As filed with the Securities and Exchange Commission on December 20, 2002

                                                  SEC Registration No. _________
================================================================================
                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM S-1
             REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

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

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

                              With copies to:

                           Clayton E. Parker, Esq.
                          Kirkpatrick & Lockhart LLP
                      201 S. Biscayne Blvd., Suite 2000
                               Miami, FL 33131
                         Telephone No. (305) 539-3305
                        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.  |_|

                                 CALCULATION OF REGISTRATION FEE


======================================================================================================
                                                               PROPOSED      PROPOSED
                                                                MAXIMUM       MAXIMUM
                                                               OFFERING      AGGREGATE    AMOUNT OF
        TITLE OF EACH CLASS OF             AMOUNT TO BE          PRICE       OFFERING    REGISTRATION
     SECURITIES TO BE REGISTERED            REGISTERED       PER SHARE (1)   PRICE (1)       FEE
------------------------------------------------------------------------------------------------------
                                                                              
Common stock, par value $0.01 per
share                                  113,408,376 shares        $0.02     $2,268,167.52  $208.67
------------------------------------------------------------------------------------------------------
TOTAL                                  113,408,376 shares        $0.02     $2,268,167.52  $208.67
======================================================================================================

(1)  In accordance  with  Rule 457(c),  the price  represents  the  average  of  the  high and low sale
     prices of the  registrant's  common stock on  December 16, 2002, on the Over-the-Counter  Bulletin
     Board.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION  STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO
DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES
THAT THIS REGISTRATION  STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION  STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS
THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.





                                  Subject to Completion, dated December __, 2002


                                   PROSPECTUS

                           NEOMEDIA TECHNOLOGIES, INC.

                       113,408,376 SHARES OF COMMON STOCK

        This  prospectus  relates  to the sale of up to  113,408,376  shares  of
NeoMedia's  common  stock by persons who are, or will  become,  stockholders  of
NeoMedia.  Please refer to "Selling Shareholders" beginning on page 16. NeoMedia
will  receive  proceeds  from the sale of common  stock under the Equity Line of
Credit and from the proceeds  from the  exercise of the  warrants for  1,904,900
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 3, 2002,  the last  reported  sale price of our common stock on the OTC
Bulletin Board was $0.04 per share.

        The selling stockholders consist of:

        o    Cornell  Capital  Partners,  L.P.,  which  intends  to  sell  up to
             102,000,000 shares of common stock.

        o    Other  selling  stockholders,  who intend to sell up to  11,408,376
             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
Equity Line of Credit Agreement.  Cornell Capital Partners will pay NeoMedia 98%
of the market  price of our common  stock.  NeoMedia  has paid  Cornell  Capital
Partners a one-time  commitment  fee of  2,000,000  shares of common  stock.  In
addition,  Cornell  Capital  Partners is  entitled to retain 5% of each  advance
under the Equity Line of Credit.  The 2% discount,  the one-time  commitment fee
and the 5% retention are underwriting discounts.

        NeoMedia has engaged Westrock Advisors, Inc., an unaffiliated registered
broker-dealer,  to advise  us in  connection  with the  Equity  Line of  Credit.
Westrock  Advisors,  Inc. was paid a fee of 62,500 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 3, 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 __, 2002.



                                TABLE OF CONTENTS
                                                                        PAGE NO.

PROSPECTUS SUMMARY...........................................................1
RISK FACTORS.................................................................3
FORWARD-LOOKING STATEMENTS..................................................14
SELLING STOCKHOLDERS........................................................15
USE OF PROCEEDS.............................................................17
DILUTION....................................................................18
DIVIDEND POLICY.............................................................19
SELECTED CONSOLIDATED FINANCIAL DATA........................................20
SUPPLEMENTARY QUARTERLY FINANCIAL DATA......................................21
CAPITALIZATION..............................................................22
EQUITY LINE OF CREDIT.......................................................23
PLAN OF DISTRIBUTION........................................................24
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...................26
DESCRIPTION OF BUSINESS.....................................................37
MANAGEMENT..................................................................43
AUDIT COMMITTEE REPORT......................................................46
EXECUTIVE COMPENSATION......................................................47
OPTION GRANTS IN LAST FISCAL YEAR...........................................48
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
 YEAR-END OPTIONS VALUES....................................................48
LEGAL PROCEEDINGS...........................................................51
PRINCIPAL STOCKHOLDERS......................................................54
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................56
COMPARATIVE STOCK PERFORMANCE...............................................57
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
 EQUITY AND OTHER STOCKHOLDER MATTERS.......................................58
DESCRIPTION OF SECURITIES...................................................64
LEGAL MATTERS...............................................................68
EXPERTS.....................................................................68
HOW TO GET MORE INFORMATION.................................................69
INDEX OF FINANCIAL STATEMENTS................................................1
PART II INFORMATION NOT REQUIRED IN PROSPECTUS...............................1


We intend to distribute to our  shareholders  annual  reports  containing  audit
financial  statements.  Our  audited  financial  statements  for the fiscal year
December 31, 2001, were contained in our Annual Report on Form 10-K.

                                       i



                               PROSPECTUS SUMMARY

                                    OVERVIEW

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

        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,   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.

                                    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 102,000,000
             shares of common stock.

        o    Other  selling  stockholders,  who intend to sell up to  11,408,376
             shares of common stock.

        Pursuant  to the  Equity  Line of  Credit,  we may,  at our  discretion,
periodically  issue and sell to Cornell Capital  Partners shares of common stock
for a total  purchase  price of $10  million.  For each  share of  common  stock
purchased under the Equity Line of Credit, 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 $150,000 per advance, with
a minimum of six trading days between  advances.  In addition,  Cornell  Capital
Partners will retain 5% of each advance under the Equity Line of Credit. Cornell
Capital  Partners  received  2,000,000  shares  of  common  stock as a  one-time
commitment  fee in connection  with the Equity Line of Credit.  Cornell  Capital
Partners intends to sell any shares purchased under the Equity Line of Credit at
the then prevailing market price.  This prospectus  relates to the shares of our
common stock to be issued under the Equity Line of Credit,  as well as shares of
common stock  issued as a commitment  fee pursuant to the Equity Line of Credit,
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  Westrock  Advisors,  Inc., an  unaffiliated  registered
broker-dealer,  to advise  us in  connection  with the  Equity  Line of  Credit.
Westrock Advisors, Inc. was paid a fee of 62,500 shares of our common stock.


COMMON STOCK OFFERED                     113,408,376 shares

OFFERING PRICE                           Market Price

COMMON STOCK OUTSTANDING                 25,391,298 shares
 PRIOR TO THIS OFFERING(1)

USE OF PROCEEDS                          The  shares  of  common  stock  offered
                                         pursuant to this prospectus are offered
                                         by the Selling  Stockholders  listed on
                                         page  16.  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
                                         Equity  Line of  Credit,  which will be
                                         used for general working  capital.  See
                                         "Use of Proceeds."

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  8,755,219  and
        7,705,090  shares of common stock,  respectively,  and up to 100,000,000
        shares of common  stock to be issued  under the  Equity  Line of Credit.
        Outstanding  shares of common stock  excludes  53,620,023  shares issued
        into escrow on December 2, 2002,  as  collateral  for a note  payable by
        NeoMedia to an unrelated  investor.  The shares are restricted,  and the
        note  holder  does not  have  title to the  securities  unless  NeoMedia
        defaults  on the note,  which  matures  on May 1,  2003.  The shares are
        therefore not deemed to be outstanding.

                                       2



                                  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 CURRENTLY  PENDING LEGAL ACTIONS WHICH THREATEN TO DIVEST US OF CRITICAL
INTELLECTUAL PROPERTY

        On September 6, 2001,  AirClic filed suit against  NeoMedia in the Court
of Common Pleas, Montgomery County,  Pennsylvania,  seeking, among other things,
the  accelerated  repayment of a $500,000 loan it advanced to NeoMedia under the
terms of a letter of intent  entered  into  between  AirClic and  NeoMedia.  The
letter of intent was subsequently  abandoned on the basis of NeoMedia's  alleged
breach of certain  representations  in the promissory  note issued to AirClic in
respect of such  advance.  The note issued by  NeoMedia in respect of  AirClic's
$500,000  advance  is  secured  by  substantially  all of  NeoMedia's  property,
including our core physical world-to-Internet  technologies. If we are deemed to
have defaulted under such note, and do not pay the judgment,  AirClic,  which is
one of our key competitors,  could acquire NeoMedia's core intellectual property
and other  assets,  which could force us to reduce or cease  operations.  We are
vigorously  defending  this  claim  and have  interposed  counterclaims  against
AirClic.  As of the date of this filing,  pleadings  were closed and the parties
have  engaged in written  discovery.  Whether or not  AirClic is  successful  in
asserting its claims that we breached certain  representations made by us in the
note,  the note became due and payable in  accordance  with its terms on January
11, 2002. Based on the cash currently available to NeoMedia, payment of the note
and  related  interest  would  have a  material  adverse  effect  on  NeoMedia's
financial condition.  If we fail to pay such note, AirClic could proceed against
our  intellectual  property and other assets securing the note which could force
us to reduce or cease operations.

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
$6,502,000 in the nine months ended September 30, 2002,  $25,469,000 in the year
ended  December 31,  2001,  $5,409,000  in the year ended  December 31, 2000 and
$10,472,000  in the year ended December 31, 1999.  Our  accumulated  losses were
approximately  $69,845,000 as of September 30, 2002,  $63,344,000 as of December
31, 2001 and  $37,875,000  as of December  31,  2000.  We had a working  capital
(deficit) of approximately  $(8,208,000) as September 30, 2002,  $(5,163,000) as
of  December  31,  2001  and   $8,426,000  as  of  December  31,  2000.  We  had
stockholders'  equity of  $(5,183,000),  $(263,000) and $19,110,000 at September
30,  2002,  December  31, 2001 and  December  2000,  respectively.  We generated
revenues of $8,452,000 for the nine months ended September 30, 2002,  $8,142,000
for the year ended December 31, 2001 and $27,565,000 for the year ended December
31, 2000.  In  addition,  we recorded  negative  cash flows from  operations  of
($669,000) during the nine months ended September 30, 2002, ($5,202,000) for the
year ended  December 31, 2001 and  ($6,775,000)  for the year ended December 31,
2000,  respectively.  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 May 6, 2002, we entered into an Equity Line of Credit  Agreement with
Cornell  Capital  Partners L.P. The agreement was terminated and a new agreement
was entered into on November 11, 2002. Under the terms of the revised agreement,
Cornell has agreed to purchase up to $10.0 million of NeoMedia common stock over
the next two years at NeoMedia's discretion. The maximum amount of each purchase
is $150,000,  with a minimum of seven days between purchases.  For each share of
common stock purchased under the Equity Line of Credit, Cornell Capital 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 of purchase by
NeoMedia.  We will pay 5% of the gross  proceeds  of each  purchase  to  Cornell
Capital  as a  commission.  According  to the  terms of the  revised  agreement,
NeoMedia  cannot draw on the Equity Line of Credit  until the shares  underlying

                                       3



the agreement are registered for with  Securities  and Exchange  Commission.  We
have not  secured  any  other  financing  as of the date of this  filing to fund
operations.

        Our cash balance as of September  30, 2002,  was  approximately  $9,000.
Based on current cash  balances and operating  budgets,  we believe we only have
enough  operating  capital to last the next 30 days. If our financial  resources
are  insufficient,  we may be forced to seek protection from our creditors under
the United States Bankruptcy Code or analogous state statutes unless we are 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, the type of any future financing, if available, or whether we will be
successful  in  identifying  entities  with which we may  consummate a merger or
other corporate finance transactions.

        On December 2, 2002, we issued to 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. We will pay an administrative fee of $16,500
and legal fees of $10,000 relating to the issuance of the note, resulting in net
proceeds to us of  $138,500.  In the event we default on the note,  the investor
will  receive   sufficient  stock  to  comprise  a  non-dilutable   51%  of  our
fully-diluted  common  stock.  In connection  with the default  provision of the
note, we entered into a Pledge  Agreement under which we have issued  53,620,020
shares to an unrelated  third party as collateral  for the note. In the event of
default,  the third  party will issue the shares to the  investor,  and we would
issue additional shares as required to increase the investor's  ownership to 51%
of our fully-diluted outstanding shares at the time of default.

        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 our Board of Directors;  William E. Fritz, outside
director of NeoMedia; and James J. Keil, outside director of NeoMedia. The notes
bear  interest  at a rate of 15% per annum,  and  mature at the  earlier of four
months,  or that date the shares of common stock  underlying  the Equity Line of
Credit are registered with the Securities and Exchange Commission. The notes are
convertible,  at the  option  of the  holder,  into  either  cash or  shares  of
NeoMedia's  common  stock at a 30%  discount to the market price upon either the
closing date or the  conversion  date,  whichever is lower.  NeoMedia  will also
grant to the holders an  additional  192,000  shares of common  stock and 60,000
warrants to purchase shares of NeoMedia's  common stock at $0.03 per share, with
a term of three years. In the event NeoMedia defaults on the note, we will issue
an  additional  1,404,330  shares of our common stock to the note  holders.  The
notes are secured by our intellectual  property,  which is subject to first lien
by AirClic, Inc.

        Over the next two  years,  we  anticipate  that in  addition  to the $10
million  available to us under the Equity Line of Credit,  we will need to raise
additional  capital to fund our  anticipated  operating  expenses.  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
through  December 31, 2002. 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 year ended
December 31, 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. The report of Arthur Andersen LLP, our former independent auditors,
with respect to our  financial  statements  and the related  notes for the years
ended December 21, 2000 and 1999,  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.

                                       4



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 12 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.

OUR SHARES HAVE BEEN 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;

                                       5



        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.

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. We can provide no
assurance that:

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

                                       6



        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 and nine months ended  September 30, 2002 and the years
ended  December  31,  2001  and  2000,  we  derived  96%,  96%,  93%,  and  69%,
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.  We can provide no assurance
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

        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,  2002,  approximately  33% 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.

