As filed with the Securities and Exchange Commission on December __, 2003

                                                  SEC Registration No. _________

================================================================================

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

                               AMENDMENT NO. 1 TO
                                    FORM SB-2
             REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933




         DELAWARE                         NEOMEDIA TECHNOLOGIES, INC.                      36-3680347
                                                                               
(State or other jurisdiction of         (Name of issuer in its charter)                 (I.R.S. Employer
incorporation or organization)                                                         Identification No.)

2201 SECOND STREET, SUITE 402                   7373                                      CHARLES T. JENSEN
  FORT MYERS, FLORIDA 33901           (Primary Standard Industrial                   2201 SECOND STREET, SUITE 402
     (239)  337-3434                  Classification  Code Number)                  FORT MYERS,  FLORIDA 33901-3083
(Address and telephone number of                                                          (239) 337-3434
Registrant's principal executive offices)                                           TELECOPIER NO.: (239) 337-3668
                                                                                 (Name, address, and telephone number
                                                                                         of agent for service)

                                 With copies to:

Clayton E. Parker, Esq.                                                             Ronald S. Haligman, Esq.
Kirkpatrick & Lockhart LLP                                                          Kirkpatrick & Lockhart LLP
201 S. Biscayne Blvd., Suite 2000                                                   201 S. Biscayne Blvd., Suite 2000
Miami, FL  33131                                                                    Miami, FL  33131
Telephone No.:  (305) 539-3305                                                      Telephone No.:  (305) 539-3305
Telecopier No.:  (305) 358-7095                                                     Telecopier No.:  (305) 358-7095



Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.

If any of the  securities  being  registered on this Form are to be offered on a
delayed or continuous  basis  pursuant to Rule 415 under the  Securities  Act of
1933 check the following box. |X|

If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the  Securities  Act  registration  statement  number of the  earlier  effective
registration statement for the same offering. |_|

If this Form is a  post-effective  amendment filed pursuant to Rule 462(c) under
the  Securities  Act,  check  the  following  box and  list the  Securities  Act
registration  statement number of the earlier effective  registration  statement
for the same offering.  |_|

If delivery  of the  prospectus  is  expected  to be made  pursuant to Rule 434,
please check the following box. |_|





                                   PROSPECTUS

                           NEOMEDIA TECHNOLOGIES, INC.

                       308,648,500 SHARES OF COMMON STOCK

         This  prospectus  relates  to the sale of up to  308,648,500  shares of
NeoMedia's  common  stock by persons who are, or will  become,  stockholders  of
NeoMedia.  Please refer to "Selling Shareholders" beginning on page 17. NeoMedia
will receive  proceeds  from the sale of common  stock under the Standby  Equity
Distribution Agreement,  and from the proceeds from the exercise of warrants for
24,560,000  shares of common stock. All costs associated with this  registration
will be borne by NeoMedia.

         The shares of common  stock are being  offered  for sale by the selling
stockholders at prices  established on the Over the Counter  Bulletin Board. The
prices will  fluctuate  based on the demand for the shares of common stock.  Our
common  stock  trades on the OTC  Bulletin  Board  under the  symbol  "NEOM." On
December 12, 2003,  the last  reported sale price of our common stock on the OTC
Bulletin Board was $0.16 per share.

         The selling stockholders consist of:

         o        Cornell Capital  Partners,  L.P.,  which intends to sell up to
                  210,000,000 shares of common stock.

         o        William Fritz, a member of our Board of Directors, who intends
                  to sell 53,443,780 shares of common stock

         o        Charles W. Fritz, the Chairman of our Board of Directors,  who
                  intends to sell 17,181,912 shares of common stock

         o        Other  selling   stockholders,   who  intend  to  sell  up  to
                  28,022,808 shares of common stock.

         Cornell Capital Partners is an "underwriter"  within the meaning of the
Securities  Act of 1933 in  connection  with the sale of common  stock under the
Standby Equity Distribution  Agreement Agreement.  Cornell Capital Partners will
pay NeoMedia 98% of the market price of our common stock.  In addition,  Cornell
Capital  Partners  is entitled  to retain 5% of each  advance  under the Standby
Equity Distribution Agreement.  The 2% discount, the one-time commitment fee and
the 5% retention are underwriting discounts.

         NeoMedia has engaged Newbridge Securities Corporation,  an unaffiliated
registered  broker-dealer,  to advise us in connection  with the Standby  Equity
Distribution  Agreement.  Newbridge  Securities  Corporation  was  paid a fee of
95,238 shares of NeoMedia's common stock.

         Brokers  or  dealers  effecting  transactions  in these  shares  should
confirm that the shares are  registered  under  applicable  state law or that an
exemption from registration is available.

         THESE  SECURITIES  ARE  SPECULATIVE  AND INVOLVE A HIGH DEGREE OF RISK.
BEGINNING  ON PAGE 4, WE HAVE  LISTED  SEVERAL  RISK  FACTORS  WHICH YOU  SHOULD
CONSIDER.  YOU SHOULD READ THE ENTIRE PROSPECTUS  CAREFULLY BEFORE YOU MAKE YOUR
INVESTMENT DECISION.

         With  the   exception  of  Cornell   Capital   Partners   which  is  an
"underwriter"  within  the  meaning  of the  Securities  Act of  1933,  no other
underwriter  or person  has been  engaged  to  facilitate  the sale of shares of
common stock in this offering.  This offering will terminate 24 months after the
accompanying  registration statement is declared effective by the Securities and
Exchange Commission.  None of the proceeds from the sale of stock by the selling
stockholders will be placed in escrow, trust or any similar account.

         NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION  HAS APPROVED OR DISAPPROVED  OF THESE  SECURITIES,  OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

                The date of this prospectus is December __, 2003.





                                TABLE OF CONTENTS




                                                                                                    PAGE NO.
                                                                                                 
PROSPECTUS SUMMARY                                                                                     1
RISK FACTORS                                                                                           4
FORWARD-LOOKING STATEMENTS                                                                            15
SELLING STOCKHOLDERS                                                                                  16
USE OF PROCEEDS                                                                                       20
DILUTION                                                                                              21
DIVIDEND POLICY                                                                                       22
CAPITALIZATION                                                                                        23
STANDBY EQUITY DISTRIBUTION AGREEMENT                                                                 24
PLAN OF DISTRIBUTION                                                                                  26
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION                                             28
DESCRIPTION OF BUSINESS                                                                               43
MANAGEMENT                                                                                            51
AUDIT COMMITTEE                                                                                       55
EXECUTIVE COMPENSATION                                                                                56
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTIONS VALUES                    57
LEGAL PROCEEDINGS                                                                                     60
PRINCIPAL STOCKHOLDERS                                                                                63
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                        65
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S  COMMON EQUITY AND OTHER STOCKHOLDER MATTERS        67
DESCRIPTION OF SECURITIES                                                                             71
LEGAL MATTERS                                                                                         76
EXPERTS                                                                                               76
HOW TO GET MORE INFORMATION                                                                           77
INDEX OF FINANCIAL STATEMENTS                                                                          1
PART II INFORMATION NOT REQUIRED IN PROSPECTUS                                                         1



Our audited  financial  statements  for the fiscal year December 31, 2002,  were
contained  in our  Annual  Report  on Form  10-K,  and were  distributed  to our
shareholders prior to our annual shareholder  meeting that was held on September
24, 2003.

                                       i




                               PROSPECTUS SUMMARY

                                    OVERVIEW

         NeoMedia   develops   proprietary   technologies   that  link  physical
information and objects to the Internet marketed under its "PaperClickTM"  brand
name.

         NeoMedia  is  structured  as  two  distinct  business  units:  Internet
Switching Service and Consulting and Integration Services.

         NeoMedia   Internet    Switching    Service   (NISS),    our   physical
world-to-Internet  offerings,  is our core  business  and is based in the United
States,  with  development  and  operating  facilities  in Fort Myers,  Florida.
Application services develops and supports all of our physical world to Internet
technology,  including our linking "switch" and our application  platforms,  and
manages our patent portfolio surrounding our technology.  NISS also provides the
systems  integration  resources  needed to  design  and  build  custom  customer
solutions predicated on our infrastructure technology.

         NeoMedia  Consulting and  Integration  Services  (NCIS) is the original
business  line upon which we were  organized.  This unit  resells  client-server
equipment and related  software.  The unit also provides general and specialized
consulting  services targeted at software driven print  applications.  NCIS also
identifies prospects for custom applications based on our products and services.
These operations are based in Lisle, Illinois.

                                    ABOUT US

         Our  principal  executive  offices are  located at 2201 Second  Street,
Suite 402, Fort Myers,  Florida  33901.  Our general  telephone  number is (239)
337-3434. Our Web site is located at www.neom.com.  Information contained on our
Web site is not part of this prospectus.


                                       1





                                  THE OFFERING

         This  offering  relates to the sale of common stock by certain  persons
who are, or will become, our stockholders. The selling stockholders consist of:

         o        Cornell  Capital  Partners,   which  intends  to  sell  up  to
                  210,000,000 shares of common stock.

         o        William Fritz, a member of our Board of Directors, who intends
                  to sell 53,443,780 shares of common stock

         o        Charles W. Fritz, the Chairman of our Board of Directors,  who
                  intends to sell 17,181,912 shares of common stock

         o        Other  selling   stockholders,   who  intend  to  sell  up  to
                  28,022,808 shares of common stock

         Pursuant to a Standby  Equity  Distribution  Agreement  entered into on
October  27,  2003  between  Cornell  Capital  Partners  and us, we may,  at our
discretion,  periodically  issue and sell to Cornell Capital  Partners shares of
common stock for a total purchase price of $20 million. For each share of common
stock purchased under the Standby Equity Distribution Agreement, Cornell Capital
Partners will pay 98% of the lowest closing bid price of our common stock on the
Over the Counter Bulletin Board for the five trading days immediately  following
the notice date.  The amount of each advance is subject to a maximum of $280,000
per  advance,  up to a maximum of $840,000 in any 30-day  period.  In  addition,
Cornell Capital Partners will retain 5% of each advance under the Standby Equity
Distribution  Agreement.  Cornell  Capital  Partners  intends to sell any shares
purchased under the Standby Equity Distribution Agreement at the then prevailing
market price.  This  prospectus  relates to the shares of our common stock to be
issued under the Standby  Equity  Distribution  Agreement,  as well as shares of
common  stock issued upon the  exercise of warrants  issued as a commitment  fee
pursuant to the Standby Equity Distribution Agreement, shares of common stock to
be acquired pursuant to the exercise of warrants  previously issued by NeoMedia,
and shares of common stock previously issued by NeoMedia.

         We have  engaged  Newbridge  Securities  Corporation,  an  unaffiliated
registered  broker-dealer,  to advise us in connection  with the Standby  Equity
Distribution  Agreement.  Newbridge  Securities  Corporation  was  paid a fee of
95,238 shares of our common stock.

         On  February  14,  2003,  the SEC  declared  effective  a  registration
statement  on Form S-1  registering  100  million  shares  of our  common  stock
registered under a $10 million Equity line of Credit  Agreement,  dated February
11, 2003, with Cornell Capital  Partners.  Since that date and through  December
12, 2003,  we have received  gross  proceeds  from Cornell  Capital  Partners of
$3,597,000, resulting in the sale to Cornell of 100,000,000 shares of our common
stock



                                                         
COMMON STOCK OFFERED                                        308,648,500 shares

OFFERING PRICE                                              Market Price

COMMON STOCK OUTSTANDING PRIOR TO THIS OFFERING(1)          243,878,428 shares

USE OF PROCEEDS                                             The shares of common stock  offered  pursuant to this  prospectus
                                                            are  offered by the  Selling  Stockholders  listed on page 17. We
                                                            will not receive any proceeds from the sale of the shares offered
                                                            hereby,  except the exercise price of warrants  being  registered
                                                            hereunder.  We will also receive proceeds from the sale of common
                                                            stock to  Cornell  Capital  Partners  under  the  Standby  Equity
                                                            Distribution  Agreement,  which will be used for general  working
                                                            capital. See "Use of Proceeds."


                                       2





                                                         
RISK FACTORS                                                An  investment  in our  common  stock is highly  speculative  and
                                                            involves  a  high  degree  of  risk  and  immediate   substantial
                                                            dilution.  You  should  read the "Risk  Factors"  and  "Dilution"
                                                            sections.

OTC BULLETIN BOARD SYMBOL                                   NEOM


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

(1)      This table  excludes  options and warrants to purchase  33,605,007  and
         26,195,000 shares of common stock, respectively,  and up to 200,000,000
         additional shares of common stock to be issued under the Standby Equity
         Distribution Agreement.


                                        3




                                  RISK FACTORS

         We are subject to various risks which may materially harm our business,
financial  condition and results of operations.  Before purchasing our shares of
common  stock,  you  should  carefully  consider  the risks  described  below in
addition to the other  information in this prospectus.  If any of these risks or
uncertainties actually occur, our business, prospects,  financial condition, and
results of operations could be materially and adversely affected.  In that case,
the trading  price of our common  stock could  decline and you could lose all or
part of your investment.

                           RISKS SPECIFIC TO NEOMEDIA

WE HAVE HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE

         We have incurred substantial losses since our inception, and anticipate
incurring  substantial losses for the foreseeable  future. We incurred a loss of
$4,060,000 in the nine months ended  September 30, 2003,  $7,421,000 in the year
ended  December 31, 2002,  $25,469,000  in the year ended December 31, 2001, and
$5,409,000  in the year ended  December 31, 2000.  Our  accumulated  deficit was
approximately  $74,825,000 as of September 30, 2003,  $70,765,000 as of December
31, 2002,  and  $63,344,000  as of December 31, 2001.  We had a working  capital
deficit of  approximately  $8,134,000  as September  30, 2003,  $8,985,000 as of
December 31, 2002, and $5,163,000 as of December 31, 2001. We had  shareholders'
deficit of $5,337,000,  $6,026,000, and $263,000 at September 30, 2003, December
31,  2002  and  December  31,  2001,  respectively.  We  generated  revenues  of
$2,009,000 for the nine months ended September 30, 2003, $9,399,000 for the year
ended  December 31, 2002,  $8,142,000  for the year ended December 31, 2001, and
$27,565,000  for the year ended December 31, 2000. In addition,  cash flows used
in  operating  activities  totaled  $2,057,000  during  the  nine  months  ended
September 30, 2003,  $598,000 for the year ended  December 31, 2002,  $5,202,000
for the year ended December 31, 2001, and $6,775,000 for the year ended December
31, 2000. To succeed, we must develop new client and customer  relationships and
substantially increase our revenue derived from improved products and additional
value-added  services.  To the extent we have available financing,  we intend to
expend substantial  resources to develop and improve our products,  increase our
valued-added services and to market our products and services. These development
and marketing  expenses must be incurred well in advance of the  recognition  of
revenue. As a result, we may not be able to achieve or sustain profitability.

WE WILL NEED TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS

         On October  27,  2003,  we entered  into a $20 million  Standby  Equity
Distribution Agreement with Cornell Capital Partners L.P. Under the terms of the
agreement,  Cornell Capital Partners has agreed to purchase up to $20 million of
our common stock over the next two years at our  discretion.  The maximum amount
of  purchases in any 7-day  period is  $280,000,  not to exceed  $840,000 in any
30-day period. For each share of common stock purchased under the Standby Equity
Distribution  Agreement,  Cornell  Capital  Partners  will pay 98% of the lowest
closing bid price on the  Over-the-Counter  Bulletin  Board  during the five-day
period  following  the delivery of a notice by  NeoMedia.  We will pay 5% of the
gross proceeds of each purchase to Cornell Capital Partners as a commission, and
$500 of escrow fees for each advance.


                                       4


         Because we cannot predict when, or if, we will realize material revenue
from our intellectual  property or PaperClick  software products,  we anticipate
that we will need to raise additional capital to fund our anticipated  operating
expenses  in the short term.  Among other  things,  external  financing  will be
required to cover our  operating  costs.  We cannot  assure you that  financing,
whether from external sources or related parties, will be available if needed or
on favorable  terms.  In the absence of financing,  we believe that we will have
sufficient  capital to sustain  operations for approximately 90 days. Our belief
is based on our operating plan,  which in turn is based on assumptions  that may
prove  to be  incorrect.  If  capital  raised  from  financing  efforts  and our
financial  resources are  insufficient  we may require  additional  financing in
order to execute on our operating plan and continue as a going  concern.  We may
not be able to obtain the necessary  additional  capital on a timely  basis,  on
acceptable  terms,  or at all.  In any of  these  events,  we may be  unable  to
implement our current plans for  expansion,  repay our debt  obligations as they
become due or respond to competitive pressures, any of which circumstances could
force us to reduce or cease  operations.  In the event that any future financing
should take the form of a sale of equity  securities,  the holders of the common
stock may experience additional dilution.

OUR INDEPENDENT ACCOUNTANTS HAVE ADDED GOING CONCERN LANGUAGE TO THEIR REPORT ON
OUR  FINANCIAL  STATEMENTS,  WHICH  MEANS  THAT WE MAY  NOT BE ABLE TO  CONTINUE
OPERATIONS

         The report of Stonefield  Josephson,  Inc., our  independent  auditors,
with respect to our  financial  statements  and the related  notes for the years
ended December 31, 2002 and 2001,  indicates  that, at the date of their report,
we had suffered  recurring  losses from operations and our current cash position
raised  substantial doubt about our ability to continue as a going concern.  Our
financial  statements do not include any adjustments that might result from this
uncertainty.

THERE IS LIMITED  INFORMATION  UPON WHICH  INVESTORS  CAN  EVALUATE OUR BUSINESS
BECAUSE THE PHYSICAL WORLD - TO - INTERNET MARKET HAS EXISTED FOR A SHORT PERIOD
OF TIME

         The physical world-to-Internet market in which we operate is a recently
developed  market.  Further,  we have  conducted  operations in this market only
since March 1996.  Consequently,  we have a relatively limited operating history
upon which you may base an evaluation of our primary  business and determine our
prospects for achieving our intended business objectives.  To date, we have sold
our physical world-to-Internet  products to only 13 companies.  Further, Digital
Convergence,  our primary customer for our physical world-to-Internet  products,
has filed Chapter 7 of the United States  Bankruptcy Code and is presently being
sued by us for default on a promissory note issued to us in lieu of payment.  We
are prone to all of the risks inherent to the  establishment of any new business
venture,  including unforeseen changes in our business plan. You should consider
the  likelihood of our future  success to be highly  speculative in light of our
limited  operating  history  in our  primary  market,  as  well  as the  limited
resources,  problems,  expenses, risks, and complications frequently encountered
by similarly situated companies in the early stages of development, particularly
companies  in  new  and  rapidly   evolving   markets,   such  as  the  physical
world-to-Internet space. To address these risks, we must, among other things,

         o        maintain and increase our client base;

         o        implement and successfully  execute our business and marketing
                  strategy;

         o        continue to develop and upgrade our products;

         o        continually  update and  improve  our  service  offerings  and
                  features;

         o        respond to industry and competitive developments; and

         o        attract, retain, and motivate qualified personnel.

         We may not be successful in addressing these risks. If we are unable to
do so, our business,  prospects,  financial condition, and results of operations
would be materially and adversely affected.


                                       5


OUR SHARES WERE DE-LISTED FROM TRADING ON THE NASDAQ SMALLCAP MARKET,  WHICH MAY
HAVE A MATERIAL  ADVERSE  EFFECT ON YOUR ABILITY TO RESELL YOUR SHARES OR OBTAIN
ACCURATE PRICE QUOTATIONS

         On March 11,  2002,  we received a Nasdaq Staff  Determination  stating
that,  as of December 31, 2001,  we did not meet either the minimum net tangible
assets ($2,000,000) or minimum  stockholders'  equity ($2,500,000)  criteria for
continued listing on the Nasdaq SmallCap Market and advising that,  accordingly,
our shares were  subject to  de-listing  from such market.  On May 16, 2002,  we
received  notification  from the Nasdaq  Listing  Qualifications  Panel that our
shares were delisted  effective May 17, 2002.  Our shares are now trading on the
OTC Bulletin Board. Your ability to resell shares of our stock,  obtain accurate
or timely price quotations on our shares, and, potentially,  our ability to sell
shares for our own account in order to raise equity  financing could possibly be
materially adversely affected by this delisting.

WE ARE SUBJECT TO PRICE VOLATILITY DUE TO OUR OPERATIONS MATERIALLY FLUCTUATING

         As a result of the emerging and evolving nature of the markets in which
we compete,  as well as the current nature of the public markets and our current
financial  condition,  we  believe  that our  operating  results  may  fluctuate
materially,  as a result of which quarter-to-quarter  comparisons of our results
of operations may not be  meaningful.  If in some future  quarter,  whether as a
result of such a fluctuation or otherwise,  our results of operations fall below
the expectations of securities analysts and investors,  the trading price of our
common stock would likely be materially and adversely  affected.  You should not
rely on our  results  of any  interim  period  as an  indication  of our  future
performance.  Additionally,  our quarterly  results of operations  may fluctuate
significantly  in the future as a result of a variety of factors,  many of which
are  outside  our  control.  Factors  that may cause our  quarterly  results  to
fluctuate include, among others:

         o        our ability to retain existing clients and customers;

         o        our ability to attract new clients and  customers  at a steady
                  rate;

         o        our ability to maintain client satisfaction;

         o        our ability to motivate  potential  clients and  customers  to
                  acquire and implement new technologies;

         o        the extent to which our products gain market acceptance;

         o        the timing and size of client and customer purchases;

         o        introductions of products and services by competitors;

         o        price competition in the markets in which we compete;

         o        the  pricing  of  hardware  and  software  which we  resell or
                  integrate into our products;

         o        the level of use of the Internet  and online  services and the
                  rate  of  market  acceptance  of  physical   world-to-Internet
                  marketing;

         o        our   ability  to  upgrade   and   develop   our  systems  and
                  infrastructure in a timely and effective manner;

         o        our ability to attract,  train, and retain skilled management,
                  strategic, technical, and creative professionals;

         o        the  amount  and  timing  of   operating   costs  and  capital
                  expenditures  relating  to  the  expansion  of  our  business,
                  operations, and infrastructure;

         o        unanticipated  technical,  legal, and regulatory  difficulties
                  with respect to use of the Internet; and

         o        general economic  conditions and economic  conditions specific
                  to Internet technology usage and electronic commerce.


                                       6



OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE DIFFICULT
FOR INVESTORS TO SELL THEIR SHARES DUE TO SUITABILITY REQUIREMENTS

         Our 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.  These
requirements  may reduce the  potential  market for our common stock by reducing
the number of potential investors. This may make it more difficult for investors
in our common stock to sell shares to third  parties or to otherwise  dispose of
them. This could cause our 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 $2.0 million (if
                  the issuer has been in continuous operation for at least three
                  years) or $10.0 million (if in  continuous  operation for less
                  than three years),  or with average revenues of less than $6.0
                  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.

WE ARE UNCERTAIN OF THE SUCCESS OF OUR INTERNET SWITCHING SERVICES BUSINESS UNIT
AND THE FAILURE OF THIS UNIT WOULD NEGATIVELY AFFECT OUR OPERATIONS

         We provide  products  and services  that  provide a seamless  link from
physical objects,  including printed material,  to the Internet.  Our operations
are subject to the risk that:

         o        this  Internet  Switching  Services  business  unit  will ever
                  achieve profitability;

         o        our current product  offerings will not be adversely  affected
                  by  the   focusing   of   our   resources   on  the   physical
                  world-to-Internet space; or

         o        the products we develop will obtain market acceptance.

         In the event that the Internet  Switching Services business unit should
never  achieve  profitability,  that our  current  product  offerings  should so
suffer,  or that our  products  fail to obtain  market  acceptance,  we could be
forced to reduce or cease operations.

OUR SUCCESS IS DEPENDENT  UPON THE RESALE OF SOFTWARE AND EQUIPMENT FOR REVENUE;
A REDUCTION IN THESE SALES WOULD MATERIALLY  ADVERSELY AFFECT OUR OPERATIONS AND
THE PRICE OF OUR STOCK

         During the three month periods ended  September 30, 2003 and 2002,  the
nine month  periods  ended  September  30,  2003 and 2002,  and the years  ended
December 31, 2002,  2001, and 2000, we derived 85%, 83%, 83%, 97%, 95%, 93%, and
70%,  respectively,  of our  revenues  from the resale of computer  software and
technology  equipment.  A loss or a  reduction  of  this  revenue  would  have a
material adverse effect on our business,  prospects,  financial  condition,  and
results of operations,  as well as our stock price.  The revenue from the resale
of software and equipment is subject to the risks that:

         o        the market for our products and services will continue;

         o        we will be  successful  in  marketing  these  products  due to
                  competition and other factors;

         o        we will continue to be able to obtain short-term financing for
                  the purchase of the products that we resell; or


                                       7


         o        our relationship with companies whose products and services we
                  sell  will  continue,  including  our  relationship  with  Sun
                  Microsystems Computer Company.

         Further,  the  technology and equipment  resale  business is becoming a
commodity  industry for products  undifferentiated  by  value-added  proprietary
elements  and  services.  A large  number of companies  act as  re-marketers  of
another  party's  products,  and  therefore,  the  competition  in this  area is
intense.  Resale operations are also being compressed as equipment manufacturers
consolidate their distribution  channels. In some instances,  we, in acting as a
re-marketer,  may  compete  with the  original  manufacturer.  An  inability  to
effectively  compete and generate  revenues in this  industry  could force us to
reduce or cease operations.

A LARGE PERCENTAGE OF OUR ASSETS ARE INTANGIBLE  ASSETS,  WHICH WILL HAVE LITTLE
OR NO VALUE IF OUR OPERATIONS ARE UNSUCCESSFUL

         At  September  30,  2003,  approximately  40% of our total  assets were
intangible  assets,  consisting  primarily of rights  related to our patents and
other intellectual  property.  If our operations are unsuccessful,  these assets
will have little or no value,  which will materially  adversely affect the value
of our stock and the ability of our stockholders to recoup their  investments in
our capital stock.

OUR ISS BUSINESS UNIT MARKETING  STRATEGY HAS NOT BEEN TESTED AND MAY NOT RESULT
IN SUCCESS

         To date, we have conducted  limited marketing efforts directly relating
to our NISS  business  unit.  All of our  marketing  efforts  have been  largely
untested in the  marketplace,  and may not result in sales of our  products  and
services.  To penetrate  the markets in which we compete,  we will have to exert
significant  efforts to create  awareness  of, and demand for,  our products and
services. With respect to our marketing efforts conducted directly, we intend to
expand our sales staff upon the receipt of  sufficient  operating  capital.  Our
failure to further develop our marketing  capabilities and  successfully  market
our products and services could force us to reduce or cease operations.

OUR INTERNALLY DEVELOPED SYSTEMS ARE INEFFICIENT AND MAY PUT US AT A COMPETITIVE
DISADVANTAGE

         We use internally  developed  technologies for a portion of our systems
integration  services,  as well as the technologies required to interconnect our
clients' and customers' physical world-to-Internet systems and hardware with our
own. As we developed 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 us at a  competitive
disadvantage when compared to competitors with more efficient systems.

WE COULD FAIL TO ATTRACT OR RETAIN KEY PERSONNEL

         Our future success will depend in large part on our 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 we have. We may not be successful in
attracting and retaining  qualified  personnel on a timely basis, on competitive
terms,  or at all. Our failure to attract and retain  qualified  personnel would
have a material adverse effect on our business, prospects,  financial condition,
and results of operations will be materially adversely affected.

WE DEPEND UPON OUR SENIOR MANAGEMENT AND THEIR LOSS OR UNAVAILABILITY  COULD PUT
US AT A COMPETITIVE DISADVANTAGE

         Our success depends largely on the skills of certain key management and
technical personnel, including Charles T. Jensen, our President, Chief Operating
Officer,  and acting Chief Executive Officer, and Charles W. Fritz, the Chairman
of the Board and the leader of our intellectual  property licensing efforts. The
loss of the  services  of Mr.  Jensen or Mr.  Fritz  could  materially  harm our
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. We do not presently maintain a key-man life insurance policy
on Mr. Jensen or Mr. Fritz.


                                       8



WE MAY BE UNABLE TO  PROTECT  OUR  INTELLECTUAL  PROPERTY  RIGHTS  AND WE MAY BE
LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS

         Our  success  in the  physical  world-to-Internet  and the  value-added
systems  integration  markets  is  dependent  upon our  proprietary  technology,
including  our patents and other  intellectual  property,  and on our ability to
protect our proprietary  technology and other  intellectual  property rights. In
addition,  we must conduct our operations  without infringing on the proprietary
rights of third parties.  We also intend to rely upon  unpatented  trade secrets
and the know-how  and  expertise of our  employees,  as well as our patents.  To
protect our  proprietary  technology and other  intellectual  property,  we rely
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.  We have 14 patents  for our  physical
world-to-Internet  technology,  including 8 patents recently acquired as part of
our  acquisition  of Secure  Source  Technologies,  Inc.  We also  have  several
trademarks  relating to our  proprietary  products.  Although we believe that we
have taken  appropriate  steps to protect  our  unpatented  proprietary  rights,
including  requiring that our employees and third parties who are granted access
to our proprietary technology enter into confidentiality  agreements with us, we
can provide no assurance  that these  measures will be sufficient to protect our
rights  against third  parties.  Others may  independently  develop or otherwise
acquire  patented or unpatented  technologies or products similar or superior to
ours.

         We license from third parties certain software tools that we include in
our services and products. If any of these licenses were terminated, we could be
required to seek  licenses  for  similar  software  from other third  parties or
develop  these tools  internally.  We 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. We may in the
future  be  required  to  defend  our   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,
us. An adverse  determination  could subject us to  significant  liabilities  to
third  parties,  require us to seek  licenses  from,  or pay royalties to, third
parties, or require us to develop appropriate  alternative  technology.  Some or
all of these licenses may not be available to us on acceptable  terms or at all,
and we 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 our
business, prospects, financial condition, and results of operations.

WE ARE EXPOSED TO PRODUCT  LIABILITY CLAIMS FOR WHICH WE DO HAVE COVERAGE AND AN
UNINSURED CLAIM COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, PROSPECTS,
FINANCIAL  CONDITION,  AND  RESULTS OF  OPERATIONS,  AS WELL AS THE VALUE OF OUR
STOCK

         Many of our  projects are  critical to the  operations  of our clients'
businesses. Any failure in a client's information system could result in a claim
for substantial  damages against us, regardless of our  responsibility  for such
failure.  We could,  therefore,  be  subject  to claims in  connection  with the
products  and  services  that we sell.  We  currently  do not  maintain  product
liability  insurance.   We  do  not  currently  maintain  errors  and  omissions
insurance.  There can be no assurance  that: we have  contractually  limited our
liability  for such claims  adequately  or at all;  or we would have  sufficient
resources to satisfy any liability resulting from any such claim.

         The  successful  assertion of one or more large claims against us could
have a material adverse effect on our business, prospects,  financial condition,
and results of operations.

WE WILL NOT PAY CASH  DIVIDENDS  AND  INVESTORS MAY HAVE TO SELL THEIR SHARES IN
ORDER TO REALIZE THEIR INVESTMENT

         We have not paid any cash  dividends  on our  common  stock  and do not
intend to pay cash  dividends  in the  foreseeable  future.  We intend to retain
future  earnings,  if any, for  reinvestment in the development and marketing of
our products and services.  Any future credit agreements into which we may enter
with institutional  lenders may similarly restrict our ability to pay dividends.
As a result,  investors may have to sell their shares of common stock to realize
their investment.


                                       9



SOME  PROVISIONS  OF OUR  CERTIFICATE  OF  INCORPORATION  AND  BY-LAWS MAY DETER
TAKEOVER  ATTEMPTS,  WHICH MAY LIMIT THE OPPORTUNITY OF OUR STOCKHOLDERS TO SELL
THEIR SHARES AT A PREMIUM TO THE THEN MARKET PRICE

         Some of the provisions of our Certificate of Incorporation  and By-Laws
could make it more  difficult  for a third party to acquire us, even if doing so
might be beneficial to our  stockholders  by providing them with the opportunity
to sell their  shares at a premium to the then market  price.  On  December  10,
1999, our 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 our 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 "poison  pill." The  stockholder  rights  plan was  designed to
enable all  stockholders  not engaged in a hostile  takeover  attempt to receive
fair and equal  treatment  in any  proposed  takeover of  NeoMedia  and to guard
against partial or two-tiered tender offers, open market accumulations and other
hostile tactics to gain control of NeoMedia. The stockholders rights plan, which
is similar to plans adopted by many leading public companies, was not adopted in
response to any effort to acquire  control of NeoMedia at the time of  adoption.
This  stockholders  rights plan may have the effect of rendering more difficult,
delaying,  discouraging,  preventing, or rendering more costly an acquisition of
NeoMedia or a change in control of NeoMedia. Certain of our directors,  officers
and principal stockholders, including Charles W. Fritz, William E. Fritz and The
Fritz Family  Limited  Partnership  and their  holdings  were  exempted from the
triggering  provisions of our "poison  pill" plan,  as their  holdings as of the
date of plans adoption might have otherwise triggered the "poison pill."

         In addition,  our Certificate of Incorporation  authorizes the issuance
of  blank-check  preferred  stock (that is,  preferred  stock which our Board of
Directors can create and issue without prior  stockholder  approval) with rights
senior to those of our  common  stock.  This  provision  may have the  effect of
delaying or preventing  changes of control or  management  of NeoMedia,  even if
such  transactions  would have significant  benefits to our  stockholders.  As a
result, this could limit the price some investors might be willing to pay in the
future for shares of our common stock.


                                       10



                         RISKS RELATING TO OUR INDUSTRY

WE WILL ONLY BE ABLE TO EXECUTE OUR PHYSICAL  WORLD-TO-INTERNET BUSINESS PLAN IF
INTERNET USAGE AND ELECTRONIC COMMERCE CONTINUE TO GROW

         Our future revenues and any future profits are substantially  dependent
upon the widespread acceptance and use of the Internet and other online services
as an effective  medium of information and commerce.  If use of the Internet and
other  online  services  does not  continue to grow or grows more slowly than we
expect,  if the  infrastructure  for the Internet and other online services does
not effectively  support the growth that may occur, or if the Internet and other
online  services do not become a viable  commercial  marketplace,  our  physical
world-to-Internet  business,  and therefore our business,  prospects,  financial
condition,  and results of operations,  could be materially  adversely affected.
Rapid growth in the use of, and interest in, the  Internet,  the Web, and online
services  is a recent  phenomenon,  and may not  continue  on a  lasting  basis.
Concerns over the security of the Internet and other electronic transactions and
the privacy of consumers  and  merchants  may inhibit the growth of the Internet
and  other  online  services  generally,  especially  as a means  of  conducting
commercial transactions.  In addition, new consumers may not adopt, and existing
consumers  may not continue to use, the Internet and other online  services as a
medium of information  retrieval or commerce.  Demand and market  acceptance for
recently  introduced  services and  products  over the Internet are subject to a
high level of uncertainty, and few services and products have generated profits.
For us to be successful,  consumers and businesses must be willing to accept and
use new ways of conducting business and exchanging information.

         In  addition,  the public in general  may not accept the  Internet  and
other online  services as a viable  commercial or information  marketplace for a
number  of  reasons,  including,  but not  limited  to,  potentially  inadequate
development of the necessary network  infrastructure and delayed  development of
enabling  technologies  and  performance  improvements.  To the extent  that the
Internet and other online networks continue to experience  significant growth in
the  number  of  users,   their   frequency  of  use,  and  in  their  bandwidth
requirements,  the  infrastructure  for the Internet and online  networks may be
unable to support the demands  placed upon them.  In addition,  the Internet and
other  online  networks  could  lose  their  viability  due  to  delays  in  the
development  or  adoption  of new  standards  and  protocols  required to handle
increased  levels of Internet  activity and increased  governmental  regulation.
Significant  issues  concerning  the  commercial  and  informational  use of the
Internet and online  networks  technologies,  including  security,  reliability,
cost, ease of use, and quality of service, remain unresolved and may inhibit the
growth of Internet business solutions that utilize these  technologies.  Changes
in, or insufficient availability of, telecommunications  services to support the
Internet or other online services also could result in slower response times and
adversely  affect usage of the Internet and other online networks  generally and
our physical  world-to-Internet product and networks in particular. In the event
that we are  unable  to  successfully  execute  our  physical  world-to-Internet
business plan, we could be forced to reduce or cease operations.

WE MAY  NOT BE  ABLE  TO  ADAPT  AS THE  INTERNET,  PHYSICAL  WORLD-TO-INTERNET,
EQUIPMENT  RESALES  AND  SYSTEMS  INTEGRATIONS  MARKETS,  AND  CUSTOMER  DEMANDS
CONTINUE TO EVOLVE

         We  may   not  be   able   to   adapt   as   the   Internet,   physical
world-to-Internet,  equipment  resales  and  systems  integration  markets,  and
consumer demands  continue to evolve.  Our failure to respond in a timely manner
to changing market conditions or client requirements could force us to reduce or
cease operations. The Internet, physical  world-to-Internet,  equipment resales,
and systems integration markets are characterized by:

         o        rapid technological change;

         o        changes in user and customer requirements and preferences;

         o        frequent new product and service  introductions  embodying new
                  technologies; and

         o        the emergence of new industry  standards  and  practices  that
                  could render proprietary  technology and hardware and software
                  infrastructure obsolete.


                                       11


         Our success will depend, in part, on our ability to:

         o        enhance and improve the  responsiveness  and  functionality of
                  our products and services;

         o        license or develop  technologies  useful in our  business on a
                  timely basis;

         o        enhance our  existing  services,  and develop new services and
                  technologies  that address the increasingly  sophisticated and
                  varied needs of our prospective or current customers; and

         o        respond  to  technological   advances  and  emerging  industry
                  standards and practices on a cost-effective and timely basis.


WE MAY NOT BE ABLE TO COMPETE  EFFECTIVELY IN MARKETS WHERE OUR COMPETITORS HAVE
MORE RESOURCES

         While  the  market  for  physical   world-to-Internet   technology   is
relatively  new,  it is  already  highly  competitive  and  characterized  by an
increasing  number of entrants that have  introduced  or developed  products and
services  similar  to those  offered  by us. We believe  that  competition  will
intensify and increase in the future.  Our target market is rapidly evolving and
is subject to continuous  technological change. As a result, our competitors may
be better  positioned to address these  developments or may react more favorably
to these changes, which could force us to reduce or cease operations.

         In addition,  the equipment resales and systems integration markets are
increasingly  competitive.  We  compete  in these  industries  on the basis of a
number of factors,  including the  attractiveness of the services  offered,  the
breadth and quality of these services,  creative design and systems  engineering
expertise, pricing,  technological innovation, and response to clients' needs. A
number of these factors are beyond our control.  Our  competitors may develop or
offer  products or services that provide  significant  technological,  creative,
performance,  price, or other  advantages over the products and services offered
by us.

         Many  of  our  competitors  have  longer  operating  histories,  larger
customer bases,  longer  relationships with clients,  and significantly  greater
financial,  technical,  marketing, and public relations resources than NeoMedia.
Based on total assets and annual revenues, we are significantly smaller than our
two largest competitors in the physical world-to-Internet industry, which is the
primary  focus of our  business.  Similarly,  we compete  against  significantly
larger and  better-financed  companies  in our systems  integration  and resales
businesses,  including the  manufacturers of the equipment and technologies that
we integrate and resell. If we compete with our primary competitors for the same
geographical or institutional markets, their financial strength could prevent us
from capturing those markets.  We may not successfully  compete in any market in
which  we  conduct  currently  or in  the  future.  In  addition,  based  on the
increasing  consolidation,  price  competition  and  participation  of equipment
manufacturers  in the systems  integration  and equipment  resales  markets,  we
believe that we will no longer be able to compete  effectively  in these markets
in the future.  It is for this  reason,  that we have  increasingly  focused our
business plan on competing in the emerging market for physical world-to-Internet
products.  In  the  event  that  we do not  successfully  execute  our  physical
world-to-Internet  business  plan,  we  could  be  forced  to  reduce  or  cease
operations.

IN THE FUTURE  THERE COULD BE  GOVERNMENT  REGULATIONS  AND LEGAL  UNCERTAINTIES
WHICH COULD HARM OUR BUSINESS

         We are not currently  subject to direct  regulation  by any  government
agency  other  than  laws or  regulations  applicable  generally  to  electronic
commerce.  Any new  legislation  or  regulation,  the  application  of laws  and
regulations  from  jurisdictions  whose  laws  do  not  currently  apply  to our
business,  or the  application of existing laws and  regulations to the Internet
and other online services, could have a material adverse effect on our business,
prospects, financial condition, and results of operations. Due to the increasing
popularity and use of the Internet and other online  services,  federal,  state,
and local governments may adopt laws and regulations, or amend existing laws and
regulations,  with  respect to the Internet or other  online  services  covering
issues  such  as  taxation,   user  privacy,   pricing,   content,   copyrights,
distribution,  and  characteristics  and quality of products and  services.  The
growth and  development of the market for  electronic  commerce may prompt calls
for more stringent  consumer  protection  laws to impose  additional  burdens on
companies  conducting  business  online.  The adoption of any additional laws or
regulations  may decrease  the growth of the Internet or other online  services,
which could, in turn, decrease the demand for our services and increase our cost
of doing  business,  or  otherwise  force  us to  reduce  or  cease  operations.
Moreover,   the  relevant   governmental   authorities  have  not  resolved  the
applicability  to the  Internet and other  online  services of existing  laws in
various  jurisdictions  governing issues such as property ownership and personal
privacy and it may take time to resolve these issues definitively.

                                       12


         Certain  of  our  proprietary  technology  allow  for  the  storage  of
demographic data from our 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 our ability to
collect and use  information  collected by our  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.  We could incur significant  additional expenses if new regulations
regarding  the use of  personal  information  are  introduced  or if our privacy
practices are investigated.

                         RISKS SPECIFIC TO THIS OFFERING

         As of December  12,  2003,  we had  243,878,428  shares of common stock
outstanding  and options and warrants to purchase up to an aggregate  59,800,007
shares of common stock. Up to an additional  200,000,000  shares of common stock
may be issued under the Standby Equity Distribution Agreement.

THE INVESTOR UNDER THE STANDBY EQUITY DISTRIBUTION  AGREEMENT WILL PAY LESS THAN
THE THEN-PREVAILING MARKET PRICE OF OUR COMMON STOCK

         The common  stock to be issued  under the Standby  Equity  Distribution
Agreement with Cornell will be issued at a 2% discount to the lowest closing bid
price  for the 5  trading  days  immediately  following  the  notice  date of an
advance.  These  discounted  sales could cause the price of our common  stock to
decline.

THE SALE OF OUR STOCK  UNDER OUR STANDBY  EQUITY  DISTRIBUTION  AGREEMENT  COULD
ENCOURAGE  SHORT SALES BY THIRD PARTIES,  WHICH COULD  CONTRIBUTE TO THE FURTHER
DECLINE OF OUR STOCK PRICE

         The  significant  downward  pressure  on the price of our common  stock
caused by the sale of  significant  amounts of common  stock  under the  Standby
Equity  Distribution  Agreement could encourage short sales by third parties. Up
to 200,000,000  shares of our common stock are being registered in this offering
for re-sale under the Standby Equity Distribution Agreement. Such an event could
place further downward  pressure on the price of our common stock. We previously
registered  100,000,000  shares for resale under a separate  $10 million  Equity
Line of Credit. This previous  registration was declared effective by the SEC on
February 14, 2003. Since that date, we have sold  100,000,000  shares to Cornell
Capital Partners under the Equity Line of Credit.

THE PRICE YOU PAY IN THIS  OFFERING  WILL  FLUCTUATE  AND MAY BE HIGHER OR LOWER
THAN THE PRICES PAID BY OTHER PEOPLE PARTICIPATING IN THIS OFFERING

         The  price in this  offering  will  fluctuate  based on the  prevailing
market  price of the common stock on the OTC Bulletin  Board.  Accordingly,  the
price you pay in this  offering  may be higher or lower than the prices  paid by
other people participating in this offering.

THE  SELLING  STOCKHOLDERS  INTEND TO SELL THEIR  SHARES OF COMMON  STOCK IN THE
PUBLIC MARKET, WHICH SALES MAY CAUSE OUR STOCK PRICE TO DECLINE

         The  selling  stockholders  intend to sell the  shares of common  stock
being  registered in this offering in the public  market.  That means that up to
308,648,500  shares of common  stock,  the number of shares being  registered in
this offering, may be sold. Such sales may cause our stock price to decline.

OUR COMMON STOCK TRADES SPORADICALLY;  THE MARKET PRICE OF OUR SECURITIES MAY BE
VOLATILE

         Our common  stock  currently  trades  sporadically  on the OTC Bulletin
Board.  The market for our common stock may  continue to be an inactive  market.
Accordingly,  unless and until an active  public market  develops,  you may have
difficulty  selling your shares of common stock at a price that is attractive to
you.


                                       13



         Our  common  stock  has  traded  as low as  $0.01  and as high as $0.41
between  September 30, 2001 and December 12, 2003.  From time to time after this
offering,  the  market  price of our  common  stock may  experience  significant
volatility.  Our  quarterly  results,  failure  to meet  analysts  expectations,
announcements by us or our competitors  regarding  acquisitions or dispositions,
loss of existing  clients,  new  procedures  or  technology,  changes in general
conditions in the economy,  and general market conditions could cause the market
price of the common stock to  fluctuate  substantially.  In addition,  the stock
market  has  experienced  significant  price and volume  fluctuations  that have
particularly affected the trading prices of equity securities of many technology
companies.  These price and volume fluctuations often have been unrelated to the
operating performance of the affected companies.

YOU MAY SUFFER  SIGNIFICANT  ADDITIONAL  DILUTION  IF  OUTSTANDING  OPTIONS  AND
WARRANTS ARE EXERCISED

         As of December 12, 2003, we had  outstanding  stock options to purchase
approximately  33.6  million  shares of common  stock and  warrants  to purchase
approximately  26.2  million  shares of common  stock,  some of which may in the
future, but do not currently,  have exercise prices at or below the price of our
common shares on the public  market.  To the extent such options or warrants are
exercised,  there will be further dilution.  In addition,  in the event that any
future financing should be in the form of, be convertible  into, or exchangeable
for, equity securities, and upon the exercise of options and warrants, investors
may experience additional dilution.

EXISTING  STOCKHOLDERS  WILL  EXPERIENCE  SIGNIFICANT  DILUTION FROM THE SALE OF
SHARES UNDER THE STANDBY EQUITY DISTRIBUTION AGREEMENT

         The sale of shares of  common  stock  pursuant  to the  Standby  Equity
Distribution  Agreement will have a dilutive  impact on our  stockholders.  As a
result,  our net income per share  could  decrease  in future  periods,  and the
market  price of our  common  stock  could  decline.  In  addition,  for a given
advance,  we will need to issue a greater number of shares of common stock under
the Standby Equity  Distribution  Agreement as our stock price declines.  If our
stock price is lower, then our existing  stockholders  would experience  greater
dilution.  For example,  if we assume that we will issue  200,000,000  shares of
common  stock  under the Standby  Equity  Distribution  Agreement  at an assumed
offering price of $0.10 (net of 2% discount to Cornell Capital  Partners),  then
new shareholders would experience dilution of $0.0717 per share

FUTURE  SALES OF COMMON STOCK BY OUR  STOCKHOLDERS  COULD  ADVERSELY  AFFECT OUR
STOCK PRICE AND OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS

         The market price of our common stock could decline as a result of sales
of a large  number of shares of our  common  stock in the  market as a result of
this offering,  or the perception that these sales could occur. These sales also
might make it more difficult for us to sell equity securities in the future at a
time and at a price  that we deem  appropriate.  If we sold to  Cornell  Capital
Partners  all  200,000,000  shares  being  registered  under the Standby  Equity
Distribution Agreement, and if all options and warrants were exercised, we would
have up to 503,678,435 shares outstanding. Up to 200,000,000 of the shares being
registered in this offering underlie our Standby Equity  Distribution  Agreement
with Cornell Capital Partners. Under the terms of the agreement, Cornell Capital
Partners  is  obligated  to buy up to $280,000  worth of our common  stock every
seven days, up to a maximum of $840,000 in a 30-day period,  at a price equal to
98% of the lowest  closing bid price during the five-day  period  subsequent  to
delivery by us of an advance notice. Assuming the market price is $0.16 (closing
price on  December  12,  2003) on the day this  registration  statement  becomes
effective,  and that we deliver an advance  notice of purchase of $280,000 worth
of our common  stock,  we would  issue  1,785,714  shares of our  common  stock.
Remaining shares would become  outstanding as we continue to sell them under the
agreement, with the number of shares dependent on the market price of our common
stock at the time of the put. The number of shares to be issued upon each put is
dependent on the stock price and cannot be determined exactly at this time.

Sales of our common stock in the public market  following  this  offering  could
lower  the  market  price of our  common  stock.  Sales  may  also  make it more
difficult for us to sell equity securities or  equity-related  securities in the
future at a time and price that our management  deems  acceptable or at all. All
243,878,428  shares of common stock  outstanding as of December 12, 2003 are, or
upon  effectiveness  of this  registration  statement  will be, freely  tradable
without restriction, unless held by our "affiliates."


                                       14



                           FORWARD-LOOKING STATEMENTS

         Information  included or  incorporated  by reference in this prospectus
may contain forward-looking  statements.  This information may involve known and
unknown  risks,  uncertainties  and other  factors  which  may cause our  actual
results,  performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements.  Forward-looking statements,  which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the  words  "may,"  "will,"  "should,"  "expect,"  "anticipate,"  "estimate,"
"believe,"  "intend"  or  "project"  or the  negative  of  these  words or other
variations on these words or comparable terminology.

         This  prospectus   contains   forward-looking   statements,   including
statements   regarding,   among  other  things,  (a)  our  projected  sales  and
profitability,  (b)  our  growth  strategies,  (c)  anticipated  trends  in  our
industry,  (d) our  future  financing  plans and (e) our  anticipated  needs for
working capital.  These statements may be found under  "Management's  Discussion
and  Analysis  or  Plan  of  Operations"  and  "Business,"  as  well  as in this
prospectus generally.  Actual events or results may differ materially from those
discussed  in  forward-looking  statements  as  a  result  of  various  factors,
including,  without  limitation,  the risks  outlined  under "Risk  Factors" and
matters  described  in this  prospectus  generally.  In light of these risks and
uncertainties,  there can be no assurance  that the  forward-looking  statements
contained in this prospectus will in fact occur.


                                       15



                              SELLING STOCKHOLDERS

         The  following  table  presents   information   regarding  the  selling
stockholders. The table identifies the selling stockholders. None of the selling
stockholders  have  held a  position  or  office,  or  had  any  other  material
relationship, with NeoMedia, except as follows:

         o        Cornell  Capital  Partners,  L.P.  is the  investor  under the
                  Standby   Equity   Distribution   Agreement.   All  investment
                  decisions of Cornell Capital  Partners are made by its general
                  partner,  Yorkville  Advisors,  LLC. Mark Angelo, the managing
                  member  of  Yorkville  Advisors,  is the  natural  person  who
                  exercises  voting  and/or  dispositive  powers over the shares
                  held by Yorkville Advisors.

         o        Newbridge Securities Corporation is an unaffiliated registered
                  broker/dealer  that has been  retained by us. It has  provided
                  advice  to  us  in   connection   with  the   Standby   Equity
                  Distribution  Agreement.  Doug Agualilla is the natural person
                  who exercises voting and/or dispositive powers over the shares
                  held by Newbridge  Securities  Corporation.  For its services,
                  Newbridge  Securities  Corporation  received  95,238 shares of
                  NeoMedia's common stock.

         o        William E. Fritz is our  corporate  secretary  and a member of
                  our  board  of  directors.  Of  the  53,443,780  shares  being
                  registered hereunder on behalf of William E. Fritz, 50,903,780
                  were  outstanding  as  of  this  filing,   and  the  remaining
                  2,540,000  are  issuable  upon  exercise of  warrants  held by
                  William E. Fritz.

         o        Charles W. Fritz is the  founder of  NeoMedia,  and  currently
                  serves as Chairman of the board of  directors.  Mr. Fritz also
                  served as  President  and CEO from  August 1996  through  June
                  2002. Of the 17,181,912  shares being registered  hereunder on
                  behalf of Charles W. Fritz,  15,671,912 were outstanding as of
                  this filing,  and the  remaining  1,510,000  are issuable upon
                  exercise of warrants held by Charles W. Fritz.

         o        James J. Keil is a member of our  board of  directors.  Of the
                  235,945 shares being  registered  hereunder on behalf of James
                  J. Keil,  225,945 were outstanding as of this filing,  and the
                  remaining  10,000 are issuable  upon exercise of warrants held
                  by James J. Keil.

         o        James Walker is the natural person who exercises voting and/or
                  dispositive  powers over the shares held by MRA  Systems,  Inc
                  d/b/a GE Access. The 500,000 shares being registered hereunder
                  on behalf of MRA  Systems,  Inc d/b/a GE Access  are  issuable
                  upon  exercise of warrants  held by MRA Systems,  Inc d/b/a GE
                  Access,  and were therefore not  outstanding as of the date of
                  this filing.

         o        Dean Karkazis is the former Vice-President and General Manager
                  of  our  NISS  business  unit.  He is no  longer  employed  by
                  NeoMedia.  The 1,600,000 shares being registered  hereunder on
                  behalf of Dean  Karkazis  were  outstanding  as of the date of
                  this filing.

         o        Steven  McFarland is the natural  person who exercises  voting
                  and/or  dispositive  powers  over  the  shares  held by  Orsus
                  Solutions  U.S.A.,  Inc. The 3,000,000 shares being registered
                  hereunder  on  behalf of Orsus  Solutions  U.S.A.,  Inc.  were
                  outstanding as of the date of this filing.

         o        The 500,000  shares  being  registered  hereunder on behalf of
                  Jonathon  D. Greene  were  outstanding  as of the date of this
                  filing.

         o        The 50,000 shares being registered hereunder on behalf of Mark
                  F. Bielski were outstanding as of the date of this filing.

         o        The 2,950,000 shares being  registered  hereunder on behalf of
                  Jonathon D. Greene/Mark F. Bielski TEN COM were outstanding as
                  of the date of this filing.


                                       16



         o        Serguey G.  Kondratieff  is the natural  person who  exercises
                  voting  and/or  dispositive  powers  over the  shares  held by
                  Dolphin  Multimedia,  Inc. The 103,907 shares being registered
                  hereunder  on  behalf  of  Dolphin   Multimedia,   Inc.   were
                  outstanding as of the date of this filing.

         o        Gregory Rice is the natural person who exercises voting and/or
                  dispositive  powers over the shares  held by R.B.  Publishing,
                  Inc. The 66,841 shares being registered hereunder on behalf of
                  R.B. Publishing,  Inc. were outstanding as of the date of this
                  filing.

         o        Martha  Refkin is the  natural  person  who  exercises  voting
                  and/or  dispositive  powers over the shares held by  Thornhill
                  Capital LLC. The 10,000,000 shares being registered  hereunder
                  on behalf of Thornhill  Capital LLC are issuable upon exercise
                  of warrants held by Thornhill  Capital LLC, and were therefore
                  not outstanding as of the date of this filing.

         o        Michael  Pritchett is the natural person who exercises  voting
                  and/or dispositive powers over the shares held by 2150 Western
                  Court LLC. The 1,325,855 shares being registered  hereunder on
                  behalf of 2150 Western  Court LLC were  outstanding  as of the
                  date of this filing.

         o        Michael  Philip E. Croke is the natural  person who  exercises
                  voting and/or dispositive powers over the shares held by Voice
                  Processing,  Inc.  d/b/a  Information  Network  for  Southwest
                  Florida. The 7,279 shares being registered hereunder on behalf
                  of  Voice  Processing,  Inc.  d/b/a  Information  Network  for
                  Southwest  Florida  were  outstanding  as of the  date of this
                  filing.

         o        Gregory L. Adams and S. Cooper Rounds are the natural  persons
                  who exercise voting and/or  dispositive powers over the shares
                  held by International  Digital Scientific,  Inc. The 8,000,000
                  shares being  registered  hereunder on behalf of International
                  Digital  Scientific,  Inc. were  outstanding as of the date of
                  this filing.



                                       17


The table follows:



                                                       PERCENTAGE OF
                                                         OUSTANDING                   PERCENTAGE OF
                                                           SHARES      SHARES TO BE    OUSTANDING                    PERCENTAGE OF
                                       SHARES           BENEFICIALLY     ACQUIRED     SHARES TO BE                      SHARES
                                    BENEFICIALLY           OWNED        UNDER THE    ACQUIRED UNDER   SHARES TO BE   BENEFICIALLY
                                    OWNED BEFORE           BEFORE      EQUITY LINE   THE EQUITY LINE   SOLD IN THE    OWNED AFTER
       SELLING STOCKHOLDERS           OFFERING          OFFERING (1)    OF CREDIT       OF CREDIT       OFFERING     OFFERING (1)
       --------------------           --------          ------------    ---------       ---------       --------     ------------
                                                                                                   
Cornell Capital Partners, L.P.          10,000,000(2)       3.9%        200,000,000      45.1%         210,000,000        ---
Newbridge Securities Corporation            95,238(3)        *              ---           0.0%              95,238        ---
William E. Fritz                        56,674,776(4)      22.9%            ---           0.0%          53,443,780       1.31%
Charles W. Fritz                        30,316,467(5)      11.8%            ---           0.0%          17,181,912       5.11%
James J. Keil                            1,485,000(6)        *              ---           0.0%             235,945       0.51%
Orsus Solutions U.S.A., Inc.             3,000,000(7)       1.2%            ---           0.0$           3,000,000       ---
Steven R. Whitley                          450,000(8)        *              ---           0.0%             450,000       ---
Mark F. Bielski                             50,000(9)        *              ---           0.0%              50,000       ---
Jonathon D. Greene                         500,000(9)        *              ---           0.0%             500,000       ---
Jonathon D. Greene/Mark F.
     Bielski TEN COM                     2,950,000(9)       1.2%            ---           0.0%           2,950,000       ---
MRA Systems d/b/a G.E. Access              500,000(10)       *              ---           0.0%             500,000       ---
Dean Karkazis                            1,600,000(11)       *              ---           0.0%           1,600,000       ---
Dolphin Multimedia, Inc.                   103,907(12)       *              ---           0.0%             103,907       ---
R.B. Publishing, Inc.                       66,841(13)       *              ---           0.0%              66,841       ---
Anthony Barkume                             37,743(14)       *              ---           0.0%              37,743       ---
Thornhill Capital LLC                   10,000,000(15)      3.9%            ---           0.0%          10,000,000       ---
2150 Western Court L.L.C.                1,325,855(16)       *              ---           0.0%              425,855      0.37%
Voice Processing, Inc.
d/b/a Information
    Network for Southwest Florida            7,279(17)       *              ---           0.0%               7,279        ---
International Digital Scientific,
Inc.                                     8,000,000(18)      3.3%            ---           0.0%           8,000,000        ---
                                  --------------------------------------------------------------------------------------------------

TOTAL                                  127,163,106         52.1%         200,000,000      45.1%        308,648,500       7.06%
                                  ==================================================================================================


---------------------------
(1)  Applicable percentage of ownership is based on 243,878,428 shares of common
     stock  outstanding  as of  December  12,  2003,  together  with  securities
     exercisable  or  convertible  into shares of common stock within 60 days of
     December 12, 2003, for each stockholder. Beneficial ownership is determined
     in accordance with the rules of the Securities and Exchange  Commission and
     generally  includes voting or investment  power with respect to securities.
     Shares of common stock subject to  securities  exercisable  or  convertible
     into shares of common stock that are currently  exercisable  or exercisable
     within 60 days of December 12, 2003, are deemed to be beneficially owned by
     the  person  holding  such  securities  for the  purpose of  computing  the
     percentage of ownership of such person,  but are not treated as outstanding
     for the purpose of computing the percentage  ownership of any other person.
     The common  stock is the only  outstanding  class of equity  securities  of
     NeoMedia.

