit of $211.3 millionand
a working capital deficit of $68.2 millionas
of December 31, 2008. We also have a continuing obligation as of December 31,
2008 of $4.6 million relating to a purchase price guarantee associated with our
prior acquisition of 12Snap (which we subsequently sold).




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




We
currently do not have sufficient cash to sustain us for the next twelve
months.  We will require additional financing in order to execute our
operating plan and continue as a going concern.  Our management’s plan
is to secure adequate funding to bridge the commercialization of our barcode
ecosystem business. We cannot predict whether this additional financing will be
in the form of equity, debt, or another form and we may not be able to obtain
the necessary additional capital on a timely basis, on acceptable terms, or at
all.  In the event that these financing sources do not materialize, or
that we are unsuccessful in increasing our revenues and profits, we may be
unable to implement our current plans for expansion, repay our debt obligations
as they become due or continue as a going concern, any of which circumstances
would have a material adverse effect on our business, prospects, financial
condition and results of operations. Should YA Global Investments, L.P (“YA
Global”) not choose provide us with capital financing,as they have in the past;
or we do not find alternative sources of financing to fund our operations; or if
we are unable to generate significant product revenues, we only have sufficient
funds to sustain our current operations through April 30, 2009.




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




39




Note 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 The American Institute of Certified Public
      Accountants, Statements of Position (“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
      collectability is reasonably assured.  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 criteria, and we
      recognize that revenue when the criteria are
met




(2)
            Technology
      service and product revenue, which includes sales of software and
      technology equipment and service fees is recognized based on
      guidance provided in  The Securities and Exchange Commission,
      Staff Accounting Bulliten (“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 collectability 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.  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.




(3)
            We
      recognize shipping and handling costs at the time of invoice. All
      associated transportation and handling costs for products shipped are
      borne by the customer and provided for as cost of sales. All shipping and
      handling charges are recognized as part of revenue recognition at the time
      of invoicing.




(4)
            We
      recognize tax billings related to our sales revenue at the time of
      invoicing. The customer is responsible for paying all associated taxes to
      us in connection with the sale as part of the terms and conditions of the
      sales invoice. Taxes on billings in connection with invoices are paid to
      the corresponding taxing authority directly by us and recovered from the
      customer upon payment of the customer
invoice.




(5)
            When
      sales transactions include multiple deliverables or shipments, we
      recognize revenue on only that part of the transaction that has been
      shipped to the customer. Revenue on subsequent shipments as part of an
      original order or deliverable, is recognized upon each new shipment or
      release of deliverables to the
customer.




40




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, 2008 and
2007, 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, assumed conversion of convertible
instruments as of the respective dates, were as follows:




As
      of December 31,2008
                          
                          
                          2007Outstanding
      Stock Options
                          
                          
                          99,736,856
                          
                          
                          
                          115,511,747Outstanding
      Warrants
                          
                          
                          1,007,971,000
                          
                          
                          
                          514,825,000Convertible
      debt
                          
                          
                          26,188,847,382
                          
                          
                          
                          3,170,695,000Convertible
      preferred stock
                          
                          
                          21,456,650,327
                          
                          
                          
                          2,166,031,00048,753,205,565
                          
                          
                          
                          5,967,062,747




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.




Derivative
Financial Instruments – 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 financial
instruments, such as warrants and the embedded conversion features of our
convertible preferred stock and convertible debentures, which 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 purposes, even when the terms of the
underlying contracts do not provide for net-cash
settlement.  Derivative financial instruments are initially recorded,
and continuously carried, at fair value.




Determining
the fair value of these complex 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.  The use of different assumptions
could have a material effect on the estimated fair value amounts.




For
certain of our convertible debentures, we have elected not to separately account
for the embedded conversion feature as a derivative instrument but to account
for the entire hybrid instrument at fair value in accordance with FAS
155.  For the remaining convertible debentures and our convertible
preferred stock, the underlying instruments are carried at amortized cost and
the embedded conversion feature is accounted for separately at fair value in
accordance with FAS 133 and EITF Issues 00-19 and 07-5.




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, cash
surrender value of life insurance, accounts payable, accrued expenses, notes
payable, and other current liabilities approximate their fair values due to
their short-term nature.  Our convertible preferred stock and
convertible debentures are either recognized as hybrid financial instruments and
carried at fair value in accordance with FAS 155 or are carried at amortized
cost, with separate recognition of the fair value of any embedded derivative
instrument liabilities, including the conversion feature.  At December
31, 2008, the face value of debentures carried at amortized cost exceeded their
carrying amount by approximately $1.1 million.  At December 31, 2008, the
face value of debentures carried at amortized cost exceeded their carrying
amount by approximately $1.1 million. At December 31, 2008 the face value of
debentures carried at fair value exceeded their carrying amount by approximately
9.0 million.




Our cash
balances are held by a highly rated financial institution. The balances in our
accounts often exceed the amounts covered by the insurance obligations of the
Federal Deposit Insurance Corporation (“FDIC”). We invest our cash on an
overnight basis in a money market fund which invests in highly liquid short-term
investments, but is not insured by the FDIC.  Our financial
institution participates in the U. S. Department of the Treasury’s Temporary
Guarantee Program for Money Market Funds. Through April 30, 2009 approximately
$0.6 million of our cash balances are guaranteed under this program. Similarly,
our cash balances in our European location, are also deposited and maintained in
financial institutions that provide deposit guarantees and are governed by local
public law. Our policies limit the concentration of credit exposure by
restricting investments with any single obligor, instrument, or geographic
area.




41




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. To the extent credit is granted to our customers, all open
accounts receivable beyond 90 days are evaluated for recovery, or the need to
establish a reserve for potential un-collectability. We do not require
collateral.




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, 2008 and 2007, the allowance for doubtful
accounts was $0 and $78,000, respectively. Substantially all of our receivables
were collectible trough the issuance date of these financial
statements.





Inventories– Inventories are stated at the lower of cost or market and were
comprised of barcode-reading equipment at our NeoMedia Europe
location.  Cost is determined using the first-in, first-out
method.




As
      of December 31,2008
                          
                          
                          2007(in
      thousands)Raw
      material
                          
                          $
                          61
                          
                          
                          $
                          59Finished
      goods
                          
                          
                          137
                          
                          
                          
                          218Work
      in process
                          
                          
                          -
                          
                          
                          
                          1Total
                          
                          
                          198
                          
                          
                          
                          278Less:
      reserve for slow-moving and obsolete inventory
                          
                          
                          (81
                          )
                          
                          
                          (80
                          )Total
      Inventory, net of reserves
                          
                          $
                          117
                          
                          
                          $
                          198




Goodwill–
Goodwill consists of the excess of the purchase price paid for NeoMedia Europe
over the fair value of the identifiable net assets and liabilities acquired,
based on an independent appraisal of the assets and liabilities acquired. In
accordance with FAS 142, “Goodwill and Other Intangible
Assets,” goodwill is no longer amortized, but is tested for
impairment, at least annually, by applying the recognition and measurement
provisions of FAS 142, which compare the carrying amount of the asset to its
fair value. If impairment of carrying value based on the calculated fair value
exists, we measure the impairment through the use of projected discounted cash
flows.




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:




42




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 cash flow 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, “Accounting for the Impairment or
Disposal of Long-Lived Assets,”  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. We follow the two-step process outlined in FAS 144 for determining
if an impairment charge should be taken: (1) the expected undiscounted cash
flows from a particular asset or asset group are compared to the carrying value;
if the expected undiscounted cash flows are greater than the carrying value, no
impairment is taken, but if the expected undiscounted cash flows are less than
the carrying value, then (2) an impairment charge is taken for the difference
between the carrying value and the expected discounted cash
flows.  The assumptions used in developing expected cash flow
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 cash flows is possible, we use a probability-weighted
approach to weigh the likelihood of those possible outcomes.  For
purposes of discounting cash flows 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 impairment charges of $0.3 million and $3.1 million during the
years ended December 31, 2008 and 2007, respectively as a result of writing down
the carrying value of our 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:




Furniture
      and fixtures
                7
      yearsEquipment
                3 -
      5 years




43




Fair-valued
Financial Instruments– Fair value measurement requirements are embodied
in certain accounting standards applied in the preparation of our financial
statements. The most significant application is in connection with our
Convertible Preferred Stock, Convertible Debentures and Warrants, where we
determine the fair value of certain hybrid instruments carried at fair value
under FAS 155 and certain derivative liabilities which are recorded at fair
value under FAS 133. See Note 5 for further information regarding the accounting
treatment of our financing instruments.  In applying FAS 157 to the
determination of fair values, we do not believe that the amounts would have been
materially different than those reflected in our consolidated financial
statements under previous standards.




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 – FAS 123R “Share-Based Payment”,
requires that all stock-based compensation be recognized as an expense in the
financial statements and that such cost be measured at the grant date fair value
of the award.




We record
the grant date fair value of stock-based compensation awards as an expense over
the vesting period of the related stock options.  In order to
determine the fair value of the stock options on the date of grant, we use the
Black-Scholes-Merton 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
realized.  We have recorded a 100% valuation allowance as of December
31, 2008 and 2007.




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 10 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 NeoMedia Europe, which use the Euro as
their functional currency.  Foreign currency transaction gains and
losses are reflected in income.  Translation gains and losses arising
from translating the financial statements of NeoMedia Europe into U.S. dollars
for reporting purposes are included in “Accumulated other comprehensive income
(loss).”




Reclassifications–
Due to the completed divestitures of 12Snap, Telecom Services, and Micro Paint
Repair during 2007 and 2008, 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 prior year
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.




44


Note
3 -  Discontinued Operations




MPR, Mobot,
Sponge, 12Snap, and Telecom Services Businesses – During August 2006, we
decided to sell our Micro Paint Repair business unit; this sale was completed on
November 15, 2007.  In the fourth quarter of 2006, we disposed of two
subsidiaries, Mobot and Sponge, including all assets and liabilities associated
with these two subsidiaries.  During the first quarter of 2007, we
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 as
discontinued operations for all periods presented and the assets of these
operations are included in Assets held for sale in the consolidated balance
sheet..




The
operating results of these business units, which have been 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.




Micro
      Paint Repair
                                    
                                    
                                    Mobot
                                    
                                    
                                    Sponge
                                    
                                    
                                    12Snap
                                    
                                    
                                    Telecom
                                      Service
                                    
                                    
                                    Total2008Net
      sales
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -Cost
      of sales
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Gross
      profit
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Sales
      and marketing expenses
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -General
      and administrative expenses
                                    
                                    
                                    258
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    65
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    323Research
      and development costs
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Loss
      from operations of discontinued business
                                    
                                    
                                    (258
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (65
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (323
                                    )Loss
      on disposal of business
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Loss
      from discontinued operations
                                    
                                    $
                                    (258
                                    )
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    (65
                                    )
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    (323
                                    )2007Net
      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
                                    )




As of
December 31, 2008 our other long term assets include our 7.5% remaining
investment in Sponge, which is valued at $260,000.




Note
4 - Capital Stock





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 our 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 non-assessable.
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 by proxy.  Shares
repurchased are held as treasury shares and used for general corporate purposes
including, but not limited to, satisfying obligations under our employee benefit
plans. Treasury stock is recorded at cost.




45





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 will 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, 2008.




46




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;




·
            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, 2008, 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 redeemable 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 or 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.




As of
December 31, 2008, no shares of the Series B Convertible Redeemable Preferred
Stock have been issued or are currently outstanding.




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:




47




·
            The
      holders of record of the Series C Convertible Preferred shares are
      entitled to dividends at a rate of 8% per annum, if, as and when declared
      by the Board of Directors. As of December 31, 2008 and 2007, accumulated
      undeclared unpaid dividends were $4.6 million and $3.0 million,
      respectively;




·
            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 is convertible, at the
      option of the holder, into shares of our common stock at the lesser
      of (i) $0.02 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




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




As of
December 31, 2008, 19,144 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.The holder of all of the outstanding shares of our Series C
convertible preferred Stock, YA Global, is limited by the contractual provisions
of their related Securities Purchase Agreements and other related transaction
documents from beneficial control of more than 4.99% of our voting securities.
Therefore, YA Global may not exercise all the voting rights contained in the
designation of these securities, unless we
have been declared by YA Global to be in default or YA Global waives this
restriction, subject to a 65 day notice period, and complies with the reporting
requirements of the SEC for affiliates.See footnote 5.




Poison
Pill. 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 stockholders, who were our founders, 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”.




In
addition, our Certificate of Incorporation authorizes our Board of Directors to
designate and issue our 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.





Note
5 - Financing





On
February 17, 2006, the Company issued Series C convertible preferred stock to YA
Global and between August 24, 2006 and October 28, 2008, has entered into ten
secured convertible debentures with YA Global. In addition, in connection with
these debentures and preferred stock, the Company also issued common stock
warrants to YA Global.




48


Series
C Convertible Preferred Stock
  On
February 17, 2006, we issued 22,000 shares of $1,000 Series C 8% convertible
preferred stock to YA Global. The Series C convertible preferred stock is
convertible into our common stock at the lower of $0.02 per share, or 97% of the
lowest closing bid price of the common stock for the 30 trading days immediately
preceding the conversion date. The fixed conversion price was reset from $0.50
to $0.02 on August 24, 2007, as an inducement for YA Global to enter into an
additional financing arrangement with us at that time. The conversions are
limited such that YA Global cannot exceed 4.99% ownership. The Series C
convertible preferred stock has voting rights on an “as converted” basis,
meaning YA Global is entitled to vote the number of shares of common stock into
which the Series C convertible preferred stock was convertible as of the record
date for a meeting of shareholders. However, YA Global is also contractually
limited to beneficially control no more than 4.99% of our common shares.
Therefore unless we
are declared to be in default by YA Global or YA Global provides us with a 65
day notice that they are waiving this beneficial ownership limitation and
complies with the SEC reporting requirers for affiliates,their voting
rights in regards to the Series C preferred stock are also
restricted.
 
 As of
December 31, 2008, YA Global has converted 2,856.10 shares of the original
22,000 shares of Series C preferred stock, leaving 19,143.90 shares outstanding,
as follows:
  Date
      Converted
                          
                          Series C Shares
                            Converted
                          
                          
                          Common Shares
      Issued11/28/06
                          
                          
                          378
                          
                          
                          
                          6,631,57906/25/07
                          
                          
                          245
                          
                          
                          
                          8,781,36208/14/07
                          
                          
                          500
                          
                          
                          
                          25,773,19610/23/07
                          
                          
                          600
                          
                          
                          
                          45,801,52710/31/07
                          
                          
                          180
                          
                          
                          
                          13,740,45802/19/08
                          
                          
                          78
                          
                          
                          
                          10,000,00003/10/08
                          
                          
                          16
                          
                          
                          
                          2,500,00003/17/08
                          
                          
                          32
                          
                          
                          
                          5,000,00003/25/08
                          
                          
                          32
                          
                          
                          
                          5,000,00004/01/08
                          
                          
                          64
                          
                          
                          
                          10,000,00005/06/08
                          
                          
                          15.5
                          
                          
                          
                          5,000,00005/09/08
                          
                          
                          15
                          
                          
                          
                          5,000,00005/22/08
                          
                          
                          11
                          
                          
                          
                          5,000,00005/30/08
                          
                          
                          44
                          
                          
                          
                          20,000,00006/13/08
                          
                          
                          52.5
                          
                          
                          
                          25,000,00006/23/08
                          
                          
                          21
                          
                          
                          
                          10,000,00006/30/08
                          
                          
                          42
                          
                          
                          
                          20,000,00007/14/08
                          
                          
                          21
                          
                          
                          
                          10,000,00007/22/08
                          
                          
                          22
                          
                          
                          
                          10,000,00008/04/08
                          
                          
                          42
                          
                          
                          
                          20,000,00008/05/08
                          
                          
                          62
                          
                          
                          
                          30,000,00008/11/08
                          
                          
                          42
                          
                          
                          
                          20,000,00008/22/08
                          
                          
                          21
                          
                          
                          
                          10,000,00009/03/08
                          
                          
                          21
                          
                          
                          
                          10,000,00009/15/08
                          
                          
                          75
                          
                          
                          
                          25,000,00009/18/08
                          
                          
                          60.1
                          
                          
                          
                          20,000,00010/02/08
                          
                          
                          58
                          
                          
                          
                          20,000,00011/11/08
                          
                          
                          11
                          
                          
                          
                          5,000,00011/14/08
                          
                          
                          11
                          
                          
                          
                          5,000,00011/17/08
                          
                          
                          44
                          
                          
                          
                          20,000,00011/24/08
                          
                          
                          40
                          
                          
                          
                          20,000,000Total
                          
                          
                          2,856.1
                          
                          
                          
                          448,228,122
  The
Series C convertible preferred stock provides anti-dilution protection such that
if, at any time while the Series C preferred stock is outstanding, we (a) offer,
sell or grant any option (excluding employee stock options) to purchase or (b)
offer, sell or grant any right to re-price our securities, or (c) otherwise
dispose of or issue any common stock or common stock equivalents, or (d) entitle
any person to acquire shares of common stock, at an effective price per share
less than the then effective conversion price then, in such instance, the
conversion price for the convertible preferred stock will be reduced to the
lower price. Any such adjustment in the effective conversion price for the
convertible preferred shares could significantly dilute existing
investors.
  49
  In
connection with the Series C convertible preferred stock, we also entered into a
Registration Rights Agreement with YA Global that required us to, among other
requirements, file a registration statement with the SEC registering the resale
of the shares of common stock issuable upon conversion of the preferred stock
and the exercise of the warrants issued to YA Global, and achieve and maintain
effectiveness of the registration statement. Although the required registration
statement was declared effective on November 5, 2007, we failed to meet the
timely filing requirements and accordingly were subject to liquidated damages
amounting to 1% of the outstanding amount of Series C preferred stock per month,
not to exceed $1.2 million. On March 27, 2007, we paid $0.8 million of
liquidated damages from the proceeds of a new secured convertible debenture.
  The
Series C preferred stock did not require liability classification when it was
issued because it did not provide for a fixed or determinable redemption (an
unconditional payment requirement) and events that could give rise to cash
redemption were conditional and not certain to occur. However, The Securities
and Exchange Commission, Accounting Series Release (“ASR”) 268 and EITF Topic
D-98 require classification of redeemable securities outside of shareholders’
equity when, irrespective of probability, contingent redemption events are
outside of the issuer’s control. As a result, the Series C Preferred was
initially classified outside of stockholders’ equity. Because the registration
statement we were required to file to register the common stock underlying the
Series C preferred stock was not effective by the required date, as discussed
above, at December 31, 2006 we were in default under the terms and conditions of
the Series C preferred stock. As of the date of default, the Series C preferred
stock became redeemable for cash at the holder’s option which required the
Series C preferred stock to be reclassified from its mezzanine classification to
a liability because the redemption was no longer conditional.  On
December 31, 2008, we obtained a waiver of all events of default including the
events of default related to the Series C preferred stock (see additional
information related to the waiver, below).  Upon effectiveness of the
waiver, the Series C preferred was no longer redeemable at the holder’s option
and the Series C preferred no longer required liability
classification.  As such, the carrying value of the Series C preferred
was reclassified as of December 31, 2008 to the “mezzanine” section of our
consolidated balance sheet, between liabilities and shareholders’ equity. The
evaluation of the classification of the Series C preferred is required at each
reporting date. FAS 150 “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity” requires reclassification as a
liability of financial instruments otherwise classified in stockholders’ equity
or contingently redeemable preferred stock, if and when the conditional
redemption becomes certain of occurrence.
  In
connection with the Series C preferred stock, YA Global also received Series A,
B and C warrants to purchase 20 million, 25 million, and 30 million shares of
our common stock, respectively. The warrants, which are exercisable separately,
originally had fixed exercise prices of $0.50, $0.40 and $0.35 per share,
respectively. As an inducement to YA Global to enter into subsequent financing
arrangements with us, the fixed exercise prices of these warrants were reduced
on December 29, 2006 to $0.04 per share and were again reduced on August 24,
2007 to $0.02 per share, subject to all the original terms and conditions of the
respective warrant agreements, including the provision that the warrants are
exercisable at the lower of the fixed exercise price (now $0.02 per share) or
97% of the lowest closing bid price of the common stock for the 30 trading days
immediately preceding the conversion date.  At December 31, 2008, the
effective conversion price was $0.00107 per share.  The warrants have
a five-year contractual life and expire on February 16, 2011. We can force
exercise of the warrants if the closing bid price of our common stock is more
than $0.10 greater than the exercise price of the warrants for 15 consecutive
trading days.
 
