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

Overview

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

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

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

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

MANAGEMENT CHANGES

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

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

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

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

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

Results of Continuing Operations

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

The loss from continuing operations increased $7.7 million, or 478% to $9.4 million for the three months ended June 30, 2008 from a net loss of $1.6 million for the three months ended June 30, 2007. This increase is primarily due to decreased sales revenue, a loss from change in fair value of our derivative financial instruments, and increased general and administrative costs during the current period compared with the prior period.

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

Revenues. Total revenues decreased $0.4 million or 67% , to 0.2 million for the three months ended June 30, 2008 and 2007. Total revenues decreased $0.5 million, or 50%, to $0.5 million for the six months ended June 30, 2008 from $1 million for the six months ended June 30, 2007. The revenue decrease was primarily due to management's focus on developing new opportunities for NeoReaderTM technology, which we believe will deliver the most value in the future.

                                                                        Increase(decrease)
                           For the Three Months Ended June 30,             2008 to 2007
                               2008                   2007               $              %
                                      (in thousands)
Hardware sales -
Gavitec                  $              82      $             136   $       (54 )          (40 )%
Lavasphere revenue -
Gavitec                                 15                    362          (347 )          (96 )%
Legacy product revenue                  91                    117           (26 )          (22 )%
Patent licensing                         0                      7            (7 )         (100 )%
Other revenue                           19                      2            17            850 %
Total revenue            $             207      $             624   $      (417 )          (67 )%



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

Hardware sales at Gavitec were $82,000 and $136,000 for the three months ended June 30, 2008 and 2007, respectively, and $149,000 and $285,000 for the six months ended June 30, 2008 and 2007, respectively. Lavasphere revenue, which tends to be project-oriented, was $15,000 and declined from $362,000 and declined to $39,000 from $373,000 for the three and six months ended June 30, 2008 and 2007, respectively. Legacy product revenue declined to $91,000 from $117,000, and declined to $168,000 from $250,000 for the three and six months ended June 30, 2008 and 2007, respectively due to our focus on our new business strategy to develop NeoReaderTM business applications. .

Operating Costs and Expenses

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

                                                  For the Three Months Ended June 30,
                                                      2008                   2007
                                                            (in thousands)
Sales and marketing                            $               655     $             543
General and administrative                                   1,367                 1,324
Research and development                                       655                   419
Gain (loss) on extinguishment of debt                           18                   253
Interest (expense)/income, net                               1,129                  (957 )
Gain (loss) from change in fair value of
derivative financial instruments                            (7,736 )               1,122




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

Sales and Marketing. Sales and marketing expenses were $0.7 million and $0.5 million, and $1.3 and $1.4 million for the three and six months ended June 30, 2008 and 2007, respectively. The increase of $112,000, or 21%, during the 3 month periods ended June 30, 2008 and 2007 was primarily due to stock option expense. The decrease during the six month periods ended June 30, 2008 and 2007 of approximately $0.1 million, or 7%, is primarily due to decreased personnel expenses and a reduction in outside professional services of $221,000.

General and Administrative. General and administrative expenses were $1.4 million and $1.3 million,, and $2.6 million and $3.8 million for the three and six months ended June 30, 2008 and 2007, respectively. During the six month periods ended June 30, 2008 and 2007, the decrease of $1.2 million, or 32%, was primarily attributable to a reduction of $1.4 million in audit and legal fees in the first quarter of 2008, partially offset by a one time charge of $254,000 for severance payable to the former CEO and CFO in the second quarter of 2008. Gavitec's general and administrative costs increased $100,000 from the six months ended June 30, 2007 as compared with the six months ended June 30, 2008, due to an increase in headcount.

Research and Development. Research and development expenses were $0.7 million and $0.4 million, and $1.2 million and $0.9 million for the three and six month periods ended June 30, 2008 and 2007, respectively. Although stock compensation decreased from the six months ended June 30, 2007 as compared with the six months ended June 30, 2008, personnel related expenses increased during the same time period, as well as non-capitalized equipment and software. Additionally, Gavitec's research and developments costs increased $165,000 over the same time period. The increase in research and development costs overall were attributable to bringing our mobile phone technology to market.

Interest (Income)/Expense. Interest (income)/expense consists primarily of interest charges or gains related to convertible debentures, combined with other interest accrued for creditors as part of financed purchases, past due balances, and notes payable, net of interest earned on cash equivalent investments. Net interest income was $1.1 million against net interest expense of $1.0 million in the three months ended June 30, 2008 and 2007, respectively, Net interest income was and $2.3 million against net interest expense of $2.7 million for the six months ended June 30, 2008 and 2007, respectively. The $2.0 million and $5.0 million differences for the three and six months ended June 30, 2008, respectively, resulted from favorable fair value adjustments of our convertible debt in accordance with the FAS 155 provisions that we use to account for the financial instruments.

Gain/(Loss) on Derivative Financial Instruments. Gain/(Loss) on derivative financial instruments was ($7.7) million and $1.1 million, for the 3 months ended June 30, 2008 and 2007, respectively, a change of $8.9 million or 789% for the three months ended June 30, 2008. Gain/(Loss) on derivative financial instruments was ($2.3) million and ($2.4) million for the six months ended June 30, 2008 and 2007, respectively, a change of $0.1 million or 5% for the six months ended June 30, 2008. The derivative gains and losses are associated with our convertible preferred stock and convertible debenture financing. Certain derivatives and embedded conversion features were created at the time of each offering and are recorded at fair value on the accompanying balance sheet. The gains (losses) represent the reduction (appreciation) in value of the derivatives and embedded conversion features from the beginning of each reporting period presented to the end of the period, resulting primarily from the changes in our stock price during the reporting period. The fair value of the derivative financial instruments at each measurement date correlates to our stock price at the same date. As a result, our net loss varies significantly from our cash flow from operations during the six months ended June 30, 2008 and 2007. In future periods, our loss could fluctuate dramatically from quarter to quarter if our stock price is significantly different from the stock price at the end of the previous measurement period. Because we cannot guarantee that we have enough authorized shares to net share settle the convertible instruments, the change in fair value of derivative instruments will be recorded to our statement of operations each reporting period until the convertible instruments are fully converted.

Results of Discontinued Operations

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

Liquidity and Capital Resources

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

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

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

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

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

Significant Liquidity Events

Going Concern

The accompanying consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern. Net loss for the three months ended June 30, 2008 was $9.2 million compared with a net loss of $2.6 million for the three months ended June 30, 2007. Net loss for the six months ended June 30, 2008 was $5.6 million compared with a net loss of $14.1 million for the six months ended June 30, 2007. Net cash used for operations was $3.2 million and $5.3 million, for the six months ended June 30, 2008 and 2007, respectively. We also had an accumulated deficit of $207.2 million and a working capital deficit of $88 million as of June 30, 2008. We also have an obligation as of June 30, 2008 of $4.6 million relating to a purchase price guarantee associated with our acquisition of 12Snap.

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

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

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

Sources of Cash and Projected Cash Requirements

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

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

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

Related Party Transactions

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

Critical Accounting Policies and Estimates

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