(2)  Ownership  before  offering  consists  of  10,000,000  warrants to purchase
     shares of our common stock at an exercise price of $0.05 per share,  issued
     in connection  with the $20 million Standby Equity  Distribution  Agreement
     between NeoMedia and Cornell Capital Partners.

(3)  The address of the referenced  holder(s) is: 1451 Cypress Creek Road, Suite
     204, Fort Lauderdale, FL, 33309. The shares were issued for advice provided
     in connection  with our $20 million Standby Equity  Distribution  Agreement
     with Cornell Capital Partners

(4)  William E. Fritz, the Company's corporate secretary and a director, and his
     wife,  Edna Fritz,  are the general  partners of the Fritz  Family  Limited
     Partnership  and therefore each are deemed to be the  beneficial  owners of
     the 1,511,742  shares held in the Fritz Family  Partnership.  As trustee of
     each of the  Chandler R. Fritz 1994 Trust,  Charles W. Fritz 1994 Trust and
     Debra F.  Schiafone  1994  Trust,  William  E.  Fritz is  deemed  to be the
     beneficial  owner of the 165,467  shares of NeoMedia  held in these trusts.
     Additionally,  Mr. Fritz is deemed to own:  51,172,567 shares held directly
     by Mr. Fritz or his spouse, 2,540,000 shares to be issued upon the exercise
     of warrants  held by Mr. Fritz or his spouse,  and  1,285,000  shares to be
     issued upon the exercise of options  held by Mr.  Fritz or his spouse.  Mr.
     William E. Fritz may be deemed to be a parent and promoter of NeoMedia,  as
     those terms are defined in the  Securities  Act.  Shares  being  registered
     include  25,000,000 shares purchased in a private placement of unregistered
     securities  in April 2003,  25,000,000  shares  issued upon the exercise of
     warrants in August 2003 issued with the private  placement,  903,780 shares
     issued with a  convertible  promissory  note entered in to during  November
     2002, and 2,540,000  shares  issuable upon the exercise of warrants  issued
     with promissory notes during 2003.

(5)  Charles W. Fritz is the Company's  founder and the Chairman of the Board of
     Directors.  Shares  beneficially  owned include 100 shares owned by each of
     Mr. Fritz's four minor children for an aggregate of 400 shares,  11,549,000
     shares of common stock issuable upon exercise of options  granted under our
     2002 and 1998 stock option plans,  1,510,000  shares issuable upon exercise
     of stock warrants,  15,714,098  shares of common stock owned by Mr. Charles
     W. Fritz directly,  and 1,542,969  shares of common stock held by the CW/LA
     II Family Limited Partnership, a family limited partnership for the benefit
     of Mr. Fritz's family.  Shares being registered  include  15,445,967 shares
     issued  in April  2003 as  payment  of past due  compensation  liabilities,
     225,945  shares  issued with a  convertible  promissory  note entered in to
     during  November 2002, and 1,510,000  shares  issuable upon the exercise of
     warrants issued with promissory notes during 2003.



                                       18



(6)  James J. Keil is a member of the Board of  Directors.  Shares  beneficially
     owned includes 10,000 shares issuable upon exercise of warrants,  1,000,000
     shares  issuable upon the exercise of options,  and 475,000 shares owned by
     Mr. Keil directly.  Shares being  registered  include 225,945 shares issued
     with a convertible  promissory note entered in to during November 2002, and
     10,000 shares issuable upon the exercise of warrants issued with promissory
     notes during 2003.

(7)  The address of the referenced  holder(s) is: Orsus Solutions  U.S.A,  Inc.,
     1616 N. Shoreline Blvd,  Mountain View, CA, 94043.  Shares being registered
     were  issued in  October  2003 as payment  of past due  invoices  that were
     subject to a lawsuit.

(8)  The  address  of  the  referenced   holder(s)  is:  c/o  Wiltshire  Whitley
     Richardson & English,  2075 West First St., Ft. Myers,  FL,  33901.  Shares
     being  registered  were  issued  in  October  2003 as  payment  of past due
     professional services.

(9)  Shares  issued to holders of Secure  Source  Technologies,  Inc.'s  ("SST")
     outstanding shares, as part of NeoMedia's purchase of SST. The addresses of
     the referenced holders are: Mark F. Bielski,  4600 Duke Street,  Suite 428,
     Alexandria, VA, 22304; Jonathon D. Greene, 8016 Aberdeen Rd., Bethesda, MD,
     20814;  and Jonathon D. Greene/Mark F. Bielski TEN COM, 7507 Arlington Rd.,
     Bethesda, MD, 20814. Shares being registered were issued in October 2003 in
     exchange for all of the outstanding shares of SST.

(10) The  address  of  the  referenced  holder(s)  is:  11300  Westmoor  Circle,
     Westminster,  CO, 80021. Shares being registered are issuable upon warrants
     issued in  February  2003 as payment of interest  relating to a  commercial
     credit agreement between GE Access and NeoMedia.

(11) The  address  of  the  referenced   holder(s)  is:  3606  Monarch   Circle,
     Naperville,  IL, 60564.  Shares being  registered  were issued in September
     2003 as payment of past due compensation liabilities.

(12) The address of the referenced  holder(s) is: 1900  Embarcadero  Road, Suite
     101, Palo Alto, CA, 94303.  Shares being  registered were issued in October
     2003 as payment of past due professional services.

(13) The  address of the  referenced  holder(s)  is: PO Box 8685,  Madison,  WI,
     53708.  Shares being  registered  were issued in October 2003 as payment of
     past due professional services.

(14) The address of the referenced holder(s) is: 20 Gateway Lane, Manorville, NY
     11949.  Shares being  registered  were issued in October 2003 as payment of
     past due professional services.

(15) Beneficial  ownership is  comprised  of  10,000,000  shares  issuable  upon
     exercise of stock warrants.  The address of the referenced holder(s) is c/o
     Martha Refkin,  3709 Fielding Drive,  Springfield,  IL, 62707. Shares being
     registered  are issuable upon warrants  issued in September 2003 as payment
     for professional services.

(16) The address of the  referenced  holder(s)  is 2777  Finley  Rd.,  Suite 23,
     Downer's Grove, IL, 60515. Shares being registered were issued in September
     2003 as payment of past due rent.

(17) The address of the  referenced  holder(s) is 13515 Bell Tower Drive,  Suite
     202, Ft. Myers,  FL, 33907.  Shares being registered were issued in October
     2003 as payment for professional services.

(18) The address of the referenced  holder(s) is 24307 Magic  Mountain  Parkway,
     #297,  Valencia,  CA, 91355. Shares being registered were issued in October
     2003 as payment of a note  payable  issued in 1994 in  connection  with our
     purchase  of  certain   software   products  from   International   Digital
     Scientific,  Inc.  The  payment  of the note  was  subject  to  arbitration
     proceedings initiated by International Digital Scientific, Inc.


                                        19



                                 USE OF PROCEEDS

         This  prospectus  relates  to shares of our  common  stock  that may be
offered and sold from time to time by certain selling  stockholders.  There will
be no proceeds to us from the sale of shares of common  stock in this  offering.
However, we will receive the proceeds from the sale of shares of common stock to
Cornell Capital Partners under the Standby Equity  Distribution  Agreement.  The
purchase price of the shares  purchased  under the Standby  Equity  Distribution
Agreement is equal to 98% of the lowest closing bid price of our common stock on
the OTC Bulletin Board for the 5 trading days  immediately  following the notice
date.

         On  February  14,  2003,  the SEC  declared  effective  a  registration
statement  on Form S-1  containing  100 million  shares  registered  under a $10
million Equity Line of Credit  Agreement with Cornell  Capital  Partners.  Since
that date and through  December 12, 2003, we have received  gross  proceeds from
Cornell Capital Partners of $3,597,000, resulting in the sale to Cornell Capital
Partners of 100,000,000 shares of our common stock

         For illustrative  purposes, we have set forth below our intended use of
proceeds for the range of net proceeds  indicated below to be received under the
Standby Equity  Distribution  Agreement.  The table assumes  estimated  offering
expenses of $50,000 and 5%  retention  of the gross  proceeds  raised  under the
Standby Equity Distribution Agreement.




                                                                 
GROSS PROCEEDS                    $1,000,000          $5,000,000          $8,403,000

NET PROCEEDS                         900,000           4,700,000           7,932,850

USE OF PROCEEDS:

Research and development                  --             250,000             750,000
Accounts payable                     100,000           1,500,000           3,000,000
Management Compensation              200,000             250,000             400,000
General Working Capital              600,000           2,700,000           3,782,850

    TOTAL                         $  900,000          $4,700,000          $7,932,850



         Any proceeds received upon exercise of outstanding options will be used
for general working capital purposes.


                                       20




                                    DILUTION

         The net tangible book value of our company as of September 30, 2003 was
$(7,452,000) or $(0.0362) per share of common stock. Net tangible book value per
share is  determined  by dividing  the  tangible  book value of NeoMedia  (total
tangible assets less total  liabilities) by the number of outstanding  shares of
our common  stock.  Since this  offering  is being  made  solely by the  selling
stockholders and none of the proceeds will be paid to NeoMedia, our net tangible
book value will be  unaffected  by this  offering.  Our net tangible book value,
however,  will be  impacted by the common  stock to be issued  under the Standby
Equity  Distribution  Agreement.  The  amount  of  dilution  will  depend on the
offering  price and  number of shares  to be  issued  under the  Standby  Equity
Distribution  Agreement.  The  following  example  shows  the  dilution  to  new
investors at an offering price of $0.10 per share (net of 2% discount to Cornell
Capital Partners).

         If we assume  that  NeoMedia  had issued  200,000,000  shares of common
stock under the Standby  Equity  Distribution  Agreement at an assumed  offering
price of $0.10 per share,  net of 2% discount to Cornell Capital Partners (i.e.,
the  maximum  number of shares  registered  in this  offering  under the Standby
Equity Distribution  Agreement),  less retention fees of $1,000,000 and offering
expenses of $50,000,  our net tangible book value as of September 30, 2003 would
have been  $11,498,000  or $0.0283 per share.  Note that at an offering price of
$0.10 per share (net of 2% discount to Cornell Capital Partners), NeoMedia would
receive gross proceeds of $20,000,000,  or the entire amount available under the
Standby  Equity  Distribution  Agreement.  Such an offering  would  represent an
immediate  increase  in net  tangible  book value to  existing  stockholders  of
$0.0645 per share and an immediate  dilution to new  stockholders of $0.0717 per
share. The following table illustrates the per share dilution:



                                                                     
Assumed public offering price per share (net of 2% discount
to Cornell Capital Partners)                                               $0.1000
Net tangible book value per share before this offering         ($0.0362)
Increase attributable to new investors                         $0.0645
                                                               -------
Net tangible book value per share after this offering                      $0.0283
                                                                           -------
Dilution per share to new stockholders                                     $0.0717
                                                                           -------


         The offering  price of our common  stock is based on the  then-existing
market price. In order to give prospective investors an idea of the dilution per
share they may  experience,  we have  prepared the  following  table showing the
dilution per share at various assumed offering prices:



         ASSUMED                                        DILUTION PER
        OFFERING               NO. OF SHARES              SHARE TO
        PRICE (1)            TO BE ISSUED (2)          NEW INVESTORS
        ---------            -----------------         -------------
                                                 
          $0.50                  40,000,000               $0.4532
          $0.25                  80,000,000               $0.2098
          $0.10                 200,000,000               $0.0717
          $0.05                 200,000,000               $0.0451
          $0.01                 200,000,000               $0.0238



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

(1)      Offering price net of 2% discount to Cornell Capital Partners.

(2)      This  represents  the maximum number of shares of common stock that are
         being registered under the Standby Equity Distribution Agreement.


                                       21



                                 DIVIDEND POLICY

         We have not  declared or paid any  dividends on our common stock during
the years ended December 31, 2002,  2001 or 2000.  Following this offering,  our
dividend  practices  with respect to our common stock will be determined and may
be  changed  from  time to time by our  board  of  directors.  We will  base any
issuance of dividends upon contractual ability,  earnings,  financial condition,
capital  requirements  and other  factors  considered  important by our board of
directors.  Delaware law and our Certificate of Incorporation do not require our
Board of Directors to declare  dividends on our common  stock.  In addition,  we
have a letter of credit with Bank One,  Chicago,  Illinois,  which requires Bank
One's written consent prior to the  declaration of cash dividends.  We expect to
retain all earnings, if any, generated by our operations for the development and
growth  of our  business  and do not  anticipate  paying  any  dividends  to our
stockholders for the foreseeable future.


                                       22



                                 CAPITALIZATION

The  following  table sets forth as of  September  30, 2003,  NeoMedia's  actual
capitalization and pro forma  capitalization after giving effect to the issuance
of  200,000,000  shares of common  stock under the Standby  Equity  Distribution
Agreement.  This  information  assumes a purchase price under the Standby Equity
Distribution  Agreement of $0.10 per share, less estimated  offering expenses of
$50,000 and a retention of $1,000,000.  This table should be read in conjunction
with the information contained in "Management's  Discussion and Analysis or Plan
of Operation" and the  consolidated  financial  statements and the notes thereto
included elsewhere in this prospectus.



                                                                               SEPTEMBER 30, 2003
                                                                         ACTUAL                 PROFORMA
                                                                       ------------           ------------
                                                                                        
Long-term debt, net of current portion                                 $     94,000           $     94,000
Stockholders' equity:

  Preferred stock, $0.01 par value, 25,000,000 authorized, no
issued and outstanding shares(2)                                                 --                     --
  Common stock, $0.01 par value, 1,000,000,000 authorized,
207,764,771 shares issued and 205,781,109 outstanding (1)(2)              2,057,811              4,057,811
Treasury stock, at cost, 201,230 shares of common stock                    (779,000)              (779,000)
Additional paid-in capital:
  Preferred stock                                                                --                     --
  Common stock                                                           68,469,000             85,419,000
Deferred stock-based compensation                                          (260,000)              (260,000)
Accumulated deficit                                                     (74,825,000)           (74,825,000)
                                                                       ------------           ------------
Total stockholders' deficit                                            ($ 5,337,189)          $ 13,612,811
                                                                       ------------           ------------
  Total capitalization                                                 ($ 5,243,189)          $ 13,706,811
                                                                       ============           ============



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

(1)      This table excludes outstanding options and warrants which if exercised
         into shares of common stock would result in NeoMedia issuing 33,605,007
         and 26,195,000, respectively, additional shares of common stock.

(2)      On September 24, 2003,  our  stockholders  approved an amendment to our
         articles of incorporation  that increased the authorized  capital stock
         to 1,000,000,000 shares of common stock.


                                       23



                      STANDBY EQUITY DISTRIBUTION AGREEMENT

         SUMMARY.  On  October  27,  2003,  we  entered  into a  Standby  Equity
Distribution  Agreement  with  Cornell  Capital  Partners,  LP.  Pursuant to the
Standby Equity Distribution Agreement,  we may, at our discretion,  periodically
sell to Cornell  shares of common stock for a total  purchase price of up to $20
million.  For each share of common  stock  purchased  under the  Standby  Equity
Distribution  Agreement,  Cornell  Capital  Partners  will pay 98% of the lowest
closing  bid  price  of our  common  stock  on the OTC  Bulletin  Board or other
principal  market on which our  common  stock is traded  for the 5 trading  days
immediately  following the notice date.  Cornell  Capital  Partners is a private
limited  partnership whose business operations are conducted through its general
partner,  Yorkville Advisors, LLC. Further, Cornell Capital Partners will retain
a fee of 5% of each advance under the Standby Equity Distribution  Agreement. In
addition,   we  engaged  Newbridge  Securities   Corporation,   an  unaffiliated
registered  broker-dealer,  to advise us in connection  with the Standby  Equity
Distribution  Agreement.  For its  services,  Newbridge  Securities  Corporation
received 95,238 shares of our common stock.

         On  February  14,  2003,  the SEC  declared  effective  a  registration
statement  on Form S-1  containing  100 million  shares  registered  under a $10
million Equity line of Credit  Agreement with Cornell  Capital  Partners.  Since
that date and through  December 12, 2003, we have received  gross  proceeds from
Cornell Capital Partners of $3,597,000, resulting in the sale to Cornell Capital
Partners of 100,000,000 shares of our common stock.

         At an  assumed  stock  price of $0.16 per share (the  closing  price on
December 12, 2003), we would need to issue 127,551,020 shares of common stock to
draw the entire $20  million  available  under the Standby  Equity  Distribution
Agreement.  This would represent  approximately 34% of our outstanding shares of
common  stock upon  issuance,  based on  243,878,428  shares  outstanding  as of
December 12, 2003. If this occurs, current NeoMedia shareholders will experience
dilution of their current NeoMedia holdings.

         STANDBY  EQUITY  DISTRIBUTION  AGREEMENT  EXPLAINED.  Pursuant  to  the
Standby Equity Distribution Agreement, we may periodically sell shares of common
stock to Cornell  Capital  Partners to raise capital to fund our working capital
needs.  The  periodic  sale of shares is known as an advance.  We may request an
advance every 7 days. A closing will be held 7 days after such written notice at
which time we will deliver shares of common stock and Cornell  Capital  Partners
will pay the advance amount, less the 5% retention.

         We may request advances under the Standby Equity Distribution Agreement
once the  underlying  shares are  registered  with the  Securities  and Exchange
Commission.  Thereafter,  we may continue to request  advances until the earlier
of: (i) the date Cornell  Capital  Partners  has advanced $20 million  under the
Standby  Equity  Distribution  Agreement,  or (ii) until two years from the date
this  registration  is  declared   effective  by  the  Securities  and  Exchange
Commission.

         The amount of each  advance is  subject  to a maximum of  $280,000  per
week, not to exceed  $840,000 in any 30-day period,  with a minimum of 6 trading
days  between   advances.   The  amount   available  under  the  Standby  Equity
Distribution  Agreement  is not  dependent  on the price or volume of our common
stock.  Cornell  Capital  Partners may not own more than 9.9% of our outstanding
common stock at any time.

         We cannot predict the actual number of shares of common stock that will
be issued  pursuant  to the  Standby  Equity  Distribution  Agreement,  in part,
because the  purchase  price of the shares will  fluctuate  based on  prevailing
market  conditions  and we have not  determined  the total amount of advances we
intend to draw. Nonetheless,  we can estimate the number of shares of our common
stock  that  will be  issued  using  certain  assumptions.  Since  our  previous
registration  including  100 million  shares under a $10 million  Equity Line of
Credit  for  Cornell  Capital  Partners  was  declared  effective  by the SEC on
February 14, 2003, we have received gross proceeds from Cornell Capital Partners
of $3,597,000,  resulting in the sale to Cornell Capital Partners of 100,000,000
shares of our common stock.  Proceeds used under the Standby Equity Distribution
Agreement will be used in the manner set forth in the "Use of Proceeds"  section
of this prospectus.  We cannot predict the total amount of proceeds to be raised
in this  transaction  because  we have not  determined  the total  amount of the
advances we intend to draw.

         We expect to incur expenses of approximately $50,000 in connection with
this  registration,  consisting  primarily of  professional  fees.  In addition,
Cornell Capital Partners will retain 5% of each advance,  and will pay us 98% of
the lowest  closing bid price of our common stock on the OTC  Bulletin  Board or
other  principal  trading  market on which our common  stock is traded for the 5
trading days  immediately  following the advance  date.  In connection  with the
Standby Equity  Distribution  Agreement,  we issued Cornell Capital  Partners an
additional  10 million  warrants  to purchase  shares of our common  stock at an
exercise  price of $0.05 per share.  In  addition,  we issued  95,238  shares of
common  stock,  valued at  $10,000,  to  Newbridge  Securities  Corporation,  an
unaffiliated registered broker-dealer, as a placement agent fee.


                                       24



                              PLAN OF DISTRIBUTION

         The selling  stockholders have advised us that the sale or distribution
of our common stock owned by the selling  stockholders may be effected  directly
to purchasers by the selling  stockholders or by pledgees,  transferees or other
successors  in  interest,  as  principals  or through one or more  underwriters,
brokers,  dealers or agents from time to time in one or more transactions (which
may involve crosses or block  transactions)  (i) on the OTC Bulletin Board or in
any other  market on which the price of our shares of common stock are quoted or
(ii) in  transactions  otherwise  than on the OTC Bulletin Board or in any other
market on which the price of our shares of common stock are quoted.  Any of such
transactions may be effected at market prices prevailing at the time of sale, at
prices related to such prevailing market prices, at varying prices determined at
the time of sale or at negotiated or fixed prices, in each case as determined by
the selling  stockholders or by agreement  between the selling  stockholders and
underwriters,  brokers,  dealers  or  agents,  or  purchasers.  If  the  selling
stockholders effect such transactions by selling their shares of common stock to
or through underwriters, brokers, dealers or agents, such underwriters, brokers,
dealers or agents may receive compensation in the form of discounts, concessions
or commissions  from the selling  stockholders or commissions from purchasers of
common stock for whom they may act as agent  (which  discounts,  concessions  or
commissions as to particular underwriters,  brokers, dealers or agents may be in
excess of those  customary in the types of transactions  involved).  The selling
stockholders  and  any  brokers,  dealers  or  agents  that  participate  in the
distribution  of the  common  stock may be deemed  to be  underwriters,  and any
profit on the sale of common  stock by them and any  discounts,  concessions  or
commissions received by any such underwriters, brokers, dealers or agents may be
deemed to be underwriting discounts and commissions under the Securities Act.

         Cornell Capital Partners is an "underwriter"  within the meaning of the
Securities  Act of 1933 in  connection  with the sale of common  stock under the
Standby Equity Distribution Agreement.  Cornell Capital Partners will pay us 98%
of the lowest closing bid price of our common stock on the OTC Bulletin Board or
other  principal  trading  market on which our common  stock is traded for the 5
trading days  immediately  following  the advance  date.  In  addition,  Cornell
Capital Partners will retain 5% of the proceeds received by us under the Standby
Equity  Distribution  Agreement.  The  2%  discount  and  the 5%  retention  are
underwriting  discounts.  In addition,  we issued 95,238 shares of common stock,
valued  at  $10,000,  to  Newbridge  Securities  Corporation,   an  unaffiliated
registered broker-dealer, as a placement agent fee.

         Cornell  Capital  Partners,  L.P.  was  formed  in  February  2000 as a
Delaware limited partnership.  Cornell Capital Partners is a domestic hedge fund
in the business of investing in and financing public companies.  Cornell Capital
Partners does not intend to make or market in  NeoMedia's  stock or to otherwise
engage in stabilizing or other  transactions  intended to help support the stock
price. Prospective investors should take these factors into consideration before
purchasing NeoMedia's common stock.

         Under the securities laws of certain states, the shares of common stock
may be sold in such  states  only  through  registered  or  licensed  brokers or
dealers.  The selling  stockholders are advised to ensure that any underwriters,
brokers,  dealers  or agents  effecting  transactions  on behalf of the  selling
stockholders are registered to sell securities in all fifty states. In addition,
in certain  states the shares of common  stock may not be sold unless the shares
have been  registered or qualified  for sale in such state or an exemption  from
registration or qualification is available and is complied with.

         We will pay all the expenses incident to the registration, offering and
sale  of  the  shares  of  common  stock  to the  public  hereunder  other  than
commissions, fees and discounts of underwriters, brokers, dealers and agents. We
have agreed to indemnify  Cornell Capital  Partners and its controlling  persons
against certain liabilities,  including liabilities under the Securities Act. We
estimate  that  the  expenses  of  the  offering  to  be  borne  by us  will  be
approximately  $50,000, and a one-time fee payable by the issuance of 10,000,000
warrants to purchase  shares of common  stock at an exercise  price of $0.05 per
share. In addition,  we engaged Newbridge Securities  Corporation,  a registered
broker-dealer,  to advise us in connection with the Standby Equity  Distribution
Agreement.  For its services,  Newbridge Securities  Corporation received 95,238
shares of our common stock, valued at $10,000. The offering expenses consist of:
a SEC registration fee of $348, printing expenses of $2,500,  accounting fees of
$15,000, legal fees of $25,000 and miscellaneous expenses of $7,152. We will not
receive any  proceeds  from the sale of any of the shares of common stock by the
selling stockholders. We will, however, receive proceeds from the sale of common
stock under the Standby Equity Distribution Agreement.

         The  selling  stockholders  should be aware that the  anti-manipulation
provisions  of  Regulation M under the Exchange Act will apply to purchases  and
sales of shares of common stock by the selling stockholders,  and that there are
restrictions on market-making  activities by persons engaged in the distribution
of the shares.  Under  Registration M, the selling  stockholders or their agents
may not bid for,  purchase,  or  attempt  to  induce  any  person  to bid for or
purchase,  shares of our  common  stock  while  such  selling  stockholders  are
distributing  shares covered by this  prospectus.  Accordingly,  except as noted
below,  the  selling  stockholders  are not  permitted  to cover  short sales by
purchasing   shares  while  the   distribution  is  taking  place.  The  selling
stockholders  are advised  that if a  particular  offer of common stock is to be
made on terms  constituting  a material  change from the  information  set forth
above with respect to the Plan of Distribution,  then, to the extent required, a
post-effective  amendment to the  accompanying  registration  statement  must be
filed with the Securities and Exchange Commission.


                                       25



            MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         The  following  information  should  be read in  conjunction  with  the
consolidated  financial  statements of NeoMedia and the notes thereto  appearing
elsewhere  in this  filing.  Statements  in  this  Management's  Discussion  and
Analysis or Plan of  Operation  and  elsewhere in this  prospectus  that are not
statements   of   historical   or  current  fact   constitute   "forward-looking
statements."

OVERVIEW

         Over the past  several  years,  our focus  has been  aimed  toward  the
intellectual property  commercialization  unit of our Internet Switching Systems
(NISS,  formerly  NAS)  business.  NISS  consists of the  patented  PaperClickTM
technology  that enables users to link directly from the physical to the digital
world, as well as the patents surrounding certain  physical-world-to-web linking
processes. Our mission is to invent, develop, and commercialize technologies and
products  that  effectively   leverage  the  integration  of  the  physical  and
electronic  to provide clear  functional  value for our  end-users,  competitive
advantage  for  their  business  partners  and  return-on-investment  for  their
investors. To this end, we have signed four intellectual property licenses since
our inception,  and also recently  acquired eight additional  patents as part of
our  acquisition  of Secure Source  Technologies,  Inc. On September 8, 2003, we
announced our PaperClick for Camera Cell Phones product, which reads and decodes
UPC/EAN or other bar codes to link users to the Internet,  providing information
and enabling  e-commerce  on a compatible  camera cell phone,  such as the Nokia
3650 model. On October 30, 2003, we unveiled our  go-to-market  strategy for the
product.  We have already  established  relationships  with several key partners
outlined  in  the  strategy,   including  agents  Big  Gig  Strategies  and  SRP
Consulting,   European   advertising   agency   12Snap,   and  worldwide   brand
communication company Seven.

         During the first quarter of 2003, we announced that that we had reached
an  agreement  in  principle  to acquire  and merge  with  Loch,  an oil and gas
provider  based in Humble,  Texas.  On October 1, 2003, we  discovered  that the
royalty  interest  from future sales of oil owned by Loch were  oversold,  which
would likely result in materially lower projected available cashflow from Loch's
operations. This projected available cashflow was the basis for the acquisition.
On October 2, 2003, the our Board of Directors voted to cancel the Memorandum of
Terms, and terminate the acquisition and merger proceedings.

         The  Company  recently  received  requests  from  the  SEC's  Southeast
Regional Office for certain  documents  including those concerning  negotiations
and  arrangements  with certain  strategic  partners and  consultants,  patents,
recent issuances of securities,  investor relations,  and the stock ownership by
the Company's  officers and directors.  The Company responded promptly and fully
and will cooperate with any further  requests.  The SEC's letter states that the
staff's  inquiry is informal and should not be construed as an indication of any
violation of law or as a reflection on any person, entity, or security.

         We recently announced the pending acquisitions of two companies:

         o        CSI  INTERNATIONAL,  INC. - On November  7, 2003,  we signed a
                  non-binding  letter of intent to  acquire  CSI  International,
                  Inc.  ("CSI"),   of  Calgary,   Alberta,   Canada,  a  private
                  technology   products   company  in  the  micro  paint  repair
                  industry.  The LOI calls for the issuance of 7,000,000  shares
                  of  our  common  stock  to  be  issued  in  exchange  for  all
                  outstanding  shares  of CSI.  In  addition,  we will  pay $2.5
                  million cash. CSI is a private technology and products company
                  in the micro paint repair industry.

         o        BSD SOFTWARE/TRITON  GLOBAL BUSINESS SERVICES - On December 9,
                  2003,  we signed a  non-binding  letter  of intent to  acquire
                  Triton Global  Business  Services Inc. and its parent company,
                  BSD  Software  Inc.  (Pink  Sheets:  BSDS),  both of  Calgary,
                  Alberta, Canada. The LOI outlined terms, including an exchange
                  of one  share  of our  common  stock  for  each  share  of BSD
                  Software,  not to exceed 40 million shares. The transaction is
                  dependent on due diligence by both companies,  approval by our
                  Board  of  Directors,   BSD  Software's  Board  of  Directors,
                  shareholders,   required  regulatory   approvals,   and  other
                  conditions.  Triton,  formed  in 1998 and  acquired  by BSD in
                  2002,  is an  Internet  Protocol-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.


                                       26


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

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED  SEPTEMBER 30, 2003 AS COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 2002

     Net sales.  Total net sales for the three months ended  September  30, 2003
were $461,000, which represented a $2,943,000,  or 86%, decrease from $3,404,000
for the three months ended September 30, 2002. This decrease  primarily resulted
from reduced resales of Sun Microsystems  equipment due to increased competition
and  general  economic  conditions.  NeoMedia  intends  to  continue  to  pursue
additional resales of equipment,  software and services,  and to the extent that
such sales can be made,  NeoMedia  expects resales to more closely  resemble the
results for the three months  ended  September  30, 2003,  rather than the three
months ended September 30, 2002.

     License  fees.  License  fees  were  $69,000  for the  three  months  ended
September 30, 2003, compared with $150,000, for the three months ended September
30, 2002, a decrease of $81,000,  or 54%.  NeoMedia  will continue to attempt to
increase  license  sales.  NeoMedia  expects  license fees to remain  materially
constant over the next 12 months.

     Resales of software and technology  equipment and service fees.  Resales of
software and technology  equipment and service fees decreased by $2,862,000,  or
88%, to $392,000 for the three months ended  September  30, 2003, as compared to
$3,254,000  for the  three  months  ended  September  30,  2002.  This  decrease
primarily resulted from increased  competition and general economic  conditions.
NeoMedia intends to continue to pursue additional resales of equipment, software
and services,  and to the extent that such sales can be made,  NeoMedia  expects
resales  to more  closely  resemble  the  results  for the  three  months  ended
September 30, 2003, rather than the three months ended September 30, 2002.

     Cost of Sales.  Cost of license fees was $76,000 for the three months ended
September 30, 2003, a decrease of $4,000, or 0.5%, compared with $80,000 for the
three months ended  September 30, 2002. The decrease is consistent with 2003 and
NeoMedia  expects  license fees will not fluctuate  materially  over the next 12
months.  Cost of resales was $378,000 for the three months ended  September  30,
2003, a decrease of $2,364,000,  or 86%,  compared with $2,742,000 for the three
months ended  September 30, 2002. The decrease  resulted from decreased  resales
for the three months ended  September  30, 2003 compared with the same period in
2002.  Cost of  resales as a  percentage  of  related  resales  was 96% in 2003,
compared  to 84% in 2002.  This  increase  is due to an  increased  sales mix of
lower-margin equipment products sold in 2003 compared to 2002, combined with the
general  erosion  of margins in the resale  sector.  NeoMedia  expects  costs of
resales to fluctuate  with the sales of its  equipment,  software,  and services
over the next 12 months.

     Gross Profit.  Gross profit was $7,000 for the three months ended September
30, 2003,  compared with $582,000 for the three months ended September 30, 2002.
This decrease of $575,000, or 99%, was the result of lower resales of, and lower
margins on, computer equipment, software, and services in 2003 relative to 2002.

     Sales and  marketing.  Sales and  marketing  expenses were $146,000 for the
three months ended September 30, 2003, a decrease of $61,000,  or 29%,  compared
with  $207,000 for the three  months ended  September  30, 2002.  This  decrease
resulted  primarily from reduced sales commissions earned on lower sales in 2003
as  compared  with  2002,  as well as a smaller  sales  force in 2003.  NeoMedia
expects sales and marketing  expense to fluctuate  with sales of it  proprietary
and resold products over the next 12 months.


                                       27



     General and administrative.  General and administrative  expenses increased
by $944,000,  or 95%, to  $1,940,000  for the three months ended  September  30,
2003,  compared to $996,000 for the three months ended  September 30, 2002.  The
increase  resulted  primarily from non-cash  expenses  relating to the Company's
option repricing program,  expense for stock options issued with exercise prices
below market price,  and  stock-based  professional  service  expense.  NeoMedia
expects general and  administrative  expense to remain materially  constant over
the next 12 months.

     Research and development. During the three months ended September 30, 2003,
NeoMedia  charged to expense  $78,000  of  research  and  development  costs,  a
decrease of $72,000 or 48% compared to $150,000 charged to expense for the three
months ended  September  30, 2002.  The decrease is primarily due to a continued
reduction in research and development  overhead since the first quarter of 2002.
NeoMedia  expects research and development  costs will not fluctuate  materially
over the next 12 months.

     (Gain)  loss on  extinguishment  of debt.  During  the three  months  ended
September 30, 2003,  the Company  recognized a net loss from  extinguishment  of
debt of $24,000 due to the difference  between the cash or market value of stock
issued  to  settle  debt  and the  carrying  value  of the  debt at the  time of
settlement.

     Interest   expense/(income),   net.  Interest   expense/(income)   consists
primarily of interest accrued for creditors as part of financed purchases,  past
due balances,  notes payable and interest earned on cash equivalent investments.
Interest  expense/(income)  increased by $22,000 to $24,000 for the three months
ended  September  30, 2003 from $2,000 for the three months ended  September 30,
2002, due to interest  expense during the third quarter of 2003  associated with
notes payable and past due trade accounts payable.

     Net Loss.  The net loss for the three months ended  September  30, 2003 was
$2,205,000,  which  represented  a  $1,432,000,  or 185% increase from a loss of
$773,000 for the three months ended  September 30, 2002.  The increase  resulted
primarily  from  non-cash  expenses  in 2003  relating to the  company's  option
repricing  program,  expense for stock options issued with exercise prices below
market price, and stock-based  professional  service  expense,  as well as lower
sales and gross profit in 2003 compared to 2002.

RESULTS OF OPERATIONS  FOR THE NINE MONTHS ENDED  SEPTEMBER 30, 2003 AS COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 2002

     Net sales.  Total net sales for the nine months  ended  September  30, 2003
were  $2,009,000,   which  represented  a  $6,443,000,  or  76%,  decrease  from
$8,452,000 for the nine months ended September 30, 2002. This decrease primarily
resulted  from reduced  resales of Sun  Microsystems  equipment due to increased
competition and general  economic  conditions.  NeoMedia  intends to continue to
pursue additional resales of equipment, software and services, and to the extent
that such sales can be made,  NeoMedia  expects resales to more closely resemble
the results for the nine months ended  September 30, 2003,  rather than the nine
months ended September 30, 2002.

     License  fees.  License  fees  were  $338,000  for the  nine  months  ended
September 30, 2003, compared with $303,000,  for the nine months ended September
30, 2002, an increase of $35,000,  or 12%.  NeoMedia will continue to attempt to
increase sales of these high-margin  products.  NeoMedia expects license fees to
remain materially constant over the next 12 months.

     Resales of software and technology  equipment and service fees.  Resales of
software and technology  equipment and service fees decreased by $6,478,000,  or
79%, to $1,671,000 for the nine months ended  September 30, 2003, as compared to
$8,149,000 for the nine months ended September 30, 2002. This decrease primarily
resulted from increased  competition and general economic  conditions.  NeoMedia
intends to continue to pursue  additional  resales of  equipment,  software  and
services,  and to the  extent  that  such  sales can be made,  NeoMedia  expects
resales to more closely resemble the results for the nine months ended September
30, 2003, rather than the nine months ended September 30, 2002.

     Cost of Sales.  Cost of license fees was $227,000 for the nine months ended
September 30, 2003, a decrease of $537,000,  or 70%,  compared with $764,000 for
the nine months ended  September  30, 2002.  The decrease  resulted from reduced
amortization  expense in 2003 of capitalized  development  costs relating to the
PaperClick,  MLM/Affinity,  and Qode products that were written off during 2002.
Cost of resales was $1,566,000  for the nine months ended  September 30, 2003, a
decrease of  $5,041,000,  or 76%,  compared with  $6,607,000 for the nine months
ended September 30, 2002. The decrease  resulted from decreased  resales in 2003
compared with 2002.  Cost of resales as a percentage of related  resales was 94%
for the nine  months  ended  September  30,  2003,  compared to 82% for the same
period in 2002.  This increase is due to an increased  sales mix of lower-margin
equipment  products  sold in 2003  compared to 2002,  combined  with the general
erosion of margins in the resale  sector.  NeoMedia  expects costs of resales to
fluctuate with the sales of its equipment,  software, and services over the next
12 months.


                                       28



     Gross Profit. Gross profit was $216,000 for the nine months ended September
30, 2003, compared with $1,081,000 for the nine months ended September 30, 2002.
This decrease of $865,000, or 80%, was primarily the result of lower resales of,
and lower margin on, computer equipment, software, and services in 2003 relative
to 2002.

     Sales and  marketing.  Sales and  marketing  expenses were $407,000 for the
nine months ended September 30, 2003, a decrease of $312,000,  or 43%,  compared
with  $719,000  for the nine months ended  September  30,  2002.  This  decrease
resulted  primarily from reduced sales commissions earned on lower sales in 2003
as  compared  with  2002,  as well as a smaller  sales  force in 2003.  NeoMedia
expects sales and marketing  expense to fluctuate  with sales of it  proprietary
and resold products over the next 12 months.

     General and administrative.  General and administrative  expenses decreased
by $147,000,  or 4%, to $3,409,000 for the nine months ended September 30, 2003,
compared to  $3,556,000  for the nine  months  ended  September  30,  2002.  The
increase  resulted  primarily from non-cash  expenses  relating to the company's
option repricing program,  expense for stock options issued with exercise prices
below market price,  and  stock-based  professional  service  expense.  NeoMedia
expects general and  administrative  expense to remain materially  constant over
the next 12 months.

     Research and development.  During the nine months ended September 30, 2003,
NeoMedia  charged to expense  $243,000  of research  and  development  costs,  a
decrease of $440,000 or 64% compared to $683,000 charged to expense for the nine
months ended  September  30, 2002.  The decrease is primarily due to a continued
reduction  in  research  and  development  overhead  since first  quarter  2002.
NeoMedia  expects research and development  costs will not fluctuate  materially
over the next 12 months.

     Loss on  Impairment of Assets.  During the nine months ended  September 30,
2002,  NeoMedia  recognized a loss on impairment of assets of $1,003,000 for the
write-off   capitalized   development   costs   relating   to   its   PaperClick
physical-world-to-internet  software. NeoMedia did not take an impairment charge
during the nine months ended September 30, 2003.

     (Gain)  loss on  extinguishment  of debt.  During  the three  months  ended
September 30, 2003,  the Company  recognized a net loss from  extinguishment  of
debt of $24,000, due to the difference between the cash or market value of stock
issued  to  settle  debt  and the  carrying  value  of the  debt at the  time of
settlement.

     Interest  expense  (income),   net.  Interest   expense/(income)   consists
primarily of interest accrued for creditors as part of financed purchases,  past
due balances,  notes payable and interest earned on cash equivalent investments.
Interest expense/(income) increased by $94,000, or 95%, to $193,000 for the nine
months ended September 30, 2003 from $99,000 for the nine months ended September
30, 2002, due to interest  expense  during the third quarter of 2003  associated
with notes payable and past due trade accounts payable.

     Loss on  Disposal of  Discontinued  Business  Unit.  During the nine months
ended  September  30,  2002,  the  Company  recognized  a loss  on  disposal  of
discontinued business unit of $1,523,000 to write off the remaining Qode-related
assets. No disposal loss was recognized in 2003.

     Net Loss.  The net loss for the nine months  ended  September  30, 2003 was
$4,060,000,  which  represented  a  $2,442,000,  or 38% decrease  from a loss of
$6,502,000 for the nine months ended  September 30, 2002. The decrease  resulted
primarily  from an  impairment  charge  of  $1,003,000  relating  to  NeoMedia's
PaperClick  assets and a loss on disposal of the Company's Qode business unit of
$1,523,000 in 2002. The decrease was offset by higher non-cash  expenses in 2003
relating to the company's  option repricing  program,  expense for stock options
issued with exercise  prices below market price,  and  stock-based  professional
service  expense,  as well as lower sales and gross  profit in 2003  compared to
2002.

RESULTS OF  OPERATIONS  FOR THE YEAR ENDED  DECEMBER 31, 2002 AS COMPARED TO THE
YEAR ENDED DECEMBER 31, 2001

     NET SALES.  Total net sales for the year ended  December 31, 2002 were $9.4
million,  which  represented a $1.3 million,  or 16%, increase from $8.1 million
for the year ended  December 31, 2001.  This  increase  primarily  resulted from
revenues relating to our newly created SAN practice in 2002. We will continue to
pursue  additional  sales of SAN products and  services,  and to the extent that
such sales can be made,  we expect total net sales to more closely  resemble the
results for the first nine months of 2002,  rather than the first nine months of
2001.


                                       29



     LICENSE  FEES.  License fees were $0.4 million for the year ended  December
31, 2002,  compared  with $0.6  million for the year ended  December 31, 2001, a
decrease  of $0.2  million,  or 33%.  The  decrease  was due to  lower  sales of
internally  developed  software  licenses in 2002.  Demand for such licenses has
historically  fluctuated  from year to year.  We intend to  continue to increase
sales efforts of its internally developed software licenses in the future.

     RESALES OF SOFTWARE AND TECHNOLOGY  EQUIPMENT AND SERVICE FEES.  Resales of
software and technology equipment and service fees increased by $1.4 million, or
18%, to $9.0 million for the year ended  December 31, 2002,  as compared to $7.6
million for the year ended December 31, 2001. This increase  primarily  resulted
from  revenues  relating  to our newly  created SAN  practice  in 2002.  We will
continue to pursue  additional  sales of SAN products and  services,  and to the
extent that such sales can be made, we expect  resales to more closely  resemble
the results for the first nine months of 2002, rather than the first nine months
of 2001.

     COST OF SALES.  Cost of license  fees was $0.8  million  for the year ended
December  31,  2002,  a decrease of $1.6  million,  or 67%,  compared  with $2.4
million for the year ended December 31, 2001. The decrease resulted from reduced
amortization  expense of capitalized  development  costs in 2002 relating to the
PaperClick,  MLM/Affinity,  and Qode products that were written off during 2002.
Cost of resales  was $7.4  million  for the year ended  December  31,  2002,  an
increase of $0.9 million,  or 14%, compared with $6.5 million for the year ended
December 31, 2001. The increase resulted form increased resales in 2002 compared
with 2001.  Cost of resales as a percentage of related  resales was 83% in 2002,
compared  to 86% in 2001.  This  decrease  is due to an  increased  sales mix of
higher-margin equipment products sold in 2002 compared to 2001.

     GROSS PROFIT. Gross profit was $1.1 million for the year ended December 31,
2002, an increase of $1.8 million,  or 257%, compared with negative gross profit
of $(0.7) million for the year ended December 31, 2001. This increase  primarily
resulted from revenues relating to our higer-margin SAN practice in 2002.

     SALES AND MARKETING. Sales and marketing expenses were $1.0 million for the
year ended  December  31,  2002,  compared  to $2.5  million  for the year ended
December 31, 2001, a decrease of $1.5  million or 60%.  This  decrease  resulted
from a reduction in sales and marketing  personnel  following our cost-reduction
initiative  started  in the  second  half of 2001.  We do not  expect  sales and
marketing  expenses to fluctuate  dramatically from 2002 levels over the next 12
months.

     GENERAL AND ADMINISTRATIVE.  General and administrative  expenses decreased
by $0.7 million,  or 15%, to $4.1 million for the year ended  December 31, 2001,
compared to $4.8  million for the year ended  December  31,  2001.  The decrease
resulted primarily from a smaller  administrative staff after the cost reduction
initiative  of late  2001.  We expect  general  and  administrative  expense  to
decrease  slightly  during 2003 due to reduced  professional  service  expenses,
lease restructuring, and other cost reduction efforts.

     RESEARCH AND  DEVELOPMENT.  During the year ended  December  31,  2002,  we
charged to expense $0.8 million of research and  development  costs, an increase
of $0.3 million or 60% compared to $0.5 million  charged to expense for the year
ended  December 31, 2000. The increase is primarily due to the fact that we were
capitalizing the majority of its product  development  costs in 2001 as the Qode
Commerce Solution was being  implemented.  The  implementation was cancelled and
the product  discontinued in the third quarter of 2001. During the third quarter
of 2002, development resources were devoted primarily to system maintenance.  We
expect research and development costs will decline during 2003.

     LOSS ON  IMPAIRMENT  OF  ASSETS.  During  2002,  we  wrote  off all  assets
associated with its PaperClickTM product line, resulting in an impairment charge
of $1.0  million.  During  2001,  we wrote off all  assets  associated  with its
discontinued  MLM/Affinity  product line,  resulting in an impairment  charge of
$2.9 million. We do not expect to take any additional losses form the impairment
of capitalized software products during 2003.

     LOSS ON DIGITAL:CONVERGENCE  CONTRACT. During 2001, we wrote off all assets
and   liabilities   relating  to  its   intellectual   property   license   with
Digital:Convergence,  resulting in a net charge of $7.4  million.  There were no
charges related to this contract in 2002. We do not expect any charges  relating
to this contract in the future.

     INTEREST  EXPENSE  (INCOME),   NET.  Interest   expense/(income)   consists
primarily of interest  paid to creditors  as part of financed  purchases,  notes
payable and our asset-based collateralized line of credit net of interest earned
on cash equivalent investments. Interest expense/(income) increased by $199,000,
or 948%, to $178,000 for the year ended December 31, 2002 from $(21,000) for the
year ended  December 31, 2001,  due to reduced cash  balances and the  resulting
increased  borrowing  costs  associated  with notes payable and other  borrowing
instruments throughout 2002 as compared to 2001.


                                       30



     LOSS FROM CONTINUING  OPERATIONS.  During the year ended December 31, 2002,
our loss from continuing operations decreased by $12.9 million or 69% from $18.8
million in 2001 to $5.9 million in 2002.  The decrease  resulted  primarily from
the $7.4 million  write-off of the Digital  Convergence  license contract during
the  second  quarter  of  2001,  combined  with  a  loss  on  impairment  of our
MLM/Affinity  product  line of $2.9  million in 2001 and a decrease of sales and
marketing  expense by $1.4  million in 2002 due to a reduction  of the sales and
marketing force.

     LOSS FROM OPERATIONS OF DISCONTINUED OPERATIONS. We discontinued operations
of its Qode  business  unit in 2001,  resulting  in a loss  from  operations  of
discontinued  business units of $3.6 million.  There was no loss from operations
of this unit during 2002.

     LOSS ON DISPOSAL OF  DISCONTINUED  OPERATIONS.  We sustained a loss of $3.1
million  in 2001 from the  disposal  of its Qode  business  unit in 2001.  As of
December 31, 2001, we reported net assets held for sale of $210,000  relating to
this business  unit,  the sale of which was subject to a  non-binding  letter of
intent with The Finx Group,  Inc., a holding company based in Elmsford,  NY. The
Finx Group was to assume  $620,000 in Qode  payables  and  $800,000 in long-term
leases in exchange for 500,000  shares of the Finx Group,  right to use and sell
Qode  services,  and up to $5 million in  affiliate  revenues  over a  five-year
period.  During June 2002,  the Finx Group notified us that it did not intend to
carry out the letter of intent due to capital constraints.  As a result,  during
the year ended  December 31,  2002,  we recorded an  additional  expense of $1.5
million for the write-off of remaining Qode assets and liabilities.

     NET  LOSS.  The net loss  for the year  ended  December  31,  2002 was $7.4
million, which represented a $18.1 million, or 71% decrease from a $25.5 million
loss for the year ended December 31, 2001. The decrease  primarily resulted from
the $7.4 million  write-off of the Digital  Convergence  license contract during
the second  quarter of 2001, a loss on  impairment of our  MLM/Affinity  product
line of $2.9 million in 2001,  loss from  discontinued  Qode  operations of $6.9
million in 2001, and a reduction in overhead expenses resulting from a reduction
in force initiated in the third quarter of 2001.

RESULTS OF  OPERATIONS  FOR THE YEAR ENDED  DECEMBER 31, 2001 AS COMPARED TO THE
YEAR ENDED DECEMBER 31, 2000

         NET SALES.  Total net sales for the year ended  December  31, 2001 were
$8.1 million,  which represented a $19.5 million, or 70.1%,  decrease from $27.6
million for the year ended December 31, 2000. This decrease  primarily  resulted
from reduced resales of Sun Microsystems  equipment due to increased competition
and general  economic  conditions.  Additionally,  we recognized $7.8 million of
revenue in 2000 related to the DC license  contract.  No revenue was  recognized
related to this  contract  in 2001.  We expect  net sales in 2002 will  increase
significantly  from  2001,  due to a  resurgence  in  demand  for  software  and
technology  equipment and services,  combined with  anticipated  revenue streams
from intellectual property licenses.

         Total net sales  during the fourth  quarter of 2001 were $4.5  million,
compared  with $0.9  million in the third  quarter of 2001,  $1.2 million in the
second  quarter  of 2001,  and $1.5  million in the first  quarter of 2001.  The
fourth-quarter  increase is primarily  due to a large Storage Area Network (SAN)
sale of $1.1 million in that quarter.  Additionally,  sales from our  Consulting
and  Integration  Services  business unit have been  historically  higher in the
fourth quarter of the calendar year.

         LICENSE  FEES.  License  fees  were  $0.6  million  for the year  ended
December 31, 2001,  compared  with $8.4 million for the year ended  December 31,
2000, a decrease of $7.8 million, or 92.9%. The decrease resulted primarily from
the   recognition   of  $7.8  million   revenue   during  2000  related  to  the
Digital:Convergence  license contract. No revenue was recognized related to this
contract in 2001. We are  anticipating  license  revenue growth in 2002 compared
with  2001  as  we  aggressively   pursue  license  contracts  relating  to  our
intellectual property.

         RESALES OF SOFTWARE AND TECHNOLOGY  EQUIPMENT AND SERVICE FEES. Resales
of software  and  technology  equipment  and  service  fees  decreased  by $11.5
million,  or 63.4%,  to $7.6 million for the year ended  December  31, 2001,  as
compared to $19.1  million for the year ended  December 31, 2000.  This decrease
primarily  resulted  from  fewer  sales  of  Sun  Microsystems  hardware  due to
increased competition and general economic conditions. We believe that resurgent
demand for such  products,  combined  with our movement  into higher  margin and
Value-Add  products and services such as Storage Area  Networks,  will result in
increased revenue from resales of software and technology  equipment and service
fees during 2002.

         COST OF SALES.  Cost of resales as a percentage of related  resales was
86.0% in 2001,  compared to 90% in 2000. This decrease is substantially due to a
sales  mix of  higher-margin  products  such as  service  fees  and  maintenance
contracts.


                                       31



         SALES AND  MARKETING.  A portion of the  compensation  to the sales and
marketing staff  constitutes  salary and is fixed in nature and the remainder of
this compensation,  which is paid as a commission,  is directly related to sales
volume.  Sales and  marketing  expenses  were $2.5  million  for the year  ended
December  31,  2001,  compared to $6.5  million for the year ended  December 31,
2000, a decrease of $4.0 million or 61.5%. This decrease primarily resulted from
fewer marketing  personnel in 2001, coupled with a decrease in sales commissions
from reduced  sales.  Sales and  marketing  expense will continue to decrease in
2002 as we move away from its applications service provider model.

         GENERAL  AND  ADMINISTRATIVE.   General  and  administrative   expenses
decreased by $2.2 million, or 30.1%, to $4.8 million for the year ended December
31,  2001,  compared to $7.0 million for the year ended  December 31, 2000.  The
decrease is  primarily  related to a reduction  in  personnel as a result of our
cost reduction  initiative.  We expect general and administrative  expenses will
continue   to  decline  in  2002  as  we  realize  the   full-year   benefit  of
cost-reduction measures begun in the fourth quarter of 2001.

         RESEARCH AND  DEVELOPMENT.  During the year ended December 31, 2001, we
charged to expense $0.5 million of research and development costs, a decrease of
$0.6 million or 54.5%  compared to $1.1 million  charged to expense for the year
ended  December  31,  2000.  This  decrease  is  predominately  associated  with
decreased  personnel devoted to our development  during the second half of 2001,
combined with increased  capitalization of software development costs associated
with our "switching"  platform and the Qode Universal  Commerce  Solution during
the first half of 2001. We expect research and  development  expense to continue
to decrease in 2002 as we move away from its applications service provider model

         LOSS ON  IMPAIRMENT  OF ASSETS.  During the third  quarter of 2001,  we
wrote off all assets associated with its discontinued MLM/Affinity product line,
resulting in an impairment charge of $2.9 million.

         LOSS ON  DIGITAL:CONVERGENCE.  During  the second  quarter of 2001,  we
wrote off all assets  and  liabilities  relating  to its  intellectual  property
license with Digital:Convergence, resulting in a net charge of $7.4 million.

         INTEREST EXPENSE  (INCOME),  NET.  Interest  expense/(income)  consists
primarily of interest  paid to creditors  as part of financed  purchases,  notes
payable and our asset-based collateralized line of credit net of interest earned
on cash equivalent  investments.  Interest  (income)  decreased by $153,000,  or
87.9%, to $(21,000) for the year ended December 31, 2001 from $(174,000) for the
year ended  December 31, 2000, due to reduced cash balances  throughout  2001 as
compared to 2000.

         LOSS FROM  CONTINUING  OPERATIONS.  During the year ended  December 31,
2001, our loss from continuing  operations  increased by $13.4 million or 248.1%
from $5.4 million in 2000 to $18.8  million in 2001.  This increase is primarily
due to the  loss  on the  Digital:Convergence  license  contract  of $7.4 in the
second  quarter  of 2001 and an  impairment  loss of $2.8  million  in the third
quarter of 2001 related to the discontinuation of our MLM/Affinity product line.

         LOSS FROM  OPERATIONS  AND  DISPOSAL  OF  DISCONTINUED  OPERATIONS.  We
discontinued  operations of our Qode business unit in 2001,  resulting in a loss
from  operations of  discontinued  business units of $3.6 million.  There was no
loss from this  business  unit during  2000.  The  business  unit's  assets were
purchased in March 2001 and the  implementation  was cancelled during the second
quarter of 2001.

         LOSS ON DISPOSAL OF  DISCONTINUED  OPERATIONS.  We  sustained a loss of
$3.1 million in 2001 from the disposal of the Qode business unit in 2001.

         NET LOSS.  Our net loss for the year ended  December 31, 2001 was $25.5
million,  which  represented  a $20.1  million,  or 372.2%  increase from a $5.4
million loss for the year ended  December 31, 2000.  The increase in net loss is
due  primarily to the loss on the  Digital:Convergence  contract,  an impairment
loss of in the third  quarter  of 2001  related  to the  discontinuation  of our
MLM/Affinity product line and the discontinuation of our Qode business unit, and
reduced resales of software and technology  equipment and service fees resulting
from increased  competition  and general  economic  conditions,  offset by lower
expenses as a result of our cost reduction effort.


                                       32



LIQUIDITY AND CAPITAL RESOURCES

         As of September 30, 2003, our cash balance was  $1,048,000  compared to
$9,000 at  September  30, 2002,  $70,000 at December  31, 2002,  and $134,000 at
December 31, 2001.

         Net cash used in operating activities was approximately  $2,057,000 for
the nine-month  period ended September 30, 2003,  compared with $589,000 for the
nine-month  period  ended  September  30,  2002.  During the nine  months  ended
September 30, 2003,  trade accounts  receivable  inclusive of costs in excess of
billings decreased $149,000, while accounts payable, amounts due under financing
arrangements,  accrued expenses, and deferred revenue decreased $698,000. During
the nine months ended September 30, 2002,  trade accounts  receivable  increased
$610,000,  while accounts  payable,  amounts due under  financing  arrangements,
accrued expenses, and deferred revenue increased $2,067,000. NeoMedia's net cash
flow from/(used in) investing activities for the nine months ended September 30,
2003 and 2002, was ($64,000) and ($24,000),  respectively.  Net cash provided by
financing  activities for the nine months ended September 30, 2003 and 2002, was
$3,099,000 and $488,000, respectively.

     During the nine  months  ended  September  30,  2003 and 2002 and the years
ended  December 31, 2002,  2001,  and 2000,  our net loss totaled  approximately
$4,060,000, $5,729,000, $7,421,000,  $25,469,000, and $5,409,000,  respectively.
As of  September  30,  2003,  we  had  accumulated  losses  from  operations  of
approximately  $74,825,000,  had a  working  capital  deficit  of  approximately
$8,134,000, and approximately $1,048,000 in cash balances.

         Net cash used in operating  activities  for the year ended December 31,
2002,  2001, and 2000, was $0.6, $5.2 million,  and $6.8 million,  respectively.
During 2002, trade accounts  receivable  decreased $2.3 million,  while accounts
payable,  accrued expenses and deferred revenue  decreased $0.5 million.  During
2001,  trade  accounts  receivable  inclusive  of costs in  excess  of  billings
increased $0.7 million,  while accounts  payable,  accrued expenses and deferred
revenue increased $2.8 million. During 2000, trade accounts receivable inclusive
of costs in excess  billings  increased $1.3 million,  while  accounts  payable,
accrued expenses and deferred revenue decreased $2.6 million.  Our net cash flow
provided by (used in)  investing  activities  for the years ended  December  31,
2002,  2001,  and  2000,  was  $42,000,  ($2.8  million),  and  ($2.6  million),
respectively.  This decrease resulted from reduced capital spending in an effort
to control costs.