 Secured Convertible
Debentures
 
 In 2006
and 2007, the Company issued four Secured Convertible Debentures to YA Global.
During the year ended December 31, 2008, the Company issued six additional
Secured Convertible Debentures to YA Global, dated April 11, 2008, May 16, 2008,
May 29, 2008, July 10, 2008, July 29, 2008, and October 28, 2008, as
follows:
  50
  April
      11,
                            2008
                          
                          
                          May
      16,
                            2008
                          
                          
                          May
      29,
                            2008Face
      Amount
                          
                          $
                          390,000
                          
                          
                          $
                          500,000
                          
                          
                          $
                          790,000Net
      Proceeds
                          
                          $
                          336,000
                          
                          
                          $
                          441,000
                          
                          
                          $
                          700,000Common
      shares indexed to debenture
                          
                          
                          92,857,143
                          
                          
                          
                          227,272,727
                          
                          
                          
                          395,000,000Common
      shares indexed to warrants
                          
                          
                          --
                          
                          
                          
                          7,500,000
                          
                          
                          
                          50,000,000Total
      common shares initially indexed
                          
                          
                          92,857,143
                          
                          
                          
                          234,772,727
                          
                          
                          
                          445,000,000
 
 
 July
      10,
                                            2008
                                          
                                          
                                          July
      29,
                                            2008
                                          
                                          
                                          October
      28,
                                            2008
                                          
                                          
                                          TotalFace
      Amount
                                          
                                          $
                                          137,750
                                          
                                          
                                          $
                                          2,325,000
                                          
                                          
                                          $
                                          2,325,000
                                          
                                          
                                          $
                                          6,467,750Net
      Proceeds
                                          
                                          $
                                          123,750
                                          
                                          
                                          $
                                          2,085,000
                                          
                                          
                                          $
                                          2,100,500
                                          
                                          
                                          $
                                          5,786,250Common
      shares indexed to debenture
                                          
                                          
                                          51,018,519
                                          
                                          
                                          
                                          930,000,000
                                          
                                          
                                          
                                          1,788,461,538
                                          
                                          
                                          
                                          3,484,609,927Common
      shares indexed to warrants
                                          
                                          
                                          --
                                          
                                          
                                          
                                          450,000,000
                                          
                                          
                                          
                                          450,000,000
                                          
                                          
                                          
                                          957,500,000Total
      common shares initially indexed at inception
                                          
                                          
                                          51,018,519
                                          
                                          
                                          
                                          1,380,000,000
                                          
                                          
                                          
                                          2,238,461,538
                                          
                                          
                                          
                                          4,442,109,927
 
 The
underlying agreements for each of the ten debentures are essentially the same,
except in regard to the interest rate, varying conversion prices per share, and
the number of warrants that were issued in conjunction with each of the
debentures. The table below summarizes the significant terms of each of the
debentures outstanding at December 31, 2008.
 
 The
debentures are convertible into our common stock at the then effective
conversion price, which varies relative to our trading stock price, as outlined
in the table below. The conversions are limited such that YA Global cannot
exceed 4.99% ownership of NeoMedia Technologies, Inc. Each convertible debenture
affords YA Global anti-dilution protection should, at any time while the
convertible debenture is outstanding, we (a) offer, sell or grant any option
(excluding employee stock options) to purchase or (b) offer, sell or grant any
right to re-price our securities, or (c) otherwise dispose of or issue any
common stock or common stock equivalents, or (d) entitle any person to acquire
shares of common stock, at an effective price per share less than the then
effective conversion price of the debenture; then, in such instance, the
conversion price of the debenture will be reduced to the lower price. Any such
adjustment in the effective conversion price for the convertible debentures
could significantly dilute existing investors.
 
 All of
the convertible debentures are secured according to the terms of a Security
Pledge Agreement dated August 23, 2006, which was entered into in connection
with the first convertible debenture with YA Global and which provides YA Global
with a security interest in substantially all of our assets.
 
 The 2008
convertible debentures are included in the terms of an existing Registration
Rights Agreement with YA Global dated August 24, 2007. That agreement requires
the Company to (i) file a registration statement with the SEC registering the
resale of the shares of common stock issuable upon conversion of the convertible
debentures and the exercise of the related warrants and (ii) maintain
effectiveness of the registration statement. Failure to meet these requirements
originally required the Company to pay liquidated damages amounting to 2% per
month of the principal amount of the debentures, not to exceed aggregate damages
of $1,000,000.  See additional information regarding the liquidated
damages subsequent to the waiver, effective December 31, 2008.
 
 In
connection with the August 2006 and December 2006 convertible debentures, we
also entered into a Registration Rights Agreement with YA Global that required
us to file a registration statement with the SEC registering the resale of the
shares of common stock issuable upon conversion of the debentures and the
exercise of the warrants, and achieve and maintain effectiveness of the
registration statement. Although the required registration statement was
declared effective on November 5, 2007, we failed to meet the timely filing
requirements, and accordingly were subject to liquidated damages amounting to 2%
of the outstanding amount of the convertible debentures, not to exceed $1.3
million. On March 27, 2007, we paid $0.5 million of the liquidated damages from
the proceeds of a new secured convertible debenture. The remaining $0.8 million
of liquidated damages was accrued until December 31, 2008 when payment of the
remaining liquidated damages was waived. On March 27, 2007, we also paid from
the proceeds of the new debenture $0.8 million of liquidated damages related to
our failure to timely file the registration statement required in connection
with the Series C preferred stock.
  51
  The
convertible debentures contain various Events of Default, which could subject us
to penalties, damages, and liabilities as specified in the agreements. Such
Events include:
 
 ·
              Any
      case or action of bankruptcy or insolvency commenced by us or any
      subsidiary, against us or adjudicated by a court for the benefit of
      creditors;
 
 ·
              Any
      default in our obligations under a mortgage or debt in excess of $0.1
      million; (we were in default of this provision as of August 24, 2008, due
      to non-payment of required principal and interest payments on the August
      24, 2006 Debenture)
 
 ·
              Any
      cessation in the eligibility of our stock to be quoted on a trading
      market;
 
 ·
              Failure
      to timely file the registration statement covering the shares related to
      the conversion option, or failure to make the registration statement
      effective timely (we were in default of this provision as of December 31,
      2006, with respect to the Series C convertible preferred stock, the August
      2006 Debenture, and the December 2006
  Debenture);
 
 ·
              Any
      failure to deliver share certificates within the specified
      time;
 
 ·
              Any
      failure by us to pay in full the amount of cash due pursuant to a buy-in
      or failure to pay any amounts owed on account of an event of default
      within 10 days of the date due.
 
 In
addition, the debentures require that:
  ·
              We
      will reserve and keep available authorized and unissued registered shares
      available to be issued upon
conversion;
 ·
              Without
      YA Global’s consent, we cannot:
 
 o
              issue
      or sell any shares of common stock or preferred stock without
      consideration or for consideration per share less than the closing bid
      price immediately prior to its
issuance,
 o
              issue
      or sell any preferred stock, warrant, option, right, contract, call, or
      other security or instrument granting the holder thereof the right to
      acquire common stock for consideration per share less than the closing bid
      price immediately prior to its
issuance,
 o
              enter
      into any security instrument granting the holder a security interest in
      any of our assets, or
 o
              file
      any registration statements on Form
S-8.
 
 52
  As of
December 31, 2008, the significant terms of the ten convertible debentures are
as follows:
 
 August
      24,
                                            2006
                                          
                                          
                                          December
      29,
                                            2006
                                          
                                          
                                          March
      27,
                                            2007
                                          
                                          
                                          August
      24,
                                            2007Principal
      amount
                                          
                                          $
                                          5,000,000
                                          
                                          
                                          $
                                          2,500,000
                                          
                                          
                                          $
                                          7,458,651
                                          
                                          
                                          $
                                          1,775,000Fees
      paid
                                          
                                          
                                          (120,817
                                          )
                                          
                                          
                                          (270,000
                                          )
                                          
                                          
                                          (780,865
                                          )
                                          
                                          
                                          (200,000
                                          )Accrued
      interest on prior obligations paid
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (365,972
                                          )
                                          
                                          
                                          -Liquidated
      damages on prior obligations paid
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (1,311,814
                                          )
                                          
                                          
                                          -Net
      proceeds to us
                                          
                                          $
                                          4,879,183
                                          
                                          
                                          $
                                          2,230,000
                                          
                                          
                                          $
                                          5,000,000
                                          
                                          
                                          $
                                          1,575,000Interest
      rate
                                          
                                          
                                          10
                                          %
                                          
                                          
                                          10
                                          %
                                          
                                          
                                          13
                                          %
                                          
                                          
                                          14
                                          %Maturity
      date (2 years)
                                          
                                          8/24/2008 **
                                          
                                          
                                          12/29/2008**
                                          
                                          
                                          3/27/2009 **
                                          
                                          
                                          8/24/2009Number
      of warrants issued
                                          
                                          
                                          175,000,000
                                          
                                          
                                          
                                          42,000,000
                                          
                                          
                                          
                                          125,000,000
                                          
                                          
                                          
                                          75,000,000Exercise
      price of warrants
                                          
                                          $
                                          0.02
                                          
                                          
                                          $
                                          0.02
                                          
                                          
                                          $
                                          0.02
                                          
                                          
                                          $
                                          0.02Warrants
      expire (5 years)
                                          
                                          8/24/2011
                                          
                                          
                                          12/29/2011
                                          
                                          
                                          3/24/2012
                                          
                                          
                                          8/24/2012Convertible
      into our common stock at the lower of:Fixed
      conversion price per share
                                          
                                          $
                                          0.15
                                          
                                          
                                          $
                                          0.06
                                          
                                          
                                          $
                                          0.05
                                          
                                          
                                          $
                                          0.02or
      percent of lowest closing bid price
                                          
                                          
                                          90
                                          %
                                          
                                          
                                          90
                                          %
                                          
                                          
                                          90
                                          %
                                          
                                          
                                          80
                                          %of
      lowest volume weighted average price preceding conversion
                                          
                                          30
      days
                                          
                                          
                                          30
      days
                                          
                                          
                                          30
      days
                                          
                                          
                                          10
      daysRegistration
      Rights Agreement:File
      registration with SEC within:
                                          
                                          30
      days
                                          
                                          
                                          150
      days
                                          
                                          
                                          by
      4/12/2007
                                          
                                          
                                          30
      days following demandAchieve
      effectiveness of registration   statement
      within:
                                          
                                          90 days
                                          
                                          
                                          90 days
                                          
                                          
                                          by
      5/10/2007
                                          
                                          
                                          90 days following
      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
 
 **   Effective
September 24, 2008, the maturity date of the August 24, 2006 and December 29,
2006 debentures were extended to July 29, 2010. On April 6, 2009 (effective
March 27, 2009) the maturity date of the March 27, 2007 debenture was extended
to July 29, 2010. See additional information related to this extension in the
sections below.
 
 53
  April
      11, 2008
                                
                                
                                May
      16, 2008
                                
                                
                                May
      29, 2008
                                
                                
                                July
      10, 2008Principal
      amount
                                
                                $
                                390,000
                                
                                
                                $
                                500,000
                                
                                
                                $
                                790,000
                                
                                
                                $
                                137,750Fees
      paid
                                
                                
                                (54,000
                                )
                                
                                
                                (59,000
                                )
                                
                                
                                (90,000
                                )
                                
                                
                                (14,000
                                )Accrued
      interest on prior obligations paid
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Liquidated
      damages on prior obligations paid
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Net
      proceeds to us
                                
                                $
                                336,000
                                
                                
                                $
                                441,000
                                
                                
                                $
                                700,000
                                
                                
                                $
                                123,750Interest
      rate
                                
                                
                                15
                                %
                                
                                
                                15
                                %
                                
                                
                                15
                                %
                                
                                
                                15
                                %Maturity
      date (2 years)
                                
                                4/11/2010
                                
                                
                                5/16/2010
                                
                                
                                5/30/2010
                                
                                
                                7/10/2010Number
      of warrants issued
                                
                                
                                -
                                
                                
                                
                                7,500,000
                                
                                
                                
                                50,000,000
                                
                                
                                
                                -Exercise
      price of warrants
                                
                                
                                -
                                
                                
                                $
                                0.0175
                                
                                
                                $
                                0.01
                                
                                
                                
                                -Warrants
      expire (7 years)
                                
                                
                                -
                                
                                
                                5/16/2015
                                
                                
                                5/29/2015
                                
                                
                                
                                -Convertible
      into our common stock at the lower of:Fixed
      conversion price per share
                                
                                $
                                0.015
                                
                                
                                $
                                0.015
                                
                                
                                $
                                0.01
                                
                                
                                $
                                0.01or
      percent of lowest closing bid price
                                
                                
                                80
                                %
                                
                                
                                80
                                %
                                
                                
                                80
                                %
                                
                                
                                80
                                %of
      lowest volume weighted averageprice
      preceding conversion
                                
                                10
      days
                                
                                
                                10
      days
                                
                                
                                10
      days
                                
                                
                                10
      daysRegistration
      rights agreement:File
      registration with SEC within:
                                
                                30 days
                                
                                
                                30 days
                                
                                
                                30
      days
                                
                                
                                30
      daysAchieve
      effectiveness of registration statement within:
                                
                                90 days
                                
                                
                                90 days
                                
                                
                                90 days
                                
                                
                                90 daysLiquidated
      damages for failure to meet filing or effectiveness
      requirements
                                
                                2% of principal, 
      per month
                                
                                
                                2% of principal, 
      per month
                                
                                
                                2% of principal, 
      per 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
 
 54
  July
      29, 2008
                              
                              
                              October
      28, 2008
                              
                              
                              Total
      of all DebenturesPrincipal
      amount
                              
                              $
                              2,325,000
                              
                              
                              $
                              2,325,000
                              
                              
                              $
                              23,201,401Fees
      paid
                              
                              
                              (240,000
                              )
                              
                              
                              (224,500
                              )
                              
                              
                              (2,053,182
                              )Accrued
      interest on prior obligations paid
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (365,972
                              )Liquidated
      damages on prior obligations paid
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (1,311,814
                              )Net
      proceeds to us
                              
                              $
                              2,085,000
                              
                              
                              $
                              2,100,500
                              
                              
                              $
                              19,470,433Interest
      rate
                              
                              
                              14
                              %
                              
                              
                              14
                              %Maturity
      date (2 years)
                              
                              7/29/2010
                              
                              
                              7/29/2010Number
      of warrants issued
                              
                              
                              450,000,000
                              
                              
                              
                              n/aExercise
      price of warrants
                              
                              $
                              0.02
      - $0.075
                              
                              
                              
                              n/aWarrants
      expire (7 years)
                              
                              7/29/2015
                              
                              
                              
                              n/aConvertible
      into our common stock at the lower of:Fixed
      conversion price per share
                              
                              $
                              .02
                              
                              
                              $
                              .02or
      percent of lowest closing bid price of volume
                                weighted
      average price preceding conversion
                              
                              
                              95
                              %
                              
                              
                              95
                              %Registration
      rights agreement:File
      registration with SEC within:
                              
                              30 days
                              
                              
                              30 daysAchieve
      effectiveness of  registration statement with SEC
      within:
                              
                              90 days
                              
                              
                              90 daysLiquidated
      damages for failure to meet filing or effectiveness
      requirements
                              
                              2% of principal,
      per month
                              
                              
                              2% of principal,
      per monthSecurity
      pledged as collateral
                              
                              Substantially
      all of
                                our
      assets
                              
                              
                              Substantially
      all of
                                our
      assets
 
 
 Warrants
  As
described above, YA Global holds warrants to purchase shares of our common stock
that were issued in connection with the convertible debentures and the Series C
convertible preferred stock. The warrants are exercisable at the lower of a
fixed exercise price or a specified percentage of the current market price. As
discussed above, the fixed exercise prices of the warrants held by YA Global
have been adjusted from time to time as an inducement for YA Global to enter
into subsequent financing arrangements.  The 175,000,000 warrants
issued on February 17, 2006 in connection with the Series C convertible
preferred stock originally had exercise prices ranging from $0.35 to $0.50 per
share and the 175,000,000 warrants issued on August 24, 2006 in connection with
the debentures originally had exercise prices ranging from $0.05 to $0.25 per
share. As an inducement to YA Global to enter into subsequent financing
arrangements with us, the fixed exercise prices of all of these warrants were
reduced on December 29, 2006 to $0.04 per share and were again reduced on August
24, 2007 to $0.02 per share. The 42,000,000 warrants issued on December 29, 2006
originally had an exercise price of $0.06 per share and the 125,000,000 warrants
issued on March 27, 2007 originally had an exercise price of $0.04 per
share.  The fixed exercise prices of these warrants were reduced on
August 24, 2007 to $0.02 per share.
 