                                       7



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 Executive
Officer and Chief  Operating  Officer.  The loss of the  services of Mr.  Jensen
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.

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 five patents for our physical
world-to-Internet  technology.  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  maintain  product  liability
insurance up to $1 million per occurrence.  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.

                                       8



        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.  We are currently a party to a Credit  Agreement with
Bank One,  which  restricts  our  ability to pay  dividends.  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.

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.

                                       9



                         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.

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

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

                                       10



        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.

        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

                                       11



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.

EXISTING  SHAREHOLDERS  WILL  EXPERIENCE  SIGNIFICANT  DILUTION FROM OUR SALE OF
SHARES UNDER THE EQUITY LINE OF CREDIT AND THE SALE OF CONVERTIBLE DEBENTURES

        The sale of shares pursuant to the conversion of debentures and pursuant
to the Equity Line of Credit 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, the lower our stock
price is the more shares of common  stock we will have to issue under the Equity
Line of Credit to draw down the full amount.  If our stock price is lower,  then
our existing stockholders would experience greater dilution.  For example, if we
assume that we will issue  100,000,000  shares of common  stock under the Equity
Line of Credit at an assumed offering price of $0.04  (approximately  91% of our
lowest  closing bid price for the five  trading  days before  December 3, 2002),
then new shareholders would experience dilution of $0.0717 per share.

                         RISKS SPECIFIC TO THIS OFFERING

        In addition,  as of December 1, 2002,  we have  outstanding  options and
warrants to purchase up to an aggregate 16,460,309 shares of common stock. Up to
an additional  100,000,000 shares of common stock may be issued under the Equity
Line of Credit.

THE  INVESTOR   UNDER  THE  EQUITY  LINE  OF  CREDIT  WILL  PAY  LESS  THAN  THE
THEN-PREVAILING MARKET PRICE OF OUR COMMON STOCK

        The common  stock to be issued  under the Equity  Line of Credit 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 EQUITY  LINE OF CREDIT  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 Equity Line
of Credit could encourage short sales by third parties. Up to 100,000,000 shares
of our common stock may be issued under the Equity Line of Credit. Such an event
could place further downward pressure on the price of our common stock.

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
113,408,376  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.

        Our common stock has traded as low as $0.02 and as high as $6.75 between
September 30, 2000 and October 29, 2002.  From time to time after this offering,
the market price of our common stock may experience significant volatility.  Our

                                       12



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 1, 2002,  we had  outstanding  stock  options to purchase
approximately  8.8  million  shares of common  stock and  warrants  to  purchase
approximately  7.7  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 EQUITY LINE OF CREDIT

        The sale of shares of common stock pursuant to the Equity Line of Credit
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 Equity  Line of Credit as our stock
price  declines.  If our stock price is lower,  then our  existing  stockholders
would experience greater dilution.

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.  Immediately  following  this
offering,  we will have  outstanding  140,799,674  shares of common stock. Up to
100,000,000 of the shares being registered in this offering  underlie our Equity
Line of Credit Agreement with Cornell Capital  Partners.  Under the terms of the
agreement, in our discussion, Cornell Capital Partners is obligated to buy up to
$150,000  worth of our common  stock every seven days 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 $0.04 (closing price on
December 3, 2002) on the day this registration statement becomes effective,  and
that we deliver an advance  notice of purchase  of $150,000  worth of our common
stock, we would issue  3,750,000  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. Of
the  25,391,298  shares of common  stock  outstanding  as of  December  1, 2002,
22,239,248 shares are, or will be, freely tradable without  restriction,  unless
held by our "affiliates." The remaining 3,152,050 shares of common stock held by
existing  stockholders  are  "restricted  securities"  and may be  resold in the
public market only if registered or pursuant to an exemption from  registration.
Some of these  shares may be resold  under Rule 144.  The amount of  outstanding
shares  excludes  53,620,023  shares  issued into escrow on December 2, 2002, as
collateral for a note payable by NeoMedia to an unrelated  investor.  The shares
are restricted,  and the noteholder does not have title to the securities unless
NeoMedia  defaults  on the note,  which  matures on May 1, 2003.  The shares are
therefore not deemed to be outstanding.

                                       13



                           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.

                                       14



                              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 Equity
             Line  of  Credit.  All  investment  decisions  of  Cornell  Capital
             Partners are made by its general partner,  Yorkville Advisors, LLC.
             Mark Angelo, the managing member of Yorkville  Advisors,  makes the
             investment decisions on behalf of Yorkville Advisors.

        o    Westrock Advisors, Inc. is an unaffiliated registered broker/dealer
             that has been  retained  by us.  It has  provided  advice  to us in
             connection  with the Equity Line of Credit.  Greg Martino makes the
             investment decisions for Westrock Advisors,  Inc. For its services,
             Westrock Advisors, Inc. received 62,500 shares of NeoMedia's common
             stock.

        o    Ronald  Breckner  makes the  investment  decisions  for Data  Sales
             Corporation.

        o    Alan Refkin makes the  investment  decisions for Thornhill  Capital
             LLC.

        o    Thomas S. Rogers makes the investment decisions for About.com, Inc.

        o    Qode.com,  Inc.  is  currently  proceeding  under  Chapter 7 of the
             United States  Bankruptcy Code. The trustee,  Soneet Kapila,  makes
             the investment decisions for Qode.com, Inc.

        o    Michael  Pritchett makes the investment  decisions for 2150 Western
             Court LLC.

        o    Greg Wharton makes the investment decisions for Ripfire, Inc.

        The table follows:



                                                                     PERCENTAGE
                                        PERCENTAGE                   OF
                                        OF                           OUTSTANDING
                                        OUTSTANDING    SHARES TO     SHARES TO                    PERCENTAGE
                            SHARES      SHARES         BE ACQUIRED   BE ACQUIRED                  OF SHARES
                         BENEFICIALLY   BENEFICIALLY   UNDER THE     UNDER THE     SHARES TO      BENEFICIALLY
                         OWNED BEFORE   OWNED BEFORE   EQUITY LINE   EQUITY LINE   BE SOLD IN     OWNED AFTER
SELLING STOCKHOLDERS       OFFERING     OFFERING(1)    OF CREDIT     OF CREDIT     THE OFFERING   OFFERING(1)
----------------------   ------------   ------------   -----------   -----------   ------------   -----------
                                                                                      
Cornell Capital
  Partners, L.P.         2,000,000(2)           7.9%   100,000,000           80%    102,000,000         0.00%

Westrock Advisors,
  Inc.                      62,500(3)              *            --            --         62,500         0.00%

Data Sales
  Corporation            1,624,501(4)           6.4%            --            --      1,624,501         0.00%

Thornhill Capital LLC    3,320,955(5)          13.1%            --            --      1,904,900         6.97%

About.com, Inc.            452,489(6)           1.8%            --            --        452,489         0.00%

Qode.com, Inc.           1,676,500(7)           6.6%            --            --      1,676,500         0.00%

David Kaminer               32,486(8)              *            --            --         32,486         0.00%

David Swain                 55,000(9)              *            --            --         55,000         0.00%

2150 Western Court
  LLC                     900,000(10)           3.5%            --            --        900,000         0.00%

                                       15





                                                                     PERCENTAGE
                                        PERCENTAGE                   OF
                                        OF                           OUTSTANDING
                                        OUTSTANDING    SHARES TO     SHARES TO                    PERCENTAGE
                            SHARES      SHARES         BE ACQUIRED   BE ACQUIRED                  OF SHARES
                         BENEFICIALLY   BENEFICIALLY   UNDER THE     UNDER THE     SHARES TO      BENEFICIALL
                         OWNED BEFORE   OWNED BEFORE   EQUITY LINE   EQUITY LINE   BE SOLD IN     OWNED AFTER
SELLING STOCKHOLDERS       OFFERING     OFFERING(1)    OF CREDIT     OF CREDIT     THE OFFERING   OFFERING(1)
----------------------   ------------   ------------   -----------   -----------   ------------   -----------
                                                                                      
Robert Koch             2,000,000(11)        7.9%               --            --      2,000,000         0.00%

Ripfire, Inc.           2,700,000(12)       10.6%               --            --      2,700,000         0.00%

TOTAL                      14,824,431      58.38%      100,000,000        79.75%    113,408,376         6.97%
                        =============      ======      ===========        ======    ===========         =====

----------

*       Less than 1%.

(1)     Applicable  percentage of ownership is based on  25,391,298  shares of common stock  outstanding  as of
        December 1, 2002,  together with  securities  exercisable  or  convertible  into shares of common stock
        within 60 days of December 1, 2002, for each stockholder. Outstanding shares excludes 53,620,023 shares
        issued into escrow on December 2, 2002,  as  collateral  for a note payable by NeoMedia to an unrelated
        investor.  The shares are restricted,  and the note holder does not have title to the securities unless
        NeoMedia  defaults on the note, which matures on May 1, 2003. The shares are therefore not deemed to be
        outstanding.  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 1, 2002,  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)     Represents  2,000,000  shares of common stock issued as a commitment fee in connection  with the Equity
        Line of Credit.

(3)     The address of the referenced holder(s) is 230 Park Avenue, Floor 9, New York, NY, 10169.

(4)     Dispositive  control of the  referenced  shares  lies with  Ronald  Breckner,  President  of Data Sales
        Corporation, Inc., 3450 West Burnsville Parkway, Burnsville, MN 55337.

(5)     Beneficial  ownership is comprised of 1,416,055  shares issuable upon exercise of stock options granted
        under our 2002 and 1998 stock option  plans,  and  1,904,900  shares  issuable  upon  exercise of stock
        warrants. The address of the referenced holder(s) is c/o Alan Refkin, 3709 Fielding Drive, Springfield,
        IL, 62707.

(6)     The address of the referenced holder(s) is c/o Tom Rogers, PRIMEDIA, Inc. (parent company of About.com,
        Inc.) 745 Fifth Avenue,  New York,  NY, 10151.  These shares are subject to a right of first refusal in
        favor of us, sale volume  restrictions and sale price restrictions  pursuant to a certain Agreement for
        Payment in Stock, with us. These restrictions are only applicable to About.com,  Inc. and will not bind
        subsequent  purchasers of its shares.  Subject to the right of first refusal  described above,  control
        over the disposition of these shares is held by Primedia,  Inc., a Delaware  corporation,  by virtue of
        its position as sole parent corporation of About.com, Inc. Primedia, Inc. is publicly-listed on the New
        York Stock Exchange,  under the trading symbol,  "PRM".  The directors of Primedia,  Inc. are Thomas S.
        Rogers,  Charles G. McCurdy and Beverly C. Chell, and the Chief Executive Officer of Primedia,  Inc. is
        Thomas S. Rogers.

(7)     Represents shares that are held in escrow pending the results of negotiations  between us and Qode with
        respect to the performance of the Qode business unit for the period March 1, 2001 through  February 28,
        2002.  Upon reaching a mutual  agreement by NeoMedia and Qode, all such shares may be released to Qode.
        Soneet Kapila, trustee for Qode.com, Inc., in its Chapter 7 bankruptcy proceeding.

(8)     The address of the referenced individual is 108 Ralph Avenue, White Plains, NY, 10606-3812.

(9)     The address of the referenced individual is 443 Upper Colony Road, Wellington, NV, 89444-9580.

(10)    The address of the referenced  holder(s) is c/o Michael Pritchett,  2777 Finley Rd., Suite 23, Downer's
        Grove, IL, 60515.  Dispositive control of the referenced shares lies with Michael Pritchett,  Manger of
        2150 Western Court L.L.C.

(11)    The address of the referenced individual is 324 Jay Street, Katonah, NY, 10536.

(12)    The address of the referenced  holder(s) is Plumtree Software,  500 Sansome Street, San Francisco,  CA,
        94111.  Dispositive  control of the  referenced  shares  lies with Greg  Wharton,  General  Counsel for
        Plumtree, successor-in-interest to Ripfire, Inc.

                                                      16



                                 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 Equity Line of Credit.  The purchase price of
the shares purchased under the Equity Line of Credit will be 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.

        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
Equity Line of Credit.  The table assumes estimated offering expenses of $85,000
and 5% retention of the gross proceeds raised under the Equity Line of Credit.

GROSS PROCEEDS                  $1,000,000          $5,000,000       $10,000,000

NET PROCEEDS                      $865,000           4,665,000         9,415,000

USE OF PROCEEDS:
Research and development                --             100,000           500,000
Accounts payable                    60,000           1,500,000         3,000,000
Management Compensation            200,000             250,000           400,000
General Working Capital            605,000           2,815,000         5,515,000
                           ---------------     ---------------   ---------------
TOTAL                             $865,000          $4,665,000        $9,415,000
                           ===============     ===============   ===============

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

                                       17



                                    DILUTION

        The net tangible  book value of our company as of September 30, 2002 was
$(7,678,000) or $(0.3054) 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 Equity Line
of Credit.  The amount of dilution will depend on the offering  price and number
of shares to be issued under the Equity Line of Credit.  The  following  example
shows the dilution to new investors at an offering price of $0.04 per share.

        If  we  assume that  NeoMedia  had issued  100,000,000  shares of common
stock under the Equity Line of Credit at an assumed  offering price of $0.04 per
share (I.E., the maximum number of shares  registered in this offering under the
Equity Line of Credit), less retention fees of $200,000 and offering expenses of
$85,000,  our net tangible  book value as of September  30, 2002 would have been
$(3,963,000) or $(0.0317) per share. Note that at an offering price of $0.04 per
share,  NeoMedia would receive gross  proceeds of $4,000,000 or $6,000,000  less
than is  available  under the Equity  Line of  Credit.  Such an  offering  would
represent  an  immediate  increase  in  net  tangible  book  value  to  existing
stockholders of $0.2737 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                                  $0.0400
Net tangible book value per share before this offering     $(0.3054)
Increase attributable to new investors                     $ 0.2737
                                                         -----------
Net tangible book value per share after this offering                  $(0.0317)
                                                                     -----------
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:

                                                                 DILUTION PER
                             ASSUMED         NO. OF SHARES TO    SHARE TO NEW
                         OFFERING PRICE       BE ISSUED (1)       INVESTORS
                         --------------     ------------------  ---------------
                            $0.1000            100,000,000          $0.0861
                            $0.0400            100,000,000          $0.0717
                            $0.0300            100,000,000          $0.0693
                            $0.0200            100,000,000          $0.0669
                            $0.0100            100,000,000          $0.0644

----------

(1)     This  represents  the maximum number of shares of common stock that will
        be registered under the Equity Line of Credit.