     During the years  ended  December  31,  2002,  2001,  and 2000 our net loss
totaled approximately $7,421,000, $25,469,000, and $5,409,000,  respectively. As
of December 31, 2002 we had accumulated  losses from operations of approximately
$70,765,000,  had a working capital  deficit of  approximately  $8,985,000,  and
approximately $70,000 in cash balances.

     The accompanying unaudited financial statements have been prepared assuming
NeoMedia will continue as a going concern. Accordingly, the financial statements
do not include any adjustments  that might result from  NeoMedia's  inability to
continue as a going concern. NeoMedia may obtain up to $20 million over the next
two years  through its Standby  Equity  Distribution  Agreement  agreement  with
Cornell  Capital  Partners LP. As of December  12,  2003,  NeoMedia had obtained
approximately  $3.6 million under its previous $10 million Equity Line of Credit
Agreement with Cornell.  Management  believes that it has sufficient  funding to
sustain  operations  through  December  31,  2003,  however,  there  can  be  no
assurances  that the  market  for  NeoMedia's  stock  will  support  the sale of
sufficient  shares of  NeoMedia's  common stock to raise  sufficient  capital to
sustain  operations  for such a period.  If necessary  funds are not  available,
NeoMedia's business and operations would be materially adversely affected and in
such event, NeoMedia would attempt to reduce costs and adjust its business plan.

     Management  believes it will need to have access to additional capital from
the Cornell Standby Equity  Distribution  Agreement agreement or other financing
sources, or we will need to generate additional cash from our current operations
to sustain our operations in 2003. The failure of management to accomplish these
initiatives  will  adversely  affect our  business,  financial  conditions,  and
results of operations and its ability to continue as a going concern.

     Based on current cash  balances and operating  budgets,  we believe we only
have  sufficient  financing to last until  December 31, 2003.  If our  financial
resources  are  insufficient,  we may be  forced  to seek  protection  from  its
creditors  under the United States  Bankruptcy  Code or analogous state statutes
unless it is able to engage in a merger or other corporate  finance  transaction
with a better capitalized entity. We cannot predict whether additional financing
will be available,  its form,  whether equity or debt, or be in another form, or
if  NeoMedia  will be  successful  in  identifying  entities  with  which it may
consummate a merger or other corporate finance transactions.


                                       33



INTANGIBLE ASSETS

         At the end of each  quarter,  or upon  occurrence  of  material  events
relating to a specific  intangible item, we perform  impairment tests on each of
its intangible assets,  which include  capitalized patent costs, and capitalized
and purchased  software  costs.  In doing so, we evaluate the carrying  value of
each  intangible  asset with respect to several  factors,  including  historical
revenue generated from each intangible  asset,  application of the assets in our
current  business  plan,  and  projected  revenue to be derived  from the asset.
Intangible  asset  balances are then  adjusted to their  current net  realizable
value based on these  criteria if  impaired.  No  impairment  charges were taken
during the three-month or nine-month  periods ended  September 30, 2003.  During
the nine months ended September 30, 2002, we recognized an impairment  charge of
$1.0 million relating to our PaperClick software product.

FINANCING AGREEMENTS

         As of  September  30,  2003,  we were party to a  commercial  financing
agreement with GE Access that provides short-term financing for certain computer
hardware  and  software  purchases.   This  arrangement  allows  us  to  re-sell
high-dollar  technology equipment and software without committing cash resources
to financing the purchase.  We and GE Access are  currently  operating  under an
additional  arrangement  under which GE Access  retains 50% of our proceeds from
sales financed by GE Access, and applies the portion of proceeds toward past due
balances.  This  arrangement  reduces  by half our cash  flow  from  resales  of
equipment  and  software  financed by GE Access,  until the  balance  owed to GE
Access is paid in full.  During October 2003, the Company and GE entered into an
additional  agreement under which the Company also makes regular payment against
its past due balances.  Termination of our financing relationship with GE Access
could materially  adversely affect our financial  condition.  Management expects
the  agreement to remain in place in the near future.  As of September 30, 2003,
the amount payable under this financing arrangement was approximately $345,000.

OTHER DEBTS

     On  December  2,  2002,  we  issued  to  Michael  Kesselbrenner,  a private
investor,  a  promissory  note in the  principal  amount  of  $165,000,  bearing
interest at a rate of 12% per annum,  with a maturity of 150 days. In connection
with the default  provision  of the  promissory  note,  we entered into a pledge
agreement,  dated December 2, 2002, under which we issued  53,620,020  shares of
common stock to an unrelated third party as collateral for the Promissory  Note.
The investor only funded $84,000 of the principal  amount of the note. We repaid
this note during March 2003, and the shares held in escrow were returned  during
April 2003. We have no further obligation under this note.


                                       34



     During November 2002, we issued  Convertible  Secured Promissory Notes with
an aggregate face value of $60,000 to 3 separate  parties,  including Charles W.
Fritz,  Chairman of the Board of  Directors of  NeoMedia;  William E. Fritz,  an
outside  director;  and James J.  Keil,  an  outside  director.  The notes  bear
interest  at a rate of 15% per annum,  and  matured  at the  earlier of i.) four
months,  or ii.) the date the  shares  underlying  the  Cornell  Standby  Equity
Distribution  Agreement are registered with the SEC. The notes were convertible,
at the option of the holder, into either cash or shares of our common stock at a
30% discount to either market price upon closing, or upon conversion,  whichever
is lower. We also granted to the holders an additional  1,355,670  shares of its
common stock and 60,000 warrants to purchase shares of its common stock at $0.03
per share,  with a term of three  years.  The warrants and shares were issued in
January 2003.  In addition,  since this debt is  convertible  into equity at the
option of the note holder at beneficial conversion rates, an embedded beneficial
conversion  feature was  recorded as a debt  discount  and  amortized  using the
effective interest rate over the life of the debt in accordance with EITF 00-27.
Total cost of beneficial conversion feature, fair value of the stock and cost of
warrants  issued  exceed the face value of the notes  payable,  therefore,  only
$60,000,  the face amount of the note, was  recognizable  as debt discount,  and
amortized  over the life of the notes  payable.  During  March 2003,  two of the
affiliated  parties,  Mr.  William  Fritz and Mr.  Keil,  agreed  to extend  the
maturity date due to our capital constraints.  We repaid Charles Fritz's note in
full during  March 2003,  and repaid  James J. Keil's note in full during  April
2003.  We paid  $30,000 of the  principal  on William  Fritz's note during April
2003, and entered into a new note with Mr. Fritz for the remaining $10,000.  The
new note bears  interest  at a rate of 10% per annum and  matures in April 2004.
The new note also includes a provision  under which,  as  consideration  for the
loan, Mr. Fritz will receive a 3% royalty on all future  revenue  generated from
our intellectual property.

GOING CONCERN

         The accompanying  condensed consolidated financial statements have been
prepared on a going concern basis,  which contemplates the realization of assets
and the  satisfaction  of liabilities in the normal course of business.  Through
September 30, 2003, we have not been able to generate  sufficient  revenues from
our operations to cover our costs and operating expenses.  Although we have been
able to issue its common stock or other  financing for a significant  portion of
its expenses, it is not known whether we will be able to continue this practice,
or if our  revenue  will  increase  significantly  to be able to meet  our  cash
operating expenses. This, in turn, raises substantial doubt about our ability to
continue as a going concern.  Management  believes that we will be able to raise
additional funds through our $20 million Standby Equity  Distribution  Agreement
with Cornell.  However, there can be no assurances that the market for our stock
will  support  the sale of  sufficient  shares of our stock to raise  sufficient
capital to sustain operations. The accompanying condensed consolidated financial
statements do not include any adjustments  that might result from the outcome of
these uncertainties.

CRITICAL ACCOUNTING POLICIES

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

      Inventory  Valuation.  Our policy is to value  inventories at the lower of
cost or market on a part-by-part  basis. This policy requires management to make
estimates regarding the market value of our inventories, including an assessment
of excess or obsolete inventories.  We determine excess and obsolete inventories
based on an estimate of the future  demand for our  products  within a specified
time horizon, generally 12 months. The estimates we use for demand are also used
for near-term capacity planning and inventory purchasing and are consistent with
revenue  forecasts.  If our demand forecast is greater than its actual demand we
may be required to take additional excess inventory charges, which will decrease
gross margin and net operating results in the future.  In addition,  as a result
of the  downturn  in demand for our  products,  we have  excess  capacity in our
facilities.  Currently,  we are not  capitalizing any inventory costs related to
this excess  capacity as the  recoverability  of such costs is not certain.  The
application of this policy adversely affects our gross margin.


                                       35



      Intangible Asset Valuation. The determination of the fair value of certain
acquired  assets and  liabilities is subjective in nature and often involves the
use of significant  estimates and  assumptions.  Determining the fair values and
useful lives of intangible assets especially  requires the exercise of judgment.
While there are a number of different  generally  accepted  valuation methods to
estimate  the  value  of  intangible  assets  acquired,  we  primarily  use  the
weighted-average  probability  method outlined in SFAS 144. This method requires
significant management judgment to forecast the future operating results used in
the  analysis.  In addition,  other  significant  estimates are required such as
residual  growth  rates and  discount  factors.  The  estimates we have used are
consistent  with the plans and  estimates  that we use to manage  its  business,
based on available historical  information and industry averages.  The judgments
made in determining the estimated  useful lives assigned to each class of assets
acquired can also significantly affect our net operating results.

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

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

EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

         In April 2002, the FASB issued  Statement No. 145,  "Rescission of FASB
Statements No. 4, 44, and 64,  Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from  Extinguishment  of Debt," and an amendment of that Statement,  FASB
Statement  No.  64,  "Extinguishments  of  Debt  Made  to  Satisfy  Sinking-Fund
Requirements"  and FASB Statement No. 44,  "Accounting for Intangible  Assets of
Motor  Carriers." This Statement  amends FASB Statement No. 13,  "Accounting for
Leases," to  eliminate an  inconsistency  between the  required  accounting  for
sale-leaseback  transactions  and the  required  accounting  for  certain  lease
modifications  that have  economic  effects  that are similar to  sale-leaseback
transactions.  NeoMedia has  implemented  the  provision of SFAS No. 145 and has
concluded  that the adoption  does not have a material  impact on our  financial
statements.

         In July 2002,  the FASB  issued  SFAS No. 146  "Accounting  for Exit or
Disposal  Activities."  The  provisions  of this  statement  are  effective  for
disposal  activities  initiated after December 31, 2002, with early  application
encouraged.  NeoMedia  has  implemented  the  provision  of SFAS No. 146 and has
concluded  that the adoption  does not have a material  impact on our  financial
statements.

         In October 2002, the FASB issued  Statement No. 147,  "Acquisitions  of
Certain  Financial  Institutions-an  amendment of FASB Statements No. 72 and 144
and  FASB  Interpretation  No.  9,"  which  removes  acquisitions  of  financial
institutions  from  the  scope of both  Statement  72 and  Interpretation  9 and
requires that those  transactions be accounted for in accordance with Statements
No. 141,  Business  Combinations,  and No. 142,  Goodwill  and Other  Intangible
Assets.  In addition,  this  Statement  amends SFAS No. 144,  Accounting for the
Impairment or Disposal of Long-Lived  Assets,  to include in its scope long-term
customer-relationship  intangible  assets  of  financial  institutions  such  as
depositor- and  borrower-relationship  intangible  assets and credit  cardholder
intangible  assets.  The  requirements  relating to  acquisitions  of  financial
institutions is effective for  acquisitions for which the date of acquisition is
on or after  October 1, 2002.  The  provisions  related  to  accounting  for the
impairment  or disposal of certain  long-term  customer-relationship  intangible
assets are effective on October 1, 2002.  The adoption of this Statement did not
have a material impact to our financial position or results of operations as the
Company has not engaged in either of these activities.


                                       36



         In December 2002, the FASB issued  Statement No. 148,  "Accounting  for
Stock-Based Compensation-Transition and Disclosure," which amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of  transition  for a  voluntary  change  to the  fair  value  based  method  of
accounting for stock-based employee  compensation.  In addition,  this Statement
amends  the  disclosure  requirements  of  Statement  123 to  require  prominent
disclosures in both annual and interim financial  statements about the method of
accounting for stock-based  employee  compensation  and the effect of the method
used  on  reported  results.  The  transition  guidance  and  annual  disclosure
provisions of Statement 148 are effective for fiscal years ending after December
15, 2002,  with earlier  application  permitted  in certain  circumstances.  The
interim  disclosure  provisions are effective for financial  reports  containing
financial  statements for interim periods beginning after December 15, 2002. The
adoption  of this  statement  did not have a  material  impact on our  financial
position  or results of  operations  as the Company has not elected to change to
the fair value based method of accounting for stock-based employee compensation.

     In November 2002, the FASB issued FASB  Interpretation No. 45, "Guarantor's
accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees  of  Indebtedness  of Others"  (FIN 45).  FIN 45  requires  that upon
issuance of a guarantee,  a guarantor  must  recognize a liability  for the fair
value  of an  obligation  assumed  under  a  guarantee.  FIN  45  also  requires
additional  disclosures  by a  guarantor  in its  interim  and annual  financial
statements  about  the  obligations   associated  with  guarantees  issued.  The
recognition  provisions  of FIN 45 are effective  for any  guarantees  issued or
modified after December 31, 2002. The disclosure  requirements are effective for
financial  statements  of interim or annual  periods  ending after  December 15,
2002.  The  adoption  of FIN45 did not have a material  effect on our  financial
position, results of operations, or cash flows.

         In January 2003, the FASB issued  Interpretation No. 46, "Consolidation
of Variable Interest Entities."  Interpretation 46 changes the criteria by which
one company includes another entity in its  consolidated  financial  statements.
Previously,   the  criteria  was  based  on  control  through  voting  interest.
Interpretation  46 requires a variable  interest  entity to be consolidated by a
company if that  company  is subject to a majority  of the risk of loss from the
variable interest  entity's  activities or entitled to receive a majority of the
entity's  residual  returns  or both.  A company  that  consolidates  a variable
interest  entity  is  called  the  primary   beneficiary  of  that  entity.  The
consolidation  requirements of  Interpretation  46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to older  entities in the first  fiscal year or interim  period  beginning
after  June  15,  2003.  Certain  of the  disclosure  requirements  apply in all
financial  statements  issued  after  January 31, 2003,  regardless  of when the
variable interest entity was established. The adoption of this Statement did not
have a material impact to our financial position or results of operations as the
Company.

         During  October  2003,  the FASB  issued  Staff  Position  No.  FIN 46,
deferring the effective date for applying the provisions of FIN 46 until the end
of the first  interim or annual  period  ending  after  December 31, 2003 if the
variable  interest was created  prior to February 1, 2003 and the public  entity
has not issued financial  statements  reporting that variable interest entity in
accordance  with  FIN 46.  The  FASB  also  indicated  it  would  be  issuing  a
modification to FIN 46 prior to the end of 2003.  Accordingly,  we have deferred
the adoption of FIN 46 with  respect to VIEs created  prior to February 1, 2003.
Management  is currently  assessing  the impact,  if any, FIN 46 may have on us;
however,  management  does not believe there will be any material  impact on our
consolidated financial statements,  results of operations or liquidity resulting
from the adoption of this interpretation.

     In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative  Instruments  and  Hedging  Activities".  This  Statement  amends and
clarifies  financial  accounting  and  reporting  for  derivative   instruments,
including   certain   derivative   instruments   embedded  in  other   contracts
(collectively  referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative  Instruments and Hedging  Activities".  This
Statement amends Statement 133 for decisions made (1) as part of the Derivatives
Implementation  Group process that effectively  required amendments to Statement
133,  (2) in  connection  with  other  Board  projects  dealing  with  financial
instruments, and (3) in connection with implementation issues raised in relation
to the application of the definition of a derivative, in particular, the meaning
of an initial net  investment  that is smaller  than would be required for other
types of contracts that would be expected to have a similar  response to changes
in market  factors,  the meaning of  underlying,  and the  characteristics  of a
derivative that contains financing  components.  The Company does not anticipate
that the adoption of this Statement will have a material effect on the financial
statements.


                                       37



         In May 2003,  the FASB  issued SFAS No.  150,  "Accounting  for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". This
Statement  establishes  standards  for how an  issuer  classifies  and  measures
certain  financial  instruments  with  characteristics  of both  liabilities and
equity.  It  requires  that an issuer  classify a financial  instrument  that is
within its scope as a  liability  (or an asset in some  circumstances).  Many of
those instruments were previously  classified as equity.  Some of the provisions
of this Statement are consistent  with the current  definition of liabilities in
FASB Concepts Statement No. 6, Elements of Financial  Statements.  The remaining
provisions of this Statement are consistent with the Board's  proposal to revise
that definition to encompass certain  obligations that a reporting entity can or
must settle by issuing  its own equity  shares,  depending  on the nature of the
relationship  established  between  the holder and the  issuer.  While the Board
still plans to revise that definition through an amendment to Concepts Statement
6, the Board decided to defer issuing that amendment  until it has concluded its
deliberations on the next phase of this project.  That next phase will deal with
certain compound financial  instruments  including puttable shares,  convertible
bonds, and dual-indexed financial  instruments.  The Company does not anticipate
that the adoption of this Statement will have a material effect on the financial
statements.

PURCHASE AND DISPOSAL OF QODE.COM, INC.

         On March 1, 2001, NeoMedia purchased all of the net assets of Qode.com,
Inc. (Qode), except for cash. Qode is a development stage company, as defined in
Statement  of  Financial  Accounting  Standards  (SFAS) No. 7,  "Accounting  and
Reporting By Development Stage Enterprises".  In consideration for these assets,
NeoMedia   issued  274,699  shares  of  common  stock,   valued  at  $1,359,760.
Additionally,  the Company placed in escrow 1,676,500 shares of its common stock
valued at $8,298,675  at the time of issuance.  Stock issued was valued at $4.95
per share,  which is the average closing price for the few days before and after
the  measurement  date of March 1, 2001.  As of December  31, 2001  NeoMedia had
released  35,074  shares of common  stock from  escrow for  performance  for the
period  March 1, 2001 to August 31, 2001.  The  remaining  1,641,426  shares are
being held in escrow pending the results of negotiations between the Company and
Qode with respect to the  performance  of the Qode  business unit for the period
March 1, 2001 through  February 28,  2002.  As a result,  all such shares may be
released to Qode.

         NeoMedia  accounted  for this  purchase  using the  purchase  method of
accounting  in  accordance  with  Accounting  Principles  Board  Opinion No. 16,
"Business Combinations". The excess fair market value of the net assets acquired
over the  purchase  price was  allocated  to reduce  proportionately  the values
assigned to  noncurrent  assets.  The  accompanying  consolidated  statements of
operations  include the operations of Qode from March 1, 2001, through September
30, 2002.



                                       38



         The purchase  price at the original  purchase date was  calculated  and
allocated as follows:



                                                          
          Original Shares: 274,699 issued at $4.95             1,360,000
          Contingent shares: 35,074 issued at $0.39          $    13,000

            Total purchase price                             $ 1,373,000

          PURCHASE PRICE ALLOCATED AS FOLLOWS:
          ASSETS PURCHASED
            Trade receivables                                $     5,000
            Inventory                                            144,000
            Prepaid expenses                                      49,000
            Furniture & fixtures                                 913,000
            Capitalized development costs                      2,132,000
            Capitalized software                                  83,000
            Refundable deposits - non-current                     38,000

          LIABILITIES ASSUMED
            Accounts payable                                    (981,000)
            Forgiveness of note receivable                      (440,000)
            Interest receivable                                  (10,000)
            Current portion of long-term debt                   (117,000)
            Note payable                                         (24,000)
            Capitalized lease obligation                        (419,000)

              Total purchase price allocated                 $ 1,373,000



                                       39



         During the third quarter of 2001,  NeoMedia issued an additional 35,074
shares under the terms of the earn-out  with  Qode.com,  Inc.  (see  explanation
below).  The value of these shares in the amount of $13,000 was allocated $9,000
to capitalized development costs and $4,000 to furniture and fixtures.

CONTINGENT CONSIDERATION

         In  accordance  with the  purchase  of the  assets of  Qode.com,  Inc.,
NeoMedia has placed  1,676,500 shares of its common stock in escrow for a period
of one year,  subject to  downward  adjustment,  based upon the  achievement  of
certain  performance  targets  over the period of March 1, 2001 to February  28,
2002. As of March 1, 2002, these performance targets were not met and therefore,
the remaining 1,641,426 shares held in escrow were not issued. The criteria used
to determine the number of shares released from escrow is a weighted combination
of revenue,  page views,  and fully allocated  earnings before taxes relating to
the Qode Universal Commerce Solution.

         At the  end of each of  certain  interim  periods  as  outlined  in the
purchase  agreement,  the number of  cumulative  shares  earned by  Qode.com  is
calculated  based on revenue  and page views and the  shares are  released.  The
resulting  financial  impact on  NeoMedia  is a  proportionate  increase  in the
long-term  assets  acquired from Qode,  resulting in an increase in depreciation
expense from that point forward.  The amount of the increase in long-term assets
is dependent  upon the number of shares  released  from  escrow,  as well as the
value of NeoMedia stock at the time of measurement.  The first such  measurement
date was July 1, 2001. At the end of the 12-month  measurement  period (February
28,  2002),  the number of shares  issued to Qode under the earn-out was 35,074,
allocated as outlined in the table above.  The  remaining  1,641,426  shares are
being held in escrow pending the results of negotiations between the Company and
Qode with respect to a disagreement  over the performance of, and investment in,
the Qode business  unit for the period March 1, 2001 through  February 28, 2002.
As a result, all such shares may be released to Qode.

INTANGIBLE ASSETS

         Intangible assets acquired from Qode.com include:

         (i) Purchased software licenses relating to the development of the Qode
Universal  Commerce  Solution,  amortized  on a  straight-line  basis over three
years.

         (ii) Capitalized software development costs relating to the development
of the Qode Universal Commerce Solution.

         All Qode  related  assets were  written off during the third and fourth
quarters of 2001.

OTHER

         On May 31, 2001,  three  creditors of Qode.com,  Inc. filed in the U.S.
Bankruptcy Court an involuntary  bankruptcy petition for Qode.com,  Inc. On July
22, 2002, the case was converted to Chapter 7, U.S. Bankruptcy Code.


DISPOSAL OF QODE BUSINESS UNIT

         On August 31, 2001, the Company  signed a non-binding  letter of intent
to sell the assets and  liabilities  of its Ft.  Lauderdale-based  Qode business
unit,  which it  acquired  in March 2001,  to The Finx  Group,  Inc.,  a holding
company  based in  Elmsford,  NY. The Finx Group was to assume  $620,000 in Qode
payables and $800,000 in long-term  leases in exchange for 500,000 shares of the
Finx  Group,  right to use and  sell  Qode  services,  and up to $5  million  in
affiliate  revenues  over the next five  years.  During  the  third  and  fourth
quarters of 2001 and the first quarter of 2002, NeoMedia recorded a $2.6 million
expense from the  write-down of the Qode  assets/liabilities  to net  realizable
value.

         The loss for discontinued  operations  during the phase-out period from
August 31,  2001  (measurement  date) to  September  30, 2001 was  $439,000.  No
further loss is anticipated.


                                       40



         During  June 2002,  the Finx Group  notified  NeoMedia  that it did not
intend  to carry  out the  letter of intent  due to  capital  constraints.  As a
result,  during the three-month period ended June 30, 2002, the Company recorded
an  additional  expense of $1.5  million for the  write-off  of  remaining  Qode
assets.  As of December  31,  2002,  NeoMedia  had $1.5  million of  liabilities
relating to the Qode system on its books.

IMPAIRMENT OF PAPERCLICK ASSET

         During the nine months ending September 30, 2002,  NeoMedia  recognized
an   impairment   charge   of   $1.0   million   relating   to  its   PaperClick
physical-world-to-internet  software solution.  Due to capital constraints,  the
Company is not currently able to devote full-time  resources and  infrastructure
to  commercializing  the  technology.  NeoMedia  intends to  re-focus  sales and
marketing  efforts  surrounding  the  product  upon the  receipt  of  sufficient
capital.


                                       41



                             DESCRIPTION OF BUSINESS

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.

         We develop proprietary  technologies that link physical information and
objects  to the  Internet  marketed  under  our  "PaperClickTM"  brand  name and
automate print production operations. We are structured as two distinct business
units: Internet Switching Service and Consulting and Integration Service.

         NeoMedia Internet  Switching Service (NISS) is our core business and is
based in the United States,  with  development and operating  facilities in Fort
Myers,  Florida.  Application services develops and supports all of our physical
world  to  Internet  technology  as well as its  suite  of  application  service
provider services, including our linking "switch" and our application platforms.
NISS also provides the systems integration  resources needed to design and build
custom customer solutions predicated on our infrastructure technology.

         NeoMedia  Consulting  and  Integration  Service  (NCIS) is the original
business  line upon which we were  organized.  This unit  resells  client-server
equipment and related  software.  The unit also provides general and specialized
consulting  services  targeted  at  software  driven  print  applications,   and
especially  at process  automation of production  print  facilities  through its
integrated document factory solution.  NCIS also identifies prospects for custom
applications  based on our products and services.  The  operations  are based in
Lisle, Illinois.

         In addition to our NISS and NCIS business units, we recently  announced
the pending acquisitions of two companies:

         o        CSI  INTERNATIONAL,  INC. - On November  7, 2003,  we signed a
                  non-binding  letter of intent to  acquire  CSI  International,
                  Inc.  ("CSI"),   of  Calgary,   Alberta,   Canada,  a  private
                  technology   products   company  in  the  micro  paint  repair
                  industry.  The LOI calls for the issuance of 7,000,000  shares
                  of  our  common  stock  to  be  issued  in  exchange  for  all
                  outstanding  shares  of CSI.  In  addition,  we will  pay $3.5
                  million cash. CSI is a private technology and products company
                  in the micro paint repair industry.

         o        BSD SOFTWARE/TRITON  GLOBAL BUSINESS SERVICES - On December 9,
                  2003,  we signed a  non-binding  letter  of intent to  acquire
                  Triton Global  Business  Services Inc. and its parent company,
                  BSD  Software  Inc.  (Pink  Sheets:  BSDS),  both of  Calgary,
                  Alberta, Canada. The LOI outlined terms, including an exchange
                  of one  share  of our  common  stock  for  each  share  of BSD
                  Software,  not to exceed 40 million shares. The transaction is
                  dependent on due diligence by both companies,  approval by our
                  Board  of  Directors,   BSD  Software's  Board  of  Directors,
                  shareholders,   required  regulatory   approvals,   and  other
                  conditions.  Triton,  formed  in 1998 and  acquired  by BSD in
                  2002,  is an  Internet  Protocol-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. The acquisition is subject to completion of
                  due  diligence  by both sides,  as well as Board  approval and
                  other conditions.


                                       42



OUR PRODUCTS AND SERVICES

INTERNET SWITCHING SERVICE

         PAPERCLICKTM  SWITCHING  SERVICE.  PaperClickTM  is a  state-of-the-art
application-switching  platform  that links  physical  objects to digital  media
through the use of scanned UPC, EAN, or custom  PaperClickTM codes. This dynamic
open solution serves a wide variety of customers in industrial,  commercial, and
educational applications.

         INTELLECTUAL  PROPERTY  LICENSING.  We currently  hold 14 U.S.  patents
relating  to the  physical  world-to-Internet  marketplace,  eight of which were
acquired as part of our recent purchase of Secure Source  Technologies,  Inc. We
intend to license this intellectual  property portfolio to companies endeavoring
to tap the potential of this emerging market. To date, we have entered into such
agreements   with   Digital:Convergence,   A.T.   Cross   Company,   and  Symbol
Technologies.  During  January  2002,  we announced  that we had entered into an
agreement  with  Baniak  Pine and  Gannon,  a law firm  specializing  in  patent
licensing  and  litigation,  under  which the firm will  represent  NeoMedia  in
seeking out potential licensees of our patent portfolio.

CONSULTING AND INTEGRATION SERVICE

         NCIS is a group of highly  skilled  application  developers  thoroughly
familiar with MSS and other  associated  NeoMedia  technologies  who contract to
develop custom applications for clients.

         STORAGE AREA NETWORKS (SAN). SAN is a Storage Management  solutions and
consultancy   offering  consisting  of  tools  and  services  that  insure  data
integrity,  efficiency and  accessibility,  achieved through moving data backup,
access and archival functions off of traditional  LANs/WANs that are added on to
a highly reliable independent managed network.

         PRODUCT   SALES  AND  EQUIPMENT   RE-SALES.   NCIS  markets  and  sells
proprietary software products,  including  high-density symbology encoders (e.g.
PDF417 and UPS Maxicode) and resells client-server  hardware and related systems
such as Sun  Microsystems,  IBM and  others  , as well as  related  applications
software and services.

         INTEGRATED DOCUMENT FACTORY (IDF). The IDF solution provides design and
implementation  of a  collection  of  tested  hardware  and  software  solutions
utilizing   Xerox's  printers  and  Sun  servers  to  turn  document   creation,
production, and printing into an assembly line manufacturing process. The system
particularly  assists  financial  service  concerns  such  as  banks,  insurance
companies,  and brokerage firms as well as helps to manage high-volume  printing
of statements on a frequent basis.

OUR MARKETS

INTERNET SWITCHING SERVICE

         We believe that our switching platform is a  state-of-the-art  open and
extensible  cross-media  publishing  tool  serving  customers  in a  variety  of
industrial,  commercial, and educational applications.  This business segment is
also responsible for licensing our intellectual property to others as a means of
promoting this new market as well as providing a revenue and cash  resource.  We
have been  developing  our physical  world-to-Internet  technology and offerings
since 1996 and consider ourselves an innovator and pioneer in this industry.  In
the past two years, we have seen similar technologies and concepts emerge in the
marketplace,  and see these  events as a  positive  validation  of the  physical
world-to-internet concept.

         Press from  competitors  is  expected  to  continue  to raise  consumer
awareness of physical-to-Web  convergence. We believe the key to the adoption of
physical  world-to-Internet  technologies  in  the  marketplace  will  be in the
development  of real world  applications  that  provide  the end user a valuable
experience.  Our service  offering,  however,  differs from those of AirClic and
other competitors in that,  unlike their products and services,  our products do
not require  the use of a  proprietary  or  specified  device,  and we offer our
service on a private label basis.  We believe that we are  positioned to provide
solutions that preserve the customer's brand and also provide tailored solutions
to fit the customer needs.

CONSULTING AND INTEGRATION SERVICE

         The  technology and equipment  resale  business is becoming a commodity
industry for products  undifferentiated by value added proprietary  elements and
services. Resale operations are also being compressed as equipment manufacturers
consolidate their distribution channels.

         Proprietary  products,  such  as  our  encoders,   systems  integration
services,  and  integrated  document  factory  solutions,  offer  a  competitive
value-add to our consulting and  integration  business.  We believe that we have
unique  offerings,  which, to the extent that they meet market needs,  offer the
potential for growth in this industry.


                                       43


         This segment also sells migration  products,  tools designed to migrate
software code from one platform to another  platform,  primarily to mid-sized to
large  corporations and government  agencies.  The products include  proprietary
products and software tools to migrate Wang, HP3000,  Data General,  DEC and IBM
DOS/VSE platforms, legacy systems, to a Unix or NT open system platform.

RECENT DEVELOPMENTS

QODE.COM ASSETS

         In March 2001, we acquired the assets of Qode.com, a Web-based commerce
facilitation  service.  On September 7, 2001, we announced  that we had signed a
non-binding  letter of intent  to sell the  assets of our Fort  Lauderdale-based
Qode business unit, which we acquired in March 2001, to The Finx Group,  Inc., a
holding company in Elmsford,  New York. The agreement  called for The Finx Group
to assume approximately  $620,000 of Qode's payables and approximately  $800,000
in long-term  assets.  We were  expecting to receive  500,000 shares of The Finx
Group common stock, a five-year license to use and sell Qode Services, and up to
$5 million in  affiliate  revenues  from The Finx Group from Qode sales over the
next five years.  In  connection  with the sale of Qode assets,  we recognized a
loss of approximately $3.1 million in 2001.

         During June 2002,  the Finx Group notified us that it did not intend to
carry out the letter of intent due to capital constraints.  As a result,  during
the nine months ended  September 30, 2002, we recorded an additional  expense of
$1.5 million for the  write-off of remaining  Qode assets.  As of September  30,
2003,  we had $1.0  million of  liabilities  relating  to the Qode system on our
books.

ABOUT.COM, INC. RELATIONSHIP

         In June 2001,  we  announced  that we entered  into a one-year  license
agreement with About.com, Inc. to provide our Qode Universal Commerce SolutionTM
to About.com's  estimated 36 million worldwide users. We and About.com  intended
to promote the co-branded  shopping service throughout the About.com network. In
June 2001,  About.com ran banner ads on its site  promoting  the Qode  Universal
Commerce   SolutionTM.   As  part  of  the  emerging   About.com   and  NeoMedia
relationship,  About.com  received  452,489  shares of our Series A  Convertible
Preferred  Stock,  par value  $0.01 per share,  of the  500,000  total  Series A
Convertible  Preferred shares which we are authorized to issue, in consideration
for these  promotions.  On January 2, 2002,  these 452,489 shares were converted
into 452,489  shares of common stock,  which are being  registered for resale in
this prospectus.  Those shares are currently subject to a right of first refusal
in favor of us prior to resale.  See  "Principal and Selling  Stockholders."  We
recorded an expense of $882,000  associated with this  transaction in the second
quarter of 2001 in sales and marketing expense in the accompanying  consolidated
statements of operations.  The agreement with About.com was terminated on August
31, 2001, in anticipation of the sale of the Qode assets to the Finx Group.

AIRCLIC, INC. RELATIONSHIP

         On July 3, 2001,  we entered into a  non-binding  letter of intent with
AirClic,  Inc.,  which  contemplated  an intellectual  property  cross-licensing
transaction  between  us and  AirClic.  Under the terms of the letter of intent,
AirClic was to provide us with bridge  financing of $2,000,000,  which was to be
paid to us in  installments.  On July 11,  2001,  AirClic  advanced  $500,000 in
bridge  financing  to us in return for a  promissory  note secured by all of our
assets.  During the  negotiation of a definitive set of agreements,  the parties
decided not to proceed with the cross-licensing  transaction.  AirClic has since
initiated  two  lawsuits  against us, one of which was  dismissed,  the other of
which was settled (see "Legal Proceedings).

DIGITAL:CONVERGENCE CORPORATION RELATIONSHIP

         We entered into an  agreement  with a  competitor,  Digital:Convergence
Corporation, a private company located in the US, in October 2000, granting them
a worldwide,  non-exclusive license of our patent portfolio for directly linking
documents,  objects,  transaction  and  voice  commands  to  the  internet.  The
agreement  provided for annual license fees over a period of ten years in excess
of $100 million  through a combination  of cash and equity.  We recognized  $7.8
million of revenue in 2000  related to this  contract,  including a $5.0 million
cash  payment  received in October 2000 for  royalties  earned  before  contract
execution,  $2.5  million  related  to the $10  million of  payments  in Digital
Convergence  common stock and cash  expected to be received in the first year of
the  contract,  and  $0.3  million  related  to DC  stock  received  by us to be
recognized over the life of the contract.


                                       44



         As part of the contract,  we issued to Digital Convergence a warrant to
purchase 1.4 million shares of our common stock.

         In the first quarter of 2001, Digital Convergence issued us an interest
bearing $3 million  note  payable in lieu of a $3 million  cash  payment  due in
January 2001. We also received  shares of Digital  Convergence  stock in January
with a  contractual  value  of $2  million  as part of the  first  contract-year
royalties due. The note was originally due on April 24, 2001,  however,  on that
date we agreed to extend it until June 24, 2001. We also  partially  wrote down,
in the first  quarter of 2001,  the value of the remaining  Digital  Convergence
stock  receivable,  and  Digital  Convergence  stock that had been  received  in
January,  to a value that management believed was reasonable at the time (50% of
the  valuation  stipulated  in the  contract).  The  write-down  consisted  of a
reduction in assets of $7.7 million and a corresponding reduction in liabilities
of $7.7  million.  The Digital  Convergence  stock  received in January 2001 was
valued at $1 million and the Digital  Convergence  receivable was valued at $9.2
million.  In April 2001, we received  additional  shares of Digital  Convergence
stock with a $5 million  value based on the valuation  method  stipulated in the
contract.  No revenue was recognized related to these shares and the shares were
not  recorded  as an asset  due to  Digital  Convergence's  worsening  financial
condition. All assets and liabilities relating to the contract were subsequently
written off in the second quarter of 2001.

         Also in  April  2001,  an  agreement  was  entered  into  with  Digital
Convergence  whereby  for a period from the date of  registration  of the shares
underlying  the warrant to purchase 1.4 million shares of our common stock until
October  24,  2001,  if we would  identify a purchaser  for our shares,  Digital
Convergence would exercise the warrant and purchase 1.4 million shares of common
stock and sell the  shares  to the  identified  purchaser.  One third of the net
proceeds  received by Digital  Convergence on the sale of our common stock shall
be paid to us toward repayment of Digital  Convergence's  obligations  under the
note to us in the amount of $3 million.  In consideration  for this, the warrant
exercise  price was reduced during this period to 38 percent of the closing sale
price of our common stock on the day prior to the date of exercise, subject to a
minimum  price.  Because the exercise of the  warrants at this reduced  price is
contingent  upon our finding a purchaser of the underlying  1.4 million  shares,
the value of this  re-pricing  will be  measured  and  recorded  at the time the
shares are sold.  As of October 24, 2001, we were not able to locate a purchaser
and therefore, the warrant was not exercised.

         On June 24,  2001,  Digital  Convergence  did not pay the note that was
due,  and on June  26,  2001,  we filed a $3  million  lawsuit  against  Digital
Convergence for breach of contract  regarding the $3 million promissory note. It
was also  learned  in the  second  quarter  of 2001 that  Digital  Convergence's
capital raising efforts and business  operations were having difficulty,  and we
decided to write off all remaining  amounts  related to the Digital  Convergence
contract.  The net effect of the  write-off is a $7,354,000  non-cash  charge to
income  during  the  second  quarter  of  2001,  which  is  included  in Loss on
Digital:Convergence   License  Contract  in  our   consolidated   statements  of
operations for the year ending December 31, 2001. Any future revenues related to
this contract will be recorded as payments are received.

         On March  22,  2002,  Digital:Convergence  filed for  bankruptcy  under
Chapter 7 of the United States Bankruptcy Code.

LOCH ENERGY, INC.

         On March 7, 2003, we announced that that we had reached an agreement in
principal to acquire and merge with Loch Energy,  Inc. ("Loch"),  an oil and gas
provider based in Humble, Texas.

         On October 1, 2003, we discovered that the royalty interest from future
sales  of oil  owned  by Loch  were  oversold,  which  would  likely  result  in
materially  lower  projected  available  cashflow from Loch's  operations.  This
projected  available  cashflow was the basis for the acquisition.  On October 2,
2003,  our Board of Directors  voted to cancel the Memorandum of Terms signed on
March 7, 2003, and terminate the acquisition and merger proceedings.

CSI INTERNATIONAL, INC.

         On  November  7,  2003,  we  signed a  non-binding  letter of intent to
acquire CSI International,  Inc. ("CSI"), of Calgary, Alberta, Canada, a private
technology  products company in the micro paint repair  industry.  The LOI calls
for the  issuance  of  7,000,000  shares  of our  common  stock to be  issued in
exchange  for all  outstanding  shares  of CSI.  In  addition,  we will pay $2.5
million  cash.  CSI is a private  technology  and products  company in the micro
paint repair industry.


                                       45



BSD SOFTWARE/TRITON GLOBAL BUSINESS SERVICES

         On  December  9,  2003,  we  signed a  non-binding  letter of intent to
acquire  Triton  Global  Business  Services  Inc.  and its parent  company,  BSD
Software Inc. (Pink Sheets:  BSDS), both of Calgary,  Alberta,  Canada.  The LOI
outlined terms,  including an exchange of one share of our common stock for each
share of BSD  Software,  not to exceed 40 million  shares.  The  transaction  is
dependent  on  due  diligence  by  both  companies,  approval  by our  Board  of
Directors, BSD Software's Board of Directors, shareholders,  required regulatory
approvals,  and other conditions.  Triton, formed in 1998 and acquired by BSD in
2002, is an Internet  Protocol-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.

OUR STRATEGY

         We have spent the past seven years  developing  and  patenting  the now
confirmed  space  of  linking  the  physical  and  Internet  environments,   and
developing and  implementing  five  generations of  continuously  refined switch
technology  that seamlessly  bridges these  environments.  We are  strategically
pursuing potential licensees of the PaperClick  switching  platform,  as well as
intellectual property licensing  opportunities with organizations  attempting to
commercialize   physical   world-to-Internet    technology,   such   as   Symbol
Technologies, A.T. Cross Company and Brandkey Systems Corporation.

         While  pursing  these  goals  we  remain  aware  of  strategic  issues,
opportunities, and constraints that will govern the interplay of competition and
alliances in this rapidly emerging market.

OUR STRATEGIC RELATIONSHIPS

INTERNET SWITCHING SERVICES

         In this  segment,  we have a number of  customers  who have used or are
using our products and services,  including  Amway,  Solar,  A.T. Cross Company,
NYCO and two  universities in Latin America.  During the year ended December 31,
2000,  we  entered  into a  license  agreement  with  Digital:Convergence.  This
customer  accounted  for  28.2% of  NeoMedia's  total  revenue  and 96.1% of our
Application  Services  revenue during such year.  During the year ended December
31, 2001, we did not recognize  any revenue  related to the  Digital:Convergence
contract,  and we  wrote  off  approximately  $7.4  million  in net  assets  and
liabilities  related to the contract.  In March 2002, Digital  Convergence filed
for bankruptcy under Chapter 7. We are aggressively pursuing numerous additional
opportunities for our products and services.

         In January  2001,  we entered  into a patent  license  with A.T.  Cross
Company, a major international  manufacturer of fine writing instruments and pen
computing  products.  A.T. Cross Company  obtained the rights under our physical
world-to-Internet  patents for personal  portable  scanning devices used to link
bar  codes on  documents  and other  physical  consumer  goods to  corresponding
Internet  content.  A.T.  Cross  Company will pay a royalty per device to us for
license rights granted under this agreement.  We have not recognized any revenue
relating to this contract as of the date of this prospectus.

         In May 2001,  we entered  into an agreement  with Symbol  Technologies,
Inc.,  granting  Symbol  a  worldwide,  non-exclusive  license  of  our  patents
surrounding   the  sale  and  use  of   scanning   devices   used  in   physical
world-to-Internet  technologies.  Symbol  will pay us a  royalty  per  qualified
device shipped.  We have not recognized any revenue relating to this contract as
of the date of this filing.

         During January 2002, we engaged  Baniak Pine and Gannon,  a Chicago law
firm specializing in intellectual  property  licensing and litigation.  The firm
will assist us in seeking out potential  licensees of our intellectual  property
portfolio, including any resulting litigation.

         During  May 2002,  we  granted a  personal,  worldwide,  non-exclusive,
limited   intellectual   property   licensing   agreement  to  Brandkey  Systems
Corporation.  Brandkey  has  paid  us a  $50,000  upfront  licensing  fee and is
obligated to pay 2.5% of all  royalty-based  revenues  earned by Brandkey,  with
minimum  royalties of $25,000 in 2003,  $50,000 in 2004, and $75,000 in 2005 and
after.


                                       46



         On  September  8, 2003,  we announced  our  PaperClick  for Camera Cell
Phones product, which reads and decodes UPC/EAN or other bar codes to link users
to the Internet,  providing  information and enabling e-commerce on a compatible
camera cell phone, such as the Nokia 3650 model.

         On October 30,  2003,  we unveiled  our  go-to-market  strategy for the
product.  We have already  established  relationships  with several key partners
outlined  in  the  strategy,   including  agents  Big  Gig  Strategies  and  SRP
Consulting,   European   advertising   agency   12Snap,   and  worldwide   brand
communication company Seven.

CONSULTING AND INTEGRATION SERVICES

         Through this segment, we provide services and products to a spectrum of
customers, ranging from closely held companies to Fortune 500 companies. For the
years ended  December 31, 2002,  2001,  and 2000,  one  customer,  SBC/Ameritech
Services,  Inc., accounted for 36%, 37%, and 30%, respectively,  of our revenue.
We expect sales to  Ameritech  as a percentage  of total sales to decline in the
future.  Furthermore,  we do not have a written  agreement  with  Ameritech and,
therefore,  there  are no  contractual  provisions  to  prevent  Ameritech  from
terminating its relationship with us at any time. Accordingly,  the loss of this
customer,  or a significant  reduction by it in buying the products and services
offered by us, absent diversification,  would materially and adversely affect of
our business,  prospects,  financial  condition,  and results of operations.  In
addition,  a single  supplier  supplies the  equipment  and  software,  which is
re-marketed  to this  customer.  Accordingly,  the loss of this  supplier  would
materially adversely affect our business,  prospects,  financial condition,  and
results of operations.  For these reasons, we are seeking, and continue to seek,
to diversify our sources of revenue and vendors from whom we purchase.

SALES AND MARKETING

INTERNET SWITCHING SERVICE

         PAPERCLICKTM.  While  we  eliminated  the  majority  of our  sales  and
marketing  staff  during the third  quarter of 2001,  we continue to promote our
PaperClickTM  line  of  products  to  potential  customers  in a wide  array  of
industries.  On September 8, 2003, we announced our  PaperClick  for Camera Cell
Phones product, which reads and decodes UPC/EAN or other bar codes to link users
to the Internet,  providing  information and enabling e-commerce on a compatible
camera cell phone,  such as the Nokia 3650 model.  We have  refocused  our sales
efforts by  focusing on signing up channel  partners  who have  industry  market
presence.  No  assurances  can be given  that any  successful  association  will
result.

         INTELLECTUAL PROPERTY LICENSING. During January 2002, we engaged Baniak
Pine and Gannon, a law firm specializing in intellectual  property licensing and
litigation.  The firm will assist us in seeking out  potential  licensees of our
intellectual property portfolio,  including any resulting litigation.  On August
13, 2002, our fifth patent surrounding our Physical-World-to-Internet technology
was issued by the U.S.  Patent and Trademark  Office.  On April 2, 2003, we were
issued  our  sixth US  Patent,  which  allows  for a  connection  from  human-or
machine-readable  input to  generate  a  tailored  response  that can  utilize a
profile of the person making the link between the code-carrying  physical object
and the desired electronic information

CONSULTING AND INTEGRATION SERVICE

         We,  through  or  systems  integration  services  segment,  market  our
products  and  services,  as well as those  for  which we act as a  re-marketer,
primarily  through a direct sales force,  which was composed of five individuals
as of December  31,  2001.  In  addition,  this  business  unit also relies upon
strategic  alliances with industry leaders to help market products and services,
provide lead referrals,  and establish informal co-marketing  arrangements.  Our
representatives   attend  seminars  and  trade  shows,   both  as  speakers  and
participants,  to help market products and services. In addition,  this business
segment has two agents in the United States that sell our products and services.


                                       47



CUSTOMERS

INTERNET SWITCHING SERVICES

         PAPERCLICKTM.   Our  customers   for  our  physical   world-to-Internet
offerings  have  included  Amway,  Solar  Communications,  Inc.,  NYCO  Products
Company,  and several large  organizations in Latin America,  including  several
prestigious universities.

         INTELLECTUAL  PROPERTY  LICENSING.  To date,  we have  entered  into IP
licensing agreements with Digital:Convergence  Corporation,  A.T. Cross Company,
Symbol  Technologies,  and  Brandkey  Systems  Corporation.  We intend to pursue
additional license agreements in the future.

CONSULTING AND INTEGRATION SERVICES

         We  provide  equipment  and  software  reselling  and  integration  and
automation  consulting  services  to a variety  of  customers  across a range of
industries,   including  telecommunications,   insurance,   financial  services,
manufacturing, government entities, and more.

RESEARCH AND DEVELOPMENT

INTERNET SWITCHING SERVICE

         NISS  employed 2, 3, and 24 persons in the area of product  development
as of December 31, 2002,  2001, and 2000,  respectively.  During the years ended
December  31,  2002,  2001,  and 2000,  NeoMedia  ISS  incurred  total  software
development  costs of $775,000,  $2,064,000,  and $2,888,000,  respectively,  of
which $0, $1,515,000, and $1,787,000, respectively, were capitalized as software
development costs and $775,000,  $549,000,  and $1,101,000,  respectively,  were
expensed as research and development costs.

CONSULTING AND INTEGRATION SERVICES

         All significant research and development relating to our consulting and
integration  products was discontinued at December 31, 1999 when we discontinued
our Y2K  business.  All  employees  that were in this area  were  reassigned  or
released  at or prior to such time.  If any future  research or  development  of
products is needed, it will be performed by the application services division or
outside contractors.

COMPETITION

INTERNET SWITCHING SERVICES

         Although,  we  have  been  developing  our  physical  world-to-Internet
technology and offerings  since 1996, the physical  world-to-Internet  market in
which we compete is  relatively  new.  In the past year,  new  technologies  and
concepts  have  emerged in the  physical  world-to-Internet  space.  We view the
increased  development  of other  products in this space as a validation  of the
physical  world-to-Internet  concept and believe that the increased promotion of
these products and services by us and other  companies in this space,  including
AirClic, Inc., will raise consumer awareness of this technology,  resulting in a
larger  market.   We  believe  that  the   significant   portfolio  of  physical
world-to-Internet  technologies  that we have developed over the last five years
will provide a barrier to entry for most potential competitors.

CONSULTING AND INTEGRATION SERVICES

         The  largest  competition,  in terms of number of  competitors,  is for
customers  desiring systems  integration,  including the re-marketing of another
party's products,  and document  solutions.  These competitors range from local,
small   privately   held   companies  to  large   national   and   international
organizations, including large consulting firms. A large number of companies act
as re-marketers of another party's products,  and therefore,  the competition in
this area is intense.  In some  instances,  we, in acting as a re-marketer,  may
compete with the original manufacturer.


                                       48



INTELLECTUAL PROPERTY

         Our  success  in the  physical  world-to-Internet  and the  value-added
systems  integration  markets  is  dependent  upon our  proprietary  technology,
including  patents,  and other  intellectual  property,  and on our  ability  to
protect our proprietary  technology and other  intellectual  property rights. In
addition,  we must conduct our operations  without infringing on the proprietary
rights of third parties.  We also intend to rely upon  unpatented  trade secrets
and the know-how  and  expertise of our  employees.  To protect our  proprietary
technology and other intellectual  property,  we rely 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.  We have 14 patents for our physical world-to-Internet technology,
eight of which were  recently  acquired as part of our purchase of Secure Source
Technologies,  Inc.. We also have several trademarks relating to our proprietary
software products.  In addition,  we license from third parties certain software
tools that we include in our services and products. We require our employees and
third parties who are granted access to our proprietary technology to enter into
confidentiality agreements with us in order to attempt to protect our unpatented
proprietary rights.

EMPLOYEES

         As of December 12, 2003, we employed 14 persons. Of the 14 employees, 6
are located at our headquarters in Fort Myers,  Florida, and 8 at other domestic
locations.  Of the 14  employees,  3 are dedicated to the  Application  Services
business  unit, 7 are  dedicated to the Systems  Integration  Services  business
unit, and 4 provide  shared  services used by both business  units.  None of our
employees are  represented by a labor union or bound by a collective  bargaining
agreement. We believe that our employee relations are good.


                                       49



                                   MANAGEMENT

DIRECTORS AND OFFICERS

         Our directors and executive officers,  their respective ages, and their
positions held with us are as follows:



NAME                                AGE     POSITION
--------------------------------------------------------------------------------
                                      
Charles W. Fritz                     47     Chairman of the Board of Directors
Charles T. Jensen                    60     President, Chief Operating Officer, Acting Chief Executive Officer and Director
David A. Dodge                       28     Vice-President, Chief Financial Officer and Controller
William E. Fritz                     73     Secretary and Director
James J. Keil                        76     Director
A. Hayes Barclay                     73     Director



         The  following  is  certain  summary  information  with  respect to the
directors and executive officers of NeoMedia:

         CHARLES W. FRITZ, is a founder of NeoMedia and has served as an officer
and as a Director of NeoMedia since our inception.  On August 6, 1996, Mr. Fritz
was appointed Chief Executive Officer and Chairman of the Board of Directors. On
April 2, 2001,  Mr. Fritz was appointed as President  where he served until June
2002. Mr. Fritz is currently a member of the  Compensation  Committee.  Prior to
founding NeoMedia,  Mr. Fritz was an account executive with IBM Corporation from
January 1986 to January 1988, and Director of Marketing and Strategic  Alliances
for the  information  consulting  group from February 1988 to January 1989.  Mr.
Fritz  holds an M.B.A.  from  Rollins  College  and a B.A.  in finance  from the
University of Florida.  Mr. Fritz is the son of William E. Fritz,  a Director of
NeoMedia.

         CHARLES  T.  JENSEN  was  Chief   Financial   Officer,   Treasurer  and
Vice-President  of NeoMedia  since May 1, 1996.  Mr.  Jensen has been a Director
since August 6, 1996, and currently is a member of the  Compensation  Committee.
During June 2002, Mr. Jensen was promoted to President, Chief Operating Officer,
and Acting Chief Executive Officer.  Prior to joining NeoMedia in November 1995,
Mr.  Jensen  was Chief  Financial  Officer  of Jack M.  Berry,  Inc.,  a Florida
corporation  which grows and processes  citrus  products,  from December 1994 to
October 1995, and at Viking Range Corporation,  a Mississippi  corporation which
manufactures gas ranges, from November 1993 to December 1994. From December 1992
to February  1994,  Mr.  Jensen was  Treasurer  of Lin Jensen,  Inc., a Virginia
corporation specializing in ladies clothing and accessories. Prior to that, from
January 1982 to March 1993,  Mr. Jensen was  Controller  and  Vice-President  of
Finance of The Pinkerton Tobacco Co., a tobacco manufacturer. Mr. Jensen holds a
B.B.A. in accounting from Western Michigan  University and is a Certified Public
Accountant.

         DAVID A.  DODGE  joined  NeoMedia  in 1999 as the  Financial  Reporting
Manager.  Since then,  Mr. Dodge has acted as  NeoMedia's  Director of Financial
Planning and Controller,  and currently holds the title of Vice President, Chief
Financial  Officer and Controller.  Prior to joining NeoMedia in 1999, Mr. Dodge
was an auditor  with Ernst & Young LLP for 2 years.  Mr.  Dodge  holds a B.A. in
economics from Yale  University and an M.S. in accounting from the University of
Hartford, and is also a Certified Public Accountant.

         WILLIAM E. FRITZ is a founder of NeoMedia  and has served as  Secretary
and Director of NeoMedia since our inception. Mr. Fritz also served as Treasurer
of NeoMedia from its inception until May 1, 1996. Since February 1981, Mr. Fritz
has been an officer and either the sole stockholder or a majority stockholder of
G.T. Enterprises, Inc. (formerly Gen-Tech, Inc.), D.M., Inc. (formerly Dev-Mark,
Inc.) and EDSCO, three railroad freight car equipment  manufacturing  companies.
Mr.  Fritz  holds a B.S.M.E.  and a Bachelor  of Naval  Science  degree from the
University of Wisconsin. Mr. Fritz is the father of Charles W. Fritz, NeoMedia's
former Chief Executive Officer and Chairman of the Board of Directors.


                                       50



         JAMES J. KEIL has been a Director of NeoMedia since August 6, 1996. Mr.
Keil  currently  is a member of the  Compensation  Committee,  the Stock  Option
Committee  and the Audit  Committee.  He is founder and President of Keil & Keil
Associates,  a business and  marketing  consulting  firm located in  Washington,
D.C.,  specializing  in  marketing,   sales,  document  application  strategies,
recruiting  and  electronic  commerce  projects.  Prior to  forming  Keil & Keil
Associates in 1990,  Mr. Keil worked for 38 years at IBM  Corporation  and Xerox
Corporation in various  marketing,  sales and senior executive  positions.  From
1989-1995,  Mr.  Keil  was on the  Board of  Directors  of  Elixir  Technologies
Corporation (a non-public  corporation),  and from 1990-1992 was the Chairman of
its  Board of  Directors.  From  1992-1996,  Mr.  Keil  served  on the  Board of
Directors of Document  Sciences  Corporation.  Mr. Keil holds a B.S. degree from
the  University of Dayton and did Masters level studies at the Harvard  Business
School and the University of Chicago in 1961/62.

         A. HAYES BARCLAY has been a Director of NeoMedia  since August 6, 1996,
and currently is a member of the Stock Option Committee and the Audit Committee.
Mr.  Barclay has practiced law for  approximately  37 years and, since 1967, has
been an officer,  owner and employee of the law firm of Barclay & Damisch,  Ltd.
and its  predecessor,  with offices in Chicago,  Wheaton and Arlington  Heights,
Illinois.  Mr. Barclay holds a B.A. degree from Wheaton College, a B.S. from the
University  of Illinois and a J.D.  from the Illinois  Institute of Technology -
Chicago Kent College of Law.

ELECTION OF DIRECTORS AND OFFICERS

         Directors are elected at each annual meeting of  stockholders  and hold
office  until  the  next   succeeding   annual  meeting  and  the  election  and
qualification of their respective  successors.  Officers are elected annually by
the  Board of  Directors  and hold  office  at the  discretion  of the  Board of
Directors.  NeoMedia's By-Laws permit the Board of Directors to fill any vacancy
and such director may serve until the next annual  meeting of  shareholders  and
the due election and qualification of his successor.

MEETINGS OF THE BOARD OF DIRECTORS

         During the year ended December 31, 2002, we held 7 directors'  meetings
and each  director  attended  more  than  seventy-five  percent  of the total of
meetings of the Board of Directors and the Committees of which he is a member.

COMMITTEES OF THE BOARD OF DIRECTORS

         NeoMedia's  Board of  Directors  has an Audit  Committee,  Compensation
Committee and a Stock Option  Committee.  The Board of Directors does not have a
standing Nominating Committee.

         AUDIT  COMMITTEE.  The Audit  Committee is  responsible  for nominating
NeoMedia's  independent  accountants  for  approval  by the Board of  Directors,
reviewing the scope, results and costs of the audit with NeoMedia's  independent
accountants,  and  reviewing  the  financial  statements,  audit  practices  and
internal controls of NeoMedia.  During 2002, members of the Audit Committee were
nonemployee directors James J. Keil and A. Hayes Barclay. During 2002, the Audit
Committee held one meeting.

         COMPENSATION  COMMITTEE.  The Compensation Committee is responsible for
recommending compensation and benefits for the executive officers of NeoMedia to
the Board of  Directors  and for  administering  NeoMedia's  Incentive  Plan for
Management.  Charles W. Fritz, Charles T. Jensen, A. Hayes Barclay, and James J.
Keil,  were members of  NeoMedia's  Compensation  Committee  during  2002.  This
Committee held one meeting during 2002.

