Special Note About Forward-Looking Statements

Certain statements in Management's Discussion and Analysis, 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, as amended and Section 21E of the Securities Exchange Act of 1934 ("the Exchange Act"), as amended. 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 2008 Form 10-K filed on April 14, 2009 with the SEC. 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

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, read and transmit 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 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 evaluate our continuing business as one consolidated business. 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 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.

Comparison of the Three Months Ended March 31, 2009 and 2008

Results of Continuing Operations

Beginning in late 2008 and continuing in 2009 we have taken aggressive steps to control our costs. These efforts have resulted in reduced operating losses of $1.6 million in the three months ended March 31, 2009 compared to $2.5 million in the three months ended March 31, 2008. However our loss from continuing operations was $106.6 million during the three months ended March 31, 2009 compared to income from continuing operations of $4.0 million during the three months ended March 31, 2008. The loss incurred in the three months ended March 31, 2009 was the result of non-cash losses from the change in fair value of our hybrid financial instruments, warrants and debentures, totaling $104.0 million. We incurred these non-cash losses principally as a result of the recent increase in the market value of our common stock. During the three months ended March 31, 2008 we reported non-cash gains on our hybrid financial instruments, warrants and debentures, totaling $6.7 million. These non-cash gains were principally the result of declines in the market value of our common stock.

A summary of our net sales is presented below:

                            Three Months Ended March 31,            Increase (decrease)
                             2009                  2008              $               %
                                   (in thousands)
Hardware sales                     397         $          67           330             492%
Lavasphere revenue                  21                    24            (3 )           -11%
Legacy product revenue              57                    77           (20 )           -25%
Patent licensing                    10                    39           (29 )           -75%
Other revenue                        5                    57           (52 )           -92%

Net Sales - Total revenues increased $226,000, or 86%, to $490,000 for the three months ended March 31, 2009 from $264,000 for the three months ended March 31, 2008. This increase was the result of increased sales of our hardware products. Sales of hardware products increased to $397,000 from $67,000 for the three months ended March 31, 2009 and 2008, respectively, as a result of the introduction of our newest model barcode scanners as well as the sale of remaining quantities of our older models. During the three months ended March 31, 2009, we recorded $5,000 of sales revenue for our barcode ecosystem products. In succeeding quarters we expect these revenues and related licensing revenues to increase as we shift the focus to our new business strategy of developing products and services to support the emerging barcode ecosystem that is being defined by bodies such as the OMA, GSMA and CTIA. We believe this focus will deliver the most value in the future.

Cost of Sales - Cost of sales was $527,000 for the three months ended March 31, 2009 compared with $313,000 for the three months ended March 31, 2008, an increase of $214,000, or 68%. Cost of sales for NeoMedia Europe, related to our hardware products, was $289,000 and $67,000 for the three months ended March 31, 2009 and 2008, respectively. Amortization costs related to our patents, and the proprietary software of NeoMedia Europe were $238,000 and $246,000 for the three months ended March 31, 2009 and 2008, respectively.

Sales and Marketing - Sales and marketing expenses were $286,000 and $628,000 for the three months ended March 31, 2009 and 2008, respectively, a decrease of $342,000 or 54%. The decrease in sales and marketing expenses was the result of strict cost controls implemented in mid-late 2008 and further reductions in 2009 compared with the first quarter of 2008.

General and Administrative - General and administrative expenses were $923,000 and $1,290,000 for the three months ended March 31, 2009 and 2008, respectively, a decrease of $367,000, or 28%. The decrease in general and administrative expenses was the result of reductions in compensation and travel costs, as well as reductions in professional fees implemented in mid-late 2008 and further reductions in 2009 compared with the first quarter of 2008.

Research and Development - Research and development expenses were $324,000 and $562,000 for the three month periods ended March 31, 2009 and 2008, respectively, a decrease of $238,000, or 42%. The decrease in research and development expenses was the result of reductions in compensation and costs associated with the development of our hardware products, which were completed and launched in late 2008. We have also implemented further cost controls in 2009 compared with the first quarter of 2008.

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 the three months ended March 31, 2009, our liability related to these hybrid instruments increased, primarily as a result of the 2,741% increase in the value of our common stock, and we recognized a loss of $23.0 million. In the three months ended March 31, 2008, we recognized a gain of $0.9 million, as the fair value of the liability decreased due to decreases in the value of our common stock. Because our stock price has been volatile and because many of our hybrid financial instruments include relatively low fixed conversion prices it is possible that further increases in the market price of our stock could cause the fair value of our hybrid financial instruments to increase significantly in future periods.