                                       18



                                 DIVIDEND POLICY

        We have not  declared or paid any  dividends  on our common stock during
the years ended December 31, 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,  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.

                                       19



                      SELECTED CONSOLIDATED FINANCIAL DATA

        The  following  financial  information  was taken from our  consolidated
financial  statements,   which  have  been  audited  by  KPMG  LLP,  our  former
independent  accountants,  for the years of 1997 and 1998,  Arthur Andersen LLP,
our  former  independent  accountants,  for the  years  of 1999  and  2000,  and
Stonefield Josephson,  Inc., our current independent  accountants,  for the year
2001. The selected  financial  data for the years ended December 31, 2001,  2000
and 1999 have been derived from our consolidated  financial  statements included
elsewhere  herein and include,  in our  management's  opinion,  all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
data for such periods.  The selected financial data for the years ended December
31, 1998 and 1997 have been derived  from  previous  annual  reports and are not
included  elsewhere  herein.  You should read the data presented  below together
with  our  consolidated  financial  statements  and  related  notes,  the  other
financial  information  contained  herein,  and  "Management's   Discussion  and
Analysis of Financial Condition and Results of Operations."



                                                      YEARS ENDED DECEMBER 31,
                          -----------------------------------------------------------------------------
                                2001            2000            1999            1998          1997
------------------------  --------------  --------------  --------------   -------------- -------------
STATEMENT OF OPERATIONS
  DATA:
                                                                            
Sales                      $     8,142     $     27,565    $     25,256     $     23,478   $   24,434

Net loss from operations      (18,768)         (5,583))        (10,246)         (11,616)      (5,904)

Net loss                      (25,469)          (5,409)        (10,472)         (11,495)      (5,973)


Loss per share             $    (1.55)     $     (0.39)    $     (1.01)     $     (1.34)   $   (0.90)

Weighted avg. number of
  common shares and
  common equiv.             16,410,246       13,931,104      10,377,478        8,560,849      6,615,107

                                                      YEARS ENDED DECEMBER 31,
                          -----------------------------------------------------------------------------
                                2001            2000           1999             1998          1997
------------------------  --------------  --------------  --------------   -------------- -------------
BALANCE SHEET DATA:

Cash                       $      134      $     4,453     $      2,460     $      1,350     $   10,283

Total assets                    9,039           40,594           13,657           12,630         19,799

Short term debt                   899              137              625              577            201

Long term debt, less
  current portion                 390              539              676              801            915

Total stockholders'
  equity                   $     (263)     $     19,110    $      4,020     $      3,261     $   13,126

                                       (in thousands, except share data)


                                       20



                        SUPPLEMENTARY QUARTERLY FINANCIAL DATA

        Certain quarterly financial  information regarding NeoMedia is set forth
below:



                                       SEPTEMBER 30, 2002     JUNE 30, 2002    MARCH 31, 2002
---------------------  -------------- --------------------   ---------------  ----------------
                                                                          
Sales                                          $3,404,000        $3,652,000         $1,396,000

Gross profit (loss)                               582,000           417,000             82,000

Net income (loss)                               (773,000)       (4,347,000)        (1,382,000)

Net income (loss) Per
  share (basic)                                   $(0.03)           $(0.11)            $(0.05)




                         DECEMBER 31,      SEPTEMBER 30,         JUNE 30,           MARCH 31,
                             2001              2001                2001               2001
---------------------  -------------- --------------------   ---------------  ----------------
                                                                       
Sales                     $4,459,000         $908,000            $1,237,000         $1,538,000

Gross profit (loss)          597,000        (503,000)             (404,000)          (414,000)

Net income (loss)        (1,692,000)      (9,310,000)          (11,042,000)        (3,425,000)

Net income (loss) Per
  share (basic)              $(0.11)          $(0.60)               $(0.72)            $(0.24)


                         DECEMBER 31,      SEPTEMBER 30,         JUNE 30,           MARCH 31,
                             2000              2000                2000               2000
---------------------  -------------- --------------------   ---------------  ----------------
Sales                        $9,875,000        $4,049,000      $9,547,000           $4,094,000

Gross profit (loss)           7,571,000            42,000         879,000              540,000

Net income (loss)             2,667,000       (3,555,000)     (2,085,000)          (2,436,000)

Net income (loss) Per
  share (basic)                   $0.21           $(0.25)         $(0.15)              $(0.19)


                                       21



                                 CAPITALIZATION

        The  following  table sets forth as of September  30,  2002,  NeoMedia's
actual  capitalization and pro forma  capitalization  after giving effect to the
issuance of 100,000,000  shares of common stock under the Equity Line of Credit.
This  information  assumes a purchase  price  under the Equity Line of Credit of
$0.04 per share, less estimated  offering expenses of $85,000 and a retention of
$200,000.  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, 2002
                                                ------------------------------
                                                   ACTUAL         PROFORMA
                                              ---------------   --------------
  Long-term debt, net of current portion           $268,000       $268,000
                                              ---------------   --------------
  Stockholders' equity:

    Preferred stock, $0.01 par value,
     25,000,000 authorized, no issued
     and outstanding shares(2)(3)                        --             --

    Common stock, $0.01 par value,
     200,000,000 authorized, 26,782,724
     shares issued and 25,141,298
     outstanding in 2002(1)(2)(4)                   251,412      1,251,412

  Treasury stock, at cost, 201,230 shares
    of common stock                               (779,000)      (779,000)

  Additional paid-in capital:
    Preferred stock                                      --             --
    Common stock                                 65,237,000     67,952,000

  Deferred stock-based compensation                (47,000)       (47,000)

  Accumulated deficit                          (69,845,000)   (69,845,000)
                                              --------------- ---------------
  Total stockholders' deficit                  ($5,182,588)   ($1,467,588)
                                              --------------- ---------------
    Total capitalization                       ($4,914,588)   ($1,199,588)
                                              =============== ===============

----------
(1)     This table excludes  outstanding options and warrants which if exercised
        into shares of common stock would result in NeoMedia  issuing  8,755,219
        and 7,705,090, respectively, additional shares of common stock.

(2)     On June 6, 2002, our stockholders  approved an amendment to our articles
        of  incorporation   that  increased  the  authorized  capital  stock  to
        200,000,000  shares of common stock and  25,000,000  shares of preferred
        stock.

(3)     As of  December  31,  2001,  there  were  452,489  shares  of  Series  B
        Convertible  Preferred  Stock  that were  converted  to shares of common
        stock on January 2, 2002. As of December 1, 2002, no Preferred Stock was
        outstanding.

(4)     An additional 19,000,000 shares were issued in February 2002 in exchange
        for $190,000 cash and promissory  notes for  $3,230,000  maturing at the
        earlier of August 12, 2002 or 30 days from the date of  registration  of
        the shares.  On August 12, 2002, the notes matured without payment,  and
        we  subsequently  cancelled the  19,000,000  shares issued in connection
        with such  notes.  As a result,  as of  December  1, 2002,  we had total
        outstanding  shares of 25,391,298  shares.  Outstanding  shares excludes
        53,620,023  shares issued into escrow on December 2, 2002, as collateral
        for a note payable by NeoMedia to an unrelated investor.  The shares are
        restricted,  and the note holder  does not have title to the  securities
        unless NeoMedia  defaults on the note, which matures on May 1, 2003. The
        shares are  therefore  not deemed to be  outstanding.  As of December 1,
        2002, we had outstanding  options to purchase 8,755,219 shares of common
        stock and 7,705,090 warrants.

                                       22



                              EQUITY LINE OF CREDIT

        SUMMARY.  On November 12, 2002, we entered into an Equity Line of Credit
with Cornell Capital Partners. Pursuant to the Equity Line of Credit, we may, at
our discretion,  periodically  sell to Cornell Capital Partners shares of common
stock  for a total  purchase  price of up to $10.0  million.  For each  share of
common stock purchased under the Equity Line of Credit, 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 Equity Line
of Credit.  In addition,  we engaged  Westrock  Advisors,  Inc., an unaffiliated
registered  broker-dealer,  to advise us in  connection  with the Equity Line of
Credit. For its services,  Westrock Advisors, Inc. received 62,500 shares of our
common stock. The  effectiveness of the sale of the shares under the Equity Line
of Credit is conditioned upon us registering the shares of common stock with the
Securities and Exchange Commission.  The costs associated with this registration
will be borne by us.

        EQUITY LINE OF CREDIT EXPLAINED.  Pursuant to the Equity Line of Credit,
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  Equity  Line of  Credit  once the
underlying  shares are registered  with the Securities and Exchange  Commission.
Thereafter,  we may continue to request  advances until Cornell Capital Partners
has  advanced  $10.0  million  or two  years  after  the  effective  date of the
accompanying registration statement, whichever occurs first.

        The amount of each  advance is subject to a maximum of  $150,000  with a
minimum of 6 trading  days  between  advances.  The amount  available  under the
Equity  Line of Credit  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 Equity Line of Credit,  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.  Assuming we issued  100,000,000  shares to Cornell
Capital  Partners  (i.e.,  the maximum number of shares being  registered in the
accompanying registration statement), based on a recent price of $0.04 per share
under the Equity Line of Credit,  we would receive gross  proceeds of $4,000,000
less estimated  offering expenses of $85,000 and a retention of $200,000.  These
shares  would  represent  80% of our  outstanding  common  stock upon  issuance.
Proceeds  used  under the Equity  Line of Credit  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  $85,000 in connection with
this  registration,  consisting  primarily of  professional  fees.  In addition,
Cornell Capital Partners will retain 5% of each advance.  In connection with the
Equity  Line of  Credit,  we paid  Cornell  Capital  Partners  a  commitment  of
2,000,000 shares of common stock. In addition, we issued 62,500 shares of common
stock, valued at $10,000, to Westrock Advisors, Inc., an unaffiliated registered
broker-dealer, as a placement agent fee.

                                       23



                              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, donees, 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
Equity Line of Credit.  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 Equity Line of
Credit and received a one-time  commitment fee paid by the issuance of 2,000,000
shares of common  stock.  The 2% discount,  the 5%  retention,  and the one-time
commitment fee are  underwriting  discounts.  In addition,  we engaged  Westrock
Advisors,  Inc.,  an  unaffiliated  registered  broker-dealer,  to  advise us in
connection with the Equity Line of Credit. For its services,  Westrock Advisors,
Inc. received 62,500 shares of our common stock.

        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  $85,000,  and a one-time fee payable by the issuance of 2,000,000
shares of common  stock.  In addition,  we engaged  Westrock  Advisors,  Inc., a
registered  broker-dealer,  to advise us in  connection  with the Equity Line of
Credit. For its services,  Westrock Advisors, Inc. received 62,500 shares of our
common stock. The offering  expenses consist of: a SEC registration fee of $210,
printing expenses of $2,500,  accounting fees of $15,000,  legal fees of $50,000
and miscellaneous expenses of $17,282. 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 Equity Line of
Credit.

        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

                                       24



purchasing  shares  while the  distribution  is taking  place.  Cornell  Capital
Partners can cover any short  positions only with shares  received from us under
the Equity  Line of Credit.  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

        Beginning in the second quarter of 2002,  NeoMedia's continued focus was
aimed toward the intellectual  property  commercialization  unit of its 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.  NeoMedia's  mission  is  to  invent,
develop,  and commercialize  technologies and products that effectively leverage
the integration of the physical and electronic to provide clear functional value
for NeoMedia's end-users,  competitive advantage for their business partners and
return-on-investment  for their  investors.  To this end, the Company  signed an
intellectual  property  license with Brandkey  Systems  Corporation,  the fourth
intellectual property license into which the Company has entered.  NeoMedia also
continued its movement  into the Storage Area Network  (SAN) market  through its
NeoMedia Consulting and Integration Services (NCIS) business unit.

        NeoMedia's  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  NeoMedia's  services  and  products,  the  cost of
material, labor and technology,  particularly in connection with the delivery of
business  services,  the costs  associated  with  initiating new contracts,  the
economic  condition of NeoMedia's target markets,  and the cost of acquiring and
integrating new businesses.

RESULTS OF OPERATIONS  FOR THE NINE MONTHS ENDED  SEPTEMBER 30, 2002 AS COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001

        NET SALES.  Total net sales for the nine months ended September 30, 2002
were $8.5 million, which represented a $4.7 million, or 124%, increase from $3.8
million for the nine months ended  September 30, 2001.  This increase  primarily
resulted  from  revenues  relating to  NeoMedia's  newly created SAN practice in
2002.  NeoMedia  will  continue to pursue  additional  sales of SAN products and
services,  and to the extent that such sales can be made, NeoMedia expects total
net sales to more  closely  resemble  the  results  for the first nine months of
2002, rather than the first nine months of 2001.

        LICENSE  FEES.  License fees were $0.3 million for the nine months ended
September  30,  2002,  a decrease  of $0.2  million or 40%,  compared  with $0.5
million for the nine months ended  September  30, 2001.  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.  NeoMedia  intends 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 $4.8 million,
or 145%,  to $8.1  million for the nine months  ended  September  30,  2002,  as
compared to $3.3 million for the nine months  ended  September  30,  2001.  This
increase  primarily  resulted from revenues relating to NeoMedia's newly created
SAN practice in 2002.  NeoMedia will continue to pursue  additional sales of SAN
products and services.