 55
  At
December 31, 2008, the warrants issued to YA Global, none of which have been
exercised, were as follows:
 
 Original
      Issue Date
                      
                      Shares
      Underlying Warrant
                      
                      
                      Original
                        Exercise
      Price
                      
                      
                      Restated
      Exercise Price December 29, 2006
                      
                      
                      Restated
      Exercise Price August 24, 2007February
      17, 2006
                      
                      
                      20,000,000
                      
                      
                      $
                      0.50
                      
                      
                      $
                      0.04
                      
                      
                      $
                      0.02February
      17, 2006
                      
                      
                      25,000,000
                      
                      
                      
                      0.40
                      
                      
                      
                      0.04
                      
                      
                      
                      0.02February
      17, 2006
                      
                      
                      30,000,000
                      
                      
                      
                      0.35
                      
                      
                      
                      0.04
                      
                      
                      
                      0.02August
      24, 2006
                      
                      
                      25,000,000
                      
                      
                      
                      0.15
                      
                      
                      
                      0.04
                      
                      
                      
                      0.02August
      24, 2006
                      
                      
                      50,000,000
                      
                      
                      
                      0.25
                      
                      
                      
                      0.04
                      
                      
                      
                      0.02August
      24, 2006
                      
                      
                      50,000,000
                      
                      
                      
                      0.20
                      
                      
                      
                      0.04
                      
                      
                      
                      0.02August
      24, 2006
                      
                      
                      50,000,000
                      
                      
                      
                      0.05
                      
                      
                      
                      n/a
                      
                      
                      
                      0.02December
      29, 2006
                      
                      
                      42,000,000
                      
                      
                      
                      0.06
                      
                      
                      
                      n/a
                      
                      
                      
                      0.02March
      27, 2007
                      
                      
                      125,000,000
                      
                      
                      
                      0.04
                      
                      
                      
                      n/a
                      
                      
                      
                      0.02August
      24, 2007
                      
                      
                      75,000,000
                      
                      
                      
                      0.02
                      
                      
                      
                      n/a
                      
                      
                      
                      n/aMay
      16, 2008
                      
                      
                      7,500,000
                      
                      
                      
                      0.0175
                      
                      
                      
                      n/a
                      
                      
                      
                      n/aMay
      29, 2008
                      
                      
                      50,000,000
                      
                      
                      
                      0.01
                      
                      
                      
                      n/a
                      
                      
                      
                      n/aJuly
      29, 2008
                      
                      
                      100,000,000
                      
                      
                      
                      0.02
                      
                      
                      
                      n/a
                      
                      
                      
                      n/aJuly
      29, 2008
                      
                      
                      100,000,000
                      
                      
                      
                      0.04
                      
                      
                      
                      n/a
                      
                      
                      
                      n/aJuly
      29, 2008
                      
                      
                      125,000,000
                      
                      
                      
                      0.05
                      
                      
                      
                      n/a
                      
                      
                      
                      n/aJuly
      29, 2008
                      
                      
                      125,000,000
                      
                      
                      
                      0.075
                      
                      
                      
                      n/a
                      
                      
                      
                      n/a999,500,000
 
 The
aggregate gross proceeds to us if YA Global were to exercise all its outstanding
in-the-money warrants, based on the December 31, 2008 effective exercise price,
would be $1.1 million.
 
 Default
Events and Waiver
 
 As of
December 31, 2006, we were in default under the February 17, 2006 Series C
preferred stock and the August 24, 2006 and December 29, 2006 debentures, due
primarily to our failure to register the shares underlying the instruments by
the prescribed deadline, and subsequently for failure to sell our Telecom
Services and Micro Paint Repair businesses by September 30, 2007, as required by
the August 24, 2007 Debenture. Due to the then default status, YA Global had
certain material rights that did not exist prior to default, including the right
to call the full face value of the instruments.  In addition, we were
responsible for liquidated damages until the default was cured with the
effectiveness of our registration statement on November 5, 2007, and the sale of
Telecom Services and MPR, which were completed on October 30, 2007 and November
15, 2007, respectively.
  As a
result of the default, at December 31, 2006 and continuing at December 31, 2007,
the accounting for the convertible securities was modified as
follows:
  ·
              Prior
      to the default, we were accreting the discount from the face amount of the
      February 17, 2006 Series C preferred stock and the August 24, 2006 and
      December 29, 2006 debentures, using the effective interest
      method.  This discount resulted from allocating a portion of the
      proceeds received for these instruments to the warrants issued to YA
      Global.  Accretion of the discount on the Series C preferred
      stock was recognized as dividends and charged to additional paid in
      capital and accretion, of the discount on the debentures was recognized
      through periodic charges to interest expense. Due to their default status,
      during the fourth quarter of 2006, we accreted the discount to the full
      face value of these instruments.
 
 ·
              The
      Series C convertible preferred stock was reported as demand debt in the
      current liabilities section of the balance sheet, pursuant to the guidance
      outlined in FAS 150.
  56





·
              The
      secured convertible debentures were classified as debt in the current
      liabilities section of the balance sheet rather than long term because the
      debentures were callable as demand debt due to the
  default.
 
 As of
August 23, 2008, we were in default on our August 23, 2006 Convertible Debenture
due to non-payment of principal and interest in accordance with the terms of the
agreement. Due to cross-default provisions in the other financing arrangements
all of our debentures were in default.  The event of default caused YA
Global to have certain material rights that did not exist prior to default,
including the right to call the full face value of the instruments and
additional default remedies including default interest and conversion price
provisions went into effect
 
 On
September 24, 2008, we entered into a Letter Agreement with YA Global which
extended the maturity dates of the August 24, 2006 and the December 29, 2006
debentures to July 29, 2010. The extension was considered a one-time extension
for the specific period indicated but was not considered a waiver of existing
events of default.  However, a waiver was subsequently obtained from
YA Global, effective as of December 31, 2008, which waiver is discussed further
below.
 
 We
reviewed the requirements of EITF Issue 02-4, “Determining Whether a Debtor’s
Modification or Exchange of Debt Instruments Is Within the Scope of FASB
Statement 15”, and determined that the extension of the maturity date of the
original issuance of our August 24, 2006 and December 29, 2006 financings met
the criteria of a troubled debt restructuring outlined in FAS.15, “Accounting by
Debtors and Creditors for Troubled Debt Restructurings”.  Accordingly,
the extension allows us to account for interest at the stated rate, rather then
the default rate.
 
 All the
debentures with YA Global contain provisions for acceleration of principal and
interest upon default.  Certain of the debentures also contain default
interest rates and conversion prices, as follows:
 
 April
      11,
                          2008
                        
                        
                        May
      16,
                          2008
                        
                        
                        May
      29,
                          2008
                        
                        
                        July
      10,
                          2008
                        
                        
                        July
      29,
                          2008
                        
                        
                        October
      28,
                          2008Default
      interest rate
                        
                        
                        24
                        %
                        
                        
                        24
                        %
                        
                        
                        24
                        %
                        
                        
                        24
                        %
                        
                        
                        20
                        %
                        
                        
                        20
                        %Convertible
      into our common stock at the lower of:Fixed
      conversion price per share
                        
                        $
                        0.015
                        
                        
                        $
                        0.015
                        
                        
                        $
                        0.01
                        
                        
                        $
                        0.01
                        
                        
                        $
                        0.02
                        
                        
                        $
                        0.02or
      percent of lowest volume weighted average price
                        
                        
                        95
                        %
                        
                        
                        80
                        %
                        
                        
                        50
                        %
                        
                        
                        50
                        %
                        
                        
                        50
                        %
                        
                        
                        50
                        %preceding
      conversion
                        
                        30
      days
                        
                        
                        10
      days
                        
                        
                        10
      days
                        
                        
                        10
      days
                        
                        
                        10
      days
                        
                        
                        10
      days
   We
obtained a waiver from YA Global, effective as of  December 31, 2008
in which all prior events of default and the related cross default provisions of
other financing instruments with YA Global were waived.   YA
Global waived the right to collect any liquidated damages, penalties or fines
which had not previously been paid by us and also acknowledged that as of
December 31, 2008, we were not under any obligation to file a registration
statement under any of the financing arrangements. YA Global does, however,
still have demand rights under certain agreements which would require us to file
registration statements in accordance with the terms of the
agreements.
 
 Prior to
the effective date of the waiver, the instruments with default conversion rates
and interest rates were being valued using these rates.  Upon the
effective date of the waiver, the conversion prices and interest rates
applicable to the instruments reverted back to the initial conversion price and
interest rate rather than the default prices and rates. This waiver was
evaluated under EITF Issue 96-19,"Debtor’s
Accounting for a Modification or Exchange of Debt Instruments"and
EITF Issue 06-06, "Debtor’s Accounting for a
Modification (or Exchange) of Convertible Debt Instruments.In
accordance with EITF Issue 96-19", a modification of terms should be considered
substantial and accounted for in the same manner as an extinguishment if the
terms of the modification result in a difference of at least 10 percent between
the present value of the future cash flows under the terms of the original
instrument and the modified instrument.
  57
  We
reviewed each agreement and determined that the waiver caused a greater than 10%
difference in the net present value of the future cash flows for each of the
convertible debentures. Accordingly, in accordance with EITF Issue 96-19, the
original convertible debentures were considered extinguished and the revised
convertible debentures were recorded at their fair value, resulting in an
extinguishment gain of of approximately $2.4 million.
 
 For
instruments which were recorded under FAS 155, the instruments were first
adjusted to fair value as of December 31, 2008, the effective date of the
waiver, using the default conversion rate and interest rate. The fair value of
the instrument was then calculated using the original conversion rate (adjusted
for anti-dilution) and the original interest rate to determine the fair value of
the instrument subsequent to the waiver. The difference in the fair value before
and after the waiver was recorded as a gain or loss on
extinguishment.
 
 For
instruments recorded under FAS 133, the embedded conversion feature was first
adjusted to fair value as of the date of  the waiver using the default
interest rate and the default conversion rate and the debt discount amortization
was recorded through December 31,2008. The carrying value of the host instrument
and the embedded conversion feature, less any deferred financing costs was then
compared to the fair value of the hybrid instrument subsequent to the waiver and
the difference was recorded as an extinguishment gain or loss.
 
 Fair
Value Considerations
  In
accordance with FAS 133 we determined that the conversion features of the
Series C convertible preferred stock, the August 2006 Debenture, and the
December 2006 Debenture met the criteria of embedded derivatives and that the
conversion features of these instruments needed to be bifurcated and accounted
for as derivative instrument liabilities. These instruments do not meet the
definition of “conventional convertible debt” because the number of shares which
may be issued upon their conversion is not fixed, and there is no cap on the
number of shares that could be issued upon conversion. Therefore, the conversion
feature fails to qualify for equity classification under EITF 00-19, and
must be accounted for as a derivative liability, at fair value. Changes in the
fair value of the derivative liability for the embedded conversion option are
charged or credited to income.
 
 Beginning
in 2007, each new financing arrangement is evaluated, on an
instrument-by-instrument basis, under FAS 155 which permits fair value
re-measurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation. During the evaluation of
the March 2007, August 2007, April 2008, May 2008 and July 2008 Debentures, we
determined that (i) the hybrid debt instrument embodied certain derivative
features whose risks were not clearly and closely related to the risks of the
host debt instrument and (ii) warrants issued in connection with the March 2007,
August 2007, April 2008, May 2008, July 29, 2008 and October 2008 Debentures did
not meet all of the established criteria for equity classification. Additionally
all the Debentures extended a right to the holder to accelerate repayment of the
debt (default put) upon the occurrence of certain contingent events and the
April 2008, May 2008, July 2008 and October 2008 Debentures contain default
interest and default conversion rate penalties. The default puts may be
triggered by certain events that are not related to the debt characteristics of
the debentures and those events are not within our control. As permitted by FAS
155, we have elected not to bifurcate the embedded derivatives in the March
2007, August 2007, April 2008 or May 2008 Debentures and accordingly these
convertible instruments are being carried in their entirety at their fair
values, with the changes in the fair value of the secured convertible debentures
charged or credited to income each period.  We have elected to bifurcate
the embedded derivatives in the August 2006, December 2006, July 2008 and
October 2008 Debentures as permitted by FAS133.  For each instrument
recorded under FAS133, we have combined all the embedded features that required
bifurcation into one compound instrument that is carried at fair value as a
component of derivative liabilities.
  The
warrants issued to YA Global in connection with the Series C preferred stock and
in connection with the convertible debentures do not meet all of the established
criteria for equity classification provided in EITF 00-19 and, accordingly, are
recorded as derivative liabilities at fair value. In addition, certain other
warrants issued by the Company do not meet the criteria for equity
classification and are also carried as derivative liabilities. Changes in the
fair value of the warrants are charged or credited to income or expense each
period.
  58
  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 carrying amount of
the debt, including any unamortized premium or discount is credited to the
capital accounts upon conversion to reflect the stock issued and no gain or loss
is recognized.
 
 Initial
Accounting for New Debentures in 2008
 
 As
discussed above, for the April 11, 2008, May 16, 2008 and May 29, 2008
convertible debentures, we elected not to bifurcate the embedded derivatives and
accordingly, in accordance with FAS 155, these convertible instruments are being
carried in their entirety at their fair values.  In connection with
the May 16, 2008 and May 29, 2008 convertible debentures, YA Global received
7,500,000 and 50,000,000 common stock warrants.  The warrants were
valued using the Black-Scholes-Merton valuation methodology because that model
embodies all of the relevant assumptions that address the features underlying
these instruments. Significant assumptions included in this model as of
inception of the financing arrangements are as follows:
 
 May
      16, 2008
                      
                      
                      May
      29, 2008Indexed
      shares
                      
                      
                      7,500,000
                      
                      
                      
                      50,000,000Exercise
      price
                      
                      $
                      0.0175
                      
                      
                      $
                      0.01Effective
      exercise price
                      
                      $
                      0.0030
                      
                      
                      $
                      0.0030Term
      (years)
                      
                      7
      years
                      
                      
                      7
      yearsVolatility
                      
                      
                      152
                      %
                      
                      
                      152
                      %Risk
      free rate
                      
                      
                      3.43
                      %
                      
                      
                      3.68
                      %
 As
discussed above, for the July 10, 2008, July 29, 2008, and October 28, 2008
convertible debentures, since the embedded conversion feature and certain other
embedded derivatives did not achieve equity classification, we elected combine
all the embedded derivative features that required bifurcation into one compound
instrument, bifurcate the compound embedded derivatives and record them as
derivative liabilities under FAS 133.
 
 In
connection with the July 29, 2008 convertible debenture, YA Global received four
warrants to purchase an aggregate 450,000,000 shares of common stock. The
warrants were valued using the Black-Scholes-Merton valuation methodology.
Significant assumptions included in this model as of inception of the financing
arrangements are as follows:
 
 Warrant
      9-1A
                    
                    
                    Warrant
      9-1B
                    
                    
                    Warrant
      9-1C
                    
                    
                    Warrant
      9-1DIndexed
      shares
                    
                    
                    100,000,000
                    
                    
                    
                    100,000,000
                    
                    
                    
                    125,000,000
                    
                    
                    
                    125,000,000Fixed
      Exercise price
                    
                    $
                    0.02
                    
                    
                    $
                    0.04
                    
                    
                    $
                    0.05
                    
                    
                    $
                    0.075Effective
      exercise price (1)
                    
                    $
                    .0025
                    
                    
                    $
                    0.0025
                    
                    
                    $
                    0.0025
                    
                    
                    $
                    0.0025Term
      (years)
                    
                    
                    7
                    
                    
                    
                    7
                    
                    
                    
                    7
                    
                    
                    
                    7Volatility
                    
                    
                    166
                    %
                    
                    
                    166
                    %
                    
                    
                    166
                    %
                    
                    
                    166
                    %Risk
      free rate
                    
                    
                    3.68
                    %
                    
                    
                    3.68
                    %
                    
                    
                    3.68
                    %
                    
                    
                    3.68
                    %
 
 The
results of the anti-dilution protection resulted in an effective exercise price
which was lower than the stated exercise price.
 
