Neomedia Techs, Inc (NEOM) - Description of business

Symbol:	NEOM
Type:	OTCBB
State location:	GA
State of Inc:	DE
Phone:	678-638-0460
Fax:	678-638-0466
Web Site:	www.neom.com
Full Time Employees:	25
Business Address:	CORPORATE CENTER II,SUITE 500 TWO CONCOURSE PARKWAY ATLANTA, GA 30328 678-638-0460
Mailing Address:	CORPORATE CENTER II,SUITE 500 TWO CONCOURSE PARKWAY ATLANTA, GA 30328

General NeoMedia develops proprietary technologies that link physical information and objects to the Internet marketed under the "PaperClick(R)" brand name. NeoMedia has also developed an extensive patent portfolio covering convergence of the physical world and the Internet. During 2005, NeoMedia continued its efforts to commercialize its PaperClick and Micro Paint Repair businesses both in North America and overseas. As part of the commercialization efforts, NeoMedia began to implement an aggressive growth campaign focusing on expansion through acquisition and globalization. As a result, during the first quarter of 2006 NeoMedia completed acquisitions of Mobot, Inc., 12Snap AG, Sponge Ltd., and Gavitec AG, and BSD Software, Inc., and also signed a letter of intent to acquire Hip Cricket, Inc. (see below for additional discussion of acquisitions) The Company has adopted a code of ethics, as required by the rules of the SEC (attached as exhibit 10.55 hereto). This code of ethics applies to all of the Company's directors, officers and employees. The code of ethics, and any amendments to, or waivers from, the code of ethics, is available in print, at no charge, to any stockholder who requests such information. Company Structure During the year ended December 31, 2005, NeoMedia was structured and evaluated by its Board of Directors and Management as three distinct business units: - NeoMedia Internet Switching Software (NISS), - NeoMedia Micro Paint Repair (NMPR) - NeoMedia Consulting and Integration Services (NCIS), and NISS is the core business and 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 PaperClick(R) linking "switch" and application platforms. NISS also manages the Company's intellectual property portfolio, including the identification and execution of licensing opportunities surrounding the patents. NMPR is the business unit encompassing the recently-acquired CSI International paint repair and chemical line. NMPR is attempting to commercialize its unique micro-paint repair solution. The Company completed its acquisition of CSI on February 6, 2004. NCIS is the original business line upon which the Company was founded. This unit resells client-server equipment and related software, and general and specialized consulting services. As a result of decreased demand for systems integration products, and increased consolidation and competition in the industry in general, during 2005 resources allocated to the NCIS business unit were increasingly used in sales and business development efforts associated with the NISS business unit. During February 2006, NeoMedia's Board of Directors elected to formally wind down the NCIS business unit. As a result, during February 2006, NeoMedia closed its Lisle, Illinois facility out of which the NCIS business unit was based. NeoMedia does, however, plan to continue servicing existing contracts and customers. Following the completion of the acquisitions of 12Snap, Sponge, Gavitec, Mobot and during the first quarter of 2006, NeoMedia expects to operate as three business units during 2006: - NeoMedia Mobile (NMM) - encompassing NeoMedia's physical-world-to-internet and mobile marketing technologies branded under PaperClick, 12Snap, Sponge, Gavitec and Mobot - NeoMedia Micro Paint Repair (NMPR) - NeoMedia Telecom Services (NTS) - encompassing the BSD/Triton business line Company History NeoMedia was incorporated under the laws of the State of Delaware on July 29, 1996, to acquire by tax-free merger Dev-Tech Associates, Inc., NeoMedia's predecessor, which was organized in Illinois in December 1989. In March 1996, Dev-Tech's common stock was split, with an aggregate of 2,551,120 shares of common stock being issued in exchange for the 164 then-issued and outstanding shares of common stock. On August 5, 1996, NeoMedia acquired all of the shares of Dev-Tech in exchange for the issuance of shares of NeoMedia's common stock to Dev-Tech's stockholders. As of December 31, 2005, NeoMedia also has the following wholly-owned subsidiaries: NeoMedia Micro Paint Repair, Inc., incorporated in Nevada; NeoMedia Migration, Inc., incorporated in Delaware; Distribuidora Vallarta, S.A., incorporated in Guatemala (a dormant subsidiary); NeoMedia Technologies of Canada, Inc., incorporated in Canada (a dormant subsidiary); NeoMedia Tech, Inc., incorporated in Delaware (a dormant subsidiary); NeoMedia EDV GMBH, incorporated in Austria (a dormant subsidiary); NeoMedia Technologies Holding Company B.V., incorporated in the Netherlands (a dormant subsidiary); NeoMedia Technologies de Mexico S.A. de C.V., incorporated in Mexico (a dormant subsidiary); NeoMedia Migration de Mexico S.A. de C.V., incorporated in Mexico (a dormant subsidiary); NeoMedia Technologies do Brazil Ltd., incorporated in Brazil (a dormant subsidiary); and NeoMedia Technologies UK Limited, incorporated in the United Kingdom (a dormant subsidiary). In October 2004, NeoMedia established NeoMedia Telecom Services, Inc. in Nevada for the purpose of acquiring BSD. In October 2004, NeoMedia established Mobot Acquisition, Inc. in Delaware for the purpose of acquiring Mobot. Subsequent to the completion of the acquisition of Mobot in February 2006, the name of this subsidiary was changed to Mobot, Inc. During the first quarter of 2006, NeoMedia also acquired 12Snap AG and Gavitec AG, both incorporated in Germany, and Sponge Ltd., incorporated in the United Kingdom. Recent Developments $27 Million Preferred Stock Sale On February 17, 2006, NeoMedia entered into an investment agreement (the "Investment Agreement") with Cornell Capital Partners, LP ("Cornell"). Pursuant to the Investment Agreement, the Company issued and sold to Cornell Twenty-Seven Million Dollars (US $27,000,000) of Series C Preferred Shares (the "Series C Preferred Shares"), of which (i) Three Million Two Hundred Eight Thousand Seven Hundred Two Dollars ($3,208,702) were purchased by Cornell for consideration solely consisting of surrendering that certain promissory note, dated March 30, 2005 in the original principal amount of Ten Million Dollars (US $10,000,000) issued in the name of Cornell, (ii) Eighteen Million Seven Hundred Ninety-One Thousand Two Hundred Ninety-Eight Dollars (US $18,791,298) were purchased by additional funding (consisting of $16,791,298 of immediately available funds and $2,000,000 of securities) from Cornell as of February 17, 2006, and (iii) Five Million Dollars (US $5,000,000) shall be purchased by an additional funding by Cornell on the date a registration statement filed by the Company pursuant to the terms of that certain investor registration rights agreement, dated February 17, 2006 by and between the Company and Cornell is declared effective by the U.S. Securities and Exchange Commission. The Series C Preferred Shares are convertible into shares of the Company's common stock, par value $0.01 per share in accordance with the terms of the Company certificate of designations, preferences, and rights of the Series C Preferred Shares. In addition, pursuant to the terms of the Investment Agreement, the Company issued to Cornell (i) a warrant to purchase twenty million (20,000,000) shares of NeoMedia common stock exercisable for a period of 5 years at an exercise price of $0.50 per share; (ii) a warrant to purchase twenty-five million (25,000,000) shares of common stock exercisable for a period of 5 years at an exercise price of $0.40 per share; and (iii) a warrant to purchase thirty million (30,000,000) shares of common stock exercisable for a period of 5 years at an exercise price of $0.35 per share. On February 17, 2006, the Company and Cornell entered into an assumption agreement, whereby Cornell sold and assigned to the Company those certain promissory notes issued by Pick Ups Plus, Inc., dated September 30, 2003, October 13, 2004, June 6, 2005, and August 4, 2005, in the aggregate principal amount of $1,365,000 and accrued interest of $246,232 for a purchase price equal to One Million Six Hundred Eleven Thousand Two Hundred Thirty-One Dollars and 78/100 (US $1,611,231.78). On February 17, 2006, the Company and Cornell entered into an assignment of common stock, whereby Cornell sold and assigned to the Company twenty million (20,000,000) shares of common stock, par value $0.001 per share, of Pick Ups Plus, Inc. for a purchase price equal to Three Hundred Eighty-Eight Thousand Seven Hundred Sixty-Eight Dollars and 22/100 (US $388,768.22). Acquisition of Mobot, Inc. On February 9, 2006, NeoMedia and Mobot, Inc. (www.mobot.com) ("Mobot") signed a definitive merger agreement under which NeoMedia acquired all of the outstanding shares of Mobot in exchange for $3,500,000 cash and $6,500,000 in shares of NeoMedia common stock. The $6,500,000 stock portion of the purchase price is represented by 16,931,493 shares of NeoMedia common stock, calculated by dividing $6,500,000 by the volume-weighted average closing price of NeoMedia common stock for the ten day up to and including February 8, 2006. On February 17, 2006, NeoMedia and Mobot completed the closing requirements and the acquisition became effective. As of December 31, 2005, NeoMedia had loaned Mobot $1,500,000, which was forgiven upon the effective closing date. Mobot is a pioneer in visual search and recognition technology designed to make marketing effective and innovative using mobile devices. Launched in 2004 to help companies cultivate rewarding relationships with the world's 1.5 billion mobile phone users, Mobot gives marketers, content providers and carriers the tools to make it easy for any consumer with a camera phone to interact with their offerings. Acquisition of 12Snap AG On February 10, 2006, NeoMedia and 12Snap AG ("12Snap") signed a definitive sale and purchase agreement under which NeoMedia acquired all of the outstanding shares of 12Snap in exchange for $2,500,000 cash and $19,500,000 in shares of NeoMedia common stock. The $19,500,000 stock portion of the purchase price is represented by 49,294,581 shares of NeoMedia common stock, calculated by dividing $19,500,000 by the volume-weighted average closing price of NeoMedia common stock for the ten day up to and including February 9, 2006. On February 28, 2006, NeoMedia and 12Snap completed the closing requirements and the acquisition became effective. 12snap AG is a non-public incorporated company headquartered in Munich with branches in Dusseldorf, New York, London, Milan, Stockholm and Vienna. As an expert in innovative marketing and entertainment for mobile phones, 12snap combines know-how in mobile applications, mobile loyalty and mobile marketing. In the mobile marketing space, 12snap creates and implements national and pan-European mobile marketing campaigns for international brands; its mobile loyalty business unit offers customer loyalty programs for companies and brands, and its mobile applications business unit is the center for development and software. 12snap sells and licenses a wide spectrum of mobile solutions to satisfy the demands of the current growing market and the new uses of the third mobile phone generation from dynamic video services and multiplayer games to personalized messaging applications. 