        COST OF SALES. Cost of license fees was $0.8 million for the nine months
ended  September  30, 2002, a decrease of $1.2 million,  or 150%,  compared with
$2.0 million for the nine months ended September 30, 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 $6.6  million  for the nine months  ended
September  30, 2002, an increase of $3.9  million,  or 144%,  compared with $2.7
million for the nine months ended September 30, 2001. The increase resulted form
increased resales in 2002 compared with 2001. Cost of resales as a percentage of
related  resales was 81% in 2002 and 84% in 2001.  NeoMedia  expects the cost of
resales as a percentage of related  resales to remain  relatively  stable in the
next 12 months.

        GROSS  PROFIT.  Gross  profit was $1.1 million for the nine months ended
September  30,  2002,  an increase of $2.0  million,  or 222%,  compared  with a
negative  gross profit of ($0.9) million in 2001. The increase was due to higher
SAN-related sales in 2002, as well as lower software  amortization costs in 2002

                                       26



due to the write-off of  Qode-related  assets at the end of 2001, and PaperClick
assets in the second quarter of 2002.

        SALES AND MARKETING.  Sales and marketing expenses were $0.7 million for
the nine months ended September 30, 2002,  compared to $2.1 million for the nine
months  ended  September  30,  2001,  a decrease  of $1.4  million or 67%.  This
decrease  resulted from a reduction in sales and marketing  personnel  following
NeoMedia's  cost-reduction  initiative  started  in the  second  half  of  2001.
NeoMedia does not expect sales and marketing expenses to fluctuate  dramatically
from 2002 levels over the next 12 months.

        GENERAL AND  ADMINISTRATIVE.  General and  administrative  expenses were
$3.6 million for the nine months ended  September 30, 2002 compared with general
and administrative  expenses of $3.4 million for the nine months ended September
30, 2001,  an increase of $0.2 million or 6%. The  increase  resulted  primarily
from increased  legal and  professional  service.  NeoMedia  expects general and
administrative expense to decrease slightly in the next 12 months due to reduced
professional  service expenses,  lease  restructuring,  and other cost reduction
efforts.

        RESEARCH AND  DEVELOPMENT.  During the nine months ended  September  30,
2002,  NeoMedia  charged to expense  $0.7  million of research  and  development
costs, compared to $0.3 million for the nine months ended September 30, 2001, an
increase of $0.4 million or 133%. The increase is primarily due to the fact that
NeoMedia was 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.  NeoMedia expects research and development  costs will decline 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 $1.0 million for the
write-off   capitalized   development   costs   relating   to   its   PaperClick
physical-world-to-internet software. Due to capital constraints, NeoMedia 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.  During
the  nine  months  ended  September  30,  2001,  NeoMedia  recognized  a loss or
impairment of assets of $2.9 million relating to NeoMedia's MLM/Affinity product
line.

        WRITE-OFF OF DIGITAL  CONVERGENCE  LICENSE  CONTRACT.  During the second
quarter of 2001,  NeoMedia took a $7.4 million charge to income to write off the
net assets associated with the Digital Convergence intellectual property license
contract.  There were no charges related to the contract in 2002. No charges are
expected in the next 12 months.

        INTEREST   EXPENSE/(INCOME).   Net  Interest  expense/(income)  consists
primarily of interest  paid to creditors  as part of financed  purchases,  notes
payable and NeoMedia's asset-based collateralized line of credit net of interest
earned on cash equivalent investments. Interest expense increased by $129,000 to
$99,000 for the nine months  ended  September  30, 2002 from income of $(30,000)
for the nine months  ended  September  30, 2001,  due to lower cash  balances in
2002,  as well as interest  charges in 2002  relating to notes  payable not held
during 2001.  NeoMedia  expects net interest expense similar to 2002 levels over
the next 12 months, due to capital constraints and borrowing costs.

        LOSS FROM CONTINUING OPERATIONS. The loss from continuing operations for
the nine months ended September 30, 2002 was $5.0 million,  which  represented a
$12.0  million,  or 71% decrease  from a $17.0  million loss for the nine months
ended September 30, 2001. 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 the  Company's  MLM/Affinity
product line of $2.9 million in 2001 and decrease of sales and marketing expense
by $1.4 million due to reduction of sales force.

        LOSS  FROM   OPERATIONS  OF  DISCONTINUED   BUSINESS   UNITS.   NeoMedia
discontinued  operations of its Qode business unit in 2001,  resulting in a loss
from  operations  of  discontinued  business  units of $3.7 million for the nine
months ended  September 30, 2001.  The business  unit's assets were purchased in
March 2001 and the  implementation  was cancelled  during the second  quarter of
2001. NeoMedia does not expect any charges relating to the Qode business unit in
the next 12 months.

        LOSS ON  DISPOSAL  OF  DISCONTINUED  BUSINESS  UNITS.  During  the third
quarter of 2001,  NeoMedia  discontinued  operations of its Qode business  unit,
resulting in a loss on disposal of  discontinued  business unit of $3.2 million.
The  remaining  Qode  system  assets  were held for sale  subject to a letter of
intent with the Finx Group,  Inc. As of September  30, 2001,  December 31, 2001,
and March 31, 2002,  NeoMedia  recorded on its  consolidated  balance  sheet net
assets held for sale in the amount of $210,000, which was the estimated value to
be  received by NeoMedia  from the Finx Group in exchange  for the Qode  assets.
During the second quarter of 2002, the Finx group withdrew its letter of intent.
As a  result,  during  the  nine  months  ended  September  30,  2002,  NeoMedia

                                       27



recognized an additional loss on disposal of discontinued  business unit of $1.5
million to write off the remaining Qode-related assets. NeoMedia does not expect
any charges relating to the Qode business unit in the next 12 months.

        NET LOSS. The net loss for the nine months ended  September 30, 2002 was
$6.5 million,  which  represented a $17.3 million,  or 73% decrease from a $23.8
million  loss for the  nine  months  ended  September  30,  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
NeoMedia's  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 THREE MONTHS ENDED  SEPTEMBER 30, 2002 AS COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 2001

        NET SALES. Total net sales for the three months ended September 30, 2002
were $3.4 million, which represented a $2.5 million, or 278%, increase from $0.9
million for the three months ended September 30, 2001.  This increase  primarily
resulted from revenues  relating to a $1.7 million  equipment and software order
in 2002.  NeoMedia  intends  to  continue  to  pursue  additional  software  and
equipment  sales, as well as sales of its SAN products and services,  and to the
extent that such sales can be made,  NeoMedia  expects  future net sales to more
closely resemble the results for the first nine months of 2002,  rather than the
first nine months of 2001.

        LICENSE FEES.  License fees were $0.2 million for the three months ended
September  30,  2002,  an increase of $0.1 million or 100%,  compared  with $0.1
million for the three months ended  September 30, 2001.  The increase was due to
higher sales of internally  developed software licenses in 2002. Demand for such
licenses  has  historically  fluctuated  from  year to  year.  NeoMedia  intends
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 $2.5 million,
or 313%,  to $3.3  million for the three  months ended  September  30, 2002,  as
compared to $0.8  million for the three months ended  September  30, 2001.  This
increase  primarily  resulted from revenues relating to a $1.7 million equipment
and software order in 2002.  NeoMedia  intends to continue to pursue  additional
software and equipment sales, as well as sales of its SAN products and services.

        COST OF  SALES.  Cost of  license  fees was $0.1  million  for the three
months ended  September 30, 2002, a decrease of $0.6 million,  or 86%,  compared
with $0.7 million for the three months ended  September  30, 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 $2.7  million for the nine months
ended  September 30, 2002, an increase of $2.0 million,  or 286%,  compared with
$0.7 million for the nine months ended September 30, 2001. The increase resulted
form  increased  resales  in 2002  compared  with  2001.  Cost of  resales  as a
percentage of related resales for the three months ended September 30 was 84% in
2002 and 91% in 2001.  This  decrease is primarily  due to a higher sales mix of
higher-margin equipment, software, and services in 2002.

        GROSS  PROFIT.  Gross profit was $0.6 million for the three months ended
September  30,  2002,  an increase of $1.1  million,  or 220%,  compared  with a
negative  gross profit of ($0.5) million in 2001. The increase was due to higher
SAN-related sales in 2002, as well as lower software  amortization costs in 2002
due to the write-off of  Qode-related  assets at the end of 2001, and PaperClick
assets in the second quarter of 2002.

        SALES AND MARKETING.  Sales and marketing expenses were $0.2 million for
the three months  ended  September  30,  2002,  compared to $0.7 million for the
three months ended  September  30, 2001, a decrease of $0.5 million or 71%. This
decrease  resulted from a reduction in sales and marketing  personnel  resulting
from NeoMedia's  cost-reduction  initiative  started in the second half of 2001.
NeoMedia does not expect sales and marketing expenses to fluctuate  dramatically
from 2002 levels over the next 12 months.

        GENERAL  AND   ADMINISTRATIVE.   General  and  administrative   expenses
increased  by $0.2  million,  or 25%, to $1.0 million for the three months ended
September  30,  2002,  compared  to $0.8  million  for the  three  months  ended
September 30, 2001. The increase  resulted  primarily  from increased  legal and
professional  service.  NeoMedia expects general and  administrative  expense to
decrease  slightly  in the next 12 months  due to reduced  professional  service
expenses, lease restructuring, and other cost reduction efforts.

                                       28



        RESEARCH AND  DEVELOPMENT.  During the three months ended  September 30,
2002, NeoMedia charged to expense $150,000 of research and development costs, an
increase of $13,000,  or 9%,  compared to $137,000  for the three  months  ended
September 30, 2001.  NeoMedia expects  research and development  costs to remain
materially constant over the next 12 months.

        LOSS ON  IMPAIRMENT OF ASSETS.  During the three months ended  September
30, 2002, NeoMedia did not recognize a loss on impairment of assets.  During the
three months ended September 30, 2001, NeoMedia recognized an impairment loss of
$2.9 million relating to its MLM/Affinity product line. NeoMedia does not expect
any additional losses from asset impairment in the next 12 months.

        INTEREST   EXPENSE/(INCOME).   Net  Interest  expense/(income)  consists
primarily of interest  paid to creditors  as part of financed  purchases,  notes
payable and NeoMedia's asset-based collateralized line of credit net of interest
earned on cash equivalent investments.  Interest expense decreased by $20,000 to
$2,000 for the three months ended  September 30, 2002 from $22,000 for the three
months ended September 30, 2001.  NeoMedia  expects net interest expense similar
to 2002 levels over the next 12 months, due to capital constraints and borrowing
costs.

        LOSS FROM CONTINUING OPERATIONS. The loss from continuing operations for
the three months ended September 30, 2002 was $0.8 million,  which represented a
$4.3  million,  or 84%  decrease  from a $5.1  million loss for the three months
ended  September 30, 2001.  The decrease  resulted  primarily from an impairment
loss of $2.9 million relating to NeoMedia's MLM/Affinity product line during the
second  quarter of 2001,  combined with  continued  company-wide  cost reduction
efforts during the last quarter of 2001 and the first three quarters of 2002.

        LOSS  FROM   OPERATIONS  OF  DISCONTINUED   BUSINESS   UNITS.   NeoMedia
discontinued  operations of its Qode business unit in 2001,  resulting in a loss
from  operations of  discontinued  business  units of $1.0 million for the three
months ended  September 30, 2001.  The business  unit's assets were purchased in
March 2001 and the  implementation  was cancelled  during the second  quarter of
2001. NeoMedia does not expect any charges relating to the Qode business unit in
the next 12 months.

        NET LOSS. The net loss for the three months ended September 30, 2002 was
$0.8 million,  which  represented  an $8.5 million,  or 91% decrease from a $9.3
million  loss for the three  months  ended  September  30,  2001.  The  decrease
resulted  from the $7.4  million  write-off of the Digital  Convergence  license
contract  and an  impairment  loss of $2.9  million  relating  to the  Company's
MLM/Affinity product line during the second 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.

                                       29



        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.

        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.

                                       30



RESULTS OF  OPERATIONS  FOR THE YEAR ENDED  DECEMBER 31, 2000 AS COMPARED TO THE
YEAR ENDED DECEMBER 31, 1999

        NET SALES.  Total net sales for the year ended  December  31,  2000 were
$27.6 million,  which represented a $2.3 million,  or 9.1%,  increase from $25.3
million for the year ended December 31, 1999. This increase  primarily  resulted
from the intellectual property license contract signed with Digital:Convergence,
offset by decreased sales of Y2K licenses and services from $3.3 million in 1999
to $0.1 million in 2000.

        LICENSE  FEES.  Total license fees  increased  from $2.4 million to $8.4
million, or 250.0%, for the years ended December 31, 1999 and December 31, 2000.
The increase was due to a license  agreement,  entered into during the fourth of
quarter    of   2000,    between    us   and    Digital:Convergence,    granting
Digital:Convergence a worldwide,  non-exclusive license of our patent portfolio.
Revenue from this agreement  totaled $7.8 million in 2000.  This was offset by a
decrease of $1.8  million due to the  discontinuation  of our Y2K product  line.
Cost of sales as a percentage of related sales was 15.4% during 2000 compared to
73.7% during 1999. This decrease in the cost of sales as a percentage of related
sales was primarily due to the Digital:Convergence  license sale in 2000 and the
discontinuation of Y2K licenses on which we paid royalties.

        RESALES OF SOFTWARE AND TECHNOLOGY  EQUIPMENT AND SERVICE FEES.  Resales
of software and technology equipment and service fees decreased by $3.7 million,
or 16.1%,  to $19.1 million for the year ended December 31, 2000, as compared to
$22.8  million for the year ended  December 31, 1999.  This  decrease  primarily
resulted from decreased resales of IBM equipment due to discontinuation of sales
in the Canadian  market.  Also  contributing to the decrease was reduced service
revenue from Y2K  products of $1.6  million.  Cost of sales as a  percentage  of
related sales decreased to 90.0% during 2000 from 90.5% during 1999.

        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  decreased $0.3 million,  or 4.4%, to $6.5
million  for the year ended  December  31,  2000 from $6.8  million for the year
ended December 31, 1999, due to a decrease in our  application  services  direct
sales force, offset by personnel additions in marketing.