 59
  At
inception, a summary of the allocation of the components of debentures entered
into in 2008 was as follows:
 
 April
      11,
                        2008
                      
                      
                      May
      16,
                        2008
                      
                      
                      May
      29,
                        2008Convertible
      debenture, at fair value
                      
                      $
                      637,270
                      
                      
                      $
                      813,631
                      
                      
                      $
                      1,389,544Warrant
      derivative liability
                      
                      
                      --
                      
                      
                      
                      21,750
                      
                      
                      
                      145,000Day-one
      derivative loss
                      
                      
                      (247,270
                      )
                      
                      
                      (335,381
                      )
                      
                      
                      (744,544
                      )Total
      gross proceeds
                      
                      $
                      390,000
                      
                      
                      $
                      500,000
                      
                      
                      $
                      790,000
 
 
 July
      10,
                              2008
                            
                            
                            July
      29,
                              2008
                            
                            
                            October
      28, 2008
                            
                            
                            TotalConvertible
      debenture derivative liability
                            
                            $
                            247,950
                            
                            
                            $
                            3,577,341
                            
                            
                            
                            3,972,512
                            
                            
                            $
                            10,638,248Warrant
      liability
                            
                            
                            --
                            
                            
                            
                            1,080,000
                            
                            
                            
                            --
                            
                            
                            
                            1,246,750Day-one
      derivative loss (1)
                            
                            
                            (110,200
                            )
                            
                            
                            (2,332,341
                            )
                            
                            
                            (1,647,512
                            )
                            
                            
                            (5,417,248
                            )Total
      gross proceeds
                            
                            $
                            137,750
                            
                            
                            $
                            2,325,000
                            
                            
                            $
                            2,325,000
                            
                            
                            $
                            6,467,750
 
 The fair
value of the debentures and warrants at inception was greater than the proceeds
received which resulted in a day-one derivative loss.
 
 Current
Period Accounting Considerations and Valuations
  Warrants:
 
 Freestanding
derivative instruments, consisting of warrants that were issued in connection
with the Series C preferred stock and the convertible debentures as well as
certain other warrants, are valued using the Black-Scholes-Merton valuation
methodology because that model embodies all of the relevant assumptions that
address the features underlying these instruments. Significant assumptions used
in this model as of December 31, 2008 are as follows:
 
 Series
      C Convertible Preferred
      Stock
                    
                    
                    August
      2006 Debenture
                    
                    
                    December
      2006 Debenture
                    
                    
                    March
      2007 Debenture
                    
                    
                    August
      2007 DebentureHolder
                    
                    YA
      Global
                    
                    
                    YA
      Global
                    
                    
                    YA
      Global
                    
                    
                    YA
      Global
                    
                    
                    YA
      GlobalExercise
      price (prior to waiver)
                    
                    $
                    0.0006
                    
                    
                    $
                    0.0006
                    
                    
                    $
                    0.0006
                    
                    
                    $
                    0.0006
                    
                    
                    $
                    0.0006Exercise
      price (subsequent to waiver)
                    
                    $
                    0.0009
                    
                    
                    $
                    0.0009
                    
                    
                    $
                    0.0009
                    
                    
                    $
                    0.0009
                    
                    
                    $
                    0.0009Remaining
      term (years)
                    
                    
                    2.12
                    
                    
                    
                    2.65
                    
                    
                    
                    2.99
                    
                    
                    
                    3.23
                    
                    
                    
                    3.65Volatility
                    
                    
                    134
                    %
                    
                    
                    126
                    %
                    
                    
                    142
                    %
                    
                    
                    138
                    %
                    
                    
                    134
                    %Risk-free
      rate
                    
                    
                    0.76
                    %
                    
                    
                    0.76
                    %
                    
                    
                    0.76
                    %
                    
                    
                    1.00
                    %
                    
                    
                    1.00
                    %Number
      of warrants
                    
                    
                    75,000,000
                    
                    
                    
                    175,000,000
                    
                    
                    
                    42,000,000
                    
                    
                    
                    125,000,000
                    
                    
                    
                    75,000,000
 
 60
  May
      16, 2008 Debenture
                                
                                
                                May
      29, 2008 Debenture
                                
                                
                                July
      29, 2008 Debenture
                                
                                
                                
                                
                                
                                TotalHolder
                                
                                YA
      Global
                                
                                
                                YA
      Global
                                
                                
                                YA
      Global
                                
                                
                                OtherInstrument
                                
                                Warrants
                                
                                
                                Warrants
                                
                                
                                Warrants
                                
                                
                                WarrantsExercise
      price
                                  (prior
      to waiver)
                                
                                $
                                0.0006
                                
                                
                                $
                                0.0006
                                
                                
                                $
                                0.0006
                                
                                
                                $
                                0.011
      - $3.45Exercise
      price
                                  (subsequent
      to waiver)
                                
                                $
                                0.0009
                                
                                
                                $
                                0.0009
                                
                                
                                $
                                0.0009
                                
                                
                                $
                                0.011
      - $3.45Remaining
      term (years)
                                
                                
                                6.38
                                
                                
                                
                                6.41
                                
                                
                                
                                6.58
                                
                                
                                
                                .15
      – 2.04Volatility
                                
                                
                                156
                                %
                                
                                
                                157
                                %
                                
                                
                                168
                                %
                                
                                
                                135%-200
                                %Risk-free
      rate
                                
                                
                                1.55
                                %
                                
                                
                                1.55
                                %
                                
                                
                                1.87
                                %
                                
                                
                                0.11%- 0.76
                                %Number
      of warrants
                                
                                
                                7,500,000
                                
                                
                                
                                50,000,000
                                
                                
                                
                                450,000,000
                                
                                
                                
                                8,471,000
                                
                                
                                1,007,971,000
  Embedded
Derivative Instruments – Series C Preferred Stock and August 2006 and December
2006, July 2008 and October 2008 Convertible Debentures
 
 Embedded
derivative financial instruments arising from the convertible instruments
consist of multiple individual features that were embedded in each instrument.
For each convertible instrument, we evaluated all significant features and, as
required under current accounting standards, aggregated the components into one
compound derivative financial instrument for financial reporting purposes. For
financings recorded in accordance with FAS 133, the compound embedded derivative
instruments are valued using the Flexible Monte Carlo methodology because that
model embodies certain relevant assumptions (including, but not limited to,
interest rate risk, credit risk, and conversion/redemption privileges) that are
necessary to value these complex derivatives.
 
 Assumptions
used as of December 31, 2008 included exercise estimates/behaviors and the
following other significant estimates:
  Series
      C Convertible Preferred Stock
                                              
                                              
                                              August
      24, 2006 Debenture
                                              
                                              
                                              December
      29, 2006 Debenture
                                              
                                              
                                              July
      10, 2008 Debenture
                                              
                                              
                                              July
      29, 2008 Debenture
                                              
                                              
                                              October
      28, 2008 DebentureConversion
      prices
                                                (
      prior to waiver)
                                              
                                              $
                                              0.0014
                                              
                                              
                                              $
                                              0.0006
                                              
                                              
                                              $
                                              0.0006
                                              
                                              
                                              $
                                              0.0006
                                              
                                              
                                              $
                                              0.0006
                                              
                                              
                                              $
                                              0.0006Conversion
      prices
                                                (subsequent
      to waiver)
                                              
                                              $
                                              0.0011
                                              
                                              
                                              $
                                              0.0009
                                              
                                              
                                              $
                                              0.0009
                                              
                                              
                                              $
                                              0.0009
                                              
                                              
                                              $
                                              0.0009
                                              
                                              
                                              $
                                              0.0010Remaining
      terms (years)
                                              
                                              
                                              0.13
                                              
                                              
                                              
                                              1.58
                                              
                                              
                                              
                                              1.58
                                              
                                              
                                              
                                              1.52
                                              
                                              
                                              
                                              1.58
                                              
                                              
                                              
                                              1.58Equivalent
      volatility
                                              
                                              
                                              193
                                              %
                                              
                                              
                                              207
                                              %
                                              
                                              
                                              207
                                              %
                                              
                                              
                                              209
                                              %
                                              
                                              
                                              207
                                              %
                                              
                                              
                                              207
                                              %Equivalent
      interest-risk adjusted rate
                                              
                                              
                                              9.50
                                              %
                                              
                                              
                                              14.75
                                              %
                                              
                                              
                                              14.75
                                              %
                                              
                                              
                                              18.06
                                              %
                                              
                                              
                                              9.94
                                              %
                                              
                                              
                                              9.94
                                              %Equivalent
      credit-risk adjusted yield rate
                                              
                                              
                                              13.05
                                              %
                                              
                                              
                                              15.82
                                              %
                                              
                                              
                                              15.82
                                              %
                                              
                                              
                                              16.42
                                              %
                                              
                                              
                                              16.42
                                              %
                                              
                                              
                                              16.42
                                              %
  Equivalent
amounts reflect the net results of multiple modeling simulations that the
Flexible Monte Carlo Simulation methodology applies to underlying assumptions.
The assumptions included in the calculation are highly subjective and subject to
interpretation.
 
 Hybrid
Financial Instruments Carried at Fair Value – 2007 and 2008 Convertible
Debentures
 
 The March
2007, August 2007, April 11, 2008, May 16, 2008 and May 29, 2008 convertible
debentures are recorded in accordance with SFAS 155 and the entire hybrid
instrument was initially recorded at fair value, with subsequent changes in fair
value recognized in earnings. These financial instruments are valued using the
common stock equivalent approach.  Prior to the date of default, the common
stock equivalent was calculated using the shares indexed to the debentures
valued at the market price of our stock and the present value of the coupon.
Subsequent to the event of default on August 23, 2008, the default conversion
rate was used to calculate the number of shares indexed to the convertible
debenture and the incremental difference between the stated interest rate and
the default interest rate was also included in the value of the common stock
equivalent. Upon receipt of the waiver as of December 31, 2008, the non-default
conversion rate and the stated interest rate are once again used to calculate
the number of shares indexed to the convertible instrument.
  61
  Current
Period Valuations
  For the
Series C Convertible Preferred Stock and the August 2006 and December 2006
debentures, due to our previous default position with respect to these
instruments, the carrying value of each instrument in effect as of December 31,
2006 was written up to its full face value during the fourth quarter of 2006.
For these instruments and the July 2008 and October 2008 debentures, the
embedded derivative instrument, primarily the conversion feature, has been
separated and accounted for as a derivative instrument liability, as discussed
above. This derivative instrument liability is marked to market each reporting
period.
 
 The March
2007, August 2007, April 2008 and May 2008 debentures were each initially
recorded at their full fair value pursuant to FAS 155. That fair value is
marked-to-market each reporting period, with any changes in the fair value
charged or credited to income.
 
 The face
value and the carrying value or fair value, as appropriate, of each instrument
as of December 31, 2008 and December 31, 2007 was:
 
 December
      31, 2008
                          
                          Face value
                          
                          
                          Carrying value
                          
                          
                          Fair value
                          
                          
                          Total(in
      thousands)Series
      C Preferred Stock
                          
                          $
                          19,144
                          
                          
                          $
                          19,144
                          
                          
                          $
                          -
                          
                          
                          $
                          19,144August
      24, 2006 debenture
                          
                          
                          5,000
                          
                          
                          
                          5,000
                          
                          
                          
                          --
                          
                          
                          
                          5,000December
      29, 2006 debenture
                          
                          
                          2,500
                          
                          
                          
                          2,500
                          
                          
                          
                          --
                          
                          
                          
                          2,500March
      27, 2007 debenture
                          
                          
                          7,459
                          
                          
                          
                          --
                          
                          
                          
                          13,478
                          
                          
                          
                          13,478August
      24, 2007 debenture
                          
                          
                          1,775
                          
                          
                          
                          --
                          
                          
                          
                          3,217
                          
                          
                          
                          3,217April
      11, 2008 debenture
                          
                          
                          390
                          
                          
                          
                          --
                          
                          
                          
                          736
                          
                          
                          
                          736May
      16 ,2008 debenture
                          
                          
                          500
                          
                          
                          
                          --
                          
                          
                          
                          955
                          
                          
                          
                          955May
      29, 2008 debenture
                          
                          
                          790
                          
                          
                          
                          --
                          
                          
                          
                          1,506
                          
                          
                          
                          1,506July
      10, 2008 debenture
                          
                          
                          137
                          
                          
                          
                          109
                          
                          
                          
                          --
                          
                          
                          
                          109July
      29, 2008 debenture
                          
                          
                          2,325
                          
                          
                          
                          1,785
                          
                          
                          
                          --
                          
                          
                          
                          1,785October
      28, 2008 debenture
                          
                          
                          2,325
                          
                          
                          
                          1,833
                          
                          
                          
                          --
                          
                          
                          
                          1,833Total
                          
                          $
                          23,201
                          
                          
                          $
                          11,227
                          
                          
                          $
                          19,892
                          
                          
                          $
                          31,119
  
 December
      31, 2007
                          
                          Face value
                          
                          
                          Carrying
      value
                          
                          
                          Fair value
                          
                          
                          Total(in
      thousands)Series
      C Preferred Stock
                          
                          $
                          20,097
                          
                          
                          $
                          20,097
                          
                          
                          $
                          --
                          
                          
                          $
                          20,097August
      24, 2006 debenture
                          
                          
                          5,000
                          
                          
                          
                          5,000
                          
                          
                          
                          --
                          
                          
                          
                          5,000December
      29, 2006 debenture
                          
                          
                          2,500
                          
                          
                          
                          2,500
                          
                          
                          
                          --
                          
                          
                          
                          2,500March
      27, 2007 debenture
                          
                          
                          7,459
                          
                          
                          
                          --
                          
                          
                          
                          18,798
                          
                          
                          
                          18,798August
      24, 2007 debenture
                          
                          
                          1,775
                          
                          
                          
                          --
                          
                          
                          
                          4,401
                          
                          
                          
                          4,401Total
                          
                          $
                          16,734
                          
                          
                          $
                          7,500
                          
                          
                          $
                          23,199
                          
                          
                          $
                          30,699
 
 We
adopted the provisions of FAS 157 as of January 1, 2008, with respect to
financial instruments. As required by FAS 157, assets and liabilities measured
at fair value are classified in their entirety based on the lowest level of
input that is significant to their fair value measurement. Our derivative
financial instruments which are required to be measured at fair value on a
recurring basis under FAS 155 or FAS 133 as of December 31, 2008 are all
measured at fair value using Level 3 inputs. Level 3 inputs are unobservable
inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
  62
  The
following tabu lar
presentation reflects the components of derivative financial instruments related
to convertible financial instruments in the liability section of our balance
sheet at December 31, 2008:
  Common
      Stock
                            Warrants
                          
                          
                          Embedded
      Conversion Feature
                            (in
      thousands)
                          
                          
                          TotalSeries
      C Convertible Preferred Stock
                          
                          $
                          23
                          
                          
                          $
                          10,728
                          
                          
                          $
                          10,751August
      24, 2006 debenture
                          
                          
                          193
                          
                          
                          
                          7,260
                          
                          
                          
                          7,453December
      29, 2006 debenture
                          
                          
                          50
                          
                          
                          
                          3,556
                          
                          
                          
                          3,606March
      27, 2007 debenture
                          
                          
                          150
                          
                          
                          
                          n/a
                          
                          
                          
                          150August
      24, 2007 debenture
                          
                          
                          90
                          
                          
                          
                          n/a
                          
                          
                          
                          90April
      11, 2008 debenture
                          
                          
                          --
                          
                          
                          
                          n/a
                          
                          
                          
                          --May
      16, 2008 debenture
                          
                          
                          10
                          
                          
                          
                          n/a
                          
                          
                          
                          10May
      29, 2008 debenture
                          
                          
                          70
                          
                          
                          
                          n/a
                          
                          
                          
                          70July
      10, 2008 debenture
                          
                          
                          --
                          
                          
                          
                          158
                          
                          
                          
                          158July
      29, 2008 debenture
                          
                          
                          601
                          
                          
                          
                          2,327
                          
                          
                          
                          2,928October
      23, 2008 debenture
                          
                          
                          --
                          
                          
                          
                          2,227
                          
                          
                          
                          2,227Other
      instruments
                          
                          
                          2
                          
                          
                          
                          --
                          
                          
                          
                          2Total
                          
                          $
                          1,189
                          
                          
                          $
                          26,256
                          
                          
                          $
                          27,445
 
 The March
2007, August 2007, April 2008 and May 2008 debentures are carried in their
entirety at fair value in accordance with FAS 155 and the value of the embedded
conversion feature is effectively embodied in those fair
values.
 
 The
following table reflects the number of common shares (in thousands) underlying
warrants outstanding and the number of shares into which the Series C preferred
stock and debentures are convertible at December 31, 2008 and 2007:
 
 December
      31, 2008
                    
                    Warrants
                    
                    
                    Conversion
                    
                    
                    Total
      SharesSeries
      C Convertible Preferred Stock
                    
                    
                    75,000
                    
                    
                    
                    21,456,650
                    
                    
                    
                    21,531,650August
      24, 2006 debenture
                    
                    
                    175,000
                    
                    
                    
                    5,555,556
                    
                    
                    
                    5,730,556December
      29, 2006 debenture
                    
                    
                    42,000
                    
                    
                    
                    3,703,957
                    
                    
                    
                    3,745,957March
      27, 2007 debenture
                    
                    
                    125,000
                    
                    
                    
                    8,287,390
                    
                    
                    
                    8,412,390August
      24, 2007 debenture
                    
                    
                    75,000
                    
                    
                    
                    1,972,222
                    
                    
                    
                    2,047,222April
      11, 2008 debenture
                    
                    
                    --
                    
                    
                    
                    433,333
                    
                    
                    
                    433,333May
      16, 2008 debenture
                    
                    
                    7,500
                    
                    
                    
                    555,556
                    
                    
                    
                    563,056May
      29, 2008 debenture
                    
                    
                    50,000
                    
                    
                    
                    877,778
                    
                    
                    
                    927,778July
      10, 2008 debenture
                    
                    
                    --
                    
                    
                    
                    153,056
                    
                    
                    
                    153,056July
      29, 2008 debenture
                    
                    
                    450,000
                    
                    
                    
                    2,325,000
                    
                    
                    
                    2,775,000October
      23, 2008 debenture
                    
                    
                    
                    
                    
                    
                    2,325,000
                    
                    
                    
                    2,325,000Other
      warrants
                    
                    
                    8,471
                    
                    
                    
                    --
                    
                    
                    
                    8,471Total
                    
                    
                    1,007,971
                    
                    
                    
                    47,645,498
                    
                    
                    
                    48,653,469
 
 December
      31, 2007
                    
                    Warrants
                    
                    
                    Conversion
                    
                    
                    Total
      SharesSeries
      C Convertible Preferred Stock
                    
                    
                    75,000
                    
                    
                    
                    2,166,031
                    
                    
                    
                    2,241,031August
      24, 2006 debenture
                    
                    
                    175,000
                    
                    
                    
                    943,396
                    
                    
                    
                    1,118,396December
      29, 2006 debenture
                    
                    
                    42,000
                    
                    
                    
                    471,698
                    
                    
                    
                    513,698March
      27, 2007 debenture
                    
                    
                    125,000
                    
                    
                    
                    1,420,695
                    
                    
                    
                    1,545,695August
      24, 2007 debenture
                    
                    
                    75,000
                    
                    
                    
                    334,906
                    
                    
                    
                    409,906Other
      warrants
                    
                    
                    22,825
                    
                    
                    
                    --
                    
                    
                    
                    22,825Total
                    
                    
                    514,825
                    
                    
                    
                    5,336,726
                    
                    
                    
                    5,851,551
  63
  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 of the Series C
convertible stock was convertible as of December 31, 2008 was calculated as the
face value plus assumed dividends (if declared), divided by 97% of the lowest
closing bid price for the 30 trading days preceding December 31, 2008. The
number of shares of common stock into which the embedded conversion feature in
the convertible debentures was convertible as of December 31, 2008 was
calculated as the face value of each instrument divided by the conversion price
as of December 31, 2008.
 