12snap has 75 employees, and services companies including McDonald's, MTV(R), Coca-Cola, Ferrero, Wella, adidas, Unilever and Gillette(R). Acquisition of Sponge Ltd. On February 20, 2006, NeoMedia and Sponge Limited ("Sponge") of London (www.spongegroup.com) signed a definitive share purchase agreement under which NeoMedia acquired all of the outstanding shares of Sponge in exchange for (pound)3,450,000 (approximately $6 million) cash and (pound)6,550,000 (approximately $11.4 million) in shares of NeoMedia common stock. The (pound)6,550,000 stock portion of the purchase price is represented by 29,696,745 shares of NeoMedia common stock, calculated by dividing (pound)6,550,000 by the volume-weighted average closing price of NeoMedia common stock for the ten days up to and including February 8, 2006. The agreement also calls for Sponge to earn an additional (pound)2,500,000 (approximately $4.4 million) in the form of NeoMedia common stock if, during the two-year period beginning at closing, the Sponge business earns in excess of (pound)1,300,000 (approximately $2.3 million) in net profits. On February 23, 2006, NeoMedia and Sponge completed the closing requirements and the acquisition became effective. Founded in 2001, Sponge has grown to become a U.K. market leader in providing mobile applications to agencies and media groups, and gain recognition as one of Europe's top independent developers of mobile applications and content. Today, Sponge counts more than 40 agencies, including WPP, Aegis and BBH, as clients, and supplies services for over 100 world-class brands, including Coca Cola(R), Heineken(R) and Diageo. Sponge also supplies a range of mobile services to media groups, including News International, Trinity Mirror, Endemol and IPC. Acquisition of Gavitec AG On February 17, 2006, NeoMedia and Gavitec AG ("Gavitec") of Wurselen, Germany (www.gavitec.com) signed a definitive sale and purchase agreement under which NeoMedia acquired all of the outstanding shares of Gavitec in exchange for $1,800,000 cash and $5,400,000 in shares of NeoMedia common stock. The $5,400,000 stock portion of the purchase price is represented by 13,660,511 shares of NeoMedia common stock, calculated by dividing $5,400,000 by the volume-weighted average closing price of NeoMedia common stock for the ten days up to and including February 16, 2006. On February 23, 2006, NeoMedia and Gavitec completed the closing requirements and the acquisition became effective Gavitec was founded in 1997 as a specialized provider and manufacturer of products and solutions for mobile marketing and mobile information technology. As a technology leader in code-reading systems and software for mobile applications, Gavitec offers its clients standardized or individual solutions in the areas of mobile marketing, mobile ticketing, mobile couponing, and mobile payment systems. Acquisition of BSD Software, Inc. On December 21, 2004, NeoMedia signed a merger agreement to acquire BSD. On March 21, 2006, NeoMedia and BSD completed the requirements to closing and the acquisition became effective. After exchange of shares certificates, NeoMedia expects to issue 7,123,698 shares of its common stock in connection with the acquisition. BSD, operating under its trade name of Triton Global Business Services, is a customer service-oriented organization providing telephone services to direct customers and telecommunications companies (including clearing houses, alternative operator service providers, local exchange carriers, long distance voice and data providers, wireless carriers), both within North America and internationally. Letter of Intent to Acquire Hip Cricket On February 16, 2006, NeoMedia signed a non-binding letter of intent to acquire HipCricket, Inc. ("HipCricket") of Essex, CT (www.hipcricket.com) in exchange for $500,000 cash and $4,000,000 of NeoMedia common stock. The letter of intent is subject to due diligence and signing of a mutually agreeable definitive purchase agreement by both parties. HipCricket is a leading mobile marketing firm that provides innovative, custom solutions to broadcasters and brand marketers. Today, HipCricket works with five of the top 10 radio groups in the U.S. as well as with some 40 major brand marketers. HipCricket combines senior marketing expertise with state-of-the-art mobile and event marketing technologies to offer clients unprecedented interactivity with their consumers, viewers, listeners or customers on a one-to-one personal level. $100 Million Standby Equity Distribution Agreement with Cornell 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. 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 $0.229 to an independent third party as a fee for negotiating and structuring the Standby Equity Distribution Agreement. 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. During 2005, iPoint-media recapitalized such that each share of its stock was exchanged for 100 shares. As a result, NeoMedia now holds 6,919,680 shares of iPoint-media common stock. NeoMedia's ownership percentage remains unchanged at 17%. 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 1st 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 will distribute approximately 2,043,500 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 Form SB-2 registration statement effective. During the year ended December 31, 2005, NeoMedia recognized an impairment charge considered to be other than temporary of $530,000 to the carrying value of its investment in iPoint-media common stock. Patent Developments On January 23, 2004, NeoMedia filed a patent infringement lawsuit against AirClic, Inc. During July 2005, NeoMedia and AirClic settled the case out of court, with AirClic agreeing to compensate NeoMedia for past and future activities. AirClic did not receive a license to use NeoMedia's patented PaperClick(R) technology. On January 2, 2004, NeoMedia filed a patent infringement lawsuit against Virgin(R) Entertainment Group, Inc., Virgin Megastore Online and Virgin Megastore (collectively, "Virgin"). During June 2005, NeoMedia and Virgin settled the case out of court, with Virgin agreeing to purchase a license to use NeoMedia's patented PaperClick(R) technology platform through 2016. 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. During October 2005, the copyright charges were dismissed by the court. 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. The parties are currently engaged in discovery in both of these actions. Management cannot predict the outcome of the matter, however, believes it has adequate defense strategies. The Company plans to vigorously defend this matter. An adverse outcome to this suit could have a material adverse effect on NeoMedia's business plan and expected future revenue from patent licensing. 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 May 13, 2005, the European Patent Office (EPO) issued a Notice of Allowance based on proceedings conducted during April 2005 in The Hague. Recognition by the EPO extends the patents for NeoMedia's core technology - the use of bar codes and other unique identifiers to automatically link to content on the Internet - to Austria, Belgium, France, Germany, Liechtenstein, Luxembourg, the Netherlands, Sweden, Switzerland and the United Kingdom. On February 1, 2006, the U.S. Patent and Trademark Office issued a new patent to NeoMedia covering the capture and processing of bar codes explicitly from camera cell phones. The patent (U.S. Patent No. 6,993,573) explicitly describes and patents NeoMedia's method of capturing the image of a bar code by the camera device on a Web-enabled cell phone, and processing the bar code so as to deliver the appropriate URL - or Web-based information - to the user's cell phone screen. PaperClick(R) Developments On September 30, 2005, NeoMedia entered into a mobile marketing alliance and co-marketing agreement with advertising agency Arnold Worldwide ("Arnold"), centered on NeoMedia's patented PaperClick(R) technology platform. The agreement calls for Arnold and NeoMedia to work together to develop opportunities and marketing campaigns utilizing PaperClick. NeoMedia will provide technical and sales support for presentations, marketing programs and campaigns conceived and developed by Arnold for its clients. On July 12, 2005, NeoMedia entered into a consulting agreement with Silicon Space, Inc., under which Silicon Space developed portions of NeoMedia's PaperClick(R) WordRegistry interface, for which NeoMedia paid Silicon Space approximately $53,000 in fees during the year ended December 31, 2005. Silicon Space replaces Science Applications International, Inc., who NeoMedia engaged in October 2004 on a contingency basis to build and host the interface. NeoMedia intends to host the WordRegistry internally upon its completion. 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 March 18, 2005, NeoMedia and Foote Cone & Belding ("FCB"), a division of FCB Worldwide LLC and part of the Interpublic Group of Companies, Inc. (NYSE: 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 up for co-marketing and sales efforts in the U.S., as well as in Europe, the Middle East, Africa and Latin America. On March 10, 2005, NeoMedia and Intactis Software, Inc., a provider of Check 21 software products and solutions for the small- to medium-sized financial institution market, 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 Intactis convertible preferred stock and warrants to own up to 25% of Intactis. Intactis also placed an order for an initial 100 copies of NeoMedia's PaperClick Print Encoder software for which NeoMedia recognized $30,000 revenue during 2005. During the year ended December 31, 2005, NeoMedia recognized an impairment charge considered other than temporary of $250,000 to the carrying value of its investment in Intactis since the carrying value exceeded its fair value as estimated by management. As of the date of this report, management does not expect to invest any more capital into Intactis. On December 13, 2004, NeoMedia introduced PaperClick(R) Mobile Marketing Services, a tool that allows global marketers and advertising agencies to have one-on-one contact with consumers through cell phones and other mobile wireless devices. PaperClick(R) Mobile Marketing Services delivers real-time promotional content, which can be updated and changed by marketers, while giving consumers one-click e-commerce buying power. The latest addition to the Mobile Marketing Services suite lets users of a wide range of already-in-use camera phones "take pictures" of special created codes on packages and promotional items and connect in one-click to marketing information. First available for Nokia(R) Series 60 mobile phones, the new capability complements the launch of the PaperClick(R) Mobile Go-Window(TM) during 2004 and PaperClick(R) for Camera Cell Phones(TM) in 2003. Micro Paint Repair Developments On February 28, 2006, NeoMedia signed a 10-year exclusive supplier agreement with Automart, a Beijing-based joint venture operating under the laws of the People's Republic of China specializing in automobile sales, financing, insurance and repair. Automart is the brand name of Jinche Yingang Auto Technological Services Limited, with which NeoMedia signed a distribution agreement in August 2005. The new agreement expands on the previous agreement, giving Automart the exclusive rights to distribute NeoMedia's micro paint repair products to their own stores and others throughout China, Hong Kong, Macao, and Taiwan, and also guaranteeing that Automart will purchase at least 70% of its non-micro paint products through NeoMedia as its distributor. NeoMedia has signed distribution agreements with DuPont and PPG, and intends to become a distributor of other automotive aftermarket products to Automart. On December 20, 2005, NeoMedia executed a definitive supply agreement with E.I. DuPont de Nemours (Belgium) BVBA of Belgium ("DuPont"), a subsidiary of E.I. DuPont, under which NeoMedia will distribute DuPont's automobile refinish paint throughout the People's Republic of China. The agreement calls for NeoMedia to serve as a non-exclusive distributor of DuPont products to Beijing Sino-US Jinche Yingang Auto Technological Services Limited ("Jinche") in the People's Republic of China. NeoMedia previously signed a distribution agreement with Jinche under which Jinche will distribute and use NeoMedia's micro paint repair products at its automotive service facilities throughout China. On February 17, 2006, in connection with the $27 million convertible preferred funding arrangement with Cornell, NeoMedia was assigned 20,000,000 shares of Pick Ups Plus ("PUPS") common stock. NeoMedia had previously acquired 8,333,333 shares of PUPS common stock directly from PUPS, in exchange for $250,000 cash. On December 14, 2005, NeoMedia executed a definitive distribution agreement with PPG Industries' PPG Shanghai Trading Co. Ltd. ("PPG"), under which NeoMedia will distribute automotive aftermarket products produced by PPG. The Agreement calls for NeoMedia to serve as a non-exclusive distributor of PPG products to Jinche in the People's Republic of China. On October 4, 2005, NeoMedia signed a definitive distribution agreement to bring its NeoMedia Micro Paint Repair business to Scandinavia. The agreement, signed with WITHO-AS of Oslo, Norway ("WITHO-AS"), calls for WITHO-AS to serve as an exclusive distributor of NeoMedia's micro paint repair products, systems and licenses to automotive service facilities throughout Denmark, Sweden, and Norway. Based in Oslo, Norway, WITHO-AS is a new company formed to specialize in products and services involving micro paint repairs for automobiles in Denmark, Sweden and Norway. On September 27, 2005, NeoMedia signed a definitive