        GENERAL  AND   ADMINISTRATIVE.   General  and  administrative   expenses
increased by $1.7 million, or 32.1%, to $7.0 million for the year ended December
31, 2000,  from $5.3 million for the year ended December 31, 1999. This increase
was  due  to the  accrual  of  executive  performance  incentives  in  2000.  No
performance  incentive expense was incurred in 1999. Also, increased legal costs
of $0.5 million were expensed in 2000.

        RESEARCH AND  DEVELOPMENT.  During the year ended  December 31, 2000, we
charged to expense $1,101,000 of research and development  expenses, an increase
of $114,000 or 11.6% compared to $986,000  charged to expense for the year ended
December 31, 1999. This increase was due to increased  resources directed toward
the  development  of the  application  services  business.  To the extent we can
obtain additional capital,  we will continue to make significant  investments in
research and development.

        NET INTEREST  (INCOME) EXPENSE.  Interest expense consists  primarily of
interest paid to creditors as part of financed purchases, capitalized leases and
our  asset-based  collateralized  line of credit net of interest  earned on cash
equivalent  investments.  Interest  expense  decreased by $400,000,  or 177%, to
income of $174,000 for the year ended December 31, 2000 from $226,000 of expense
for the year ended December 31, 1999. This was due to reduced  interest  expense
resulting  from the  repayment of notes in the first quarter of 2000, as well as
interest income from higher cash balances during 2000.

        NET LOSS.  Our net loss for the year ended  December  31,  2000 was $5.4
million,  which  represented  a $5.1  million,  or 48.6%  decrease  from a $10.5
million loss for the year ended  December 31, 1999.  The decrease was  primarily
due to revenue from the licensing of our intellectual property in 2000. This was
offset by a 97% decrease of Y2K revenue in 2000 along with increased general and
administrative expenses.

INTANGIBLE ASSETS

        At the end of each  quarter we perform  impairment  tests on each of our
intangible assets, which include capitalized patent costs,  capitalized software
development costs, and purchased software. 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.

                                       31



LIQUIDITY AND CAPITAL RESOURCES

        As of September 30, 2002, NeoMedia's cash balance was $9,000 compared to
$10,000 at June 30, 2002 and $134,000 at December 31, 2001.

        Net  cash  used in  operating  activities  for  the  nine  months  ended
September 30, 2002 and 2001,  was $0.7 million and $4.8  million,  respectively.
During the nine months ended  September  30,  2002,  trade  accounts  receivable
increased $0.6 million,  while accounts  payable  inclusive of amounts due under
financing  agreements,  liabilities in excess of assets of discontinued business
unit,  accrued expenses and deferred revenue increased $2.0 million.  During the
nine months ended September 30, 2001, trade accounts  receivable  decreased $1.3
million,  while  accounts  payable  inclusive  of  amounts  due under  financing
agreements,  accrued  expenses  and deferred  revenue  decreased  $0.1  million.
NeoMedia's net cash flow from/(used in) investing activities for the nine months
ended September 30, 2002 and 2001 was $0.1 and ($3.0) million, respectively.

        Net cash  provided by  financing  activities  for the nine months  ended
September 30, 2002 and 2001,  was $0.5 million and $3.7  million,  respectively.
The decrease  was due to $1.6 million  proceeds for the sale of common stock and
$1.2 million from the exercise of stock options and warrants in 2001. During the
nine months ended  September 30, 2002,  NeoMedia  sold 19 million  shares of its
common stock at $0.17 per share in exchange for promissory notes maturing at the
earlier of i), August 12, 2002, or ii) 30 days from  registration of the shares.
During August 2002, the notes matured without payment, and NeoMedia subsequently
cancelled the 19 million shares issued in connection  with such notes.  NeoMedia
has accrued a  liability  in the third  quarter of $190,000  relating to the par
value paid in connection with the issuance of the shares.

        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.  Based on current  cash  balances and
operating  budgets,  NeoMedia believes it only has sufficient  financing to last
until  December 31, 2002. If NeoMedia's  financial  resources are  insufficient,
NeoMedia 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.  NeoMedia 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.

        On November 12, 2002,  NeoMedia and Cornell Capital Partners  terminated
the May 2002 Equity Line of Credit  Agreement and entered into a new Equity Line
of Credit  Agreement with Cornell  Capital  Partners under which Cornell Capital
Partners agreed to purchase up to $10.0 million of NeoMedia's  common stock over
the next two years,  with the timing and amount of the  purchase  at  NeoMedia's
discretion.  The maximum amount of each purchase is $150,000 with a minimum of 7
days between  purchases.  The shares will be valued at 98% of the lowest closing
bid price during the 5-day period following the delivery of a notice of purchase
by  NeoMedia.  NeoMedia  will pay 5% of the gross  proceeds of each  purchase to
Cornell  Capital  Partners  as a  commission.  According  to  the  terms  of the
agreement,  NeoMedia  cannot  request an advance  pursuant to the Equity Line of
Credit  until the shares  underlying  the Equity  Line of Credit  Agreement  are
registered for trading with the Securities and Exchange Commission.

OTHER DEBTS

        On December 2, 2002, NeoMedia 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,  NeoMedia  entered into a
Pledge Agreement, dated December 2, 2002, under which NeoMedia issued 53,620,020
shares  of  common  stock to an  unrelated  third  party as  collateral  for the
Promissory Note. In the event of default,  the third party will issue the shares
to Mr. Kesselbrenner,  and NeoMedia would issue additional shares as required to
increase the Mr.  Kesselbrenner's  ownership of  securities of NeoMedia to equal
51% of its fully-diluted outstanding shares at the time of such default.

        On November  12,  2002,  NeoMedia  settled  the lawsuit  with its former
General  Counsel over payment of the 2000  executive  incentive,  severance  and
unpaid  vacation days in the amount of  approximately  $154,000.  The settlement
calls for cash  payments  totaling  approximately  $100,000  over a period of 10
months,  plus 250,000  vested  options to purchase  shares of NeoMedia's  common
stock at an exercise price of $0.01 and a term of five years.

        During November 2002,  NeoMedia issued  Convertible  Secured  Promissory
Notes in an aggregate  principal amount equal to $60,000 to 3 separate  parties,
including  Charles W.  Fritz,  Chairman  of our Board of  Directors;  William E.
Fritz,  outside  director of NeoMedia;  and James J. Keil,  outside  director of
NeoMedia.  The notes bear interest at a rate of 15% per annum, and mature at the

                                       32


earlier of four  months or that date the shares  underlying  the Equity  Line of
Credit are registered with the Securities and Exchange Commission. The notes are
convertible,  at the  option  of the  holder,  into  either  cash or  shares  of
NeoMedia's  common  stock at a 30%  discount to the market price upon either the
closing date, or upon the  conversion  date,  whichever is lower.  NeoMedia will
also grant to the holders an  additional  192,000  shares of  NeoMedia's  common
stock and 60,000 warrants to purchase shares of NeoMedia's common stock at $0.03
per share,  with a term of three years.  In the event  NeoMedia  defaults on the
notes, NeoMedia will issue an additional 1,404,330 shares of its common stock to
the note  holders.  The notes are secured by NeoMedia's  intellectual  property,
which is subject to first lien by AirClic, Inc.

GOING CONCERN

        The accompanying 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,  2002,  NeoMedia  has not been able to  generate
sufficient  revenues  from its  operations  to cover  its  costs  and  operating
expenses.  Although  NeoMedia  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  NeoMedia's  ability to
continue as a going concern.  Management  believes that NeoMedia will be able to
raise  additional  funds through an offering of its common stock or  alternative
sources of financing.  However,  no assurances can be given as to the success of
these  plans.  The  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 purchased  intangibles  and goodwill,
which affects our amortization and write-offs of goodwill and other intangibles;
the valuation of strategic  equity  investments,  which affects our other income
and expense;  and valuation of deferred  income taxes,  which affects our income
tax expense and benefit. 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 use 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 us 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 our revenue forecasts.
If our demand  forecast is greater than our 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  manufacturing
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.

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 discounted cash flow method.
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
our business,  based on available historical  information and industry averages.
The judgments  made in determining  the estimated  useful lives assigned to each

                                       33



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.

EFFECT OF RECENTLY ISSUED 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.

        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.

                                       34



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.

        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,  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.

                                       35



        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 309,773,
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.

        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  September  30, 2002,  NeoMedia  had $1.5 million of  liabilities
relating to the Qode system on its books.

IMPAIRMENT OF PAPERCLICK ASSET

        During the three-month period ending June 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.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Market risk is the potential loss arising from adverse changes in market
rates and  prices,  such as  foreign  currency  exchange,  interest  rates and a
decline in the stock  market.  NeoMedia dos not enter into  derivative  or other
financial instruments for trading or speculative purposes.  NeoMedia has limited
exposure  to market  risks  related  to changes in  interest  rates and  foreign
currency   exchange  rates.   NeoMedia  does  not  currently  invest  in  equity
instruments of public or private companies for business or strategic purposes.

                                       36



        NeoMedia  generally  conducts  business,   including  sales  to  foreign
customers,  in U.S.  dollars,  and as a result,  has  limited  foreign  currency
exchange  rate risk.  The effect of an  immediate  10 percent  change in foreign
exchange  rates  would  not  have a  material  impact  on  NeoMedia's  financial
condition or results of operations.

                                       37



                             DESCRIPTION OF BUSINESS

        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.

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 five U.S.  patents
relating to the  physical  world-to-Internet  marketplace.  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.

                                       38



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.

        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 three-month period ended June 30, 2002, we recorded an additional expense of
$1.5 million for the write-off of remaining Qode assets. As of June 30, 2002, we
had $1.3 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

                                       39



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 currently pending lawsuits against us.

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.

        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.

        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

                                       40



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.

OUR STRATEGY

        We have  spent  the past six  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.

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, 2001,  2000,  and 1999,  one  customer,  SBC/Ameritech
Services,  Inc., accounted for 37%, 30%, and 24%, 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,

                                       41



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.  Upon  receipt of  sufficient  financing,  we plan to  re-focus  our
efforts on the sale of  PaperClickTM  licenses  through the hiring of additional
sales and marketing  staff.  We have  refocused our sales efforts by focusing on
signing up channel  partners who have  industry  market  presence.  We intend to
negotiate  with  a  number  of  industry-focused   companies  who  will  be  our
"go-to-market"  partners.  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.

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.

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 3, 24 and 19 persons in the area of product development as
of December  31,  2001,  2000,  and 1999,  respectively.  During the years ended
December  31,  2001,  2000  and  1999,  NeoMedia  ISS  incurred  total  software
development  costs of $2,064,000,  $2,888,000 and $1,722,000,  respectively,  of
which  $1,515,000,  $1,787,639 and $736,000,  respectively,  were capitalized as
software development costs and $549,000, $1,101,000 and $986,000,  respectively,
were expensed as research and development costs.

                                       42



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.

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  five  patents  for  our   physical   world-to-Internet
technology. 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. We are currently engaged in two lawsuits  initiated against
us by one of our  primary  competitors,  AirClic.  AirClic  seeks,  among  other
things,  to succeed to our core  assets,  by suing for alleged  default  under a
promissory  note in the  principal  amount of $500,000  issued to AirClic by us,
secured by our core assets.  AirClic is also suing to invalidate  our patents on
our key physical world-to-Internet technologies.

EMPLOYEES

        As of December 1, 2002, we employed 18 persons.  Of the 18 employees,  8
are located at our headquarters in Fort Myers, Florida, and 10 at other domestic
locations.  Of the 18  employees,  3 are dedicated to the  Application  Services
business  unit, 10 are dedicated to the Systems  Integration  Services  business
unit, and 5 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.

                                       43



                                   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        46    Chairman of the Board of Directors
Charles T. Jensen       59    President, Chief Operating Officer, Acting Chief
                                Executive Officer and Director
David A. Dodge          27    Vice-President, Chief Financial Officer and
                                Controller
William E. Fritz        72    Secretary and Director
James J. Keil           75    Director
A. Hayes Barclay        72    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.

        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  approximately  38  years  at  IBM
Corporation  and Xerox  Corporation  in  various  marketing,  sales  and  senior

                                       44



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 our fiscal year ended  December 31, 2001,  our Board of Directors
held 13 meetings. All members of the Board of Directors attended at least 75% of
such meetings.

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 2001, members of the Audit Committee were
nonemployee  directors - James J. Keil,  A. Hayes Barclay and,  until  September
2001 when he  resigned as a  Director,  John  Lopiano.  During  2001,  the Audit
Committee held two meetings.

        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, James J. Keil, Paul Reece, and,
until  September  2001,  John Lopiano,  were members of NeoMedia's  Compensation
Committee during 2001. During January 2002, Mr. Reece resigned from the Board of
Directors  and  Compensation  Committee.  This  Committee  held  seven  meetings
throughout 2001.

        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  2001,  this  Committee  held four
meetings.

COMPENSATION OF DIRECTORS

        Directors  are  reimbursed  for  expenses  incurred in  connection  with
attending meetings of the Board of Directors.  Upon election or re-election as a
director,  non-employee  directors  receive options to purchase 15,000 shares of
NeoMedia's common stock under the 1998 Stock Option Plan. Each employee director
receives either fees of $2,000 per meeting attended or, at his election, options
to purchase an additional 3,000 shares of NeoMedia's common stock under the 1998
Stock Option Plan. The options vest immediately upon grant.

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

                                       45



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.

        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 Company  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 Company  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.

COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER

        Since August 1996, Charles W. Fritz has served as NeoMedia's Chairman of
the Board and Chief  Executive  Officer.  Mr. Fritz resigned as Chief  Executive
Officer in June 2002.  Charles T. Jensen is  currently  acting  Chief  Executive
Officer, President, Chief Operating Officer and a Director.