         STOCK OPTION COMMITTEE. The Stock Option Committee,  which is comprised
of non-employee  directors,  is responsible for  administering  NeoMedia's Stock
Option  Plans.  A. Hayes  Barclay and James J. Keil are the  current  members of
NeoMedia's  Stock  Option  Committee.  During  2002,  this  Committee  held five
meetings.

COMPENSATION OF DIRECTORS

         Each outside director will be granted  1,000,000 options at an exercise
price of $0.01 per share  from the 2003  Stock  Option  Plan.  The last grant to
outside  directors was at  NeoMedia's  previous  annual  meeting held on June 6,
2002, at which each outside  director  received 100,000 options with an exercise
price of $0.05 per share.  NeoMedia does not have a written  compensation policy
for its outside directors at this time.


                                       51



                  COMPENSATION COMMITTEE REPORT TO STOCKHOLDERS

         The  Compensation  Committee,  which  meets  on a  periodic  basis,  is
comprised  of Messrs.  Charles  W. Fritz and  Charles  T.  Jensen,  officers  of
NeoMedia and James J. Keil, a non-employee member of the Board of Directors. The
Compensation Committee formulates and administers  compensation policies for the
President and Chief Executive  Officer and all vice  presidents of NeoMedia.  (A
Stock Option Committee  consisting of two non-employee  Directors is responsible
for  determining  to whom and under what terms stock options  should be granted,
other than options  which are  automatically  granted to members of the Board of
Directors, under the Plan.)

                      REPORT OF THE COMPENSATION COMMITTEE

               OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION

         The following is a report of the Compensation Committee of the Board of
Directors (the "Committee")  describing the compensation  policies applicable to
NeoMedia's executive officers during the fiscal year ended December 31, 2002.

         The  Committee is  responsible  for  establishing  and  monitoring  the
general compensation policies and compensation plans of NeoMedia, as well as the
specific compensation levels for executive officers.

GENERAL COMPENSATION PHILOSOPHY

         Under the supervision of the Committee,  NeoMedia's compensation policy
is designed to attract, motivate and retain qualified key executives critical to
NeoMedia's  success.  It is the  objective of NeoMedia to have a portion of each
executive's  compensation  dependent upon NeoMedia's performance as well as upon
the executive's individual  performance.  Accordingly,  each executive officer's
compensation  package is  comprised  of three  elements:  (i) base salary  which
reflects  individual  performance and expertise,  (ii) variable bonus payable in
cash and tied to the achievement of certain annual  performance  goals and (iii)
stock  options  which are  designed  to align  the  long-term  interests  of the
executive  officer with those of NeoMedia's  stockholders.  NeoMedia did not pay
any bonuses during 2001 or 2002.

         The  Committee  considers  the  total  compensation  of each  executive
officer in establishing  each element of compensation,  other than stock options
which  are the  responsibility  of the Stock  Option  Committee.  All  incentive
compensation  plans are  reviewed  at least  annually  to  assure  they meet the
current strategies and needs of NeoMedia.

         The  summary  below  describes  in more  detail  the  factors  that the
Committee  considers in establishing each of the three primary components of the
compensation package provided to the executive officers.

BASE SALARY

         Base  salary  ranges  are  established  based on  benchmark  data  from
nationally recognized surveys of similar high-technology  companies that compete
with NeoMedia for executive officers and NeoMedia's  research of peer companies.
Each  executive  officer's  base  salary  is  established  on the  basis  of the
individual's qualifications and relevant experience.

VARIABLE BONUS

         The  Committee  believes  that a  substantial  portion  of  the  annual
compensation of each executive  should be in the form of variable  incentive pay
to reinforce  the  attainment of NeoMedia's  goals.  The Incentive  Plan rewards
achievement of specified  levels of corporate  profitability.  A pre- determined
formula, which takes into account profitability against the annual plan approved
by the Board of Directors,  is used to determine the bonus award. The individual
executive  officer's bonus award is based upon discretionary  assessment of each
officer's  performance  during the prior fiscal  year.  NeoMedia did not pay any
bonuses during 2001 or 2002.

COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER

         Charles W. Fritz served as  NeoMedia's  Chairman of the Board and Chief
Executive  Officer from August 1996 until June 2002. During June 2002, Mr. Fritz
resigned  his  duties  as  Chief  Executive  Officer,  and  Charles  T.  Jensen,
NeoMedia's  former Chief  Financial  Officer,  was elected  president  and Chief
Operating Officer, and also named acting CEO.


                                       52



         BASE SALARY: The Committee reviews the Chief Executive  Officer's major
accomplishments  and reported base salary  information  for the chief  executive
officers of other  companies in NeoMedia's  peer group.  Mr.  Jensen's salary is
currently  $175,00 per year. During the period from May 1, 2003 through July 15,
2003,  Mr.  Jensen's  salary was  reduced to  $120,000  per year in an effort to
reduce costs. He is not under contract with NeoMedia.

         CASH INCENTIVE:  The Chief Executive  Officer's  incentive target is at
the discretion of the  Committee.  Achievement of the target is based on overall
company  income  versus  annual Plan income.  Neither Mr.  Fritz nor Mr.  Jensen
earned a bonus relating to fiscal 2002 or 2001.  During June 2001, the Committee
approved an adjustment, relating to the Digital:Convergence patent license fees,
to the 2000 Incentive Plan that reduced the bonus payout by  approximately  $1.1
million. Mr. Fritz's incentive relating to fiscal 2000 was reduced from $430,800
to $148,800.  The award was paid in April 2003 with shares of NeoMedia's  common
stock.  NeoMedia did not recognize or pay a bonus to any employees during fiscal
2001 or 2002.


                             COMPENSATION COMMITTEE
                       -----------------------------------
                                Charles W. Fritz
                                Charles T. Jensen
                                  James J. Keil




           COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         The Compensation Committee of the Board of Directors currently consists
of Messrs. Fritz, Jensen, and Keil. During the last fiscal year, no interlocking
relationship  existed  between  NeoMedia's  Board of Directors  or  Compensation
Committee  and the board of  directors  or  compensation  committee of any other
company.


                                       53



                          REPORT OF THE AUDIT COMMITTEE

         The  Audit  Committee  for  the  last  fiscal  year  consisted  of  two
nonemployee  Directors.  The Board of Directors has determined  that none of the
members of the Audit Committee has a relationship to NeoMedia that may interfere
with his independence from NeoMedia and its management.  The Audit Committee has
a written  charter,  a copy of which was filed as Appendix A to  NeoMedia  proxy
statement filed on May 23, 2001.

         The primary  function of the Audit  Committee is to assist the Board of
Directors in fulfilling its oversight  responsibilities  by reviewing  financial
reports and other financial information provided by NeoMedia to any governmental
body or the public,  NeoMedia's  systems of internal controls regarding finance,
accounting,  legal  compliance  and  ethics  that  management  and the  Board of
Directors have established,  and NeoMedia's  auditing,  accounting and financial
processes  generally.  The Audit Committee  annually  recommends to the Board of
Directors  the  appointment  of a firm of  independent  auditors  to  audit  the
financial  statements  of NeoMedia and meets with such  personnel of NeoMedia to
review the scope and the results of the annual audit,  the amount of audit fees,
NeoMedia's  internal  accounting   controls,   NeoMedia's  financial  statements
contained in NeoMedia's Annual Report to Stockholders and other related matters.

         The Audit  Committee has reviewed and  discussed  with  management  the
financial statements for fiscal year 2002 audited by Stonefield Josephson, Inc.,
NeoMedia's   independent  auditors.  The  Audit  Committee  has  discussed  with
Stonefield Josephson,  Inc. various matters related to the financial statements,
including  those  matters  required to be discussed by SAS 61  (Codification  of
Statements  on Auditing  Standards,  AU ss. 380).  The Audit  Committee has also
received the written disclosures and the letter from Stonefield Josephson,  Inc.
required by Independence Standards Board Standard No. 1 (Independence  Standards
Board Standard No. 1, Independence  Discussions with Audit Committees),  and has
discussed with the firm its independence. Based upon such review and discussions
the Audit  Committee  recommended  to the Board of  Directors  that the  audited
financial  statements be included in  NeoMedia's  Annual Report on Form 10-K for
the fiscal  year  ending  December,  2002 for  filing  with the  Securities  and
Exchange Commission.


                                 AUDIT COMMITTEE
                         -------------------------------
                                  James J. Keil
                                A. Hayes Barclay




         The report of the Audit Committee  shall not be deemed  incorporated by
reference  by any  general  statement  incorporating  by  reference  this  proxy
statement  into  any  filing  under  the  Securities  Act of 1933 or  under  the
Securities  Exchange  Act  of  1934,  except  to  the  extent  that  the  filing
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.


                                       54



                             EXECUTIVE COMPENSATION

         The following table sets forth certain  information with respect to the
compensation  paid during the years ended December 31, 2002,  2001, and 2000 to:
(i)  NeoMedia's  Chief  Executive  Officer  and (ii)  each of  NeoMedia's  other
executive  officers  as  of  December  31,  2002  who  received  aggregate  cash
compensation  during the year ended  December 31, 2001 in excess of $100,000 for
services rendered to NeoMedia (collectively, "the Named Executive Officers"):



                                                             SUMMARY COMPENSATION TABLE

                                              ANNUAL COMPENSATION                         LONG-TERM COMPENSATION
                                                                     OTHER                 SECURITIES
                                                                     ANNUAL    RESTRICTED   UNDERLYING
                                                                    COMPENS-      STOCK      OPTIONS/        LTIP        ALL OTHER
     NAME AND                             SALARY        BONUS        ATION       AWARD(S)     SARS (1)     PAYOUTS     COMPENSATION
PRINCIPAL POSITION             YEAR        ($)           ($)          ($)          ($)          (#)         ($)             ($)
------------------------------------------------------------------------------------------------------------------------------------
                                                                                               
Charles W. Fritz               2002     $ 144,583    $      --        $ --     $      --     1,800,000   $      --     $   4,470(3)
  Chairman of the Board        2001       221,758           --          --            --       400,000          --        21,532(3)
                               2000       250,000      148,800(2)       --            --        49,000          --        22,502(3)

Charles T. Jensen              2002       163,542           --          --            --       800,000          --         5,079(3)
  Chief Operating Officer,     2001       144,239           --          --            --       240,000          --        17,794(3)
  President, Acting Chief      2000       150,000       87,860(2)       --            --        37,000          --        29,767(3)
  Executive Officer


(1)      Represents  options granted under NeoMedia's 2002 and 1998 Stock Option
         Plans and warrants  granted at the  discretion of  NeoMedia's  Board of
         Directors.

(2)      In June 2001, NeoMedia's Compensation Committee approved an adjustment,
         relating to the Digital:Convergence  patent license fees, to the Annual
         Incentive  Plan for  Management  that  reduced the 2000 bonus payout by
         approximately  $1.1 million.  The original  amount recorded in 2000 and
         reported on NeoMedia's Form 10-KSB for 2000 was $430,800 for Charles W.
         Fritz and  $193,860 for Charles T.  Jensen.  The  adjusted  amounts are
         presented in the table above.

(3)      Includes life insurance  premiums where policy  benefits are payable to
         his  beneficiary and automobile  expenses  attributable to personal use
         and the corresponding income tax effects.


                                       55



                        OPTION GRANTS IN LAST FISCAL YEAR

         The  following  table  contains  information  concerning  the  grant of
options,  all of which are  nonqualified,  and  warrants to the Named  Executive
Officers during the year ended December 31, 2002:



                                          PERCENT OF
                           NUMBER OF        TOTAL
                          SECURITIES       OPTIONS/                                                POTENTIAL REALIZABLE VALUE
                          UNDERLYING        SARS                                                    AT ASSUMED ANNUAL RATES
                           OPTIONS       GRANTED TO       EXERCISE OR                             OF STOCK PRICE APPRECIATION
                           GRANTED      EMPLOYEES IN      BASE PRICE     EXPIRATION                     FOR OPTION TERM
       NAME                 (#)          FISCAL YEAR       ($/SHARE)        DATE                      5% ($)         10% ($)
                                                                                                  
Charles W. Fritz              50,000        0.3%            $0.14       January 9, 2012              $ 4,245        $10,758
                             250,000        1.4%            $0.05       June 6, 2012                 $ 7,861        $19,922
                           1,500,000        8.7%            $0.05       June 6, 2007                 $20,721        $45,788

Charles T. Jensen             50,000        0.3%            $0.14       January 9, 2012              $ 4,245        $10,758
                             250,000        1.4%            $0.05       June 6, 2012                 $ 7,861        $19,922
                             500,000        2.9%            $0.05       June 6, 2012                 $15,722        $39,844


----------

                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                       AND FISCAL YEAR-END OPTIONS VALUES

         The  following  table sets forth  options  exercised by NeoMedia  Named
Executive  Officers  during  fiscal  2002,  and  the  number  and  value  of all
unexercised options at fiscal year end.



                                                         NUMBER OF UNEXERCISED
                          SHARES                          SECURITIES UNDERLYING                 VALUE OF UNEXERCISED IN-
                         ACQUIRED        VALUE               OPTIONS/SARS AT                    THE-MONEY OPTIONS/SARS AT
                        ON EXERCISE    REALIZED             DECEMBER 31, 2002                     DECEMBER 31, 2002 (1)
NAME                        (#)           ($)         EXERCISABLE      UNEXERCISABLE          EXERCISABLE      UNEXERCISABLE
-----------------------------------------------------------------------------------------------------------------------------
                                                                                            
Charles W. Fritz          140,775       $1,408         2,829,400          219,600                  --                 --

Charles T. Jensen              --           --         1,400,586          104,800                  --                 --


(1)      The value of the in the money options is  calculated by the  difference
         between the market  price of the stock at December 31, 2002 ($0.01) and
         the  exercise  price  of the  options.  No  options  held by the  Named
         Executive Officers were "In-the-money" as of December 31, 2002.

OPTION REPRICING PROGRAM

         To encourage  the exercise of options,  our Board of Directors in April
2002  adopted an option  repricing  program.  Under the program,  those  persons
holding options granted under the 1996, 1998 and 2002 Stock Option Plans, to the
extent their options are  exercisable  during the period ending October 9, 2002,
were allowed to exercise the option at a price which is the greater of $0.12 per
share or 50% of the last sale  price of a share of our  common  stock on the OTC
Bulletin Board on the trading date  immediately  preceding the date of exercise.
No options were exercised under the program.

      During May 2003,  the Company  re-priced  approximately  8.0 million stock
options under a 6-month repricing program.  Under the terms of the program,  the
exercise price for outstanding  options under the Company's 2002, 1998, and 1996
Stock Option Plans was restated to $0.01 per share for a period of 6 months.  In
accordance with FASB Interpretation, FIN 44, Accounting for Certain Transactions
Involving Stock Transactions,  the award has been accounted for as variable from
May  19,  2003  through  the  period  ended  September  30,  2003.  Accordingly,
approximately  $544,000 and $710,000 was recorded as compensation in general and
administrative  expense during the three months and nine months ended  September
30, 2003.

      Under  applicable  provisions of the Internal  Revenue Code, to the extent
the nonqualified  options are exercised,  the holders will be deemed to have the
taxable income to the extent of the difference between the fair market value and
the  exercise  price and we will  suffer a  comparable  charge to our  earnings.
Alpine Securities Inc., a broker-dealer registered under the Securities Exchange
Act has agreed to assist option  holders in the option  exercise and the sale of
shares  acquired  and the  payment  to us of the  exercise  price  from the sale
proceeds.


                                       56



EMPLOYMENT AGREEMENTS

         NeoMedia does not currently  have any unexpired  employment  agreements
with any of its officers or employees.

INCENTIVE PLAN FOR MANAGEMENT

         Effective as of January 1, 1996,  NeoMedia  adopted an Annual Incentive
Plan for  Management  ("Incentive  Plan"),  which provides for annual bonuses to
eligible  employees  based  upon the  attainment  of  certain  corporate  and/or
individual  performance goals during the year. The Incentive Plan is designed to
provide  additional  incentive to NeoMedia's  management to achieve these growth
and profitability goals. Participation in the Incentive Plan is limited to those
employees  holding  positions  assigned to incentive  eligible salary grades and
whose  participation  is authorized by NeoMedia's  Compensation  Committee which
administers the Incentive Plan,  including  determination of employees  eligible
for  participation  or exclusion.  The Board of Directors  can amend,  modify or
terminate  the  Incentive  Plan for the next plan year at any time  prior to the
commencement of such next plan year.

         To be eligible for  consideration  for inclusion in the Incentive Plan,
an employee must be on NeoMedia's  payroll for the last three months of the year
involved.  Death, total and permanent disability or retirement are exceptions to
such  minimum  employment,  and awards in such  cases are  granted on a pro-rata
basis. In addition, where employment is terminated due to job elimination, a pro
rata  award  may  be  considered.  Employees  who  voluntarily  terminate  their
employment,  or who are  terminated  by NeoMedia for  unacceptable  performance,
prior to the end of the year are not eligible to  participate  in the  Incentive
Plan.  All awards are subject to any  governmental  regulations in effect at the
time of payment.

         Performance  goals  are  determined  for  both  NeoMedia's  and/or  the
employee's  performance  during the year, and if performance goals are attained,
eligible employees are entitled to an award based upon a specified percentage of
their base salary.

         No incentive plan was in place for fiscal year 2002.

STOCK OPTION PLANS

         Effective February 1, 1996 (and amended and restated effective July 18,
1996 and further amended through  November 18, 1996),  NeoMedia adopted its 1996
Stock  Option  Plan  ("1996  Stock  Option  Plan").  The 1996 Stock  Option Plan
provides for the granting of  non-qualified  stock options and "incentive  stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended,  and provides  for the issuance of a maximum of 1,500,000  shares of
common stock.

         Effective March 27, 1998,  NeoMedia  adopted its 1998 Stock Option Plan
("1998 Stock Option Plan"). The 1998 Stock Option Plan provides for the granting
of  non-qualified  stock  options and  provides for the issuance of a maximum of
8,000,000 shares of common stock.

         Effective  June 6, 2002,  NeoMedia  adopted its 2002 Stock Option Plan.
The 2002 Stock Option Plan  provides for authority for the Board of Directors to
the grant  non-qualified  stock  options with respect to a maximum of 10,000,000
shares of common stock.

         Effective  September 24, 2003,  NeoMedia  adopted its 2003 Stock Option
Plan.  The 2003  Stock  Option  Plan  provides  for  authority  for the Board of
Directors to the grant  non-qualified stock options with respect to a maximum of
150,000,000  shares of common stock. On October 17, 2003,  NeoMedia filed a Form
S-8 to register all 150,000,000  shares underlying the options in the 2003 Stock
Option Plan.


                                       57



STOCK INCENTIVE PLAN

         Effective  October 31, 2003,  NeoMedia adopted the 2003 Stock Incentive
Plan.  Under  the  terms of the Plan,  NeoMedia  has set aside up to  30,000,000
shares of  common  stock to be issued  to pay  compensation  and other  expenses
related to employees, former employees, consultants, and non-employee directors.
On November 3, 2003, NeoMedia filed a Form S-8 to register all 30,000,000 shares
underlying the options in the 2003 Stock Incentive Plan.

401(K) PLAN

         NeoMedia  maintains a 401(k) Profit Sharing Plan and Trust (the "401(k)
Plan"). All employees of NeoMedia who are 21 years of age and who have completed
three months of service are  eligible to  participate  in the 401(k)  Plan.  The
401(k) Plan provides that each participant may make elective contributions of up
to 20% of such  participant's  pre-tax  salary (up to a  statutorily  prescribed
annual  limit) to the 401(k) Plan,  although the  percentage  elected by certain
highly  compensated  participants  may be  required  to be  lower.  All  amounts
contributed  to the 401(k) Plan by employee  participants  and earnings on these
contributions  are fully vested at all times.  The 401(k) Plan also provides for
matching and discretionary  contributions by NeoMedia. To date, NeoMedia has not
made any such contributions.

PROPERTIES

         Our  principal  executive,  development  and  administrative  office is
located at 2201 Second Street,  Suite 402, Fort Myers,  Florida 33901. We occupy
approximately  5,000  square  feet  under  terms  of a  written  lease  from  an
unaffiliated party which expires on January 31, 2004, with monthly rent totaling
approximately  $7,000.  During September 2002, we entered into an agreement with
the landlord of this facility  under which we vacated  approximately  70% of our
previously  rented  space in  exchange  for  reduced  rent.  We maintain a sales
facility at 2150 Western  Court,  Suite 230,  Lisle,  Illinois  60532,  where we
occupy  approximately  6,000 square feet under the terms of a written lease from
an  unaffiliated  party expiring on October 31, 2004, with monthly rent totaling
approximately $8,000.


                                       58



                                LEGAL PROCEEDINGS

         We are involved in the following  legal  actions  arising in the normal
course of business, both as claimant and defendant.

     NEOMEDIA SHAREHOLDERS

     During January 2002, certain of our shareholders filed a complaint with the
Securities  and Exchange  Commission,  alleging that the  shareholders  were not
included in the special  shareholders  meeting of November 25, 2001,  to vote on
the issuance of 19 million  shares of our common  stock.  On March 11, 2002,  we
filed  our  response  claiming  that  we  had  fully  complied  with  all of its
obligations  under the laws and  regulations  administered by the Securities and
Exchange  Commission,  as well as with its  obligation  under  Delaware  General
Corporation Law. No further action has been taken with respect to this matter.

     AIRCLIC, INC. LITIGATION

     On September 6, 2001,  AirClic,  Inc. filed suit against us in the Court of
Common Pleas, Montgomery County, Pennsylvania,  seeking, among other things, the
accelerated repayment of a $500,000 loan it advanced to us pursuant to the terms
of a Secured  Promissory Note made on July 11, 2003 and a non-binding  Letter of
Intent  dated  July 3, 2001  between  AirClic  and us.  The note was  secured by
substantially  all of our  intellectual  property,  including  the core physical
world-to-Internet  technologies.  In the suit, we  acknowledged  our obligations
under the note but filed a  counterclaim  against  AirClic  seeking  damages for
fraud, negligent misrepresentation and promissory estoppel.

     On October 3, 2003,  we paid  AirClic the  principal  plus  interest in the
approximate  amount of  $610,000.  On  December 5, 2003,  we paid an  additional
$115,000 in legal fees and entered  into a  settlement  agreement  with  AirClic
under which the suit was dismissed.  We have no further  obligation  relating to
this matter.

      DIGITAL:CONVERGENCE LITIGATION

      On June 26,  2001,  we filed a $3  million  lawsuit  in the U.S.  District
Court, Northern District of Texas, Dallas Division, against  Digital:Convergence
Corporation for breach of contract regarding a $3 million promissory note due on
June 24, 2001 that was not paid.  We are seeking  payment of the $3 million note
plus  interest  and  attorneys  fees.  We have not accrued any gain  contingency
related to this  matter.  On March 22,  2002,  Digital:Convergence  filed  under
Chapter 7 of the United States Bankruptcy Code. The matter is pending before the
bankruptcy court.

      OTHER LITIGATION

      On August  20,  2001,  Ripfire,  Inc.  filed  suit  against  us in the San
Francisco  County  Superior  Court seeking  payment of $138,000 under a software
license  agreement  entered into between us and Ripfire in May 2001  relating to
implementation of the Qode Universal Commerce Solution. On September 6, 2002, we
settled this suit for $133,000 of our common stock,  to be valued at the time of
registration of the shares. Our stock was trading at approximately $0.05 at that
time. We included for  registration 2.7 million shares in the name of Ripfire in
our form S-1 that was declared  effective  by the SEC on February 14, 2003.  Our
stock was trading at approximately $0.02 on February 14, 2003. The actual number
of shares to be issued to Ripfire per the pricing  outlined in the agreement was
approximately  9.8 million.  On March 31, 2003, we issued the 2.7 million shares
of  common  stock  that  had  been  registered  in the  S-1 to  Ripfire.  We are
negotiating  settlement of the  remaining  balance.  We had a remaining  accrued
liability of $106,000 relating to this matter as of September 30, 2003.

      On November 30, 2001,  Orsus Solutions USA, Inc.,  filed a summons seeking
payment in full of  approximately  $525,000  relating to a software and services
contract associated with implementation of the Qode Universal Commerce Solution.
In October 2003, we settled this matter for $10,000 cash payments plus 3,000,000
shares  of  common  stock  being  registered  hereunder.  Under the terms of the
agreement,  Orsus has the right to return the shares to us if the shares are not
registered for resale by February 14, 2003. Orsus will have until March 15, 2003
to return the shares under this  arrangement.  If they opt to return the shares,
we will pay up to $200,000 in cash over a period of approximately 20 months.  We
had accrued a liability of $331,000 as of September 30, 2003.


                                       59



      On July 27, 2002, our former General  Counsel filed suit in U.S.  District
Court,  Ft. Myers  division,  seeking  payment of the 2000 executive  incentive,
severance and unpaid vacation days in the amount of approximately  $154,000.  In
June  2001,  our  compensation  committee  approved  an  adjustment  to the 2000
executive incentive plan that reduced the executive incentive payout as a result
of  the  write-off  of the  Digital:Convergence  intellectual  property  license
contract in the second quarter of 2001. As a result,  we reduced the accrual for
such payout by an aggregate of approximately  $1.1 million in the second quarter
of 2002.  The  plaintiff  is seeking  payment of the entire  original  incentive
payout.  On November 12, 2002, we settled the lawsuit.  The settlement calls for
cash payments totaling  approximately  $90,000 over a period of ten months, plus
250,000  vested  options to purchase  shares of our common  stock at an exercise
price of $0.01 with a term of five years.  We had a liability  of  approximately
$7,000 relating to this matter as of September 30, 2003.

      On September 12, 2002,  R. R.  Donnelley & Sons Company filed a summons in
the  Circuit  Court of The  Twentieth  Judicial  Circuit in and for Lee  County,
Florida,  seeking  payment of  approximately  $92,000  in past due  professional
services  bills,  plus interest and attorney fees.  During July 2003, we settled
the suit for cash  payments over a period of  approximately  one year. We had an
accrued  liability  of  approximately  $97,000  relating  to this  matter  as of
September 30, 2003.

      On September 13, 2002, Wachovia Bank, N.A., owner of the building in which
our Ft. Myers,  Florida  headquarters  is located,  filed a complaint in Circuit
Court of The Twentieth Judicial Circuit in and for Lee County, Florida,  seeking
payment of  approximately  $225,000 in past due rents.  The complaint also seeks
payment of all future  rent  payments  under the lease  term,  which  expires in
January  2004,  as well as  possession  of the  premises.  On October 28,  2002,
NeoMedia and Wachovia reached a settlement on this matter.  The settlement calls
for cash payments of past due rents of  approximately  $250,000 over a period of
16  months.  We  also  vacated  approximately  70% of the  unused  space  in our
headquarters,  and the rent for the  remainder  of the lease,  which  expires in
January  2004,  was reduced  according to square  footage used. We had accrued a
liability of approximately  $180,000 relating to this matter as of September 30,
2003.

      On October 21, 2002, International Digital Scientific, Inc. ("IDSI") filed
a demand for  arbitration  relating to past due payments on an  uncollateralized
note  payable  by us to IDSI  dated  October  1,  1994.  The note was  issued in
exchange for the purchase by us of computer  software from IDSI.  The note calls
for us to  make  payments  of the  greater  of:  (i) 5% of the  collected  gross
revenues  from sales of software or (ii) $16,000 per month.  As of September 30,
2003,  we had  recorded  a  current  portion  of  long  term  debt  to  IDSI  of
approximately  $591,000.  The net carrying value of future  obligation under the
note was  approximately  $684,000 as of September 30, 2003. On October 31, 2003,
we paid off all past due and future  obligations  under the note to IDSI through
the issuance of  8,000,000  shares of our common  stock,  being  registered  for
resale hereunder. Under the terms of the agreement, IDSI has the right to return
the shares to us if the shares are not  registered  for resale by  February  14,
2003.  IDSI will have  until  March 15,  2003 to return  the  shares  under this
arrangement. If they opt to return the shares, then enforcement will be governed
by the original purchase agreement from 1994.

      On October 28, 2002, Merrick & Klimek,  P.C., filed a complaint against us
seeking payment of approximately $170,000 in past due legal services. The amount
in question is subject to an unsecured  promissory  note that matured  unpaid on
February  28,  2002.  On May 1,  2003,  we  settled  the suit for cash  payments
totaling  approximately  $196,000,  to be paid at a rate of $30,000  per quarter
until the  balance is  satisfied.  If the balance is paid within one year of the
settlement,  we will not pay interest charges.  We had a remaining  liability of
approximately $120,000 relating to this matter as of September 30, 2003.

      On November  11, 2002,  Avnet/Hallmark  Computer  Marketing  Group filed a
complaint  against  us  seeking  payment  of  approximately  $66,000 in past due
amounts  relating to hardware and software  re-sold by us. During December 2002,
we made payment of approximately  $30,000 to Avnet, reducing the balance owed to
approximately  $37,000. On April 1, 2003, the plaintiff received a judgment from
the circuit  court for the remaining  balance.  We have agreed to a payment plan
for the balance over a period of approximately  nine months.  We had a liability
of approximately $37,000 relating to this matter as of September 30, 2003.

      On February 6, 2003, Allen Norton & Blue, P.A., filed a complaint  against
us seeking payment of approximately  $25,000 in past due legal services. We have
agreed to a payment plan relating to this matter under which the balance will be
paid over  approximately 12 months. We had a liability of approximately  $19,000
relating to this matter as of September 30, 2003.

      On April 18, 2003, a former  participant in our 2001  self-insured  health
plan sued us to recover approximately $46,000 in unpaid health claims from 2001.
On December 1, 2003,  we settled  this suit for cash  payments  over a period of
approximately one year. We had accrued approximately $51,000 as of September 30,
2003

      On November  21,  2003 we  received a letter  from Day West &  Associates,
threatening  litigation for  approximately  $7,000 relating to staffing services
provided in connection with our due diligence review of Loch Energy, Inc. we are
currently negotiating a resolution to this matter with Day West's attorney.


                                       60



                             PRINCIPAL STOCKHOLDERS

The following  table sets forth,  as of December 12, 2003,  certain  information
regarding  beneficial  ownership of NeoMedia's  common stock by: (i) each person
known by  NeoMedia  to be the  beneficial  owner of more  than 5% of  NeoMedia's
outstanding  common  stock;  (ii) each  director;  (iii)  each  named  executive
officer; and (iv) all executive officers and directors as a group.



                                                       AMOUNT AND NATURE OF          PERCENT OF
                                                     BENEFICIAL OWNERSHIP (1)         CLASS (1)
                                                     ------------------------         ---------
                                                                                
Charles W. Fritz (2)(3)                                      30,316,467                   11.8%
William Fritz(2)(4)                                          56,674,776                   22.9%
Charles T. Jensen(2)(5)                                      11,506,886                    4.5%
David A. Dodge(2)(6)                                          2,300,000                      *
A. Hayes Barclay(2)(7)                                        1,139,000                      *
James J. Keil(2)(8)                                           1,485,000                      *
                                                            -----------                -------

Officers and Directors as a Group (9 Persons)(9)            103,422,129                   37.4%
                                                            -----------                -------


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

* Indicates less than 1%.

(1)    Applicable  percentage  of  ownership is based on  243,878,428  shares of
       common  stock  outstanding  as  of  December  12,  2003,   together  with
       securities  exercisable or convertible into shares of common stock within
       60 days of December 12, 2003, for each stockholder.  Beneficial ownership
       is determined in accordance with the rules of the Securities and Exchange
       Commission and generally includes voting or investment power with respect
       to securities.  Shares of common stock subject to securities  exercisable
       or convertible into shares of common stock that are currently exercisable
       or  exercisable  within 60 days of December  12,  2003,  are deemed to be
       beneficially  owned by the person holding such securities for the purpose
       of computing  the  percentage  of  ownership of such person,  but are not
       treated as  outstanding  for the  purpose  of  computing  the  percentage
       ownership of any other person.  The common stock is the only  outstanding
       class of equity securities of NeoMedia.

(2)    Address of the referenced individual is c/o NeoMedia Technologies,  Inc.,
       2201 Second Street, Suite 402, Fort Myers, FL, 33901.

(3)    Charles W. Fritz is the  Company's  founder and the Chairman of the Board
       of Directors.  Shares beneficially owned include 100 shares owned by each
       of Mr.  Fritz's  four minor  children  for an  aggregate  of 400  shares,
       11,549,000  shares of common  stock  issuable  upon  exercise  of options
       granted  under our stock option  plans,  1,510,000  shares  issuable upon
       exercise of stock  warrants,  15,714,098  shares of common stock owned by
       Mr. Charles W. Fritz directly,  and 1,542,969 shares of common stock held
       by the CW/LA II Family Limited Partnership,  a family limited partnership
       for the benefit of Mr. Fritz's family.

(4)    William E. Fritz, the Company's corporate  secretary and a director,  and
       his wife,  Edna  Fritz,  are the  general  partners  of the Fritz  Family
       Limited  Partnership  and therefore  each are deemed to be the beneficial
       owners of the 1,511,742 shares held in the Fritz Family  Partnership.  As
       trustee of each of the  Chandler  R. Fritz 1994  Trust,  Charles W. Fritz
       1994 Trust and Debra F. Schiafone 1994 Trust,  William E. Fritz is deemed
       to be the  beneficial  owner of the 165,467  shares of  NeoMedia  held in
       these trusts. Additionally, Mr. Fritz is deemed to own: 51,172,567 shares
       held directly by Mr. Fritz or his spouse,  2,540,000  shares to be issued
       upon the  exercise  of  warrants  held by Mr.  Fritz or his  spouse,  and
       1,285,000  shares to be issued upon the  exercise of options  held by Mr.
       Fritz or his  spouse.  Mr.  William E. Fritz may be deemed to be a parent
       and  promoter of NeoMedia,  as those terms are defined in the  Securities
       Act.

(5)    Charles T. Jensen is President,  Chief  Operating  Officer,  Acting Chief
       Executive  Officer,  and a member of the Board of  Directors.  Beneficial
       ownership  includes  11,505,386  shares of  common  stock  issuable  upon
       exercise of options  granted under  NeoMedia's  stock option  plans,  and
       1,500 shares owned by Mr. Jensen's son.

(6)    David  A.  Dodge  is  Vice  President,   Chief  Financial  Officer,   and
       Controller.  Beneficial  ownership  includes  2,300,000  shares of common
       stock issuable upon exercise of options  granted under  NeoMedia's  stock
       option plans.

(7)    A.  Hayes  Barclay  is a  member  of the  Board of  Directors.  Ownership
       includes  1,134,000  shares of common  stock  issuable  upon  exercise of
       options  granted under  NeoMedia's  stock option plans,  and 5,000 shares
       owned by Mr. Barclay directly.

(8)    James J. Keil is a member of the Board of Directors.  Shares  benficially
       owned  includes   10,000  shares  issuable  upon  exercise  of  warrants,
       1,000,000  shares  issuable  upon the  exercise of  options,  and 475,000
       shares owned by Mr. Keil directly.

(9)    Includes an  aggregate of  28,773,386  currently  exercisable  options to
       purchase  shares of common stock  granted under  NeoMedia's  stock option
       plans,  4,060,000  currently  exercisable  warrants to purchase shares of
       common stock, and 70,588,743 shares owned directly by NeoMedia's officers
       and directors.


                                       61




                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         During August 2003, we borrowed  $50,000 from William E. Fritz,  one of
our outside  directors,  under an unsecured note payable with a term of 30 days.
The note was repaid in full during September 2003.

         During July 2003, we borrowed $25,000 from William E. Fritz, one of our
outside  directors.  This amount was added to the  principal  of a $10,000  note
payable to Mr.  Fritz that  matures in April  2004,  with all other terms of the
note  remaining  the same. As  consideration  for the loan, we granted Mr. Fritz
2,500,000  warrants to purchase  shares of our common stock at an exercise price
of $0.01 per share.

         During April 2003, we entered into a consulting  agreement with William
Fritz, an outside director,  for consulting and advisement  services relating to
the merger with Loch  Energy,  Inc.,  and to the  subsequent  implementation  of
various management  programs  surrounding the business.  The agreement calls for
total  payments of $250,000  over a period of one year.  During  August 2003, we
paid the  consulting  contract in full.  During  September  2003, the consulting
contract was rescinded and the full $250,000 was returned to us.

         During April 2003, our Board of Directors  approved the payment in full
of  approximately  $154,000 of liabilities owed by NeoMedia to Charles W. Fritz,
our Founder  and  Chairman of the Board of  Directors,  through the  issuance of
15,445,967  shares of common stock. We recognized a discount  expense in general
and   administrative   expenses  of  approximately   $15,000  relating  to  this
transaction with Mr. Fritz.

         During April 2003, we sold 25,000,000  shares of its common stock,  par
value $0.01, in a private placement at a price of $0.01 per share. In connection
with the sale,  we also granted the  purchaser  25,000,000  warrants to purchase
shares of our common stock at an exercise price of $0.01 per share. The warrants
had a fair value of $298,000 and have been  recorded as a cost of issuance.  The
purchaser was William E. Fritz, a member of our Board of Directors.  Proceeds to
us from sale of the shares were  $250,000.  We recognized a discount  expense in
general and  administrative  expenses of approximately  $50,000 relating to this
transaction  with Mr. Fritz. On August 6, 2003, Mr. Fritz exercised his warrants
and purchased  25,000,000  additional shares of common stock at a price of $0.01
per share.

         During November 2002, we issued  Convertible  Secured  Promissory Notes
with an aggregate face value of $60,000 to 3 separate parties, including Charles
W. Fritz,  Chairman of the Board of Directors of NeoMedia;  William E. Fritz, an
outside  director;  and James J.  Keil,  an  outside  director.  The notes  bear
interest  at a rate of 15% per annum,  and  matured  at the  earlier of i.) four
months, or ii.) the date the shares underlying the Cornell Equity Line of Credit
are registered  with the SEC. The notes were  convertible,  at the option of the
holder,  into  either  cash or shares of our common  stock at a 30%  discount to
either market price upon closing,  or upon  conversion,  whichever is lower.  We
also granted to the holders an additional  1,355,670  shares of its common stock
and 60,000  warrants to purchase  shares of its common stock at $0.03 per share,
with a term of three years. The warrants and shares were issued in January 2003.
In  addition,  since this debt is  convertible  into equity at the option of the
note holder at beneficial  conversion rates, an embedded  beneficial  conversion
feature was  recorded  as a debt  discount  and  amortized  using the  effective
interest  rate over the life of the debt in  accordance  with EITF 00-27.  Total
cost of  beneficial  conversion  feature,  fair  value of the  stock and cost of
warrants  issued  exceed the face value of the notes  payable,  therefore,  only
$60,000,  the face amount of the note, was  recognizable  as debt discount,  and
amortized  over the life of the notes  payable.  During  March 2003,  two of the
affiliated  parties,  Mr.  William  Fritz and Mr.  Keil,  agreed  to extend  the
maturity date due to our capital constraints.  We repaid Charles Fritz's note in
full during  March 2003,  and repaid  James J. Keil's note in full during  April
2003.  We paid  $30,000 of the  principal  on William  Fritz's note during April
2003, and entered into a new note with Mr. Fritz for the remaining $10,000.  The
new note bears  interest  at a rate of 10% per annum and  matures in April 2004.
The new note also includes a provision  under which,  as  consideration  for the
loan, Mr. Fritz will receive a 3% royalty on all future  revenue  generated from
our intellectual property.

         During  April 2002,  we borrowed  $11,000 from William E. Fritz under a
note payable  bearing  interest at 8% per annum with a term of 60 days. The note
was repaid in April 2003.

         During March 2002,  we borrowed  $190,000 from William E. Fritz under a
note payable  bearing  interest at 8% per annum with a term of 16 days. The note
was repaid during March 2002.


                                       62



         During February 2002, we borrowed $10,000 from William E. Fritz under a
note payable  bearing  interest at 8% per annum with a term of 30 days. The note
was repaid in April 2003.

         During  October  2001,  we borrowed  $4,000 from Charles W. Fritz,  our
Chairman,  our former  Chief  Executive  Officer  and a  director,  under a note
payable  bearing  interest at 10% per annum with a term of six months.  The note
was repaid in April 2003.

         We believe that all of the above  transactions were conducted at "arm's
length",  representing  what  we  believe  to be fair  market  value  for  those
services.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section  16(a)  of  the  Securities   Exchange  Act  of  1934  requires
NeoMedia's officers and directors,  and persons who own more than ten percent of
a registered class of NeoMedia's equity securities, to file reports of ownership
and changes in ownership with the Securities and Exchange Commission.  Officers,
directors  and  greater  than  ten-percent  shareholders  are  required  by  SEC
regulation to furnish NeoMedia with copies of all Section 16(a) forms they file.

         Based  solely on a review  of the  copies of such  forms  furnished  to
NeoMedia,  NeoMedia  believes that during 2002 there was no  delinquency  in the
Section  16(a) filing  obligations  of  NeoMedia's  officers,  directors and ten
percent beneficial owners.


                                       63



                MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
                   COMMON EQUITY AND OTHER STOCKHOLDER MATTERS

         Our common stock began trading on The Nasdaq  SmallCap Market under the
symbol "NEOM" on November 25, 1996, the date of our initial public offering.  On
March 11, 2002,  we received a Nasdaq Staff  Determination  stating  that, as of
December  31,  2001,  we did not meet  either the minimum  net  tangible  assets
($2,000,000) or minimum stockholders' equity ($2,500,000) criteria for continued
listing on the Nasdaq SmallCap Market and advising that, accordingly, our shares
were subject to de-listing  from such market.  Our shares are now trading on the
OTC Bulletin  Board under the symbol  "NEOM." As of December 12, 2003 there were
243,878,428 common shares outstanding.

         The following  table  summarizes  the high and low closing sales prices
per share of the common  stock for the  periods  indicated  as  reported  on The
Nasdaq SmallCap Market or OTC Bulletin Board:



                                                            (U.S. $)
--------------------------------------------------------------------------------
2000                                               HIGH                    LOW
--------------------------------------------------------------------------------
                                                                  
First Quarter                                    $  14.50               $   5.69
Second Quarter                                      11.12                   5.00
Third Quarter                                        6.75                   4.12
Fourth Quarter                                       6.50                   1.94
--------------------------------------------------------------------------------

2001                                               HIGH                    LOW
--------------------------------------------------------------------------------
First Quarter                                    $   6.00               $   2.50
Second Quarter                                       4.50                   1.76
Third Quarter                                        1.85                   0.16
Fourth Quarter                                       0.24                   0.11
--------------------------------------------------------------------------------

2002                                               HIGH                    LOW
--------------------------------------------------------------------------------
First Quarter                                    $   0.41               $   0.14
Second Quarter                                       0.17                   0.05
Third Quarter                                        0.10                   0.02
Fourth Quarter                                       0.05                   0.01
--------------------------------------------------------------------------------

2003                                               HIGH                    LOW
--------------------------------------------------------------------------------
First Quarter                                    $   0.06               $   0.01
Second Quarter                                       0.04                   0.01
Third Quarter                                        0.29                   0.01
--------------------------------------------------------------------------------



HOLDERS OF COMMON EQUITY

         As of December12,  2003, NeoMedia had approximately 3,500 recordholders
of common stock.

DIVIDENDS

         We have not  declared or paid any  dividends on our common stock during
the nine months ended  September 30, 2003 or the years ended  December 31, 2002,
2001 or 2000.  Following this offering,  our dividend  practices with respect to
our common stock will be determined  and may be changed from time to time by our
board of  directors.  We will base any issuance of dividends  upon our earnings,
financial condition, capital requirements and other factors considered important
by our board of directors.  Delaware law and our certificate of incorporation do
not require our board of directors to declare  dividends on our common stock. In
addition, we have a letter of credit with Bank One, Chicago, Illinois, the terms
of which require Bank One's written  consent  prior to the  declaration  of cash
dividends. We expect to retain all earnings, if any, generated by our operations
for the development and growth of our business and do not anticipate  paying any
dividends to our stockholders for the foreseeable future.


                                       64



RECENT SALES OF UNREGISTERED SECURITIES

         On  November  4,  2003,  we  issued   8,000,000   shares  of  stock  to
International  Digital  Scientific,  Inc.,  as  payment  of all past and  future
amounts owed under a note payable from 1994. These shares are being included for
registration hereunder.

         On  October  28,  2003,  we issued  3,000,000  shares of stock to Orsus
Solutions,  USA, Inc., an unrelated  vendor, as payment of past due liabilities.
These shares are being included for registration hereunder.

         On October 28,  2003,  we issued  95,238  shares of stock to  Newbridge
Securities  Corporation,  an unrelated  advisor,  for  services  relating to the
Standby  Equity  Distribution  Agreement.  These  shares are being  included for
registration hereunder.

         On October 27, 2003,  we issued 7,279 shares of stock to one  unrelated
vendor as payment of past due  liabilities.  These shares are being included for
registration hereunder.

         On  October  27,  2003,  we issued to  Cornell  Capital  Partners,  LP,
10,000,000  warrants to purchase shares of our common stock at an exercise price
of $0.05 per  share.  The  warrants  were  issued as a one-time  commitment  fee
relating to the Standby Equity  Distribution  Agreement  between Cornell and us.
The  shares  underlying  these  warrants  are being  included  for  registration
hereunder.

         On October 27, 2003, we issued 3,500,000 shares of stock to the holders
of all of the outstanding shares of Secure Source Technologies, Inc. ("SST"), in
exchange for all the outstanding shares of common stock of SST. These shares are
being included for registration hereunder.

         On October 22, 2003,  we issued 66,841 shares of stock to one unrelated
vendor as payment of past due  liabilities.  These shares are being included for
registration hereunder.

         On October 7, 2003, we issued  103,907 shares of stock to one unrelated
vendor as payment of past due  liabilities.  These shares are being included for
registration hereunder.

         On October 6, 2003,  we issued  37,743 shares of stock to one unrelated
vendor as payment of past due  liabilities.  These shares are being included for
registration hereunder.

         On  September  25,  2003,  we  issued  875,855  shares  of stock to two
unrelated  vendors as payment of past due  liabilities.  These  shares are being
included for registration hereunder.

         On September 25, 2003, we issued  1,600,000 shares of stock to a former
employee as payment of past due incentive  compensation.  These shares are being
included for registration hereunder.

         On July 9, 2003, we borrowed  $25,000 from William E. Fritz, one of our
outside  directors.  This amount was added to the  principal  of a $10,000  note
payable to Mr.  Fritz that  matures in April  2004,  with all other terms of the
note  remaining  the same. As  consideration  for the loan, we granted Mr. Fritz
2,500,000  warrants  to  purchase  shares of the  Company's  common  stock at an
exercise price of $0.01 per share. The shares  underlying the warrants are being
included for registration hereunder.

         On April 21, 2003, we sold 25,000,000  shares of our common stock,  par
value $0.01, in a private placement at a price of $0.01 per share. In connection
with the sale,  we also granted the  purchaser  25,000,000  warrants to purchase
shares of our common stock at an exercise price of $0.01 per share. The warrants
had a fair value of $298,000 and have been  recorded as a cost of issuance.  The
purchaser was William E. Fritz, a member of our Board of Directors.  Proceeds to
us from sale of the shares were  $250,000.  We recognized a discount  expense in
general and  administrative  expenses of approximately  $50,000 relating to this
transaction  with Mr. Fritz. On August 6, 2003, Mr. Fritz exercised his warrants
and purchased  25,000,000  additional shares of common stock at a price of $0.01
per  share.  The  shares,  and the shares  underlying  the  warrants,  are being
included for registration hereunder.


                                       65


         On April 17, 2003, our Board of Directors  approved the payment in full
of  approximately  $154,000 of liabilities  owed by us to Charles W. Fritz,  our
Founder  and  Chairman  of the  Board of  Directors,  through  the  issuance  of
15,445,967  shares of common stock. We recognized a discount  expense in general
and   administrative   expenses  of  approximately   $15,000  relating  to  this
transaction  with Mr. Fritz.  These shares are being  included for  registration
hereunder.

         On  December  2, 2002,  we issued to Michael  Kesselbrenner,  a private
investor,  a  promissory  note in the  principal  amount  of  $165,000,  bearing
interest at a rate of 12% per annum,  with a maturity of 150 days. In connection
with the default  provision  of the  promissory  note,  we entered into a pledge
agreement,  dated December 2, 2002, under which we issued  53,620,020  shares of
common stock to an unrelated third party as collateral for the Promissory  Note.
The investor only funded $84,000 of the principal  amount of the note. We repaid
this note during March 2003, and the shares held in escrow were returned  during
April 2003. We have no further obligation under this note.

         During November 2002, we issued  Convertible  Secured  Promissory Notes
with an aggregate face value of $60,000 to 3 separate parties, including Charles
W. Fritz,  Chairman of the Board of Directors of NeoMedia;  William E. Fritz, an
outside director; and James J. Keil, an outside director. In connection with the
notes,  we granted to the holders an additional  1,355,670  shares of our common
stock and 60,000  warrants to purchase  shares of our common  stock at $0.03 per
share,  with a term of three  years.  The  warrants  and shares  were  issued in
January 2003.  The shares,  and the shares  underlying  the warrants,  are being
included for registration hereunder.

         In August  2002,  we  issued  900,000  shares  of common  stock to 2150
Western  Court  L.L.C,  the landlord of our Lisle,  Illinois  sales  office,  as
settlement  of a lawsuit  relating to past-due and future  building  rents.  The
shares were valued at $0.03 per share, the market price at the date of issuance.
There were no cash proceeds to NeoMedia in this transaction.

         In June 2002,  we issued  10,000 shares of common stock to an unrelated
vendor as an interest payment on past-due accounts  payable.  There were no cash
proceeds to us in these transactions.

         In February 2002, we issued  19,000,000 shares of our common stock at a
price of $0.17 per share to five  individuals  and two  institutional  unrelated
parties.  The shares  were issued in exchange  for limited  recourse  promissory
notes maturing at the earlier of i.) 90 days from the date of issuance,  or ii.)
30 days from the date of registration of the shares.  The gross proceeds of such
transaction  will be  approximately  $3,040,000 upon maturity of the notes, as a
purchase price of $0.01 per share,  or $190,000 in aggregate,  was paid in cash.
During  August 2002,  the notes matured  without  payment,  and we  subsequently
cancelled the 19 million  shares issued in connection  with such notes.  We have
accrued a liability in the third quarter of 2001 of $190,000 relating to the par
value paid in connection with the issuance of the shares.

         In  February  2002,  we  issued  500,000  warrants  to  a  provider  of
commercial  financing services,  in exchange for interest due to the provider on
past due amounts under our credit agreement.  The shares underlying the warrants
are being included for registration hereunder.

         In January 2002, we issued 452,489 shares of common stock to About.com,
Inc.  The shares  were  issued  upon  conversion  of 452,489  shares of Series A
Convertible Preferred Stock issued to About.com, Inc. as payment for advertising
expenses  incurred  during  2001.  This  issuance  was made  pursuant to Section
3(a)(9) of the Act.

         In January  2002, we issued 55,000 shares of common stock at a price of
$0.13 per share to an individual unrelated party. Cash proceeds to NeoMedia were
$7,150.

         In January  2002,  we issued  1,646,987  shares of common  stock to two
unrelated vendors as settlement of past-due accounts payable and future payments
under  equipment  lease  agreements.  There were no cash proceeds to us in these
transactions.

         In March and April 2001, we issued  316,500  shares of our common stock
at a price of $3.40 per share to four foreign  institutional  unrelated parties.
The  gross  proceeds  of such  transaction  were  approximately  $1,076,000.  In
connection with the sale, we issued as a commission  50,000 warrants to purchase
shares of our common stock at an exercise  price of $3.56 per share to a foreign
individual.


                                       66



         In March 2001,  we issued  18,000 shares of our common stock at a price
of $3.41  per  share to a  foreign  institutional  unrelated  party.  The  gross
proceeds of such transaction were $61,000.

         In March 2001, we issued  156,250 shares of our common stock at a price
of $3.20  per  share to a  foreign  institutional  unrelated  party.  The  gross
proceeds of such transaction were $500,000.

         In March 2000, we issued an aggregate of 1,000,000 shares of our common
stock at a price of $7.50 per share to 20 foreign  individuals  and one  foreign
institutional  unrelated  party.  The gross  proceeds of such  transaction  were
approximately $7,500,000. In connection with the sale, we issued as a commission
125,000  warrants to purchase shares of our common stock at an exercise price of
$7.50 per share,  125,000  warrants to purchase shares of our common stock at an
exercise price of $15.00 per share,  and 100,000  warrants to purchase shares of
our common  stock at an exercise  price of $7.20 per share to the  institutional
investor and an independent consultant.

         In February  2000,  we issued  39,535  shares of our common  stock at a
price of $6.88  per  share to one  individual  and one  institutional  unrelated
party.  In  connection  with the sale,  we also issued  2,500  warrants  with an
exercise price of $12.74 and 1,454 warrants with an exercise price of $9.56. The
gross proceeds of such transaction were approximately $272,000.

         In February  2000,  we issued  50,000  shares of our common  stock at a
price of $6.00 per share to an institutional unrelated party. In connection with
the sale, we also issued 2,982  warrants with an exercise  price of $10.06.  The
gross proceeds of such transaction were approximately $300,000.

         In February  2000, we issued 37,500 shares of our common stock upon the
exercise  of  outstanding  warrants  at a price of $2.00 per  share,  originally
issued in connection  with the  transaction  described  above in March 2002. The
gross proceeds of such transaction were approximately $75,000.

         In January 2000, we issued an aggregate of 301,368 shares of our common
stock at a price of $3.75 per share to 14  unrelated  parties,  3 of which  were
institutions  and 11 of which were  individuals,  of which two were foreign.  In
connection with the sale, we also issued an aggregate of 12,570 warrants with an
exercise price of $7.19,  5,400  warrants with an exercise  price of $6.44,  and
12,167  warrants  with an exercise  price of $7.37.  The gross  proceeds of such
transaction  were  approximately  $1,130,000.  In  connection  with the sale, we
issued as  commissions  9,502  shares of its  common  stock  valued at $7.09 per
share.

         We relied upon the exemption provided in Section 4(2) of the Securities
Act and/or  Rule 506  thereunder,  which  cover  "transactions  by an issuer not
involving any public  offering,"  to issue  securities  discussed  above without
registration  under the Securities Act of 1933. We made a determination  in each
case  that  the  person  to whom the  securities  were  issued  did not need the
protection that  registration  would afford.  The certificates  representing the
securities  issued displayed a restrictive  legend to prevent transfer except in
compliance  with  applicable  laws, and our transfer agent was instructed not to
permit  transfers  unless  directed to do so by us, after  approval by our legal
counsel.  We believe that the investors to whom  securities were issued had such
knowledge and  experience in financial and business  matters as to be capable of
evaluating the merits and risks of the prospective  investment.  We also believe
that the  investors  had  access  to the same  type of  information  as would be
contained in a registration statement.


                                       67



                            DESCRIPTION OF SECURITIES

         The following  description of our capital stock and certain  provisions
of our Certificate of Incorporation and By-Laws is a summary and is qualified in
its entirety by the provisions of our Certificate of Incorporation  and By-Laws,
which have been filed as exhibits to our  registration  statement  of which this
prospectus is a part.

         On  September  24,  2003,  our  shareholders  voted to (i) increase the
number of  shares  of common  stock,  par  value  $0.01 per  share,  that we are
authorized to issue from  200,000,000 to  1,000,000,000;  and (ii) implement the
2003  Stock  Option  Plan,  under  which  NeoMedia  is  authorized  to  grant to
employeees,  directors,  and  consultants up to 150,000,000  options to purchase
shares of its common stock. On October, 30, 2003, our Board of Diretors approved
the 2003  Stock  Incentive  Plan,  under  which the  Company  can issue up to 30
million shares of stock to employees,  non-employee  directors,  consultants for
incentive purposes. As of December 12, 2003,  243,878,428 shares of common stock
were outstanding, and no shares of preferred stock were outstanding.

COMMON STOCK

         Holders of common stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. Holders of the common
stock do not have cumulative voting rights, which means that the holders of more
than one half of our outstanding  shares of common stock,  subject to the rights
of the  holders of  preferred  stock,  can elect all of our  directors,  if they
choose to do so. In this event,  the holders of the  remaining  shares of common
stock would not be able to elect any  directors.  Subject to the prior rights of
any  class  or  series  of  preferred  stock  which  may  from  time  to time be
outstanding,  if any,  holders of common stock are entitled to receive  ratably,
dividends  when,  as, and if  declared  by the Board of  Directors  out of funds
legally  available for that purpose and, upon our liquidation,  dissolution,  or
winding up, are entitled to share ratably in all assets  remaining after payment
of liabilities and payment of accrued  dividends and liquidation  preferences on
the preferred stock, if any.  Holders of common stock have no preemptive  rights
and have no rights to convert their common stock into any other securities.  The
outstanding common stock is duly authorized and validly issued,  fully paid, and
nonassessable. In the event we were to elect to sell additional shares of common
stock following this offering, investors in this offering would have no right to
purchase additional shares. As a result,  their percentage equity interest in us
would be diluted.

         The shares of our common stock  offered in this  offering will be, when
issued and paid for, fully paid and not liable for further call and  assessment.
Except as otherwise  permitted by Delaware law, and subject to the rights of the
holders of preferred  stock,  all  stockholder  action is taken by the vote of a
majority  of the  outstanding  shares of common  stock  voted as a single  class
present at a meeting of stockholders at which a quorum  consisting of a majority
of the outstanding shares of common stock is present in person or proxy.

PREFERRED STOCK

         We may issue  preferred  stock in one or more  series  and  having  the
rights, privileges, and limitations, including voting rights, conversion rights,
liquidation preferences,  dividend rights and preferences and redemption rights,
as may, from time to time,  be  determined by the Board of Directors.  Preferred
stock may be issued in the future in connection with  acquisitions,  financings,
or other matters, as the Board of Directors deems appropriate. In the event that
we  determine  to  issue  any  shares  of  preferred  stock,  a  certificate  of
designation containing the rights, privileges, and limitations of this series of
preferred  stock  shall be filed  with the  Secretary  of State of the  State of
Delaware. The effect of this preferred stock designation power is that our Board
of Directors  alone,  subject to Federal  securities  laws,  applicable blue sky
laws, and Delaware law, may be able to authorize the issuance of preferred stock
which could have the effect of delaying,  deferring,  or  preventing a change in
control  of  NeoMedia  without  further  action  by our  stockholders,  and  may
adversely affect the voting and other rights of the holders of our common stock.
The  issuance  of  preferred  stock with voting and  conversion  rights may also
adversely affect the voting power of the holders of our common stock,  including
the loss of voting control to others.