distribution agreement to bring its NeoMedia Micro Paint Repair business to Mexico and Latin America, as well as be a distributor of other automotive aftermarket products. The agreement, signed with Micropaint de Mexico, S.A. ("Micropaint de Mexico"), calls for Micropaint de Mexico to serve as an exclusive distributor of NeoMedia's micro paint repair products, systems and licenses to automotive service facilities throughout Mexico and Latin America. The agreement also calls for Micropaint de Mexico to buy certain automotive aftermarket repair and environmental protection products from NeoMedia. Founded earlier this year and based in Monterrey, Mexico, Micropaint de Mexico specializes in providing automotive aftermarket products throughout Mexico and Latin America. On August 30, 2005, NeoMedia signed a distribution agreement with Jinche, under which Jinche will act as a distributor of automotive products in China. Jinche is a Beijing PRC-registered company specializing in automobile sales, financing, insurance and repair. NeoMedia will supply Jinche with its micro paint repair products, as well as various other automotive aftermarket products from other manufacturers. On February 25, 2005, NeoMedia signed two non-binding letters of intent 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 letter of intent 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 letter of intent, 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 letter of intent 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 letters of intent are non-binding and subject to due diligence by NeoMedia and AP. On September 21, 2005, the BOD approved to change the deal structure for the acquisition of AP, so that the Company would acquire only 30% of AP for a total purchase price of $1.6 million of which $600K would be paid in cash and $446K would be paid through the assumption of debt, and $554K through the issuance of restricted Neomedia stock. Neomedia will not acquire the remaining 70% of AP under the new structure. Industry Overview NeoMedia Mobile NeoMedia Mobile (NMM) business unit encompasses all the technologies, products and services designed to connect the physical world to the electronic world, with consumer, enterprise, educational and governmental applications. Being an early pioneer in the wireless solutions industry, NeoMedia has been developing its PaperClick platform and applications since 1996. During that time, NeoMedia has also established an extensive portfolio of intellectual property. The original commercial use of the PaperClick technology depended on utilizing a scanning device (e.g. pen with scanner) to de-code printed codes, which it would then link via PC to the Internet to enable the consumer to retrieve extensive information on the Internet. With the advent and proliferation of the cell phone, NeoMedia realized the immense potential to reach consumers anywhere and anytime with a device that they carried with them. This was further augmented by the escalation of camera phones in the marketplace over the past several years. With the PaperClick platform, cell phone users (and users of other mobile devices such as personal digital assistants) are able to directly access the mobile internet in one step, via "texting,, "keying," "clicking" on printed barcodes or smartcodes, or "keying" in keywords or product on their cell phones. To accelerate NeoMedia's entry into the fast-growing and lucrative mobile marketing marketplace, NeoMedia has made a number of several key strategic acquisitions already in 2006: Boston-based visual recognition provider Mobot, London-based applications developer Sponge, Aachen (Germany) based code-reading specialist Gavitec and Munich-based award-winning mobile marketing agency 12Snap. All of these companies have proven track records in creating highly innovative wireless marketing solutions that they have successfully introduced into the market, on behalf of numerous household name consumer goods and media companies in the US, across Europe, and in Asia/Pacific including Australia and Japan. NeoMedia anticipates further growth in the mobile marketing industry to come from several factors: (1) The increased growth of mobile subscribers, and those subscribers accessing the Internet. According to the Cellular Telecommunications & Internet Association (CTIA) and the Mobile Marketing Association (MMA), there are over 1.9 billion-plus phones in use worldwide--more than TVs and PCs combined, and, that by the end of 2008, it is projected that more than 600 million phone users will have Internet access. (2) Improvements in Infrastructure. The penetration of high speed GPRS networks is increasing bandwidths, which in turn allows more complex application development, faster speed and enhanced user experience, resulting in mobile customers embracing mobile content in ever greater numbers and complexity. NeoMedia's 12snap unit, for example, is now offering consumers in Germany personalized screensavers and animations for their handsets.. (3) Enhanced Handset Functionality. Color screens and camera phones are driving sales of mobile devices in the replacement market. Worldwide, 295 million camera phones were sold during 2005, and that number is expected to grow to almost 750 million by 2009 (Source: Gartner Dataquest, November 2005). No less than three products in NeoMedia's arsenal of solutions - PaperClick, Gavitec's Lavasphere and Mobot's visual recognition product are technologies that are designed to bring enhanced user experience to consumers via the camera in their wireless handsets. Additionally, in early 2006 NeoMedia obtained a further U.S. patent covering the capture and processing of bar codes explicitly from camera cell phones. The Japanese and European marketplaces are leading the way in mobile marketing usage and acceptance. In Japan, the use of 2D "smart codes" in advertising and marketing has become increasingly more popular with subscriber levels now approaching 10million consumers. Northwest Airlines recently ran a 30' billboard of a smart code in downtown Tokyo, promoting one of its Japanese routes; according to The Wall Street Journal, "For Northwest, of St. Paul, Minnesota - which last month filed for bankruptcy protection in the face of high labor costs, soaring oil prices and intense competition - the [smart code] campaign is a chance to boost its Japanese presence and its reputation as a technology leader." In Europe, two specific areas where mobile marketing has already proven successful are SMS (text) and MMS (picture messaging) mobile marketing campaigns. There, 40% of brands surveyed have already deployed text messaging campaigns and 18% have deployed MMS campaigns (Source: Airwide Solutions Feb. 2006). This study also showed that by 2008, 89% of brands expect to use wireless marketing campaigns to reach their audience, and in five years 52% expect to spend between 5% and 25% of their marketing budget on the "Third Screen" as the cell phone is now being described in marketing circles. NeoMedia, by acquiring Sponge, Mobot, 12Snap and Gavitec in particular, has overnight become an innovative global leader in creating and executing mobile campaigns and in developing related content. From campaigns that 7% of the population take part in - as was the case with a recent Walkers (Frito-Lay) promotion in the UK run by its Sponge unit - to 12snap winning four prestigious Lions at the renowned Cannes Advertising Festival, NeoMedia has added companies with wireless solutions of the highest standard to accompany its groundbreaking PaperClick technology, driving recognition as one of the lead players in its industry. NeoMedia Micro Paint Repair NMPR has made great strides over the past year to become a global supplier to the automotive rejuvenation market. NMPR now offers a comprehensive line of products and services needed for complete interior and exterior automotive rejuvenation, expanding from its initial business in the light collision and automotive paint repair industry. NMPR also offers its clients full service training at its corporate headquarters in Fort Myers, Florida or onsite at its clients' places of business. Focused on quality, efficiency, innovativeness and environmentally sound products and technologies, NMPR offers its clients expert solutions intended to increase their productivity and profits while helping them to deliver a positive experience to the end consumer. NMPR's products are positioned to augment traditional paint repair methods commonly used in body shops, as well as allowing non-body shop operations to expand their service offerings. NeoMedia Telecom Services Triton was incorporated in April 1998 as a next generation Internet Protocol (IP) enabled provider of live and automated operator calling services, e-Business support, billing and clearinghouse functions and information management services to telecommunications, internet and e-business service providers. Triton was acquired by NeoMedia in March 2006, at which time NeoMedia established the NeoMedia Telecom Services (NTS) business unit, consisting solely of Triton's business. NTS' technology platforms are capable of providing its customers with the ability to integrate traditional telephony services, internet information and subscription services and e-Commerce transactions and place the charges on the billing medium of the end users' choice. Strategy NeoMedia Mobile NeoMedia has spent the past decade as a pioneer in the now confirmed space of linking the physical world to the electronic world, developing, patenting and implementing four generations of continuously refined switch technology that bridges these environments. During the past two and a half years, NeoMedia has introduced PaperClick(R) for Camera Cell Phones and the PaperClick(R) GoWindow and CodeWindow, to capitalize on the rapidly emerging mobile marketing sector and using it as a basis from which to demonstrate the effectiveness of its PaperClick platform. With this industry positioned for rapid worldwide growth, NeoMedia believes its poised to gain global market share, both from its patented PaperClick direct-to-web platform and from the platforms, applications and services of its recent acquisitions. The acquisitions of Mobot, Sponge, Gavitec and 12Snap have placed NeoMedia into a leadership position in the wireless solutions industry. Taken together with NeoMedia's patented PaperClick(R) platform, NeoMedia offers marketers end-to-end solutions to market to their target audiences via mobile devices through SMS (text messaging), MMS (multimedia messaging), direct-to-Internet GoWindow(TM), and CodeWindow(TM), Visual Recognition, and 1-D barcode and 2-D smartcode recognition. NeoMedia intends to gain market share in the global mobile marketing industry through organic growth from existing markets and new and existing clients, together with geographic growth in new and expanding markets. With the combination of platforms, services, content and applications now available through NeoMedia, each NMM business sub-unit has the ability to offer its existing client base ever more sophisticated and innovative mobile marketing services and solutions. With the growth of cell phone usage world-wide, and by having many global brands such as McDonald's, Coca-Cola, adidas and Unilever as existing clients, NeoMedia intends to bring mobile marketing services to additional geographic regions around the globe, notwithstanding the immense potential in the virtually untapped mobile marketing industry in the United States, which is about 1-2 years behind Europe and Japan in its maturity. Beyond consumer goods, the PaperClick platform is also an effective platform for other industry markets and can be utilized through other devices, such as personal computers. As such, NeoMedia is pursuing opportunities in areas as diverse as homeland security, banking, search, food labeling, inventory tracking and multiple enterprise applications--from affinity programs to mobile service solutions to complete company management systems. NeoMedia Micro Paint Repair NeoMedia Micro Paint Repair (NMPR) offers its clients a "one-stop shop" to obtain a comprehensive line of technologically and environmentally advanced products and processes for interior and exterior automotive rejuvenation. Its proprietary Micro Paint Repair system can dramatically reduce costs for current auto body repair facilities, or create a new profit center for auto-related businesses that do not currently offer paint repair. Likewise, NMPR can help automotive repair businesses offer complementary services beyond micro paint, not only through its product line, but also through