        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. Based on this information,
the  Committee  recommends  a  salary  adjustment  to the  Board  of  Directors.
Beginning in 1996,  NeoMedia and Mr. Fritz  entered into a five-year  employment
agreement under which Mr. Fritz was paid $170,000 per year. In January 1998, the
Committee  increased  Mr.  Fritz's  salary  to  $250,000.  In  April  2001,  the
employment  agreement  expired.  In June  2002,  Mr.  Fritz  resigned  as  Chief
Executive  Officer.  His  salary is  currently  $120,000  in his  capacity  as a
part-time business development executive.  NeoMedia owes Mr. Fritz approximately
$56,000  relating  to deferred  salary  from 2001 to 2002.  Charles T. Jensen is
currently Acting Chief Executive Officer with a salary of $180,000 per year.

        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.  Mr.  Fritz  did not earn a bonus
relating to fiscal 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 had not been paid as of December 1, 2002.

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

                                       46



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.

                             AUDIT COMMITTEE REPORT

        The  Audit   Committee  for  the  last  fiscal  year  consisted  of  two
nonemployee  Directors  (a third  resigned  in  September  2001).  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 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 2001 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,  2001 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 prospectus or
registration 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.

                                       47


                             EXECUTIVE COMPENSATION

        The following table sets forth certain  information  with respect to the
compensation  paid during the years ended  December 31, 2001,  2000 and 1999 to:
(i)  NeoMedia's  Chief  Executive  Officer  and (ii)  each of  NeoMedia's  other
executive  officers  as  of  December  31,  2001  who  received  aggregate  cash
compensation  during the year ended  December 31, 2001 in excess of $100,000 for
services rendered to NeoMedia:



                                                         SUMMARY COMPENSATION TABLE
---------------------------------------------------------------------------------------------------------------------------------
                                  ANNUAL COMPENSATION(1)                                  LONG-TERM COMPENSATION
                               ----------------------------                  ---------------------------------------------------
                                                                                          SECURITIES
                                                                  OTHER      RESTRICTED   UNDERLYING
                                                                  ANNUAL        STOCK      OPTIONS/        LTIP      ALL OTHER
                                        SALARY     BONUS       COMPENSATION    AWARD(S)     SARS(2)      PAYOUTS    COMPENSATION
NAME AND PRINCIPAL POSITION    YEAR      ($)        ($)            ($)           ($)          (#)          ($)          ($)
-----------------------------  ------  --------  --------     -------------  ----------  ------------   ----------  ------------
                                                                                                 
Charles W. Fritz               2001    $221,758  $      -              --           --      400,000           --         $21,352(4)
   Chairman of the Board       2000     250,000   148,800(3)           --           --       49,000           --          22,502(4)
                               1999     250,000         -              --           --      400,000           --          84,914(4)

Charles T. Jensen              2001     144,239         -              --           --      240,000           --          17,794(4)
   President, Chief Operating  2000     150,000    87,860(3)           --           --       37,000           --          29,767(4)
   Officer, and Acting Chief   1999     150,000         -              --           --      180,000           --          42,712(4)
   Chief Executive Officer


----------

(1)     In accordance with the rules of the Securities and Exchange  Commission,  other  compensation in the form of perquisites and
        other  personal  benefits has been omitted in those  instances  where the  aggregate  amount of such  perquisites  and other
        personal benefits constituted less than the lesser of $50,000 or 10% of the total of annual salary and bonuses for the Named
        Executive Officer for such year.

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

(3)     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.

(4)     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.

                                                                 48




        The following table contains  information  regarding  options granted in
the year ended December 31, 2001, by NeoMedia's named executive officers.

                        OPTION GRANTS IN LAST FISCAL YEAR


                                   PERCENT
                                   OF TOTAL
                                   OPTIONS/
                                    SARS
                      NUMBER OF    GRANTED
                     SECURITIES      TO                                           POTENTIAL REALIZED VALUE
                     UNDERLYING   EMPLOYEES   EXERCISE                            AT ASSUMED ANNUAL RATES
                       OPTIONS       IN       OR BASE                           OF STOCK PRICE APPRECIATION
                       GRANTED     FISCAL      PRICE                                  FOR OPTION TERM
NAME                    (#)         YEAR     ($/SHARE)    EXPIRATION DATE          5% ($)          10%($)
-----------------   ------------ ----------  ---------  --------------------   -----------------------------

                                                                              
Charles W. Fritz      200,000       5.7%      $2.50      January 2, 2011          $814,447      $1,296,871
                      200,000       5.7%      $0.20      September 13, 2011       $65,156         $103,750

Charles T. Jensen      90,000       2.6%      $2.50      January 2, 2011          $366,501        $583,592
                      150,000       4.3%      $0.20      September 13, 2011       $48,867         $77,812


        The following table contains information  regarding options exercised in
the year ended  December  31,  2001,  and the  number of shares of common  stock
underlying  options held as of December 31, 2001, by NeoMedia's  named executive
officers.



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



                                                                             VALUE OF UNEXERCISED
                                                 NUMBER OF SECURITIES            IN-THE-MONEY
                                                UNDERLYING UNEXERCISED      OPTIONS/SARS AT FISCAL
                                                OPTIONS/SARS AT FISCAL             YEAR END
                                                       YEAR END           EXERCISABLE/UNEXERCISABLE(1)
                                              --------------------------  ----------------------------
                       SHARES
                    ACQUIRED ON     VALUE
                      EXERCISE     REALIZED   EXERCISABLE  UNEXERCISABLE   EXERCISABLE  UNEXERCISABLE
NAME                    (#)          ($)
-----------------  -------------  ----------  -----------  -------------   -----------  -------------
                                                                              
Charles W. Fritz          --           --      699,600        549,400             --            --
Charles T. Jensen         --           --      413,186        292,200             --            --


----------
(1)     Based on the closing price of $0.14 of NeoMedia's common stock as quoted
        on OTC Bulletin Board on December 31, 2001 and the exercise price of the
        option.

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.

        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.

EMPLOYMENT AGREEMENTS

        The five year employment agreements between NeoMedia and each of Charles
W. Fritz, as Chief Executive  Officer and Chairman of the Board,  and Charles T.
Jensen, as Executive Vice-President and Chief Technical Officer expired on April

                                       49



30,  2001.  Their  annual  compensation,  which  at the time of  expiration  was
$250,000 and  $150,000,  respectively,  was  continued  except that each agreed,
along with other officers of NeoMedia, to a 20% reduction in the annual rate for
the two month  period ended July 15, 2001 in the effort to reduce  expenses.  We
plan to  renegotiate  new  employment  agreements  with Mr.  Jensen.  Mr.  Fritz
resigned as Chief  Executive  Officer in June 2002.  In the interim,  we entered
into agreements  providing for six months  severance in the event of termination
related to a change of control.  During the year ended  December 31,  2001,  the
Board of  Directors  granted Mr.  Fritz  options to purchase  400,000  shares of
common stock under the 1998 Stock Option Plan, 200,000 of which were exercisable
at the price of $0.20 per share,  and  200,000 of which  were  exercisable  at a
price of $2.50 per share.  During the year ended December 31, 2001, the Board of
Directors  granted Mr. Jensen options to purchase 240,000 shares of common stock
under the 1998 Stock Option Plan, 150,000 of which were exercisable at the price
of $0.20 per share, and 90,000 of which were exercisable at a price of $2.50 per
share.  Mr. Fritz had received  under the 1998 Stock Option Plan during the year
ended December 31, 2000,  options to purchase 49,000 shares of common stock at a
price of $4.44 per share and during the year ended December 31, 1999, options to
purchase  200,000  shares at a price of $3.63 per share and  options to purchase
200,000  shares at a price of $5.13.  Mr.  Jensen  received  options to purchase
37,000  shares at $4.44 per share  during 2000,  and 90,000  shares at $3.63 and
90,000  shares at $5.13  during  1999,  in each case under the 1998 Stock Option
Plan.

INCENTIVE PLAN FOR MANAGEMENT

        Effective as of January 1, 1996,  NeoMedia  adopted an Annual  Incentive
Plan for  Management,  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.

STOCK OPTION PLANS

        Effective as of February 1, 1996, NeoMedia adopted its 1996 Stock Option
Plan, which was amended and restated effective July 18, 1996 and further amended
through  November 18, 1996. 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.  Nonqualified
options  granted under the 1996 Stock Option Plan with respect to 155,664 shares
were outstanding as of December 1, 2002.

        Effective March 27, 1998,  NeoMedia  adopted its 1998 Stock Option Plan.
The 1998 Stock Option Plan  provides for authority for the Board of Directors to
the grant  non-qualified  stock  options  with respect to a maximum of 8,000,000
shares of common stock. Nonqualified options granted under the 1998 Stock Option
Plan with respect to 5,454,555 shares were outstanding as of December 1, 2002.

        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.  Nonqualified  options granted under the 2002 Stock Option Plan
with respect to 3,145,000 shares were outstanding as of December 1, 2002.

                                       50



401(K) PLAN

        NeoMedia maintains a 401(k) Profit Sharing Plan and Trust. 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, which
is $10,500  for 2001 and  $11,000  for 2002) 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 $16,000.  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,  2003.  Monthly  rent on this
facility was negotiated from approximately  $9,000 per month to $3,000 per month
for a period of nine months as part of a settlement agreement between us and the
landlord  finalized in August 2002. In March 2001,  with the  acquisition of the
assets of Qode.com,  Inc., we added an additional 8,388 square feet office lease
at 4850 N. State Road 7, Suite 104, Ft. Lauderdale,  Florida,  with monthly rent
totaling  approximately  $9,200.  Upon the  discontinuation of the Qode business
unit, we vacated the premises.  We were subsequently sued by Headway Associates,
the landlord, for past and future rents on the facility. We settled the suit for
cash payments of $100,000,  all of which have been made.  During 2001, we closed
our  office  in  Monterrey,  Mexico,  which  was  primarily  used for  sales and
consulting  efforts.  We believe that existing  office space is adequate to meet
current and short-term requirements.

                                       51



                                LEGAL PROCEEDINGS

INTERNATIONAL DIGITAL SCIENTIFIC, INC.

      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 September
30,  2002,  we had a past  due  balance  under  the IDSI  note of  approximately
$256,000.  We have filed a  counterclaim  with the  arbitrator  relating to this
matter. The arbitration hearing has not yet been scheduled.

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,  we entered  into a  non-binding  letter of intent with
AirClic 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  from us  secured  by all of our  assets,
including our physical  world-to-Internet  patents.  During the  negotiation  of
definitive  agreements,  the letter of intent was  abandoned on the basis of our
alleged breach of certain representations made by us in the promissory note.

        On  September  6, 2001,  AirClic  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 under the terms of a
letter of intent  entered into between  AirClic and us. The letter of intent was
subsequently   abandoned  on  the  basis  of  our  alleged   breach  of  certain
representations  made by us in the promissory  note issued to AirClic in respect
of such advance.  The note issued by us in respect of AirClic's $500,000 advance
is secured by  substantially  all of our  property,  including our core physical
world-to-Internet  technologies.  If we are  unsuccessful  in  this  litigation,
AirClic,  which  is  one  of  our  key  competitors,   could  acquire  our  core
intellectual  property  and other  assets,  which would have a material  adverse
effect  on  our  business,  prospects,   financial  condition,  and  results  of
operations.  We are vigorously defending this claim and have filed counterclaims
against AirClic.  As of the date of this  prospectus,  pleadings were closed and
the  parties  have  engaged in  written  discovery.  Whether  or not  AirClic is
successful in asserting its claims that we breached certain representations made
by it in the note, the note became due and payable in accordance  with its terms
on January 11, 2002. Based on the cash currently available to us, payment of the
note and related  interest would have a material adverse effect on our financial
condition.  If we fail to pay such  note,  AirClic  could  proceed  against  our
intellectual  property  and other  assets  securing  the note which would have a
material adverse effect on our business,  prospects,  financial  condition,  and
results of  operations.  We have not accrued any  additional  liability over and
above the note  payable and related  accrued  interest.  As of December 3, 2002,
pleadings were closed and the parties have engaged in written discovery.

        AirClic  has also filed suit  against us 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 us 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 our core patented or patentable  technology is  non-protectable  and in the
public domain would have a material  adverse effect on our business,  prospects,
financial condition, and results of operations. We are vigorously defending this
second  action as well.  On November  21,2001,  we 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,  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  for
bankruptcy under Chapter 7 of the United States Bankruptcy Code.

OTHER LITIGATION

        In April 2001, our former President and director filed a lawsuit against
us and several of our 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 we

                                       52



breached the employment agreement.  The individual's employment with us ended in
January  2001.  During May 2002, we settled the suit. We will make cash payments
of $90,000 directly to the plaintiff during the period May 2002 through December
2002, of which $50,000 has been paid as of the date of this prospectus.  We will
also make cash payments to the plaintiff's attorney for legal fees in the amount
of $45,000 over the next several months, of which $7,500 has been paid as of the
date of this prospectus.  In addition, the plaintiff was granted 360,000 options
to  purchase  shares of our common  stock at an exercise  price of $0.08.  As of
March 31, 2002, we had accrued a $347,000  liability  relating to the suit. As a
result, we 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  September  30, 2002 we had an accrued  liability  of
$72,000 relating to this matter.

        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  Ripfire and us in May 2001 relating to
implementation  of the Qode  Universal  Commerce  Solution.  On  September 6, we
settled the suit for $133,000 of our common  stock,  to be valued at the average
closing  price  for the five  days  preceding  the date  that  such  shares  are
registered for resale with the Securities and Exchange Commission.

        On October 3, 2001,  Headway  Associates,  Ltd.  filed a  complaint  for
damages in the Circuit  Court of the  Seventeenth  Judicial  Circuit for Broward
County, Florida. Headway Associates,  Ltd. is seeking payment of all amounts due
under the terms the lease agreement of the Ft.  Lauderdale  office of NeoMedia's
Qode business unit. The lease commenced on March 3, 2000 and terminates on March
31, 2005. On February 25, 2002,  Headway agreed to accept  $100,000 cash payment
over a two-month  period for  settlement of all past-due and future amounts owed
under the lease.  As of June 30, 2002, we had made all payments  relating to the
settlement.

