Note 2 - Summary of Significant Accounting Policies

The accompanying unaudited financial statements have been prepared in accordance with US GAAP for interim financial information and Rule 8.03 of Regulation S-X. They do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. For further information, refer to our financial statements as of December 31, 2010 and 2009, and for the years then ended, including notes thereto in the Company’s Annual Report on Form 10-K, for the year ended December 31, 2010.

Basis of Presentation – The consolidated financial statements include the accounts of NeoMedia Technologies, Inc. and our wholly-owned subsidiaries. We operate as one reportable segment. All significant intercompany accounts and transactions have been eliminated.

Use of Estimates – The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Changes in facts and circumstances may result in revised estimates, which are recorded in the period in which they become known.

Stock-Based Compensation - FASB ASC 718, Stock Compensation , requires that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the grant date fair value of the award. We account for modifications of terms of existing option grants as exchanges of the existing equity instruments for new instruments. The fair value of the modified option at the grant date is compared with the value at that date of the original option immediately before its terms are modified. Any excess fair value of the modified option over the original option is recognized as additional compensation expense.

Basic and Diluted Net Income (Loss) Per Share – Basic net income (loss) per share is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of shares of common stock outstanding during the period. During the three and six months ended June 30, 2011, we reported a net loss per share, and as such, basic and diluted loss per share were equivalent. During the three and six months ended June 30, 2010, we reported net income per share and included dilutive instruments in the fully diluted net income per share calculation.

The following is a reconciliation of the numerator and denominator of the basic and diluted net income (loss) per share calculations for each period:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(in thousands except share and per share data)
Numerator:
Net income (loss)	$	(55,862	)	$	9,502		$	(47,071	)	$	66,834
Adjustments to reconcile net income to income (loss) applicable to common stockholders:
Accretion of Series D Preferred stock		-			-			-			(2,500	)
Numerator for basic earnings per share - income available to common stockholders		(55,862	)		9,502			(47,071	)		64,334

Effect of dilutive securities:
Adjustment for change in fair value of derivative liability-Series C and D preferred stock and debentures		-			(6,645	)		-			(46,824	)
Adjustment for change in fair value of derivative liability- warrants		-			(4,305	)		-			(10,856	)
Adjustment for change in fair value of hybrid financial instruments		-			(1,180	)		-			(19,552	)
Adjustment for dividends on convertible preferred stock		-			-			-			-
Adjustment for interest expense related to convertible debt		-			478			-			927
		-			(11,652	)		-			(70,662	)
Numerator for diluted earnings per share- income available for common stockholders after assumed conversions of debentures and exercise of warrants	$	(55,814	)	$	(2,150	)	$	(47,071	)	$	(6,328	)

Denominator:
Weighted average shares used to compute basic EPS		137,692,460			22,675,678			46,114,822			22,675,678
Effect of dilutive securities:
Employee stock options		-			76,319			-			118,522
Derivative warrants		-			-			-			-
Convertible debentures		-			202,777,415			-			200,102,566
Convertible preferred stock		-			76,575,018			-			76,195,302
Dilutive potential common shares		-			279,428,752			-			276,416,389

Denominator for diluted earnings per share- adjusted weighted average shares and assumed conversions		137,692,460			302,104,430			46,114,822			299,092,067

Basic earning per share	$	(0.41	)	$	0.42		$	(1.02	)	$	2.84
Diluted earnings per share	$	(0.41	)	$	(0.01	)	$	(1.02	)	$	(0.02	)

The above table includes only dilutive instruments and their effects on earnings per common share.

The following outstanding stock options, warrants, convertible debt and convertible preferred securities for the three and six months ended June 30, 2011 and 2010, are anti-dilutive and therefore have been excluded from diluted net income (loss) per share:

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Stock options		1,289,481		839,830		1,289,481		872,662
Warrants		28,595,000		13,465,035		28,595,000		12,459,085
Convertible debt		2,571,618,911		-		2,523,689,224		-
Convertible preferred stock		656,768,321		-		656,768,321		-
		3,258,271,713		14,304,865		3,210,342,026		13,331,747

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

Recent Accounting Pronouncements - The following Accounting Standards Codification Updates have recently been issued:

Pronouncement	Issued	Title
ASU No. 2011-02	April 2011	Receivables (Topic 310): A Creditor’s Determination of Whether a
		Restructuring Is a Troubled Debt Restructuring

ASU No. 2011-03	April 2011	Update No. 2011-03—Transfers and Servicing (Topic 860): Reconsideration of
		Effective Control for Repurchase Agreements

ASU No. 2011-04	May 2011	Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair
		Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs

ASU No. 2011-05	June 2011	Comprehensive Income (Topic 220): Presentation of Comprehensive Income

ASU No. 2011-06	July 2011	Other Expenses (Topic 720): Fees Paid to the Federal Government by Health
		Insurers (a consensus of the FASB Emerging Issues Task Force)

ASU No. 2011-07	July 2011	Health Care Entities (Topic 954): Presentation and Disclosure of Patient
		Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful
		Accounts for Certain Health Care Entities (a consensus of the FASB Emerging
		Issues Task Force)

To the extent appropriate, the guidance in the above Accounting Standards Codification Updates is already reflected in our consolidated financial statements and management does not anticipate that these accounting pronouncements will have any material future effect on our consolidated financial statements.