Edgar Filing: NEOMEDIA TECHNOLOGIES INC

U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

---------------------------------

FORM 10-QSB

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2005

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-21743

NEOMEDIA TECHNOLOGIES, INC.
(Exact Name of Small Business Issuer as Specified In Its Charter)

Delaware 36-3680347
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

2201 Second Street, Suite 402, Fort Myers, Florida 33901
(Address of Principal Executive Offices) (Zip Code)

239-337-3434 Issuer's Telephone Number (Including Area Code)

Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No

As of May 3, 2005, there were 448,480,725 outstanding shares of the
issuer's Common Stock.

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NeoMedia Technologies, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet (Unaudited)
(In Thousands, Except Share Data)

March 31,
2005
--------

ASSETS
Current assets:
Cash and cash equivalents $ 9,937
Trade accounts receivable, net of allowance for doubtful accounts of $76 547
Inventories net 112
Investment in marketable securities 208
Prepaid expenses and other current assets 316
--------
Total current assets 11,120

Property and equipment, net 147
Leasehold improvements, net 28
Capitalized patents, net 2,134
Micro paint chemical formulations and proprietary process, net 1,587
Goodwill 1,099
Other Intangible assets, net 205
Investment in IPoint-media, Ltd. 1,000
Cash surrender value of life insurance policy 718
Other long-term assets 277
--------
Total assets $ 18,315
========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,756
Amounts payable under settlement agreements 78
Liabilities of discontinued business unit 676
Sales taxes payable 58
Accrued expenses 1,369
Deferred revenues and other 442
Notes payable 10,036
--------
Total current liabilities 14,415
--------

Shareholders' equity:
Preferred stock, $0.01 par value, 25,000,000 shares authorized, none
issued and outstanding --
Common stock, $0.01 par value, 1,000,000,000 shares authorized,
470,208,803 shares issued and 441,486,029 outstanding 4,415
Additional paid-in capital 98,799
Deferred stock-based compensation (592)
Deferred equity financing costs (13,256)
Accumulated deficit (84,596)
Accumulated other comprehensive loss - foreign currency
translation adjustment and unrealized loss
on marketable securities (91)
Treasury stock, at cost, 201,230 shares of common stock (779)
--------
Total shareholders' equity 3,900
--------
Total liabilities and shareholders' equity $ 18,315
========

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

NeoMedia Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
and Comprehensive Income (Loss)(Unaudited)
(In Thousands, Except per Share Data)

Three Months Ended March 31,
------------------------------
2005 2004
------------- -------------

NET SALES:
License fees $ 164 $ 72
Resale of software and technology equipment and service fees 128 192
Micro paint repair products and services 455 86
------------- -------------
Total net sales 747 350
------------- -------------

COST OF SALES:
License fees 88 89
Resale of software and technology equipment and service fees 88 160
Micro paint repair products and services 273 57
------------- -------------
Total cost of sales 449 306
------------- -------------

GROSS PROFIT 298 44

Sales and marketing expenses 795 425
General and administrative expenses 699 378
Research and development costs 184 118
------------- -------------

Loss from operations (1,380) (877)
Gain on extinguishment of debt 138 126
Amortization of debt discount -- (1,394)
Interest (expense) income, net 23 (77)
------------- -------------

NET LOSS (1,219) (2,222)

Other comprehensive income (loss):
Unrealized loss on marketable securities (42) --
Foreign currency translation adjustment 11 (22)
------------- -------------

COMPREHENSIVE LOSS $ (1,250) $ (2,244)
============= =============

LOSS PER SHARE--BASIC AND DILUTED $ (0.00) $ (0.01)
============= =============

Weighted average number of common shares--basic and diluted
437,764,971 270,139,433
============= =============

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

NeoMedia Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)

Three Months Ended
March 31,
--------------------
2005 2004
-------- --------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 1,219) ($ 2,222)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of discount on note payable -- 1,394
Depreciation and amortization 160 140
Fair value of expense portion of stock-based compensation granted
for professional services 96 190
Interest expense allocated to debt -- 3
Decrease in value of life insurance policies 10 8
Decrease of fair value of repriced options -- (163)
Changes in operating assets and liabilities
Trade accounts receivable, net (265) 26
Inventory 3 (24)
Other current assets 54 104
Accounts payable, amounts due under financing agreements, liabilities in excess
of assets of discontinued business unit, accrued expenses and stock liability (425) (648)
Deferred revenue other current liabilities (74) 62
-------- --------
Net cash used in operating activities (1,660) (1,130)
-------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in securities (500) --
Capitalization of software development and purchased intangible assets (38) (50)
Acquisition of property and equipment (88) (79)
-------- --------
Net cash used in investing activities (626) (129)
-------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock, net of issuance costs of $85 in
2005 and $226 in 2004 1,505 1,832
Net proceeds from exercise of stock options and warrants 173 575
Borrowings under notes payable and long-term debt 10,500 4,000
Repayments on notes payable and long-term debt (1,600) (2,162)
Cash commitment fee for $100 million Standby Equity Distribution Agreement (1,000)
Cash paid to acquire CSI International, Inc. (net of cash acquired) -- (2,390)
-------- --------
Net cash provided by financing activities 9,578 1,855
-------- --------

EFFECT OF EXCHANGE RATE CHANGES ON CASH 11 (22)

NET INCREASE IN CASH AND CASH EQUIVALENTS 7,303 574

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,634 61
-------- --------

CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,937 $ 635
======== ========

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the period $ 47 $ 47
Income taxes paid -- --
Non-cash investing and financing activities:
Reduction in accounts payable and accruals for debt paid in stock -- 221
Fair value of warrants as fees related to the $100 million Standby Equity
Distribution Agreement 12,256 --
Fair value of stock issued for services and deferred to future periods 239 549
Fair value of shares issued to acquire CSI Int'l (net of costs of registration) -- 695
Change in net assets resulting from acquisition of CSI (net of cash acquired) -- 3,090
Unrealized loss on marketable securities (42) --
Gain on extinguishment of debt 138 126
Direct costs associated with Standby Equity Distribution Agreement and
Equity Line of Credit 1,204 500

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

NeoMedia Technologies, Inc. and Subsidiaries
Unaudited Notes to Condensed Consolidated Financial Statements

1. Basis of Presentation and Nature of Business Operations

Basis of Presentation

The condensed consolidated financial statements include the financial
statements of NeoMedia Technologies, Inc. and its wholly-owned subsidiaries
("NeoMedia" or the "Company"). The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the instructions to
Form 10-QSB and do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for
complete consolidated financial statements. These condensed consolidated
financial statements and related notes should be read in conjunction with the
Company's Form 10-KSB for the fiscal year ended December 31, 2004. In the
opinion of management, these condensed consolidated financial statements reflect
all adjustments which are of a normal recurring nature and which are necessary
to present fairly the consolidated financial position of NeoMedia as of March
31, 2005, the results of operations for the three-month periods ended March 31,
2005 and 2004, and cash flows for the three-month periods ended March 31, 2005
and 2004. The results of operations for the three-month periods ended March 31,
2005 and 2004 are not necessarily indicative of the results which may be
expected for the entire fiscal year. All significant intercompany accounts and
transactions have been eliminated in preparation of the condensed consolidated
financial statements.

The accompanying condensed consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplate continuation of the Company as a
going concern. However, the Company has reported net losses of $1,219,000 and
$2,222,000 for the three months ended March 31, 2005 and 2004, respectively, and
has an accumulated deficit of $84,596,000 as of March 31, 2005. In addition, the
Company had working capital deficit of $3,295,000 as of March 31, 2005.

The Company cannot be certain that anticipated revenues from operations
will be sufficient to satisfy its ongoing capital requirements. Management's
belief is based on the Company's operating plan, which in turn is based on
assumptions that may prove to be incorrect. If the Company's financial resources
are insufficient the Company may require additional financing in order to
execute its operating plan and continue as a going concern. The Company cannot
predict whether this additional financing will be in the form of equity, debt,
or another form. The Company may not be able to obtain the necessary additional
capital on a timely basis, on acceptable terms, or at all. In any of these
events, the Company may be unable to implement its current plans for expansion,
repay its debt obligations as they become due or respond to competitive
pressures, any of which circumstances would have a material adverse effect on
its business, prospects, financial condition and results of operations.