                                       68



         During December 1999, our Board of Directors  approved a Certificate of
Resolutions  Designating  Rights and Preferences of Preferred Stock,  filed with
the  Secretary of State of the State of Delaware on December  20, 1999.  By this
approval and filing, 200,000 shares of Series A Preferred Stock were designated.
Series A Preferred carries the following rights:

         o        The right to receive  mandatory  cash  dividends  equal to the
                  greater  of $0.001  per  share or 100 times the  amount of all
                  dividends (cash or non-cash, other than dividends of shares of
                  common  stock)  paid to  holders of the  common  stock,  which
                  dividend  is  payable  30 days  after the  conclusion  of each
                  calendar quarter and immediately  following the declaration of
                  a dividend on common stock;

         o        One hundred votes per each share of Series A Preferred on each
                  matter submitted to a vote of our stockholders;

         o        The  right to elect  two  directors  at any  meeting  at which
                  directors  are to be  elected,  and to fill any vacancy on the
                  Board of Directors  previously filled by a director  appointed
                  by the Series A Preferred holders;

         o        The right to receive an amount,  in  preference to the holders
                  of common  stock,  equal to the  amount  per share  payable to
                  holders  of  common   stock,   plus  all  accrued  and  unpaid
                  dividends,   and   following   payment   of  1/100th  of  this
                  liquidation  preference to the holders of each share of common
                  stock,  an additional  amount per share equal to 100 times the
                  per share amount paid to the holders of common stock.

         o        The right to exchange each share of Series A Preferred for 100
                  times the consideration  received per share of common stock in
                  connection  with any  merger,  consolidation,  combination  or
                  other   transaction  in  which  shares  of  common  stock  are
                  exchanged  for or  converted  into cash,  securities  or other
                  property.

         o        The right to be redeemed in accordance  with our  stockholders
                  rights plan.

         While accrued mandatory dividends are unpaid, we may not declare or pay
dividends or distributions on, or redeem, repurchase or reacquire, shares of any
class or series of junior or parity stock.

         The Series A Preferred was created to be issued in connection  with our
stockholders rights plan,  described below. No shares of Series A Preferred have
been issued to date.

         On June 19, 2001,  our Board of  Directors  approved a  Certificate  of
Designations  to  Create a Class of  Series A  Convertible  Preferred  Stock for
NeoMedia  Technologies,  Inc., filed with the Secretary of State of the State of
Delaware  on June 20,  2001.  By this  approval  and filing,  47,511  shares are
designated as Series A  Convertible  Preferred  Stock.  Our Series A Convertible
Preferred Stock, par value $0.01 per share, has the following rights:

         o        Series A Convertible  Preferred is convertible  into shares of
                  our  common   stock  at  a   one-to-one   ratio,   subject  to
                  proportional  adjustments  in the  event  of stock  splits  or
                  combinations,  and  dividends  or  distributions  of shares of
                  common stock, at the option of the holder;  shares are subject
                  to  automatic  conversion  as  determined  in  each  agreement
                  relating  to the  purchase  of shares of Series A  Convertible
                  Preferred;

         o        Each share of Series A  Convertible  Preferred  is entitled to
                  receive  a  liquidation   preference  equal  to  the  original
                  purchase  price  of such  share in the  event of  liquidation,
                  dissolution, or winding up;

         o        Upon  merger or  consolidation,  or the  sale,  lease or other
                  conveyance of all or substantially  all of our assets,  shares
                  of   Series  A   Convertible   Preferred   are   automatically
                  convertible  into  the  number  of  shares  of  stock or other
                  securities  or property  (including  cash) to which the common
                  stock into which it is convertible would have been entitled;

         o        Shares of Series A  Convertible  Preferred are entitled to one
                  vote per  share,  and vote  together  with  holders  of common
                  stock.

         In June 2001,  452,489  shares of Series A Convertible  Preferred  were
issued to About.com,  Inc. pursuant to a certain Agreement for Payment in Common
Stock, in lieu of cash payment to About.com for online advertising  services. On
January 2, 2002, such shares were converted into 452,489 shares of common stock.


                                       69



         On January 16, 2002,  our Board of Directors  approved a Certificate of
Designation,  Preferences,  Rights and  Limitations of Series B 12%  Convertible
Redeemable  Preferred  Stock of  NeoMedia  Technologies,  Inc.,  filed  with the
Secretary  of State of the State of  Delaware  on  February  28,  2002.  By this
approval and filing,  100,000 shares are designated as Series B 12%  Convertible
Redeemable  Preferred Stock. Our Series B 12% Convertible  Redeemable  Preferred
Stock, par value $0.01 per share, has the following rights:

         o        Series B Preferred  shares  accrue  dividends at a rate of 12%
                  per annum,  or $1.20 per share,  between  the date of issuance
                  and the first anniversary of issuance;

         o        Series B Preferred is redeemed to the maximum extent permitted
                  by law (based on our funds legally  available for  redemption)
                  at a price per share of  $15.00,  plus  accrued  dividends  (a
                  total  of  $16.20  per  share)  on the  first  anniversary  of
                  issuance;

         o        Series B Preferred  receive  proceeds of $12.00 per share upon
                  our liquidation, dissolution or winding up;

         o        To the  extent,  not  redeemed  on the  first  anniversary  of
                  issuance, Series B Preferred is automatically convertible into
                  our then  existing  general class of common stock on the first
                  anniversary  of issuance at a price equal to $16.20 divided by
                  the greater of $0.20 and the lowest  publicly-sold share price
                  during the 90 day period preceding the conversion date, but in
                  no event more than 19.9% of our  outstanding  capital stock as
                  of the date immediately prior to conversion.

         o        Upon  merger or  consolidation,  or the  sale,  lease or other
                  conveyance of all or substantially  all of our assets,  shares
                  of Series B Preferred are  automatically  convertible into the
                  number  of  shares of stock or other  securities  or  property
                  (including  cash) to which the  common  stock into which it is
                  convertible would have been entitled; and

         o        Shares  of Series B  Preferred  are  entitled  to one vote per
                  share and vote with common  stock,  except  where the proposed
                  action would adversely  affect the Series B Preferred or where
                  the non-waivable provisions of applicable law mandate that the
                  Series B  Preferred  vote  separately,  in which case Series B
                  Preferred vote separately as a class, with one vote per share.

         Our Preferred Stock is currently  comprised of 25,000,000  shares,  par
value  $0.01 per  share,  of which  200,000  shares are  designated  as Series A
Preferred  Stock,  none of which are issued or outstanding,  and,  following the
conversion into common stock of 452,489 shares of Series A Convertible Preferred
Stock issued to  About.com,  of which 47,511  shares are  designated as Series A
Convertible  Preferred Stock,  none of which are issued and outstanding,  and of
which 100,000 shares of Series B 12%  Convertible  Redeemable  Preferred  Stock,
none of which are issued and outstanding. We have no present agreements relating
to or requiring the  designation  or issuance of additional  shares of preferred
stock.

WARRANTS AND OPTIONS

         As of December 12, 2003 there were outstanding  options and warrants to
purchase  33,605,007 and 26,195,000,  shares of our common stock,  respectively,
with original  exercise prices ranging from $0.01 to $7.31.  All options granted
under our 1996,  1998,  and 2002 Stock Option Plans are  currently  subject to a
repricing  under which the exercise prices were restated to $0.01 per share from
May 2003 through  December 31, 2003. The number of shares issuable upon exercise
and the exercise  prices of the warrants are subject to  adjustment in the event
of certain  events such as stock  dividends,  splits and  combinations,  capital
reorganization  and with  respect to  certain  warrants,  issuance  of shares of
common stock at prices below the then exercise price of the warrants.

         As of September 24, 2003, NeoMedia shareholders approved the 2003 Stock
Option Plan.  Under this plan,  NeoMedia is  authorized  to grant to  employees,
directors,  and  consultants  up to  150,000,000  options to share of its common
stock.  As of  September  25,  2003,  we had issued  approximately  34.4 million
options under the 2003 Stock Option Plan, none of which had been exercised.


                                       70



         In March  2002,  we adopted a warrant  repricing  program.  The program
entitled holders of up to 1.2 million warrants to exercise the warrants within a
period  ending the earlier of September 19, 2002 or the  expiration  date of the
warrant at a price per share equal to the greater of $0.12 or 50% of the closing
sales per  share  price on the OTC  Bulletin  Board of our  common  stock on the
trading  date  immediately  preceding  the date of exercise.  Approximately  0.4
million of the warrants  placed in the program  were  exercised.  We  recognized
approximately  $38,000 in expense  relating to the program during the first nine
months of 2002.

         During April 2002,  we repriced 7.4 million of our common stock options
held by employees,  consultants and advisors for a period of six months.  During
the term of the option repricing program, participating holders were entitled to
exercise  subject options at an exercise price per share equal to the greater of
(1)  $0.12 or (2) 50% of the last sale  price of  shares of Common  Stock on the
OTCBB, on the trading date immediately  preceding the date of exercise.  Shortly
after the announcement of the repricing program, the market price for our common
stock fell below $0.12. As a result, no options were exercised under the term of
the  program and we did not  recognize  any  expense  relating to the  repricing
program during 2002.

      During May 2003,  we re-priced  approximately  8.0 million  stock  options
under a 6-month repricing program.  Under the terms of the program, the exercise
price for outstanding  options under our 2002, 1998, and 1996 Stock Option Plans
was  restated to $0.01 per share for a period of 6 months.  In  accordance  with
FASB Interpretation, FIN 44, Accounting for Certain Transactions Involving Stock
Transactions,  the award has been  accounted  for as variable  from May 19, 2003
through  the  period  ended  September  30,  2003.  Accordingly,  we  recognized
approximately   $544,000   and   $710,000   as   compensation   in  general  and
administrative  expense during the three and nine month periods ended  September
30, 2003.  Approximately  4.4 million options were exercised under the repricing
program during the nine months ended September 30, 2003.  During September 2003,
the deadline for the option  repricing  was extended to December 31, 2003 by the
Stock Option Committee of our Board of Directors.

ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE ARTICLES OF INCORPORATION

         On December 10, 1999,  our Board of  Directors  adopted a  stockholders
rights plan and declared a non-taxable dividend of one right on each outstanding
share of our common  stock to  stockholders  of record on December  10, 1999 and
each share of common stock issued  prior to the rights plan  trigger  date.  The
stockholder  rights  plan was  adopted  as an  anti-takeover  measure,  commonly
referred to as a "poison  pill." The  stockholder  rights  plan was  designed to
enable all  stockholders  to receive  fair and equal  treatment  in any proposed
takeover of the corporation  and to guard against  partial or two-tiered  tender
offers,  open market  accumulations  and other hostile  takeover tactics to gain
control of NeoMedia.  The  stockholders  rights plan,  which is similar to plans
adopted by many  leading  public  companies,  was not adopted in response to any
effort to acquire  control of NeoMedia at the time of  adoption.  Certain of our
directors,  officers and principal  stockholders,  Charles W. Fritz,  William E.
Fritz and The Fritz Family Limited  Partnership and their holdings were exempted
from the  triggering  provisions  of our "poison  pill" plan, as a result of the
fact  that,  as of the plans  adoption,  their  holdings  might  have  otherwise
triggered the "poison pill".

TRANSFER AGENT

         The transfer agent and registrar for our common stock is American Stock
Transfer,  located in New York, New York.  The transfer  agent's phone number is
(718) 921-8293.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

         As permitted by the Delaware General Corporation Law ("DGCL"),  we have
included in our  Certificate  of  Incorporation  a provision  to  eliminate  the
personal  liability of our directors for monetary  damages for breach or alleged
breach of their fiduciary duties as directors,  except for liability (i) for any
breach of the director's duty of loyalty to NeoMedia or its  stockholders,  (ii)
for acts or omissions not in good faith or which involved intentional misconduct
or a knowing  violation of law,  (iii) in respect of certain  unlawful  dividend
payments or stock redemptions or repurchases,  as provided in Section 174 of the
DGCL, or (iv) for any  transaction  from which the director  derived an improper
personal  benefit.  The effect of this  provision is to eliminate  the rights of
NeoMedia and its stockholders (through stockholders'  derivative suits on behalf
of NeoMedia) to recover  monetary  damages  against a director for breach of the
fiduciary duty of care as a director  except in the situations  described in (i)
through (iv) above.  This  provision  does not limit nor eliminate the rights of
NeoMedia or any stockholder to seek non-monetary relief such as an injunction or
rescission  in the  event  of a  breach  of a  director's  duty of  care.  These
provisions  will not alter the liability of directors  under federal  securities
laws.


                                       71



         The certificate of  incorporation  and the by-laws of NeoMedia  provide
that we are required and  permitted  to  indemnify  our officers and  directors,
employees and agents under certain  circumstances.  In addition, if permitted by
law,  we are  required to advance  expenses to our  officers  and  directors  as
incurred in  connection  with  proceedings  against them in their  capacity as a
director  or  officer  for which  they may be  indemnified  upon  receipt  of an
undertaking  by or on behalf of such director or officer to repay such amount if
it  shall  ultimately  be  determined  that  such  person  is  not  entitled  to
indemnification.  At  present,  we are not aware of any  pending  or  threatened
litigation or  proceeding  involving a director,  officer,  employee or agent of
NeoMedia in which indemnification would be required or permitted.

         Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors,  officers or  controlling
persons of NeoMedia pursuant to the foregoing provisions, or otherwise, NeoMedia
has been advised that in the opinion of the Securities  and Exchange  Commission
such  indemnification  is against  public policy as expressed in the Act and is,
therefore, unenforceable.


                                       72



                                  LEGAL MATTERS

         The validity of the shares of common stock  offered  hereby as to their
being fully paid, legally issued and  non-assessable  will be passed upon for us
by Kirkpatrick and Lockhart LLP, Miami, Florida.

                                     EXPERTS

         The audited consolidated financial statements of NeoMedia Technologies,
Inc.  and its  subsidiaries  for the years  ended  December  31,  2002 and 2001,
included in this  prospectus  and elsewhere in the  registration  statement have
been  audited  by  Stonefield  Josephson,  Inc.,  independent  certified  public
accountants, as indicated in their report with respect thereto, and are included
herein in  reliance  upon the  authority  of said firm as experts in giving said
report.  Reference  is  made to  said  report,  which  includes  an  explanatory
paragraph  with  respect  to the  uncertainty  regarding  NeoMedia's  ability to
continue as a going concern, as discussed in Note 3 to the financial statements.

         The audited consolidated financial statements of NeoMedia Technologies,
Inc. and its subsidiaries for the year ended December 31, 2000, included in this
prospectus  and  elsewhere in the  registration  statement  have been audited by
Arthur Andersen LLP, independent  certified public accountants,  as indicated in
their report with respect thereto,  and are included herein in reliance upon the
authority  of said firm as experts in giving said  report.  Reference is made to
said  report,  which  includes  an  explanatory  paragraph  with  respect to the
uncertainty  regarding  NeoMedia's  ability to continue as a going  concern,  as
discussed in Note 3 to the financial  statements.  In accordance with Securities
Act Rule 437a,  the consent of Arthur  Andersen LLP has not been  included as an
exhibit  herewith.  NeoMedia  has been  unable  to  obtain a  consent  of Arthur
Andersen  LLP due to the  departure of their  engagement  team leaders from such
firm.  Any  recovery  by  investors  posed by the lack of  consent is limited by
Securities Act Rule 437a.

CHANGES IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND  FINANCIAL
DISCLOSURES

         On June 7, 1999, we filed a Report on Form 8-K reporting  that KPMG LLP
had  resigned  as our  independent  auditors.  In  connection  with the audit of
NeoMedia's  financial statements for the fiscal year ended December 31, 1998 and
in the subsequent interim periods,  there were no disagreements with KPMG LLP on
any  matters  of  accounting   principles  or  practice,   financial   statement
disclosure,  or auditing  scope and  procedures  which,  if not  resolved to the
satisfaction  of KPMG LLP,  would have caused KPMG LLP to make  reference to the
matter in their report.  In their report ended March 18, 1998 for the year ended
December  31,  1997,  KPMG LLP did not issue a  qualified  or  adverse  opinion.
Effective  July  14,  1999,  we  engaged  Arthur   Andersen  LLP  to  audit  our
consolidated financial statements for the fiscal year ending December 31, 1999.

         On October 29, 2001,  we filed a Report on Form 8-K  reporting  that we
had dismissed  Arthur  Andersen LLP as our independent  auditors.  In connection
with the audit of  NeoMedia's  financial  statements  for the fiscal years ended
December 31, 2000 and 1999 and in the subsequent interim periods,  there were no
disagreements  with Arthur Andersen LLP on any matters of accounting  principles
or practice,  financial statement  disclosure,  or auditing scope and procedures
which,  if not resolved to the  satisfaction  of Arthur  Andersen LLP would have
caused Arthur Andersen LLP, to make reference to the matter in their report.  In
their  report dated March 30,  2001,  for the years ended  December 31, 2000 and
1999,  Arthur  Andersen  LLP did not issue an adverse  opinion,  but did issue a
qualified  opinion with a "going concern" clause.  Effective October 25, 2001 we
engaged Stonefield Josephson, Inc. as our new independent accountants.


                                       73



                           HOW TO GET MORE INFORMATION

         We file annual,  quarterly, and current reports, proxy statements,  and
other  documents with the Securities and Exchange  Commission.  You may read and
copy any document we file at the SEC's public  reference room at Judiciary Plaza
Building,  450 Fifth  Street,  N.W.,  Washington,  D.C.  20549.  You should call
1-800-SEC-0330  for more  information  on the operation of the Public  Reference
Room.  The SEC  maintains an Internet site at  http://www.sec.gov  where certain
information regarding issuers, including NeoMedia, may be found. Our Web site is
http://www.neom.com.

         This prospectus is part of a registration  statement that we filed with
the  SEC.  The  registration  statement  contains  more  information  than  this
prospectus  regarding NeoMedia and its common stock,  including certain exhibits
and schedules.  You can get a copy of the registration statement from the SEC at
the address listed above or from its Internet site, www.sec.gov.


                                       74


                          INDEX OF FINANCIAL STATEMENTS



                                                                                       
NeoMedia Technologies, Inc. consolidated financial statements for the years
         ended December 31, 2002, 2001 and 2000,.......................................    F-1
NeoMedia Technologies, Inc. consolidated financial statements for the nine months
         ended September 30, 2003 and 2002.............................................    F-36






THIS IS A COPY OF THE AUDIT REPORT  PREVIOUSLY  ISSUED BY ARTHUR ANDERSEN LLP IN
CONNECTION WITH NEOMEDIA TECHNOLOGIES, INC.'S FILING FOR THE YEAR ENDED DECEMBER
31, 2000 AND 1999.  THIS AUDIT REPORT HAS NOT BEEN  REISSUED BY ARTHUR  ANDERSEN
LLP IN CONNECTION WITH THIS FORM 10-K. SEE EXHIBIT 23.2 FOR FURTHER DISCUSSION.


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To NeoMedia Technologies, Inc.:

We have  audited  the  accompanying  consolidated  balance  sheets  of  NeoMedia
Technologies,  Inc. (a Delaware corporation) and subsidiaries as of December 31,
2000  and  1999,  and  the  related   consolidated   statements  of  operations,
shareholders'  equity and cash flows for the years then ended.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of NeoMedia Technologies, Inc. and
subsidiaries  as of  December  31,  2000  and  1999,  and the  results  of their
operations  and their cash flows for the years  then  ended in  conformity  with
accounting principles generally accepted in the United States.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 3 to the
consolidated  financial  statements,  the Company has suffered  recurring losses
from operations and the current cash position of the Company raises  substantial
doubt about its ability to continue as a going  concern.  Management's  plans in
regards to these matters are also described in Note 3. The financial  statements
do not  include  any  adjustments  that might  result  from the  outcome of this
uncertainty.

                                        /s/ ARTHUR ANDERSEN LLP

Tampa, Florida
March 30, 2001


                                      F-1



               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and
Stockholders of Neomedia Technologies, Inc.

We have  audited  the  accompanying  consolidated  balance  sheets  of  Neomedia
Technolgies,  Inc. (a Delaware  Corporation) and subsidiaries as of December 31,
2002  and  2001,  and  the  related   consolidated   statements  of  operations,
stockholders'   deficit,  and  cash  flows  for  the  years  then  ended.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  consolidated  financial  statements.  An audit also includes  assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall  consolidated  financial  statement  presentation.  We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in  all  material   respects,   the  financial   position  of  Neomedia
Technologies,  Inc.  as of December  31,  2002 and 2001,  and the results of its
operations  and its cash  flows  for the years  then  ended in  conformity  with
accounting principles generally accepted in the United States of America.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated  financial statements,  the Company's significant operating losses,
working capital deficit,  and current cash flow position raise substantial doubt
about its ability to continue as a going concern.  Management's  plans regarding
those  matters  also  are  described  in  Note  3.  The  consolidated  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.

/s/ STONEFIELD JOSEPHSON, INC.

CERTIFIED PUBLIC ACCOUNTANTS

Irvine, California
April 2, 2003



                                      F-2



                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)




                                                                                          DECEMBER 31,
                                                                               ---------------------------------
                                                                                   2002                 2001
                                                                               ------------         ------------
ASSETS

Current assets:
                                                                                              
      Cash and cash equivalents                                                $         70         $        134
      Trade accounts receivable, net of allowance for doubtful accounts
         of $55 in 2002 and $65 in 2001                                                 327                2,626
      Inventories                                                                       112                  197
      Current assets of discontinued business unit                                       --                  210
      Prepaid expenses and other current assets                                         629                  582
                                                                               ------------         ------------
      Total current assets                                                            1,138                3,749

      Property and equipment, net                                                        98                  205
      Capitalized patents, net                                                        2,244                2,500
      Capitalized and purchased software costs, net                                     149                1,828
      Other long-term assets                                                            694                  757
                                                                               ------------         ------------

           Total assets                                                        $      4,323         $      9,039
                                                                               ============         ============

LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities:
      Accounts payable                                                         $      3,313         $      2,886
      Amounts due under financing agreements                                            430                2,283
      Liabilities in excess of assets of discontinued business unit                   1,495                   --
      Accrued expenses                                                                2,325                1,922
      Current portion of long-term debt                                                 425                  149
      Notes payable                                                                     893                  750
      Sales taxes payable                                                               326                  148
      Deferred revenues                                                                 879                  767
      Other                                                                              37                    7
                                                                               ------------         ------------
           Total current liabilities                                                 10,123                8,912

Long-term debt, net of current portion                                                  226                  390
                                                                               ------------         ------------

           Total liabilities                                                         10,349                9,302
                                                                               ------------         ------------

Shareholders' deficit:
      Preferred stock, $0.01 par value, 25,000,000 shares authorized,
        none issued and outstanding in 2002, 452,489 issued and outstanding
        in 2001                                                                          --                    5
      Additional paid-in capital, preferred stock                                        --                  878
      Common stock, $0.01 par value, 200,000,000 shares authorized,
        87,136,802 shares issued and 30,746,968 outstanding in 2002,
        20,446,343 shares shares issued and 18,804,917 outstanding in 2001              307                  188
      Additional paid-in capital                                                     65,442               63,029
      Stock subscription receivable                                                      --                 (240)
      Deferred stock-based compensation                                                (231)                  --
      Accumulated deficit                                                           (70,765)             (63,344)
      Treasury stock, at cost, 201,230 shares of common stock                          (779)                (779)
                                                                               ------------         ------------
      Total shareholders' deficit                                                    (6,026)                (263)
                                                                               ------------         ------------
           Total liabilities and shareholders' deficit                         $      4,323         $      9,039
                                                                               ============         ============


              The accompanying notes are an integral part of these
                          consolidated balance sheets.

                                      F-3



                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)




                                                                                       YEARS ENDED DECEMBER 31,
                                                                         ----------------------------------------------------
                                                                            2002                 2001                2000
                                                                         ------------        ------------        ------------
                                                                                                        
NET SALES:
      License fees                                                       $        446        $        576        $      8,417
      Resale of software and technology equipment and service fees              8,953               7,566              19,148
                                                                         ------------        ------------        ------------
      Total net sales                                                           9,399               8,142              27,565
                                                                         ------------        ------------        ------------

COST OF SALES:
      License fees                                                                841               2,355               1,296
      Resale of software and technology equipment and service fees              7,423               6,511              17,237
                                                                         ------------        ------------        ------------
      Total cost of sales                                                       8,264               8,866              18,533
                                                                         ------------        ------------        ------------

GROSS PROFIT (LOSS)                                                             1,135                (724)              9,032

      Sales and marketing expenses                                              1,009               2,519               6,504
      General and administrative expenses                                       4,068               4,772               7,010
      Research and development costs                                              775                 549               1,101
      Loss on impairment of assets                                              1,003               2,871                  --
      Loss on Digital:  Convergence license contract                               --               7,354                  --
                                                                         ------------        ------------        ------------

      Loss from operations                                                     (5,720)            (18,789)             (5,583)
      Interest expense (income), net                                              178                 (21)               (174)
                                                                         ------------        ------------        ------------

      Loss from continuing operations                                          (5,898)            (18,768)             (5,409)
      Discontinued operations (Note 2):
         Loss from operations of discontinued business unit                        --              (3,613)                 --
         Loss on disposal of discontinued business unit,
           including provision of $0 in 2002 and $439
           in 2001 for operating losses during phase-out period                (1,523)             (3,088)                 --
                                                                         ------------        ------------        ------------

NET LOSS                                                                 $     (7,421)       $    (25,469)       $     (5,409)
                                                                         ============        ============        ============

NET LOSS PER SHARE FROM CONTINUING OPERATIONS-
      BASIC AND DILUTED                                                  ($      0.26)       ($      1.14)       ($      0.39)
                                                                         ============        ============        ============

NET LOSS PER SHARE FROM DISCONTINUED OPERATIONS-
      BASIC AND DILUTED                                                  ($      0.07)       ($      0.41)                 --
                                                                         ============        ============        ============

NET LOSS PER SHARE--BASIC AND DILUTED                                    ($      0.33)       ($      1.55)       ($      0.39)
                                                                         ============        ============        ============

Weighted average number of common shares--basic and diluted                22,330,485          16,410,246          13,931,104



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


                                      F-4



                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)



                                                                                           YEARS ENDED DECEMBER 31,
                                                                                   ----------------------------------------
                                                                                     2002            2001            2000
                                                                                   --------        --------        --------
                                                                                                          
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net loss                                                                     ($ 7,421)       ($25,469)       ($ 5,409)
      Adjustments to reconcile net loss to net cash used in
        operating activities:
      Depreciation and amortization                                                   1,061           3,369           2,336
      Inventory reserve                                                                 130              --              --
      Loss on disposal of discontinued business units                                 1,523           2,649              --
      Loss on disposal of and impairment of assets                                    1,003           2,871              58
      Effect of loss on Digital:Convergence contract                                     --           7,354              --
      Preferred stock issued to pay advertising expense                                  --             882              --
      Expense associated with warrant repricing                                         195             947              --
      Fair value of expense portion of stock based
               compensation granted for professional services                           685              69             437
      Amortization of discount on convertible debt                                       23              --              --
      Changes in operating assets and liabilities
         Trade accounts receivable, net                                               2,299            (663)          1,459
         Digital Convergence receivable                                                  --              --          (2,767)
         Prepaid - Digital Convergence                                                   --             118              --
         Other current assets                                                           346            (109)           (121)
         Other long-term assets                                                          --              --            (194)
         Accounts payable, amounts due under financing agreements,
           liabilities in excess of assets of discontinued business
           unit, accrued expenses and stock liability                                  (584)          2,466          (2,758)
         Deferred revenue                                                               112             318             184
         Other current liabilities
                                                                                         30              (4)             --
                                                                                   --------        --------        --------
           Net cash used in operating activities                                       (598)         (5,202)         (6,775)
                                                                                   --------        --------        --------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Capitalization of software development and purchased intangible assets            (21)         (2,883)         (2,317)
      (Increase)/decrease in value of life insurance policies                            63             158            (199)
      Acquisition of property and equipment                                              --             (81)           (123)
                                                                                   --------        --------        --------
         Net cash provided by/(used in) investing activities                             42          (2,806)         (2,639)
                                                                                   --------        --------        --------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Net proceeds from issuance of common stock, net of issuance
        costs of $0 in 2002, $149 in 2001, and $74 in 2000                                8           1,638           9,203
      Net proceeds from exercise of stock warrants                                       45           1,045           2,877
      Net proceeds from exercise of stock options                                       274             138             537
      Common stock repurchased                                                           --              --            (779)
      Borrowings under notes payable and long-term debt                                 165             504              --
      Change in restricted cash                                                          --             750             194
      Repayments on notes payable and long-term debt                                     --            (386)           (625)
                                                                                   --------        --------        --------
         Net cash provided by financing activities                                      492           3,689          11,407
                                                                                   --------        --------        --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                    (64)         (4,319)          1,993

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                            134           4,453           2,460
                                                                                   --------        --------        --------

CASH AND CASH EQUIVALENTS, END OF YEAR                                             $     70        $    134        $  4,453
                                                                                   ========        ========        ========

SUPPLEMENTAL CASH FLOW INFORMATION:
      Interest paid/(received) during the year                                     $     15        ($    61)       $    170
      Income tax paid                                                                    --              --              --
      Non-cash investing and financing activities:
      Net assets acquired as part of Qode purchase agreement in exchange
           for common stock and forgiveness of note                                      --           1,800              --
      Shares earned by Qode.com under purchase agreement                                 --              13
      Accounts payable converted to note payable                                         --             246              --
      Common stock issued in exchange for note receivable                                --             240              --
      Net assets classified as "Liabilities held for sale"                               --             210              --
      Daystar assets purchased with shares of common stock                               --              --           3,520
      Warrants issued for license contract                                               --              --           4,704
      Deferred revenue relating to license contract                                      --              --          15,432
      Common stock and options issued to settle debt                                    343              --              --
      Cancellation of common stock issued in 2001 to offset stock
        subscription receivable                                                        (240)             --              --
      Net effect of issuance and subsequent
           cancellation of common stock underlying notes receivable                    (190)             --              --
      Beneficial conversion features                                                     23
      Stock and  warrants issued with convertible promissory notes                       37              --              --



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


                                      F-5



                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                        (IN THOUSANDS, EXCEPT SHARE DATA)



                                    COMMON STOCK
                           ---------------------------------------------
                                                              ADDITIONAL            STOCK            DEFERRED
                                                               PAID-IN           SUBSCRIPTION          STOCK
                              SHARES           AMOUNT          CAPITAL            RECEIVABLE       COMPENSATION
----------------------------------------------------------------------------------------------------------------------
                                                                                    
BALANCE, DECEMBER 31,
1999                        12,023,389      $       119      $    36,367               --               --
Exercise of stock
options                        182,787                2              535               --               --
Issuance of common
stock through Private
placement, net of
$170 of Issuance costs       1,415,279               15            9,188               --               --
Fair value of
warrants issued for
Professional services
rendered                            --               --              253               --               --
Fair value of  stock
issued for
professional Services
rendered                        21,500                1              183               --               --
Fair value of
warrants issued
Related to license
agreement With
Digital Convergence                 --               --            4,704               --               --
Exercise of warrants           495,600                5            2,872               --               --
Stock issued to
purchase assets                321,829                3            3,517               --               --
Treasury stock at cost              --               --               --               --               --
Net Loss                            --               --               --               --               --
----------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31,
2000                        14,460,384      $       145      $    57,619               --               --
----------------------------------------------------------------------------------------------------------------------
Exercise of employee                --               --               --               --               --
options                         38,560              138              138
Issuance of Common
Stock through private
Placement, Net of
$149 of issuance costs       3,490,750               35            1,843               --               --
Expense associated
with warrant repricing              --               --              947               --               --
Fair value of options
issued for
Professional services
rendered                            --               --               69               --               --
Exercise of Warrants           505,450                5            1,040               --               --
Stock issued to
purchase assets                309,773                3            1,373               --               --
Issuance of Preferred
Stock for services                  --               --               --               --               --
Stock Subscription
Receivable                        (240)              --             (240)
Net Loss                            --               --               --               --               --
----------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31,
2001                        18,804,917      $       188      $    63,029             (240)               0
----------------------------------------------------------------------------------------------------------------------
Exercise of employee
options                      5,252,455               52              222               --               --
Issuance of Common
Stock through private
Placement, Net of $0
of issuance costs               55,000                1                7               --               --
Cancellation of
Private Placement
Shares                      (3,000,000)             (30)            (210)              --               --
Expense associated
with warrant repricing              --               --              195               --               --
Fair value of stock
issued for
professional services
rendered                     4,900,000               49              192               --               --
Fair value of options
and warrants issued
for professional
services rendered                   --               --              723               --               --
Exercise of Warrants           369,450                4               41               --               --
Stock issued to pay
liabilities                  2,556,987               24              319               --               --
Conversion of
preferred stock to
common stock                   452,489                5              878               --               --
Issuance of warrants
and stock with
convertible notes
payable                      1,355,670               14               23               --               --
Benefical conversion
feature embedded in
convertible notes
payable                             --               --               23               --               --
Stock Subscription
Receivable                          --               --               --              240               --
Deferred Stock
Compensation                        --               --               --               --             (231)
Net Loss                            --               --               --               --               --
----------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31,
2002                        30,746,968      $       307      $    65,442                0             (231)
----------------------------------------------------------------------------------------------------------------------



                                      F-6




                                               PREFERRED STOCK                                          TREASURY STOCK
                                ------------------------------------------                  ----------------------------------------
                                                              ADDITIONAL                                                 TOTAL
                                                               PAID-IN    ACCUMULATED                                STOCKHOLDERS'
                                SHARES       AMOUNT            CAPITAL      DEFICIT         SHARES         AMOUNT        EQUITY
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                
BALANCE, DECEMBER 31,
1999                              --            --               --      ($   32,466)          --              --      $     4,020
Exercise of stock
options                           --            --               --               --           --              --              537
Issuance of common
stock through Private
placement, net of
$170 of Issuance costs            --            --               --               --           --              --            9,203
Fair value of
warrants issued for
Professional services
rendered                          --            --               --               --           --              --              253
Fair value of  stock
issued for
professional Services
rendered                          --            --               --               --           --              --              184
Fair value of
warrants issued
Related to license
agreement With
Digital Convergence               --            --               --               --           --              --            4,704
Exercise of warrants              --            --               --               --           --              --            2,877
Stock issued to
purchase assets                   --            --               --               --           --              --            3,520
Treasury stock at cost            --            --               --               --      201,230            (779)            (779)
Net Loss                          --            --               --           (5,409)          --              --           (5,409)
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31,
2000                              --            --               --      ($   37,875)     201,230     ($      779)     $    19,110
-----------------------------------------------------------------------------------------------------------------------------------
Exercise of employee              --            --               --               --
options
Issuance of Common
Stock through private
Placement, Net of
$149 of issuance costs            --            --               --               --           --              --            1,878
Expense associated
with warrant repricing            --            --               --               --           --              --              947
Fair value of options
issued for
Professional services
rendered                          --            --               --               --           --              --               69
Exercise of Warrants              --            --               --               --           --              --            1,045
Stock issued to
purchase assets                   --            --               --               --           --              --            1,376
Issuance of Preferred
Stock for services           452,489             5              878               --           --              --              883
Stock Subscription
Receivable
Net Loss                          --            --               --          (25,469)          --              --          (25,469)
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31,
2001                         452,489      $      5      $       878      ($   63,344)     201,230     ($      779)     ($      263)
-----------------------------------------------------------------------------------------------------------------------------------
Exercise of employee
options                           --            --               --               --           --              --              274
Issuance of Common
Stock through private
Placement, Net of $0
of issuance costs                 --            --               --               --           --              --                8
Cancellation of
Private Placement
Shares                            --            --               --               --           --              --             (240)
Expense associated
with warrant repricing            --            --               --               --           --              --              195
Fair value of stock
issued for
professional services
rendered                          --            --               --               --           --              --              241
Fair value of options
and warrants issued
for professional
services rendered                 --            --               --               --           --              --              723
Exercise of Warrants              --            --               --               --           --              --               45
Stock issued to pay
liabilities                       --            --               --               --           --              --              343
Conversion of
preferred stock to
common stock                (452,489)           (5)            (878)              --           --              --               --
Issuance of warrants
and stock with
convertible notes
payable                           --            --               --               --           --              --               37
Benefical conversion
feature embedded in
convertible notes
payable                           --            --               --               --           --              --               23
Stock Subscription
Receivable                        --            --               --               --           --              --              240
Deferred Stock
Compensation                      --            --               --               --           --              --             (231)
Net Loss                          --            --               --           (7,421)          --              --           (7,421)
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31,
2002                               0      $      0      $         0      ($   70,765)     201,230     ($      779)     ($    6,026)
-----------------------------------------------------------------------------------------------------------------------------------



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


                                      F-7


1.      BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS

BASIS OF PRESENTATION

        The consolidated  financial  statements include the financial statements
of NeoMedia  Technologies,  Inc.  and its  wholly-owned  subsidiaries,  NeoMedia
Migration,   Inc.,  a  Delaware  corporation;   Distribuidora   Vallarta,   S.A.
incorporated in Guatemala; NeoMedia Technologies of Canada, Inc. incorporated in
Canada;  NeoMedia  Tech,  Inc.  incorporated  in  Delaware;  NeoMedia  EDV  GmbH
incorporated in Austria; NeoMedia Technologies Holding Company B.V. incorporated
in the Netherlands; NeoMedia Technologies de Mexico S.A. de C.V. incorporated in
Mexico;  NeoMedia  Migration  de Mexico  S.A.  de C.V.  incorporated  in Mexico;
NeoMedia  Technologies  do  Brasil  Ltd.  incorporated  in Brazil  and  NeoMedia
Technologies UK Limited incorporated in the United Kingdom, and are collectively
referred  to  as  "NeoMedia"  or  the  "Company".   The  consolidated  financial
statements  of NeoMedia are  presented on a  consolidated  basis for all periods
presented.  All significant  intercompany  accounts and  transactions  have been
eliminated in preparation of the consolidated financial statements.

NATURE OF BUSINESS OPERATIONS

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

                NeoMedia Internet Switching Services (NISS), and

                NeoMedia Consulting and Integration Services (NCIS)

NEOMEDIA INTERNET SWITCHING SERVICES (NISS)

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

NEOMEDIA CONSULTING AND INTEGRATION SERVICES (NCIS)

        NCIS  (systems  integration  service  offerings)  resells  client-server
equipment and related software,  and general and specialized consulting services
targeted at software driven print applications, especially at process automation
of production print facilities through its integrated document factory solution.
Systems integration  services also identifies  prospects for custom applications
based on our  products  and  services.  This unit  recently  moved its  business
offerings to a much higher  Value-Add  called Storage Area Networks  (SAN).  The
operations are based in Lisle, Illinois.

2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS

        For the purposes of the  consolidated  balance  sheets and  consolidated
statements of cash flows, all highly liquid investments with original maturities
of three months or less are considered cash equivalents.

ESTIMATES

        The  preparation of financial  statements in conformity  with accounting
principles  generally accepted in the United States requires  management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities at the date of the financial  statements and the reported amounts of
revenues and expenses  during the reported  period.  Actual results could differ
from those estimates.

REVENUE RECOGNITION

        We derive revenues from two primary  sources:  (1) license  revenues and
(2) resale of software and technology equipment and service fee revenues.


                                      F-8


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

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

        Revenue for resale of software and technology  equipment and service fee
is recognized based on guidance  provided in Securities and Exchange  Commission
(SEC) Staff  Accounting  Bulletin  No. 101,  "Revenue  Recognition  in Financial
Statements,"  as amended (SAB 101).  Software and  technology  equipment  resale
revenue is recognized  when all of the  components  necessary to run software or
hardware  have been  shipped.  Service  revenues  include  maintenance  fees for
providing system updates for software products, user documentation and technical
support  and are  recognized  over the life of the  contract.  Software  license
revenue  from  long-term  contracts  has  been  recognized  on a  percentage  of
completion  basis,  along with the  associated  services being  provided.  Other
service  revenues,  including  training and  consulting,  are  recognized as the
services are  performed.  The Company uses  stand-alone  pricing to determine an
element's  vendor  specific  objective  evidence  (VSOE) in order to allocate an
arrangement  fee amongst various pieces of a  multi-element  contract.  NeoMedia
records an allowance for uncollectible accounts on a customer-by-customer  basis
as appropriate.

PURCHASE AND DISPOSAL OF QODE.COM, INC.

            On  March 1,  2001,  NeoMedia  purchased  all of the net  assets  of
Qode.com,  Inc. (Qode), except for cash. Qode is a development stage company, as
defined in Statement of Financial Accounting Standards (SFAS) No. 7, "Accounting
and Reporting By Development  Stage  Enterprises".  In  consideration  for these
assets,  NeoMedia  issued 274,699 shares of common stock,  valued at $1,359,760.
Additionally,  the Company placed in escrow 1,676,500 shares of its common stock
valued at $8,298,675  at the time of issuance.  Stock issued was valued at $4.95
per share,  which is the average closing price for the few days before and after
the  measurement  date of March 1, 2001. As of December 31, 2001 the Company had
released  35,074  shares of common  stock from  escrow for  performance  for the
period  March 1, 2001 to August 31, 2001.  The  remaining  1,641,426  shares are
being held in escrow pending the results of negotiations between the Company and
Qode with respect to the  performance  of the Qode  business unit for the period
March 1, 2001 through  February 28,  2002.  As a result,  all such shares may be
released to Qode.

            The Company accounted for this purchase using the purchase method of
accounting  in  accordance  with  Accounting  Principles  Board  Opinion No. 16,
"Business Combinations". The excess fair market value of the net assets acquired
over the  purchase  price was  allocated  to reduce  proportionately  the values
assigned to  noncurrent  assets.  The  accompanying  consolidated  statements of
operations  include the operations of Qode from March 1, 2001, through September
30, 2002.


                                      F-9



The purchase price at the original purchase date was calculated and allocated as
follows:



                                                                  
Original Shares: 274,699 issued at $4.95                               1,360,000
Contingent shares: 35,074 issued at $0.39                            $    13,000
                                                                     -----------
   Total purchase price                                              $ 1,373,000
                                                                     -----------
PURCHASE PRICE ALLOCATED AS FOLLOWS:

ASSETS PURCHASED
   Trade receivables                                                 $     5,000
   Inventory                                                             144,000
   Prepaid expenses                                                       49,000
   Furniture & fixtures                                                  913,000
   Capitalized development costs                                       2,132,000
   Capitalized software                                                   83,000
   Refundable deposits - non-current                                      38,000

LIABILITIES ASSUMED
   Accounts payable                                                     (981,000)
   Forgiveness of note receivable                                       (440,000)
   Interest receivable                                                   (10,000)
   Current portion of long-term debt                                    (117,000)
   Note payable                                                          (24,000)
   Capitalized lease obligation                                         (419,000)
                                                                     -----------

      Total purchase price allocated                                 $ 1,373,000
                                                                     ===========



            During the third quarter of 2001,  the Company  issued an additional
35,074  shares  under  the  terms  of the  earn-out  with  Qode.com,  Inc.  (see
explanation  below).  The value of these  shares in the  amount of  $13,000  was
allocated  $9,000 to capitalized  development  costs and $4,000 to furniture and
fixtures.

CONTINGENT CONSIDERATION

            In  accordance  with the purchase of the assets of  Qode.com,  Inc.,
NeoMedia has placed  1,676,500 shares of its common stock in escrow for a period
of one year,  subject to  downward  adjustment,  based upon the  achievement  of
certain  performance  targets  over the period of March 1, 2001 to February  28,
2002. As of March 1, 2002, these performance targets were not met and therefore,
the remaining 1,641,426 shares held in escrow were not issued. The criteria used
to determine the number of shares released from escrow is a weighted combination
of revenue,  page views,  and fully allocated  earnings before taxes relating to
the Qode Universal Commerce Solution.

            At the end of each of certain  interim  periods as  outlined  in the
purchase  agreement,  the number of  cumulative  shares  earned by  Qode.com  is
calculated  based on revenue  and page views and the  shares are  released.  The
resulting  financial  impact on  NeoMedia  is a  proportionate  increase  in the
long-term   assets  acquired  from  Qode,  with  a  corresponding   increase  in
depreciation  expense  from that point  forward.  The amount of the  increase in
long-term assets is dependent upon the number of shares released from escrow, as
well as the value of NeoMedia stock at the time of  measurement.  The first such
measurement date was July 1, 2001. At the end of the 12-month measurement period
(February 28, 2002),  the number of shares issued to Qode under the earn-out was
35,074, allocated as outlined in the table above. The remaining 1,641,426 shares
are being held in escrow pending the results of negotiations between the Company
and Qode with respect to a disagreement  over the performance of, and investment
in, the Qode  business  unit for the period March 1, 2001  through  February 28,
2002. As a result, all such shares may be released to Qode.


                                      F-10



        Intangible assets

      Intangible assets acquired from Qode.com include:

            i). Purchased  software  licenses relating to the development of the
Qode Universal Commerce Solution,  amortized on a straight-line basis over three
years.

            ii).   Capitalized   software  development  costs  relating  to  the
development of the Qode Universal Commerce Solution.

Other

      On May 31,  2001,  three  creditors of  Qode.com,  Inc.  filed in the U.S.
Bankruptcy Court an involuntary  bankruptcy petition for Qode.com,  Inc. On July
22, 2002, the case was converted to Chapter 7, U.S. Bankruptcy Code.

Disposal of Qode Business Unit

            On August 31,  2001,  the  Company  signed a  non-binding  letter of
intent to sell the  assets  and  liabilities  of its Ft.  Lauderdale-based  Qode
business  unit,  which was  acquired in March 2001,  to The Finx Group,  Inc., a
holding company based in Elmsford,  NY. The Finx Group was to assume $620,000 in
Qode payables and $800,000 in long-term leases in exchange for 500,000 shares of
the Finx  Group,  right to use and sell Qode  services,  and up to $5 million in
affiliate  revenues  over the next five  years.  During  the  third  and  fourth
quarters  of 2001 and the first  quarter of 2002,  the  company  recorded a $2.6
million  expense  from  the  write-down  of the Qode  assets/liabilities  to net
realizable value.

            The loss for  discontinued  operations  during the phase-out  period
from August 31, 2001 (measurement  date) to September 30, 2001 was $439,000.  No
further loss is anticipated.

            During June 2002,  the Finx Group  notified  the Company that it did
not intend to carry out the letter of intent  due to capital  constraints.  As a
result, during the nine months ended September 30, 2002, the Company recorded an
additional  expense of $1.5 million for the write-off of remaining  Qode assets.
As of December 31, 2002, the Company had $1.5 million of liabilities relating to
the Qode system on its books.

DIGITAL:CONVERGENCE CORPORATION INTELLECTUAL PROPERTY LICENSE AGREEMENT

        The   Company   entered   into   an   agreement   with   a   competitor,
Digital:Convergence  Corporation ("DC"), a private company located in the United
States, in October 2000, granting them a worldwide, non-exclusive license of the
Company's  extensive patent portfolio for directly linking  documents,  objects,
transaction  and voice  commands to the  internet.  The  agreement  provided for
annual license fees over a period of ten years in excess of $100 million through
a combination of cash and equity. The Company recognized $7.8 million of revenue
in 2000 related to this contract, including a $5.0 million cash payment received
in October 2000 for royalties  earned before  contract  execution,  $2.5 million
related to the $10 million of payments in DC common  stock and cash  expected to
be received in the first year of the  contract,  and $0.3 million  related to DC
stock received by NeoMedia to be recognized over the life of the contract.

        As part of the contract,  the Company issued to DC a warrant to purchase
1.4 million shares of NeoMedia common stock.

        In the first quarter of 2001, DC issued the Company an interest  bearing
$3 million  note  payable in lieu of a $3 million  cash  payment  due in January
2001. The Company also received shares of DC stock in January with a contractual
value of $2 million as part of the first  contract-year  royalties due. The note
was originally due on April 24, 2001,  however,  on that date the Company agreed
to extend it until June 24, 2001. The Company also partially  wrote down, in the
first quarter of 2001,  the value of the remaining DC stock  receivable,  and DC
stock that had been received in January, to a value that management believed was
reasonable at the time (50% of the valuation  stipulated in the  contract).  The
write-down   consisted   of  a  reduction  in  assets  of  $7.7  million  and  a
corresponding reduction in liabilities of $7.7 million. The DC stock received in
January 2001 was valued at $1 million and the DC  receivable  was valued at $9.2
million.  In April 2001, the Company received additional shares of DC stock with
a $5 million value based on the valuation method stipulated in the contract.  No
revenue was recognized  related to these shares and the shares were not recorded
as  an  asset  due  to  DC's  worsening  financial  condition.  All  assets  and
liabilities relating to the contract were subsequently written off in the second
quarter of 2001


                                      F-11



        Also in April,  an  agreement  was  entered  into with DC whereby  for a
period from the date of  registration  of the shares  underlying  the warrant to
purchase 1.4 million  shares of the  Company's  common  stock until  October 24,
2001, if the Company would  identify a purchaser  for the Company's  shares,  DC
would  exercise the warrant and purchase 1.4 million  shares of common stock and
sell the  shares to the  identified  purchaser.  One  third of the net  proceeds
received by DC on the sale of the  Company's  common  stock shall be paid to the
Company toward  repayment of DC's  obligations  under the note to the Company in
the amount of $3 million.  In consideration for this, the warrant exercise price
was reduced  during  this period to 38 percent of the closing  sale price of the
Company's  common stock on the day prior to the date of  exercise,  subject to a
minimum  price.  Because the exercise of the  warrants at this reduced  price is
contingent  upon the Company  finding a purchaser of the  underlying 1.4 million
shares,  the value of this  re-pricing will be measured and recorded at the time
the shares  are sold.  As of October  24, the  Company  was not able to locate a
purchaser and therefore, the warrant was not exercised.

        On June 24, 2001,  DC did not pay the note that was due, and on June 26,
2001, the Company filed a $3 million  lawsuit  against DC for breach of contract
regarding  the $3 million  promissory  note.  It was also  learned in the second
quarter of 2001 that DC's capital raising  efforts and business  operations were
having  difficulty,  and the Company decided to write off all remaining  amounts
related  to the DC  contract.  The  following  table  represents  balance  sheet
balances at December 31, 2000 and March 31, 2001, as well as all amounts written
off during the second quarter of 2001:



                                                                              March 31,
                                                              December 31,  2001 Balances       Write-off
                                                             2000 Balances    (Unaudited)     June 30, 2001
                                                             -------------    -----------     -------------
                                                                          (Dollars in thousands)
                                                                -----------------------------------------
ASSETS
                                                                                         
Available for sale securities - Digital Convergence             $    --          $ 1,000          $ 1,000
Trade Accounts Receivable
                                                                  2,500            1,500            1,500
Digital Convergence receivable                                    5,144            5,144            5,144
Prepaid expenses (current portion)                                  470              470              470
Digital Convergence receivable, net of current portion           10,288            2,572            2,572
Prepaid DC (long-term portion)                                    4,116            3,998            3,998
                                                                -------          -------          -------
   Total assets                                                 $22,518          $14,684          $14,684
                                                                =======          =======          =======

LIABILITIES

Deferred revenues DC                                            $ 1,543          $   772          $   772
Long-term deferred revenues - DC                                 13,503            6,558            6,558
                                                                -------          -------          -------
   Total liabilities                                            $15,046          $ 7,330          $ 7,330
                                                                =======          =======          =======



        The net effect of the  write-off  was a  $7,354,000  non-cash  charge to
income  during  the  second  quarter  of  2001,  which  is  included  in Loss on
Digital:Convergence   License  Contract  in  the   consolidated   statements  of
operations for the year ending December 31, 2001. Any future revenues related to
this contract will be recorded as payments are received.

AIRCLIC, INC. RELATIONSHIP

        On July 3, 2001,  NeoMedia  signed a  non-binding  letter of intent with
AirClic, Inc. to cross-license the companies'  intellectual  property. The terms
of the proposed agreement called for NeoMedia to: (i) acquire an equity interest
in AirClic, and (ii) issue a significant equity interest in NeoMedia to AirClic,
which interest would likely have exceeded 50% of NeoMedia's  outstanding  equity
securities.  Further  terms of the  agreement  called  for  NeoMedia  to acquire
AirClic's Connect2  comparison  shopping business unit, which was to be combined
with NeoMedia's Qode business unit. AirClic has loaned NeoMedia $500,000 under a
secured  note due on the  earlier  of (i) the date on which  NeoMedia  raises $5
million in equity  financing from a source other than AirClic,  (ii) a change in
control of NeoMedia, or (iii) January 11, 2002.


                                      F-12



        During the  negotiation  of a definitive  set of agreements  between the
companies,  it was  determined  that  the  consummation  of the  transaction  as
provided  in the  non-binding  letter of intent  would  not be  completed.  As a
result, additional notes aggregating $1,500,000 will not be executed between the
companies.

        On  September  6, 2001,  AirClic  filed suit  against the Company in the
Court of Common Pleas, Montgomery County, PA, for breach of contract relating to
the July 3, 2001 non-binding letter of intent signed by the Company and AirClic.
AirClic claims that the Company violated express  representations and warranties
relating to the Company's assets and state of business affairs.  AirClic seeks a
judgment to accelerate  repayment of the $500,000 note due January 11, 2002, and
to relieve  AirClic from any  obligation to make further loans to the Company as
outlined  in the letter of intent.  On October  3,  2003,  we paid  AirClic  the
principal plus interest in the amount of approximately  $610,000. On December 5,
2003, we paid an additional $115,000 in legal fees and entered into a settlement
agreement  with AirClic under which the suit was  dismissed.  We have no further
obligation relating to this matter.

        AirClic  also  filed suit  against  the  Company  in the  United  States
District Court for the Eastern District of Pennsylvania.  In this second action,
AirClic seeks a declaration that certain core intellectual property securing the
note issued by the Company to AirClic,  some of which is patented and others for
which a patent application is pending,  is invalid and in the public domain. Any
declaration  that the  Company's  core  patented  or  patentable  technology  is
non-protectable and in the public domain would have a material adverse effect on
the  Company's  business,   prospects,   financial  condition,  and  results  of
operations.  The Company is vigorously  defending this second action as well. On
November  21,2001,  the  Company  filed a motion to dismiss  the  complaint.  On
December 19, 2001, AirClic filed a response opposing that position. On September
18,  2002,  the court  ruled in favor of the  Company  and  dismissed  AirClic's
complaint.

ADVERTISING EXPENSE

During the year ended  December  31, 2001,  the Company  entered into a one-year
license  agreement with About.com,  Inc. to provide the Qode Universal  Commerce
SolutionTM to About.com's  users. In June 2001,  About.com ran banner ads on its
site  promoting  the  Qode  Universal  Commerce  SolutionTM.  As  part  of  this
transaction,  About.com  received  452,489  shares of the  Series B  Convertible
Preferred  Stock,  par value  $0.01 per share,  of the  500,000  total  Series B
Convertible   Preferred   shares  the  Company  is  authorized   to  issue,   in
consideration for these promotions.  The Company recorded an advertising expense
of $882,000  associated with this transaction in sales and marketing  expense in
the  accompanying  consolidated  statements of  operations.  The agreement  with
About.com was terminated on August 31, 2001, in  anticipation of the sale of the
Qode assets to the Finx  Group.  Total  advertising  expense for the years ended
December  31,  2002,  2001,  and  2000  was  $4,000,   $883,000,   and  $70,000,
respectively.

SEVERANCE EXPENSE

        During the third  quarter of 2001,  the Company  laid off 55  employees,
including  the  chief  technology  officer  and  the  chief  operating  officer,
representing  a 60%  decrease in its total  workforce.  In  connection  with the
layoffs,  the Company  recognized a severance expense of approximately  $494,000
during the third quarter of 2001. The layoffs were part of a  company-wide  cost
reduction initiative.

EXECUTIVE INCENTIVE EXPENSE

        In  June  2001,  the  Company's   compensation   committee  approved  an
adjustment, relating to the Digital:Convergence patent license fees, to the 2000
executive  incentive  plan that reduced the bonus payout by  approximately  $1.1
million.   This  was  recorded  as  a  negative   expense  in  the  accompanying
consolidated statement of operations.

OPTION AND WARRANT REPRICING PROGRAMS

            In  May  2001,  the  Company  re-priced  approximately  1.5  million
additional  warrants subject to a limited exercise period and other  conditions,
including  certain warrants issued in connection with NeoMedia's  initial public
offering in 1996,  which will expire at the end of 2001.  The repricing  program
allowed  the warrant  exercise  price to be reduced to 33 percent of the closing
sale price of the Company's common stock (subject to a minimum) on the day prior
to the date of exercise  for a period of six months from the date the  repricing
program began.  The exercise of the warrants and sale of the  underlying  common
stock was at the  discretion  of a broker  selected by the  Company,  within the
parameters of the repricing arrangement. In accordance with FASB Interpretation,
FIN 44, Accounting for Certain  Transactions  Involving Stock Transactions,  the
award was  accounted for as variable  from the date of  modifications  on May 1,
2001.  Accordingly,  $181,000 was recorded as compensation  in the  accompanying
consolidated statement of operations.


                                      F-13


            In June 2002,  the  Company  repriced 3 million of its common  stock
warrants  from  $0.12 to $.05 per  share.  All of the  warrants  were  exercised
immediately.  The  Company  recognized  an expense of  $132,000  related to this
repricing.

        In April 2002, in order to encourage the exercise of options,  our Board
of Directors  adopted an option  repricing  program.  Under the  program,  those
persons  holding  options  granted  under the 1996,  1998 and 2002 Stock  Option
Plans,  to the extent their  options were  exercisable  during the period ending
October 9, 2002,  were  allowed to  exercise  the option at a price which is the
greater  of $0.12  per  share or 50% of the  last  sale  price of a share of our
common stock on the OTC Bulletin Board on the trading date immediately preceding
the date of exercise. No options were exercised under the program and no expense
was recognized relating to the program.

        During March 2002, the Company repriced  approximately1.2 million of its
common stock warrants for a period of six months. During the term of the warrant
repricing  program,  participating  holders were entitled to exercise  qualified
warrants at an exercise price per share equal to the greater of (1) $0.12 or (2)
50% of the last  sale  price of  shares of  Common  Stock on the  OTCBB,  on the
trading date immediately  preceding the date of exercise.  Approximately 370,000
warrants were exercised in connection with the program,  and NeoMedia recognized
approximately $63,000 in expense relating to the repricing during the year ended
December 31, 2002.

WARRANT ISSUANCE

        In June 2001,  the Board of  Directors  approved the issuance of 414,000
warrants for Charles W. Fritz,  NeoMedia's  Chairman,  CEO, and  President at an
exercise price of $2.09.  The warrant grant was later rescinded  during 2001 and
the warrants were not issued.

        In June 2002, the Board of Directors  approved the issuance of 1,500,000
warrants  for Charles W. Fritz,  NeoMedia's  Chairman,  at an exercise  price of
$0.05, to replace warrants  exercised in the Company's warrant repricing program
for which Mr. Fritz  received no profit.  The Company  recognized  an expense of
approximately  $66,000  relating  to  the  issuance  of  these  warrants  in the
accompanying consolidated statement of operations.

VALUATION AND RESERVES

Allowance for doubtful  accounts  activity for the years ended December 31, 2002
and 2001 was as follows:



                                                       (dollars in thousands)
                                                       ----------------------
                                                       2002            2001
                                                       -----           -----
                                                                 
Beginning balance                                      $  65           $ 484
Bad debt expense                                          41              --
Write-off of uncollectible accounts                       --             (68)
Collection of accounts previously written off             --            (182)
Adjustment to general allowance                          (51)           (169)
                                                       -----           -----
   Ending balance                                      $  55           $  65
                                                       =====           =====



INVENTORIES

        Inventories  are stated at the lower of cost or market,  and at December
31,  2002 and 2001  were  comprised  of  purchased  computer  technology  resale
products.  Cost is determined using the first-in,  first-out method. At December
31, 2002, the reserve for obsolescence  was $130,000.  Reserves for obsolescence
were increased by $130,000 for 2002.