training on how to do additional interior and exterior repairs. NMPR markets its comprehensive automotive rejuvenation system to a myriad of automotive industry businesses, from auto dealers to body shops to glass repair shops, and more. Two facilities, NMPR's headquarters in Fort Myers, Florida and its Canadian head office in Calgary, Alberta offer repairs directly to customers, and on-site training to business clients. Geographically, outside of the United States NeoMedia has expanded its micro paint repair offering into: China through partnerships with Jinche (Automart), DuPont and PPG; Scandinavia, through its distribution agreement with WI-THO AS in Norway; Mexico and Latin America, through its distribution agreement with Micropaint de Mexico; Australia/New Zealand, through a distribution agreement with Micro Paint Systems (Australasia) Limited of New Zealand; and Canada, through a distribution agreement with MDA Co-Auto. NeoMedia Telecom Services NTS is a fully implemented alternate billing agent within the Local Exchange Carriers (LEC's) billing system in Canada. NTS's vision is to continue expanding its live and automated operator service capability focusing on making emerging web-based information and transaction services easier to access and pay for. NTS has aligned itself to provide globally accessible products, coupled with sophisticated proprietary technology, allowing it to offer this global marketplace fully-integrated or unbundled solutions. NeoMedia believes that the future growth of the industry is largely based upon the ability of service providers to offer multiple billing options for consumer services thus increasing market penetration. Products/Services NeoMedia Mobile Mobile Marketing Through the acquisitions of Mobot, Sponge, Gavitec and 12Snap in early 2006, NeoMedia Mobile (NMM) now offers complete end-to-end mobile marketing products and services. This includes: the proprietary PaperClick(R) Mobile Marketing Service; mobile content & application development, including the Mobot proprietary visual matching platform; complete campaign management including execution and campaign analysis; and CRM (customer relationship management). Clients can choose from any or all delivery options offered through NeoMedia for their mobile marketing campaigns: SMS (text messaging), MMS (multimedia messaging), GoWindow(TM), CodeWindow(TM), Visual Recognition, or 1D and 2D Bar Code Recognition. PaperClick(R) Mobile Marketing Service PaperClick(R) is a mobile marketing service, based on the patented PaperClick technology platform, which enables brand managers and product manufacturers to market directly to their target customers via their portable devices such as mobile phones and PDAs. By entering a word or phrase (e.g.: brand name or tagline) into a mobile device using the PaperClick(R) GoWindow; by entering a numeric product code into a mobile device using the PaperClick(R) CodeWindow; or by clicking on a barcode or smart code on product packaging or marketing collateral using PaperClick(R) for Camera Phones, a consumer can retrieve tailored Web content in a single step, even to pages deep-linked within a website. PaperClick bypasses long URLs, search engines or difficult-to-navigate phone menus by linking directly from a word or code to mobile commerce, rebates, contests, coupons, registration, instructional videos, ad tracking, polling, customer profiling and more. The PaperClick solution consists of: o Word Registration and Activation 1. Registration of brand names and taglines in the PaperClick(R) WordRegistry(TM). The WordRegistry is the official repository for PaperClick Keywords; 2. Bidding for non-trademarked generic keywords (e.g., cola, burger, car), which will be auctioned to the highest bidder via the PaperClick WordRegistry; and 3. Activation of brand names, taglines and non-trademarked keywords by linking them to mobile web content using the Link Manager Software. o New Code Activation. NeoMedia can create custom smartcodes to print on product packaging or literature, a subway poster, a direct mailer or other marketing collateral. Consumers with a camera phone then click on the code to link directly to Web content designated by the product's manufacturer. o Existing Code Activation. As with new smartcodes, PaperClick(R) can link already-existing product codes, such as UPC, EAN, JAN, and ISBN codes, to tailored Web content. Upon activation, the PaperClick platform also provides the following word management tools: o Link Manager Software. Software for a PC that allows a product owner to link keywords and codes to a specific URL; o Handset Software. Device software required for a mobile device customers to read activated codes and keywords; and o Enterprise Reporting. Allows product owner of keywords or codes to track the number of consumer "hits" by code, date and time. Other value-added services: o Click Management Services - Link Manager Service. Management of the linking of all words and codes on behalf of a product owner; and - Code Verification. Testing of each code to ensure that it is printed properly and that it links to the correct URL. o Web Content Creation Services. Assistance in creating Web content for mobile devices in XHTML, WAP and other mobile formats. o Mobile Marketing Campaign Services. Assistance in creating mobile advertising campaigns using products with PaperClick(R) technology. o Customized Reporting. Customized reporting and data mining that allows product owners to receive additional data about their marketing campaigns. o Server Software. For companies managing a large number of codes or keywords, server software is available that allows clients to store the links within their organization's network. Content & Application Development 12snap and Sponge, acquired as subsidiaries of NeoMedia during the first quarter of 2006, are recognized leaders in content and application development for mobile marketing. Between them they have developed and implemented over 20,000 applications and tens of thousands of content items for use by major brands in Europe and the U.S., activating over 4 billion products in the process. Their platforms are highly scalable and capable of running hundreds of campaigns simultaneously. The NMM business sub-units typically retain the IP for custom-made applications, therefore the applications can be "re-skinned" for use by other clients quickly and efficiently. Some applications are server-based, some are handset-based while others still are handset-based but server-linked. Delivery mechanisms are via SMS, MMS, WAP-push link with subsequent download, Bluetooth, infrared, IVR or direct to Web. Sponge's proprietary core applications suite, Text Generator, deploys applications for clients quickly and efficiently in a user-friendly environment, with all applications offering a wide range of monitoring and performance tools. Clients access their own-labeled environment via an internet-enabled PC, enabling them to setup , edit, terminate and report on all their applications. Examples of Sponge's applications include: o Games. Multilevel single-player games (e.g. adventure, sports, arcade), Bluetooth multiplayer games (e.g. Mud Racer, Madagascar Multiplayer) as well as web and mobile convergence games (e.g. Fish Snapper, Coke Music Summer Games). o Competitions. Various formats (e.g. multiple choice, tie-breakers, free text entry). o Feedbacks. Clients are able to sort feedback and quickly target selected responses for publication. o Votes. Rapid implementation of voting formats with unlimited vote options,, generating real-time voting patterns with the ability to block multiple votes. o Text to Win. Entrants get code and short message number to text in to win a variety of prizes; client options include multiple prize groups, caps on prizes, win ratio management, prize draws, varying start and end dates by prize group and email alerts when prizes are won o Reverse Auction. Turnkey reverse auction promotions, where the lowest unique bid is the ultimate winner. o SMS- or MMS-to-Postcard. Customers send in recipient's address and greeting message, which is matched to a postcard and sent to recipient. o Intelligent Offline Client. (European Patent Pending). Serves as a mobile content and application portal (i.e. an offline browser) which remains installed as a handset-based application on a mobile phone. o Messenger. Provides all the functions of an instant messaging application on PCs. o The Cam. Allows customers to enrich photos taken with a camera phone by combining them with pre-defined characters. 12snap's Content Management Platform offers dynamic content creation. In numerous mobile marketing programs this platform has delivered tens of millions of content pieces to end users. Examples of Mobile Content Include: o Wallpaper o Ring Tones o Music o Mobile Web-Based Information o Mobile Cards Mobot Proprietary Visual Matching Service With Mobot's proprietary visual recognition technology, consumers use the camera in their phone to snap on a brand advertisement, an editorial page in a magazine, or even a product in a catalog, whereby visual matching technology identifies their picture and connects them directly to relevant information. Fast and easy for consumers, it's a powerful tool for any media company or marketer. Designed to allow seamless integration, Mobot requires no modifications to existing visual media -- no keywords, phone numbers, URLs, short codes, product codes, or bar codes are necessary. Mobot visual matching technology "reads" the image and delivers a wide range of responses to the consumer. Gavitec Platforms & Applications Lavasphere for Smartphones This software solution - specifically designed for smartphones and based on the award-winning Lavasphere technology - enables mobile camera phones to read 2D-codes (such as Data Matrix and QR codes) as well as traditional barcodes with the integrated digital camera, even during preview (Zero-Click(TM) live-stream decoding). Using the mobile phone, the user can retrieve information contained within a QR smartcode for example, or link directly to a specific web page, access services, retrieve real-time information or place orders. To use Lavasphere(R), no additional hardware is required. This set of ultra-small footprint algorithms is designed to be integrated into any current and future series 60 camera phones with Symbian server-client architecture. Lavasphere for Smartphone is the ideal solution to turn a smartphone into a universal personnel code reader and provides many mobile applications: o M-Commerce o Mobile marketing and advertising o Access to multimedia HTML, XHTML, WAP information and services o Print-to-web integration o Content linking o Data collection o E-Ticketing o Price comparison o Logistics EXIO EXIO is an advanced and complete solution, including printer, display, keypad and GSM/GPRS module - able to read and process two-dimensional (2D) smartcode symbologies such as Data Matrix from mobile phone displays as well as printed one-dimensional (1D) barcodes. Thanks to a high-speed Digital Signal Processor (DSP) and a high-resolution camera, EXIO automatically recognizes smartcodes sent as SMS (text) or MMS (picture message) to any compatible mobile phone. EXIO has been designed for various direct marketing applications such as mobile ticketing, mobile couponing, mobile payment and mobile loyalty programs, and is therefore the ideal off-the-shelf solution for innovative application areas such as m-Commerce, 1-to-1-communication, entertainment and retail trade. MD-20 MD-20 is a high-performance OEM code reader providing unparalleled flexibility in scanning two-dimensional (2D) smartcode symbologies such as Data Matrix from mobile phone displays as well as printed one-dimensional (1D) barcodes. Designed to be embedded directly into OEM devices, the new MD-20 features a high-resolution video camera with CMOS sensor and specialized code reading algorithms allowing automatic detection of 2D smartcodes sent as MMS or Picture SMS to mobile phones. Equipped with a high-speed digital signal processor (DSP), it reads smartcodes with extreme accuracy and rapidity. Offering Ethernet and supporting RS-232 for data connection, the new MD-20 can be directly connected to any host system to process the decoded information. The MD-20 enables device manufacturers as well as third-party providers to maximize their business. By implementing MD-20 into their product design, manufacturers and system integrators can enhance the attractiveness and complement the functionality of their products with significant added value. The MD-20 creates competitive advantages through