Should these financing sources fail to materialize, management would seek
alternate funding sources through sale of common and/or preferred stock.
Management's plan is to secure adequate funding to bridge to profitability from
the Company's PaperClick business, intellectual property portfolio and Micro
Paint Repair business.

Nature of Business Operations

NeoMedia is structured as three distinct business units: NeoMedia Internet
Software Service (NISS), NeoMedia Consulting and Integration Services (NCIS),
and NeoMedia Micro Paint Repair (NMPR).

NISS (physical world-to-Internet offerings) is the core business and is
based in the United States, with development and operating facilities in Fort
Myers, Florida. NISS develops and supports NeoMedia's physical world to Internet
core technology, including the linking "switch" and application platforms. NISS
also manages NeoMedia's intellectual property portfolio, including the
identification and execution of licensing opportunities surrounding the patents.

NCIS (systems integration service offerings) is the original business line
upon which NeoMedia was organized. This unit resells client-server equipment and
related software, and general and specialized consulting services. Systems
integration services also identifies prospects for custom applications based on
NeoMedia's products and services. These operations are based in Lisle, Illinois.

NMPR (micro paint repair offerings) is the business unit encompassing the
CSI International chemical line acquired during 2004. NMPR is attempting to
commercialize its unique micro-paint repair solution. The Company completed its
acquisition of CSI on February 6, 2004.

Reclassifications

Certain amounts in the 2004 condensed consolidated financial statements
have been reclassified to conform to the 2005 presentation.

Standby Equity Distribution Agreement ("SEDA") with Cornell Capital Partners, LP
("Cornell")

On February 11, 2003, NeoMedia and Cornell entered into an Equity Line of
Credit Agreement under which Cornell agreed to purchase up to $10 million of
NeoMedia's common stock over a two-year period, with the timing and amount of
the purchase at the Company's discretion. The maximum amount of each purchase
was $150,000 with a minimum of seven days between purchases. The shares were
valued at 98% of the lowest closing bid price during the five-day period
following the delivery of a notice of purchase by NeoMedia. The Company paid 5%
of the gross proceeds of each purchase to Cornell.

On October 27, 2003, the Company and Cornell entered into a $20 million
SEDA. The terms of the agreement are identical to the terms of the previous
Equity Line of Credit, except that the maximum "draw" under the new agreement is
$280,000 per week, not to exceed $840,000 in any 30-day period, and Cornell will
purchase up to $20 million of the Company's common stock over a two-year period.
As a consideration fee for Cornell to enter into the agreement, the Company
issued 10 million warrants to Cornell with an exercise price of $0.05 per share,
and a term of five years. Cornell exercised the warrants in January 2004,
resulting in $500,000 cash receipts to the Company. In November 2003, the
Company filed a Form SB-2 to register 200 million shares under this $20 million
SEDA. In January 2004, the Form SB-2 was declared effective by the Securities
and Exchange Commission. In April 2004, the Company filed a Form SB-2 to
register 40 million shares underlying warrants granted to Cornell in connection
with a promissory note issued by the Company to Cornell (see "Notes Payable to
Cornell" below). In May 2004, the Form SB-2 was declared effective by the
Securities and Exchange Commission.

During the three months ended March 31, 2005, the Company sold 6,998,931
shares of its common stock to Cornell under the SEDA. The following table
summarizes funding received from Cornell during the three-month periods ended
March 31, 2005 and 2004:

Three Three
Months Months
Ended Ended
March 31, March 31,
2005 2004
------------ ------------

Number of shares sold to Cornell 6,998,931 21,282,203

Gross Proceeds from sale of
shares to Cornell $ 1,709,000 $ 2,332,000
Less: discounts and fees* (204,000) (500,000)
------------ ------------
Net Proceeds from sale of shares to Cornell $ 1,505,000 $ 1,832,000
------------ ------------

* - Per Equity line of Credit Agreement, stock is valued at 98% of the lowest
closing bid price during the week it is sold

On March 30, 2005, NeoMedia and Cornell entered into a SEDA under which
Cornell agreed to purchase up to $100 million of NeoMedia's common stock over a
two-year period, with the timing and amount of the purchase at NeoMedia's
discretion. The maximum amount of each purchase would be $2,000,000 with a
minimum of five business days between advances. The shares would be valued at
98% of the lowest closing bid price during the five-day period following the
delivery of a notice of purchase by NeoMedia, and NeoMedia would pay 5% of the
gross proceeds of each purchase to Cornell. As a commitment fee for Cornell to
enter into the agreement, NeoMedia issued 50 million warrants to Cornell with an
exercise price of $0.20 per share, and a term of three years, and also paid a
cash commitment fee of $1 million. NeoMedia also issued 4 million warrants with
an exercise price of $0.227 to a consultant as a fee for negotiating and
structuring the SEDA. NeoMedia has recorded the $12.3 million fair value of the
warrants to "Deferred equity financing costs" and, upon effectiveness of the
SEDA, will amortize this amount to additional paid-in capital straight-line over
the two-year life of the SEDA. NeoMedia expects to file a registration statement
with the US Securities and Exchange Commission during 2005 to register the
shares underlying the $100 million SEDA. The new SEDA would become active at the
time the SEC declares effective a registration statement containing such shares.

Promissory Notes Payable to Cornell

On March 30, 2005, NeoMedia borrowed from Cornell the principal amount of
$10,000,000 before discounts and fees in the form of a secured promissory note.
Cornell withheld structuring and escrow fees of $68,000 related to the note. As
of March 31, 2005, NeoMedia had not made any payments against the principal of
the note. The note is scheduled to be repaid at a rate of $1,120,000 per month
commencing May 1, 2005 (which was subsequently changed to $840,000 per month)
and continuing until principal and interest are paid in full. The note accrues
interest at a rate of 8% per annum on any unpaid principal. NeoMedia has the
option to prepay any remaining principal of the note in cash without penalty. In
connection with the note, NeoMedia and Cornell entered into a security agreement
under which the note is secured by all of NeoMedia's assets other than its
patents and patent applications. NeoMedia also escrowed 25,000,000 shares of its
common stock as security for the note. As of April 29, 2005, NeoMedia had made
payments of $840,000 against the principal.

Other Events

During February 2004, the Company entered into a consulting agreement with
an unrelated third party, under which the consultant will provide sales and
marketing services relating to the Company's Micro Paint business unit over a
period of three years. As consideration for the contract, the Company issued
6,055,556 options with an exercise price of $0.01 to the consultant. The fair
value of the options at the time of issuance was $550,000. The Company is
recognizing the fair value as sales and marketing expense over the term of the
contract (three years). Accordingly, the Company recognized $50,000 and $27,000
in expense relating the contract during the three month periods ended March 31,
2005 and 2004, respectively.

During January 2005, NeoMedia introduced the newest PaperClick(R) Mobile
Go Window(TM) for Nokia(R) Series 60 cell phones and other cell phones which use
Series 60 software. This introduction became the fifth Go Window from NeoMedia,
making the product line available across five mobile operating environments, on
over 35 models of cell phones.

During January 2005, NeoMedia signed a reseller agreement with Jorge
Christen & Partners LLP of Mexico. The reseller agreement gives Jorge Christen &
Partners LLP the rights to resell PaperClick(R) products in Mexico and Latin
America.

During January 2005, NeoMedia signed a reseller agreement with Deusto
Sistemas of Bilbao, Spain. The reseller agreement gives Deusto Sistemas the
rights to resell PaperClick(R) products in Europe.

During January 2005, NeoMedia signed a reseller agreement with E&I
Marketing and Consulting Co. of Taipei, Taiwan. The reseller agreement gives E&I
Marketing and Consulting Co. the rights to resell PaperClick(R) products in
Asia.