                                      F-14


PROPERTY AND EQUIPMENT

        Property  and  equipment   are  carried  at  cost  less   allowance  for
accumulated  depreciation.  Repairs  and  maintenance  are charged to expense as
incurred. Depreciation is generally computed using the straight-line method over
the estimated  useful lives of the related  assets.  The estimated  useful lives
range from three to five years for  equipment  and seven years for furniture and
fixtures.  Leasehold  improvements are amortized over the shorter of the life of
the lease or the useful lives of the related  assets.  Upon  retirement or sale,
cost and accumulated  depreciation are removed from the accounts and any gain or
loss is reflected in the consolidated statements of operations.

        Depreciation expense was $108,000,  $249,000, and $263,000 for the years
ended December 31, 2002, 2001, and 2000, respectively.

CAPITALIZED AND PURCHASED SOFTWARE COSTS

        Intangible assets consist of capitalized  software development costs and
patents.

        Software   development  costs  are  accounted  for  in  accordance  with
Statement of Accounting  Standards  (SFAS) No. 86,  "Accounting for the Costs of
Computer Software to be Sold,  Leased, or Otherwise  Marketed." Costs associated
with the planning and designing phase of software development,  including coding
and testing activities  necessary to establish  technological  feasibility,  are
classified  as  research  and  development   and  expensed  as  incurred.   Once
technological  feasibility  has been  determined,  additional  costs incurred in
development,  including coding, testing, quality assurance and documentation are
capitalized.  Once a  product  is made  available  for sale,  capitalization  is
stopped unless the related costs are associated with a technologically  feasible
enhancement to the product.  Amortization of purchased and developed software is
provided on a  product-by-product  basis over the estimated economic life of the
software, generally three years, using the straight-line method.

        In accordance  with SFAS No. 86, at the end of each quarterly  reporting
period,  the Company  evaluates each of its software  products for impairment by
adjusting the unamortized capitalized costs of each computer software product to
its net realizable  value. Net realizable value is equal to the estimated future
gross  revenues  from each  product  reduced by the  estimated  future  costs of
completing  and  disposing of that  product,  including  the costs of performing
maintenance   and   customer   support   required  to  satisfy   the   Company's
responsibility set forth at the time of sale. It is reasonably possible that the
estimates  underlying the impairment analysis could change in the near term, and
the effect of the change could be material to the financial statements.

        Patents  (including  patents  pending  and  intellectual  property)  and
acquired  customer  lists are  stated at cost,  less  accumulated  amortization.
Patents are  generally  amortized  over  periods  ranging from five to seventeen
years.

        Intangible  assets  activity  for the years ended  December 31, 2002 and
2001 were as follows:



                                                  (dollars in thousands)
                                                -------------------------
                                                 2002              2001
                                                -------           -------
CAPITALIZED PATENTS
                                                            
Beginning balance                               $ 2,500           $ 2,661
Additions                                            17               102
Amortization                                       (273)             (263)
                                                -------           -------
   Ending balance                               $ 2,244           $ 2,500
                                                                  =======

CAPITALIZED & PURCHASED SOFTWARE COSTS
Beginning balance                               $ 1,828           $ 6,382
Additions                                             4             2,391
Intangible assets moved
      (to)/from "Assets Held for Sale"            1,027            (1,027)
Disposals/write-offs                             (2,030)           (3,061)
Amortization                                       (680)           (2,857)
                                                -------           -------
   Ending balance                               $   149           $ 1,828
                                                =======           =======



        Amortization expense of intangible assets was $953,000,  $3,120,000, and
$2,073,000 for the years ended December 31, 2002, 2001, and 2000, respectively.


                                      F-15


LOSS ON IMPAIRMENT OF ASSETS

        In  connection  with the  Company's  reduction  in work force during the
third quarter 2001, the Company sold the rights to its Pacer Advantage  end-user
software  product for $40,000 cash.  Accordingly,  the Company wrote off all its
assets  aggregating $2.9 million related to the MLM/Affinity  program  including
assets pertaining to the purchase of Daystar  services,  LLC and a customer list
purchased in 1998. Revenue related to the MLM/Affinity  program was $0, $92,000,
and  $259,000  for  the  years  ended   December  31,  2002,   2001,  and  2000,
respectively.  Net loss allocated to the MLM/Affinity  program was $0, $832,000,
and  $1,075,000,  for the  years  ended  December  31,  2002,  2001,  and  2000,
respectively.

        During the year ended  December  31,  2002,  the Company  recognized  an
impairment    charge   of   $1.0    million    relating   to   its    PaperClick
physical-world-to-internet  software solution.  Due to capital constraints,  the
Company is not currently able to devote full-time  resources and  infrastructure
to commercializing the technology.

EVALUATION OF LONG-LIVED ASSETS

        In October  2001,  the FASB  issued SFAS No.  144,  "Accounting  for the
Impairment or Disposal of Long-Lived Assets." This statement supersedes SFAS No.
121,  "Accounting  for the  Impairment of Long-Lived  Assets and for  Long-Lived
Assets  to  Be  Disposed  of."  Although   retaining  many  of  the  fundamental
recognition and measurement  provisions of SFAS 121, the new rules significantly
change  the  criteria  that  would  have  to be  met to  classify  an  asset  as
held-for-sale.  The statement also supersedes  certain  provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations--Reporting
the Effects of Disposal of a Segment of a Business,  and Extraordinary,  Unusual
and Infrequently  Occurring Events and  Transactions," and will require expected
future  operating  losses  from  discontinued  operations  to  be  displayed  in
discontinued  operations  in the  period  or  periods  in which the  losses  are
incurred  rather than as of the  measurement  date,  as presently  required.  We
adopted this new statement on January 1, 2002,  and concluded that the effect of
adopting  this  statement  had no  material  impact on our  financial  position,
results of operations, or cash flows.

INCOME TAXES

        In accordance with SFAS No. 109,  "Accounting for Income Taxes",  income
taxes are accounted for using the assets and liabilities approach.  Deferred tax
assets  and  liabilities   are  recognized  for  the  future  tax   consequences
attributable to differences  between the financial statement carrying amounts of
existing assets and liabilities,  and their  respective tax bases.  Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be  recovered  or  settled.  Deferred  tax  assets are  reduced  by a  valuation
allowance  when, in the opinion of  management,  it is more likely than not that
some  portion or all of the  deferred  tax assets  will not be  recognized.  The
Company has recorded a 100% valuation  allowance as of December 31, 2002,  2001,
and 2000.

COMPUTATION OF NET LOSS PER SHARE

        Basic  net  loss per  share  is  computed  by  dividing  net loss by the
weighted average number of shares of common stock outstanding during the period.
The Company has excluded all  outstanding  stock  options and warrants  from the
calculation  of  diluted  net  loss  per  share  because  these  securities  are
anti-dilutive for all years presented.  The shares excluded from the calculation
of diluted net loss per share are detailed in the table below:



                                             DECEMBER 31, 2002         DECEMBER 31, 2001        DECEMBER 31, 2000
                                             -----------------         -----------------        -----------------
                                                                                       
         Outstanding Stock Options               10,801,219                4,214,000                4,294,000
         Outstanding Warrants                     7,433,758                3,240,000                3,968,000


FINANCIAL INSTRUMENTS

        The Company  believes that the fair value of its  financial  instruments
approximate carrying value.


                                      F-16



CONCENTRATIONS OF CREDIT RISK

        Financial    instruments   that   potentially    subject   NeoMedia   to
concentrations  of credit risk consist  primarily of trade  accounts  receivable
with  customers.  NeoMedia  extends  credit to its customers as determined on an
individual basis and has included an allowance for doubtful accounts of $55,000,
$65,000,  and $484,000 in its December 31,  2002,  2001,  and 2000  consolidated
balance  sheets,  respectively.  NeoMedia had net sales to one major customer in
the  telecommunications  industry  (Ameritech)  of $3,362,000,  $2,983,000,  and
$5,824,000   during  the  years  ended  December  31,  2002,   2001,  and  2000,
respectively, resulting in trade accounts receivable of $47,000, $1,499,000, and
$229,000 as of December 31, 2002, 2001, and 2000,  respectively.  In addition, a
single  company  supplies the majority of the  Company's  resold  equipment  and
software, which is re-marketed to this customer.  Accordingly,  the loss of this
customer or supplier would materially adversely affect the Company's operations.
Revenue  generated  from the  remarketing  of computer  software and  technology
equipment has accounted for a significant percentage of NeoMedia's revenue. Such
sales accounted for  approximately  87%, 73%, and 66% of NeoMedia's  revenue for
the years ended December 31, 2002,  2001, and 2000,  respectively.  NeoMedia had
license  fees to one major  customer  (DC) of  $7,768,000  during the year ended
December  31, 2000,  resulting in an accounts  receivable  of  $2,500,000  as of
December 31, 2000. Revenue generated from this licensing agreement accounted for
approximately  28% of NeoMedia  revenue for the year ended December 31, 2000. No
revenue was recognized  under this agreement during the years ended December 31,
2002 or 2001.

RECLASSIFICATIONS

        Certain  reclassifications have been made to the 2000 and 2001 financial
statements to conform to the 2002 presentation.

COMPREHENSIVE INCOME

         For the years ended December 31, 2002,  2001, and 2000, the Company did
not have other comprehensive income and therefore has not included the statement
of comprehensive income in the accompanying financial statements.

RECENT ACCOUNTING PRONOUNCEMENTS

            On July 21, 2001, the Financial  Accounting  Standards  Board issued
Statements of Financial  Accounting  Standards No. 141 (SFAS No. 141), "Business
Combinations",  and No.  142  (SFAS No.  142),  "Goodwill  and Other  Intangible
Assets." SFAS No. 141 addresses financial  accounting and reporting for goodwill
and other intangible  assets acquired in a business  combination at acquisition.
SFAS No. 141  requires  the  purchase  method of  accounting  to be used for all
business  combinations  initiated after June 30, 2001 and  establishes  specific
criteria for the recognition of intangible assets separately from goodwill; SFAS
No. 142  addresses  financial  accounting  and  reporting for goodwill and other
intangible  assets subsequent to their  acquisition.  SFAS No. 142 provides that
goodwill and intangible  assets which have  indefinite  useful lives will not be
amortized,  but rather will be tested at least annually for impairment.  It also
provides that  intangible  assets that have finite useful lives will continue to
be amortized over their useful lives,  but those lives will no longer be limited
to forty years.  SFAS No. 141 is effective for all business  combinations  after
June 30, 2001. The provisions of SFAS No. 142 are effective beginning January 1,
2002.  NeoMedia has  implemented  the provisions of SFAS No. 141 and No. 142 and
has concluded that the adoption does not have a material impact on the Company's
financial statements.

            In October 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement  Obligations," which requires companies to record the fair value of a
liability  for asset  retirement  obligations  in the  period in which  they are
incurred. The statement applies to a company's legal obligations associated with
the retirement of a tangible long-lived asset that results from the acquisition,
construction,  and  development or through the normal  operation of a long-lived
asset. When a liability is initially recorded,  the company would capitalize the
cost,  thereby  increasing  the  carrying  amount  of  the  related  asset.  The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value.  Upon  settlement of
the liability,  the obligation is settled at its recorded  amount or the company
incurs a gain or loss.  The  statement is effective  for fiscal years  beginning
after June 30,  2002.  NeoMedia  does not expect the adoption to have a material
impact to NeoMedia's financial position or results of operations.

            In October 2001, the FASB issued SFAS No. 144,  "Accounting  for the
Impairment  or Disposal of  Long-Lived  Assets".  Statement  144  addresses  the
accounting  and reporting for the  impairment or disposal of long-lived  assets.
The statement  provides a single  accounting  model for long-lived  assets to be
disposed  of.  New  criteria  must be met to  classify  the  asset  as an  asset
held-for-sale.  This  statement  also  focuses  on  reporting  the  effects of a
disposal of a segment of a business.  This  statement  is  effective  for fiscal
years  beginning  after  December  15,  2001.  The  Company  does not expect the
adoption  to have a  material  impact to its  financial  position  or results of
operations.  Neomedia  has  implemented  the  provision  of SFAS No. 144 and has
concluded  that the adoption  does not have a material  impact on the  Company's
financial statements.


                                      F-17


            In April 2002,  the FASB issued  Statement No. 145,  "Rescission  of
FASB  Statements  No. 4, 44, and 64,  Amendment  of FASB  Statement  No. 13, and
Technical Corrections." This Statement rescinds FASB Statement No. 4, "Reporting
Gains  and  Losses  from  Extinguishment  of  Debt,"  and an  amendment  of that
Statement,  FASB  Statement  No.  64,  "Extinguishments  of Debt Made to Satisfy
Sinking-Fund Requirements" and FASB Statement No. 44, "Accounting for Intangible
Assets  of Motor  Carriers."  This  Statement  amends  FASB  Statement  No.  13,
"Accounting  for  Leases," to eliminate  an  inconsistency  between the required
accounting  for  sale-leaseback  transactions  and the required  accounting  for
certain  lease  modifications  that have  economic  effects  that are similar to
sale-leaseback  transactions.  NeoMedia  does not expect the  adoption to have a
material impact to NeoMedia's financial position or results of operations.

            In July 2002, the FASB issued SFAS No. 146  "Accounting  for Exit or
Disposal  Activities."  The  provisions  of this  statement  are  effective  for
disposal  activities  initiated after December 31, 2002, with early  application
encouraged.  The Company  does not expect the adoption of FASB No. 146 to have a
material impact on the Company's financial position or results of operations.

      In October  2002,  the FASB issued  Statement  No. 147,  "Acquisitions  of
Certain  Financial  Institutions-an  amendment of FASB Statements No. 72 and 144
and  FASB  Interpretation  No.  9",  which  removes  acquisitions  of  financial
institutions  from  the  scope of both  Statement  72 and  Interpretation  9 and
requires that those  transactions be accounted for in accordance with Statements
No. 141,  Business  Combinations,  and No. 142,  Goodwill  and Other  Intangible
Assets.  In addition,  this  Statement  amends SFAS No. 144,  Accounting for the
Impairment or Disposal of Long-Lived  Assets,  to include in its scope long-term
customer-relationship  intangible  assets  of  financial  institutions  such  as
depositor- and  borrower-relationship  intangible  assets and credit  cardholder
intangible  assets.  The  requirements  relating to  acquisitions  of  financial
institutions is effective for  acquisitions for which the date of acquisition is
on or after  October 1, 2002.  The  provisions  related  to  accounting  for the
impairment  or disposal of certain  long-term  customer-relationship  intangible
assets are effective on October 1, 2002.  The adoption of this Statement did not
have a  material  impact to the  Company's  financial  position  or  results  of
operations as the Company has not engaged in either of these activities.

      In December  2002,  the FASB issued  Statement  No. 148,  "Accounting  for
Stock-Based Compensation-Transition and Disclosure", which amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of  transition  for a  voluntary  change  to the  fair  value  based  method  of
accounting for stock-based employee  compensation.  In addition,  this Statement
amends  the  disclosure  requirements  of  Statement  123 to  require  prominent
disclosures in both annual and interim financial  statements about the method of
accounting for stock-based  employee  compensation  and the effect of the method
used  on  reported  results.  The  transition  guidance  and  annual  disclosure
provisions of Statement 148 are effective for fiscal years ending after December
15, 2002,  with earlier  application  permitted  in certain  circumstances.  The
interim  disclosure  provisions are effective for financial  reports  containing
financial  statements for interim periods beginning after December 15, 2002. The
adoption  of this  statement  did not have a  material  impact on the  Company's
financial  position or results of  operations  as the Company has not elected to
change to the fair value based method of  accounting  for  stock-based  employee
compensation.

      In January 2003, the FASB issued  Interpretation No. 46, "Consolidation of
Variable Interest Entities." Interpretation 46 changes the criteria by which one
company  includes  another  entity  in its  consolidated  financial  statements.
Previously,   the  criteria  was  based  on  control  through  voting  interest.
Interpretation  46 requires a variable  interest  entity to be consolidated by a
company if that  company  is subject to a majority  of the risk of loss from the
variable interest  entity's  activities or entitled to receive a majority of the
entity's  residual  returns  or both.  A company  that  consolidates  a variable
interest  entity  is  called  the  primary   beneficiary  of  that  entity.  The
consolidation  requirements of  Interpretation  46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to older  entities in the first  fiscal year or interim  period  beginning
after  June  15,  2003.  Certain  of the  disclosure  requirements  apply in all
financial  statements  issued  after  January 31, 2003,  regardless  of when the
variable  interest  entity  was  established.  The  Company  does not expect the
adoption  to have a  material  impact to the  Company's  financial  position  or
results of operations.

3.          LIQUIDITY

            During  the  years  ended  December  31,  2002,  2001,  and 2000 the
Company's  net  loss  totaled   approximately   $7,421,000,   $25,469,000,   and
$5,409,000, respectively. As of December 31, 2002 the Company had an accumulated
deficit of approximately  $70,765,000 and approximately  $70,000 in unrestricted
cash balances. As of December 31, 2002, the Company had negative working capital
of $8,985,000 and negative  cashflow from operations of $598,000.  The Company's
unrestricted  cash  balance as of  February  5, 2003 was  approximately  $44,000
(unaudited).


                                      F-18



        On November 12, 2002, the Company  entered into an Equity Line of Credit
Agreement  with  Cornell  under  which  Cornell  agreed to  purchase up to $10.0
million of NeoMedia's  common stock and over the next two years, with the timing
and amount of the purchase at the Company's  discretion.  The maximum  amount of
each  purchase is $150,000 with a minimum of seven days between  purchases.  The
shares will 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.  The Company
will pay 5% of the gross  proceeds of each  purchase to Cornell as a commission.
According to the terms of the agreement,  the Company cannot draw on the line of
credit until the shares underlying the agreement are registered for trading with
the Securities and Exchange  Commission.  On February 14, 2003, the SEC declared
effective  the  S-1  registration   statement   containing  100  million  shares
underlying the Equity Line of Credit.

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

        Should these  financing  sources fail to materialize,  management  would
seek alternate  funding sources through sale of common and/or  preferred  stock.
Management's plan is to secure adequate funding to bridge to revenue  generation
from the Company's  valuable  intellectual  property  portfolio and PaperClickTM
internet  "switching"  software.  To this end,  the Company has retained the law
firm of Baniak Pine & Gannon to pursue potential license  agreements,  and plans
to implement a sales strategy for PaperClickTM upon receipt of adequate funding.
Additionally,  on March 13, 2003,  the Company  announced that it has reached an
agreement in principal to acquire and merge with Loch Energy, Inc. ("Loch"),  an
oil and gas provider  based in Humble,  Texas.  Loch  currently owns mineral and
lease rights to five properties, totaling approximately 130 acres, near Houston,
Texas. Loch's portion of the proven reserves on the five properties is estimated
at  7,707,247  barrels.  Loch's  portion of the  probable  reserves  on the five
properties is estimated at an  additional  5,963,748  barrels.  The merger would
provide for one share of common stock of the Company to be  exchanged  for every
four shares of Loch common stock on an adjusted basis, and additional "earn out"
shares to be issued to Loch  shareholders  based on actual oil production in the
first year after closing.  Total shares to be issued to Loch  shareholders  will
not  exceed  50% of  NeoMedia  outstanding  shares.  The  merger is  subject  to
negotiations of definitive contracts, corporate filing requirements,  completion
of due  diligence  and any  required  approval  by the Boards of  Directors  and
shareholders  of each  company.  It is  anticipated  that  closing  would  occur
approximately 30 days after such conditions are satisfied.

4.      CONTRACT ACCOUNTING

        NeoMedia  periodically  enters into long-term  software  development and
consultation  agreements  with  certain  customers.  As of December 31, 2002 and
2001,  certain  contracts  were not completed and  information  regarding  these
uncompleted contracts was as follows:



                                                              (dollars in thousands)
                                                               -------------------
                                                               2002           2001
                                                               ----           ----
                                                                        
Costs incurred on contracts                                    $  7           $ 50
Profit to date                                                    3             15
                                                               ----           ----
      Total costs and estimated earnings                         10             65

Less - billings to date                                          (8)           (35)
                                                               ----           ----
   Costs and estimated earnings in excess of billings          $  2           $ 30
                                                               ====           ====


The above figures are grouped in the  accompanying  consolidated  balance sheets
under the following captions:



                                                                   (dollars in thousands)
                                                                    -------------------
                                                                    2002           2001
                                                                    ----           ----
                                                                             
Accounts receivable                                                 $  3           $ 43
Deferred revenue                                                      (1)           (13)
                                                                    ----           ----
   Costs and estimated earnings in excess of billings, net          $  2           $ 30
                                                                    ====           ====


5.          PROPERTY AND EQUIPMENT

        As of December 31, 2002 and 2001,  property and  equipment  consisted of
the following:




                                                     (dollars in thousands)
                                                   -------------------------
                                                    2002              2001
                                                   -------           -------
                                                               
Furniture and fixtures                             $   274           $   643
Leasehold improvements                                  --               109
Equipment                                              166               326
                                                   -------           -------
          Total                                        440             1,078

Less: accumulated depreciation
     Furniture and fixtures                           (208)             (273)
     Leasehold improvements                             --              (109)
     Equipment                                        (134)             (226)

Less property and equipment held for sale               --              (265)
                                                   -------           -------
          Total property and equipment, net        $    98           $   205
                                                   =======           =======


        During the years ended  December 31, 2002 and 2001,  the Company took an
impairment  charge  against  property  and  equipment  of $0.3  million and $0.6
million,  respectively,  relating to the  discontinuation  of its Qode  business
unit.

6.      INTANGIBLE ASSETS

        As of December  31, 2002 and 2001,  intangible  assets  consisted of the
following:




                                                                (dollars in thousands)
                                                              ---------------------------
                                                                2002               2001
                                                              --------           --------
                                                                           
Cost:
Capitalized and purchased software costs                      $    672           $  8,520
Patents and related costs                                        3,142              3,125
                                                              --------           --------
          Total                                                  3,814             11,645
                                                              --------           --------
Less: accumulated amortization:
     Capitalized and purchased software costs                     (523)            (5,665)
     Patents and related costs                                    (898)              (625)
                                                              --------           --------
          Total                                                 (1,421)            (6,290)
                                                              --------           --------
Carrying value:
     Capitalized and purchased software costs                      149              2,855
     Patents and related costs                                   2,244              2,500
                                                              --------           --------
                                                                 2,393              5,355

Less intangible assets of discontinued business unit                --             (1,027)
                                                              --------           --------
               Intangible assets, net                         $  2,393           $  4,328
                                                              ========           ========


        During the year ended  December  31,  2002,  the Company  recognized  an
impairment    charge   of   $1.0    million    relating   to   its    PaperClick
physical-world-to-internet  software solution.  Due to capital constraints,  the
Company is not currently able to devote full-time  resources and  infrastructure
to  commercializing  the  technology.  The Company intends to re-focus sales and
marketing  efforts  surrounding  the  product  upon the  receipt  of  sufficient
capital.

        As of December  31,  2002,  the Company  estimated  future  amortization
expense be $389,000 for 2003, $294,000 for 2004, $205,000 for 2005, $157,000 for
2006 and $148,000 for 2007.


                                      F-19



        During the years ended  December 31, 2002 and 2001,  the Company took an
impairment   charge   against   intangible   assets  of  $0  and  $2.1  million,
respectively, relating to the discontinuation of its Qode business unit.

7.      FINANCING AGREEMENTS

        RESALE FINANCING ARRANGEMENT

        The Company has an  agreement  with a  commercial  finance  company that
provides  short-term  financing  for  certain  computer  hardware  and  software
purchases.  Under the  agreement,  there are generally no financing  charges for
amounts  paid within 30 or 45 days,  depending  on the vendor used to source the
product.  Under this agreement there are two separate lines of credit. The first
line  has  credit   availability  of  $750,000.   The  second  line  has  credit
availability  of up to  $2,000,000,  based upon the  Company's  customer  credit
rating.  The commercial  finance company  currently applies 50% of the Company's
proceeds from  re-sales of equipment and software  toward past due balances owed
by the Company to the commercial  finance company.  The Company expects to begin
receiving 100% of its proceeds during 2003.

        Borrowings are collateralized by all inventory,  property and equipment,
and accounts  receivable.  As of December  31, 2002 and 2001,  amounts due under
this  financing  agreement  included  in  accounts  payable  were  $430,000  and
$2,283,000, respectively.

        NOTES PAYABLE

        On March 1,  2001,  the  Company  assumed a bank note  agreement  in its
purchase of Qode for approximately  $15,000,  bearing interest at 11% per annum.
The note  matured on March 15,  2002.  As of  December  31,  2002 and 2001,  the
outstanding  balance of this note was  $15,000.  Accrued  interest  amounted  to
$3,000 and $1,400, respectively, as of December 31, 2002 and 2001.

        On July 11, 2001, the Company entered into a note payable agreement with
AirClic, Inc., in the amount of $500,000,  bearing interest at 8% per annum. The
note  matured  on  January  5,  2002.  As of  December  31,  2002 and 2001,  the
outstanding  balance of this note was  $500,000,  and accrued  interest  payable
amounted  to  $59,000  and  $19,000,  respectively.  This  note  is  subject  to
litigation between the Company and AirClic (see "Legal Proceedings, Note 11).

        On September 21, 2001, the Company entered into a note payable agreement
with a law firm for  approximately  $76,000,  bearing interest at 10% per annum.
The note  matured on February 28,  2002.  As of December 31, 2002 and 2001,  the
outstanding  balance of this note was  $76,000,  and  accrued  interest  payable
amounted to $8,900 and $1,300, respectively.

        On September 28, 2001, the Company entered into a note payable agreement
with a law firm for approximately  $170,000,  bearing interest at 10% per annum.
The note  matured on February 28,  2002.  As of December 31, 2002 and 2001,  the
outstanding  balance of this note was  $170,000,  and accrued  interest  payable
amounted  to $21,000 and  $4,300,  respectively.  The note is subject to a legal
action by the holder against the Company (see "Legal Proceedings").

        On October 16, 2001, the Company  borrowed $4,000 from Charles W. Fritz,
its Chairman and Chief Executive Officer,  under a note payable bearing interest
at 10% per annum.  The note matured,  on April 16, 2002. As of December 31, 2002
and 2001, the outstanding  balance of this note was $4,000, and accrued interest
payable amounted to $300 and $100, respectively.

        On February 26, 2002, the Company borrowed $10,000 from William E. Fritz
under a note payable bearing interest at 8% per annum. The note matured on March
28,  2002.  As of December 31, 2002,  the  outstanding  balance of this note was
$10,000 and accrued interest payable amounted to $1,700.

        On April 5, 2002,  the Company  borrowed  $11,000  from William E. Fritz
under a note payable bearing  interest at 8% per annum. The note matured on June
4, 2002. As of December 31, 2002,  outstanding  balance of this note was $11,000
and accrued interest payable amounted to $1,800.

        On March 1, 2001, the Company  assumed a note of $104,000 in relation to
purchase of Qode assets.  The note payable bears interest at 5.5% per annum. The
note  matured on  December  31,  2001.  As of December  31,  2002 and 2001,  the
outstanding  balance was $0 and  $104,000,  respectively,  and accrued  interest
payable amounted to $0 and $4,700, respectively.


                                      F-20



        During November 2002,  NeoMedia issued  Convertible  Secured  Promissory
Notes with an aggregate face value of $60,000 to 3 separate  parties,  including
Charles W. Fritz,  Chairman of the Board of Directors  of  NeoMedia;  William E.
Fritz, an outside director;  and James J. Keil, an outside  director.  The notes
bear interest at a rate of 15% per annum,  and mature at the earlier of i.) four
months, or ii.) the date the shares underlying the Cornell Equity Line of Credit
are  registered  with the SEC. The notes are  convertible,  at the option of the
holder,  into  either  cash or shares of our common  stock at a 30%  discount to
either  market  price upon  closing,  or upon  conversion,  whichever  is lower.
NeoMedia  also  granted to the  holders an  additional  1,355,670  shares of its
common stock and 60,000 warrants to purchase shares of its common stock at $0.03
per share,  with a term of three  years.  The warrants and shares were issued in
January 2003.  In addition,  since this debt is  convertible  into equity at the
option of the note holder at beneficial conversion rates, an embedded beneficial
conversion  feature will be recorded as a debt discount and amortized  using the
effective interest rate over the life of the debt in accordance with EITF 00-27.
Total cost of beneficial conversion feature, fair value of the stock and cost of
warrants  issued  exceed the face value of the notes  payable,  therefore,  only
$60,000,  the face amount of the note, is recognizable as debt discount,  and is
being  amortized  over the  life of the  notes  payable.  Any  unamortized  debt
discount  related to  beneficial  conversion  feature will be charged to expense
upon  conversion,  as interest  expense.  In the event NeoMedia  defaults on the
note, NeoMedia will issue an additional  1,483,318 shares of its common stock to
the note holders. The notes are secured by the Company's  intellectual property,
which is subject to first lien by AirClic,  Inc.  During the year ended December
31, 2002, the Company amortized discount of $23,000 related to these convertible
notes. During March 2002, two of the affiliated  parties,  Mr. William Firtz and
Mr.  Keil,  agreed to extend  the  maturity  date due to the  Company's  capital
constraints.  The Company repaid Mr.  Charles  Fritz's note in full during March
2003.  NeoMedia will continue to pursue additional  capital through the issuance
of Convertible Secured Promissory Notes with the same terms as above.

            On December 2, 2002, the Company issued to Michael Kesselbrenner,  a
private investor, a Promissory Note in the principal amount of $165,000, bearing
interest at a rate of 12% per annum,  with a maturity of 150 days. In connection
with the default  provision of the Promissory  Note, the Company  entered into a
Pledge  Agreement,  dated  December  2, 2002,  under  which the  Company  issued
53,620,020  shares of common stock to an unrelated third party as collateral for
the  Promissory  Note.  The investor  only funded to the Company  $84,000 of the
principal  amount of the note.  The Company  repaid this note during March 2003,
and the shares  held in escrow  were  returned.  The  Company  has not  incurred
further obligation under this note agreement.

8.      LONG-TERM DEBT

        In October 1994, the Company  purchased,  via seller financing,  certain
computer software from International  Digital  Scientific,  Inc.  ("IDSI").  The
aggregate  purchase  price was  $2,000,000  and was funded by the seller with an
uncollateralized  note  payable,  without  interest,  in an amount  equal to the
greater of: (i) 5% of the collected gross revenues of NeoMedia Migration for the
preceding month; or (ii) the minimum installment payment as defined,  until paid
in full. The minimum  installment  payment is the amount necessary to provide an
average  monthly  payment for the most recent twelve month period of $16,000 per
month.  The present value of $2,000,000  discounted  at 9% (the  Company's  then
incremental  borrowing rate) for 125 months was  approximately  $1,295,000,  the
capitalized  cost of the assets  acquired.  The  discount  is being  accreted to
interest expense over the term of the note. The software  acquired was amortized
over its estimated useful life of three years. As of December 31, 2002 and 2001,
the balance of the note payable, net of unamortized  discount,  was $651,000 and
$540,000, respectively.

        As of  December  31,  2002,  the Company  included  $425,000 in "Current
portion of long-term  debt" on the  accompanying  balance sheet relating to past
due payments under the arrangement  with IDSI. On October 21, 2002, IDSI filed a
demand for  arbitration  relating to past due payments on the note.  The Company
has filed a  counterclaim  with the  arbitrator  relating  to this  matter.  The
arbitration hearing has been scheduled for June 25, 2003.


                                      F-21



        As of  December  31,  2002 and 2001,  long-term  debt  consisted  of the
following:



                                                                                 2002            2001
                                                                                 -----           -----
                                                                                           
         Note payable to International Digital Scientific, Inc. (IDSI),
            non-interest bearing with interest imputed at 9%, due with
            minimum monthly installments of $16,000 through March 2005           $ 665           $ 624
         Less: unamortized discount                                                (14)            (85)
                                                                                 -----           -----
            Total long-term debt                                                   651             539
         Less:  current portion                                                   (425)           (149)
                                                                                 -----           -----

         Long-term debt, net of current portion                                  $ 226           $ 390
                                                                                 =====           =====


        The  long-term  debt  repayments  for each of the next five fiscal years
ending December 31 are as follows:



                                                                (IN THOUSANDS)
                                                             
        2003..............................................      $        425
        2004..............................................               192
        2005..............................................                48
        2006..............................................              ----
        2007..............................................              ----
                                                                ------------

               Total......................................      $        665
                                                                ============



9.      INCOME TAXES

        For the years ended December 31, 2002, 2001, and 2000, the components of
income tax expense were as follows:




                                                    2002                   2001                  2000
                                               -------------          -------------          -------------
                                                                     (IN THOUSANDS)
                                                                                    
         Current ....................          $          --          $          --          $          --
         Deferred ...................                     --                     --                     --
                                               -------------          -------------          -------------
         Income tax expense/(benefit)          $          --          $          --          $          --
                                               =============          =============          =============



        As of  December  31,  2002,  2001,  and  2000,  the  types of  temporary
differences  between the tax basis of assets and liabilities and their financial
reporting  amounts which gave rise to deferred taxes, and their tax effects were
as follows:



                                                                            2002               2001               2000
                                                                          --------           --------           --------
                                                                                                       
         Accrued employee benefits                                        $     26           $     62           $     30
         Provisions for doubtful accounts                                       22                 26                182
         Deferred revenue                                                       --                 --                 13
         Capitalized software development costs and fixed assets               821                676                284
         Net operating loss carryforwards (NOL)                             25,134             22,916             15,021
         Accruals                                                              468                470                864
         Write-off of long-lived assets                                      2,070              1,060                 --
         Other                                                                  95                 --                 17
         Alternative minimum tax credit carryforward                            45                 45                 45
                                                                          --------           --------           --------
         Total deferred tax assets                                          28,681             25,255             16,456
         Valuation Allowance                                               (28,681)           (25,255)           (16,456)
                                                                          --------           --------           --------

            Net deferred income tax asset                                 $     --           $     --           $     --
                                                                          ========           ========           ========


        Because it is more  likely than not that  NeoMedia  will not realize the
benefit of its deferred  tax assets,  a valuation  reserve has been  established
against them.

        For the years ended  December 31, 2002,  2001,  and 2000, the income tax
benefit differed from the amount computed by applying the statutory federal rate
of 34% as follows:


                                      F-22




                                                                      2002            2001            2000
                                                                    -------         -------         -------
                                                                                           
Benefit at federal statutory rate                                   $(2,523)        $(8,659)        $(1,839)
State income taxes, net of federal                                     (294)         (1,009)           (196)
Exercise of non-qualified stock options                                  --             (17)           (176)
Permanent difference - write-off of Digtal Convergence stock          1,190
                                                                    -------         -------         -------
Permanent and other, net                                               (609)           (304)           (860)
Change in valuation allowance                                         3,426           8,799           3,071
                                                                    -------         -------         -------
   Income tax expense/(benefit)                                     $    --         $    --         $    --
                                                                    =======         =======         =======



        As of December 31, 2002,  NeoMedia had net operating loss  carryforwards
for federal tax purposes totaling  approximately $62.8 million which may be used
to offset future taxable income,  or, if unused expire between 2011 and 2020. As
a result of certain of NeoMedia's  equity  activities  occurring during the year
ended  December  31,  1997,  NeoMedia  anticipates  that the annual usage of its
pre-1998 net operating loss carryforwards may be further restricted  pursuant to
the provisions of Section 382 of the Internal Revenue Code.

10.     TRANSACTIONS WITH RELATED PARTIES

        In June 1999,  the  Company  sold a license for the right to utilize its
Neolink  Information  Server to Daystar Services L.L.C.  ("Daystar") a Tennessee
limited liability company,  owned in part by an officer and one of the Company's
board members,  for $500,000.  The original  business purpose of the sale was to
generate revenue through the sale of an exclusive  license to Daystar.  In April
2000,  in  anticipation  of either a  potential  acquisition  of the  Company by
Digital:Convergence  ("DC") (which  subsequently did not occur),  or a long-term
intellectual  property license with DC, the Company purchased  substantially all
the assets of Daystar, including the rights to the license it sold to Daystar in
1999, for approximately $3.5 million of our common stock. In order to enter into
a 10-year  intellectual  property  license  agreement  with DC, the  Company was
required to re-purchase  the exclusive  license  agreement.  Additional  Daystar
assets purchased were to be employed in our MLM/Affinity  licensing program. The
assets  purchased  were  recorded as  intangible  assets at  approximately  $3.5
million on the accompanying  consolidated  balance sheets.  The Company believes
this transaction was conducted on terms as good as favorable as those would have
been derived from an arm's length negotiation.

        During the year ended  December 31, 2000,  the Company leased office and
residential facilities from related parties for rental payments totaling $5,000.
The lease expired during 2000.

        During October 2001, the Company  borrowed $4,000 from Charles W. Fritz,
its Chairman and Chief Executive Officer,  under a note payable bearing interest
at 10% per annum with a term of six months.

        During February 2002, the Company borrowed $10,000 from William E. Fritz
under a note  payable  bearing  interest at 8% per annum with a term of 30 days.
The note has not been  repaid as of the date of this  filing  and  continues  to
accrue interest.

        During March 2002, the Company  borrowed  $190,000 from William E. Fritz
under a note  payable  bearing  interest at 8% per annum with a term of 16 days.
The note was repaid during March 2002.

        During April 2002,  the Company  borrowed  $11,000 from William E. Fritz
under a note  payable  bearing  interest at 8% per annum with a term of 60 days.
The note had not been  repaid as of the date of this  filing  and  continues  to
accrue interest.

        During November 2002,  NeoMedia issued  Convertible  Secured  Promissory
Notes with an aggregate face value of $60,000 to 3 separate  parties,  including
Charles W. Fritz,  Chairman of the Board of Directors  of  NeoMedia;  William E.
Fritz, an outside director;  and James J. Keil, an outside  director.  The notes
bear interest at a rate of 15% per annum,  and mature at the earlier of i.) four
months, or ii.) the date the shares underlying the Cornell Equity Line of Credit
are  registered  with the SEC. The notes are  convertible,  at the option of the
holder,  into  either  cash or shares of our common  stock at a 30%  discount to
either  market  price upon  closing,  or upon  conversion,  whichever  is lower.
NeoMedia  also  granted to the  holders an  additional  1,355,670  shares of its
common stock and 60,000 warrants to purchase shares of its common stock at $0.03
per share,  with a term of three  years.  The warrants and shares were issued in
January 2003.  In addition,  since this debt is  convertible  into equity at the
option of the note holder at beneficial conversion rates, an embedded beneficial
conversion  feature will be recorded as a debt discount and amortized  using the
effective interest rate over the life of the debt in accordance with EITF 00-27.
Total cost of beneficial conversion feature, fair value of the stock and cost of
warrants  issued  exceed the face value of the notes  payable,  therefore,  only
$60,000,  the face amount of the note, is recognizable as debt discount,  and is
being  amortized  over the  life of the  notes  payable.  Any  unamortized  debt
discount  related to  beneficial  conversion  feature will be charged to expense
upon  conversion,  as interest  expense.  In the event NeoMedia  defaults on the
note, NeoMedia will issue an additional  1,483,318 shares of its common stock to
the note holders. The notes are secured by the Company's  intellectual property,
which is subject to first lien by AirClic,  Inc.  During March 2002,  two of the
affiliated  parties,  Mr.  William  Firtz and Mr.  Keil,  agreed  to extend  the
maturity date due to the Company's capital  constraints.  The Company repaid Mr.
Charles Fritz's note in full during March 2003. NeoMedia will continue to pursue
additional capital through the issuance of Convertible  Secured Promissory Notes
with the same terms as above.


                                      F-23



        The Company believes that all of the above  transactions  were conducted
at "arm's  length",  representing  what it believes to be fair market  value for
those services.

11.     COMMITMENTS AND CONTINGENCIES

        NeoMedia  leases its office  facilities  and certain office and computer
equipment under various operating leases. These leases provide for minimum rents
and generally  include  options to renew for additional  periods.  For the years
ended December 31, 2002,  2001, and 2000,  NeoMedia's rent expense was $853,000,
$1,246,000, and $1,067,000, respectively.

        The following is a schedule of the future  minimum lease  payments under
non-cancelable operating leases as of December 31, 2002:



                                                                   PAYMENTS
                                                                (IN THOUSANDS)
                                                                  
         2003 .............................................          $170
         2004..............................................             7
         2005 .............................................            --
         2006 .............................................            --
         2007 .............................................            --
                                                                     ----
         Total ............................................          $177
                                                                     ====



        As of December  31, 2002,  none of the  Company's  employees  were under
contract.  Additionally, as of December 31, 2002, the Company was not a party to
any long-term consulting agreements that are to be paid in cash.

LEGAL PROCEEDINGS

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

      NEOMEDIA SHAREHOLDERS

            During  January  2002,  certain of NeoMedia's  shareholders  filed a
complaint  with  the  Securities  and  Exchange  Commission,  alleging  that the
shareholders were not included in the special  shareholders  meeting of November
25, 2001, to vote on the issuance of 19 million shares of NeoMedia common stock.
On March 11, 2002,  NeoMedia filed its response claiming that NeoMedia had fully
complied with all of its obligations under the laws and regulations administered
by the Securities and Exchange Commission,  as well as with its obligation under
Delaware General Corporation Law.

      AIRCLIC, INC. LITIGATION

            On July 3, 2001,  the Company  entered into a non-binding  letter of
intent with AirClic which contemplated an intellectual property  cross-licensing
transaction  between the Company and  AirClic.  Under the terms of the letter of
intent,  AirClic was to provide the Company with bridge financing of $2,000,000,
which was to be paid to the Company in installments.  On July 11, 2001,  AirClic
advanced  $500,000 in bridge financing to the Company in return for a promissory
note from the  Company  secured by all of its  assets,  including  its  physical
world-to-Internet  patents. During the negotiation of definitive agreements, the
letter of intent was abandoned on the basis of the Company's  alleged  breach of
certain representations made by the Company in the promissory note.


                                      F-24



            On September 6, 2001,  AirClic filed suit against the Company in the
Court of Common Pleas,  Montgomery County,  Pennsylvania,  seeking,  among other
things, the accelerated  repayment of a $500,000 loan it advanced to the Company
under the  terms of a letter of intent  entered  into  between  AirClic  and the
Company.  The letter of intent was  subsequently  abandoned  on the basis of the
Company's alleged breach of certain  representations  made by the Company in the
promissory note issued to AirClic in respect of such advance. The note issued by
the Company in respect of AirClic's $500,000 advance is secured by substantially
all  of  the  Company's   property,   including  the  Company's   core  physical
world-to-Internet  technologies.  On  October  3,  2003,  we  paid  AirClic  the
principal plus interest in the amount of approximately  $610,000. On November 3,
2003,  we reached a settlement  agreement  with AirClic which will end the suit.
The parties are currently  drafting the release  document and expect the suit to
be dismissed by the end of November 2003. .

            AirClic has also filed suit against the Company in the United States
District Court for the Eastern District of Pennsylvania.  In this second action,
AirClic seeks a declaration that certain core intellectual property securing the
note issued by the Company to AirClic,  some of which is patented and others for
which a patent application is pending,  is invalid and in the public domain. Any
declaration  that the  Company's  core  patented  or  patentable  technology  is
non-protectable and in the public domain would have a material adverse effect on
the  Company's  business,   prospects,   financial  condition,  and  results  of
operations.  The Company is vigorously  defending this second action as well. On
November  21,2001,  the  Company  filed a motion to dismiss  the  complaint.  On
December 19, 2001, AirClic filed a response opposing that position. On September
18,  2002,  the court  ruled in favor of the  Company  and  dismissed  AirClic's
complaint.  The Company has not accrued any  liability in  connection  with this
matter.

        DIGITAL:  CONVERGENCE LITIGATION

        On June 26,  2001,  the Company  filed a $3 million  lawsuit in the U.S.
District  Court,   Northern   District  of  Texas,   Dallas  Division,   against
Digital:Convergence  Corporation  for breach of contract  regarding a $3 million
promissory  note due on June 24, 2001 that was not paid.  The Company is seeking
payment of the $3 million note plus interest and attorneys fees. The Company has
not accrued any gain  contingency  related to this  matter.  On March 22,  2002,
Digital:Convergence filed under Chapter 7 of the United States Bankruptcy Code.

        OTHER LITIGATION

        In April 2001,  the former  President  and director of NeoMedia  filed a
lawsuit against the Company and several of its directors.  The suit was filed in
the Circuit Court of the Twentieth Judicial Circuit for Sarasota,  Florida.  The
claim alleges the individual was fraudulently  induced into accepting employment
and that  the  Company  breached  the  employment  agreement.  The  individual's
employment with the Company ended in January 2001.  During May 2002, the Company
settled the suit.  The  Company is  obligated  to make cash  payments of $90,000
directly to the plaintiff  during the period May 2002 through December 2002, and
cash  payments  to the  plaintiff's  attorney  for legal  fees in the  amount of
$45,000 due in July and August 2002.  In  addition,  the  plaintiff  was granted
360,000 options to purchase shares of NeoMedia common stock at an exercise price
of $0.08.  As of March 31,  2002,  the Company had accrued a $347,000  liability
relating to the suit.  As a result,  the Company  recognized  an increase to net
income of  approximately  $176,000 during the three-month  period ended June 30,
2002 to adjust the liability to the  settlement  amount.  As of December 31, the
Company  had an accrued  liability  of  approximately  $33,000  relating to this
matter.

        On August 20, 2001, Ripfire,  Inc. filed suit against the Company in the
San Francisco County Superior Court seeking payment of $138,000 under a software
license  agreement  entered  into  between  the  Company and Ripfire in May 2001
relating to implementation of the Qode Universal Commerce Solution. On September
6, 2002,  the Company  settled  this suit for $133,000 of the  Company's  common
stock. On March 31, 2003, the Company issued 2,700,000 shares of common stock to
Ripfire  under this  arrangement.  The Company has accrued a $133,000  liability
relating to this matter as of December 31, 2002.

        On November 30, 2001, Orsus Solutions USA, Inc., filed a summons seeking
payment in full of  approximately  $525,000  relating to a software and services
contract associated with implementation of the Qode Universal Commerce Solution.
The Company is currently  attempting to negotiate settlement of this matter. The
Company has accrued a liability of $525,000 as of December 31, 2002.

        On July 22, 2002, 2150 Western Court,  L.L.C.,  the property manager for
the  Company's   Lisle,   IL,  office,   filed  a  summons  seeking  payment  of
approximately $72,000 for all past due rents on the facility.  The summons asked
for a judgment for the above amount plus  possession of the premises.  On August
9, 2002,  the Company  settled this matter.  The  settlement  calls for past due
rents of  approximately  $72,000 to be paid over a 15-month  period,  as well as
reduced  rents for the period  August 2002  through  March 2003.  As  additional
consideration in the settlement, the Company issued 900,000 shares of its common
stock to 2150 Western Court L.L.C.  The Company had a liability of approximately
$49,000 relating to this matter as of December 31, 2002.


                                      F-25



        On July 27, 2002,  the Company's  former  General  Counsel filed suit in
U.S.  District Court, Ft. Myers division,  seeking payment of the 2000 executive
incentive,  severance and unpaid  vacation  days in the amount of  approximately
$154,000.  In June  2001,  the  Company's  compensation  committee  approved  an
adjustment  to the 2000  executive  incentive  plan that  reduced the  executive
incentive  payout  as a  result  of the  write-off  of  the  Digital:Convergence
intellectual  property  license  contract  in the second  quarter of 2001.  As a
result,  the Company  reduced the  accrual  for such payout by an  aggregate  of
approximately  $1.1  million in the second  quarter of 2002.  The  plaintiff  is
seeking payment of the entire original  incentive  payout. On November 12, 2002,
the Company settled the lawsuit. The settlement calls for cash payments totaling
approximately  $90,000 over a period of ten months,  plus 250,000 vested options
to purchase  shares of the Company's  common stock at an exercise price of $0.01
with a term of five years. The Company had a liability of approximately  $70,000
relating to this matter as of December 31, 2002.

        On September 12, 2002, R. R. Donnelley & Sons Company filed a summons in
the  Circuit  Court of The  Twentieth  Judicial  Circuit in and for Lee  County,
Florida,  seeking  payment of  approximately  $92,000  in past due  professional
services bills. The Company is attempting to negotiate  settlement of this issue
out of court  prior to the court date.  The  Company  has accrued  approximately
$92,000 relating to this matter as of December 31, 2002.

        On September 13, 2002,  Wachovia  Bank,  N.A.,  owner of the building in
which  the  Company's  Ft.  Myers,  Florida  headquarters  is  located,  filed a
complaint  in Circuit  Court of The  Twentieth  Judicial  Circuit in and for Lee
County,  Florida,  seeking payment of approximately  $225,000 in past due rents.
The complaint  also seeks  payment of all future rent  payments  under the lease
term,  which expires in January 2004, as well as possession of the premises.  On
October 28, 2002, the Company and Wachovia  reached a settlement on this matter.
The  settlement  calls  for cash  payments  of past due  rents of  approximately
$250,000 over a period of 16 months. The Company will also vacate  approximately
70% of the unused space in its  headquarters,  and the rent for the remainder of
the lease,  which expires in January 2004,  will be reduced  according to square
footage  used.  The Company has accrued a liability  of  approximately  $270,000
relating to this matter as of December 31, 2002.

      On October 21, 2002, International Digital Scientific, Inc. ("IDSI") filed
a demand for  arbitration  relating to past due payments on an  uncollateralized
note  payable  from us to IDSI dated  October  1,  1994.  The note was issued in
exchange for the purchase by us of computer  software from IDSI.  The note calls
for the Company to make  payments  of the  greater  of: (i) 5% of the  collected
gross revenues from sales of software or (ii) $16,000 per month.  As of December
31,  2002,  the  Company  had  a  past  due  balance  under  the  IDSI  note  of
approximately  $304,000.  The net carrying value of future  obligation under the
note was $390,000 as of December 31, 2002.  On October 31, 2003, we paid off all
past due and future  obligations  under the note to IDSI through the issuance of
8,000,000 shares of common stock being registered for resale hereunder.

        On October 28, 2002,  Merrick & Klimek,  P.C., filed a complaint against
the  Company  seeking  payment  of  approximately  $170,000  in past  due  legal
services. The amount in question is subject to an unsecured promissory note that
matured  unpaid on February 28,  2002.  The Company is  attempting  to negotiate
settlement  of this issue out of court prior to the court date.  The Company has
recorded the note payable amount of approximately  $170,000 and accrued interest
of approximately $21,000 relating to this matter as of December 31, 2002.

            On November 11, 2002,  Avnet/Hallmark Computer Marketing Group filed
a complaint against the Company seeking payment of approximately $66,000 in past
due amounts  relating to hardware  and software  re-sold by the Company.  During
December  2002,  the Company  made  payment of  approximately  $30,000 to Avnet,
reducing  the  balance  owed to  approximately  $37,000.  On April 1, 2003,  the
Company  received a judgment from the circuit  court for the remaining  balance.
The Company had a liability of approximately  $37,000 relating to this matter as
of December 31, 2002.

        On December 30, 2002, Brooks Automation,  Inc. filed a complaint against
the  Company  seeking  payment  of  approximately  $37,000  in past due  amounts
relating to software  re-sold by the Company.  On January 16, 2003,  the Company
and Brooks Automation  reached a settlement under which the Company will pay the
amount owed to Brooks Automation over a period of approximately 15 months,  with
the payment  amount  increasing  after three  months.  The Company had a $37,000
liability relating to this matter as of December 31, 2002.

        On  February  6, 2003,  Norton  Allen & Blue,  P.A.,  filed a  complaint
against the Company seeking payment of  approximately  $25,000 in past due legal
services. The Company is attempting to negotiate settlement of this issue out of
court prior to the court date.


                                      F-26


        On March 10, 2003, IBM Credit  Corporation filed a complaint against the
Company seeking payment of approximately  $9,000 in past due amounts relating to
computer equipment leased by the Company. The Company is attempting to negotiate
settlement of this issue out of court prior to the court date.

12.     DEFINED CONTRIBUTION SAVINGS PLAN

        NeoMedia   maintains  a  defined   contribution   401(k)  savings  plan.
Participants  may make elective  contributions  up to  established  limits.  All
amounts  contributed by  participants  and earnings on these  contributions  are
fully vested at all times.  The plan  provides  for  matching and  discretionary
contributions by NeoMedia,  although no such contributions to the plan have been
made to date.

13.     EMPLOYEE STOCK OPTION PLAN

        Effective February 1, 1996,  NeoMedia adopted the 1996 Stock Option Plan
making  available  for grant to employees of NeoMedia  options to purchase up to
1,500,000  shares of NeoMedia's  common stock. The stock option committee of the
board of  directors  has the  authority  to  determine  to whom  options will be
granted, the number of options, the related term, and exercise price. The option
exercise price shall be equal to or in excess of the fair market value per share
of NeoMedia's  common stock on the date of grant.  These options granted expired
ten years from the date of grant. These options vest 100% one year from the date
of grant.

        Effective  March 27, 1998,  NeoMedia  adopted the 1998 Stock Option Plan
making  available  for grant to employees of NeoMedia  options to purchase up to
8,000,000  shares of NeoMedia's  common stock. The stock option committee of the
board of  directors  has the  authority  to  determine  to whom  options will be
granted, the number of options, the related term, and exercise price. The option
exercise  price may be less than the fair market  value per share of  NeoMedia's
common stock on the date of grant. Options generally vest 20% upon grant and 20%
per year thereafter. The options expire ten years from the date of grant.

        Effective June 6, 2002, NeoMedia adopted its 2002 Stock Option Plan. The
2002 Stock Option Plan provides for authority for the stock option  committee of
the board of directors to grant  non-qualified  stock  options with respect to a
maximum of 10,000,000  shares of common stock.  The option exercise price may be
less than the fair market value per share of NeoMedia's common stock on the date
of grant,  and may be granted with any vesting schedule as approved by the stock
option committee.

        Effective  January 1, 1996,  NeoMedia adopted SFAS No. 123,  "Accounting
for Stock-Based  Compensation"  defines a fair-value  based method of accounting
for an employee  stock option or similar  equity  instrument  and encourages all
entities  to adopt that method of  accounting  for all of their  employee  stock
compensation  plans.  However,  SFAS 123 also  allows an entity to  continue  to
measure   compensation  cost  for  stock-based   compensation  plans  using  the
intrinsic-value  method of accounting  prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25").  Entities
electing to continue using the  accounting  method in APB 25 must make pro forma
disclosures of net income and earnings per share as if the fair-value  method of
accounting  had been adopted.  Because  NeoMedia  elected to continue  using the
accounting  method in APB 25, no  compensation  expense  was  recognized  in the
consolidated  statements  of operations  for the years ended  December 31, 2002,
2001, and 2000 for stock-based employee compensation.

        For grants in 2002, 2001, and 2000, the following assumptions were used:
(i) no expected dividends; (ii) a risk-free interest rate of 4.5% for 2002, 4.5%
for 2001, and 6% for 2000; (iii) expected  volatility  ranging from 135% to 211%
for 2002,  135% for 2001,  and 80% for 2000,  and (iv) an  expected  life of the
shorter of 5 years or the stated life of the option for options granted in 2002,
the shorter of 5 years or the stated  life of the option for options  granted in
2002,  and the  shorter of 4 years or the stated  life of the option for options
granted  in  2000.  The  fair-value  was  determined  using  the   Black-Scholes
option-pricing model.

        The  estimated  fair value of grants of stock  options  and  warrants to
non-employees  of NeoMedia is charged to expense in the  consolidated  financial
statements.  These  options  vest in the same  manner  as the  employee  options
granted under each of the option plans as described above.

            Utilizing the assumptions  detailed above, our net loss and loss per
share,  as  reported,  would  have been the  following  pro forma  amounts ($ in
thousands except per share data).


                                      F-27



                                       2002            2001            2000
                                       ----            ----            ----
                                                           
NET LOSS
   As reported                       ($7,421)       ($25,469)        ($5,409)
   Pro forma                         ($8,420)       ($27,888)        ($7,498)

NET LOSS PER SHARE
   As reported                       ($0.33)         ($1.55)         ($0.39)
   Pro forma                         ($0.38)         ($1.70)         ($0.54)



        A summary of the status of NeoMedia's  2002,  1998 and 1996 stock option
plans as of and for the years ended  December  31,  2002,  2001,  and 2000 is as
follows:



                                                        2002                    2001                       2000
                                               ----------------------   ---------------------     ----------------------
                                                            WEIGHTED                WEIGHTED                   WEIGHTED
                                                             AVERAGE                AVERAGE                     AVERAGE
                                                            EXERCISE                EXERCISE                   EXERCISE
                                                SHARES        PRICE      SHARES      PRICE         SHARES        PRICE
                                               ---------    ---------   --------    ---------     ---------    ---------
                                                  (In                      (In                      (In
                                                thousands)              thousands)               thousands)
                                                                                             
Outstanding at beginning of year                   4,214    $    2.96      4,294    $    4.71         3,418    $    4.43
Granted                                           12,306    $    0.06      3,499    $    2.00         1,192    $    4.87
Exercised                                         (5,252)   $    0.07        (38)   $    3.60          (170)   $    2.83
Forfeited                                           (467)   $    2.75     (3,541)   $    4.13          (146)   $    5.78
                                               ---------    ---------   --------    ---------     ---------    ---------
   Outstanding at end of year                     10,801    $    1.11      4,214    $    2.96         4,294    $    4.71
                                               =========    =========   ========    =========     =========    =========

Options exercisable at year-end                   10,272                   2,452                      2,140

Weighted-average fair value of options
   granted during the year                                  $    0.10               $    1.40                  $    3.05

Available for grant at the end of the year         2,319                   4,158                      4,116



        The  following  table  summarizes  information  about  NeoMedia's  stock
options outstanding as of December 31, 2002:



                                       OPTIONS OUTSTANDING                                             OPTIONS EXERCISABLE
      -------------------------------------------------------------------------------------       ---------------------------------
                                                             WEIGHTED-            WEIGHTED-                           WEIGHTED-
                                                               AVERAGE              AVERAGE                            AVERAGE
          RANGE OF                    NUMBER                  REMAINING            EXERCISE          NUMBER           EXERCISE
       EXERCISE PRICES              OUTSTANDING           CONTRACTUAL LIFE          PRICE         EXERCISABLE           PRICE
       ---------------              -----------           -----------------         -----         ------------          -----
                                  (In thousands)                                                 (In thousands)
                                                                                                       
        $-- to $0.10                        5,705           6.6    years            $0.04               5,705           $0.04
        0.11 to 0.22                        2,449           5.0    years            $0.18               2,449           $0.18
        0.23 to 4.88                        1,753           6.8    years            $3.18               1,300           $3.15
        4.89 to 7.88                          801           6.2    years            $6.18                 729           $6.27
        7.89 to 10.88                          93           6.7    years            $8.86                  89           $8.88
-----------------------------------------------------------------------------------------------------------------------------------
       $0.84 to $10.88                     10,801           6.2    years            $1.11              10,272           $0.98
===================================================================================================================================



        In October 2000,  the Company issued 80,000 options to buy shares of the
Company's  common stock to an outside  consultant  at a price of $4.13 per share
for  consulting  services  rendered,  and recognized  approximately  $253,000 in
expense in its 2000 consolidated  financial  statements.  These warrants vest in
the same manner as the  employee  options  granted  under the 1998 Stock  Option
Plan. All these warrants were outstanding and 48,000 were vested at December 31,
2002.