 Changes
in the fair value of convertible instruments that are carried at fair value (the
March 2007 Debenture, August 2007 Debenture, April 2008 Debenture and May 2008
Debentures) are reported as “Gain/(loss) from change in fair value of hybrid
financial instruments” in the accompanying consolidated statement of operations.
The following represents a reconciliation of the changes in fair value of
financial instruments measured at fair value under FAS 155:
 
 Year ended December
      31,(in
      thousands)
                    
                    2008
                    
                    
                    2007March
      27, 2007 debenture
                    
                    $
                    5,320
                    
                    
                    $
                    (7,961
                    )August
      24, 2007 debenture
                    
                    
                    (196
                    )
                    
                    
                    137April
      11, 2008 debenture
                    
                    
                    (215
                    )
                    
                    
                    --May
      16, 2008 debenture
                    
                    
                    (564
                    )
                    
                    
                    --May
      29, 2008 debenture
                    
                    
                    (783
                    )
                    
                    
                    --Total
                    
                    $
                    3,562
                    
                    
                    $
                    (7,824
                    )
 
 Changes
in the fair value of derivative instrument liabilities (including warrants and
the bifurcated embedded derivative features of convertible instruments not
carried at fair value) are reported as “Loss from change in fair value of
derivative financial instruments” in the accompanying consolidated statement of
operations. The following represents a reconciliation of the changes in fair
value of derivative financial instruments recorded under FAS 133:
  Year ended December
      31,(in
      thousands)
                                
                                2008
                                
                                
                                2007Series
      C Convertible Preferred Stock
                                
                                $
                                (3,312
                                )
                                
                                $
                                (447
                                )August
      24, 2006 debenture
                                
                                
                                2,205
                                
                                
                                
                                2,284December
      29, 2006 debenture
                                
                                
                                776
                                
                                
                                
                                (645
                                )March
      27, 2007 debenture
                                
                                
                                1,113
                                
                                
                                
                                (4,641
                                )August
      24, 2007 debenture
                                
                                
                                742
                                
                                
                                
                                (3,796
                                )May
      16, 2008 debenture
                                
                                
                                12
                                
                                
                                
                                --May
      29, 2008 debenture
                                
                                
                                75
                                
                                
                                
                                --July
      10, 2008 debenture
                                
                                
                                (94
                                )
                                
                                
                                --July
      29, 2008 debenture
                                
                                
                                (2,267
                                )
                                
                                
                                --October
      23, 2008 debenture
                                
                                
                                (1,589
                                )
                                
                                
                                --Other
      derivative instruments
                                
                                
                                --
                                
                                
                                
                                (395
                                )Total
                                
                                $
                                (2,339
                                )
                                
                                $
                                (7,640
                                )
  The
following represents a reconciliation of the changes in fair value of financial
instruments measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) during the year ended December 31,
2008:
 
 (in
      thousands)
                        
                        December
      31, 2008Beginning
      balance: Derivative financial instruments
                        
                        $
                        24,651Total
      gains (losses)
                        
                        
                        (2,339
                        )Transfers
      in/out of Level 3
                        
                        
                        5,133Ending
      balance
                        
                        $
                        27,445
 
 Gains and
losses included in earnings are reported in the Consolidated Statements of
Operations in “Loss from change in fair value of derivative financial
instruments” for warrants and embedded conversion features accounted for under
FAS 133 and in “Gain/(loss) from change in fair value of hybrid financial
instruments” for financial instruments recorded at fair value under FAS
155.
  64
  The fair
value of derivative financial instrument liabilities was as
follows:
  (in
      thousands)
                      
                      December
      31, 2008
                      
                      
                      December 31, 2007Warrants
      and embedded conversion features in preferred stock
                      
                      $
                      10,751
                      
                      
                      $
                      8,410Warrants
      and embedded conversion features in certain debentures
                      
                      
                      16,692
                      
                      
                      
                      16,136Other
      warrants
                      
                      
                      2
                      
                      
                      
                      26Special
      preference stock of Mobot
                      
                      
                      -
                      
                      
                      
                      79Total
      derivative financial instruments
                      
                      $
                      27,445
                      
                      
                      $
                      24,651
  Note
6 - Property and Equipment
  As of
December 31, 2008 and 2007, property and equipment consisted of the
following:
  As of December
      31,2008
                                              
                                              
                                              2007(in
      thousands)Furniture and
      fixtures
                                              
                                              $
                                              349
                                              
                                              
                                              $
                                              287Equipment
                                              
                                              
                                              411
                                              
                                              
                                              
                                              374Other
                                              
                                              
                                              -
                                              
                                              
                                              
                                              19Total
                                              
                                              
                                              760
                                              
                                              
                                              
                                              680Less: Accumulated
      depreciation
                                              
                                              
                                              (681
                                              )
                                              
                                              
                                              (595
                                              )Total property and equipment,
      net
                                              
                                              $
                                              79
                                              
                                              
                                              $
                                              85
  Depreciation
expense was $80,700 and $103,500 for the years ended December 31, 2008 and 2007,
respectively.
  Note
7 - Goodwill and Other Intangible Assets
  At
December 31, 2008 and 2007, we had goodwill of $3.4million related to our
purchase of NeoMedia Europe.  Goodwill represents the excess of the
purchase price paid over the fair value of the identifiable tangible and
intangible assets and liabilities acquired.
  The
following table summarizes other intangible assets and balances for the years
ended December 31, 2008 and 2007:
  TotalSubtotal -
                                  
                                  
                                  
                                  
                                  
                                  IntangiblesPatents and
                                  
                                  
                                  
                                  
                                  
                                  andCopy-righted
                                  
                                  
                                  Other
                                  
                                  
                                  Proprietary
                                  
                                  
                                  ProprietaryPatents
                                  
                                  
                                  Materials
                                  
                                  
                                  Intangibles
                                  
                                  
                                  Software
                                  
                                  
                                  Software(in
    thousands)Beginning 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
                                  
                                  
                                  
                                  6,021Additions
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  12
                                  
                                  
                                  
                                  12Amortization
                                  
                                  
                                  (305
                                  )
                                  
                                  
                                  (10
                                  )
                                  
                                  
                                  (315
                                  )
                                  
                                  
                                  (687
                                  )
                                  
                                  
                                  (1,002
                                  )Ending balance, December 31,
      2008
                                  
                                  $
                                  2,271
                                  
                                  
                                  $
                                  22
                                  
                                  
                                  $
                                  2,293
                                  
                                  
                                  $
                                  2,738
                                  
                                  
                                  $
                                  5,031Weighted-average remaining
      amortizationperiod in
      years
                                  
                                  
                                  7.4
                                  
                                  
                                  
                                  2.2
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  4.0
  65
  As of
December 31, 2008, we estimate future amortization expense of intangible assets
for the next five years to be (in thousands):
  2009
                      
                      $
                      9642010
                      
                      $
                      9352011
                      
                      $
                      9072012
                      
                      $
                      9032013
                      
                      $
                      346
  Note
8 - 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, 2008 and 2007:
  As
      of December 31,2008
                                        
                                        
                                        2007(in
      thousands)Beginning
      balance
                                        
                                        $
                                        (78
                                        )
                                        
                                        $
                                        (69
                                        )Bad debt recovery
      (expense)
                                        
                                        
                                        58
                                        
                                        
                                        
                                        (78
                                        )Write-off of uncollectible
      accounts
                                        
                                        
                                        20
                                        
                                        
                                        
                                        69Ending
      balance
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        (78
                                        )
  The
following table summarizes our inventory reserves as of December 31, 2008 and
2007:
  As
      of December 31,2008
                                  
                                  
                                  2007(in
      thousands)Beginning
      balance
                                  
                                  $
                                  (80
                                  )
                                  
                                  $
                                  (53
                                  )Provision
                                  
                                  
                                  (1
                                  )
                                  
                                  
                                  (27
                                  )Charge-off
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Ending
    balance
                                  
                                  $
                                  (81
                                  )
                                  
                                  $
                                  (80
                                  )
  Note
9 - Comprehensive Income (Loss)
  Comprehensive
income 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 income
as of December 31, 2008 and 2007:
  Year Ended December
      31,2008
                                                
                                                
                                                2007(in
      thousands)Beginning
      balance:Unrealized
      gain/(loss) on marketable securities
                                                
                                                $
                                                (442
                                                )
                                                
                                                $
                                                (393
                                                )Foreign currency
      translation adjustment
                                                
                                                
                                                (90
                                                )
                                                
                                                
                                                (317
                                                )Annual
      Activity:Unrealized
      gain/(loss) on marketable securities
                                                
                                                
                                                442
                                                
                                                
                                                
                                                (49
                                                )Foreign currency
      translation adjustment
                                                
                                                
                                                104
                                                
                                                
                                                
                                                227Ending
    balance
                                                
                                                $
                                                14
                                                
                                                
                                                $
                                                (532
                                                )
  66
  Note
10 - Income Taxes
  As of
December 31, 2008 and 2007, 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:
  As of December
      31,2008
                      
                      
                      2007(in
    thousands)Net operating loss carryforwards
      (NOL)
                      
                      $
                      56,799
                      
                      
                      $
                      49,726Capital
      loss
                      
                      
                      3,388
                      
                      
                      
                      3,677Write-off of
      long-lived assets
                      
                      
                      507
                      
                      
                      
                      9,801Amortization of
      intangibles
                      
                      
                      (502
                      )
                      
                      
                      (509
                      )Stock options
      compensation
                      
                      
                      2,238
                      
                      
                      
                      1,717Capitalized
      software development costs and fixed assets
                      
                      
                      65
                      
                      
                      
                      1Deferred
      revenue
                      
                      
                      188
                      
                      
                      
                      100Alternative
      minimum tax credit carryforward
                      
                      
                      39
                      
                      
                      
                      45Provisions for
      doubtful accounts
                      
                      
                      123
                      
                      
                      
                      (343
                      )Inventory
      reserve
                      
                      
                      30
                      
                      
                      
                      -Accruals
                      
                      
                      2,386
                      
                      
                      
                      2,483Impairment
      loss
                      
                      
                      2,531
                      
                      
                      
                      2,668Derivative
      gain/loss
                      
                      
                      982
                      
                      
                      
                      (596
                      )Gain on sale of
      marketable securities
                      
                      
                      -
                      
                      
                      
                      209Interest
      expense
                      
                      
                      4,118
                      
                      
                      
                      7,114Total deferred tax
      assets
                      
                      
                      72,892
                      
                      
                      
                      76,093Valuation
      allowance
                      
                      
                      (72,892
                      )
                      
                      
                      (76,093
                      )Net deferred tax
      asset
                      
                      $
                      -
                      
                      
                      $
                      -
  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, 2008 and 2007, the income tax benefit differed from the
amount computed by applying the statutory federal rate of 34% as
follows:
  Year
      Ended December 31,2008
                                  
                                  
                                  2007(in
    thousands)Benefit at federal statutory
      rate
                                  
                                  $
                                  (3,137
                                  )
                                  
                                  $
                                  (13,279
                                  )State income taxes, net of
      federal
                                  
                                  
                                  (365
                                  )
                                  
                                  
                                  (1,547
                                  )Permanent and other,
      net
                                  
                                  
                                  301
                                  
                                  
                                  
                                  (11,641
                                  )Decrease/(increase) in valuation
      allowance
                                  
                                  $
                                  (3,201
                                  )
                                  
                                  $
                                  (26,467
                                  )
  As of
December 31, 2008, we had net operating loss carry forwards for federal tax
purposes totaling approximately $155.7 million which may be used to offset
future taxable income, or, if unused, expire between 2011 and 2028 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, our subsidiary NeoMedia Eurpoe, had foreign operations
which are not included with our consolidated income tax noted above.
NeoMedia Europe did not have income tax expense during the years ended December
31, 2008 and 2007.
  NeoMedia
Europe has net operating loss carry forwards that are estimated to be $4.4
million and $2.7 million as of December 31, 2008 and 2007, respectively, not
included in our consolidated deferred tax assets stated above, that are fully
offset with a valuation allowance.  Due to the uncertainty of the
utilization and recoverability of the loss carry forwards 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.
  67
  We
adopted FIN 48 as of January 1, 2007.  We have not taken any uncertain
tax positions on any of our open income tax returns filed through the period
ended December 31, 2008 that would have materially distorted 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.  We have determined that
there were no uncertain tax positions for the years ended December 31, 2008 and
2007, therefore, there was no impact on our results of operations, financial
condition or liquidity.
  Note
11 - Transactions With Related Parties
  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. Mr. O’Leary is a member of our Board of Directors.
Under this agreement, in 2008, we paid SKS $26,500 and issued stock valued at $0
to Mr. O’Leary and paid $10,500 and issued stock valued at $17,564 to Mr. Bonk,
and in 2007 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.
  Prior to
his employment as our Chief Executive Officer and Chairman of our Board of
Directors we paid $30,327 to GEMM Ltd. for consulting services of Mr. Iain A.
McCready during the year ended December 31, 2008.
  Note
12 - 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 for our office facilities of $257,000 and $334,000 during
the years ended December 31, 2008 and 2007, respectively.
  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
      previously issued convertible debentures with a face value of $23.2
      million that are subject to conversion at future
  dates.
  68
  The
following table sets forth our future minimum payments due under operating
leases, vendor and consulting agreements, convertible stock agreements, and debt
agreements:
  2009
                                                                          
                                                                          
                                                                          2010
                                                                          
                                                                          
                                                                          2011
                                                                          
                                                                          
                                                                          2012
                                                                          
                                                                          
                                                                          2013
                                                                          
                                                                          Thereafter
                                                                          
                                                                          
                                                                          Total(in
    thousands)Operating
      leases
                                                                          
                                                                          $
                                                                          264
                                                                          
                                                                          
                                                                          $
                                                                          249
                                                                          
                                                                          
                                                                          $
                                                                          129
                                                                          
                                                                          
                                                                          $
                                                                          3
                                                                          
                                                                          
                                                                          $
                                                                          -
                                                                          
                                                                          
                                                                          $
                                                                          -
                                                                          
                                                                          
                                                                          $
                                                                          645Vendor and
      consultingagreements
                                                                          
                                                                          
                                                                          253
                                                                          
                                                                          
                                                                          
                                                                          30
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          283Notes
    payable
                                                                          
                                                                          
                                                                          50
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          50Subsidiary
      acquisitioncommitments
                                                                          
                                                                          
                                                                          4,614
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          4,614Convertible
      debentures
                                                                          
                                                                          
                                                                          9,234
                                                                          
                                                                          
                                                                          
                                                                          13,967
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          23,201Total
                                                                          
                                                                          $
                                                                          14,415
                                                                          
                                                                          
                                                                          $
                                                                          14,246
                                                                          
                                                                          
                                                                          $
                                                                          129
                                                                          
                                                                          
                                                                          $
                                                                          3
                                                                          
                                                                          
                                                                          $
                                                                          -
                                                                          
                                                                          
                                                                          $
                                                                          -
                                                                          
                                                                          
                                                                          $
                                                                          28,793
  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 will not have a material
adverse effect on our financial position or operating results. We expense
professional fees associated with our legal proceedings as they are incurred
according to the terms negotiated between us and the respective professional who
represents our interests. We have not accrued a loss contingency in relation to
any of our pending litigation.
  Electronic
Frontier Foundation-In October 2007, we received a
communication from the United States Patent and Trademark Office (USPTO) stating
that a request by the Electronic Frontier Foundation for Ex-Parte Reexamination
of U.S. Patent No. 6,199,048 (“the ‘048 patent”) had been granted.The reexamination was terminated in
favor of NeoMedia when the U.S. Patent and Trademark office issued a Notice of
Intent to Issue Ex Parte Reexamination Certificate on February 17, 2009, which
indicated allowability of the pending claims of the '048
patent.
 
 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 had 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 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. Currently the case has been stayed due to the reexamination
of the ‘048 patent (see Electronic Frontier Foundation, above). Based on the
USPTO’s, recent Notice of Intent
to Issue Ex Parte Reexamination Certificate, we have provided the court with
a joint summary status of the case.  We are now awaiting a status hearing
date.
 
 Rothschild
Trust Holdings, LLC–On
September 19, 2008, we were served a complaint by Rothschild Trust Holding, LLC
alleging we owed royalty payments for the use of certain patents.On
February 25, 2009 we filed an answer to the complaint, and no discovery has
taken place to date. We believe the complaint is without merit.
 