During January 2005, NeoMedia signed a Letter of Intent to enter into a
licensing agreement with Shelron Group, Inc. for PaperClick(R)'s family of
mobile marketing products to be used with Shelron's ActivShopper comparison
shopping toolbar. The agreement will give Shelron Group, Inc. the worldwide
rights to use PaperClick(R) on the new ActivShopper Mobile Edition for cell
phones and PDA's. ActivShopper is a free software download designed to
automatically scan, locate and compare prices for items a consumer selects at an
e-commerce site.

During February 2005, NeoMedia was awarded a patent in Mexico from
Instituto Mexicano de la Propiedad Industrial, the patent office in Mexico. The
patent recognizes NeoMedia's innovation in creating a secure link between
printed documents and the Internet using an obfuscated bar code and its
technology.

During February 2005, NeoMedia was issued an allowance for a new patent,
application serial no. 09/821,677, covering 44 claims, and is an adaptation of
NeoMedia's U.S. Patent 6,542,933, applying to technology that accesses Internet
content from wireless devices from the U.S. Patent and Trademark Office.

During February 2005, NeoMedia signed a reseller agreement with IT-Global,
Inc. The reseller agreement gives IT-Global the rights to resell PaperClick(R)
products in the New York tri-state area, where it is based, as well as other
areas, domestically and internationally, it serves.

On February 25, 2005, NeoMedia signed two non-binding letters of
intent (individually, an "LOI" and collectively the "LOIs") to acquire up to
100% of Automotive Preservation, Inc. ("AP"), a distributor of automotive paint
and accessory products, from AP's parent company, PUPS. The first LOI calls for
NeoMedia to initially acquire 30% of AP for $1,600,000, to be paid $600,000 in
cash, $554,000 in shares of NeoMedia restricted common stock, and $446,000
through the assumption of AP debt by NeoMedia. Under the second LOI, upon
completion of the acquisition of the initial 30% of AP by NeoMedia, NeoMedia
would have the option to acquire an additional 30% of AP for $1,650,000, payable
in shares of NeoMedia restricted common stock. The second LOI also gives
NeoMedia the option to purchase the final 40% of AP for either: (i) $2,200,000,
payable in shares of NeoMedia restricted common stock, if NeoMedia exercises
this right within 12 months of acquiring the second 30% of AP, or (ii) a price
equivalent to AP's previous quarter EBITDA multiplied by 8, payable in shares of
NeoMedia restricted common stock. Both LOIs are non-binding and subject to due
diligence by NeoMedia and AP.

During March 2005, NeoMedia entered into a business development agreement
with Intactis Software, Inc. ("Intactis") under which the two companies will
develop a database lookup system for validating codes printed on negotiable
instruments such as checks. In addition, NeoMedia invested $250,000 in exchange
for 250,000 shares of Intactis non-voting convertible preferred stock. In
connection with the investment, NeoMedia received a warrant to purchase up to an
additional 50,000 shares of Intactis. In accordance with Accounting Principles
Board (APB) Opinion No. 18, "The Equity Method of Accounting for Investments in
Common Stock," the investment in Intactis is being recorded using the equity
method under other long-term assets. As of March 31, 2005, the company did not
include its proportionate share of the earnings/(losses) of Intactis, as the
proportionate share from March 10, 2005 through March 31, 2005 is not material
to the accompanying condensed consolidated financial statements.

During March 2005, NeoMedia and Foote Cone & Belding ("FCB"), a division
of FCB Worldwide LLC and part of the Interpublic Group of Companies, Inc. (IPG),
entered into a co-marketing agreement surrounding NeoMedia's PaperClick(R)
technology platform. The agreement calls for FCB to work with NeoMedia to create
and develop opportunities and programs utilizing PaperClick(R), to integrate
PaperClick into marketing campaigns for new and existing clients, and to
facilitate the introduction of NeoMedia and PaperClick in the mobile
telecommunications industry. NeoMedia will provide technical and sales support
for presentations and marketing programs co-developed for FCB clients, work with
FCB to explore and create marketing opportunities and solutions, and introduce
FCB to its business customers, including brand managers. FCB and NeoMedia will
team for co-marketing and sales efforts in the U.S., as well as in Europe, the
Middle East, Africa and Latin America.

On March 29, 2005, NeoMedia's Micro Paint Repair business signed a
national marketing and sales agreement with Restex, Inc., of Dallas, Texas, a
provider of products to automobile dealerships. The agreement calls for Restex
to sell and market NeoMedia's proprietary micro paint repair system to its
customers in the automotive industry.

Subsequent Events

On April 12, 2005, NeoMedia acquired four search-oriented patents issued
in the U.S. and pending in Europe and Japan from LoyaltyPoint Inc. for $1.5
million cash and 10% royalties on all future sales for a period of ten years.
The first patent (U.S. 6,430,554 B1) covers technology that uses uniquely-coded
objects, such as consumer goods to automatically generate an online search for
information related to those objects or goods from a computer, PDA, mobile phone
or other device. The second patent (U.S. 6,651,053 B1) is an extension of the
first, covering additional mechanisms for performing such searches using mobile
devices. The third patent (U.S. 6,675,165 B1) covers uses of location-based
technology to deliver content that is based both on a particular advertisement
and the geographic location in which the advertisement is located. The fourth
patent (U.S. 6,766,363 B1) covers techniques for providing information to end
users based on objects, goods or other items depicted in external media, such as
video, audio, film or printed matter.

On April 18, 2005, NeoMedia announced that it named Martin N. Copus, a
global and interactive marketing executive who has worked with many of the
world's leading brands, as its COO and to the newly-created position of chief
executive of its PaperClick wireless business unit. Prior to joining NeoMedia,
Mr. Copus was Managing Director of 12Snap UK, an internationally-acclaimed,
award-winning mobile marketing company focusing on wireless channels, where he
led development and implementation of interactive marketing programs for major
blue-chip companies including McDonald's(R), Kellogg(R), Procter & Gamble(R),
Coca-Cola(R), Safeway(R), Budweiser(R), and 20th Century Fox(R). Prior to
running the U.K. operations of 12Snap, Mr. Copus's background included
assignments as executive director of Huntsworth PLC, a marketing services group
listed on the main board of the London Stock Exchange; Worldwide Board Director
of Interpublic Group's Ammirati Puris Lintas advertising unit; and senior vice
president of Leo Burnett Company Inc., Chicago, responsible for its Marlboro(R)
USA advertising and marketing services account. Mr. Copus holds a B.A. in
marketing and an M.A. in modern languages, both from Oxford University.

On May 2, 2005, NeoMedia announced that it had signed a letter of intent
with Jinche Yingang Automobile Co. of Beijing, China ("Jinche"), under which
Jinche will act as a distributor of NeoMedia's micro paint repair products in
China. Jinche is a Beijing PRC-registered company specializing in automobile
sales, financing, insurance and repair.

Investment in Marketable Securities

On February 25, 2005, NeoMedia invested $250,000 in exchange for 8,333,333
shares, or approximately 5.8% of Pickups Plus, Inc. ("PUPS") restricted common
stock. PUPS is a retail operator and franchiser of retail automotive parts and
accessories stores catering to the light truck market, and also provides new
vehicle preparation, environmental protection packages, detailing and
reconditioning products and services. In accordance with Statements of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," the investment in PUPS is being recorded as
available-for-sale securities and reported at fair value. Accordingly,
unrealized gains and losses on the equity securities are reflected in the
condensed consolidated statement of operations and comprehensive income (loss).

The investments in marketable securities are summarized as follows:

Amortized Unrealized Unrealized Fair
Cost Holding Gain Holding Losses Value
--------------------- ----------------------- --------------------- ---------------------

Available-for-sale $ 250,000 $ -- $ 42,000 $ 208,000

Financial Instruments

The carrying amount of the Company's cash equivalents, accounts
receivable, prepaid expenses, other current assets, cash surrender value of life
insurance policy, accounts payable and accrued expenses, accrued salaries and
benefits, and payable to merchants approximates their estimated fair values due
to the short-term maturities of those financial instruments.

Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.

It is not practicable to estimate the fair value of the Company's 17%
investment in the common stock of i-Point Media Ltd. and its investments of
250,000 shares of preferred stock of Intactis Software, Inc., because of the
lack of quoted market prices and the inability to estimate fair value without
incurring excessive costs. However, management believes that the total carrying
amount of $1,250,000 in the investments in iPoint Media Ltd. and Intactis
Software, Inc. at March 31, 2005 was not impaired.

For all available-for-sale investment securities, the carrying values
represents fair value of the securities and unrealized gain (losses) that are
other than temporary are recognized as other comprehensive income (loss). The
Company does not hold these securities for speculative or trading purposes.

Pro-forma Information Required by SFAS 148

At March 31, 2005, the Company has five stock-based employee compensation
plans (the 2003 Stock Incentive Plan, the 2003 Stock Option Plan, the 2002 Stock
Option Plan, the 1998 Stock Option Plan, and the 1996 Stock Option Plan). The
Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is reflected
in net loss, except when options granted under those plans had an exercise price
less than the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.

Three Months Ended
March 31,
------------------
2005 2004
------- -------

Net Loss, as reported ($1,219) ($2,222)
Compensation recognized under APB 25 -- --
Compensation recognized under SFAS 123 (725) (455)
------- -------
Pro-forma net loss ($1,944) ($2,677)
======= =======

Net Loss per share:
-------------------
Basic and diluted - as reported ($ 0.00) ($ 0.01)
======= =======
Basic and diluted - pro-forma ($ 0.00) ($ 0.01)
======= =======

Segment Reporting

The Company is structured and evaluated by its Board of Directors and
Management as three distinct business units:

NeoMedia Internet Switching Services (NISS), is based in the United
States, with development and operating facilities in Fort Myers, Florida. NISS
develops and supports the Company's physical world to Internet core technology,
including NeoMedia's linking "switch" and application platforms. NISS also
manages the Company's valuable intellectual property portfolio, including the
identification and execution of licensing opportunities surrounding the patents.

NeoMedia Consulting and Integration Services (NCIS) is the Company's
systems integration business unit. This unit resells client-server equipment and
related software, and general and specialized consulting services. NCIS also
identifies prospects for custom applications based on NeoMedia's products and
services. The operations are based in Lisle, Illinois.

NeoMedia Micro Paint Repair (NMPR) is the business unit encompassing the
Company's micro paint repair products and services acquired in 2004.

The Company's reportable segments are strategic business units that offer
different technology and marketing strategies. NCIS operates principally in the
United States. NISS operates principally in the United States and Europe. NMPR
is headquartered in Ft. Myers, Florida, and currently sells into Canada, the
United States, Australia, and New Zealand, and has entered into a letter of
intent to begin distribution in China.

Consolidated net sales, net operating losses by geographic area for the
three-month periods ended March 31, 2005 and 2004, and long-lived assets by
geographic area as of March 31, 2005, were as follows:

(in thousands)
-----------------------
Three Months Ended
March 31,
-----------------------
2005 2004
------- -------
Net Sales:
United States $ 610 $ 266
Canada 137 84
------- -------
$ 747 $ 350
------- -------

Net Loss:
United States ($1,000) ($2,180)
Canada (219) (42)
------- -------
($1,219) ($2,222)
------- -------

Long-lived Assets
United States $ 4,322
Canada 3,123
-------
$ 7,445
-------

Consolidated net sales, net operating losses for the three-month periods
ended March 31, 2005 and 2004, and identifiable assets as of March 31, 2005,
were as follows:

(in thousands)
--------------------
Three Months Ended
March 31,
--------------------
2005 2004
-------- --------
Net Sales:
NeoMedia Consulting & Integration Services $ 272 $ 251
NeoMedia Internet Switching Service 20 13
NeoMedia Micro Paint Repair 455 86
-------- --------
$ 747 $ 350
-------- --------

Net Loss:
NeoMedia Consulting & Integration Services ($ 514) ($ 722)
NeoMedia Internet Switching Service (445) (870)
NeoMedia Micro Paint Repair (260) (630)
-------- --------
($ 1,219) ($ 2,222)
-------- --------

Identifiable Assets
NeoMedia Consulting & Integration Services $ 215
NeoMedia Internet Switching Service 2,334
NeoMedia Micro Paint Repair 3,307
Corporate 12,501
--------
$ 18,357
--------

Effect Of Recently Issued Accounting Pronouncements

In March 2005, the staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 107 ("SAB 107"). The interpretations in SAB
107 express views of the staff regarding the interaction between Statement of
Financial Accounting Standards Statement No. 123 (revised 2004), "Share-Based
Payment" ("Statement 123(R)") and certain SEC rules and regulations and provide
the staff's views regarding the valuation of share-based payment arrangements
for public companies. In particular SAB 107 provides guidance related to
share-based payment transactions with nonemployees, the transition from public
entity status, valuation methods (including assumptions such as expected
volatility and expected term), the accounting for certain redeemable financial
instruments issued under share-based payment arrangements, the classification of
compensation expense, non-GAAP financial measures, first-time adoption of
Statement 123(R) in an interim period, capitalization of compensation cost
related to share-based payment arrangements, the accounting for income tax
effects of share-based payment arrangements upon adoption of Statement 123(R),
the modification of employee share options prior to adoption of Statement 123(R)
and disclosures in Management's Discussion and Analysis subsequent to adoption
of Statement 123(R).

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Overview

NISS (Physical-World-to-Internet Offerings) Business Unit Developments.

Over the past several years, NeoMedia's focus has been aimed toward the
commercialization of its Internet Switching Systems ("NISS") business unit. NISS
consists of the patented PaperClickTM technology that enables users to link
directly from the physical to the digital world, as well as the patents
surrounding certain physical-world-to-Internet linking processes. NeoMedia's
mission is to invent, develop, and commercialize technologies and products that
effectively leverage the integration of the physical and electronic to provide
clear functional value for its end-users, competitive advantage for their
business partners and return-on-investment for their investors.

On September 8, 2003, NeoMedia announced its PaperClick(R) for Camera Cell
PhonesTM product, which reads and decodes UPC/EAN or other bar codes to link
users to the Internet, providing information and enabling e-commerce on a
compatible camera cell phone, such as the Nokia(R) 3650 model. During the second
quarter of 2004, NeoMedia introduced its PaperClick(R) Mobile Go-WindowTM, a
horizontal bar on the screen of a wireless device where users can enter numeric
strings from UPC or other bar codes to link directly to targeted online
information via patented PaperClick technology and software. The PaperClick(R)
Mobile Go-WindowTM currently works with PalmTM Tungsten C PDA, the HandspringTM
Treo 270 and 600 Smartphones, Pocket PC(R), Java MIDP 2.0 (Mobile Independent
Device Profile) standard, and Microsoft Windows Mobile(TM)-based Smartphones.

During 2003, NeoMedia unveiled the go-to-market strategy for its
PaperClick(R) suite of products. Over the past several months, NeoMedia has
signed contracts with several key partners outlined in the strategy, including
agents and resellers Big Gig Strategies (United Kingdom), SRP Consulting (United
States), AURA Digital Communications (Australia), Relyco (United States), E&I
Marketing (Taiwan), Deusto Sistemas (Spain), Nextcode Corporation (United
States), and Jorge Christen and Partners LLP (Mexico). NeoMedia has also teamed
with systems integrator SAIC, and European advertising agency 12Snap to provide
click management services for PaperClick(R) products in Europe. In June 2004,
NeoMedia entered into a collaborative agreement with Intel Corporation for
NeoMedia's PaperClick(R) mobile connectivity platform to operate on the recently
introduced Intel PXA27x processor family-based cellular phones.