        In September  2001, the Company issued 150,000  options to buy shares of
the  Company's  common  stock to an outside  consultant  at a price of $0.20 per
share for consulting services rendered, and recognized $18,800 in expense in the
2001 consolidated  financial statements.  The warrants vested 40% upon grant and
the  remaining  60% in September  2002.  As of December  31,  2002,  all 150,000
options were outstanding and vested.


                                      F-28



        In March 2002, the Company issued 2,946,310 options to buy shares of the
Company's common stock to two outside  consultants at a price of $0.17 per share
for  consulting  services  rendered  over a  six-month  period,  and  recognized
approximately $407,000 in expense in the 2002 consolidated financial statements.
The options  vested 100% upon grant.  As of December  31,  2002,  984,055 of the
options were still outstanding and vested.

        In June 2002, the Company issued 3,000,000  options to buy shares of the
Company's  common stock to an outside  consultant  at a price of $0.01 per share
for  consulting  services  rendered  over  a  one-year  period,  and  recognized
approximately $125,000 in expense in the 2002 consolidated financial statements.
The options vested 100% upon grant. All 3,000,000  options were exercised during
2002, resulting in proceeds to the Company of $30,000.

        In December 2002, the Company issued 2,000,000  options to buy shares of
the  Company's  common  stock to an outside  consultant  at a price of $0.01 per
share  for  consulting  services  rendered  over  a  twelve-month   period,  and
recognized  approximately $78,000 in expense in the 2002 consolidated  financial
statements. The options vested 100% upon grant. All 2,000,000 options were still
outstanding and vested as of December 31, 2002.


                                      F-29



            Warrants

        Warrant activity as of December 31, 2002, 2001, and 2000, is as follows:



                                                                 
Balance December 31, 1999                                             2,676,362
 Warrants issued                                                      1,787,073
 Warrants exercised                                                    (495,600)
                                                                     ----------

Balance December 31, 2000                                             3,967,835
 Warrants issued                                                        887,512
 Warrants exercised                                                    (505,450)
 Warrants expired                                                    (1,110,000)
                                                                     ----------

Balance December 31, 2001                                             3,239,897
 Warrants issued                                                      5,000,000
 Warrants exercised                                                    (369,450)
 Warrants expired                                                      (436,689)
                                                                     ----------

Balance December 31, 2002                                             7,433,758
                                                                     ==========



        During October 2000, the Company issued 1,400,000  warrants as part of a
ten-year  license of the Company's  intellectual  property to DC. These warrants
were immediately  vested and exercisable.  The associated  expense was initially
being  recognized over the life of the contract,  and was written off as part of
the "Loss on  Digital:Convergence  license  contract"  recognized  in 2000.  All
1,400,000  warrants  were  outstanding  as of December 31, 2002. DC is currently
proceeding under Chapter 7 of the U.S. Bankruptcy Code.

        During 2001, the Company re-priced  approximately 1.5 million additional
warrants  subject to a limited exercise period and other  conditions,  including
certain warrants issued in connection with NeoMedia's initial public offering in
1996,  which  expired at the end of 2001.  The  repricing  program  allowed  the
warrant  exercise price to be reduced to 33 percent of the closing sale price of
the Company's  common stock  (subject to a minimum) on the day prior to the date
of  exercise  for a period of six  months  from the date the  repricing  program
began. The exercise of the warrants and sale of the underlying  common stock was
at the discretion of a broker selected by the Company,  within the parameters of
the repricing  arrangement.  In  accordance  with FASB  Interpretation,  FIN 44,
Accounting for Certain Transactions Involving Stock Transactions,  the award was
accounted  for as  variable  from  the  date of  modifications  on May 1,  2001.
Accordingly, $181,000 was recorded in during 2001 as compensation expense.

        In  June  2001,  the  Company  issued  404,900  warrants  to an  outside
consultant at an exercise price of $2.09. During 2001, the Company recognized an
expense of approximately $742,000 related to this transaction, which is included
in  general  and  administrative   expense  in  the  accompanying   consolidated
statements  of  operations.  The Company used the  Black-Scholes  option-pricing
model to value the  shares,  with the  following  assumptions:  (i) no  expected
dividends (ii) a risk-free  interest rate of 4.5% (iii)  expected  volatility of
135% and (iv) an  expected  life of 3 years.  All of these  warrants  were still
outstanding as of December 31, 2002.

        In June  2002,  the  Company  issued  2,000,000  warrants  to an outside
consultant at an exercise price of $0.00. During 2002, the Company recognized an
expense of approximately $100,000 related to this transaction, which is included
in  general  and  administrative   expense  in  the  accompanying   consolidated
statements  of  operations.  The Company used the  Black-Scholes  option-pricing
model to value the  shares,  with the  following  assumptions:  (i) no  expected
dividends (ii) a risk-free  interest rate of 4.5% (iii)  expected  volatility of
135% and (iv) an expected  life of 1 year.  All  2,000,000  warrants  were still
outstanding as of December 31, 2002.

        In June 2002, the Company issued 1,500,000 warrants to buy shares of the
Company's  common  stock at a price of $0.05 per share to Charles W. Fritz,  the
Company's  Chairman  of the Board and former CEO, as  replacement  for  warrants
exercised  in the  Company's  warrant  repricing  program  for which  Mr.  Fritz
received no profit. The Company recognized  approximately  $66,000 in expense in
the 2002 consolidated financial statements relating to the warrant issuance. All
1,500,000 warrants were outstanding as of December 31, 2002.


                                      F-30



        In June 2002, the Company issued 1,500,000 warrants to buy shares of the
Company's  common stock at a price of $0.05 per share to an outside  consultant,
as replacement for warrants exercised in the Company's warrant repricing program
for which the  outside  consultant  received no profit.  The Company  recognized
approximately  $66,000 in expense in the 2002 consolidated  financial statements
relating to the warrant issuance.  All 1,500,000 warrants were outstanding as of
December 31, 2002.

        The following table summarizes information about warrants outstanding at
December 31, 2002, all of which are exercisable:



                                                          WEIGHTED-                WEIGHTED-
                                                           AVERAGE                  AVERAGE
       RANGE OF                   WARRANTS                 REMAINING                EXERCISE
   EXERCISE PRICES              OUTSTANDING            CONTRACTUAL LIFE               PRICE
   ---------------              -----------            ----------------               -----
                               (In thousands)
                                                                         
    $--- to $0.05                   5,009               2.8    years                  $0.03
     0.06 to 2.13                     485               0.4    years                  $2.10
     2.14 to 3.56                     241               5.3    years                  $3.46
     3.57 to 7.37                   1,443               2.7    years                  $6.03
    7.38 to 15.00                     256               0.2    years                 $11.24
  ------------------             -----------          ----------------            ------------
    $--- to $15.00                  7,434               2.6    years                  $1.83
  ==================             ===========          ================            ============



14.     SEGMENT INFORMATION

        Beginning  with the year ended  December 31, 1999,  the Company  adopted
SFAS  No.  131,  "Disclosures  about  Segments  of  an  Enterprise  and  Related
Information"  (SFAS 131).  SFAS 131 supersedes  Financial  Accounting  Standards
Board's  SFAS  No.  14,   "Financial   Reporting  for  Segments  of  a  Business
Enterprise."   SFAS  131  establishes   standards  for  the  way  that  business
enterprises  report  information  about operating  segments in annual  financial
statements.  SFAS 131 also establishes  standards for related  disclosures about
products and services, geographic areas and major customers.

        The Company is organized into two business  segments:  (a) NeoMedia ISS,
and (b) NeoMedia CIS.  Performance is evaluated and resources allocated based on
specific  segment  requirements  and  measurable  factors.  Management  uses the
Company's   internal   income   statements  to  evaluate  each  business  unit's
performance.  Assets of the business  units are not available for  management of
the business segments or for disclosure.


                                      F-31



        Operational  results for the two segments  for the years ended  December
31, 2002, 2001, and 2000 and are presented below (in thousands):




      --------------------------------------------------------------------------------------------------
                                                     NEOMEDIA ISS       NEOMEDIA CIS
                                                      (FORMERLY          (FORMERLY
                                                     NEOMEDIA ASP)      NEOMEDIA SI)       CONSOLIDATED
                                                     -------------      ------------       ------------
YEAR ENDED DECEMBER 31, 2002
      Net Sales
                                                                                    
             License fees                              $     29           $    417           $    446
             Software and equipment resales
                and related services                         --              8,953              8,953
                     Total net sales                         29              9,370              9,399

      Loss from Continuing Operations                    (4,623)            (1,275)            (5,898)
      Loss from disposal of
             discontinued business unit                  (1,523)                --             (1,523)
      Net Loss                                           (6,146)            (1,275)            (7,421)

YEAR ENDED DECEMBER 31, 2001
      Net Sales
             Qode Business Unit                        $     13           $     --           $     13
             Paperclick/Amway/MLM                           140                                   140
             Software and equipment resales
                and related services                         --              8,002              8,002
                     Total gross sales                      153              8,002              8,155
             Less: Qode Business Unit Sales                 (13)                --                (13)

                     Total net sales                        140              8,002              8,142

      Loss from Continuing Operations                   (17,639)            (1,129)           (18,768)
      Loss from operations of and disposal of
             discontinued business unit                  (6,701)                --             (6,701)
      Net Loss                                          (24,340)            (1,129)           (25,469)

YEAR ENDED DECEMBER 31, 2000

      Net Sales
             Patent license fees                       $  7,768            $    --           $  7,768
             Other license fees                             315                334                649
             Software and equipment resales
                and related services                         --             19,148             19,148
                     Total net sales                      8,083             19,482             27,565

      Net Loss                                           (4,225)            (1,184)            (5,409)



                                      F-32


15.     QUARTERLY INFORMATION (UNAUDITED)

            The summarized quarterly financial data presented below reflects all
adjustments  which, in the opinion of management,  are of a normal and recurring
nature  necessary to present  fairly the results of  operations  for the periods
presented.



                                                         (dollars in thousands except per share data)
                                        -----------------------------------------------------------------------------
                                         TOTAL            FOURTH           THIRD            SECOND            FIRST
2002
                                                                                             
Total net sales                         $  9,399         $    947         $  3,404         $  3,652         $  1,396
Gross profit                            $  1,135         $     54         $    582         $    417         $     82
(Loss) before income taxes
     and discontinued operations        ($ 5,720)        ($   741)        ($   773)        ($ 2,824)        ($ 1,382)
Net (loss)                              ($ 7,421)        ($   919)        ($   773)        ($ 4,347)        ($ 1,382)
Net (loss) per share:
     basic and diluted                  ($  0.33)        ($  0.03)        ($  0.03)        ($  0.11)        ($  0.05)
Segment operating income (loss):
NeoMedia ISS                            ($ 6,147)        ($   145)        ($   464)        ($ 4,301)        ($ 1,237)
NeoMedia CIS                            ($ 1,274)        ($   774)        ($   309)        ($    46)        ($   145)

2001
Total net sales                         $  8,142         $  4,459         $    908         $  1,237         $  1,538
Gross profit                            ($   724)        $    597         ($   503)        ($   404)        ($   414)
(Loss) before income taxes
     and discontinued operations        ($18,768)        $    771         ($ 5,072)        ($11,042)        ($ 3,425)
Net (loss)                              ($25,469)        ($ 1,692)        ($ 9,310)        ($11,042)        ($ 3,425)
Net (loss) per share:
     basic and diluted                  ($  1.55)        ($  0.11)        ($  0.60)        ($  0.72)        ($  0.24)
Segment operating income (loss):
NeoMedia ISS                            ($24,340)        ($ 1,660)        ($ 8,956)        ($10,931)        ($ 2,793)
NeoMedia CIS                            ($ 1,129)        ($    32)        ($   354)        ($   111)        ($   632)

2000
Total net sales                         $ 27,565         $  9,875         $  4,049         $  9,547         $  4,094
Gross profit                            $  9,032         $  7,571         $     42         $    879         $    540
(Loss) before income taxes
     and discontinued operations        ($ 5,409)        $  2,667         ($ 3,555)        ($ 2,085)        ($ 2,436)
Net income (loss)                       ($ 5,409)        $  2,667         ($ 3,555)        ($ 2,085)        ($ 2,436)
Net (loss) per share:
     basic and diluted                  ($  0.39)        $   0.21         ($  0.25)        ($  0.15)        ($  0.19)
Segment operating income (loss):
NeoMedia ISS                            ($ 4,225)        $  4,061         ($ 3,051)        ($ 2,818)        ($ 2,417)
NeoMedia CIS                            ($ 1,184)        ($ 1,394)        ($   504)        $    733         ($    19)



16.     COMMON STOCK

        Holders of common  stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. Holders of the common
stock do not have cumulative voting rights, which means that the holders of more
than one half of our outstanding  shares of common stock,  subject to the rights
of the  holders of  preferred  stock,  can elect all of our  directors,  if they
choose to do so. In this event,  the holders of the  remaining  shares of common
stock would not be able to elect any  directors.  Subject to the prior rights of
any  class  or  series  of  preferred  stock  which  may  from  time  to time be
outstanding,  if any,  holders of common stock are entitled to receive  ratably,
dividends  when,  as, and if  declared  by the Board of  Directors  out of funds
legally  available for that purpose and, upon our liquidation,  dissolution,  or
winding up, are entitled to share ratably in all assets  remaining after payment
of liabilities and payment of accrued  dividends and liquidation  preferences on
the preferred stock, if any.  Holders of common stock have no preemptive  rights
and have no rights to convert their common stock into any other securities.  The
outstanding common stock is duly authorized and validly issued,  fully-paid, and
nonassessable. In the event we were to elect to sell additional shares of common
stock following this offering, investors in this offering would have no right to
purchase additional shares. As a result,  their percentage equity interest in us
would be diluted.


                                      F-33



        On June 6, 2002, the Company's shareholders voted to increase the number
of shares of common  stock,  par value  $0.01 per  share,  that the  Company  is
authorized to issue from  50,000,000 to  200,000,000  and the number of share of
preferred  stock,  par value $0.01 per share,  that the Company is authorized to
issue from 10,000,000 to 25,000,000.

        On November 12, 2002, the Company  entered into an Equity Line of Credit
Agreement  with  Cornell  under  which  Cornell  agreed to  purchase up to $10.0
million of NeoMedia's  common stock and over the next two years, with the timing
and amount of the purchase at the Company's  discretion.  The maximum  amount of
each  purchase is $150,000 with a minimum of seven days between  purchases.  The
shares will 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.  The Company
will pay 5% of the gross  proceeds of each  purchase to Cornell as a commission.
According to the terms of the agreement,  the Company cannot draw on the line of
credit until the shares underlying the agreement are registered for trading with
the Securities and Exchange  Commission.  On February 14, 2003, the SEC declared
effective  the  S-1  registration   statement   containing  100  million  shares
underlying the Equity Line of Credit.

17.   PREFERRED STOCK

            The Company's  Preferred Stock is currently  comprised of 25,000,000
shares,  par value $0.01 per share,  of which 200,000  shares are  designated as
Series A  Preferred  Stock,  none of  which  are  issued  or  outstanding,  and,
following  the  conversion  into  common  stock of  452,489  shares  of Series A
Convertible Preferred Stock issued to About.com, 47,511 shares are designated as
Series A Convertible  Preferred Stock, none of which are issued and outstanding,
and 100,000 shares of Series B 12% Convertible  Redeemable Preferred Stock, none
of which are issued  and  outstanding.  The  Company  has no present  agreements
relating to or requiring the  designation  or issuance of  additional  shares of
preferred stock.

18.     SUBSEQUENT EVENTS

        On  February  6, 2003,  Norton  Allen & Blue,  P.A.,  filed a  complaint
against the Company seeking payment of  approximately  $25,000 in past due legal
services. The Company is attempting to negotiate settlement of this issue out of
court prior to the court date.

        On February 14, 2003,  the SEC declared  effective the S-1  registration
statement  containing 100 million shares underlying the Company's Equity Line of
Credit.  As of March 17, 2003 the Company had issued  1,342,642 shares of common
stock  under  the  Equity  Line of Credit  and  received  cash of  approximately
$150,000.

        On March 13,  2003,  the Company  announced  that that it had reached an
agreement in principal to acquire and merge with Loch Energy, Inc. ("Loch"),  an
oil and gas provider based in Humble,  Texas.  On October 1, 2003, we discovered
that the royalty  interest from future sales of oil owned by Loch were oversold,
which would likely result in materially lower projected  available cashflow from
Loch's  operations.  This  projected  available  cashflow  was the basis for the
acquisition.  On  October 2, 2003,  our Board of  Directors  voted to cancel the
Memorandum of Terms, and terminate the acquisition and merger proceedings.

        On April 2, 2003,  the  Company  was  issued  its sixth US  Patent.  The
technology  covered  by  the  patent  allows  for  a  connection  from  human-or
machine-readable  input to  generate  a  tailored  response  that can  utilize a
profile of the person making the link between the code-carrying  physical object
and the desired electronic information. The patent allowed 58 claims.

        On October  27,  2003,  we entered  into a Standby  Equity  Distribution
Agreement with Cornell Capital Partners, LP ("Cornell"). Pursuant to the Standby
Equity Distribution Agreement,  we may, at our discretion,  periodically sell to
Cornell  shares of common stock for a total purchase price of up to $20 million.
For each share of common stock purchased  under the Standby Equity  Distribution
Agreement, Cornell Capital Partners will pay 98% of the lowest closing bid price
of our common stock on the OTC Bulletin Board or other principal market on which
our common  stock is traded for the 5 trading  days  immediately  following  the
notice date.


                                      F-34



            On  November  10,  2003,  we  announced  that  that we had  signed a
non-binding  letter of intent to acquire CSI  International,  Inc.  ("CSI"),  of
Calgary,  Alberta,  Canada, a private  technology  products company in the micro
paint repair industry. The LOI calls for the issuance of 7,000,000 shares of our
common  stock to be issued in  exchange  for all  outstanding  shares of CSI. In
addition,  we will  pay  $3.5  million  cash.  The  acquisition  is  subject  to
completion of due diligence by both sides,  as well as Board  approval and other
conditions.

            On December  9, 2003,  we signed a  non-binding  letter of intent to
acquire  Triton  Global  Business  Services  Inc.  and its parent  company,  BSD
Software Inc. (Pink Sheets:  BSDS), both of Calgary,  Alberta,  Canada.  The LOI
outlined terms,  including an exchange of one share of our common stock for each
share of BSD  Software,  not to exceed 40 million  shares.  The  transaction  is
dependent  on  due  diligence  by  both  companies,  approval  by our  Board  of
Directors, BSD Software's Board of Directors, shareholders,  required regulatory
approvals,  and other conditions.  Triton, formed in 1998 and acquired by BSD in
2002, is an Internet  Protocol-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.  The acquisition is subject to completion of due diligence by
both sides, as well as Board approval and other conditions.


                                      F-35



                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEET
                        (IN THOUSANDS, EXCEPT SHARE DATA)



                                                                                         SEPTEMBER 30,
                                                                                             2003
                                                                                             ----
ASSETS
Current assets:
                                                                                        
        Cash and cash equivalents                                                          $  1,048
        Restricted cash                                                                         600
        Trade accounts receivable, net of allowance for doubtful accounts of $28                178
        Inventories, net                                                                         13
        Prepaid expenses and other current assets                                               511
                                                                                           --------
        Total current assets                                                                  2,350

        Property and equipment, net                                                              72
        Capitalized patents, net                                                              2,055
        Capitalized and purchased software costs, net                                            60
        Other long-term assets                                                                  704
                                                                                           --------

             Total assets                                                                  $  5,241
                                                                                           ========

LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities:
        Accounts payable                                                                   $  3,096
        Amounts due under financing agreements                                                  345
        Liabilities in excess of assets of discontinued business unit                           996
        Sales taxes payable                                                                     194
        Accrued expenses                                                                      2,782
        Deferred revenues                                                                       576
        Notes payable                                                                           732
        Cash advances payable through the issuance of common stock                            1,135
        Current portion of long-term debt                                                       591
        Other                                                                                    37
                                                                                           --------
             Total current liabilities                                                       10,484

Long-term debt, net of current portion                                                           94
                                                                                           --------

             Total liabilities                                                               10,578
                                                                                           --------

Shareholders' deficit:
        Preferred stock, $0.01 par value, 25,000,000 shares authorized, none issued
           and outstanding                                                                       --
        Additional paid-in capital, preferred stock                                              --
        Common stock, $0.01 par value, 1,000,000,000 shares authorized,
           207,764,771 shares issued and 205,781,109 outstanding                              2,058
        Additional paid-in capital                                                           68,469
        Deferred stock-based compensation                                                      (260)
        Accumulated deficit                                                                 (74,825)
        Treasury stock, at cost, 201,230 shares of common stock                                (779)
                                                                                           --------
        Total shareholders' deficit                                                          (5,337)
                                                                                           --------
             Total liabilities and shareholders' deficit                                   $  5,241
                                                                                           ========


               The accompanying notes are an integral part of this
                     condensed consolidated balance sheet.


                                      F-36



                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)



                                                                           THREE MONTHS ENDED SEPTEMBER 30,
                                                                          -----------------------------------
                                                                              2003                    2002
                                                                          -------------         -------------
NET SALES:
                                                                                          
      License fees                                                        $          69         $         150
      Resale of software and technology equipment and service fees                  392                 3,254
                                                                          -------------         -------------
      Total net sales                                                               461                 3,404
                                                                          -------------         -------------

COST OF SALES:
      License fees                                                                   76                    80
      Resale of software and technology equipment and service fees                  378                 2,742
                                                                          -------------         -------------
      Total cost of sales                                                           454                 2,822
                                                                          -------------         -------------

GROSS PROFIT                                                                          7                   582
      Sales and marketing expenses                                                  146                   207
      General and administrative expenses                                         1,940                   996
      Research and development costs                                                 78                   150
                                                                          -------------         -------------

      Loss from operations                                                       (2,157)                 (771)
      Other expenses:
      Loss on extinguishment of debt                                                 24                    --
      Interest expense                                                               24                     2
                                                                          -------------         -------------

NET LOSS                                                                  $      (2,205)        $        (773)
                                                                          =============         =============

NET LOSS PER SHARE--BASIC AND DILUTED                                     $       (0.01)        $       (0.03)
                                                                          =============         =============

WEIGHTED AVERAGE NUMBER OF COMMON SHARES--BASIC AND DILUTED                 151,698,465            22,979,755
                                                                          =============         =============


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

                                      F-37


                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)



                                                                           NINE MONTHS ENDED SEPTEMBER 30,
                                                                          ---------------------------------
                                                                              2003                 2002
                                                                          ------------         ------------
NET SALES:
                                                                                         
      License fees                                                        $        338         $        303
      Resale of software and technology equipment and service fees               1,671                8,149
                                                                          ------------         ------------
      Total net sales                                                            2,009                8,452
                                                                          ------------         ------------

COST OF SALES:
      License fees                                                                 227                  764
      Resale of software and technology equipment and service fees               1,566                6,607
                                                                          ------------         ------------
      Total cost of sales                                                        1,793                7,371
                                                                          ------------         ------------

GROSS PROFIT                                                                       216                1,081
      Sales and marketing expenses                                                 407                  719
      General and administrative expenses                                        3,409                3,556
      Research and development costs                                               243                  683
      Loss on impairment of assets                                                  --                1,003
                                                                          ------------         ------------

      Loss from operations                                                      (3,843)              (4,880)

      Other expenses:
      Loss on extinguishment of debt                                                24                   --
      Interest expense                                                             193                   99
                                                                          ------------         ------------

Loss from continuing operations                                                 (4,060)              (4,979)

      Loss on disposal of discontinued business unit (Note 1)                       --               (1,523)
                                                                          ------------         ------------

NET LOSS                                                                  $     (4,060)        $     (6,502)
                                                                          ============         ============

NET LOSS PER SHARE FROM
      CONTINUING OPERATIONS--BASIC AND DILUTED                            $      (0.05)        $      (0.24)
                                                                          ============         ============

NET LOSS PER SHARE FROM
      DISCONTINUED OPERATIONS--BASIC AND DILUTED                          $         --         $      (0.07)
                                                                          ============         ============

NET LOSS PER SHARE--BASIC AND DILUTED                                     $      (0.05)        $      (0.31)
                                                                          ============         ============

WEIGHTED AVERAGE NUMBER OF COMMON SHARES--BASIC AND DILUTED                 89,440,869           20,736,080
                                                                          ============         ============



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


                                      F-38


                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (IN THOUSANDS)



                                                                                              NINE MONTHS ENDED SEPTEMBER 30,
                                                                                              -------------------------------
                                                                                                    2003           2002
                                                                                                   -------        -------
                                                                                                            
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net loss                                                                                     ($4,060)       ($6,502)
      Adjustments to reconcile net loss to net cash used in operating activities:
      Depreciation and amortization                                                                    368            938
      Loss on disposal of discontinued business unit                                                    --          1,523
      Loss on impairment of assets                                                                      --          1,003
      Expense associated with option and warrant repricing                                             748             38
      Fair value of expense portion of stock-based
               compensation granted for professional services                                          442            383
      Interest expense allocated to debt                                                                75             --
      Discount related to issuance of employee common stock                                            688             --
      Loss on payments of accounts payable in stock                                                     24             --
      (Increase)/decrease in value of life insurance policies                                          (10)            80
      Changes in operating assets and liabilities
         Trade accounts receivable, net                                                                149           (610)
         Other current assets                                                                          217            491
         Accounts payable,  amounts due under financing agreements,  liabilities
           in excess of assets of discontinued  business unit,  accrued expenses
           and stock liability                                                                        (395)         1,916
         Deferred revenue other current liabilities                                                   (303)           151
                                                                                                   -------        -------
           Net cash used in operating activities                                                    (2,057)          (589)
                                                                                                   -------        -------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Capitalization of software development and purchased intangible assets                           (22)           (24)
      Acquisition of property and equipment                                                            (42)            --
                                                                                                   -------        -------
         Net cash used in investing activities                                                         (64)           (24)
                                                                                                   -------        -------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Net proceeds from issuance of common stock                                                     2,409            198
      Net proceeds from cash advances payable through the issuance of common stock                   1,135             --
      Net proceeds from exercise of stock warrants                                                     250             43
      Net proceeds from exercise of stock options                                                       90            272
      Borrowings under notes payable and long-term debt                                                 75             21
      Transfer to restriced cash for long-term debt                                                   (600)            --
      Repayments on notes payable and long-term debt                                                  (260)            --
      Issuance of deferred stock-based compensation                                                     --            (46)
                                                                                                   -------        -------
         Net cash provided by financing activities                                                   3,099            488
                                                                                                   -------        -------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                                             (125)
                                                                                                                      978

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
                                                                                                        70            134
                                                                                                   -------        -------

CASH AND CASH EQUIVALENTS                                                                          $ 1,048        $     9
                                                                                                   =======        =======

SUPPLEMENTAL CASH FLOW INFORMATION:
      Interest paid/(received) during the year                                                     $     6        ($   66)
      Income taxes paid                                                                                 --             --
      Non-cash investing and financing activities:
         Reduction in accounts payable for debt paid in stock                                           72             --
         Cancellation of common stock issued in 2001 to offset stock subscription receivable            --           (240)
         Fair value of stock and warrants issued with debt                                              56             --
         Fair value of stock issued for services                                                       148             --
         Fair value of stock compensation deferred to future periods                                    64             --
         Direct costs associated with Equity Line of Credit                                          5,693             --
         Net effect of issuance and subsequent
             cancellation of common stock underlying notes receivable                                   --           (190)


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


                                      F-39



                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
         UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.    BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS

BASIS OF PRESENTATION

      The  condensed  consolidated  financial  statements  include the financial
statements  of NeoMedia  Technologies,  Inc. and its  wholly-owned  subsidiaries
("NeoMedia" or the "Company"). The accompanying unaudited condensed consolidated
financial  statements have been prepared in accordance with the  instructions to
Form 10-QSB and do not include all of the information and footnotes  required by
accounting  principles  generally  accepted in the United  States of America for
complete  consolidated   financial  statements.   These  condensed  consolidated
financial  statements and related notes should be read in  conjunction  with the
Company's  Form 10-K for the fiscal year ended December 31, 2002. In the opinion
of management,  these condensed  consolidated  financial  statements reflect all
adjustments  which are of a normal  recurring  nature and which are necessary to
present fairly the consolidated  financial  position of NeoMedia as of September
30, 2003,  and the results of operations and cashflows for the  three-month  and
nine-month  periods ended September 30, 2003 and 2002. The results of operations
for the  three-month  and  nine-month  periods ended  September 30, 2003 are not
necessarily  indicative  of the  results  which may be  expected  for the entire
fiscal year. All significant  intercompany  accounts and transactions  have been
eliminated in preparation of the condensed consolidated financial statements.

      NATURE OF BUSINESS OPERATIONS

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

            NeoMedia Internet Switching Services (NISS) (formerly named NeoMedia
            Application Services), and

            NeoMedia Consulting and Integration  Services (NCIS) (formerly named
            NeoMedia SI)

      NISS (physical world-to-Internet offerings) is the Company's 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 our linking  "switch" and our  application
platforms.  NISS also  manages  the  Company's  valuable  intellectual  property
portfolio, including the identification and execution of licensing opportunities
surrounding the patents.

      NCIS (systems integration service offerings) is the original business line
upon which the Company was organized.  This unit resells client-server equipment
and related software, and general and specialized  consulting services.  Systems
integration  services also identifies prospects for custom applications based on
our  products  and  services.  During  2002,  this unit  expanded  its  business
offerings to include a higher  Value-Add called Storage Area Networks (SAN). The
operations are based in Lisle, Illinois.

      RECLASSIFICATIONS

      Certain amounts in the 2002 condensed  consolidated  financial  statements
have been reclassified to conform to the 2003 presentation.

      RECENT ACCOUNTING PRONOUNCEMENTS

      In April 2002,  the FASB issued  Statement  No. 145,  "Rescission  of FASB
Statements No. 4, 44, and 64,  Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from  Extinguishment  of Debt," and an amendment of that Statement,  FASB
Statement  No.  64,  "Extinguishments  of  Debt  Made  to  Satisfy  Sinking-Fund
Requirements"  and FASB Statement No. 44,  "Accounting for Intangible  Assets of
Motor  Carriers." This Statement  amends FASB Statement No. 13,  "Accounting for
Leases," to  eliminate an  inconsistency  between the  required  accounting  for
sale-leaseback  transactions  and the  required  accounting  for  certain  lease
modifications  that have  economic  effects  that are similar to  sale-leaseback
transactions.  NeoMedia has  implemented  the  provision of SFAS No. 145 and has
concluded  that the adoption  does not have a material  impact on the  Company's
financial statements.


                                      F-40



      In July  2002,  the FASB  issued  SFAS  No.  146  "Accounting  for Exit or
Disposal  Activities."  The  provisions  of this  statement  are  effective  for
disposal  activities  initiated after December 31, 2002, with early  application
encouraged.  NeoMedia  has  implemented  the  provision  of SFAS No. 146 and has
concluded  that the adoption  does not have a material  impact on the  Company's
financial statements.

      In October  2002,  the FASB issued  Statement  No. 147,  "Acquisitions  of
Certain  Financial  Institutions-an  amendment of FASB Statements No. 72 and 144
and  FASB  Interpretation  No.  9,"  which  removes  acquisitions  of  financial
institutions  from  the  scope of both  Statement  72 and  Interpretation  9 and
requires that those  transactions be accounted for in accordance with Statements
No. 141,  Business  Combinations,  and No. 142,  Goodwill  and Other  Intangible
Assets.  In addition,  this  Statement  amends SFAS No. 144,  Accounting for the
Impairment or Disposal of Long-Lived  Assets,  to include in its scope long-term
customer-relationship  intangible  assets  of  financial  institutions  such  as
depositor- and  borrower-relationship  intangible  assets and credit  cardholder
intangible  assets.  The  requirements  relating to  acquisitions  of  financial
institutions is effective for  acquisitions for which the date of acquisition is
on or after  October 1, 2002.  The  provisions  related  to  accounting  for the
impairment  or disposal of certain  long-term  customer-relationship  intangible
assets are effective on October 1, 2002.  The adoption of this Statement did not
have a  material  impact to the  Company's  financial  position  or  results  of
operations as the Company has not engaged in either of these activities.

      In December  2002,  the FASB issued  Statement  No. 148,  "Accounting  for
Stock-Based Compensation-Transition and Disclosure," which amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of  transition  for a  voluntary  change  to the  fair  value  based  method  of
accounting for stock-based employee  compensation.  In addition,  this Statement
amends  the  disclosure  requirements  of  Statement  123 to  require  prominent
disclosures in both annual and interim financial  statements about the method of
accounting for stock-based  employee  compensation  and the effect of the method
used  on  reported  results.  The  transition  guidance  and  annual  disclosure
provisions of Statement 148 are effective for fiscal years ending after December
15, 2002,  with earlier  application  permitted  in certain  circumstances.  The
interim  disclosure  provisions are effective for financial  reports  containing
financial  statements for interim periods beginning after December 15, 2002. The
adoption  of this  statement  did not have a  material  impact on the  Company's
financial  position or results of  operations  as the Company has not elected to
change to the fair value based method of  accounting  for  stock-based  employee
compensation.

      In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees  of  Indebtedness  of Others"  (FIN 45).  FIN 45  requires  that upon
issuance of a guarantee,  a guarantor  must  recognize a liability  for the fair
value  of an  obligation  assumed  under  a  guarantee.  FIN  45  also  requires
additional  disclosures  by a  guarantor  in its  interim  and annual  financial
statements  about  the  obligations   associated  with  guarantees  issued.  The
recognition  provisions  of FIN 45 are effective  for any  guarantees  issued or
modified after December 31, 2002. The disclosure  requirements are effective for
financial  statements  of interim or annual  periods  ending after  December 15,
2002.  The  adoption  of FIN45 did not have a material  effect on the  Company's
financial position, results of operations, or cash flows.

      In January 2003, the FASB issued  Interpretation No. 46, "Consolidation of
Variable Interest Entities." Interpretation 46 changes the criteria by which one
company  includes  another  entity  in its  consolidated  financial  statements.
Previously,   the  criteria  was  based  on  control  through  voting  interest.
Interpretation  46 requires a variable  interest  entity to be consolidated by a
company if that  company  is subject to a majority  of the risk of loss from the
variable interest  entity's  activities or entitled to receive a majority of the
entity's  residual  returns  or both.  A company  that  consolidates  a variable
interest  entity  is  called  the  primary   beneficiary  of  that  entity.  The
consolidation  requirements of  Interpretation  46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to older  entities in the first  fiscal year or interim  period  beginning
after  June  15,  2003.  Certain  of the  disclosure  requirements  apply in all
financial  statements  issued  after  January 31, 2003,  regardless  of when the
variable interest entity was established. The adoption of this statement did not
have a  material  impact to the  Company's  financial  position  or  results  of
operations.

      During October 2003, the FASB issued Staff Position No. FIN 46,  deferring
the  effective  date for applying the  provisions of FIN 46 until the end of the
first interim or annual  period  ending after  December 31, 2003 if the variable
interest  was created  prior to  February 1, 2003 and the public  entity has not
issued  financial   statements   reporting  that  variable  interest  entity  in
accordance  with  FIN 46.  The  FASB  also  indicated  it  would  be  issuing  a
modification  to FIN 46 prior to the end of 2003.  Accordingly,  the Company has
deferred the  adoption of FIN 46 with respect to VIEs created  prior to February
1, 2003.  Management is currently  assessing the impact, if any, FIN 46 may have
on the Company; however,  management does not believe there will be any material
impact on its  consolidated  financial  statements,  results  of  operations  or
liquidity resulting from the adoption of this interpretation.


                                      F-41



      In April 2003,  the FASB issued SFAS No. 149,  "Amendment of Statement 133
on Derivative  Instruments and Hedging  Activities".  This Statement  amends and
clarifies  financial  accounting  and  reporting  for  derivative   instruments,
including   certain   derivative   instruments   embedded  in  other   contracts
(collectively  referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative  Instruments and Hedging  Activities".  This
Statement amends Statement 133 for decisions made (1) as part of the Derivatives
Implementation  Group process that effectively  required amendments to Statement
133,  (2) in  connection  with  other  Board  projects  dealing  with  financial
instruments, and (3) in connection with implementation issues raised in relation
to the application of the definition of a derivative, in particular, the meaning
of an initial net  investment  that is smaller  than would be required for other
types of contracts that would be expected to have a similar  response to changes
in market  factors,  the meaning of  underlying,  and the  characteristics  of a
derivative that contains  financing  components.  The adoption of this statement
did not have a material impact to the Company's financial position or results of
operations.

      In May  2003,  the FASB  issued  SFAS No.  150,  "Accounting  for  Certain
Financial Instruments with Characteristics of both Liabilities and Equity". This
Statement  establishes  standards  for how an  issuer  classifies  and  measures
certain  financial  instruments  with  characteristics  of both  liabilities and
equity.  It  requires  that an issuer  classify a financial  instrument  that is
within its scope as a  liability  (or an asset in some  circumstances).  Many of
those instruments were previously  classified as equity.  Some of the provisions
of this Statement are consistent  with the current  definition of liabilities in
FASB Concepts Statement No. 6, Elements of Financial  Statements.  The remaining
provisions of this Statement are consistent with the Board's  proposal to revise
that definition to encompass certain  obligations that a reporting entity can or
must settle by issuing  its own equity  shares,  depending  on the nature of the
relationship  established  between  the holder and the  issuer.  While the Board
still plans to revise that definition through an amendment to Concepts Statement
6, the Board decided to defer issuing that amendment  until it has concluded its
deliberations on the next phase of this project.  That next phase will deal with
certain compound financial  instruments  including puttable shares,  convertible
bonds, and dual-indexed  financial  instruments.  The adoption of this statement
did not have a material impact on the Company's financial position or results of
operations.

LOCH ENERGY, INC. ("LOCH")

            On March 7, 2003,  NeoMedia  announced  that that it had  reached an
agreement in  principle to acquire and merge with Loch,  an oil and gas provider
based in Humble, Texas. On October 1, 2003, NeoMedia discovered that the royalty
interest  from  future  sales of oil owned by Loch were  oversold,  which  would
likely  result in  materially  lower  projected  available  cashflow from Loch's
operations.  This  projected  available  cashflow was the basis for the proposed
acquisition by NeoMedia. On October 2, 2003, NeoMedia's Board of Directors voted
to cancel the  Memorandum  of Terms signed on March 13, 2003,  and terminate the
acquisition and merger.

EQUITY LINE OF CREDIT WITH CORNELL CAPITAL PARTNERS, LP ("CORNELL")

      On February 11, 2003,  NeoMedia and Cornell entered into an Equity Line of
Credit  Agreement  under which  Cornell  agreed to purchase up to $10 million of
NeoMedia's  common stock over a two-year  period,  with the timing and amount of
the purchase at the Company's discretion. The maximum amount of each purchase is
$150,000 with a minimum of seven days between  purchases.  The shares are valued
at 98% of the lowest closing bid price during the five-day period  following the
delivery of a notice of purchase by  NeoMedia.  The Company pays 5% of the gross
proceeds of each  purchase to Cornell.  On February 14,  2003,  the SEC declared
effective  the  S-1  registration   statement   containing  100  million  shares
underlying the Equity Line of Credit.

      During the nine months ended  September 30, 2003, the Company has received
gross  funding of  $3,597,000  from the sale of stock  under the Equity  Line of
Credit, through the sale of 87,933,244 shares of its common stock. The following
table summarizes funding received from the Equity line of Credit during the nine
months ended September 30, 2003:


                                      F-42




                                                                                                      NINE MONTHS
                                                                                                         ENDED
                                             FIRST              SECOND               THIRD            SEPTEMBER 30,
                                            QUARTER             QUARTER             QUARTER               2003
                                          ------------        ------------        ------------        ------------
                                                                                          
Number of shares sold to Cornell             3,452,373          28,411,871          56,069,000          87,933,244

Gross funds received by NeoMedia          $    312,000        $    685,000        $  2,600,000        $  3,597,000
Less: discount and fees*                       (28,000)            (50,000)           (226,000)           (304,000)
                                          ------------        ------------        ------------        ------------
   Net funding received by NeoMedia       $    284,000        $    635,000        $  2,374,000        $  3,293,000
                                          ------------        ------------        ------------        ------------


* - Includes  placement fees,  escrow fees, and a 5% reduction in gross proceeds
retained by Cornell


        Subsequent  to  September  30,  2003,  the  Company  sold an  additional
12,066,756  shares to Cornell  under the Equity Line of Credit,  resulting in an
additional discount of $1,172,000.

      Funding  received from Cornell during the nine months ended  September 30,
2003,  was in the form of a debt  instrument,  under  which the  Company had the
option to pay down the principal on the promissory  note through the issuance of
"puts" of common stock to Cornell over a period of several  weeks,  or by making
payments in cash.

      On September 11, 2003, the Company received an advance from Cornell in the
gross amount of $500,000 before Cornell  discounts and fees. As of September 30,
2003,  the Company had not issued any shares  against  this  advance to Cornell.
Accordingly,  the company has recorded the advance  balance of $500,000 in "Cash
advances  payable  through  the  issuance  of  common  stock"  on its  condensed
consolidated  balance sheet as of September 30, 2003.  During  October 2003, the
Company issued  1,066,756  shares to Cornell against this advance,  reducing the
balance to approximately $376,000.

      On September 29, 2003, the Company received an advance from Cornell in the
gross amount of $1,500,000  before  Cornell  discounts and fees. As of September
30,  2003,  the  Company  had issued to Cornell  15,000,000  shares  against the
advance,  valued at approximately  $865,000. The Company has recorded the unpaid
advance  amount of $635,000 as "Cash  advances  payable  through the issuance of
common  stock" on the condensed  consolidated  balance sheet as of September 30,
2003. During October 2003, the Company issued an additional 11,000,000 shares to
Cornell to pay off the advance in full.

      On October 27,  2003,  the Company and Cornell  entered into a $20 million
Standby Equity Distribution Agreement.  The terms of the agreement are identical
to the terms of the  previous  Equity  Line of Credit,  except  that the maximum
"draw" under the new agreement is $280,000 per week,  not to exceed  $840,000 in
any 30-day period,  and Cornell will purchase up to $20 million of the Company's
common stock.  As a  consideration  fee for Cornell to enter into the agreement,
the  Company  issued 10 million  warrants to Cornell  with an exercise  price of
$0.05 per share, and a term of five years.

OPTION REPRICING

        During May 2003, the Company  re-priced  approximately 8.0 million stock
options under a 6-month repricing program.  Under the terms of the program,  the
exercise price for outstanding  options under the Company's 2002, 1998, and 1996
Stock Option Plans was restated to $0.01 per share for a period of 6 months.  In
accordance with FASB Interpretation, FIN 44, Accounting for Certain Transactions
Involving Stock Transactions,  the award has been accounted for as variable from
May 19, 2003 through the period ended June 30,  2002.  Accordingly,  the Company
recognized  approximately  $544,000 and $710,000 as  compensation in general and
administrative  expense during the three and nine month periods ended  September
30, 2003.  Approximately  4.4 million options were exercised under the repricing
program during the nine months ended September 30, 2003.  During September 2003,
the deadline for the option  repricing  was extended to December 31, 2003 by the
Stock Option Committee of NeoMedia's Board of Directors.

DISPOSAL OF QODE BUSINESS UNIT

        On August 31, 2001, the Company signed a non-binding letter of intent to
sell the assets and liabilities of its former Ft. Lauderdale-based Qode business
unit,  which it  acquired  in March 2001,  to The Finx  Group,  Inc.,  a holding
company  based in  Elmsford,  NY. The Finx Group was to assume  $620,000 in Qode
payables  and  $800,000  in  long-term  leases in exchange  for the  issuance of
500,000 shares of the Finx Group, right to use and sell Qode services, and up to
$5 million in affiliate revenues over the next five years.  During the third and
fourth  quarters of 2001 and the first quarter of 2002,  the company  recorded a
$2.6 million expense from the write-down of the Qode  assets/liabilities  to net
realizable value.

        During June 2002,  the Finx Group  notified  the Company that it did not
intend  to carry  out the  letter of intent  due to  capital  constraints.  As a
result,  during the three-month period ended June 30, 2002, the Company recorded
an  additional  expense of $1.5  million for the  write-off  of  remaining  Qode
assets.  As of September  30, 2003,  the Company had  approximately  $996,000 of
liabilities relating to the Qode system remaining on its books.


                                      F-43



OTHER EVENTS

        On March 13, 2003, the Company  repaid the remaining  balance of $85,000
on a note due to Michael  Kesselbrenner,  a private investor.  The original note
had been issued in the amount of  $165,000  on December 2, 2002,  with a term of
150 days.  In  connection  with the default  provision of the note,  the Company
entered into a Pledge Agreement, dated December 2, 2002, under which the Company
issued  53,620,020  shares  of  common  stock  to an  unrelated  third  party as
collateral  for the note.  The note balance of $85,000 was paid off on March 13,
2003,  and the  53,620,020  shares were returned to the Company on April 4, 2003
and retired.

        On April 2, 2003,  the  Company  was  issued  its sixth US  Patent.  The
technology  covered  by  the  patent  allows  for  a  connection  from  human-or
machine-readable  input to  generate  a  tailored  response  that can  utilize a
profile of the person making the link between the code-carrying  physical object
and the desired electronic information.

        On April 17, 2003,  the Board of  Directors of the Company  approved the
payment in full of approximately  $154,000 of liabilities owed by the Company to
Charles W. Fritz, the Company's  Founder and Chairman of the Board of Directors,
through  the  issuance  of  15,445,967  shares  of  common  stock.  The  Company
recognized  a  discount  expense  in  general  and  administrative  expenses  of
approximately $15,000 relating to this transaction with Mr. Fritz.

        On April 21,  2003,  the Company  sold  25,000,000  shares of its common
stock, par value $0.01, in a private placement at a price of $0.01 per share. In
connection  with the sale,  the Company  also granted the  purchaser  25,000,000
warrants to purchase  shares of the Company's  common stock at an exercise price
of $0.01 per share.  The  warrants  had a fair value of  $298,000  and have been
recorded as a cost of issuance.  The purchaser was William E. Fritz, a member of
the  Company's  Board of  Directors.  Proceeds to the  Company  from sale of the
shares were $250,000.  The Company  recognized a discount expense in general and
administrative  expenses of  approximately  $50,000 relating to this transaction
with Mr.  Fritz.  On August 6,  2003,  Mr.  Fritz  exercised  his  warrants  and
purchased  25,000,000  additional shares of common stock at a price of $0.01 per
share.

        During  April  2003,  the  Company  repriced  approximately  1.9 million
warrants held by Thornhill Capital LLC  ("Thornhill"),  an outside consultant to
the Company.  Of the 1.9 million warrants,  1.5 million had an exercise price of
$0.05 per share,  and  approximately  0.4 million had an exercise price of $2.09
per share.  All 1.9  million  warrants  were  repriced  to $0.00 per share.  The
Company  recognized  an  expense  of  approximately   $27,000  related  to  this
transaction  during the second  quarter of 2003.  These  warrants were exercised
immediately after the repricing.

      During April 2003,  the Company  entered into a consulting  agreement with
William Fritz,  an outside  director,  for  consulting  and advisement  services
relating  to  the  merger  with  Loch  Energy,   Inc.,  and  to  the  subsequent
implementation  of various  management  programs  surrounding the business.  The
agreement calls for total payments of $250,000 over a period of one year. During
August 2003, the Company paid the consulting  contract in full. During September
2003, the  consulting  contract was rescinded and the full $250,000 was returned
to us.

        On July 9, 2003, the Company borrowed $25,000 from William E. Fritz, one
of its outside  directors.  This amount was added to the  principal of a $10,000
note payable to Mr.  Fritz that  matures in April 2004,  with all other terms of
the note remaining the same. As consideration  for the loan, the Company granted
Mr. Fritz 2,500,000 warrants to purchase shares of the Company's common stock at
an  exercise  price  of  $0.01  per  share.  The  warrants  had a fair  value of
approximately  $74,000.  In accordance with EITF 00-27, the Company recorded the
relative  fair value of the  warrants  as a discount  against  the note,  and is
amortizing the discount over the life of the note.

        On July 16, 2003,  the Company's  Board of Directors  voted to authorize
the  issuance  of  approximately   34.4  million  stock  options  to  employees,
contingent  upon the passage at the  Company's  annual  meeting on September 24,
2003,  of a proposal to adopt a 2003 Stock Option Plan,  under which 150 million
options  would  be  allocated  for  future   issuance.   The  Company   expensed
approximately  $624,000  related to the  issuance  of these  options  during the
quarter  ended  September  30, 2003.  The 2003 Stock Option Plan was approved by
NeoMedia's  shareholders.  Subsequent to September 30, 2003,  the Company issued
the 34.4 million options.

        On July 21, 2003, the Company  entered into a consulting  agreement with
an  unrelated  party  under which the Company  paid the  consultant  3.6 million
shares of the Company's  common stock for services to be performed over a period
of one year. The Company recorded  expense of $19,000 and the remaining  $81,000
was recorded as deferred compensation.


                                      F-44



        On July 28,  2003,  the  Company  signed a  binding  letter of intent to
purchase Secure Source  Technologies  ("SST"),  a provider of security solutions
and covert  security  technology for the  manufacturing  and financial  services
industries, in exchange for 3.5 million shares of the Company's common stock. On
October 8, 2003,  the merger was  completed,  and the Company issued 3.5 million
shares  to the  stockholders  of SST.  With the  purchase  of SST,  the  Company
acquired eight  additional  patents that  compliment  its existing  intellectual
property portfolio.

        On August 29, 2003, the Company  borrowed $50,000 from William E. Fritz,
one of its outside directors, under an unsecured note payable. The note was paid
in full during September 2003.

        On  September  3, 2003,  the  Company  issued 10 million  warrants to an
unrelated consultant for professional  services rendered in the third and fourth
quarter of 2003. The warrants have an exercise price of $0.01 and a term of five
years. Services provided by the consultant include  capital-raising  services in
the third  quarter of 2003,  advisory  services  relating to our Standby  Equity
Distribution Agreement with Cornell Capital Partners, and merger and acquisition
advisement  provided  during the third and fourth  quarters of 2003. The Company
recorded approximately $19,000 as expense, $74,000 as deferred compensation, and
$47,000 as cost of raising capital against additional paid in capital.

        On September 24, 2003, the Company's  shareholders voted to (i) increase
the  number of  shares of common  stock,  par value  $0.01 per  share,  that the
Company is  authorized  to issue from  200,000,000  to  1,000,000,000;  and (ii)
implement  the 2003 Stock Option Plan,  under which the Company is authorized to
grant to employeees,  directors,  and  consultants up to 150,000,000  options to
purchase shares of its common stock.

      On  September  29,  2003,  the Company  transferred  $600,000 to an escrow
account to be used to pay princiapal  and interest  relating to its note payable
to AirClic,  Inc.  ("AirClic") which is subject to a lawsuit between the Company
and AirClic (see "Legal Proceedings"). On October 3, 2003, NeoMedia paid AirClic
the principal plus interest in the approximate  amount of $610,000.  On December
5,  2003,  we paid an  additional  $115,000  in legal  fees and  entered  into a
settlement  agreement with AirClic under suit was dismissed.  We have no further
obligation relating to this matter.

      On  September  30,  2003,  the Company  received  requests  from the SEC's
Southeast  Regional  Office for certain  documents  including  those  concerning
negotiations and arrangements with certain  strategic  partners and consultants,
patents,  recent  issuances of  securities,  investor  relations,  and the stock
ownership  by the  Company's  officers  and  directors.  The  Company  responded
promptly  and fully and will  cooperate  with any  further  requests.  The SEC's
letter  states that the staff's  inquiry is informal and should not be construed
as an  indication  of any  violation  of law or as a  reflection  on any person,
entity, or security.

PRO-FORMA INFORMATION REQUIRED BY SFAS 148

      At  September  30,  2003,  the  Company  has  four  stock-based   employee
compensation  plans (the 2003 Stock Option Plan, the 2002 Stock Option Plan, the
1998 Stock Option Plan,  and the 1996 Stock Option Plan).  The Company  accounts
for those plans under the recognition and measurement  principles of APB Opinion
No. 25, Accounting for Stock Issued to Employees,  and related  Interpretations.
No stock-based employee  compensation cost is reflected in net loss, except when
options  granted  under those  plans had an exercise  price less than the market
value of the underlying  common stock on the date of grant.  The following table
illustrates the effect on net loss and loss per share if the company had applied
the fair value recognition  provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.




                                                  THREE MONTHS                  NINE MONTHS
                                               ENDED SEPTEMBER 30,           ENDED SEPTEMBER 30,
                                             ----------------------        ----------------------
                                               2003           2002          2003           2002
                                             -------        -------        -------        -------
                                                                              
Net Loss, as reported                        ($2,205)       ($  773)       ($4,060)       ($6,502)
Compensation recognized under APB 25             623             --            623             --
Compensation recognized under SFAS 123          (925)          (313)        (1,361)          (629)
                                             -------        -------        -------        -------
   Pro-forma net loss                        ($2,507)       ($1,086)       ($4,798)       ($7,131)
                                             =======        =======        =======        =======

Net Loss per share:

Basic and diluted - as reported              ($ 0.01)       ($ 0.03)       ($ 0.05)       ($ 0.31)
                                             =======        =======        =======        =======
Basic and diluted - pro-forma                ($ 0.02)       ($ 0.05)       ($ 0.05)       ($ 0.34)
                                             =======        =======        =======        =======



                                      F-45


SEGMENT REPORTING

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

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

        NeoMedia  Consulting and  Integration  Services  (NCIS) is the Company's
systems integration business unit. This unit resells client-server equipment and
related software,  and general and specialized  consulting  services.  NCIS also
identifies  prospects for custom  applications based on NeoMedia's  products and
services.  This unit  recently  added to its  business  offerings  a much higher
Value-Add called Storage Area Networks (SAN). The operations are based in Lisle,
Illinois.

         The Company's  reportable  segments are strategic  business  units that
offer  different  technology and marketing  strategies.  The Company's  areas of
operations are  principally in the United States.  No single foreign  country or
geographic area is significant to the consolidated financial statements

                Consolidated net sales, net operating losses for the nine months
ended September 30, 2003 and 2002, and  identifiable  assets as of September 30,
2003, were as follows:



                                                                                (in thousands)
                                                         -------------------------------------------------------------
                                                                THREE MONTHS                        NINE MONTHS
                                                             ENDED SEPTEMBER 30,                ENDED SEPTEMBER 30,
                                                         -------------------------           -------------------------
                                                          2003              2002              2003              2002
                                                         -------           -------           -------           -------
                                                                                                   
NET SALES:
     NeoMedia Consulting & Integration Services          $   448           $ 3,391           $ 1,971           $ 8,424
     NeoMedia Internet Switching Service                      13                13                38                28
                                                         -------           -------           -------           -------
                                                         $   461           $ 3,404           $ 2,009           $ 8,452
                                                         -------           -------           -------           -------

NET LOSS:
     NeoMedia Consulting & Integration Services          ($1,855)          ($  338)          ($3,310)          ($  546)
     NeoMedia Internet Switching Service                    (350)             (435)             (750)           (5,956)
                                                         -------           -------           -------           -------
                                                         ($2,205)          ($  773)          ($4,060)          ($6,502)
                                                         -------           -------           -------           -------




                                                         AS OF
                                                     SEPTEMBER 30,
IDENTIFIABLE ASSETS                                       2003
                                                      
     NeoMedia Consulting & Integration Services          $  603
     NeoMedia Internet Switching Service                  2,115
     Corporate                                            2,523
                                                         ------
                                                         $5,241
                                                         ------



SUBSEQUENT EVENTS

            On October 8, 2003, the Company  completed its acquisition of Secure
Source Technologies,  Inc., a provider of security solutions and covert security
technology for the  manufacturing  and financial  services  industries,  for 3.5
million shares of NeoMedia  common stock.  With the purchase of SST, the Company
acquired eight  additional  patents that  compliment  its existing  intellectual
property portfolio.


                                      F-46



            On October 20, 2003, the Company entered into a consulting agreement
with an unrelated third party to provide services related to the  implementation
of the Company's PaperClick for Camera Cell Phone business plan in Europe over a
12-month  period.  The consultant  was paid  1,000,000  options with an exercise
price of $0.01 per share and a term of three years.

            On October 20, 2003, the Company entered into a consulting agreement
with an unrelated third party to provide services related to the  implementation
of the Company's  domestic  business plan relating to PaperClick patent business
plan over a 12-month  period.  The consultant  was paid 500,000  options with an
exercise price of $0.01 per share and a term of three years.

            On October 27,  2003,  The  Company  entered  into a Standby  Equity
Distribution  Agreement  with  Cornell  Capital  Partners,  LP.  Pursuant to the
Standby  Equity  Distribution  Agreement,  the Company  may, at its  discretion,
periodically  sell to Cornell  shares of common stock for a total purchase price
of up to $20 million. For each share of common stock purchased under the Standby
Equity  Distribution  Agreement,  Cornell  Capital  Partners will pay 98% of the
lowest closing bid price of the Company's common stock on the OTC Bulletin Board
or other principal  market on which our common stock is traded for the 5 trading
days  immediately  following  the notice  date.  The  amount of each  advance is
subject to a maximum of $280,000 per week, not to exceed  $840,000 in any 30-day
period,  with a minimum of 6 trading days between  advances.  As a consideration
fee for  Cornell  to enter into the  agreement,  the  Company  issued 10 million
warrants  to Cornell  with an exercise  price of $0.05 per share,  and a term of
five years.  On November 7, 2003 the Company filed a  Registration  Statement on
Form SB-2 to register  the sale of up to  200,000,000  shares  under the Standby
Equity  Distribution  Agreement,  as well as the 10,000,000  warrants  issued to
Cornell Capital Partners.

            Effective  October  31,  2003,   NeoMedia  adopted  the  2003  Stock
Incentive Plan. Under the terms of the Plan,  30,000,000  shares of common stock
are initially  authorized to be issued to pay  compensation  and other  expenses
related to employees, former employees, consultants, and non-employee directors.
On November 3, 2003, NeoMedia filed a Form S-8 to register all 30,000,000 shares
under the 2003 Stock Incentive Plan.