        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.
We are  currently  negotiating  settlement  of this  matter.  We have  accrued a
liability of $525,000 in the accompanying financial statements.

        On March 20,  2002,  IOS  Capital,  Inc.  filed a summons  seeking  full
payment of approximately  $38,700 relating to past due and future payments under
an office  equipment  lease.  During April 2002, we settled this matter for cash
payments  totaling  $29,000.  As of September 30, 2002, we had made all payments
under the settlement agreement.

        On July 22, 2002, 2150 Western Court,  L.L.C.,  the property manager for
our 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 8, 2002, we settled for
cash  payments of  approximately  $72,000 on past due amounts over the remaining
term of the  lease,  which  expires  in October  2003.  Additionally,  we issued
900,000  shares of our common  stock,  which are  included in this  registration
statement, in exchange for a reduction in rent of approximately $55,000 over the
period from August 2002 to March 2003. NeoMedia had a liability of approximately
$61,000 relating to this matter as of September 30, 2002.

        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.  On November  12,  2002,  NeoMedia  settled the lawsuit with its former
General  Counsel over payment of the 2000  executive  incentive,  severance  and
unpaid  vacation days in the amount of  approximately  $154,000.  The settlement
calls for cash  payments  totaling  approximately  $100,000  over a period of 10
months,  plus 250,000  vested  options to purchase  shares of NeoMedia's  common
stock at an exercise price of $0.01 and a term of five years.

        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. We have accrued  approximately  $92,000 relating to this matter.
We are  attempting  to negotiate  settlement of this issue out of court prior to
the court date.

                                       53



        On September 13, 2002,  Wachovia Bank, N.A. 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 on our headquarters in Ft.
Myers,  Florida.  On October  28,  2002,  NeoMedia  settled  this  lawsuit.  The
settlement calls for cash payments of past due rents of  approximately  $250,000
over a period of 16 months.  NeoMedia will also vacate  approximately 70% of the
unused space in its  headquarters,  and the rent for the remainder of the lease,
which expires  January 2004,  will be reduced  according to square footage used.
NeoMedia accrued a liability of approximately  $250,000  relating to this matter
as of September 30, 2002.

        On October 28, 2002, Merrick and Klimek,  P.C., a law firm that formerly
represented  us, filed a complaint in Circuit Court for the  Twentieth  Judicial
Circuit  of  Florida,  seeking  payment  of a  note  payable  in the  amount  of
approximately  $170,000.  The note was entered into in September 2001 between us
and Merrick and Klimek and matured  unpaid in February  2002. The balance of the
note consists of fees for legal services provided in 2001 and earlier.

                                       54



                             PRINCIPAL STOCKHOLDERS

        The  following  table  sets  forth,  as of  December  1,  2002,  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 and  director-nominee;
(iii)  each  named  executive  officer;  and (iv)  all  executive  officers  and
directors as a group.



                                                                  COMMON STOCK BENEFICIALLY OWNED
                                                                  -------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER       TITLE OF CLASS      NUMBER OF SHARES   PERCENT OF CLASS(1)
----------------------------------------   -----------------   -----------------  -------------------
                                                                                       
Charles W. Fritz (2)
2201 Second Street, Suite 402
Fort Myers, Florida  33901                 Common Stock                4,454,955                17.5%

Fritz Family Limited Partnership(3)
2201 Second Street, Suite 402
Fort Myers, Florida  33901                 Common Stock                1,511,742                 6.0%

Chandler T. Fritz 1994 Trust(3)(4)(5)
2201 Second Street, Suite 402
Fort Myers, Florida  33901                 Common Stock                   58,489                    *

Charles W. Fritz 1994 Trust(3)(4)(6)
2201 Second Street, Suite 402
Fort Myers, Florida  33901                 Common Stock                   58,489                    *

Debra F. Schiafone 1994 Trust(3)(4)(7)
2201 Second Street, Suite 402
Fort Myers, Florida  33901                 Common Stock                   48,489                    *

William Fritz(3)
2201 Second Street, Suite 402
Fort Myers, Florida  33901                 Common Stock                  439,701                 1.7%

Edna Fritz(3)
2201 Second Street, Suite 402
Fort Myers, Florida  33901                 Common Stock                   90,609                    *

Charles T. Jensen(8)
2201 Second Street, Suite 402
Fort Myers, Florida  33901                 Common Stock                1,420,086                 5.6%

David A. Dodge(9)
2201 Second Street, Suite 402
Fort Myers, Florida  33901                 Common Stock                  188,820                    *

A. Hayes Barclay(10)
2201 Second Street, Suite 402
Fort Myers, Florida  33901                 Common Stock                  269,000                 1.1%

James J. Keil(11)
2201 Second Street, Suite 402
Fort Myers, Florida  33901                 Common Stock                  423,000                 1.7%

Officers and Directors As a Group (9
Persons) (12)                              Common Stock                8,863,380                34.9%

Thornhill Capital LLC (13)
C/o Alan Refkin
3709 Fielding Drive
Springfield, IL.  62707                    Common Stock                3,336,955                13.1%



----------
*       Indicates less than 1%.

(1)     Applicable  percentage  of  ownership is based on  25,391,298  shares of
        common  stock  outstanding  as  of  December  1,  2002,   together  with
        securities exercisable or convertible into shares of common stock within
        60 days of December 1, 2002 for each stockholder.  Beneficial  ownership
        is  determined  in  accordance  with  the  rules of the  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  1,  2002 are  deemed to be
        beneficially owned by the person holding such options 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.  Outstanding  shares excludes  53,620,023
        shares issued into escrow on December 2, 2002, as collateral  for a note
        payable by NeoMedia to an unrelated investor. The shares are restricted,

                                       55



        and the  note  holder  does  not have  title  to the  securities  unless
        NeoMedia  defaults on the note, which matures on May 1, 2003. The shares
        are therefore not deemed to be outstanding.

(2)     Shares  beneficially  owned  include  100  shares  owned  by each of Mr.
        Fritz's four minor  children  for an aggregate of 400 shares,  1,369,400
        shares of common stock  issuable upon exercise of options  granted under
        our 2002 and 1998 stock option  plans,  1,500,000  shares  issuable upon
        exercise of stock  warrants,  42,186 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.

(3)     William E. Fritz, our corporate secretary, and his wife, Edna Fritz, are
        the  general  partners  of the  Fritz  Family  Limited  Partnership  and
        therefore  each are deemed to be the  beneficial  owner 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 shares of  NeoMedia  held in each trust.  Accordingly,  Mr.
        William E. Fritz is deemed to be the beneficial owner of an aggregate of
        2,207,519  shares,  165,467 of which as a result of being trustee of the
        Chandler T. Fritz 1994  Trust,  Charles W. Fritz 1994 Trust and Debra F.
        Schiafone 1994 Trust,  1,511,742  shares as a result of being co-general
        partner of the Fritz  Family  Partnership,  268,787  shares owned by Mr.
        Fritz or his spouse,  12,523  shares to be issued  upon the  exercise of
        warrants held by Mr. Fritz or his spouse and 249,000 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.

(4)     William E. Fritz is the trustee of this Trust and therefore is deemed to
        be the beneficial owner of such shares.

(5)     Chandler T. Fritz,  son of William E. Fritz, is the primary  beneficiary
        of this trust.

(6)     Charles W.  Fritz,  son of William  E.  Fritz and our  president,  chief
        executive officer, and Chairman of the Board, is the primary beneficiary
        of this trust.

(7)     Debra F.  Schiafone,  daughter  of  William  E.  Fritz,  is the  primary
        beneficiary of this trust.

(8)     Includes  1,418,586  shares of common stock  issuable  upon  exercise of
        options granted under our 2002, 1998, and 1996 stock option plans.

(9)     Includes  188,820  shares of common  stock  issuable  upon  exercise  of
        options granted under our 2002 and 1998 stock option plans.

(10)    Includes  264,000  shares of common  stock  issuable  upon  exercise  of
        options granted under our 1996 and 1998 stock option plans.  The address
        of the  referenced  individual  is c/o Barclay & Damisch  Ltd.  115 West
        Wesley Street Wheaton, IL 60187.

(11)    Includes  283,000  shares of common  stock  issuable  upon  exercise  of
        options granted under  NeoMedia's 1996 and 1998 stock option plans,  and
        140,000 shares owned by Mr. Keil directly. The address of the referenced
        individual  is  c/o  Keil  &  Keil  Associates  733  15th  Street,  N.W.
        Washington D.C., 20005.

(12)    Includes an  aggregate  of 3,772,806  currently  exercisable  options to
        purchase shares of common stock granted under our 1996 stock option plan
        and 1998 stock option plan and 1,512,523 currently  exercisable warrants
        to purchase shares of common stock.

(13)    Beneficial  ownership is comprised of  1,432,055  shares  issuable  upon
        exercise of stock  options  granted under our 2002 and 1998 stock option
        plans, and 1,904,900 shares issuable upon exercise of stock warrants.

                                       56



                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        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.) that 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  will also grant to the  holders an  additional  192,000  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.  In the event  NeoMedia  defaults on the
note, NeoMedia will issue an additional  1,404,330 shares of its common stock to
the note holders. The notes are secured by our intellectual  property,  which is
subject  to first  lien by  AirClic,  Inc.  NeoMedia  will  continue  to  pursue
additional capital through the issuance of Convertible  Secured Promissory Notes
with the same terms as above.

        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
had not been  repaid  as of the date of this  filing  and  continues  to  accrue
interest.

        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.

        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
has not been  repaid  as of the date of this  filing  and  continues  to  accrue
interest.

        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
has not been  repaid  as of the date of this  filing  and  continues  to  accrue
interest.

        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 2001 there was no  delinquency  in the
Section  16(a) filing  obligations  of  NeoMedia's  officers,  directors and ten
percent beneficial owners.

                                       57



                          COMPARATIVE STOCK PERFORMANCE

        The  following  graph  compares  the  yearly  percentage  change  in the
cumulative  total  stockholder  return  (change in stock  price plus  reinvested
dividends) on NeoMedia's  common stock with the cumulative  total return for the
Nasdaq Stock Market Index (U.S.) and the Dow Jones Internet Composite Index. The
graph assumes that $100 was invested in the common stock of NeoMedia and in each
of the  comparative  indices on December  31,  1996,  the trading day before the
beginning of NeoMedia's  fifth preceding  fiscal year. The graph further assumes
that such amount was initially invested in the common stock of NeoMedia at a per
share price of $5.625,  the price at which  shares of  NeoMedia's  common  stock
closed  on  the  Nasdaq SmallCap Market on December 31, 1996. The comparisons in
the graph are required by the  Securities  and Exchange  Commission  and are not
intended  to  forecast  or be  indicative  of  possible  future  performance  of
NeoMedia's common stock.


                     COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
                        AMONG NEOMEDIA TECHNOLOGIES, INC.
                THE NASDAQ COMPOSITE AND DOW-JONES INTERNET INDEX

[GRAPHIC OMITTED]

           ---------------------------------
              NEOM        100       ECM
           ---------------------------------
--------------------------------------------
                         Nasdaq   Dow-Jones
   Date     NeoMedia     Comp     Internet
--------------------------------------------

12/31/1996   100.000    100.000   100.000
01/31/1997   111.111    112.198   100.000
02/28/1997   102.222    103.543   100.000
03/31/1997    86.667     97.041   100.000
04/30/1997    86.667    106.499   100.000
05/28/1997    82.222    119.631   100.000
06/30/1997   134.444    116.551   100.000
07/30/1997   156.667    134.044   100.000
08/31/1997   193.333    130.765   104.531
09/30/1997   183.333    133.578   122.281
10/29/1997   171.111    125.373   122.566
11/30/1997   144.444    127.899   117.909
12/31/1997   161.668    120.633   120.115
01/31/1998   122.222    130.409   120.873
02/28/1998   132.222    145.384   148.263
03/31/1998   138.889    148.614   168.266
04/30/1998   155.001    151.958   183.807
05/28/1998   137.778    147.905   166.109
06/30/1998    86.667    162.820   214.476
07/30/1998    60.555    173.134   201.712
08/31/1998    46.667    138.836   132.534
09/30/1998    45.556    163.811   171.905
10/29/1998    44.444    169.999   180.672
11/30/1998    35.556    189.681   256.419
12/31/1998    51.111    223.533   322.964
01/31/1999    73.333    258.984   491.346
02/28/1999    63.333    234.401   397.430
03/31/1999    82.222    256.451   524.322
04/30/1999    87.221    260.104   601.392
05/28/1999    93.333    254.401   505.556
06/30/1999   108.889    279.630   530.373
07/30/1999   140.000    276.484   450.490
08/31/1999   157.778    291.817   457.637
09/30/1999   120.000    293.160   503.910
10/29/1999    94.444    321.106   533.503
11/30/1999    97.778    361.195   655.996
12/31/1999    84.444    451.426   861.668
01/31/2000   173.333    434.651   811.297
02/29/2000   248.889    519.497   957.774
03/31/2000   151.111    535.434   824.677
04/30/2000   168.889    459.382   643.207
05/31/2000    91.666    404.704   515.420
06/30/2000   104.444    458.239   618.012
07/31/2000   104.444    439.436   570.532
08/31/2000    78.889    496.444   690.105
09/30/2000   113.333    434.719   615.344
10/31/2000    88.889    399.618   491.997
11/30/2000    53.333    305.169   315.420
12/31/2000    53.333    285.100   292.744
01/31/2001    88.889    315.696   326.155
02/28/2001    86.667    232.337   204.374
03/31/2001    88.889    191.542   149.487
04/30/2001    52.089    225.863   187.927
05/31/2001    38.044    219.135   188.378
06/30/2001    34.667    223.136   181.041
07/31/2001    20.444    204.978   146.312
08/31/2001     4.267    178.935   113.485
09/30/2001     3.911    142.248    83.446
10/31/2001     2.844    166.161    99.387
11/30/2001     1.956    194.318   126.180
             -------    -------   -------
12/31/2001     2.489    192.005   133.575

        The above graph compares the closing price of NeoMedia's common stock on
the Nasdaq  SmallCap  Market at the end of each month versus the weekend closing
price of the Nasdaq Composite Index and the Dow-Jones  Internet  Composite Index
for the period  January 1, 1997  through  December 31,  2001.  We believe  these
indices  provide the best  benchmark  by which to compare the price of our stock
against competitors and others in similar markets.