marketing differentiation as well as to enhance company's image for innovation. Thanks to its compact size, speed and flexibility, MD-20 is the ideal high-performance fixed-position smartcode reader for a wide range of applications where mobile code reading, mobile couponing, mobile ticketing and mobile marketing are required, thus enabling the phone to be used as the single universal mobile device. The MD-20 can be integrated, for example, into a terminal or an access control system to permit quick and easy access to users. It can be also used to validate all sorts of tickets, such as admission tickets or transportation tickets and also to redeem vouchers, to get a discount, or to pay for a product or service. Mobile Marketing Campaign Management Through NeoMedia, marketers and agencies can get full-service mobile marketing account management including campaign reporting and integration into media-led campaigns (TV, radio, print, outdoor, direct, events, etc.). Those marketers looking for a full end-to-end creative solution would likely turn to 12snap. Those marketers who wish to add mobile marketing to their existing marketing strategy while utilizing their existing agencies would turn to PaperClick, Mobot, Gavitec or Sponge, depending on their technology or campaign requirements, or the geographical footprint of their desired market or campaign. Customer Relationship Management Gavitec, Sponge and 12snap have customer relationship management (CRM) platforms that utilize the mobile phone to build loyalty among clients, establishing long-term customer relationships and a stable revenue base. 12snap's 12CRM platform includes design, data analysis, content creation and ongoing program management. It also includes a mobile couponing solution, utilizing Gavitec readers, that allows marketers to send out personalized coupons that link directly to a consumer's mobile phone, making it impossible to redeem the coupon multiple times. Sponge's CRM application includes list management, opt-in database functionality and messaging scheduling. Enterprise & Niche Market Products and Services NMM has a unique competitive advantage of holding intellectual property for the numerous products, services and platforms mentioned above that allows it entry into established broad-based markets as well as many more niche industry opportunities. From homeland security to banking to inventory tracking to food labeling, NMM has the solutions ready to customize and implement. NeoMedia Micro Paint Repair NMPR offers both its own unique product line and acts as a distributor of other companies' products to round out its comprehensive offering to automotive rejuvenation businesses worldwide. The products offered through NMPR include: NMPR Paint System. NMPR offers a license to use its proprietary NMPR Paint System, along with a training program and ongoing technical support relating to the system. The system itself utilizes proprietary technology to repair cosmetic automobile damage such as chips, scratches, spots, blemishes and oxidized paint. While competitive paint repair products utilize a mechanical fix, the NMPR system chemically alters the paint to make the repair invisible to the naked eye, even with the most lustrous metal flake and pearlized auto paints. Repairs can be completed in a fraction of the time of conventional methods, and all of NMPR's products are free of harmful icocyanates. NMPR Paint System Products. NMPR supplies the products necessary for a paint system operator to implement an NMPR Paint System. Products include NMPR's proprietary chemicals, auto paint and application hardware. NMPR Specialty Products. NMPR offers a variety of non-paint related specialty products, including paintless dent repair, interior cleaning, corrosion protection, windshield repair and warranty programs. NMPR Auto Rejuvenation Services. NMPR currently operates two repair facilities, one in its headquarters office in Fort Myers, Florida and the other in its Canadian head office in Calgary, Alberta. The facilities utilize the NMPR Paint System and other auto rejuvenation services to make cosmetic repairs to automobiles for dealerships, rental car companies and consumers. NMPR Auto Rejuvenation Training. NMPR offers complete training on its own proprietary micropaint system, paintless dent repair and other auto rejuvenation services to clients of all sizes in its facilities in Fort Myers, Florida and Calgary, Alberta, and at client locations. In early 2006, NMPR specialists trained partner Jinche in China on the NeoMedia Micro Paint Repair system in 30 of Jinche's Beijing facilities initially. Other Automotive Aftermarket Products. In some geographies, NMPR serves as a distributor of other automotive aftermarket products from a variety of manufacturers, such as DuPont and PPG. NeoMedia Telecom Services NTS has sophisticated proprietary software and hardware services that are capable of processing call records for telecommunications companies worldwide. They track and process bills for a wide range of services, from local and long distance operator services as well as paging, voice mail, caller ID, phone cards and other "ease of access" 0+Plus dialing solutions. NTS has also developed flat-fee billing solutions that it believes will benefit Internet content and service providers. With the addition of services for the Internet community, NTS anticipates that it will be able to meet the needs of an even broader range of communications companies. NTS's products and services include, in the operator/agent service field: global and domestic origination, hospitality providers, payphone providers, directory assistance, North America service, international service, enhanced information services, e-business support services, e-commerce transaction support, "Click-2-Talk" web-based voice routing, and call center ASP solutions. NTS's billing services include: North American LEC billing, online subscription-based billing, and web-based transaction billing (e-commerce). Strategic Relationships NeoMedia Mobile The initial business sub unit within NeoMedia Mobile (NMM), PaperClick, and the recent strategic acquisitions to NMM, Sponge, Mobot, Gavitec and 12snap, have all developed strategic relationships to leverage their capabilities across new geographic and product markets. In February 2006, NeoMedia entered into a strategic alliance with Italian mobile marketing pioneer Mobedia (www.mobedia.it). The new strategic relationship with NeoMedia is a co-marketing partnership agreement, which allows Mobedia to integrate NeoMedia's direct-to-mobile-internet PaperClick(R) technology into all of its campaigns. Mobedia was founded in Milan in July 2005 by a group of ex-Unilever marketers. With a collective network of business relationships covering a wide range of sectors, from fast moving consumer packaged goods to network operators, and from media to advertising and promotion agencies, Mobedia is positioned to expand its mobile marketing offerings in Italy and across southern Europe. In October 2005, NeoMedia entered into a mobile marketing alliance and co-marketing agreement with Arnold Worldwide, one of the largest and best-known advertising agencies in the U.S. and globally. The agreement has Arnold and NeoMedia working together to develop opportunities and marketing campaigns utilizing the PaperClick platform. In March 2005, NeoMedia and Foote Cone & Belding, a division of FCB Worldwide LLC, entered into a co-marketing agreement centered on NeoMedia's patented PaperClick(R) technology platform. The agreement calls for Foote Cone & Belding's FCBi unit to work with NeoMedia to develop opportunities and marketing campaigns utilizing PaperClick, and facilitate the introduction of NeoMedia and PaperClick in the mobile telecommunications industry. NeoMedia provides technical and sales support for presentations and marketing programs co-developed for FCBi clients and is working with FCBi to explore and create marketing opportunities and innovative solutions for its business customers. In March 2005, NeoMedia also entered into a business development agreement with Intactis Software, Inc., a provider of Check 21 software products and solutions for the small- to medium-sized financial institution market, under which the two companies committed to develop a database lookup system for validating codes printed on negotiable instruments (checks). During 2005, Gavitec and PostFinance, the largest Swiss bank for private customers, started a project with system integrator Unisys and numerous partners in the retail sector (Migros, COOP, SBB, McDonald's, Interdiscount, Mobilezone and PostShops) enabling customers to pay easily and safely by mobile phone instead of EC-card - the first mobile macro-payment system worldwide. During 2005, Gavitec also signed a distribution agreement with Philippine company Omniprime Corp, a leading supplier of full service solutions to various industries throughout Asia, and by this expanded the distribution of its product lines of code scanners to the Far East region. Gavitec concluded three further business co-operations during 2005: first with RegiSoft Ltd., leading developer of innovative VAS solutions for the mobile market place, then with REA Card GmbH, market leader for cashless payment systems and lastly with Clicktivities AG, supplier of digital premium solutions. The cooperation agreement with RegiSoft Ltd. focuses on the integration of Gavitec hardware solutions and RegiSoft's World Trade Server(TM) (WTS(TM)) to provide customers with complete and integrated products and services for mobile marketing, mobile ticketing and mobile couponing. Gavitec and the two subsidiaries of REA Systeme GmbH, REA Card GmbH and FunkTicket AG, intend to bundle their competencies and products in order to enable secure and easy payments by mobile phones. In addition, they plan to develop a hybrid-system which combines Gavitec scanners with REA terminals to one single payment system. In conjunction with Clicktivities AG, Gavitec plans to address the mobile marketing segment by offering customized digital solutions for eBusinness. In November 2005, Mobot announced an agreement with the Light Agency to use and distribute its visual search and recognition technology for mobile phones, exclusively to the grocery sector in the UK. This adds an additional dimension onto an already running program based on a unique partnership between The Light Agency, Jacksons Stores, a Sainsbury's Plc company and nearly 200 brands. Consumers participating in this program can "shop, scan, and save" while in the grocery store through texting and now by snapping and sending information through their mobile phones, based on an advertisement in the store. NeoMedia has on ongoing relationship with Baniak Pine and Gannon, a Chicago law firm specializing in intellectual property licensing and litigation. The firm assists NeoMedia in seeking out potential licensees of its intellectual property portfolio, including any resulting litigation. Baniak Pine and Gannon currently represents NeoMedia in its lawsuit against Scanbuy. During 2004 and 2005, NeoMedia engaged key partners around the world to assist in the anticipated roll-out of the PaperClick(R) family of products. During such time NeoMedia has partnered with affiliates and resellers, such as Big Gig Strategies (United Kingdom), Relyco and IT-Global (United States), AURA Digital Communications (Australia), E&I Marketing (Taiwan), Deusto Sistemas (Spain), and Jorge Christen and Partners LLP (Mexico). NeoMedia Micro Paint Repair On August 30, 2005, NeoMedia signed a distribution agreement with Jinche, under which Jinche will act as a distributor of automotive products in China. Jinche is a Beijing PRC-registered company specializing in automobile sales, financing, insurance, repair, and accessories through its Automart branded facilities. NeoMedia will supply Jinche with its micro paint repair products, as well as various other automotive aftermarket products from other manufacturers. In early 2006, NeoMedia strengthened this relationship to a 10-year exclusive agreement to supply micro paint and related products and to supply 70% of the macro paint sales at Jinche's Automart-branded facilities. Conversely, Jinche gets sole distributorship of NeoMedia products in China, Hong Kong & Taiwan for this 10-year period. An additional goal of the NMPR business unit is to act as the premier supplier and distributor of automotive aftermarket products. To this end, during 2005 NeoMedia signed agreements to distribute DuPont and PPG paint and aftermarket products to Jinche. To achieve a global supplier status, the NMPR