In addition, during June 2004 NeoMedia signed a teaming agreement with
IPSO, an integrator of proprietary solutions developed by its provider companies
for financial institution members and a leader in meeting Check 21 standards.
Enacted by Congress and signed into law last year, Check 21 requires banks to
begin accepting substitute checks (called "IRDs" for image replacement
documents) in lieu of original checks as of October 29, 2004. NeoMedia and IPSO
could partner on proposals and presentations surrounding Check 21. On March 10,
2005, NeoMedia and Intactis Software, Inc., (IPSO's successor), entered into a
business development agreement under which the two companies will develop a
database lookup system for validating codes printed on negotiable instruments
(checks). In addition, NeoMedia invested $250,000 in exchange for 250,000 shares
of Intactis non-voting convertible preferred stock. In connection with the
investment, NeoMedia received a warrant to purchase up to an additional 50,000
shares of Intactis. . Intactis also placed an order for an initial 100 copies of
NeoMedia's PaperClick Print Encoder software.

During October 2004, NeoMedia entered into a marketing alliance with
Science Applications International Corporation ("SAIC") to jointly establish,
launch, develop and promote NeoMedia's PaperClick(R) line of products.

During January 2005, NeoMedia signed a Letter of Intent to enter into a
licensing agreement with Shelron Group, Inc. for PaperClick's(R) family of
mobile marketing products to be used with Shelron's ActivShopper comparison
shopping toolbar. The agreement will give Shelron Group, Inc. the worldwide
rights to use PaperClick(R) on the new ActivShopper Mobile Edition for cell
phones and PDAs. ActivShopper is a free software download designed to
automatically scan, locate and compare prices for items a consumer selects at an
e-commerce site.

On April 8, 2005, NeoMedia acquired from Loyaltypoint, Inc.
("Loyaltypoint") four issued United States patents, and two patent applications,
one each in Europe and Japan, relating to mobile search and location-based
advertising. In exchange for the patents and patent applications, NeoMedia paid
$1,500,000 cash. NeoMedia will also pay Loyaltypoint a 10% royalty on all future
licensing revenue earned by NeoMedia from the acquired patents.

NMPR (Micro Paint Repair) Business Unit Developments.

On February 6, 2004, NeoMedia acquired 100% ownership of CSI
International, Inc., of Calgary, Alberta, Canada, a private technology products
company in the micro paint repair industry. NeoMedia currently has approximately
50 active paint repair end-user system agreements.

On June 1, 2004, NeoMedia announced that it had entered into a
distribution agreement with Micro Paint Systems (Australasia) Limited of New
Zealand for exclusive distribution rights to NeoMedia's Micro Paint Repair
products in Australia and New Zealand. The agreement is contingent upon a
minimum purchase of 500 systems over five years in that territory. NeoMedia
received an initial payment on signing of the contract, which included the fee
for four initial systems.

On June 22, 2004, NeoMedia announced its new product called "Silver
Solutions," a process created specifically to mend the popular high metallic and
pearl paint finishes on new cars.

On July 16, 2004, NeoMedia announced that its NeoMedia Micro Paint Repair
business unit added five more licensees as part of a private label contract with
Crackmaster Distributors Ltd., a Canadian auto aftermarket company.

On August 2, 2004, NeoMedia announced that it signed a distribution
agreement with Motor Dealer's Association Co-Auto Ltd. ("MDA Co-Auto"), the
largest buying consortium for new car franchised dealers in Western Canada. The
agreement provides exclusive rights for MDA Co-Auto to market NeoMedia's Micro
Paint Repair system to its member dealers. MDA Co-Auto has 1,050 member dealers
in British Columbia, Alberta, Saskatchewan, Manitoba and the Yukon.

On December 29, 2004, NeoMedia received a $290,000 order for proprietary
paints and related materials from Micro Paint Systems (Australasia) Limited of
New Zealand, which holds distribution rights to NeoMedia's micro paint repair
products in Australia and New Zealand. Micro Paint Systems (Australasia) Limited
of New Zealand is offering NeoMedia's proprietary paint and systems under its
label in that market. The order was shipped during the first quarter of 2005.

On February 25, 2005, NeoMedia invested $250,000 in exchange for 8,333,333
shares of Pickups Plus, Inc. ("PUPS")(OTCBB:PUPS) restricted common stock. PUPS
is a retail operator and franchiser of retail automotive parts and accessories
stores catering to the light truck market, and also provides new vehicle
preparation, environmental protection packages, detailing and reconditioning
products and services.

Also on February 25, 2005, NeoMedia signed two non-binding letters of
intent (individually, an "LOI" and collectively the "LOIs") to acquire up to
100% of Automotive Preservation, Inc. ("AP"), a distributor of automotive paint
and accessory products, from AP's parent company, PUPS. The first LOI calls for
NeoMedia to initially acquire 30% of AP for $1,600,000, to be paid $600,000 in
cash, $554,000 in shares of NeoMedia restricted common stock, and $446,000
through the assumption of AP debt by NeoMedia. Under the second LOI, upon
completion of the acquisition of the initial 30% of AP by NeoMedia, NeoMedia
would have the option to acquire an additional 30% of AP for $1,650,000, payable
in shares of NeoMedia restricted common stock. The second LOI also gives
NeoMedia the option to purchase the final 40% of AP for either: (i) $2,200,000,
payable in shares of NeoMedia restricted common stock, if NeoMedia exercises
this right within 12 months of acquiring the second 30% of AP, or (ii) a price
equivalent to AP's previous quarter EBITDA multiplied by 8, payable in shares of
NeoMedia restricted common stock. Both LOIs are non-binding and subject to due
diligence by NeoMedia and AP.

On May 2, 2005, NeoMedia announced that it had signed a letter of intent
with Jinche Yingang Automobile Co. ("Jinche"), a Beijing, China, PRC-registered
company specializing in automobile sales, financing, insurance and repair, under
which Jinche will act as a distributor of NeoMedia's micro paint repair products
in China.

NCIS (Systems Integration) Business Unit Developments.

NCIS is the original business line upon which NeoMedia was organized. This
unit resells client-server equipment and related software, and general and
specialized consulting services. Systems integration services also identifies
prospects for custom applications based on NeoMedia's products and services.
These operations are based in Lisle, Illinois.

Acquisitions

CSI International, Inc. On February 6, 2004, NeoMedia acquired 100%
ownership of CSI International, Inc., of Calgary, Alberta, Canada, a
private company in the micro paint repair industry. NeoMedia issued
7,000,000 shares of its common stock, plus $2.5 million cash in exchange
for all outstanding shares of CSI. NeoMedia has centralized the
administrative functions in its Fort Myers, Florida headquarters, and
maintains a sales office in Calgary, Alberta, Canada.

BSD Software, Inc. On December 21, 2004, NeoMedia and BSD signed a
definitive Agreement and Plan of Merger. BSD owns 90% of the outstanding
shares of Triton Global Business Services, Inc., a provider of live and
automated operator calling services and e-business support, including
billing, clearinghouse and information management services, to companies
in the telecommunications industry. BSD's shareholders will receive, for
each share of BSD stock owned, NeoMedia stock equivalent to .07 divided by
the volume-weighted average price of NeoMedia stock for the five days
prior to the effective time of the merger. The agreement has been approved
by holders of approximately 63% of BSD's outstanding shares and its Board
of Directors. On April 4, 2005 NeoMedia and BSD filed a joint
registration/information statement with the United States Securities and
Exchange Commission (the "SEC"). NeoMedia expects to complete the merger
when the review is complete and the registration is approved. At this
time, the exchange rate will be determined and closing will be held.
Closing is subject to the terms and conditions outlined in the merger
agreement, as well as regulatory approval of the merger and
registration/information statement by the SEC.

iPoint-Media Ltd.