 Scanbuy and
Marshall Feature Recognition, LLC – On or around December 19, 2008, we
received a complaint filed in the Eastern District of Texas by Scanbuy and
Marshall Feature Recognition, LLC (“MFR”) alleging infringement of certain
patents. On January 8, 2009, we filed an answer denying infringement and asserting that the
patents of Scanbuy and MFR are invalid. We believe the complaint is without
merit.
  69
  Ephrian
Saguy, iPoint – media, plc. and iPoint – media, Ltd. – On or around March 5, 2008 we
received a summons and notice that the plaintiffs had commenced a third party
action in the Magistrate Court in Tel-Aviv-Jaffa, Israel seeking damages of
approximately $2.2 million from us and YA Global for breach of contract and
unjust enrichment related to services provided by iPoint and investment by us
and YA Global. We have entered into an assignment agreement with YA Global and
have retained legal counsel inIsraelto represent us. At this time we are
unable to determine a probable outcome in this matter.
 
 Federal
Aviation Administration-
On November 25, 2008 we settled the outstanding claim in this matter for
$7,500.
  Note
13 - 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 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.
  Note
14 - 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”), 2003 Stock Incentive Plan (the “2003
Incentive Plan”), the 2002 Stock Option Plan (the “2002 Plan”), the 1998 Stock
Option Plan (the “1998 Plan”), collectively referred to as the “Option
Plans”.  Options issued under these Option Plans have a term of 10
years. The plans
allow for exercise prices of options issued under the Option Plans to be set at
amounts 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 would be issued from our authorized and unissued shares.
  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, 2008, options to purchase 28.9 million shares of common stock
remained available for issuance under the 2003 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, 2008, 23.2 million shares of common
stock remain available for issuance under the 2003 Stock Incentive
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, 2008, 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, 2008, options to
purchase 165,450 shares of common stock remained available for issuance under
the 1998 Plan.
  As of
December 31, 2008, we had a total of approximately 112.3 million shares of
common stock reserved for future issuance under our stock option
plans.
  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 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.
As of December 31, 2008 23.3 million of these re-priced options are still
outstanding
  70
  The fair
value of stock-based awards was estimated using the Black-Scholes-Merton model
with the following weighted-average assumptions:
  Year Ended December
      31,2008
                      
                      
                      2007Volatility
                      
                      
                      88.06-120.48
                      %
                      
                      
                      96.15 - 115.05
                      %Expected
      dividends
                      
                      
                      -
                      
                      
                      
                      -Expected term (in
      years)
                      
                      
                      2.62
                      
                      
                      
                      3Risk-free
    rate
                      
                      
                      4.35
                      %
                      
                      
                      4.35
                      %
  A summary
of the transactions during the years ended December 31, 2008 and 2007 with
respect to our stock option plans follows:
  Weighted-AverageWeighted-
                                  
                                  
                                  
                                  
                                  
                                  ContractualAverage
                                  
                                  
                                  Aggregate
                                  
                                  
                                  LifeExercice
                                  
                                  
                                  Intrinsic
                                  
                                  
                                  RemainingShares
                                  
                                  
                                  Price
                                  
                                  
                                  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
                                  
                                  
                                  
                                  7Outstanding at January 1,
      2008
                                  
                                  
                                  115,511
                                  
                                  
                                  $
                                  0.08Granted
                                  
                                  
                                  56,194
                                  
                                  
                                  $
                                  0.01Forfeited
                                  
                                  
                                  (71,968
                                  )
                                  
                                  $
                                  0.06Outstanding at December 31,
      2008
                                  
                                  
                                  99,737
                                  
                                  
                                  $
                                  0.02
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  8.1Exercisable at December 31,
      2008
                                  
                                  
                                  57,839
                                  
                                  
                                  $
                                  0.03
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  7.1
  71
  During
the year ended December 31, 2008 no options were exercised. During the year
ended December 31, 2007, a total of 1,639,444 options, with an intrinsic value
of $77,316 were exercised.  A summary of the status of our non-vested
options as of December 31, 2008, and changes during the year ended December 31,
2008 is presented below:
  WeightedAverageGrant DateNonvested
      Shares
                        
                        
                        Shares
                        
                        
                        Fair Value(in
    thousands)Nonvested at January 1,
      2008
                        
                        
                        
                        30,786
                        
                        
                        $
                        0.03Granted
                        
                        
                        
                        56,194
                        
                        
                        
                        0.01Vested
                        
                        
                        
                        (22,530
                        )
                        
                        
                        0.01Forfeited
                        
                        
                        
                        (22,552
                        )
                        
                        
                        0.02Nonvested at December 31,
      2008
                        
                        
                        
                        41,898
                        
                        
                        $
                        0.01
  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, 2008 was $1.8million.  As of
December 31, 2008, the total unrecognized compensation cost related to
non-vested stock awards was $1.3 million net of expected forfeitures and the
related weighted-average period over which it is expected to be recognized is
approximately 1.2 years.
  The
following table summarizes information about our stock options outstanding as of
December 31, 2008:
  Options
      Outstanding
                            
                            
                            Options
      ExercisableWeighted-
                            
                            
                            
                            
                            
                            
                            
                            Weighted-Average
                            
                            
                            Weighted-
                            
                            
                            
                            
                            AverageNumber of
                            
                            
                            Remaining
                            
                            
                            Average
                            
                            
                            Number of
                            
                            ExerciseRangeofExercisePrices
                            
                            Shares
                            
                            
                            Life
                            
                            
                            Exercise Price
                            
                            
                            Shares
                            
                            Price(in
    thousands)
                            
                            
                            (in years)
                            
                            
                            
                            
                            
                            (in
    thousands)$0.01
      to $0.05
                            
                            
                            90,903
                            
                            
                            
                            8.2
                            
                            
                            $
                            0.02
                            
                            
                            
                            49,390
                            
                            
                            $
                            0.02$0.06
      to $0.10
                            
                            
                            6,339
                            
                            
                            
                            6.3
                            
                            
                            $
                            0.08
                            
                            
                            
                            6,327
                            
                            
                            $
                            0.08$0.10
      to $0.15
                            
                            
                            2,123
                            
                            
                            
                            6.5
                            
                            
                            $
                            0.13
                            
                            
                            
                            2,122
                            
                            
                            $
                            0.13$0.15
      to $0.20
                            
                            
                            372
                            
                            
                            
                            7.2
                            
                            
                            $
                            0.18
                            
                            
                            
                            -
                            
                            
                            $
                            -99,737
                            
                            
                            
                            8.1
                            
                            
                            $
                            0.02
                            
                            
                            
                            57,839
                            
                            
                            $
                            0.03
  The
following table summarizes information about our stock incentive plan for the
years ended December 31, 2008 and 2007:
  Year ended December
      31,2008
                                    
                                    
                                    2007(in
      thousands)Shares issued under 2003 Stock
      Incentive Plan
                                    
                                    
                                    500
                                    
                                    
                                    
                                    1,299Aggregate grant date fair value of
      shares issued
                                    
                                    $
                                    17
                                    
                                    
                                    $
                                    73Expense
      recognized
                                    
                                    $
                                    17
                                    
                                    
                                    $
                                    73
  72
  Note
15 - Segment and Geographical Information
  As of
December 31, 2008, we were structured and evaluated by our Board of Directors
and management as one business unit.
  Consolidated
net sales and net loss from continuing operations for the years ended December
31, 2008 and 2007, and identifiable assets as of December 31, 2008 and 2007 by
geographic area were as follows:
  Year
      Ended December 31,2008
                                            
                                            
                                            2007(in
    thousands)Net Sales:United
    States
                                            
                                            $
                                            397
                                            
                                            
                                            $
                                            547Germany
                                            
                                            
                                            649
                                            
                                            
                                            
                                            1,317$
                                            1,046
                                            
                                            
                                            $
                                            1,864Net Loss from Continuing
      Operations:United
    States
                                            
                                            $
                                            (5,950
                                            )
                                            
                                            $
                                            (31,484
                                            )Germany
                                            
                                            
                                            (1,746
                                            )
                                            
                                            
                                            (420
                                            )$
                                            (7,696
                                            )
                                            
                                            $
                                            (31,904
                                            )As
      of December 31,2008
                                            
                                            
                                            2007Identifiable
      Assets:United
    States
                                            
                                            $
                                            10,920
                                            
                                            
                                            $
                                            12,875Germany
                                            
                                            
                                            568
                                            
                                            
                                            
                                            649$
                                            11,488
                                            
                                            
                                            $
                                            13,524
  Note
16 - Subsequent Events
  Extension
of Maturity Date on March 2007 Debenture
 
 On April
6, 2009, we entered into a letter agreement, effective on March 27, 2009, with
YA Global to extended the maturity date of the March 27 2007 Debenture to July
29, 2010.
 
 Amendment to
Third Closing of July 29, 2008 Securities Purchase Agreement
 
 On April
6, 2009, we entered into an amendment agreement with YA Global whereby the July
29, 2008 SPA was amended in order to reduce the value of the third secured
convertible Debenture from $4,000,000 to $1,100,000, and third closing was
broken down into two separate closings, the first occurred on April 6, 2009 in
which YA Global purchased a secured convertible Debenture in the principal
amount of $550,000. The second closing is an optional closing, at the sole
discretion of YA Global. The date of the optional second closing is May 1, 2009.
YA Global has the option (in its sole discretion) to purchase a secured
convertible Debenture in the principal amount of $550,000.
 
 The
amendment modifies certain terms with respect to the reservation of shares and
use of proceeds, and the Investor waived any event of default that may have
occurred as a result of any breach by us of those provisions relating to the
reservation of shares and use of proceeds under the SPA. The agreement requires
us to appoint one additional member to our Board of Directors who shall be to
the complete satisfaction of YA Global. We also granted YA Global a release from
all causes of action, suits, debts claims and demands whatsoever known or
unknown, at law, in equity or otherwise, which the Company ever had, now has or
thereafter may have on or prior to April 6, 2009, and any claims for reasonable
attorneys’ fees, penalties, liquidated damages, and indemnification for losses,
liabilities and expenses, in consideration for YA Global’s accommodations made
in the Amendment.
  73
  ITEM 9.Changes in and Disagreements with
Accountants on Accounting and Financial Disclosures
  None.
  Item 9A.  Controls and
Procedures
  a)  Evaluation
of Disclosure Controls and Procedures
  We maintain disclosure controls and
procedures, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934
(“the Exchange Act”), that are designed to provide reasonable assurance that the
information required to be disclosed by us in reports filed under the Exchange
Act is (i) recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms and (ii) accumulated and
communicated to our management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding
disclosure. A controls system cannot provide absolute assurance that the
objectives of the controls system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected. Our management, with the participation
of our Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, because of the material
weaknesses in internal control over financial reporting discussed in
Management’s Report on Internal Control Over Financial Reporting below, our
disclosure controls and procedures were not effective as of December 31,
2008. In light of these material weaknesses, we performed additional
post-closing procedures and analyses in order to prepare the Consolidated
Financial Statements included in thisAnnual Report. As a result of these procedures,
we believe our Consolidated Financial Statements included in thisAnnual Report present fairly, in all material
respects, our financial condition, results of operations and cash flows for the
period presented.
  b)  Management’s
Annual Report on Internal Control over Financial Reporting
 
 Management is responsible for
establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. Our internal control over financial
reporting includes those policies and procedures that pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets; provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of our assets that could have a material effect on the financial
statements.
 
 Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. 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 is 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 our
annual or interim Consolidated Financial Statements will not be prevented or
detected on a timely basis.
 
 Management evaluated our internal
control over financial reporting as of December 31,
2008.Management’s evaluationalsoincludedassessing the effectiveness of internal
controls over financial
reporting atNeoMedia Europe,AG, which was acquiredby uson February 23, 2006. In making this assessment, management
used the criteria established inInternal Control-Integrated
Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
As a result of this assessment and based on the criteria in the COSO framework,
management has concluded that, as of December 31, 2008, our internal
control over financial reporting was not effective due to the existence of the
following material weaknesses:
  74
  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 constraints and senior
      management turnover, to promptly address control weaknesses brought to
      their attention throughout this and the previous year’s
    audit;
 
 ·
              We,
      through our senior management, failed to maintain formalized accounting
      policies and procedures. Once implemented, the policies 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.
 
 ·
              The
      Company did not maintain an effective financial reporting process
      concerning our convertible debentures and warrants.  Senior
      management, in conjunction with a third party accounting valuation firm,
      is responsible for the valuation of all the Company’s convertible
      debentures and warrant financing.  These valuations are
      conducted in accordance with applicable U.S. GAAP and FASB
      pronouncements.  A material weakness in this valuation process
      exists due to senior management turnover in the finance department, a lack
      of consistent communication with our third party accounting valuation
      firm, and a lack of adequate internal controls over the analysis, review,
      and recording of these highly complex accounting and disclosure
      issues.
 
 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.
 
 ThisAnnualReport does not include an attestation
report of the Company’s registered public accounting firm regarding internal
control over financial reporting. Management’s report was not subject to
attestation by the Company’s registered public accounting firm pursuant to
thetemporaryrules of theSECthat permit the company to provide only
management’s report in thisAnnualReport.
  c)
Remediation
 
 As of December 31, 2008, management
would like to report that it has remediated the following material weaknesses
noted in its December 31, 2007 Annual Report on Form 10-K:
 
 ·
              We
      have named George O’Leary as the financial expert of the Audit
      Committee.  Mr. O’Leary’s background and experience meet the
      SEC’s criteria of a financial expert as outlined in its “Final Rule: Audit
      Committee Financial Expert
Requirements”.
 
 ·
              Spreadsheet
      controls at NeoMedia Europe have been instituted which assist in ensuring
      that financial data compiled and transmitted to our corporate headquarters
      is adequately safeguarded and complies with our Spreadsheet Control
      Policy.
  d)
Subsequent Changes in Internal Control over Financial
Reporting
 
 We have commenced efforts to address the
material weaknesses in our internal control over financial reporting and the
ineffectiveness of our disclosure controls and procedures as of
December 31, 2008. Although the remediation efforts are underway, the above
material weaknesses will not be considered remediated until new controls over
financial reporting are fully designed and operating effectively for an adequate
period of time.
  75
  ITEM
9B.Other
Information
  Since
December 31, 2008 we have filed the following reports on Form 8-K:
  ·
              On
      January 7, 2009 we filed a report on Form 8-K to disclose the appointment
      of Ms. Laura A. Marriott to our Board of
  Directors.
  ·
              On
      April 13, 2009 we filed a report on Form 8-K to disclose entry into the
      following material definitive
agreements:
  o
              Extension
      of the maturity date of our March 27, 2007 debenture with YA
      Global
  o
              Amendment
      of our July 29, 2009 SPA with YA Global on April 6,
  2009
  o
              The
      sale of a debenture in the principal amount of $550,000 to YA Global on
      April 6, 2009
  o
              A
      waiver agreement with YA Global effective on December 31,
    2008
  76
  PART III
  ITEM
10.  Directors, Executive Officers and Corporate
Governance
  Directors
and Executive Officers
 
 Set forth
below are the names of our directors and officers, their business experience
during the last five years, their ages and all positions and offices that they
hold with us as of the date of this Annual Report.
  Name
                            
                            Age
                            
                            PositionIain A.
      McCready
                            
                            47
                            
                            Chief Executive
      Officer and ChairmanMichael W.
    Zima
                            
                            51
                            
                            Chief Financial
      Officer and SecretaryJames J.
    Keil
                            
                            81
                            
                            DirectorGeorge G.
      O'Leary
                            
                            46
                            
                            DirectorLaura A.
      Marriott
                            
                            39
                            
                            Director
  Family
Relationships
 
 There are
no family relationships by and between or among the members of the Board or
other executives. None of our directors and officers are directors or executive
officers of any company that files reports with the SEC except as set forth in
the “Biographies of Officers and Directors” section below.
  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 their successor.
 
 Biographies
of Officers and Directors
 
  Iain A.
McCready.Mr. McCreadyjoined
the Company on May22, 2008 as
Chief Executive Officer and Chairman of the Board of Directors of the Company.
Mr. McCready has extensive experience in successfully growing technology
businesses. From October 2004 through November 2007, Mr. McCready served as
Chief Executive Officer of Mobiqa, a world leader in mobile ticketing and mobile
couponing solutions based on the creation, optimization, delivery and redemption
of barcodes to mobile phones. From November 2003 through December 2007, Mr.
McCready served as Non-Executive Chairman of Scolocate Limited, a provider of
co-location and managed services to the IT marketplace, specializing in IT
architecture, design and planning, project management and implementation
services. From September 2003 through March 2004, Mr. McCready served as the
Non-Executive Director of Concept Systems Limited, a leading supplier of
advanced IT systems, solutions and services to the oil exploration and
production industry. From January 2003 to November 2003, Mr. McCready served as
the Interim Chief Operating Officer at Hanon Solution Limited. Prior to that, he
served for twenty years at KSCL, Scotland’s largest software house (now part of
Convergys), developing customer care and billing applications for the world’s
leading mobile phone operators. Mr. McCready had held a number of positions
during his tenure at KSCL including Chief Operating Officer and Customer
Services Director.
  77
  Michael W.
Zima.Mr. Zima joined the Company on August 28, 2008 and was
appointed Chief Financial Officer and Corporate Secretary on September 17, 2008.
From 2006 to August 2008, Mr. Zima was a Senior Manager in the Consulting
Division of Solomon Edwards Group, LLC, where he served a publicly traded
television broadcasting company and a publicly traded enterprise software
company, assisting both in SEC reporting matters. From 2004 to 2006, Mr. Zima
served as a Senior Consultant with Horne Murdock Cole, where he served a
publicly traded television broadcasting company assisting them with SEC
reporting matters and a publicly traded textile manufacturing company assisting
them with the implementation of SOX documentation and testing processes. From
2002 to 2004, Mr. Zima served as Director of Finance for a non-profit social
service agency. From 1991 to 2002, Mr. Zima served as a senior financial
executive for both publicly and privately held businesses. Mr. Zima began his
career in public accounting in 1980, working for several firms including
McGladrey & Pullen. Mr. Zima received his BBA from Emory University in 1980
and has been a Certified Public Accountant in Georgia since 1982.
  James J.
Keil.  Mr. 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.  Mr. Keil is
founder and President of Keil & Keil Associates, now known as the Keil
Partnership, 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.  Mr. 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 the Company, Mr. O’Leary was
and still is a consultant to NeoGenomics (NGNM.OB) and was acting Chief
Operating Officer from October 2004 to April 2005. He is currently a member the
board of directors of NeoGenomics Inc. and ISONICS Corporation (ISON.OB), both
of which are public companies. Prior to becoming a director 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.
  Laura A.
Marriott.  Ms. Marriott was named to our Board of Directors in
January 2009. Ms. Marriott had recently served as President of the Mobile
Marketing Association (“MMA”) since July 15,
2005 and prior to that, she served as Director of Marketing for Intrado, Inc.
from April 1, 2003 through July 14, 2005.  Effective January 1, 2009,
Ms. Marriott became President Emeritus and a member of the Board of Advisors of
the MMA. During her tenure at MMA,
the MMA membership experienced substantial growth, established global
headquarters and regional chapters throughout the world, and developed
guidelines for the industry. Earlier this year, she was named one of the
industry’s Top 10 Women in Wireless byFierceMarkets. Laura has
more than seventeen years of experience in the high-tech industry in the areas
of business development, product management and marketing.
  Legal
Proceedings
  None of
the members of the Board or other executives has been involved in any bankruptcy
proceedings, criminal proceedings, any proceeding involving any possibility of
enjoining or suspending members of our Board or other executives from engaging
in any business, securities or banking activities, and have not been found to
have violated, nor been accused of having violated, any federal or state
securities or commodities laws.
  78
  Promoters
and Control Persons
 
 None.
 