business unit has established agreements with distributors in other key geographies to help promote, sell and distribute its micro paint repair system and products. During 2004 and 2005, NeoMedia has enlisted the following distributors: o Micro Paint Systems Australasia (Australia and New Zealand) o WI-THO AS (Scandinavia) o Micropaint de Mexico (Mexico) o MDA Co-Auto (Canada) o Restex (USA) During 2005 NeoMedia also signed two non-binding Letters of Intent outlining steps for NeoMedia to acquire an interest in Auto Preservation, Inc., a wholly-owned subsidiary of Cincinnati-based Pickups Plus. NeoMedia Telecom Services NTS has developed and secured strategic alliances within the industry that it believes are key to the successful service and maintenance of its client support systems and the delivery of advanced features. The strategic partnerships are expected to promote global solutions with billing as the core function or source of revenue. NTS continually enhances and streamlines its service offerings to remain competitive in an evolving marketplace. NTS has completed the development of a state-of-the-art IP e-commerce platform described below for future deployment. Next Generation IP-Enabled Operator Services Platform. NTS's International Operator Services Platform, which is not yet deployed, has been created by integrating hardware and software applications from Cisco's IP Gateway, CosmoCom's IP-based Next Generation CosmoCall Universe Platform, and the Enhanced Operator Services ("EOS") from Intelis. CosmoCall Universe is a multimedia, multi-channel call center system that goes far beyond the capabilities of traditional call center technology. Traditional call centers are based on circuit-switched automatic call distributors ("ACDs"), and support only voice telephone calls. CosmoCall has all the capabilities of a modern telephone call center, but as a multimedia, multi-channel interaction center, CosmoCall supports not only voice telephone calls, but also live multimedia communication sessions via the Internet. Integrated together these products provide NTS the capability to launch web-based services as well as support for traditional telephony including collect, third party and calling card supported calls. NTS's Telco Grade Billing Platform. Highland Lakes Software ("Highland") is an independent global service provider for core billing services for competitive LECs ("CLECs") and LECs. NTS has been able to achieve continued market penetration by employing Highlands' core billing software at the root of its billing infrastructure. NeoMedia expects that Highland will continue to provide billing solutions to NTS as the industry matures and demands more technically enhanced functionality. NTS works closely with Highland to provide extended electronic billing services to meet the demands of service providers and the Internet end-user. With the coordination of Highland engineers, NTS has developed proprietary modules to enhance allowable billing types and to provide an effective direct billing service as well as an aggressive revenue recovery service for our customers. Sales and Marketing NeoMedia Mobile NeoMedia Mobile (NMM) has worked to establish a global network of direct salespeople, affiliates and business development personnel to market, upsell and cross-sell its suite of products and services. Its core target markets across a number of geographic regions including: the U.S., the U.K., Germany, Italy, Scandinavia, Central & Eastern Europe, and in Asia/Pacific: Japan, Korea, Singapore Australia. Core markets for the sales force include: Brand Marketers and Marketing Services Agencies. NeoMedia markets its robust suite of end-to-end (and everything in between) mobile marketing products and services to both agencies, who maintain the main relationships with major brands while the NeoMedia business units creates and manages the wireless marketing campaign portion of the relationship, and directly to brand/product marketers where there is a higher level of wireless experience or expertise.. Media. NMM supplies applications and services, such as competitions, votes and alerts to media companies operating in the TV, radio and print media industries. Network Operators/Carriers & Handset Manufacturers. There are a range of applications and platforms that are suited directly for network operators or carriers and the handset manufacturers who supply them; many applications are custom developed at the request of these operators and manufacturers. Retailers. In addition to mobile marketing campaigns carried out on behalf of major retailers in a variety of markets by the NeoMedia Wireless companies, Gavitec's EXIO and MD20 products represent the next evolution in point-of-sale equipment offering m-coupons and m-commerce. Enterprise Clients, Government & Education. The robust and innovative platforms, on which many of the products offered by NeoMedia run, can be customized to work in numerous other environments and in many industries including finance, security, tracking and labeling. NeoMedia Micro Paint Repair NeoMedia markets its Micro Paint Repair products and services primarily through a direct sales force, as well as a worldwide network of distributors and agents. During 2004 and 2005, NeoMedia Micro Paint Repair signed distribution agreements to bring its products to China, Australia, New Zealand, Scandinavia, Mexico and Latin America, in addition to its existing distribution channels in the US and Canada. NeoMedia Telecom Services Direct sales and strategic sales alliances are used as the business strategy for NTS as it continues to grow. As a provider of billing, clearinghouse and information management services to the telecommunications industry, NTS has attempted to position itself to take advantage of the current disarray in the telecommunications sector. Historically many of the international collect calling and international billing and clearing contracts have been controlled by intermediary agents. NTS's sales team is segmented between target customer segments and geography (domestic and international). NTS anticipates that initially, incremental business development representatives will be added to target North American carriers including clearing houses, alternative operator service providers, local exchange carriers, long distance voice and data providers, wireless carriers and internet and e-business service providers. While this will involve primarily direct marketing and selling, it is anticipated that alliances can be established where NTS's products and services can be positioned as part of a bundled offering in conjunction with other complementary services. Customers and Clients NeoMedia Mobile PaperClick. To date, NeoMedia has licensed its patents to, or settled patent-related lawsuits with, Digital:Convergence, A.T. Cross Company, Symbol Technologies, Brandkey Systems Corporation, Virgin Entertainment Group, and AirClic, Inc. NeoMedia intends to pursue additional license agreements of its patent portfolio in the future, in addition to enabling consumer brand and enterprise organization campaigns and projects. With the acquisitions of Mobot, Sponge, Gavitec and 12Snap during the first quarter of 2006, NeoMedia has added an extensive list of major clients including: Mobot. Major brands utilizing Mobot's visual recognition technology to date include L'Oreal, Samsung and Saturn. Media clients include ELLEgirl, VIBE and JANE magazines, together with music label WEA (Warner Music Group's U.S. sales and retail marketing company) Sponge. Major agency clients include WPP, Aegis and BBH, while brand and telco clients include Walkers Crisps (Frito-Lay), NEC, Coca-Cola, Heineken, Diageo, Vodafone and Unilever. Major media groups utilizing Sponge's multi-application platform include Endemol, IPC, Trinity Mirror and News International. Gavitec. Network provider/carrier clients include T-Mobile, Vodafone and Telefonica, together with mobile handset manufacturers: Motorola and Nokia. IT Leader clients comprise Hewlett Packard, Ericsson Mobility World and Unisys, to name but three, while content providers such as Warner Music International and RTL Enterprises, European solutions providers including xsmart, Dimoco, ucp morgen, RegiSoft, and Top Solutions, and access management systems company SkiData(TM) are all represented on the Gavitec roster. 12snap. Major brand clients to have used 12snap's award-winning platform and creativity include Sony PS2, Nokia, Coca-Cola, McDonald's, MTV, Unilever, Gillette, Ferrero, Wella, Vodafone, adidas, Procter & Gamble, and Kellogg's NeoMedia Micro Paint Repair The customer base for the NMPR business unit consists of auto dealerships, general automotive repair shops, collision shops, rental car agencies, and other automotive service facilities in Canada, the US, China, Scandinavia, Mexico, Latin America and Australia/New Zealand. NeoMedia Telecom Services (BSD/Triton) Triton is a customer service-oriented organization providing telephone services to direct customers and telecommunications companies (including clearing houses, alternative operator service providers, local exchange carriers, long distance voice and data providers, wireless carriers), both within North America and internationally. Triton has also developed flat-fee billing solutions that it believes will benefit Internet content and service providers. With the addition of services for the Internet community, Triton anticipates that it will be able to meet the needs of an even broader range of communications companies. Competition NeoMedia Mobile Through the combination of all its business sub units: PaperClick(R), Sponge, Mobot, Gavitec and 12snap, NeoMedia believes its NMM business unit has positioned itself to compete as a global leader in mobile marketing solutions. The individual business units, prior to acquisition, were already known as leaders in their own respective marketplaces, so taken together, NeoMedia believes itself now to be one of the most experienced and successful global end-to-end mobile marketing solutions providers in the world. However, within the mobile marketing industry there are numerous players, many of which are just beginning to appear, who offer parts of the mobile marketing equation. Traditional agencies are starting to add mobile campaigns to their clients' overall marketing mix, often at the request of the client. However, many of these agencies turn to different companies to provide content and applications, and to the aggregators who have the relationship with the wireless carriers to obtain the short codes for SMS and MMS messaging. It is important to note that the PaperClick platform transcends messaging services since, once the PaperClick technology is on a mobile phone, there is only one step to access the mobile web--via keyword or numeric entry into the GoWindow(R) or CodeWindow(R) or by clicking on a barcode or smartcode with the camera in a handset. In the European market, where mobile marketing has been embraced by many large brands (and poised to grow exponentially--see Industry Section) and numerous consumers, the competition is quite fragmented by geographic region and by product and service offerings. For example, while Flytxt, Aerodeon and Enpocket have traditionally competed with NeoMedia companies Sponge and 12snap in the UK mobile marketing marketplace, Mindmatics has provided the principal competition in Germany. Additionally, Spielplatz.cc is one of the larger premium players in Germany, Austria and Switzerland. Also, Austria-based DIMICO is focused on premium SMS connectivity and messaging. In general, due to the relative immaturity of the mobile marketing industry, small players have sprung up offering very specialized products and services. This is even more pronounced in the U.S. where mobile marketing has mostly been confined to text-to-vote applications. As the mobile marketing industry matures, NeoMedia expects consolidation as industry leaders emerge. Moreover, NeoMedia believes its well positioned at the onset due to the intellectual property, including many patents, on which its products and services are based. NeoMedia expects that its intellectual property, coupled with its early aggregation of proven market leaders, will serve as a competitive advantage as this market rapidly matures. NeoMedia Micro Paint Repair. NeoMedia's competitors in the micro paint repair industry consist primarily of suppliers of traditional paint repair methods, such as automotive paint manufacturers. Various ancillary competitors exist in the automotive paintless dent repair, window repair, interior repair, etc. markets. NeoMedia Telecom Services