On September 7, 2004, NeoMedia and iPoint-media Ltd. ("iPoint-media") of
Tel Aviv, Israel, entered into a business development agreement. In exchange for
entering into the service agreement, NeoMedia received 7% ownership in
iPoint-media, consisting of 28,492 shares of iPoint-media common stock. In
addition to the business development agreement, NeoMedia acquired an additional
10% ownership of iPoint-media, consisting of 40,704 shares of common stock, for
$1 million cash.

iPoint-media was founded in April 2001 as a spin-off from Imagine Visual
Dialog LTD, whose shareholders include Israeli-based Nisko group, an Israeli
holding company, Singapore-based Keppel T&T, and marketing and advertising group
WPP. iPoint-media specializes in customer interaction management and is the
world's first developer of IP Video Call Centers for Deutsche Telecom. Muki
Geller, the founder of Imagine Visual Dialog, is the founder, President & CEO of
iPoint-media. iPoint-media is located in Tel Aviv, Israel, with a European
customer support center in The Netherlands. iPoint-media's mission is to become
the video access platform and application engine of choice for service
providers.

On October 26, 2004, NeoMedia announced that it would issue its first-ever
stock dividend with the distribution of common shares of IPoint-media Ltd. of
Tel Aviv as a property dividend. NeoMedia intends to distribute 5% (or 20,435
shares) of iPoint-media's common stock to NeoMedia shareholders of record as of
November 17, 2004. The date of the property dividend payment will be announced
after the Securities and Exchange Commission declares iPoint-media's
registration statement on Form SB-2 effective.

NeoMedia's operating results have been subject to variation and will
continue to be subject to variation, depending upon factors, such as the mix of
business among services and products, the cost of material, labor and
technology, particularly in connection with the delivery of business services,
the costs associated with initiating new contracts, the economic condition of
NeoMedia's target markets, and the cost of acquiring and integrating new
businesses.

Critical Accounting Policies

The United States Securities and Exchange Commission (the "SEC") issued
Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure
About Critical Accounting Policies" ("FRR 60"), suggesting companies provide
additional disclosure and commentary on their most critical accounting policies.
In FRR 60, the SEC defined the most critical accounting policies as the ones
that are most important to the portrayal of a company's financial condition and
operating results, and require management to make its most difficult and
subjective judgments, often as a result of the need to make estimates of matters
that are inherently uncertain. Based on this definition, NeoMedia's most
critical accounting policies include: inventory valuation, which affects cost of
sales and gross margin; and the valuation of intangibles, which affects
amortization and impairment of goodwill and other intangibles. NeoMedia also has
other key accounting policies, such as policies for revenue recognition,
including the deferral of a portion of revenues on sales to distributors,
allowance for doubtful accounts, and stock-based compensation. The methods,
estimates and judgments NeoMedia uses in applying these most critical accounting
policies have a significant impact on the results it reports in its consolidated
financial statements.

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, NeoMedia primarily uses the
weighted-average probability method outlined in SFAS 144. 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 NeoMedia has used are
consistent with the plans and estimates that NeoMedia uses to manage its
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 NeoMedia's net operating
results.

Allowance for Doubtful Accounts. NeoMedia maintains an allowance for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. Allowance for doubtful accounts is based on
NeoMedia's assessment of the collectibility of specific customer accounts, the
aging of accounts receivable, NeoMedia's history of bad debts, and the general
condition of the industry. If a major customer's credit worthiness deteriorates,
or NeoMedia's customers' actual defaults exceed historical experience,
NeoMedia's estimates could change and impact its reported results.

Inventory. Inventories are stated at lower of cost (using the first-in,
first-out method) or market. NeoMedia continually evaluates the composition of
its inventories assessing slow-moving and ongoing products and maintains a
reserve for slow-moving and obsolete inventory as well as related disposal
costs.

Stock-based Compensation. NeoMedia records stock-based compensation to
outside consultants at fair market value in general and administrative expense.
NeoMedia does not record expense relating to stock options granted to employees
with an exercise price greater than or equal to market price at the time of
grant. NeoMedia reports pro forma net loss and loss per share in accordance with
the requirements of SFAS 123 and 148. This disclosure shows net loss and loss
per share as if NeoMedia had accounted for its employee stock options under the
fair value method of those statements. Pro forma information is calculated using
the Black Scholes option pricing model on the date of grant. This option
valuation model requires input of highly subjective assumptions. Because
NeoMedia's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing model does not necessarily provide a reliable single
measure of fair value of its employee stock options.

In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment". Statement 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. Statement 123(R) covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as originally issued in
1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable fair-value-based method been used. Public entities
(other than those filing as small business issuers) will be required to apply
Statement 123(R) as of the first interim or annual reporting period that begins
after December 15, 2005. The Company is currently evaluating the impact of the
adoption of this Statement.

Estimate of Litigation-based Liability. NeoMedia is defendant in certain
litigation in the ordinary course of business (see the section of this
information statement/prospectus entitled "Legal Proceedings"). NeoMedia accrues
liabilities relating to these lawsuits on a case-by-case basis. NeoMedia
generally accrues attorney fees and interest in addition to the liability being
sought. Liabilities are adjusted on a regular basis as new information becomes
available. NeoMedia consults with its attorneys to determine the viability of an
expected outcome. The actual amount paid to settle a case could differ
materially from the amount accrued.

Revenue Recognition. NeoMedia derives revenues from three primary sources:
(1) license revenues and (2) resale of software and technology equipment and
service fee revenues, and (3) sale of its proprietary Micro Paint Repair
solution.

(1) License fees, including Intellectual Property licenses, represent
revenue from the licensing of NeoMedia's proprietary software tools
and applications products. NeoMedia licenses its development tools
and application products pursuant to non-exclusive and
non-transferable license agreements. Resales of software and
technology equipment represent revenue from the resale of purchased
third party hardware and software products and from consulting,
education, maintenance and post contract customer support services.

The basis for license fee revenue recognition is substantially
governed by American Institute of Certified Public Accountants
("AICPA") Statement of Position 97-2 "Software Revenue Recognition"
("SOP 97-2"), as amended, and Statement of Position 98-9,
Modification of SOP 97-2, "Software Revenue Recognition, With
Respect to Certain Transactions.". License revenue is recognized if
persuasive evidence of an agreement exists, delivery has occurred,
pricing is fixed and determinable, and collectibility is probable.

(2) Revenue for resale of software and technology equipment and service
fee is recognized based on guidance provided in SEC Staff Accounting
Bulletin ("SAB") No. 104, "Revenue Recognition in Financial
Statements," as amended (SAB 104). Software and technology equipment
resale revenue is recognized when all of the components necessary to
run software or hardware have been shipped. 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. Software license revenue from
long-term contracts has been recognized on a percentage of
completion basis, along with the associated services being provided.
Other service revenues, including training and consulting, are
recognized as the services are performed. NeoMedia uses stand-alone
pricing to determine an element's vendor specific objective evidence
("VSOE") in order to allocate an arrangement fee amongst various
pieces of a multi-element contract. NeoMedia records an allowance
for doubtful accounts on a customer-by-customer basis as
appropriate.

(3) Revenue for training and certification on NeoMedia's Micro Paint
Repair systems is recognized equally over the term of the contract,
which is currently one year. A portion of the initial fee paid by
the customer is allocated to training costs and initial products
sold with the system, and is recognized upon completion of training
and shipment of the products. Ongoing product and service revenue is
recognized as products are shipped and services performed.

Results Of Operations For The Three Months Ended March 31, 2005 As Compared To
The Three Months Ended March 31, 2004

Net sales. Total net sales for the three months ended March 31, 2005 were
$747,000, which represented an increase of $397,000, or 113%, from $350,000 for
the three months ended March 31, 2004. This increase resulted from revenue
generated by the Company's micro paint repair business unit acquired in February
2004. This increase in micro paint revenue was offset by reduced resales of Sun
Microsystems equipment due to increased competition and general economic
conditions. NeoMedia could realize an increase in license fees over the next 12
months if the Company is successful in implementing its PaperClick go-to-market
strategy, or if pending court cases involving its intellectual property are
resolved in NeoMedia's favor. NeoMedia could also realize a material increase in
micro paint repair revenue if the Company is successful in implementing its
business plan for that business unit.