 CORPORATE
GOVERNANCE
  Committees
of our Board of Directors
  Our Board
of Directors has an Audit Committee, a Compensation Committee and a Stock Option
Committee.  There is not a standing Nominating Committee, and there
have been no material changes to the procedures by which security holders may
recommend nominees to the Company’s Board of Directors during the period covered
by this Annual Report.
  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 the year ended
December 31, 2008, Mr. George G. O’Leary Served as chairman of the Audit
Committee. Mr. O’Leary is designated as a financial expert. Because of his
consulting agreement with the company Mr. O’Leary was not independent. Mr. James
J. Keil is an independent director and also served on the
committee.
  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.  directors James J. Keil and George
G. O’Leary were members of our Compensation Committee during 2008. Mr.
O’Leary was not an independent director.
  Stock Option
Committee–The
Stock Option Committee has responsibility for administering our stock option
plans.  During 2008, the committee was comprised of directors
James J. Keil and George G. O’Leary. Mr. O’Leary was not an independent
director.
  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
SEC.  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, 2008, Mr. George G. O’Leary did not timely file three Form 4s to report his
beneficial ownership of additional shares and options granted in 2007 and
additional shares and options granted twice in 2008.
  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.  A copy of the Company’s Code of Ethics
is incorporated herein as Exhibit 14.1.
  79
  ITEM
11.  Executive Compensation
  Summary
Compensation Table
  The following table sets forth certain
information with respect to the compensation paid to those persons who were our
Named Executive Officers during the year ended December 31, 2008:
  AllOption
                                                
                                                
                                                OtherName and
                                                
                                                
                                                
                                                Salary
                                                
                                                
                                                Bonus
                                                
                                                
                                                Awards
                                                
                                                
                                                Compensation
                                                
                                                
                                                TotalPrincipal
      Position
                                                
                                                Year
                                                
                                                ($)
                                                
                                                
                                                ($)
                                                
                                                
                                                ($)
                                                
                                                
                                                ($)
                                                
                                                
                                                ($)Iain A. McCready
                                                
                                                2008
                                                
                                                $
                                                168,893
                                                
                                                
                                                $
                                                88,568
                                                
                                                
                                                $
                                                48,682
                                                
                                                
                                                $
                                                30,327
                                                
                                                
                                                $
                                                336,470Chief Executive OfficerMichael W. Zima
                                                
                                                2008
                                                
                                                $
                                                46,756
                                                
                                                
                                                
                                                -
                                                
                                                
                                                $
                                                1,864
                                                
                                                
                                                $
                                                464
                                                
                                                
                                                $
                                                49,084Chief Financial OfficerChristian
      Steinborn
                                                
                                                2008
                                                
                                                $
                                                245,361
                                                
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                2,857
                                                
                                                
                                                $
                                                15,190
                                                
                                                
                                                $
                                                263,408Chief Executive officer of
                                                
                                                2007
                                                
                                                $
                                                211,923
                                                
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                11,181
                                                
                                                
                                                $
                                                13,579
                                                
                                                
                                                $
                                                236,683NeoMedia Europe,
      AGWilliam
    Hoffman
                                                
                                                2008
                                                
                                                $
                                                175,604
                                                
                                                
                                                $
                                                48,000
                                                
                                                
                                                $
                                                111,346
                                                
                                                
                                                $
                                                149,862
                                                
                                                
                                                $
                                                484,812Former Chief Executive Officer
                                                
                                                2007
                                                
                                                $
                                                140,223
                                                
                                                
                                                $
                                                68,800
                                                
                                                
                                                $
                                                112,383
                                                
                                                
                                                $
                                                3,054
                                                
                                                
                                                $
                                                324,460
  Narrative
Disclosure To Summary Compensation Table
  Iain A.
McCready–Mr.
McCready became our Chief Executive Officer on June 10, 2008. His employment is
governed by an employment agreement as of that date which sets his annual salary
at ₤160,000 British Pounds; a fixed bonus of ₤20,000 British Pounds; incentive
bonuses based on criteria established by the Compensation Committee of up to
₤60,000 British Pounds; and an annual bonus in-lieu of his participation in our
employee benefit programs of ₤6,095 British Pounds. During 2008, Mr. McCready
received the pro-rata portion of his salary and employee benefit bonus, His
Fixed bonus and one half of his Incentive Bonus. Mr. McCready’s employment
agreement provided for the grants of two options to purchase our common stock.
The first grant was made on the date of his employment for 16,025,643 shares
with an exercise price of $0.01 per share and vesting equally over a 15 month
period. The second grant was made on November 15, 2008 for 16,025,643 shares of
our common stock with an exercise price of $0.01 per share and vesting on
November 29, 2009. During 2008 we recorded $48,682 of expense related to these
options under the provision of SFAS 123(R). All Other Compensation for Mr.
McCready included amounts paid to him for consulting services prior to his
employment in the amount of $30,327 and the pro-rata portion of his employee
benefit bonus.
  Mr.
McCready is eligible to earn as additional incentive compensation a bonus upon a
successful sale of the company on or before December 10, 2009. The bonus is
payable in the amount of 2.5% of the sale proceeds, if the sale proceeds are at
least $45 million but not to exceed $200 million.
  Mr.
McCready is also the Chairman of our Board of Directors but is not eligible to
receive additional compensation in that capacity.
  Michael W.
Zima – Mr. Zima became our Chief Financial Officer on September 17, 2008.
His employment is not governed by an employment agreement. Mr. Zima’s annual
salary is $140,000 and he is eligible to receive a bonus of $10,000 based on his
performance against specified objectives on the anniversary of his employment.
During 2008 Mr. Zima received the pro-rata portion of his salary. Mr. Zima
received two grants of options to purchase our common stock during 2008. The
first grant was made on August 28, 2008, the date of his employment, prior to
his promotion to Chief Financial Officer for 500,000 options to purchase shares
of our common stock with an exercise price of $0.01 per share and vesting
equally over a four year period. The second grant was made upon his promotion to
Chief Financial Officer for 4,500,000 options to purchase shares of our common
stock with an exercise price of $0.01 per share and vesting equally over a four
year period. During 2008 we recorded $1,864 of expense related to these options
under the provision of SFAS 123(R). All Other Compensation for Mr. Zima included
amounts related to his participation in our employee benefit plans.
  80
  Christian
Steinborn – Dr. Steinborn served as our Chief Operating Officer from
October 1, 2007 until June 11, 2008. Dr. Steinborn continues to serve as the
chief executive officer of our NeoMedia Europe, AG subsidiary. His employment is
governed by an employment agreement which sets his annual salary at €160,000
Euros. Dr. Steinborn has received several stock option grants during his
employment and is tenure as an officer. The first grant was made on December 23,
2006 for 400,000 shares with exercise prices ranging from $0.045 per share to
$0.175 per share which vests 25% per year. On February 16, 2007 he entered in to
an incentive option agreement under which he was eligible to earn up to 500,000
options to purchase shares of our common stock per year to purchase our common
stock over each of the next four years. He earned the first allocation based on
2007 objectives and 500,000 of these options were vested and are exercisable at
$0.047 per share. He has not earned the subsequent allocation based on 2008
objectives. On December 20, 2007, in connection with his promotion to Chief
Operating Officer he was granted 1,600,000 options to purchase shares of our
common stock with an exercise price of $0.011 per share and vesting equally over
a four year period. Also on December 20, 2007 he entered in to an additional
incentive option agreement under which he was eligible to earn and up to 400,000
options per year to purchase our common stock at an exercise price of $0.0105
per share over each of the next four years. He did not earn the allocation based
on 2008 objectives. During 2008 and 2007, we recorded $2,857 and $11,181,
respectively, of expense related to these options under the provision of SFAS
123(R). All Other Compensation for Dr. Steinborn includes the annual value of
his company provided automobile.
  William
Hoffman – Mr. Hoffman was our Chief Executive Officer from June 18, 2007
until his resignation on May 22, 2008. His employment was governed by an
employment agreement during the term of his employment and a severance agreement
which covered the terms of his resignation. During his employment his annual
salary was $250,000 per year and he was eligible to earn an annual incentive
bonus of $150,000 to $250,000, payable quarterly with certain minimum guaranteed
amounts during 2007. During 2008 and 2007 Mr. Hoffman received the pro-rata
portions of his salary and bonus as determined by the Board of Directors. In
2008, the severance agreement prescribed a one-time payment of $94,000 during
2008 and four installment payments totaling $94,000 during late 2008 and early
2009. The pro-rata portions of the severance payments were paid to him in 2008
and are included in All Other Compensation. During the term of his employment
his employment, he received grants of options and incentive options to purchase
shares of our common stock. All of the options granted to him expired according
to their terms in 2008 after his severance. As part of his severance agreement
he was granted 10,000,000 options to purchase our common stock exercisable at
$0.01 per share. These options were outstanding as of December 31, 2008 but
expired unexercised on February 28, 2009. We recorded $111,346 and $112,383 of
expense during 2008 and 2007, respectively, related to these options under the
provision of SFAS 123(R) during 2008 and 2007. All Other Compensation for Mr.
Hoffman also included amounts paid by us during 2008 and 2007, respectively, of
$4,574 and $3,054 related to his participation in our employee benefit
plans.
  81
  Outstanding
Equity Awards at Year-End
  The following table sets forth certain
information relative to outstanding option awards held by the Named Executive
Officers as of December 31, 2008:
  Option
    AwardsEquity Incentive
      PlanAwards: Number
      ofNumber of Securities
                                                        Underlying
                                                      
                                                      
                                                      Securities
      Underlying
                                                      
                                                      
                                                      OptionUnexercised
      Options
                                                      
                                                      
                                                      Unexercised
                                                      
                                                      
                                                      Exercise
                                                      
                                                      OptionExercisable
                                                      
                                                      
                                                      Unexercisable
                                                      
                                                      
                                                      Unearned
      Options
                                                      
                                                      
                                                      Option
                                                        Price
                                                      
                                                      Option
                                                        ExpirationName
                                                      
                                                      
                                                      
                                                      
                                                      (#)
                                                      
                                                      
                                                      (#)
                                                      
                                                      
                                                      (#)
                                                      
                                                      
                                                      ($)
                                                      
                                                      DateIain A.
      McCready
                                                      
                                                      
                                                      (1
                                                      )
                                                      
                                                      
                                                      7,478,632
                                                      
                                                      
                                                      
                                                      8,547,011
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      $
                                                      0.0100
                                                      
                                                      6/10/2018Chief Executive
      Officer
                                                      
                                                      
                                                      (2
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      16,025,643
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      $
                                                      0.0100
                                                      
                                                      11/15/2018Michael W.
    Zima
                                                      
                                                      
                                                      (3
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      500,000
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      $
                                                      0.0100
                                                      
                                                      8/28/2018Chief Financial
      Officer
                                                      
                                                      
                                                      (4
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      4,500,000
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      $
                                                      0.0100
                                                      
                                                      9/17/2018Christian
      Steinborn
                                                      
                                                      
                                                      (5
                                                      )
                                                      
                                                      
                                                      100,000
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      $
                                                      0.0450
                                                      
                                                      2/23/2016Chief Executive officer
      of
                                                      
                                                      
                                                      (5
                                                      )
                                                      
                                                      
                                                      100,000
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      $
                                                      0.0750
                                                      
                                                      2/23/2016NeoMedia Europe,
      AG
                                                      
                                                      
                                                      (5
                                                      )
                                                      
                                                      
                                                      100,000
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      $
                                                      0.1250
                                                      
                                                      2/23/2016(5
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      100,000
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      $
                                                      0.1750
                                                      
                                                      2/23/2016(6
                                                      )
                                                      
                                                      
                                                      500,000
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      $
                                                      0.0470
                                                      
                                                      2/15/2017(6
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      1,000,000
                                                      
                                                      
                                                      Various
                                                      
                                                      2/15/2017(7
                                                      )
                                                      
                                                      
                                                      400,000
                                                      
                                                      
                                                      
                                                      1,200,000
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      $
                                                      0.0110
                                                      
                                                      12/19/2017(8
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      1,200,000
                                                      
                                                      
                                                      $
                                                      0.0105
                                                      
                                                      12/19/2017William
    Hoffman
                                                      
                                                      
                                                      (9
                                                      )
                                                      
                                                      
                                                      10,000,000
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      $
                                                      0.0100
                                                      
                                                      2/28/2009Former Chief
      ExecutiveOfficer
 (1)Mr. McCready’s option grant on June 10, 2008 vests in 15 equal
      monthly installments beginning on June 29, 2008 and will completely vest
      on August 29, 2009.
  (2)Mr. McCready’s option grant on November 15, 2008 vests in its
      entirety on November 29, 2009.
  (3)Mr. Zima’s option grant on August 28, 2008 vests over a 4 year
      period, 25% vesting on each subsequent anniversary date of the
      grant.
  (4)Mr. Zima’s option grant on September 17, 2008 vests over a 4 year
      period, 25% vesting on each subsequent anniversary date of the
      grant.
  (5)Mr. Steinborn’s option grant on December 23, 2006 vests over a 3
      year period, 25% vesting on the grant date and 25% on each subsequent
      anniversary date of the grant.
  (6)Mr. Steinborn’s incentive option plan entered into on February 16,
      2007 originally provided for up to 2,000,000 options to purchase our
      shares. Each year 25% of the original incentive option plan could be
      earned and options vested based on the achievement of goals as determined
      by the Compensation Committee. It was determined that the first 25%
      increment of this plan, for options to purchase 500,000 shares, were
      earned and vested. It was determined that the second 25% increment of this
      plan was not earned. The exercise price of each portion of the options
      earned under this plan is established at the dated it is
      earned.
  82
  (7)Mr. Steinborn’s option grant on December 20, 2007 vests over a 4
      year period, 25% vesting on each subsequent anniversary date of the
      grant.
  (8)Mr. Steinborn’s incentive option agreement entered into on December
      20, 2007 originally provided for up to 1,600,000 options to purchase our
      shares. Each year 25% of the original incentive option plan could be
      earned and options vested based on the achievement of goals as determined
      by the Compensation Committee. It was determined that the first 25%
      increment of this plan was not
earned.
  (9)Mr. Hoffman’s option grant on June 2, 2008 was fully vested at the
      time of issuance, and expired unexercised on February 28,
      2009.
  Additional
      Narrative Disclosure
  Retirement
      Benefits
  We offer
a defined contribution plan in accordance with Section 401(K) of the Internal
Revenue Code. Under the provisions of this plan eligible employees may defer a
portion of their pre-tax compensation into the plan. However, we do not make any
matching contributions to the plan.
  Change
      in Control Agreements
  Our Chief
Executive Officer, Iain A. McCready is employed under the terms of an Employment
Agreement dated June 10, 2008, whereby if he is terminated without cause, he is
entitled to nine months' salary, currently valued at approximately $165,000; a
prorated portion of any declared but unpaid incentive bonus; any earned sale
bonus; and accelerated vesting of all the remaining unvested stock
options.
  Director
Compensation
  The following table sets forth certain
information relative to compensation paid to outside directors for the year
ended December 31, 2008:
  FeesEarned or
                        
                        
                        (a)
                        
                        
                        (b)
                        
                        
                        AllPaid in
                        
                        
                        Stock
                        
                        
                        Option
                        
                        
                        OtherCash
                        
                        
                        Awards
                        
                        
                        Awards
                        
                        
                        Compensation
                        
                        
                        TotalName
                        
                        ($)
                        
                        
                        ($)
                        
                        
                        ($)
                        
                        
                        ($)
                        
                        
                        ($)James J.
    Keil
                        
                        $
                        36,500
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        36,500George
    O'Leary
                        