Gain (Loss) from Change in Value of Warrants - We account for our outstanding common stock warrants that were issued in connection with the preferred stock and our debentures, at fair value. In the three months ended March 31, 2009, our liability related to warrants increased, primarily as a result of the 2,741% increase in the value of our common stock, and we recognized a loss of $33.2 million. In the three months ended March 31, 2008, we recognized a gain of $2.0 million, as the fair value of the liability decreased due to decreases in the value of our common stock. Because our stock price has been volatile and because many of our warrants include relatively low fixed conversion prices it is possible that further increases in the market price of our stock could cause the fair value of our warrants to increase significantly in future periods.

Gain (Loss) from Change in Value of Debentures - 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, at fair value. In the three months ended March 31, 2009, our liability related to these derivative instruments increased, primarily as a result of the 2,741% increase in the value of our common stock, and we recognized a loss of $47.7 million. This liability is significantly greater than the face amount of our debt that would be otherwise due in cash. In the three months ended March 31, 2008, we recognized a gain of $3.4 million, as the fair value of the liability decreased due to decreases in the value of our common stock. Because our stock price has been volatile and because many of our derivative financial instruments include relatively low fixed conversion prices it is possible that further increases in the market price of our stock could cause the fair value of our derivative financial instruments to increase significantly in future periods.

Other Interest Expense, net - Other interest expense was $1.1 million and $0.2 million during the three months ended March 31, 2009 and 2008, 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.

Results of Discontinued Operations - In 2007, we discontinued the operations of our Mobot, Sponge, 12Snap, Telecom Services and Micro Paint Repair businesses. During the three months ended March 31, 2008, we recognized a loss of $445,000, primarily attributable to wind-down expenses associated with Micro Paint Repair, 12Snap, and Telecom Services

Liquidity and Capital Resources

As of March 31, 2009, we had $0.2 million in cash and cash equivalents,a decrease of $1.0 million, or 82%, compared with a total of $1.3 million as of December 31, 2008.

Cash used in operating activities decreased to $1.1 million for the three months ended March 31, 2009 compared with $1.7 million for the period ended March 31, 2008. The decrease in cash used in operations is primarily due to the cost control measures implemented in late 2008 and early 2009.

Cash used in investing activities was $24,000 for the three months ended March 31, 2009, representing the purchase of equipment. Net cash provided by investing activities was $0.5 million for the three months ended March 31, 2008. This was primarily due to the sale of our remaining ownership of 12Snap, a partial settlement of intercompany loans and cash retained by us from the shut-down of Micro Paint Repair-US which resulted in net proceeds to us of $0.8 million.

Cash provided by financing activities was $0.1 million for the three months ended March 31, 2009 which resulted from the proceeds received upon exercise of stock options by two former employees. Cash used in investing activities during the three months ended March 31, 2008 was $29,000 and was the result of the repayment of portions of our notes payable.

Significant Liquidity Events

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 three months ended March 31, 2009 $106.6 million while net cash used by operations was $1.1 million. We also have an accumulated deficit of $319.2 million and a working capital deficit of $173.3 million as of March 31, 2009, much of which is related to the derivative value of our financing instruments. . We also have a continuing obligation as of March 31, 2009 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 attempt 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. We believe that we can obtain additional financing, but 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. In 2009 we have received $1.0 million in financing from YA Global Investments, L.P ("YA Global"). Should YA Global choose not to provide us with capital financing, as they have in the past, or if we do not find alternative sources of financing to fund our operations, or if we are unable to generate significant product revenues, then we only have sufficient funds to sustain our current operations through May 31, 2009.

The financial statements in this Form 10-Q 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.

Sources of Cash and Projected Cash Requirements - As of March 31, 2009, our cash balance was $0.2 million. 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, without YA Global's consent we cannot (i) issue or sell any shares of our common stock or our 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 our 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 or (iv) file any registration statements on Form S-8. In addition, pursuant to security agreements between us and YA Global, 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 we secured funding.

Additionally, pursuant to the terms of the Investment Agreement between us and YA Global in connection with our 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.

Critical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, "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, 2008.