Competitors of the NTS business unit fall into two major categories: (1) Third Party Billing Companies, and (2) Alternative Operator Services Providers ("AOSPs"). Third Party Billing Companies. The majority of clearinghouse competitors are United States-based or are part of an incumbent LEC. NTS believes that its position as an independent Canadian operation makes it unique among those in the third party billing market in North America. NTS may not be able to compete with large telecommunication providers on a revenue scale, but NTS believes that it does have the ability to meet the evolving telecom market's needs quickly and efficiently. Most of these competitors are restricted from entering the Canadian marketplace due to regulatory issues. This means that these competitors can also become NTS customers in certain segments of their business, particularly when it comes to providing services to all outside competitors who wish to bill for Canadian Services. AOSPs. In addition to providing sophisticated billing and clearing, the technology platform currently being developed will allow NTS to compete with carriers and companies providing live and automated operator services both domestically and, with multi-language capabilities, on an international basis. In addition to specific AOSPs, the majority of the LECs in the United States and Canada provide operator services as part of their core offerings. In 1997, the Federal Communications Commission ruled that in order to be an eligible telecommunications carrier a service provider would have to provide the basic universal services as laid out in the Telecommunications Act of 1996, including: voice grade access to the PSTN, single party service, access to emergency service (i.e., 911), and access to both operator services and directory assistance (i.e., 411). While telecommunication carriers are mandated to provide these services, they do not have to provide these services themselves. NTS believes that this provides opportunity for NTS to look to these competitors as prospective customers for its AOSP and future IP-enabled service offerings. NTS's Canadian-based low cost infrastructure, fewer regulatory encumbrances than United States-based carriers and the ability to provide a fully-bundled suite of services on a single IP enabled platform allows it to compete for both traditional services as well as future services. Product Liability The Company has never had any product liability claim asserted against it. Currently the Company maintains product liability insurance, but there can be no guarantee that such policy will be sufficient to cover any claims made against the Company. Government Regulation Existing or future legislation could limit the growth of use of the Internet, which would curtail the Company's revenue growth. Statutes and regulations directly applicable to Internet communications, commerce and advertising are becoming more prevalent. Congress recently passed laws regarding children's online privacy, copyrights and taxation. The law remains largely unsettled, even in areas where there has been legislative action. It may take years to determine whether and how existing laws governing intellectual property, privacy, libel and taxation apply to the Internet, e-commerce and online advertising. In addition, the growth and development of e-commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad. Certain of the Company's proprietary technology allows for the storage of demographic data from NeoMedia's users. In 2000, the European Union adopted a directive addressing data privacy that may limit the collection and use of certain information regarding Internet users. This directive may limit the Company's ability to collect and use information collected by the Company's technology in certain European countries. In addition, the Federal Trade Commission and several state governments have investigated the use by certain Internet companies of personal information. The Company could incur significant additional expenses if new regulations regarding the use of personal information are introduced or if the Company's privacy practices are investigated. Environmental Protection Compliance The Company's Micro Paint Division operations are subject to normal environmental protection regulations. Compliance with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, is not expected to have a material effect upon the capital expenditures, earnings or the competitive position of the Company. However, environmental requirements are constantly changing, and it is difficult to predict the effect of future requirements on the Company. Company policy requires that all operations fully meet or exceed legal and regulatory requirements. As of the date of this report, the Company is not aware of any non-compliance matters. Employees As of December 31, 2005, the Company employed 51 persons, of which 25 were located at the Company's headquarters in Fort Myers, Florida, 7 at the Company's Lisle, Illinois office (which was subsequently closed during the first quarter of 2006), 9 at the NeoMedia's micro paint repair facility in Ft, Myers Florida, 9 at the Company's Calgary, Alberta, Canada office, and 1 remote employee. None of the Company's employees are represented by a labor union or bound by a collective bargaining agreement. The Company believes that its employee relations are good. The Company's success depends on a significant extent on the performance of its senior management and certain key employees. Competition for highly skilled employees, including sales, technical and management personnel, is intense in the computer industry. The Company's failure to attract additional qualified employees or to retain the services of key personnel could materially adversely affect the Company's business. Safe Harbor Provision of the Private Securities Litigation Act of 1995 The Company operates in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. The market for software products is generally characterized by rapidly changing technology, frequent new product introductions and changes in customer requirements which can render existing products obsolete or unmarketable. The statements contained in this document that are not historical facts may be forward-looking statements (as such term is defined in the rules promulgated pursuant to the Securities Exchange Act of 1934) that are subject to a variety of risks and uncertainties more fully described in the Company's filings with the Securities and Exchange Commission. The forward-looking statements are based on the beliefs of the management of the Company, as well as assumptions made by, and information currently available to, the Company's management. Accordingly, these statements are subject to significant risks, uncertainties and contingencies which could cause the Company's actual growth, results, performance and business prospects and opportunities in 2006 and beyond to differ materially from those expressed in, or implied by, any such forward-looking statements. Wherever possible, words such as "anticipate," "plan," "expect," "believe," "estimate," and similar expressions have been used to identify these forward-looking statements, but are not the exclusive means of identifying such statements. These risks, uncertainties and contingencies include, but are not limited to, the Company's limited operating history on which expectations regarding its future performance can be based, competition from, among others, high technology companies that have greater financial, technical and marketing resources and distribution capabilities than the Company, the availability of sufficient capital, the effectiveness of the Company's efforts to control operating expenses and general economic and business conditions affecting the Company and its customers in the United States and other countries in which the Company sells and anticipates to sell its products and services. RISK FACTORS Risks Specific To NeoMedia Risks Related to NeoMedia's Business NeoMedia has Historically Lost Money and Losses May Continue NeoMedia has incurred substantial losses since inception, and anticipates continuing to incur substantial losses for the foreseeable future. NeoMedia incurred a loss of $9,147,000 and $7,230,000 for the years ended December 31, 2005 and 2004, respectively. NeoMedia's accumulated losses were approximately $92,524,000 as of December 31, 2005. As of December 31, 2005 and 2004, NeoMedia had a working capital deficit of approximately $4,874,000 and $2,597,000, respectively. NeoMedia had stockholders' equity of $4,227,000 and $4,392,000 December 31, 2005 and 2004, respectively. NeoMedia generated revenues of $2,156,000 and $1,700,000 for the years ended December 31, 2005 and 2004, respectively. In addition, during the years ended December 31, 2005 and 2004, NeoMedia recorded negative cash flows from operations of $7,309,000 and $4,650,000, respectively. To succeed, NeoMedia must develop new client and customer relationships and substantially increase its revenue derived from improved products and additional value-added services. NeoMedia has expended, and to the extent it has available financing, NeoMedia intends to continue to expend, substantial resources to develop and improve its products, increase its value-added services and to market its products and services. These development and marketing expenses must be incurred well in advance of the recognition of revenue. As a result, NeoMedia may not be able to achieve or sustain profitability. NeoMedia's Independent Registered Public Accounting Firm Have Added Going Concern Language To Their Report On NeoMedia's Consolidated Financial Statements, Which Means That NeoMedia May Not Be Able To Continue Operations The report of Stonefield Josephson, Inc., NeoMedia's independent registered public accounting firm, with respect to NeoMedia's consolidated financial statements and the related notes for the years ended December 31, 2005 and 2004, indicates that, at the date of their report, NeoMedia had suffered significant recurring losses from operations and its working capital deficit raised substantial doubt about its ability to continue as a going concern. NeoMedia's consolidated financial statements do not include any adjustments that might result from this uncertainty. There is Limited Information Upon Which Investors Can Evaluate NeoMedia's Business Because The Physical-World-to-Internet Market Has Existed For Only A Short Period Of Time The physical-world-to-Internet market in which NeoMedia operates is a recently developed market. Further, NeoMedia has conducted operations in this market only since March 1996. Consequently, NeoMedia has a relatively limited operating history upon which an investor may base an evaluation of NeoMedia's primary business and determine NeoMedia's prospects for achieving its intended business objectives. To date, NeoMedia has sold its physical-world-to-Internet products to only 12 companies. NeoMedia is prone to all of the risks inherent to the establishment of any new business venture, including unforeseen changes in its business plan. An investor should consider the likelihood of NeoMedia's future success to be highly speculative in light of its limited operating history in its primary market, as well as the limited resources, problems, expenses, risks, and complications frequently encountered by similarly situated companies in new and rapidly evolving markets, such as the physical-world-to-Internet space. To address these risks, NeoMedia must, among other things: o maintain and increase its client base; o implement and successfully execute its business and marketing strategy; o continue to develop and upgrade its products; o continually update and improve service offerings and features; o respond to industry and competitive developments; and o attract, retain, and motivate qualified personnel. NeoMedia may not be successful in addressing these risks. If NeoMedia is unable to do so, its business, prospects, financial condition, and results of operations would be materially and adversely affected. NeoMedia's future success depends on the timely introduction of new products and the acceptance of these new products in the marketplace. Rapid technological change and frequent new product introductions are typical for the markets NeoMedia serves. NeoMedia's future success will depend in large part on continuous, timely development and introduction of new products that address evolving market requirements. To the extent that NeoMedia fails to introduce new and innovative products, it may lose market share to its competitors, which may be difficult to