                        $
                        -
                        
                        
                        $
                        6,094
                        
                        
                        $
                        11,470
                        
                        
                        $
                        10,500
                        
                        
                        $
                        28,064
  
  Narrative
To Director Compensation Table
 
 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, 2008 was as follows:
  ·
              $1,500
      as a monthly retainer for each independent member of the
    Board
 ·
              $1,000
      for each Board of Directors 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.
  83
  During
2008 Mr. O’Leary’s consulting firm, SKS Consulting of South Florida Corp.
(“SKS”) received $10,500 for services provided under an agreement between SKS
and us dated December 1, 2006. Due to our payments for these consulting
services, Mr. O'Leary did not receive any director’s fee compensation during
2008. For further information, see Item 13 – Certain Relationships and Related
Transactions and Director Independence. During 2008, SKS, Mr. O’Leary and Mr.
Jay Bonk, an employee of SKS, received, for services provided by SKS, 580,536
shares of restricted common stock valued at $6,094 and 580,536 vested options
exercisable at $0.04 per share, for which we recorded expense in 2008 of $11,470
as provided for under SFAS 123(R).
  Ms. Laura
A. Marriott joined our Board of directors on January 1, 2009 and did not receive
any compensation in 2008.
  Grants
of Plan-based Awards
  Not
required for a smaller reporting company
  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 April 1,
2009: (i) by each of our directors, (ii) by each of the 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 beneficially own more than five
percent (5%) of any class of our outstanding shares. As of April 1, 2009 there
were 1,696,581,883 shares of our common stock outstanding:
  Common
StockName and Address of Beneficial
      Owner
                                          
                                          Beneficial
                                            Ownership
    (1)
                                          
                                          
                                          Percent of

                                              Class(1)Directors and Named Executive
      OfficersIain A. McCready(2)
      (3)
                                          
                                          
                                          12,820,512
                                          
                                          
                                          
                                          *Michael W. Zima(2)
      (4)
                                          
                                          
                                          -
                                          
                                          
                                          
                                          *Christian
      Steinborn(2)
      (5)
                                          
                                          
                                          3,053,697
                                          
                                          
                                          
                                          *James J. Keil(2)
      (6)
                                          
                                          
                                          5,000,000
                                          
                                          
                                          
                                          *George G. O'Leary(2)
      (7)
                                          
                                          
                                          3,142,085
                                          
                                          
                                          
                                          *Laura A. Marriott(2)
      (8)
                                          
                                          
                                          -
                                          
                                          
                                          
                                          *Officers and
      Directors as a Group (6 Persons)(9)
                                          
                                          
                                          24,016,294
                                          
                                          
                                          
                                          1.4
                                          %Other Beneficial OwnersApax Europe IV GP
      Co. Limited(10)
                                          
                                          
                                          87,994,468
                                          
                                          
                                          
                                          5.2
                                          %Argo Global
      Capital, LLC(11)
                                          
                                          
                                          87,810,775
                                          
                                          
                                          
                                          5.2
                                          %Total
                                          
                                          
                                          175,805,243
                                          
                                          
                                          
                                          10.4
                                          %
  
 *
Indicates less than 1%.
  (1)Applicable percentage of ownership is based on 1,696,581,883 shares
      of common stock outstanding on April 1, 2009. Percentage ownership is
      determined based on shares owned together with securities exercisable or
      convertible into shares of common stock within 60 days of April 1, 2009
      for each stockholder. Beneficial ownership is determined in accordance
      with the rules of the SEC 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
      April 1, 2009 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.  Our
      common stock and Series C preferred stock are our only issued and
      outstanding classes of securities eligible to vote. Series C preferred
      stock is entitled to vote on an as-converted basis with holders of our
      common stock and each share of Series C preferred stock is eligible to
      vote the equivalent of 100,000 shares of common stock. However the holders
      of our Series C  preferred stock are subject to contractual
      limitations in regards to their beneficial ownership, including their
      ability to exercise their voting rights, to the extent that they can not
      exceed 4.99% combined beneficial ownership. If
      YA Global were to declare us in default or if they issue a notice waiving
      the 4.99% limitation, upon 65 days notice, and comply with the SEC’s
      beneficial ownership reporting requirements for affiliates, they would be
      able to vote their Series C preferred stock on an as-converted
      basis.
  84
  (2)Address of the referenced individual is c/o NeoMedia Technologies,
      Inc., Two Concourse Parkway, Suite 500, Atlanta, GA,
  30328.
  (3)Iain A. McCready is our Chief Executive Officer and Chairman of our
      Board of Directors.  Ownership includes shares of common stock
      issuable upon exercise of stock options that are exercisable within 60
      days of April 1, 2009.
  (4)Michael W. Zima is our Chief Financial
      Officer.  Ownership includes shares of common stock issuable
      upon exercise of stock options that are exercisable within 60 days of
      April 1, 2009.
  (5)Christian Steinborn is Chief Executive officer of our subsidiary
      NeoMedia Europe, AG.  Ownership includes 1,753,697 shares of
      common stock and 1,300,000 shares of common stock issuable upon exercise
      of stock options that are exercisable within 60 days of April 1,
      2009.
  (6)James J. Keil is a member of our Board of
      Directors.  Ownership includes 2,500,000 shares of common stock
      and 2,500,000 shares of common stock issuable upon exercise of stock
      options that are exercisable within 60 days of April 1,
    2009.
  (7)George O'Leary is a member of our Board of
      Directors.  Ownership includes 1,022,128 shares owned by SKS
      Consulting of South Florida Corp, a company that Mr. O'Leary currently
      serves as President, and 340,676 shares owned by Mr. Jay Bonk, an employee
      of SKS Consulting of South Florida Corp., 1,388,652 shares of common stock
      issuable upon exercise of stock options that are exercisable within 60
      days of April 1, 2009, and 390,729 shares of common stock issuable upon
      exercise of stock options in the name of Mr. Bonk that are exercisable
      within 60 days of April 1, 2009.
  (8)Ms. Laura Marriott is a member of our Board of Directors. Ownership
      includes shares of common stock issuable upon exercise of stock options
      that are exercisable within 60 days of April 1,
  2009.
  (9)Includes an aggregate of 17,331,517 options to purchase shares of
      common stock which will have vested within 60 days of April 1, 2009 and
      5,616,401 shares owned directly by our named executive officers and
      directors.
  (10)This information is based solely on a review of Schedule 13G filed
      with the SEC by Apax Global Europe IV GP Co. Limited. The address of Apax
      Global Europe IV GP Co. Limited is P.O. Box 63, St Peter Port, Guernsey,
      Channel Islands, GY16JL.
  (11)This information is based solely on a review of Schedule 13G filed
      with the SEC by Argo Global Capital, LLC. The address of Argo Global
      Capital, LLC is 601 Edgewater Drive, Suite 345, Wakefield, Massachusetts
      01880.
  85
  ITEM
13. Certain Relationships and Related Transactions, and Director
Independence
  Related
Party Transactions
  In December 2006, we entered into a 25
month consulting agreement with SKS Consulting of South Florida Corp., whereby
we paid SKS for services rendered by our director Mr. O’Leary and an employee of
SKS, Mr. Bonk. Payments under this agreement in the form of cash, shares of our
common stock and stock options are described in Item 12 above.
  Director
Independence
  As of
December 31, 2008 Mr. Keil was an independent director. Because of his
consulting arrangement through SKS Mr. O’Leary was not independent. Upon
joining our Board of Directors on January 1, 2009 Ms. Marriott was
independent.
  ITEM
14. Principal Accountant Fees and Services
  Audit
and Audit-Related Fees
  The aggregate fees billed by our
independent auditors, Kingery & Crouse, P.A., for the audit of our annual
consolidated financial statements for the year ended December 31, 2008 and for
the review of our quarterly financial statements during 2008 were $133,600. The
aggregate fees billed for the audit of our annual consolidated financial
statements for the year ended December 31, 2007 and for the review of our
financial statements for the quarter ended September 30, 2007 were $130,000. The
aggregate fees for other products and services, primarily related to review of
prior filings and workpapers to transition from our prior auditors during the
year ended December 31, 2007 were $2,000. During 2007 we paid our predecessor
auditors $163,000 for reviews of our financial statements for the quarters ended
March 31,2007 and June 30, 2007.
  Audit
Committee Pre-approval
  The Audit Committee of our Board of
Directors approves all non-audit services provided by our primary
accountants.
  86
  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 because they are
either not required, not applicable, or the information is otherwise
included.
  (b)
              Exhibits
 
 Exhibit
                
                
                Filed
                
                
                
                FilingNumber
                
                Description
                Herewith
                
                Form
                Exhibit
                Date3.1
                
                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
 
 87
  Exhibit
                                                        
                                                        
                                                        Filed
                                                        
                                                        
                                                        
                                                        FilingNumber
                                                        
                                                        Description
                                                        Herewith
                                                        
                                                        Form
                                                        Exhibit
                                                        Date10.9
                                                        
                                                        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
 
 88
  Exhibit
                                                                  
                                                                  
                                                                  Filed
                                                                  
                                                                  
                                                                  
                                                                  FilingNumber
                                                                  
                                                                  Description
                                                                  Herewith
                                                                  
                                                                  Form
                                                                  Exhibit
                                                                  Date10.40
                                                                  
                                                                  Escrow
      agreement amongst NeoMedia, Mobot, FMS, and Kirkpatrick and Lockhart
      Nicholson Graham LLP
                                                                  
                                                                  
                                                                  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
 
 89
  Exhibit
                                                                
                                                                
                                                                Filed
                                                                
                                                                
                                                                
                                                                FilingNumber
                                                                
                                                                Description
                                                                Herewith
                                                                
                                                                Form
                                                                Exhibit
                                                                Date10.69
                                                                
                                                                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
                                                                2/8/0810.87
                                                                
                                                                Arbitration
      Agreement, dated January 31, 2008, by and between NeoMedia and Bernd
      Michael.
                                                                
                                                                
                                                                8-K
                                                                10.1
                                                                2/8/0810.88
                                                                
                                                                Secured Convertible Debenture,
      dated April 11, 2008, issued by the Company to YA Global Investments,
      L.P.
                                                                
                                                                
                                                                8-K
                                                                10.1
                                                                4/17/0810.89
                                                                
                                                                Secured Convertible Debenture,
      dated May 16, 2008, issued by the Company to YA Global Investments,
      L.P.
                                                                
                                                                
                                                                8-K
                                                                10.1
                                                                5/22/0810.90
                                                                
                                                                Warrant, dated May 16, 2008,
      issued by the Company to YA Global Investments,
L.P.
                                                                
                                                                
                                                                8-K
                                                                10.2
                                                                5/22/0810.91
                                                                
                                                                Secured Convertible Debenture,
      dated May 30, 2008, issued by the Company to YA Global Investments,
      L.P.
                                                                
                                                                
                                                                8-K
                                                                10.1
                                                                6/5/0810.92
                                                                
                                                                Warrant, dated May 30, 2008,
      issued by the Company to YA Global Investments,
L.P.
                                                                
                                                                
                                                                8-K
                                                                10.2
                                                                6/5/08
  90
  Exhibit
                                                              
                                                              
                                                              Filed
                                                              
                                                              
                                                              
                                                              FilingNumber
                                                              
                                                              Description
                                                              Herewith
                                                              
                                                              Form
                                                              Exhibit
                                                              Date10.93
                                                              
                                                              Settlement Agreement and Release,
      dated June 3, 2008, by and between the Company and William
      Hoffman
                                                              
                                                              
                                                              8-K
                                                              10.5
                                                              6/5/0810.94
                                                              
                                                              Resignation Letter, effective May
      22, 2008, executed by William Hoffman
                                                              
                                                              
                                                              8-K
                                                              10.6
                                                              6/5/0810.95
                                                              
                                                              Settlement Agreement and Release,
      dated June 2, 2008, by and between the Company and Frank J.
      Pazera
                                                              
                                                              
                                                              8-K
                                                              10.7
                                                              6/5/0810.96
                                                              
                                                              Resignation Letter, effective May
      22, 2008, executed by Frank J. Pazera
                                                              
                                                              
                                                              8-K
                                                              10.8
                                                              6/5/0810.97
                                                              
                                                              Employment Agreement, dated June
      10, 2008, by and between NeoMedia Technologies, Inc. and Iain
      McCready
                                                              
                                                              
                                                              8-K
                                                              10.1
                                                              6/16/0810.98
                                                              
                                                              Secured Convertible Debenture,
      dated July 10, 2008, issued by the Company to YA Global Investments,
      L.P.
                                                              
                                                              
                                                              8-K
                                                              10.1
                                                              7/16/0810.99
                                                              
                                                              Securities Purchase Agreement,
      dated July 29, 2008, by and between the Company and YA Global Investments,
      L.P.
                                                              
                                                              
                                                              8-K
                                                              10.1
                                                              8/4/0810.100
                                                              
                                                              Secured Convertible Debenture,
      dated July 29, 2008, issued by the Company to YA Global Investments,
      L.P.
                                                              
                                                              
                                                              8-K
                                                              10.2
                                                              8/4/0810.101
                                                              
                                                              Security Agreement, dated July 29,
      2008, by and among the Company, each of the Company’s subsidiaries made a
      party thereto and YA Global Investments, L.P.
                                                              
                                                              
                                                              8-K
                                                              10.3
                                                              8/4/0810.102
                                                              
                                                              Patent Security Agreement, dated
      July 29, 2008, by and among the Company, each of the Company’s
      subsidiaries made a party thereto and YA Global Investments,
      L.P.
                                                              
                                                              
                                                              8-K
                                                              10.4
                                                              8/4/0810.103
                                                              
                                                              Warrant 9-1A, dated July 29, 2008,
      issued by the Company to YA Global Investments,
L.P.
                                                              
                                                              
                                                              8-K
                                                              10.5
                                                              8/4/0810.104
                                                              
                                                              Warrant 9-1B, dated July 29, 2008,
      issued by the Company to YA Global Investments,
L.P.
                                                              
                                                              
                                                              8-K
                                                              10.6
                                                              8/4/0810.105
                                                              
                                                              Warrant 9-1C, dated July 29, 2008,
      issued by the Company to YA Global Investments,
L.P.
                                                              
                                                              
                                                              8-K
                                                              10.7
                                                              8/4/0810.106
                                                              
                                                              Warrant 9-1D, dated July 29, 2008,
      issued by the Company to YA Global Investments,
L.P.
                                                              
                                                              
                                                              8-K
                                                              10.8
                                                              8/4/0810.107
                                                              
                                                              Escrow Agreement, dated July 29,
      2008, by and among the Company, YA Global Investments, L.P., Yorkville
      Advisors, LLC and David Gonzalez, Esq.
                                                              
                                                              
                                                              8-K
                                                              10.9
                                                              8/4/0810.108
                                                              
                                                              Irrevocable Transfer Agent
      Instructions, dated July 29, 2008, by and among the Company, the Investor,
      David Gonzalez, Esq. and WorldWide Stock Transfer,
    LLC
                                                              
                                                              
                                                              8-K
                                                              10.10
                                                              8/4/0810.109
                                                              
                                                              Letter Agreement, dated September
      24, 2008, by and among NeoMedia Technologies, Inc. and YA Global
      Investments, L.P.
                                                              
                                                              
                                                              8-K
                                                              10.1
                                                              10/1/0810.110
                                                              
                                                              Second Secured Convertible
      Debenture, dated October 28, 2008, issued by the Company to YA Global
      Investments, L.P.
                                                              
                                                              
                                                              8-K
                                                              10.3
                                                              11/3/0810.111
                                                              
                                                              Revised Exhibit A to Escrow
      Agreement, dated October 28, 2008
                                                              
                                                              
                                                              8-K
                                                              10.12
                                                              11/3/0810.112
                                                              
                                                              Letter
      Agreement, dated March 27, 2009, by and between the Company and YA Global
      Investments, L.P.
                                                              
                                                              
                                                              8-K
                                                              10.13
                                                              4/13/0910.113
                                                              
                                                              Amendment
      Agreement, dated April 6, 2009, by and between the Company and YA Global
      Investments, L.P.
                                                              
                                                              
                                                              8-K
                                                              10.14
                                                              4/13/0910.114
                                                              
                                                              Third
      Secured Convertible Debenture (first closing), dated April 6, 2009, issued
      by the Company to YA Global Investments, L.P.
                                                              
                                                              
                                                              8-K
                                                              10.15
                                                              4/13/09
  91
  Exhibit
                      
                      
                      Filed
                      
                      
                      
                      FilingNumber
                      
                      Description
                      Herewith
                      
                      Form
                      Exhibit
                      Date10.115
                      
                      Waiver,
      effective as of December 31, 2008, by and between the Company and YA
      Global Investments, L.P.
                      
                      
                      8-K
                      10.16
                      4/13/0914
                      
                      Code of Professional
      Ethics
                      
                      
                      10-K
                      14.1
                      4/3/0721.1
                      
                      Subsidiaries of the
      Registrant
                      X23.1
                      
                      Consent of Kingery & Crouse,
      P.A.
                      X31.1
                      
                      Rule 13 a – 14
      (a) Certificate of the Chief Executive Officer
                      X31.2
                      
                      Rule 13 a – 14
      (a) Certificate of the Chief Financial Officer
                      X32.1
                      
                      Section 1350 Certificate of
      the Chief Executive Officer
                      X32.2
                      
                      Section 1350 Certificate of
      the Chief Financial Officer
                      X
  92
  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 its behalf by the
undersigned, thereunto duly authorized.
  NEOMEDIA
      TECHNOLOGIES, INC.Date:
      April14,
    2009By:
                      /s/ Iain A.
      McCreadyIain
      A. McCreadyChief
      Executive Officer
  /s/ Michael W. ZimaMichael
      W. ZimaChief
      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 April14, 2009
 .
 Signatures
              
              Title
              
              Date/s/ Iain A. McCready
              
              Chief
      Executive Officer, principal executive officer
              
              April14,
    2009Iain
      A. McCready
              
              and
      Director/s/ Michael W. Zima
              
              Chief
      Financial Officer, principal finanial and
              
              April14,
    2009Michael
      W. Zima
              
              accounting  officer/s/ James J. Keil
              
              Director
              
              April14,
    2009James
      J. Keil/s/ George G. O’Leary
              
              Director
              
              April14,
    2009George
      G. O’Leary/s/ Laura Marriott
              
              Director
              
              April14,
    2009Laura
      Marriott
 
 93