            On November 10, 2003, the Company  announced that that it has signed
a non-binding letter of intent to acquire and merge with CSI International, Inc.
("CSI"), of Calgary,  Alberta, Canada, a private technology products company and
worldwide  leader  in the micro  paint  repair  industry.  The LOI calls for the
issuance  of  7,000,000  shares of the  Company's  common  stock to be issued in
exchange for all  outstanding  shares of CSI. In addition,  the Company will pay
$2.5 million cash.  The merger is subject to completion of due diligence by both
sides.

            On December  9, 2003,  we signed a  non-binding  letter of intent to
acquire  Triton  Global  Business  Services  Inc.  and its parent  company,  BSD
Software Inc. (Pink Sheets:  BSDS), both of Calgary,  Alberta,  Canada.  The LOI
outlined terms,  including an exchange of one share of our common stock for each
share of BSD  Software,  not to exceed 40 million  shares.  The  transaction  is
dependent  on  due  diligence  by  both  companies,  approval  by our  Board  of
Directors, BSD Software's Board of Directors, shareholders,  required regulatory
approvals,  and other conditions.  Triton, formed in 1998 and acquired by BSD in
2002, is an Internet  Protocol-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.

CRITICAL ACCOUNTING POLICIES

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


                                      F-47



        Intangible  Asset  Valuation.  The  determination  of the fair  value of
certain  acquired  assets  and  liabilities  is  subjective  in nature and often
involves the use of significant estimates and assumptions.  Determining the fair
values and useful lives of intangible assets especially requires the exercise of
judgment.  While there are a number of different  generally  accepted  valuation
methods  to  estimate  the value of  intangible  assets  acquired,  the  Company
primarily uses the  weighted-average  probability  method  outlined in SFAS 144.
This method  requires  significant  management  judgment to forecast  the future
operating results used in the analysis. In addition, other significant estimates
are required such as residual growth rates and discount  factors.  The estimates
the  Company  has used are  consistent  with the  plans and  estimates  that the
Company uses to manage its business,  based on available historical  information
and industry  averages.  The judgments made in determining the estimated  useful
lives assigned to each class of assets  acquired can also  significantly  affect
our net operating results.

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

        Revenue  Recognition.  We derive revenues from two primary sources:  (1)
license revenues and (2) resale of software and technology equipment and service
fee revenues.

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

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

        Revenue for resale of software and technology  equipment and service fee
is recognized based on guidance  provided in Securities and Exchange  Commission
(SEC) Staff  Accounting  Bulletin  No. 101,  "Revenue  Recognition  in Financial
Statements,"  as amended (SAB 101).  Software and  technology  equipment  resale
revenue is recognized  when all of the  components  necessary to run software or
hardware  have been  shipped.  Service  revenues  include  maintenance  fees for
providing system updates for software products, user documentation and technical
support  and are  recognized  over the life of the  contract.  Software  license
revenue  from  long-term  contracts  has  been  recognized  on a  percentage  of
completion  basis,  along with the  associated  services being  provided.  Other
service  revenues,  including  training and  consulting,  are  recognized as the
services are  performed.  The Company uses  stand-alone  pricing to determine an
element's  vendor  specific  objective  evidence  (VSOE) in order to allocate an
arrangement  fee amongst various pieces of a  multi-element  contract.  NeoMedia
records an allowance for uncollectible accounts on a customer-by-customer  basis
as appropriate.

INTANGIBLE ASSETS

            At the end of each quarter,  or upon  occurrence of material  events
relating to a specific intangible item, the Company performs impairment tests on
each of its  intangible  assets,  which include  capitalized  patent costs,  and
capitalized and purchased software costs. In doing so, the Company evaluates the
carrying  value of each  intangible  asset  with  respect  to  several  factors,
including  historical revenue generated from each intangible asset,  application
of the assets in our current business plan, and projected  revenue to be derived
from the asset. Intangible asset balances are then adjusted to their current net
realizable value based on these criteria if impaired. No impairment charges were
taken during the  three-month  or nine-month  periods ended  September 30, 2003.
During the nine months ended  September  30,  2002,  the Company  recognized  an
impairment charge of $1.0 million relating to its PaperClick software product.


                                      F-48


FINANCING AGREEMENTS

            As of  September  30,  2003,  the Company was party to a  commercial
financing  agreement  with GE Access  that  provides  short-term  financing  for
certain computer hardware and software  purchases.  This arrangement  allows the
Company  to  re-sell  high-dollar  technology  equipment  and  software  without
committing  cash resources to financing the purchase.  The Company and GE Access
are currently  operating under an additional  arrangement  under which GE Access
retains 50% of the  Company's  proceeds  from sales  financed by GE Access,  and
applies the  portion of proceeds  toward  past due  balances.  This  arrangement
reduces by half the  Company's  cash flow from resales of equipment and software
financed  by GE  Access,  until the  balance  owed to GE Access is paid in full.
During  October 2003,  the Company and GE entered into an  additional  agreement
under  which  the  Company  also  makes  regular  payment  against  its past due
balances.  Termination of the Company's  financing  relationship  with GE Access
could  have  a  material  adverse  effect  the  Company's  financial  condition.
Management  expects the  agreement to remain in place in the near future.  As of
September 30, 2003,  the amount  payable under this  financing  arrangement  was
approximately $345,000.

OTHER DEBTS

      On  December  2, 2002,  the  Company  issued to Michael  Kesselbrenner,  a
private investor, a promissory note in the principal amount of $165,000, bearing
interest at a rate of 12% per annum,  with a maturity of 150 days. In connection
with the default  provision of the promissory  note, the Company  entered into a
pledge  agreement,  dated  December  2, 2002,  under  which the  Company  issued
53,620,020  shares of common stock to an unrelated third party as collateral for
the Promissory Note. The investor only funded $84,000 of the principal amount of
the note. The Company repaid this note during March 2003, and the shares held in
escrow were returned  during April 2003.  The Company has no further  obligation
under this note.

      During November 2002, NeoMedia issued Convertible Secured Promissory Notes
with an aggregate face value of $60,000 to 3 separate parties, including Charles
W. Fritz,  Chairman of the Board of Directors of NeoMedia;  William E. Fritz, an
outside  director;  and James J.  Keil,  an  outside  director.  The notes  bear
interest  at a rate of 15% per annum,  and  matured  at the  earlier of i.) four
months, or ii.) the date the shares underlying the Cornell Equity Line of Credit
were registered with the SEC. The notes were  convertible,  at the option of the
holder,  into  either  cash or shares of our common  stock at a 30%  discount to
either  market  price upon  closing,  or upon  conversion,  whichever  is lower.
NeoMedia  also  granted to the  holders an  additional  1,355,670  shares of its
common stock and 60,000 warrants to purchase shares of its common stock at $0.03
per share,  with a term of three  years.  The warrants and shares were issued in
January 2003.  In addition,  since this debt is  convertible  into equity at the
option of the note holder at beneficial conversion rates, an embedded beneficial
conversion  feature was  recorded as a debt  discount  and  amortized  using the
effective interest rate over the life of the debt in accordance with EITF 00-27.
Total cost of beneficial conversion feature, fair value of the stock and cost of
warrants  issued  exceed the face value of the notes  payable,  therefore,  only
$60,000,  the face amount of the note, was  recognizable  as debt discount,  and
amortized  over the life of the notes  payable.  During  March 2003,  two of the
affiliated  parties,  Mr.  William  Fritz and Mr.  Keil,  agreed  to extend  the
maturity  date due to the  Company's  capital  constraints.  The Company  repaid
Charles  Fritz's note in full during March 2003, and repaid James J. Keil's note
in full during April 2003.  The Company paid $30,000 of the principal on William
Fritz's note during  April 2003,  and entered into a new note with Mr. Fritz for
the remaining  $10,000.  The new note bears  interest at a rate of 10% per annum
and matures in April 2004.  The new note also includes a provision  under which,
as consideration for the loan, Mr. Fritz will receive a 3% royalty on all future
revenue generated from the Company's intellectual property.

GOING CONCERN

            The accompanying  condensed  consolidated  financial statements have
been prepared on a going concern basis,  which  contemplates  the realization of
assets and the  satisfaction  of  liabilities  in the normal course of business.
Through September 30, 2003, the Company has not been able to generate sufficient
revenues from its operations to cover its costs and operating expenses. Although
the Company  has been able to issue its common  stock or other  financing  for a
significant  portion of its expenses,  it is not known whether  NeoMedia will be
able to continue this practice, or if its revenue will increase significantly to
be able to meet its cash operating  expenses.  This, in turn, raises substantial
doubt about the  Company's  ability to continue as a going  concern.  Management
believes  that the Company will be able to raise  additional  funds  through its
Standby Equity  Distribution  Agreement with Cornell.  However,  there can be no
assurances  that the market for the  Company's  stock will  support  the sale of
sufficient  shares of NeoMedia's  stock to raise  sufficient  capital to sustain
operations.  The condensed  consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.


                                      F-49



WE HAVE NOT  AUTHORIZED  ANY DEALER,  SALESPERSON OR OTHER PERSON TO PROVIDE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS ABOUT NEOMEDIA TECHNOLOGIES, INC. EXCEPT
THE INFORMATION OR REPRESENTATIONS CONTAINED IN THIS PROSPECTUS.  YOU SHOULD NOT
RELY ON ANY ADDITIONAL INFORMATION OR REPRESENTATIONS IF MADE.

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

This prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy any securities:


/ /   except the common stock offered by this prospectus;

/ /   in any jurisdiction in which the offer or solicitation is not authorized;

/ /   in any jurisdiction where the dealer or other salesperson is not qualified
      to make the offer or solicitation;


/ /   to any person to whom it is unlawful to make the offer or solicitation; or

/ /   to any person who is not a United  States  resident  or who is outside the
      jurisdiction of the United States.

The delivery of this prospectus or any accompanying sale does not imply that:

/ /   there have been no changes in the affairs of NeoMedia  Technologies,  Inc.
      after the date of this prospectus; or

/ /   the information  contained in this prospectus is correct after the date of
      this prospectus.

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

Until  _____,  2003,  all  dealers  effecting  transactions  in  the  registered
securities,  whether or not participating in this distribution,  may be required
to deliver a  prospectus.  This is in addition to the  obligation  of dealers to
deliver a prospectus when acting as underwriters.





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

                                   PROSPECTUS


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




                       308,648,500 SHARES OF COMMON STOCK




                           NEOMEDIA TECHNOLOGIES, INC.






                                   _____, 2003








                                     PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

            The following  table sets forth  estimated  expenses  expected to be
incurred in  connection  with the issuance and  distribution  of the  securities
being  registered.  NeoMedia  will pay all  expenses  in  connection  with  this
offering.



                                                               
     Securities and Exchange Commission Registration Fee          $   348
     Printing and Engraving Expenses                                2,500
     Accounting Fees and Expenses                                  15,000
     Legal Fees and Expenses                                       25,000
     Miscellaneous                                                  7,152
                                                                  -------
     TOTAL                                                        $50,000
                                                                  =======



ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

            As  permitted  by the  Delaware  General  Corporation  Law,  we have
included in our  Certificate  of  Incorporation  a provision  to  eliminate  the
personal  liability of our directors for monetary  damages for breach or alleged
breach of their fiduciary duties as directors,  except for liability (i) for any
breach of the director's duty of loyalty to NeoMedia or its  stockholders,  (ii)
for acts or omissions not in good faith or which involved intentional misconduct
or a knowing  violation of law,  (iii) in respect of certain  unlawful  dividend
payments or stock redemptions or repurchases,  as provided in Section 174 of the
DGCL, or (iv) for any  transaction  from which the director  derived an improper
personal  benefit.  The effect of this  provision is to eliminate  the rights of
NeoMedia and its stockholders (through stockholders'  derivative suits on behalf
of NeoMedia) to recover  monetary  damages  against a director for breach of the
fiduciary duty of care as a director  except in the situations  described in (i)
through (iv) above.  This  provision  does not limit nor eliminate the rights of
NeoMedia or any stockholder to seek non-monetary relief such as an injunction or
rescission  in the  event  of a  breach  of a  director's  duty of  care.  These
provisions  will not alter the liability of directors  under federal  securities
laws.

            The certificate of incorporation and the by-laws of NeoMedia provide
that we are required and  permitted  to  indemnify  our officers and  directors,
employees and agents under certain  circumstances.  In addition, if permitted by
law,  we are  required to advance  expenses to our  officers  and  directors  as
incurred in  connection  with  proceedings  against them in their  capacity as a
director  or  officer  for which  they may be  indemnified  upon  receipt  of an
undertaking  by or on behalf of such director or officer to repay such amount if
it  shall  ultimately  be  determined  that  such  person  is  not  entitled  to
indemnification.  At  present,  we are not aware of any  pending  or  threatened
litigation or  proceeding  involving a director,  officer,  employee or agent of
NeoMedia in which indemnification would be required or permitted.

            Insofar  as  indemnification   for  liabilities  arising  under  the
Securities  Act of 1933 (the "Act") may be permitted to  directors,  officers or
controlling  persons of the Company  pursuant to the  foregoing  provisions,  or
otherwise,  the Company has been advised  that in the opinion of the  Securities
and  Exchange  Commission  such  indemnification  is  against  public  policy as
expressed in the Act and is, therefore, unenforceable.

RECENT SALES OF UNREGISTERED SECURITIES

            On  November  4,  2003,  we  issued  8,000,000  shares  of  stock to
International  Digital  Scientific,  Inc.,  as  payment  of all past and  future
amounts owed under a note payable from 1994. These shares are being included for
registration hereunder.

            On October 28, 2003,  we issued  3,000,000  shares of stock to Orsus
Solutions,  USA, Inc., an unrelated  vendor, as payment of past due liabilities.
These shares are being included for registration hereunder.

            On October 28, 2003,  we issued  95,238 shares of stock to Newbridge
Securities  Corporation,  an unrelated  advisor,  for  services  relating to the
Standby  Equity  Distribution  Agreement.  These  shares are being  included for
registration hereunder.


                                      II-1



            On  October  27,  2003,  we  issued  7,279  shares  of  stock to one
unrelated  vendor as payment  of past due  liabilities.  These  shares are being
included for registration hereunder.

            On October 27,  2003,  we issued to Cornell  Capital  Partners,  LP,
10,000,000  warrants to purchase shares of our common stock at an exercise price
of $0.05 per  share.  The  warrants  were  issued as a one-time  commitment  fee
relating to the Standby Equity  Distribution  Agreement  between Cornell and us.
The  shares   underlying  the  warrants  are  being  included  for  registration
hereunder.

            On October  27,  2003,  we issued  3,500,000  shares of stock to the
holders of all of the  outstanding  shares of Secure Source  Technologies,  Inc.
("SST"),  in exchange  for all the  outstanding  shares of common  stock of SST.
These shares are being included for registration hereunder.

            On  October  22,  2003,  we  issued  66,841  shares  of stock to one
unrelated  vendor as payment  of past due  liabilities.  These  shares are being
included for registration hereunder.

            On  October  7,  2003,  we  issued  103,907  shares  of stock to one
unrelated  vendor as payment  of past due  liabilities.  These  shares are being
included for registration hereunder.

            On  October  6,  2003,  we  issued  37,743  shares  of  stock to one
unrelated  vendor as payment  of past due  liabilities.  These  shares are being
included for registration hereunder.

            On September  25,  2003,  we issued  875,855  shares of stock to two
unrelated  vendors as payment of past due  liabilities.  These  shares are being
included for registration hereunder.

            On September  25,  2003,  we issued  1,600,000  shares of stock to a
former employee as payment of past due incentive compensation.  These shares are
being included for registration hereunder.

            On July 9, 2003, we borrowed  $25,000 from William E. Fritz,  one of
our outside directors.  This amount was added to the principal of a $10,000 note
payable to Mr.  Fritz that  matures in April  2004,  with all other terms of the
note  remaining  the same. As  consideration  for the loan, we granted Mr. Fritz
2,500,000  warrants  to  purchase  shares of the  Company's  common  stock at an
exercise price of $0.01 per share. The shares  underlying the warrants are being
included for registration hereunder.

            On April 21, 2003,  we sold  25,000,000  shares of our common stock,
par value  $0.01,  in a private  placement  at a price of $0.01  per  share.  In
connection with the sale, we also granted the purchaser  25,000,000  warrants to
purchase shares of our common stock at an exercise price of $0.01 per share. The
warrants  had a fair  value of  $298,000  and have  been  recorded  as a cost of
issuance.  The  purchaser  was  William  E.  Fritz,  a  member  of our  Board of
Directors. Proceeds to us from sale of the shares were $250,000. We recognized a
discount expense in general and administrative expenses of approximately $50,000
relating  to this  transaction  with Mr.  Fritz.  On August 6, 2003,  Mr.  Fritz
exercised  his warrants and  purchased  25,000,000  additional  shares of common
stock at a price of $0.01 per share. The shares,  and the shares  underlying the
warrants, are being included for registration hereunder

            On April 17, 2003,  our Board of  Directors  approved the payment in
full of  approximately  $154,000 of liabilities  owed by us to Charles W. Fritz,
our Founder  and  Chairman of the Board of  Directors,  through the  issuance of
15,445,967  shares of common stock. We recognized a discount  expense in general
and   administrative   expenses  of  approximately   $15,000  relating  to  this
transaction  with Mr. Fritz.  These shares are being  included for  registration
hereunder.

            On December 2, 2002, we issued to Michael  Kesselbrenner,  a private
investor,  a  promissory  note in the  principal  amount  of  $165,000,  bearing
interest at a rate of 12% per annum,  with a maturity of 150 days. In connection
with the default  provision  of the  promissory  note,  we entered into a pledge
agreement,  dated December 2, 2002, under which we issued  53,620,020  shares of
common stock to an unrelated third party as collateral for the Promissory  Note.
The investor only funded $84,000 of the principal  amount of the note. We repaid
this note during March 2003, and the shares held in escrow were returned  during
April 2003. We have no further obligation under this note.

            During November 2002, we issued Convertible Secured Promissory Notes
with an aggregate face value of $60,000 to 3 separate parties, including Charles
W. Fritz,  Chairman of the Board of Directors of NeoMedia;  William E. Fritz, an
outside director; and James J. Keil, an outside director. In connection with the
notes,  we granted to the holders an additional  1,355,670  shares of our common
stock and 60,000  warrants to purchase  shares of our common  stock at $0.03 per
share,  with a term of three  years.  The  warrants  and shares  were  issued in
January 2003.  The shares,  and the shares  underlying  the warrants,  are being
included for registration hereunder.


                                      II-2



            In August  2002,  we issued  900,000  shares of common stock to 2150
Western  Court  L.L.C,  the landlord of our Lisle,  Illinois  sales  office,  as
settlement  of a lawsuit  relating to past-due and future  building  rents.  The
shares were valued at $0.03 per share, the market price at the date of issuance.
There were no cash proceeds to NeoMedia in this transaction.

            In June  2002,  we  issued  10,000  shares  of  common  stock  to an
unrelated vendor as an interest payment on past-due accounts payable. There were
no cash proceeds to us in these transactions.

            In February 2002, we issued 19,000,000 shares of our common stock at
a price of $0.17 per share to five individuals and two  institutional  unrelated
parties.  The shares  were issued in exchange  for limited  recourse  promissory
notes maturing at the earlier of i.) 90 days from the date of issuance,  or ii.)
30 days from the date of registration of the shares.  The gross proceeds of such
transaction  will be  approximately  $3,040,000 upon maturity of the notes, as a
purchase price of $0.01 per share,  or $190,000 in aggregate,  was paid in cash.
During  August 2002,  the notes matured  without  payment,  and we  subsequently
cancelled the 19 million  shares issued in connection  with such notes.  We have
accrued a liability in the third  quarter of $190,000  relating to the par value
paid in connection with the issuance of the shares.

            In  February  2002,  we issued  500,000  warrants  to a provider  of
commercial  financing services,  in exchange for interest due to the provider on
past due amounts under our credit agreement.  The shares underlying the warrants
are being included for registration hereunder.

            In  January  2002,  we issued  452,489  shares  of  common  stock to
About.com,  Inc.  The shares were issued upon  conversion  of 452,489  shares of
Series A Convertible  Preferred  Stock issued to About.com,  Inc. as payment for
advertising  expenses  incurred  during 2001. This issuance was made pursuant to
Section 3(a)(9) of the Act.

            In January  2002, we issued 55,000 shares of common stock at a price
of $0.13 per share to an individual  unrelated party.  Cash proceeds to NeoMedia
were

$7,150.

            In January 2002, we issued  1,646,987  shares of common stock to two
unrelated vendors as settlement of past-due accounts payable and future payments
under  equipment  lease  agreements.  There were no cash proceeds to us in these
transactions.

            In March and April  2001,  we issued  316,500  shares of our  common
stock at a price of $3.40  per  share to four  foreign  institutional  unrelated
parties.  The gross proceeds of such transaction were approximately  $1,076,000.
In  connection  with the sale,  we issued as a  commission  50,000  warrants  to
purchase shares of our common stock at an exercise price of $3.56 per share to a
foreign individual.

            In March  2001,  we issued  18,000  shares of our common  stock at a
price of $3.41 per share to a foreign  institutional  unrelated party. The gross
proceeds of such transaction were $61,000.

            In March 2001,  we issued  156,250  shares of our common  stock at a
price of $3.20 per share to a foreign  institutional  unrelated party. The gross
proceeds of such transaction were $500,000.

            In March 2000,  we issued an aggregate  of  1,000,000  shares of our
common  stock at a price of $7.50 per share to 20  foreign  individuals  and one
foreign  institutional  unrelated  party. The gross proceeds of such transaction
were  approximately  $7,500,000.  In  connection  with the sale,  we issued as a
commission  125,000  warrants  to  purchase  shares  of our  common  stock at an
exercise price of $7.50 per share,  125,000  warrants to purchase  shares of our
common stock at an exercise price of $15.00 per share,  and 100,000  warrants to
purchase  shares of our common stock at an exercise  price of $7.20 per share to
the institutional investor and an independent consultant.

            In February  2000,  we issued 39,535 shares of our common stock at a
price of $6.88  per  share to one  individual  and one  institutional  unrelated
party.  In  connection  with the sale,  we also issued  2,500  warrants  with an
exercise price of $12.74 and 1,454 warrants with an exercise price of $9.56. The
gross proceeds of such transaction were approximately $272,000.

            In February  2000,  we issued 50,000 shares of our common stock at a
price of $6.00 per share to an institutional unrelated party. In connection with
the sale, we also issued 2,982  warrants with an exercise  price of $10.06.  The
gross proceeds of such transaction were approximately $300,000.


                                      II-3



            In February  2000,  we issued 37,500 shares of our common stock upon
the exercise of outstanding  warrants at a price of $2.00 per share,  originally
issued in connection  with the  transaction  described  above in March 2002. The
gross proceeds of such transaction were approximately $75,000.

            In January  2000,  we issued an aggregate  of 301,368  shares of our
common stock at a price of $3.75 per share to 14 unrelated  parties,  3 of which
were institutions and 11 of which were  individuals,  of which two were foreign.
In connection with the sale, we also issued an aggregate of 12,570 warrants with
an exercise price of $7.19,  5,400 warrants with an exercise price of $6.44, and
12,167  warrants  with an exercise  price of $7.37.  The gross  proceeds of such
transaction  were  approximately  $1,130,000.  In  connection  with the sale, we
issued as  commissions  9,502  shares of its  common  stock  valued at $7.09 per
share.

            We  relied  upon  the  exemption  provided  in  Section  4(2) of the
Securities  Act and/or  Rule 506  thereunder,  which cover  "transactions  by an
issuer not involving any public  offering," to issue securities  discussed above
without  registration  under the Securities Act of 1933. We made a determination
in each case that the person to whom the securities were issued did not need the
protection that  registration  would afford.  The certificates  representing the
securities  issued displayed a restrictive  legend to prevent transfer except in
compliance  with  applicable  laws, and our transfer agent was instructed not to
permit  transfers  unless  directed to do so by us, after  approval by our legal
counsel.  We believe that the investors to whom  securities were issued had such
knowledge and  experience in financial and business  matters as to be capable of
evaluating the merits and risks of the prospective  investment.  We also believe
that the  investors  had  access  to the same  type of  information  as would be
contained in a registration statement.


                                      II-4


EXHIBITS




EXHIBIT NO.   DESCRIPTION                        LOCATION
-----------   -----------                        --------
                                           
3.1           Articles of Incorporation of       Incorporated by reference to Exhibit 3.1 to
              Dev-Tech Associates, Inc. and      Registrant's Registration Statement No. 333-5534 as
              amendment thereto                  filed with the SEC on November 25, 1996

3.2           Bylaws of DevSys, Inc.             Incorporated by reference to Exhibit 3.2 to
                                                 Registrant's Registration Statement No. 333-5534 as
                                                 filed with the SEC on November 25, 1996

3.3           Restated Certificate of            Incorporated by reference to Exhibit 3.3 to
              Incorporation of DevSys, Inc.      Registrant's Registration Statement No. 333-5534 as
                                                 filed with the SEC on November 25, 1996

3.4           By-laws of DevSys, Inc.            Incorporated by reference to Exhibit 3.4 to
                                                 Registrant's Registration Statement No. 333-5534 as
                                                 filed with the SEC on November 25, 1996

3.5           Articles of Merger and Agreement   Incorporated by reference to Exhibit 3.5 to
              and Plan of Merger of DevSys,      Registrant's Registration Statement No. 333-5534 as
              Inc and Dev-Tech Associates, Inc.  filed with the SEC on November 25, 1996

3.6           Certificate of Merger of           Incorporated by reference to Exhibit 3.6 to
              Dev-Tech Associates, Inc. into     Registrant's Registration Statement No. 333-5534 as
              DevSys, Inc.                       filed with the SEC on November 25, 1996

3.7           Articles of Incorporation of       Incorporated by reference to Exhibit 3.7 to
              Dev-Tech Migration, Inc. and       Registrant's Registration Statement No. 333-5534 as
              amendment thereto                  filed with the SEC on November 25, 1996

3.8           By-laws of Dev-Tech Migration,     Incorporated by reference to Exhibit 3.8 to
              Inc.                               Registrant's  Registration  Statement  No.  333-5534
                                                 as  filed  with  the SEC on November 25, 1996

3.9           Restated Certificate of            Incorporated by reference to Exhibit 3.9 to
              Incorporation of DevSys            Registrant's Registration Statement No. 333-5534 as
              Migration, Inc.                    filed with the SEC on November 25, 1996

3.10          Form of By-laws of DevSys          Incorporated by reference to Exhibit 3.10 to
              Migration, Inc.                    Registrant's Registration Statement No. 333-5534 as
                                                 filed with the SEC on November 25, 1996


                                       II-4



EXHIBITS

EXHIBIT NO.   DESCRIPTION                        LOCATION
-----------   -----------                        --------
                                           
3.11          Form of Agreement and Plan of      Incorporated by reference to Exhibit 3.11 to
              Merger of Dev-Tech Migration,      Registrant's Registration Statement No. 333-5534 as
              Inc. into DevSys Migration, Inc.   filed with the SEC on November 25, 1996

3.12          Form of Certificate of Merger of   Incorporated by reference to Exhibit 3.12 to
              Dev-Tech Migration, Inc. into      Registrant's Registration Statement No. 333-5534 as
              DevSys Migration, Inc.             filed with the SEC on November 25, 1996

3.13          Certificate of Amendment to        Incorporated by reference to Exhibit 3.13 to
              Certificate of Incorporation of    Registrant's Registration Statement No. 333-5534 as
              DevSys, Inc. changing its name     filed with the SEC on November 25, 1996
              to NeoMedia Technologies, Inc.

3.14          Form of Certificate of Amendment   Incorporated by reference to Exhibit 3.14 to
              to Certificate of Incorporation    Registrant's Registration Statement No. 333-5534 as
              of NeoMedia Technologies, Inc.     filed with the SEC on November 25, 1996
              authorizing a reverse stock
              split

3.15          Form of Certificate of Amendment   Incorporated by reference to Exhibit 3.5 to
              to Restated Certificate of         Registrant's Annual Report as filed with the SEC on
              Incorporation of NeoMedia          November 2, 2001
              Technologies, Inc. increasing
              authorized capital and creating
              preferred stock

4.1           Form of Certificate for Common     Incorporated by reference to Exhibit 4.1 to the
              Stock of DevSys, Inc.              Registrant's Registration Statement No. 333-5534 as
                                                 filed with the SEC on November 25, 1996

4.2           Form of Joseph Charles' Warrant    Incorporated by reference to Exhibit 4.2 to the
              Agreement                          Registrant's Registration Statement No. 333-5534 as
                                                 filed with the SEC on November 25, 1996

4.3           Form of Private Placement          Incorporated by reference to Exhibit 4.4 to the
              Financing Converted Securities     Registrant's Registration Statement No. 333-5534 as
              Registration Rights Agreement      filed with the SEC on November 25, 1996

4.4           Form of 10% Unsecured              Incorporated by reference to Exhibit 4.5 to the
              Subordinate Convertible            Registrant's Registration Statement No. 333-5534 as
              Promissory Note                    filed with the SEC on November 25, 1996

4.5           Form of Principal Stockholder's    Incorporated by reference to Exhibit 4.6 to the
              Warrant                            Registrant's Registration Statement No. 333-5534 as
                                                 filed with the SEC on November 25, 1996

4.6           Form of Placement Agent's          Incorporated by reference to Exhibit 4.7 to the
              Registration Rights Agreement      Registrant's Registration Statement No. 333-5534 as
                                                 filed with the SEC on November 25, 1996


                                      II-5





EXHIBIT NO.   DESCRIPTION                        LOCATION
-----------   -----------                        --------
                                           
4.7           Form of Placement Agent's          Incorporated by reference to Exhibit 4.8 to the
              Warrant for the Purchase of        Registrant's Registration Statement No. 333-5534 as
              Shares of Common Stock and         filed with the SEC on November 25, 1996
              Warrants

4.8           Form of Warrant Agreement and      Incorporated by reference to Exhibit 4.9 to the
              Warrant                            Registrant's Registration Statement No. 333-5534 as
                                                 filed with the SEC on November 25, 1996

4.9           NeoMedia Technologies, Inc. 1998   Incorporated by reference to Appendix A to the
              Stock Option Plan                  Registrant's Form 14A as filed with the SEC on
                                                 February 18, 1998

4.10          Form of Warrant to Charles W.      Incorporated by reference to Exhibit 4.10 to the
              Fritz                              Registrant's Registration Statement on Form 10-KSB
                                                 as filed with the SEC on March 31, 1998

4.11          Form of Warrant to Dominick &      Incorporated by reference to Exhibit 4.11 to the
              Dominick, Incorporated             Registrant's Annual Report on Form 10-KSB as filed
                                                 with the SEC on March 31, 1998

4.12          Form of Warrant to Compass         Incorporated by reference to Exhibit 4.12 to the
              Capital LLC                        Registrant's Annual Report on Form 10-KSB as filed
                                                 with the SEC on March 31, 1998

4.13          Form of Warrant to Thornhill       Incorporated by reference to Exhibit 4.13 to the
              Capital, LLC                       Registrant's Annual Report on Form 10-KSB as filed
                                                 with the SEC on March 31, 1998

4.14          Form of Warrant to Southeast       Incorporated by reference to Exhibit 4.14 to the
              Research Partners, Inc.            Registrant's Annual Report on Form 10-KSB as filed
                                                 with the SEC on March 31, 1998

4.15          Form of Warrant to Joseph          Incorporated by reference to Exhibit 4.15 to the
              Charles & Associates, Inc.         Registrant's Annual Report on Form 10-KSB as filed
                                                 with the SEC on March 31, 1998

5             Opinion re:  Legality              *

10.1          Form of "Lock Up" Agreement to     Incorporated by reference to Exhibit 10.1 to the
              be entered into by NeoMedia and    Registrant's Registration Statement No. 333-5534 as
              its Officers, Directors, and       filed with the SEC on November 25, 1996
              Shareholders

10.2          Form of Nonsolicitation and        Incorporated by reference to Exhibit 10.2 to the
              Confidentiality Agreement          Registrant's Registration Statement No. 333-5534 as
                                                 filed with the SEC on November 25, 1996

10.3          Employment Agreement, dated May    Incorporated by reference to Exhibit 10.3 to the
              1, 1996 between Dev-Tech           Registrant's Registration Statement No. 333-5534 as
              Associates, Inc. and Charles W.    filed with the SEC on November 25, 1996
              Fritz



                                      II-6





EXHIBIT NO.   DESCRIPTION                        LOCATION
-----------   -----------                        --------
                                           
10.4          Employment Agreement, dated        Incorporated by reference to Exhibit 10.4 to the
              April 1, 1996 between Dev-Tech     Registrant's Registration Statement No. 333-5534 as
              Associates, Inc. and Robert T.     filed with the SEC on November 25, 1996
              Durst, Jr.

10.5          Employment Agreement, dated May    Incorporated by reference to Exhibit 10.5 to the
              1, 1996, between Dev-Tech          Registrant's Registration Statement No. 333-5534 as
              Associates, Inc. and Charles T.    filed with the SEC on November 25, 1996
              Jensen

10.6          Lease Agreement dated September    Incorporated by reference to Exhibit 10.6 to the
              1, 1994 for 112 South Tryon        Registrant's Registration Statement No. 333-5534 as
              Street, Charlotte, North           filed with the SEC on November 25, 1996
              Carolina

10.7          Lease dated August 29, 1995 for    Incorporated by reference to Exhibit 10.8 to the
              280 Shuman Boulevard,              Registrant's Registration Statement No. 333-5534 as
              Naperville, Illinois               filed with the SEC on November 25, 1996

10.8          Promissory Note, dated as of       Incorporated by reference to Exhibit 10.9 to the
              December 31, 1994, in the          Registrant's Registration Statement No. 333-5534 as
              principal amount of $413,000       filed with the SEC on November 25, 1996
              from Dev-Tech Associates, Inc.
              payable to William E. Fritz

10.9          Promissory Note, dated as of       Incorporated by reference to Exhibit 10.10 to the
              December 31, 1994, in the          Registrant's Registration Statement No. 333-5534 as
              principal amount of $75,000 from   filed with the SEC on November 25, 1996
              Dev-Tech Associates, Inc.
              payable to Dev-Mark, Inc.

10.11         Promissory Note, dated as of       Incorporated by reference to Exhibit 10.12 to the
              December 31, 1994, in the          Registrant's Registration Statement No. 333-5534 as
              principal amount of $90,000 from   filed with the SEC on November 25, 1996
              Dev-Tech Migration, Inc. payable
              to William E. Fritz

10.12         Promissory Note, dated as of       Incorporated by reference to Exhibit 10.13 to the
              December 31, 1994, in the          Registrant's Registration Statement No. 333-5534 as
              principal amount of $10,000 from   filed with the SEC on November 25, 1996
              Dev-Tech Migration, Inc. payable
              to Charles W. Fritz

10.13         Demand Promissory Note, dated as   Incorporated  by reference to Exhibit  10.14 to the
              of December 9, 1994, in the        Registrant's Registration Statement No. 333-5534 as
              principal amount of $500,000       filed with the SEC on November 25, 1996
              from Dev-Tech Migration, Inc.
              payable to Dev-Tech Associates,
              Inc.

10.14         Promissory Note, dated as of       Incorporated by reference to Exhibit 10.15 to the
              December 28, 1995, in the          Registrant's Registration Statement No. 333-5534 as
              principal amount of $450,000       filed with the SEC on November 25, 1996
              from Dev-Tech Migration, Inc.
              payable to Charles W. Fritz

10.15         Promissory Note, dated as of       Incorporated by reference to Exhibit 10.16 to the
              January 2, 1996, in the            Registrant's Registration Statement No. 333-5534 as
              principal amount of $360,000       filed with the SEC on November 25, 1996
              from Dev-Tech Associates, Inc.
              to Dev-Tech Migration, Inc.



                                      II-7





EXHIBIT NO.   DESCRIPTION                        LOCATION
-----------   -----------                        --------
                                           
10.16         Promissory Note, dated as of       Incorporated by reference to Exhibit 10.17 to the
              January 2, 1996, in the            Registrant's Registration Statement No. 333-5534 as
              principal amount of $472,000       filed with the SEC on November 25, 1996
              from William E. Fritz to
              Dev-Tech Associates, Inc.

10.17         Promissory Note, dated as of       Incorporated by reference to Exhibit 10.18 to the
              January 2, 1996, in the            Registrant's Registration Statement No. 333-5534 as
              principal amount of $750,000       filed with the SEC on November 25, 1996
              from Dev-Tech Migration, Inc. to
              Charles W. Fritz

10.18         Promissory Note, dated as of       Incorporated by reference to Exhibit 10.19 to the
              December 31, 1994, in the          Registrant's Registration Statement No. 333-5534 as
              principal amount of $46,748 from   filed with the SEC on November 25, 1996
              Dev-Tech Migration, Inc. to
              Brandon Edenfield

10.19         Promissory Note, dated as of       Incorporated by reference to Exhibit 10.20 to the
              June 19, 1995, in the principal    Registrant's Registration Statement No. 333-5534 as
              amount of $20,000 from Dev-Tech    filed with the SEC on November 25, 1996
              Migration, Inc. to Brandon
              Edenfield

10.20         Security Agreement, dated as of    Incorporated by reference to Exhibit 10.21 to the
              December 9 1994, between           Registrant's Registration Statement No. 333-5534 as
              Dev-Tech Associates, Inc. and      filed with the SEC on November 25, 1996
              Dev-Tech Migration, Inc

10.21         Agreement for Wholesale            Incorporated by reference to Exhibit 10.35 to the
              Financing (Security Agreement),    Registrant's Registration Statement No. 333-5534 as
              dated October 20, 1992, to IBM     filed with the SEC on November 25, 1996
              Credit Corporation from Dev-Tech
              Associates, Inc.

10.22         Guaranty from Gen-Tech, Inc. to    Incorporated by reference to Exhibit 10.36 to the
              IBM Credit Corporation             Registrant's Registration Statement No. 333-5534 as
                                                 filed with the SEC on November 25, 1996

10.23         Guaranty from Dev-Mark, Inc. to    Incorporated by reference to Exhibit 10.37 to the
              IBM Credit Corporation             Registrant's Registration Statement No. 333-5534 as
                                                 filed with the SEC on November 25, 1996

10.24         Amendment to Agreement for         Incorporated by reference to Exhibit 10.38 to the
              Wholesale Financing and Addendum   Registrant's Registration Statement No. 333-5534 as
              to Agreement for Wholesale         filed with the SEC on November 25, 1996
              Financing

10.25         Assignment Agreement, dated        Incorporated by reference to Exhibit 10.39 to the
              September 15, 1994, from           Registrant's Registration Statement No. 333-5534 as
              Dev-Tech Associates, Inc. to IBM   filed with the SEC on November 25, 1996
              Credit Corporation

10.26         Guaranty dated October 20, 1992    Incorporated by reference to Exhibit 10.40 to the
              to IBM Credit Corporation from     Registrant's Registration Statement No. 333-5534 as
              Charles W. Fritz                   filed with the SEC on November 25, 1996



                                      II-8






EXHIBIT NO.   DESCRIPTION                        LOCATION
-----------   -----------                        --------
                                           

10.27         Collateralized Guaranty, dated     Incorporated by reference to Exhibit 10.41 to the
              August 16, 1994, to IBM Credit     Registrant's Registration Statement No. 333-5534 as
              Corporation from Charles W.        filed with the SEC on November 25, 1996
              Fritz, as Guarantor

10.28         Collateralized Guaranty, dated     Incorporated by reference to Exhibit 10.42 to the
              August 16, 1994, to IBM Credit     Registrant's Registration Statement No. 333-5534 as
              Corporation from Dev-Mark, Inc.    filed with the SEC on November 25, 1996

10.29         Dev-Tech Associates, Inc. Annual   Incorporated by reference to Exhibit 10.43 to the
              Incentive Plan for Management      Registrant's Registration Statement No. 333-5534 as
                                                 filed with the SEC on November 25, 1996

10.30         Dev-Tech Associates, Inc. 1996     Incorporated by reference to Exhibit 10.44 to the
              Stock Option Plan                  Registrant's Registration Statement No. 333-5534 as
                                                 filed with the SEC on November 25, 1996

10.31         First Amendment and Restatement    Incorporated by reference to Exhibit 10.45 to the
              of Dev-Tech Associates, Inc.       Registrant's Registration Statement No. 333-5534 as
              1996 Stock Option Plan             filed with the SEC on November 25, 1996

10.32         Form of Stock Option Agreement -   Incorporated by reference to Exhibit 10.46 to the
              Dev-Tech Associates, Inc.          Registrant's Registration Statement No. 333-5534 as
                                                 filed with the SEC on November 25, 1996

10.33         Dev-Tech Migration, Inc. 1996      Incorporated by reference to Exhibit 10.47 to the
              Stock Option Plan                  Registrant's Registration Statement No. 333-5534 as
                                                 filed with the SEC on November 25, 1996

10.34         First Amendment and Restatement    Incorporated by reference to Exhibit 10.48 to the
              of Dev-Tech Migration, Inc.        Registrant's Registration Statement No. 333-5534 as
                                                 filed with the SEC on November 25, 1996

10.35         Form of Stock Option Agreement -   Incorporated by reference to Exhibit 10.49 to the
              Dev-Tech Migration, Inc.           Registrant's Registration Statement No. 333-5534 as
                                                 filed with the SEC on November 25, 1996

10.36         Dev-Tech Associates, Inc. 401(k)   Incorporated by reference to Exhibit 10.50 to the
              Plan and amendments                Registrant's Registration Statement No. 333-5534 as
                                                 filed with the SEC on November 25, 1996

10.37         Engagement Letter, dated March     Incorporated by reference to Exhibit 10.51 to the
              13, 1995, with Compass Capital,    Registrant's Registration Statement No. 333-5534 as
              Inc. and Amendments thereto        filed with the SEC on November 25, 1996



                                      II-9





EXHIBIT NO.   DESCRIPTION                        LOCATION
-----------   -----------                        --------
                                           
10.38         Mutual General Release and Stock   Incorporated by reference to Exhibit 10.52 to the
              Purchase Agreement with the        Registrant's Registration Statement No. 333-5534 as
              Estate of Thomas Ruberry           filed with the SEC on November 25, 1996

10.39         Form of "Lock-Up" Agreement with   Incorporated by reference to Exhibit 10.53 to the
              Bridge Financing Selling           Registrant's Registration Statement No. 333-5534 as

              Stockholders and Form of           filed with the SEC on November 25, 1996
              Addendum to Subscription
              Agreement

10.40         Forms of Agreements Not to Sell    Incorporated by reference to Exhibit 10.58 to the
                                                 Registrant's Registration Statement No. 333-5534 as
                                                 filed with the SEC on November 25, 1996

10.41         Letter of Intent dated October     Incorporated by reference to Exhibit 10.59 to the
              11, 1996 between NeoMedia          Registrant's Registration Statement No. 333-5534 as
              Technologies, Inc. and E-Stamp     filed with the SEC on November 25, 1996
              Corporation

10.42         First Amendment and Restatement    Incorporated by reference to Exhibit 10.60 to the
              of NeoMedia Technologies, Inc.     Registrant's Registration Statement No. 333-5534 as
              1996 Stock Option Plan             filed with the SEC on November 25, 1996

10.43         Agreement of Lease, dated          Incorporated  by reference to Exhibit  10.43 to the
              November 27, 1996, between First   Registrant's Annual Report on Form 10-KSB as filed
              Union National Bank of Florida     with the SEC on March 27, 1997
              and NeoMedia Technologies, Inc.

10.44         Sublease Agreement between         Incorporated by reference to Exhibit 10.44 to the
              NeoMedia Technologies, Inc. and    Registrant's Annual Report on Form 10-KSB as filed
              Lancaster Annuity Services         with the SEC on March 27, 1997
              Company dated November 8, 1996

10.45         Agreement for Sale of Assets       Incorporated by reference to Exhibit 10.45 to the
              between Basic Developments, Inc.   Registrant's Annual Report on Form 10-KSB as filed
              and Meja Sistemas C.A. and         with the SEC on March 27, 1997
              NeoMedia Technologies, dated
              February 12, 1997

10.46         Master Lease between William E.    Incorporated by reference to Exhibit 10.46 to the
              Fritz and NeoMedia Technologies,   Registrant's Annual Report on Form 10-KSB as filed
              Inc., dated November 6, 1996       with the SEC on March 27, 1997

10.47         Agreement for Wholesale            Incorporated by reference to Exhibit 10.47 to the
              Financing, dated February 20,      Registrant's Annual  Report on Form 10-KSB as filed
              1997,  between  IBM Credit         with the SEC on March 27, 1997
              Corporation  and
              NeoMedia Technologies, Inc.

10.48         Collateralized Guaranty, dated     Incorporated  by reference to Exhibit 10.48 to the
              February 20, 1997,  between IBM    Registrant's  Annual Report on Form 10-KSB as filed
              Credit Corporation and NeoMedia    with the SEC on March 27, 1997
              Technologies, Inc.

10.49         Lease by and between American      Incorporated by reference to Exhibit 10.50 to the
              National Bank and Trust Company    Registrant's Quarterly Report on Form 10-QSB as
              of Chicago and NeoMedia            filed with the SEC on March 31, 1997
              Technologies, Inc., February 25,
              1997



                                      II-10




EXHIBITS

EXHIBIT NO.   DESCRIPTION                        LOCATION
-----------   -----------                        --------
                                           

10.50         Letter Agreement by and between    Incorporated by reference to Exhibit 10.51 to the
              Dominick & Dominick,               Registrant's Quarterly Report on Form 10-QSB as
              Incorporated and NeoMedia          filed with the SEC on June 30, 1997
              Technologies, Inc. dated March
              20, 1997

10.51         Stock Purchase Agreement dated     Incorporated by reference to Exhibit 99.1 to the
              August 30, 1997 by and between     Registrant's Current Report on Form 8-K as filed
              NeoMedia Technologies, Inc. and    with the SEC on September 25, 1997
              George Luntz and Gerald L. Willis

10.52         Registration Rights Agreement      Incorporated by reference to Exhibit 99.2 to the
              dated September 25, 1997 by and    Registrant's Current Report on Form 8-K as filed
              between NeoMedia Technologies,     with the SEC on September 25, 1997
              Inc., Gerald L. Willis and
              George G. Luntz

10.53         Consulting Agreement dated         Incorporated by reference to Exhibit 99.3 to the
              August 30, 1997 by and between     Registrant's Current Report on Form 8-K as filed
              NeoMedia Technologies, Inc. and    with the SEC on September 25, 1997
              George Luntz

10.54         Employment Agreement dated         Incorporated by reference to Exhibit 99.4 to the
              August 30, 1997 by and between     Registrant's Current Report on Form 8-K as filed
              NeoMedia Technologies, Inc. and    with the SEC on September 25, 1997
              George Luntz

10.55         Termination of Collaterized        Incorporated by reference to Exhibit 10.49 to the
              Guaranty between IBM Credit        Registrant's Annual Report on Form 10-KSB as filed
              Corporation, Gen-Tech, Inc. and    with the SEC on March 27, 1997
              Dev-Mark, Inc., dated February
              5, 1997

10.56         Purchase Agreement dated           Incorporated by reference to Exhibit 10.30 to the
              December 31, 1998, by and          Registrant's Annual Report on Form 10-KSB as filed
              between NeoMedia Technologies,     with the SEC on April 15, 1999
              Inc. and Solar Communications,
              Inc.

10.57         NeoMedia Technologies, Inc. 1998   Incorporated by reference to Appendix A of the
              Stock Option Plan                  Registrant's Form 14A as filed with the SEC on
                                                 February 18, 1998

10.58         Amendment to NeoMedia              Incorporated by reference to Form 14A as filed with
              Technologies 1998 Stock Option     the SEC on July 2, 1999
              Plan

10.59         Employment Agreement dated         Incorporated by reference to Exhibit 10.32 to the
              August 2, 1999 between NeoMedia    Registrant's Annual Report on Form 10-KSB as filed
              Technologies, Inc. and William     with the SEC on March 30, 2000
              Goins

10.60         Licensing Agreement between        Incorporated by reference to Exhibit 10.1 to the
              Digital Convergence Corporation    Registrant's Quarterly Report on Form 10-QSB as
              and NeoMedia Technologies, Inc.    filed with the SEC on October 30, 2000

10.61         Sale and Purchase Agreement        Incorporated by reference to Exhibit 10.48 to the
              between Qode.com, Inc. and         Registrant's Current Report on Form 8-K as filed
              NeoMedia Technologies, Inc.        with the SEC on March 15, 2001

10.62         Warrant repricing letter dated     Incorporated by reference to Exhibit 1.2 to the
              March 19, 2002                     Registrant's Current Report on Form 8-K as filed
                                                 with the SEC on April 2, 2002

10.63         Option repricing letter dated      Incorporated by reference to Exhibit 1.2 to the
              April 3, 2002                      Registrant's Current Report on Form 8-K as filed
                                                 with the SEC on April 15, 2002



                                      II-11




EXHIBITS

EXHIBIT NO.   DESCRIPTION                        LOCATION
-----------   -----------                        --------
                                           

10.64         Intellectual Property licensing    Incorporated by reference to Exhibit 10.18 to the
              agreement between NeoMedia and     Registrant's Form S-1/A as filed with the SEC on
              A.T. Cross Company                 April 24, 2002

10.65         Intellectual Property licensing    Incorporated by reference to Exhibit 10.19 to the
              agreement between NeoMedia and     Registrant's Form S-1/A as filed with the SEC on
              Symbol Technologies, Inc.          April 24, 2002

10.66         Sponsorship and Advertising        Incorporated by reference to Exhibit 10.20 to the
              Agreement between NeoMedia and     Registrant's Form S-1/A as filed with the SEC on
              About.com, Inc.                    April 24, 2002

10.67         Letter of Intent regarding         Incorporated by reference to Exhibit 10.21 to the
              proposed strategic transaction     Registrant's Form S-1/A as filed with the SEC on
              between NeoMedia and AirClic,      April 24, 2002
              Inc.

10.68         Form of Promissory Note issued     Incorporated by reference to Exhibit 10.22 to the
              to AirClic, Inc.                   Registrant's Form S-1/A as filed with the SEC on
                                                 April 24, 2002

10.69         Form of Limited  Recourse          Incorporated  by reference to Exhibit 10.23 to the
              Promissory Note issued in          Registrant's Form S-1/A as filed with the SEC on
              exchange for 19 Million Shares     April 24, 2002 of Common Stock

10.70         Nasdaq Staff  Determination        Incorporated  by reference to Exhibit 10.24 to the
              Letter with respect to             Registrant's Form S-1/A as filed with the SEC on
              de-listing of NeoMedia             April 24, 2002 securities from the Nasdaq SmallCap market

10.71         Revised warrant repricing letter   Incorporated by reference to Exhibit 10.25 to the
              dated April 3, 2002                Registrant's Form S-1/A as filed with the SEC on
                                                 April 24, 2002

10.72         Equity Line of Credit Agreement,   Incorporated  by  reference  to Exhibit  10.17 to the
              dated May 6, 2002,  between        Registrant's  Quarterly  Report on Form 10-Q as filed
              NeoMedia  Technologies  and        with the SEC on August  14,  2002
              Cornell Capital Partners, LP

10.73         License Agreement, dated October   Incorporated  by reference to Exhibit  10.1 to the
              18, 2000, between Digital          Registrants Form 10-QSB as filed on October 30, 2000
              Convergence Corporation and
              NeoMedia

10.74         Nasdaq Staff delisting             Incorporated by reference to Exhibit 10.18 to the
              notification letter dated May      Registrant's Quarterly Report on Form 10-Q as filed
              16, 2002                           with the SEC on August 14, 2002

10.75         Settlement Agreement relating to   Incorporated by reference to Exhibit 10.19 to
              the wrongful termination lawsuit   Registrant's Form 10-Q as filed with the SEC on
              brought by former president and    August 14,  2002
              Chief Operating Officer

10.76         Mutual settlement agreement by     Incorporated by reference to Exhibit 10.20 to the
              and between NeoMedia               Registrants Form 10-Q as filed on November 14, 2002
              Technologies and 2150 Western
              Court Company, LLC

10.77         Mutual settlement agreement by     Incorporated by reference to Exhibit 10.21 to the
              and between NeoMedia               Registrants Form 10-Q as filed on November 14, 2002
              Technologies and Ripfire, Inc.



                                      II-12



EXHIBITS

EXHIBIT NO.   DESCRIPTION                        LOCATION
-----------   -----------                        --------
                                           

10.78         Mutual settlement agreement by     Incorporated by reference to Exhibit 10.22 to the
              and between NeoMedia               Registrants Form 10-Q as filed on November 14, 2002
              Technologies and Wachovia Bank,
              N.A.

10.79         Mutual settlement agreement by     Incorporated by reference to Exhibit 10.23 to the
              and between NeoMedia               Registrants Form 10-Q as filed on November 14, 2002
              Technologies and Marianne LePera,
              NeoMedia Technologies' former
              General Counsel

10.80         Revised  Equity Line of Credit     Incorporated  by reference to Exhibit  10.80 to the
              Agreement,  dated  February 11,    Registrants  Form S-1/A as filed on February  14,  2003
              2003,  between  NeoMedia
              Technologies  and Cornell
              Capital Partners LP

10.81         Sponsorship  and Advertising       Incorporated  by  reference  to Exhibit  23.7 to the
              Agreement,  dated May 23, 2001,    Registrants Form S-1/A as filed on November 16, 2001
              between About.com and NeoMedia

10.82         Promissory Note dated December     Incorporated by reference to Exhibit 99.1 of the
              2, 2002 between Michael            Registrant's Form 8-K as filed with the SEC on
              Kesselbrenner and NeoMedia         December 12, 2002.

10.83         Pledge Agreement dated December    Incorporated by reference to Exhibit 99.2 of the
              2, 2002,  between  Michael         Registrant's Form 8-K as filed with the SEC on
              Kesselbrenner and NeoMedia         December 12, 2002.

10.84         Form of Placement Agent            Incorporated  by  reference to Exhibit  10.84 to the
              Agreement, dated November 2002,    Registrant's Form S-1 as filed on February 12, 2003
              between NeoMedia Technologies
              and Westrock Advisors, Inc.

10.85         Form of Escrow Agreement, dated    Incorporated by reference to Exhibit 10.85 to the
              November 2002,  between NeoMedia   Registrant's Form S-1 as filed on February 12, 2003
              Technologies and Cornell
              Capital Partners

10.86         Form of  Registration  Rights      Incorporated  by reference to Exhibit 10.86 to the
              Agreement,  dated  November 2002,  Registrant's Form S-1 as filed on February 12, 2003
              between NeoMedia Technologies and
              Cornell Capital Partners

10.87         Promissory Note, dated February    Incorporated  by reference to Exhibit  10.87 to the
              23,  2001,  between  Digital       Registrant's Form S-1 as filed on February 12, 2003
              Convergence Corporation and
              NeoMedia

10.88         Termination Agreement, dated       Incorporated by reference to Exhibit 10.88 to the
              August 21, 2001, between           Registrant's Form S-1 as filed on February 12, 2003
              About.com and NeoMedia

10.89         Memorandum  of Terms to merge,     Incorporated  by  reference  to  Exhibit  3.1 to the dated
              March 7,  2003,  between           Registrant's Form 8-K as filed on March 19, 2003
              NeoMedia and Loch Energy, Inc.

10.89         Binding  Letter of  Intent to      Incorporated  by  reference  to  Exhibit  99.5 to the
              merge,  dated  July 25,  2003,     Registrant's Form 10-QSB as filed on August 14, 2003
              between NeoMedia and Secure
              Source Technologies, Inc.

10.90         Definitive  Merger  Agreement,     Incorporated  by  reference to Exhibit  99.1 to the
              dated  October 3, 2003,  between   Registrant's Form 8-K as filed on October 8, 2003
              NeoMedia and Secure Source
              Technologies, Inc



                                      II-13




EXHIBITS

EXHIBIT NO.   DESCRIPTION                        LOCATION
-----------   -----------                        --------
                                           
10.91         Standby Equity Distribution        Filed Herewith
              Agreement, dated October 27,
              2003, between NeoMedia and

              Cornell Capital Partners, LP

10.92         Form of Placement Agent            Filed Herewith
              Agreement, dated October 27,
              2003, between NeoMedia and
              Newbridge Securities Corporation

10.93         Form of Registration Rights        Filed Herewith
              Agreement, dated October 27,
              2003, between NeoMedia and

              Cornell Capital Partners, LP

10.94         Form of Escrow Agreement, dated    Filed Herewith
              October 27, 2003, between
              NeoMedia and Cornell Capital
              Partners, LP

10.95         2003 Stock Compensation Plan       Incorporated by reference to Exhibit 4.1 to the
                                                 Registrant's Form S-8 as filed on October 31, 2003

10.96         Letter of Intent to acquire CSI    Incorporated by reference to Exhibit 3.1 to the
              International, Inc., dated         Registrant's Form 8-K as filed on November 13, 2003
              November 8, 2003

10.97         Letter of Intent to acquire BSD    Incorporated by reference to Exhibit 3.1 to the
              Software, Inc., dated December     Registrant's Form 8-K as filed on December 11, 2003
              9, 2003

21.0          Subsidiaries                       Provided Herewith

23.1          Consent of Stonefield Josephson,   Provided Herewith
              Inc.

23.2          Consent of Kirkpatrick &           Incorporated by reference to Exhibit 5 of this
              Lockhart, LLP                      filing


*     Included in the SB-2 filed with the Commission on November 7, 2003. II-14




UNDERTAKINGS

      The undersigned registrant hereby undertakes:

            (1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:

                  (i) Include any prospectus required by Sections 10(a)(3) of
the Securities Act of 1933 (the "Act");

                  (ii) Reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement;

                  (iii) Include any additional or changed material information
on the plan of distribution;

      (2) That, for the purpose of determining any liability under the Act, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the bona fide offering thereof.

      (3) To remove from registration by means of a post-effective amendment any
of the securities that remain unsold at the end of the offering.

      Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.


                                     II-15



                                   SIGNATURES

      In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on our behalf by the undersigned, on December 17, 2003.



                                NEOMEDIA TECHNOLOGIES, INC.

                                By: /s/ Charles T. Jensen
                                    -------------------------
                                    Charles T. Jensen
                                    President, Chief Operating Officer,
                                    Acting Chief Executive Officer and Director


      Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.



SIGNATURES                                                 TITLE                                                   DATE
----------                                                 -----                                                   ----
                                                                                                             
/s/ Charles T. Jensen                                      President, Chief Executive Officer,
------------------------------------
Charles T. Jensen                                          Chief Operating Officer and Director                    December 17, 2003


/s/ William E. Fritz                                       Director and Secretary                                  December 17, 2003
------------------------------------
William E. Fritz


/s/ Charles W. Fritz                                       Chairman of the Board
------------------------------------
Charles W. Fritz                                                                                                   December 17, 2003


/s/ David A. Dodge                                         Vice-President, Chief Financial
------------------------------------
David A. Dodge                                             Officer and Controller                                  December 17, 2003


/s/ Hayes Barclay                                          Director                                                December 17, 2003
------------------------------------
Hayes Barclay


/s/ James J. Keil                                          Director                                                December 17, 2003
------------------------------------
James J. Keil


                                     II-16