License fees. License fees were $164,000 for the three months ended March
31, 2005, compared with $72,000 for the three months ended March 31, 2004, an
increase of $92,000, or 128%. The increase was due to higher sales of internally
developed software licenses in 2005. NeoMedia could realize an increase in
license fees over the next 12 months if the Company is successful in
implementing its PaperClick go-to-market strategy, or if pending court cases
involving its intellectual property are resolved in NeoMedia's favor.

Resales of software and technology equipment and service fees. Resales of
software and technology equipment and service fees decreased by $64,000, or 33%,
to $128,000 for the three months ended March 31, 2005, as compared to $192,000
for the three months ended March 31, 2004. This decrease primarily resulted from
reduced resales of Sun Microsystems equipment due to increased competition and
general economic conditions. NeoMedia intends to continue to pursue additional
resales of equipment, software and services. NeoMedia expects resales to more
closely resemble the results for the three months ended March 31, 2005, rather
than the three months ended March 31, 2004.

Micro paint repair products and services. Sales of micro paint repair
products and services were $455,000 for the three months ended March 31, 2005,
compared with $86,000 for the period of February 6, 2004 to March 31, 2004, an
increase of $369,000 or 429%. The increase was primarily from a $290,000 sale of
products to Micro Paint Repair Australasia, NeoMedia's distributor in the
Australia and New Zealand market. NeoMedia expects sales of micro paint to more
closely resemble the results for the three months ended March 31, 2005, rather
for the three months ended March 31, 2004.

Cost of license fees. Cost of license fees was $88,000 for the three
months ended March 31, 2005, a decrease of $1,000, or 1%, compared with $89,000
for the three months ended March 31, 2004. The decrease resulted from decreased
amortization of capitalized patent costs during 2005.

Cost of resales of software and technology equipment and service fees.
Cost of resales of software and technology equipment and service fees was
$88,000 for the three months ended March 31, 2005, a decrease of $72,000, or
45%, compared with $160,000 for the three months ended March 31, 2004. The
decrease resulted from decreased resales in 2005 compared with 2004. Cost of
resales as a percentage of related resales was 69% in 2005, compared to 83% in
2004. This decrease is mainly due to the decrease in revenue. NeoMedia expects
costs of resales to fluctuate with the mix of sales of equipment, software, and
services over the next 12 months.

Cost of micro paint repair products and services. Cost of micro paint
repair products and services was $273,000 for the three months ended March 31,
2005, compared with $57,000 for the period of February 6, 2004 to March 31,
2004, an increase of $216,000 or 379%. The increase was primarily due to of the
cost of sale of products to Micro Paint Repair Australasia, NeoMedia's
distributor in the Australia and New Zealand market. NeoMedia expects cost of
micro paint to more closely resemble the results for the three months ended
March 31, 2005, rather for the three months ended March 31, 2004.

Gross Profit. Gross profit was $298,000 for the three months ended March
31, 2005, an increase of $254,000, or 577%, compared with gross profit of
$44,000 for the three months ended March 31, 2004. This increase was primarily
the result of increased sales of higher-margin micro paint repair products and
internally developed software licenses during 2005.

Sales and marketing. Sales and marketing expenses were $795,000 for the
three months ended March 31, 2005, compared to $425,000 for the three months
ended March 31, 2004, an increase of $370,000 or 87%. The increase is a result
of the addition of the micro paint business sales force and cost associated with
marketing and promotion of the Company's PaperClick and micro paint repair
products. NeoMedia expects sales and marketing expense to increase over the next
12 months with the continued development and anticipated rollout of the
PaperClick and Micro Paint Repair product suites.

General and administrative. General and administrative expenses increased
by $321,000, or 85%, to $699,000 for the three months ended March 31, 2005,
compared to $378,000 for the three months ended March 31, 2004. The increase
resulted primarily from higher legal and professional fees in 2005 compared with
2004. NeoMedia expects general and administrative expense to increase over the
next 12 months with the potential acquisition of BSD Software.

Research and development. During the three months ended March 31, 2005,
NeoMedia charged to expense $184,000 of research and development costs, an
increase of $66,000 or 56% compared to $118,000 for the three months ended March
31, 2004. The increase is primarily due to the amortization of the micro paint
chemical formulations and proprietary process during 2005, as well as additional
development resources allocated to the PaperClick product line. NeoMedia expects
research and development costs to increase over the next 12 months with the
continued development efforts, and the anticipated rollout of NeoMedia's
PaperClick product suite.

Gain on extinguishment of debt. During the three months ended March 31,
2005, NeoMedia recognized a gain on extinguishment of debt of $138,000, an
increase of $12,000 or 10% compared to a gain of $126,000 during the three
months ended March 31, 2004. These gains resulted from a discount in settlement
of debt and/or the difference between the cash or market value of stock issued
to settle the debt and the carrying value of the debt at the time of settlement.

Amortization of debt discount. During the three months ended March 31,
2005, NeoMedia recognized an amortization of debt issuance cost of $0, a
decrease of $1,394,000 compared to the three months ended March 31, 2004. This
cost is related to the amortization of the fair value of warrants granted to
Cornell Capital Partners in connection with promissory notes issued to Cornell
by NeoMedia during January 2004.

Interest (expense) / income. Interest expense consists primarily of
interest accrued for creditors as part of financed purchases, past due balances
and notes payable during 2004. Interest income consists primarily of interest
earned on cash equivalent investments. During the three months ended March 31,
2005, NeoMedia recognized interest income of $23,000, an increase of $100,000
compared to interest expense of $77,000 during the three months ended March 31,
2004. The change is primarily due to reversal of certain provisions of accrued
interest on accounts payable which were settled with the vendors without any
interest in the current quarter.

Net Loss. The net loss for the three months ended March 31, 2005 was
$1,219,000, which represented decrease of $1,003,000, or 45% from a loss of
$2,222,000 for the three months ended March 31, 2004. The decrease resulted
primarily from expenses relating to the amortization of debt discount relating
to debt financing through Cornell in 2004, combined with increased gross profit
from the Company's micro paint repair business. These items were offset by
increased sales and marketing, and general and administrative expenses relating
to the rollout of the Company's micro paint repair and PaperClick business units
and increased professional fees.

Liquidity and Capital Resources

Net cash used in operating activities was $1,660,000 for the three months
March 31, 2005, compared with $1,130,000 for the three months ended March 31,
2004. NeoMedia's net cash flow used in investing activities for the three months
ended March 31, 2005 and 2004 was $626,000 and $129,000, respectively. Net cash
provided by financing activities for the three months ended March 31, 2005 and
2004 was $9,578,000 and $1,855,000, respectively.

During the three months ended March 31, 2005 and 2004, NeoMedia's net loss
totaled $1,219,000 and $2,222,000, respectively. As of March 31, 2005, NeoMedia
had accumulated losses from operations of $84,596,000, had a working capital
deficit of $3,503,000, and $9,937,000 in cash balances.

The accompanying condensed consolidated financial statements have been
prepared assuming NeoMedia will continue as a going concern. Accordingly, the
consolidated financial statements do not include any adjustments that might
result from NeoMedia's inability to continue as a going concern.

On March 30, 2005, NeoMedia obtained $8.9 million cash from Cornell in the
form of a promissory note.

As of March 31, 2005, NeoMedia had drawn $10.9 million against its current
$20 million Standby Equity Distribution Agreement with Cornell, leaving an
available balance of $9.1 million. During the three months ended March 31, 2005
and 2004, NeoMedia sold approximately 7 million and 22 million shares,
respectively, to Cornell under the Standby Equity Distribution Agreement.
NeoMedia expects to use proceeds from the SEDA to repay all or a portion of the
$10 million promissory note due to Cornell. The Company expects to use the cash
proceeds as future working capital and to fund potential acquisitions. As of
April 29, 2005, NeoMedia had made payments of $840,000 against the principal.