regain. Any inability, for technological or other reasons, to successfully develop and introduce new products could materially and adversely affect NeoMedia's business. NeoMedia's Common Stock Is Deemed To Be "Penny Stock," Which May Make It More Difficult For Investors To Sell Their Shares Due To Suitability Requirements NeoMedia's common stock is deemed to be "penny stock" as that term is defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934, as amended. These requirements may reduce the potential market for NeoMedia's common stock by reducing the number of potential investors. This may make it more difficult for investors in NeoMedia's common stock to sell shares to third parties or to otherwise dispose of them. This could cause NeoMedia's stock price to decline. Penny stocks are stock: o with a price of less than $5.00 per share; o that are not traded on a "recognized" national exchange; o whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ listed stock must still have a price of not less than $5.00 per share); or o in issuers with net tangible assets less than $2 million (if the issuer has been in continuous operation for at least three years) or $10 million (if in continuous operation for less than three years), or with average revenues of less than $6 million for the last three years. Broker-dealers dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker-dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. NeoMedia is Uncertain Of The Success Of Its Internet Switching Software Business Unit And The Failure Of This Unit Would Negatively Affect The Price Of NeoMedia's Stock NeoMedia provides products and services that provide a link from physical objects, including printed material, to the Internet. NeoMedia can provide no assurance that: o this Internet Switching Software business unit will ever achieve profitability; o its current product offerings will not be adversely affected by the focusing of its resources on the physical-world-to-Internet space; or o the products NeoMedia develops will obtain market acceptance. In the event that the Internet Switching Software business unit should never achieve profitability, that NeoMedia's current product offerings should so suffer, or that NeoMedia's products fail to obtain market acceptance, NeoMedia's business, prospects, financial condition, and results of operations would be materially adversely affected. A Large Percentage Of NeoMedia's Assets Are Intangible Assets, Which Will Have Little Or No Value If NeoMedia's Operations Are Unsuccessful At December 31, 2005 and 2004, approximately 48% and 49%, respectively, of NeoMedia's total assets were intangible assets, consisting primarily of rights related to NeoMedia's patents, other intellectual property, and excess of purchase price over fair market value paid for CSI International, Inc. (now NeoMedia Micro Paint Repair). If NeoMedia's operations are unsuccessful, these assets will have little or no value, which would materially adversely affect the value of NeoMedia's stock and the ability of NeoMedia's stockholders to recoup their investments in NeoMedia's capital stock. NeoMedia's Physical-World-To-Internet Marketing Strategy Has Not Been Tested And May Not Result In Success To date, NeoMedia has conducted limited marketing efforts directly relating to NeoMedia's NISS business unit. All of NeoMedia's marketing efforts have been largely untested in the marketplace, and may not result in sales of NeoMedia's products and services. To penetrate the markets in which it competes, NeoMedia will have to exert significant efforts to create awareness of, and demand for, its products and services. With respect to NeoMedia's marketing efforts conducted directly, NeoMedia intends to expand its sales staff upon the receipt of sufficient operating capital. NeoMedia's failure to further develop NeoMedia's marketing capabilities and successfully market NeoMedia's products and services would have a material adverse effect on NeoMedia's business, prospects, financial condition, and results of operations. NeoMedia's Internally Developed Systems Are Inefficient And May Put NeoMedia At A Competitive Disadvantage NeoMedia uses internally developed technologies for a portion of its systems integration services, as well as the technologies required to interconnect its clients' and customers' physical-world-to-Internet systems and hardware with its own. As NeoMedia develops these systems in order to integrate disparate systems and hardware on a case-by-case basis, these systems are inefficient and require a significant amount of customization. Such client and customer-specific customization is time consuming and costly and may place NeoMedia at a competitive disadvantage when compared to competitors with more efficient systems. NeoMedia Could Fail to Attract Or Retain Key Personnel NeoMedia's future success will depend in large part on its ability to attract, train, and retain additional highly skilled executive level management, creative, technical, and sales personnel. Competition is intense for these types of personnel from other technology companies and more established organizations, many of which have significantly larger operations and greater financial, marketing, human, and other resources than NeoMedia has. NeoMedia may not be successful in attracting and retaining qualified personnel on a timely basis, on competitive terms, or at all. NeoMedia's failure to attract and retain qualified personnel could have a material adverse effect on its business, prospects, financial condition, and results of operations. NeoMedia Depends Upon Its Senior Management And Their Loss Or Unavailability Could Put NeoMedia At A Competitive Disadvantage NeoMedia's success depends largely on the skills of certain key management and technical personnel, including Charles T. Jensen, NeoMedia's President and Chief Executive Officer, Charles W. Fritz, NeoMedia's founder and Chairman of the Board of Directors, Martin N. Copus, NeoMedia's Chief Operating Officer and head of the NMM business unit, and David A. Dodge, NeoMedia's Chief Financial Officer. The loss of the services of Messrs. Jensen, Fritz, Copus, or Dodge could materially harm NeoMedia's business because of the cost and time necessary to replace and train a replacement. Such a loss would also divert management attention away from operational issues. NeoMedia does not presently maintain a key-man life insurance policy on Messrs. Jensen, Fritz, Copus, or Dodge. NeoMedia May Be Unsuccessful In Integrating Its Recently Completed and Pending Acquisitions With Its Current Business The success of the acquisitions of Mobot, 12Snap, Sponge, Gavitec, and BSD could depend on the ability of NeoMedia's executive management to integrate the business plan of each company with NeoMedia's overall business plan. Failure to properly integrate the business could have a material adverse effect on the expected revenue and operations of the acquisitions, as well as the expected return on investment for NeoMedia. NeoMedia May Be Unable To Protect Its Intellectual Property Rights And May Be Liable For Infringing The Intellectual Property Rights Of Others NeoMedia's success in the physical-world-to-Internet and the value-added systems integration markets is dependent upon its proprietary technology, including patents and other intellectual property, and on the ability to protect proprietary technology and other intellectual property rights. In addition, NeoMedia must conduct its operations without infringing on the proprietary rights of third parties. NeoMedia also intends to rely upon unpatented trade secrets and the know-how and expertise of its employees, as well as its patents. To protect its proprietary technology and other intellectual property, NeoMedia relies primarily on a combination of the protections provided by applicable patent, copyright, trademark, and trade secret laws as well as on confidentiality procedures and licensing arrangements. Although NeoMedia believes that it has taken appropriate steps to protect its unpatented proprietary rights, including requiring that its employees and third parties who are granted access to NeoMedia's proprietary technology enter into confidentiality agreements, NeoMedia can provide no assurance that these measures will be sufficient to protect its rights against third parties. Others may independently develop or otherwise acquire patented or unpatented technologies or products similar or superior to NeoMedia's. NeoMedia licenses from third parties certain software tools that are included in NeoMedia's services and products. If any of these licenses were terminated, NeoMedia could be required to seek licenses for similar software from other third parties or develop these tools internally. NeoMedia may not be able to obtain such licenses or develop such tools in a timely fashion, on acceptable terms, or at all. Companies participating in the software and Internet technology industries are frequently involved in disputes relating to intellectual property. NeoMedia may in the future be required to defend its intellectual property rights against infringement, duplication, discovery, and misappropriation by third parties or to defend against third party claims of infringement. Likewise, disputes may arise in the future with respect to ownership of technology developed by employees who were previously employed by other companies. Any such litigation or disputes could result in substantial costs to, and a diversion of effort by, NeoMedia. An adverse determination could subject NeoMedia to significant liabilities to third parties, require NeoMedia to seek licenses from, or pay royalties to, third parties, or require NeoMedia to develop appropriate alternative technology. Some or all of these licenses may not be available to NeoMedia on acceptable terms or at all, and NeoMedia may be unable to develop alternate technology at an acceptable price or at all. Any of these events could have a material adverse effect on NeoMedia's business, prospects, financial condition, and results of operations. NeoMedia Is Exposed To Product Liability Claims And An Uninsured Claim Could Have A Material Adverse Effect On NeoMedia's Business, Prospects, Financial Condition, And Results Of Operations, As Well As The Value Of NeoMedia's Stock Many of NeoMedia's projects are critical to the operations of its clients' businesses. Any failure in a client's information system could result in a claim for substantial damages against NeoMedia, regardless of NeoMedia's responsibility for such failure. NeoMedia could, therefore, be subject to claims in connection with the products and services that it sells. NeoMedia currently maintains product liability insurance. There can be no assurance that: o NeoMedia has contractually limited its liability for such claims adequately or at all; or o NeoMedia would have sufficient resources to satisfy any liability resulting from any such claim. The successful assertion of one or more large claims against NeoMedia could have a material adverse effect on its business, prospects, financial condition, and results of operations. NeoMedia Will Not Pay Cash Dividends and Investors May Have To Sell Their Shares In Order To Realize Their Investment NeoMedia has not paid any cash dividends on its common stock and does not intend to pay cash dividends in the foreseeable future. NeoMedia intends to retain future earnings, if any, for reinvestment in the development and marketing of NeoMedia's products and services. As a result, investors may have to sell their shares of common stock to realize their investment. Some Provisions Of NeoMedia's Certificate of Incorporation And bylaws May Deter Takeover Attempts, Which May Limit The Opportunity Of NeoMedia's Stockholders To Sell Their Shares At A Premium To The Then-Current Market Price Some of the provisions of NeoMedia's Certificate of Incorporation and bylaws could make it more difficult for a third party to acquire NeoMedia, even if doing so might be beneficial to NeoMedia's stockholders by providing them with the opportunity to sell their shares at a premium to the then-current market price. On December 10, 1999, NeoMedia's Board of Directors adopted a stockholders rights plan and declared a non-taxable dividend of one right to acquire Series A Preferred Stock of NeoMedia, par value $0.01 per share, on each outstanding share of NeoMedia's common stock to stockholders of record on December 10, 1999 and each share of common stock issued thereafter until a pre-defined hostile takeover date. The stockholder rights plan was adopted as an anti-takeover measure, commonly referred to as a "poi