On March 30, 2005, NeoMedia and Cornell entered into a Standby Equity
Distribution Agreement under which Cornell agreed to purchase up to $100 million
of NeoMedia's common stock over a two-year period, with the timing and amount of
the purchase at NeoMedia's discretion. The maximum amount of each purchase would
be $2,000,000 with a minimum of five business days between advances. NeoMedia
expects to file a registration statement with the US Securities and Exchange
Commission during 2005 to register the shares underlying the $100 million
Standby Equity Distribution Agreement. The Standby Equity Distribution Agreement
would become active at the time the SEC declares effective a registration
statement containing such shares.

There can be no assurances that the market for NeoMedia's stock will
support the sale of sufficient shares of NeoMedia's common stock to raise
sufficient capital to sustain operations for such a period, or that actual
revenue will meet management's expectations. If necessary funds are not
available, NeoMedia's business and operations would be materially adversely
affected and in such event, NeoMedia would attempt to reduce costs and adjust
its business plan.

ITEM 3. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. As of the end of the period
covered by this report, the Company carried out an evaluation, under the
supervision and with the participation of the Company's Principal Executive
Officer and Principal Financial Officer of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. The Company's
disclosure controls and procedures are designed to provide a reasonable level of
assurance of achieving the Company's disclosure control objectives. The
Company's Principal Executive Officer and Principal Financial Officer have
concluded that the Company's disclosure controls and procedures are, in fact,
effective at this reasonable assurance level as of the period covered. In
addition, the Company reviewed its internal controls, and there have been no
significant changes in its internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation or from the end of the reporting period to the date of this Form
10-QSB.

Changes in Internal Controls. In connection with the evaluation of the Company's
internal controls during the Company's first fiscal quarter ended March 31,
2005, the Company's Principal Executive Officer and Principal Financial Officer
have determined that there are no changes to the Company's internal controls
over financial reporting that has materially affected, or is reasonably likely
to materially effect, the Company's internal controls over financial reporting.

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

AirClic, Inc., Scanbuy, Inc., and LScan Technologies, Inc.

On January 23, 2004, NeoMedia filed a patent infringement lawsuit against
AirClic, Inc., Scanbuy, Inc., and LScan Technologies, Inc. in the Northern
District of Illinois, claiming that each of the parties has manufactured, or has
manufactured for it, and has used, or actively induced others to use, technology
which allows customers to use a built-in UPC bar code scanner to scan individual
items and access information, thereby infringing NeoMedia's patents. The
complaint stated that on information and belief, AirClic, Scanbuy and LScan 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 suit against AirClic and Scanbuy for lack of
personal jurisdiction.

On April 19, 2004, AirClic filed a declaratory judgment action against
NeoMedia in the Eastern District of Pennsylvania. NeoMedia answered and
counterclaimed on May 18, 2004. AirClic answered NeoMedia's counterclaim on June
10, 2004. On April 20, 2004, NeoMedia re-filed its suit against AirClic in
Pennsylvania for patent infringement. AirClic answered and counterclaimed on May
13, 2004. NeoMedia filed its answer to AirClic's counterclaims on June 2, 2004.
NeoMedia filed an amended complaint on July 1, 2004, and AirClic answered and
counterclaimed on July 20, 2004. NeoMedia's answer to AirClic's counterclaims
was filed on August 3, 2004.

NeoMedia voluntarily dismissed the suit against LScan in the Northern
District of Illinois and re-filed the suit on May 26, 2004, in the Eastern
District of Pennsylvania. After LScan failed to answer, NeoMedia filed and
served its motion for default judgment on July 6, 2004.

On March 29, 2004, Scanbuy filed suit against NeoMedia in the Southern
District of New York alleging that NeoMedia infringed Scanbuy's copyrights,
violated the Lanham Act and committed deceptive trade practices and tortious
interference. Scanbuy filed an amended complaint on June 23, 2004. NeoMedia
filed its answer and affirmative defenses on July 23, 2004. On April 20, 2004,
NeoMedia re-filed its suit against Scanbuy in the Southern District of New York
alleging patent infringement. Scanbuy filed its answer on June 2, 2004. NeoMedia
filed its answer and affirmative defenses on July 23, 2004.

Virgin Entertainment Group

On January 2, 2004, NeoMedia filed a patent infringement lawsuit against
Virgin(R) Entertainment Group, Inc., Virgin Megastore Online and Virgin
Megastore ("Virgin"). The complaint for Patent Infringement and Damages was
filed in the United States District Court for the Northern District of Illinois,
by Baniak Pine & Gannon, NeoMedia's intellectual property law firm. The
complaint claims that Virgin has infringed four of NeoMedia's patents - U.S.
Patents Nos. 5,933,829, 5,978,773, 6,108,656, and 6,199,048. The complaint
alleges that the Virgin Megaplay Stations located in Virgin's Megastores
infringe NeoMedia's patents by using Virgin's Megascan technology to allow
customers to scan UPC codes from in-store CDs and DVDs to access Internet-based
product information, such as music and movie previews, and album and video art.
The complaint also alleges that Virgin had notice of NeoMedia's patents since
the latter part of 2002 or before, yet it continued with its infringing
activities. The complaint seeks compensatory damages for Virgin's infringement,
with those damages to be trebled due to the willful and wanton nature of the
infringement. NeoMedia also seeks to preliminarily and permanently enjoin Virgin
from its infringing activities. Virgin answered NeoMedia's complaint on March 1,
2004.

Other Litigation

On May 2, 2005, three shareholders of BSD Software, Inc. filed a complaint
against BSD and NeoMedia, claiming that the purchase price as outlined in the
purchase agreement between NeoMedia and BSD is too low. The plaintiffs are
seeking unspecified damages and injunctive relief against the merger. NeoMedia
is currently reviewing the case with its attorneys.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (a), (b), (c) AND (d)

None.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

Exhibit No. Description Location
----------- ----------- --------

31.1 Certification by Chief Executive Officer pursuant to Provided herewith
15 U.S.C. Section 7241, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification by Chief Financial Officer pursuant to Provided herewith
15 U.S.C. Section 7241, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

32.1 Certification by Chief Executive Officer pursuant to Provided herewith
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

32.2 Certification by Chief Financial Officer pursuant to Provided herewith
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K:

NeoMedia filed a report on Form 8-K on March 1, 2005, with respect to Item
8.01, reporting that it had invested $250,000 for 8,333,333 shares of Pickups
Plus, Inc (PUPS) and had signed two non-binding letters of intent to acquire
100% of Automotive Preservation, Inc., a subsidiary of PUPS.

NeoMedia filed a report on Form 8-K on March 24, 2005, with respect to
Item 1.01, reporting that it had entered into a co-marketing agreement with
Foote Cone & Belding , a division of Worldwide LLC and a part of the Interpublic
Group of Companies, Inc., surrounding NeoMedia's PaperClick (R) technology
platform.

NeoMedia filed a report on Form 8-K on March 31, 2005, with respect to
Item 1.01, reporting that it signed a national marketing and sales agreement
with Restex, Inc. for NeoMedia's proprietary micro paint repair system.

NeoMedia filed a report on Form 8-K on April 1, 2005, with respect to
Items 1.01 and 2.03, reporting that it entered into a $100 million Standby
Equity Distribution Agreement with Cornell Capital Partners LP (Cornell), and
also that it had borrowed from Cornell the principal amount of $10,000,000 in
the form of a secured promissory note.

NeoMedia filed a report on Form 8-K on April 13, 2005, with respect to
Item 2.01, reporting that it had acquired four United States Patents and two
patent applications, one each in Europe and Japan from Loyaltypoint, Inc.

NeoMedia filed a report on Form 8-K, on April 22, 2005, with respect to
Item 5.02, reporting that it has named Martin N. Copus as its COO and chief
executive of NeoMedia's PaperClick business.

SIGNATURES

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

NEOMEDIA TECHNOLOGIES, INC.
Registrant

Date: May 11, 2005 By: /s/ Charles T. Jensen
------------ -------------------------------------
Charles T. Jensen, President,
Chief Executive Officer, and Director

Date: May 11, 2005 By: /s/ David A. Dodge
------------ -------------------------------------
David A. Dodge, Vice President and
Chief Financial Officer