                                       58



                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 1, 2002,  there were
25,391,298 common shares outstanding. This amount of outstanding shares excludes
53,620,023  shares issued into escrow on December 2, 2002,  as collateral  for a
note payable by NeoMedia to an unrelated  investor.  The shares are  restricted,
and the note  holder  does not have  title  to the  securities  unless  NeoMedia
defaults on the note, which matures on May 1, 2003. The shares are therefore not
deemed to be 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:

                                  THE NASDAQ SMALLCAP MARKET
                                           (U.S. $)
------------------------------------------------------------------------------
2000                          HIGH                            LOW
------------------------------------------------------------------------------
First Quarter                  $14.50                        $5.69
Second Quarter                  11.13                         5.00
Third Quarter                    6.75                         4.13
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                    0.13                         0.02

HOLDERS OF COMMON EQUITY

        As of December 1, 2002, NeoMedia had 168 recordholders of common stock.

DIVIDENDS

        We have not  declared or paid any  dividends  on our common stock during
the nine months ended  September 30, 2002 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.

RECENT SALES OF UNREGISTERED SECURITIES

        On December 2, 2002,  Jerald Eicke was issued 4,000,000 shares of common
stock in exchange for consulting  services rendered.  The shares of common stock
were priced at $0.05 totaling a value of $200,000.

                                       59



        On December 2, 2002, NeoMedia 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,  NeoMedia  entered into a
Pledge  Agreement,  dated  December  2, 2002,  by and between  NeoMedia  and the
Investor under which  NeoMedia  issued  53,620,020  shares of common stock to an
unrelated  third party as collateral  for the  Promissory  Note. In the event of
default,  the third party would issue the shares to the  Investor,  and NeoMedia
would  issue  additional  shares as required  to  increase  Mr.  Kesselbrenner's
ownership  of  securities  of  NeoMedia  to  equal  51%  of  its   fully-diluted
outstanding shares at the time of such default.

        On November 12, 2002,  NeoMedia and Cornell Capital Partners  terminated
the May 2002 Equity Line of Credit  Agreement and entered into a new 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 NeoMedia'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 advance by NeoMedia.  NeoMedia will
pay 5% of the gross  proceeds  of each  purchase  to  Cornell  as a  commission.
According  to the terms of the  agreement,  NeoMedia  cannot draw on the line of
credit until the shares underlying the agreement are registered for trading with
the  Securities and Exchange  Commission.  Cornell  Capital  received a one-time
commitment  fee payable in 2,000,000  shares of our common stock.  Additionally,
Westrock  Advisors,  Inc. was paid a fee of 62,500 shares of  NeoMedia's  common
stock for acting as the placement agent.

        In September 2002, NeoMedia issued 1,161,402 shares of common stock upon
exercise of outstanding  options by an unrelated  consultant at a price of $0.01
per share. The gross proceeds of such transaction were approximately $12,000.

        In August 2002,  NeoMedia  issued 900,000 shares of common stock to 2150
Western  Court  L.L.C,  the landlord of its 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 July,  August and September 2002, we issued an aggregate of 3,000,000
shares of our  common  stock  upon the  exercise  of  outstanding  options  by a
consultant at a price of $0.01 per share. The gross proceeds of such transaction
were $30,000.

        In July 2002, we issued 575,980 shares of common stock upon the exercise
of outstanding options by an unrelated consultant at a price of $0.01 per share.
The gross proceeds of such transaction were approximately $6,000.

        In June 2002, we issued  900,000 shares of common stock to two unrelated
consultants  as payment for  consulting  services to be performed from June 2002
through June 2003. There were no cash proceeds to us in these transactions.

        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 May 2002,  we issued an  aggregate  of 200 shares of our common stock
upon the exercise of outstanding  options by an employee at a price of $0.12 per
share. The gross proceeds of such transaction were $24.

        During  April 2002,  NeoMedia  repriced  7.4 million of its 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  are
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
the  Company's  common  stock fell below  $0.12,  and has not closed above $0.12
since. As a result, no options were exercised under the terms of the program and
NeoMedia did not recognize any expense relating to the repricing  program during
the nine  months  ended  September  30,  2002 due to  immaterial  effect  on the
financial statements.

        In April 2002,  we issued an aggregate  of 140,775  shares of our common
stock upon the  exercise  of  outstanding  warrants  by Charles  W.  Fritz,  its
Chairman and Chief Executive  Officer,  at a price of $0.12 per share. Mr. Fritz
subsequently  sold the  shares  into the  market.  The  gross  proceeds  of such
transaction were  approximately  $17,000.  In accordance with Section 16(b), all
proceeds from the sales were retained by us.

        In April 2002, we issued an aggregate of 1,962,255  shares of our common
stock upon the exercise of  outstanding  options by two  unrelated  parties at a
price  of  $0.12  per  share.  The  gross  proceeds  of  such  transaction  were
approximately $235,000.

                                       60



        In April 2002,  we issued an  aggregate  of 40,000  shares of our common
stock upon the  exercise  of  outstanding  options by James J. Keil,  an outside
director.  Mr. Keil  purchased  25,000 shares at an exercise price of $0.135 and
15,000  shares  at  $0.20.   The  gross  proceeds  of  such   transaction   were
approximately $6,000.

        During  March 2002,  NeoMedia  repriced  1.2 million of its common stock
warrants  for a period of six months.  During the term of the warrant  repricing
program, participating holders are 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
$38,000 in expense  relating  to the  repricing  during  the nine  months  ended
September 30, 2002.

        In March 2002,  we issued an aggregate  of 228,675  shares of our common
stock upon the exercise of outstanding warrants by an unrelated party at a price
of $0.12 per share. The gross proceeds of such  transaction  were  approximately
$27,000.

        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 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,  NeoMedia issued 55,000 shares of its 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 September  2001,  we issued  150,000  options to buy shares of common
stock at a price of $0.20 per share for consulting services.

        In July  2001,  we issued an  aggregate  of 11,300  shares of our common
stock upon the exercise of  outstanding  warrants at a price of $2.00 per share.
The  gross  proceeds  of  such  transaction  were  $23,000.  The  warrants  were
originally  issued to one unrelated party for professional  services provided to
us.

        In June 2001, we issued  warrants to purchase  404,900  shares of common
stock with an exercise price of $2.09 for consulting services.

        In June 2001, we issued an aggregate of 4,100 shares of our common stock
upon the  exercise of  outstanding  warrants at a price of $2.00 per share.  The
gross proceeds of such  transaction  were $8,000.  The warrants were  originally
issued to one unrelated party for professional services provided to us.

        In May 2001,  we issued an  aggregate  of  320,050  shares of our common
stock upon the exercise of  outstanding  warrants at a price of $2.00 per share.
The  gross  proceeds  of such  transaction  were  $641,000.  The  warrants  were
originally  issued to one related party in exchange for  forgiveness of debt and
one unrelated party for professional services provided to us.

        In April 2001,  we issued  warrants to purchase  50,000 shares of common
stock at a price of $0.01  per  share to an  outside  institution  for  services
performed.

        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

                                       61



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 2001,  we issued  170,000  shares of our common stock  issuable
upon the  exercise  of  outstanding  warrants  held by a  foreign  institutional
unrelated party,  originally issued in connection with the transaction described
in paragraph 4, above. The gross proceeds of such transaction were approximately
$362,000.

        In October 2000, we issued  warrants to purchase 80,000 shares of common
stock at a price of $4.13 per share for consulting services.

        In October  2000,  we issued  warrants to purchase  1,400,000  shares of
common stock at a price of $6.00 per share to Digital:Convergence Corporation as
consideration for a 10-year intellectual property license agreement.

        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 March 2000,  we issued  187,500  shares of our common  stock upon the
exercise  of  outstanding  warrants  at a price of $7.38  per  share.  The gross
proceeds of such transaction were  approximately  $1,383,000.  The warrants were
originally issued as payment for professional services provided to us.

        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.

        In December 1999, we issued options to purchase 150,000 shares of common
stock at a price of $0.20 per share for consulting services.

        In November 1999, we issued an aggregate of 143,334 shares of our common
stock at a price of $3.75  per  share to two  individual  and two  institutional
unrelated  parties.  In connection with the sale, we also issued an aggregate of
5,067 warrants with an exercise price of $5.50,  1,267 warrants with an exercise
price of $4.75,  5,333  warrants  with an  exercise  price of  $4.67,  and 2,667
warrants with an exercise price of $5.84. The gross proceeds of such transaction
were approximately $538,000. In connection with the sale, we paid commissions of
approximately $35,000.

                                       62



        In October  1999, we issued 15,000 shares of our common stock at a price
of $4.38 per share to an individual  unrelated  party.  In  connection  with the
sale, we also issued 1,500 warrants with an exercise  price of $4.38.  The gross
proceeds of such transaction were approximately $66,000.

        In  September  1999,  we issued an  aggregate  of 210,000  shares of our
common  stock at a price of $7.00 per share to one  foreign  individual  and two
foreign institutional  unrelated parties. The gross proceeds of such transaction
were  approximately  $1,470,000.  In  connection  with the sale,  we issued as a
commission  105,000  warrants  to  purchase  shares  of our  common  stock at an
exercise price of $6.00 per share to a foreign institutional investor.

        In  September  1999,  we issued an  aggregate  of 275,231  shares of our
common  stock  at a price  of  $5.75  per  share  to two  individual  and  three
institutional  unrelated parties. In connection with the sale, we also issued an
aggregate of 27,523 warrants with an exercise price of $6.75. The gross proceeds
of such transaction were approximately  $1,583,000. In connection with the sale,
we paid commissions of $30,000 cash, and also issued 11,172 shares of its common
stock  valued at $6.19 per share and 10,000  warrants to purchase  shares of our
common stock at an exercise price of $6.19 per share.

        In June 1999, we issued 250,000 shares of our common stock at a price of
$4.00 per share to A.T. Cross Company,  an unrelated  party.  In connection with
the sale, we also issued 100,000  warrants with an exercise price of $7.00.  The
gross proceeds of such transaction were approximately $1,000,000.

        In May 1999, we issued an aggregate of 65,000 shares of our common stock
at a price of $4.75 per share to two individual unrelated parties. In connection
with the sale,  we also issued an aggregate of 6,500  warrants  with an exercise
price of $5.00.  The  gross  proceeds  of such  transaction  were  approximately
$309,000.  In connection with the sale, we paid  commissions of $3,375 cash plus
3,250  warrants to purchase  shares of our common stock at an exercise  price of
$5.00 per share.

        In April 1999, we issued an aggregate of 1,000,000  shares of our common
stock at a price of $3.45 per share to two foreign individual  unrelated parties
and four institutional unrelated parties, three of which were foreign. The gross
proceeds of such transaction were approximately  $3,450,000.  In connection with
the sale, we issued as a commission  175,000  warrants to purchase shares of our
common stock at an exercise price of $3.45 per share to a foreign  institutional
unrelated party.

        In April 1999,  we issued  warrants to purchase  50,000 shares of common
stock at a price of $0.01  per  share to an  outside  institution  for  services
performed.

        In February  1999,  we issued  250,000  shares of our common  stock at a
price  of  $4.00  per  share to A.T.  Cross  Company,  an  unrelated  party.  In
connection with the sale, we also issued 100,000 warrants with an exercise price
of $5.00. The gross proceeds of such transaction were $1,000,000.

        In January and February  1999, we issued an aggregate of 145,000  shares
of our common stock at a price of $3.50 per share to six unrelated parties,  two
of which were foreign institutions,  two of which were foreign individuals,  and
two of which were domestic  individuals.  In  connection  with the sale, we also
issued an aggregate of 3,000 warrants with an exercise price of $3.50. The gross
proceeds of such transaction were approximately $507,500. In connection with the
sale, we also issued as a commission  280,000 warrants to purchase shares of our
common stock at an exercise price of $2.13 per share to five of the purchasers.

        In January  1999, we issued 42,857 shares of our common stock at a price
of $3.50 per share to an individual  related party. In connection with the sale,
we also  issued  4,286  warrants  with an  exercise  price of  $3.50.  The gross
proceeds of such transaction were approximately $150,000.

        In January  1999,  we issued  82,372  shares of our  common  stock to an
individual  related party at a price of $3.04 per share.  In connection with the
sale, we also issued 8,237 warrants with an exercise  price of $3.04.  The gross
proceeds of such transaction were approximately $250,000.

        In January 1999, we issued warrants to purchase 230,000 shares of common
stock at a price of  $2.13  per  share to an  outside  consultant  for  services
performed.

        In November  1998,  we borrowed  $500,000,  in two  separate  notes from
unrelated third parties.  These notes were due in November 1999 with an interest
rate of 20%. One $250,000 note was extended until January 6, 2000, and the other
was extended until February 25, 2000. These notes were secured by 375,000 shares
of our common  stock by placing  them in an escrow  account.  These  shares were

                                       63



considered  issued  but not  outstanding  for  1999.  As part of  obtaining  the
financing, 37,500 stock warrants, exercisable at $2.00 per share, were issued to
the lender.  These warrants were exercised in February 2000.  During 2000,  both
notes were repaid and the 375,000  shares  securing the notes have been released
from escrow and retired by us.

        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.

                                       64



                            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 June 6, 2002,  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 50,000,000 to 200,000,000 and the number of share of preferred stock,
par value $0.01 per share,  that we are  authorized to issue from  10,000,000 to
25,000,000;  and (ii) implement the 2002 Stock Option Plan, under which NeoMedia
is  authorized  to  grant  to  employeees,  directors,  and  consultants  up  to
10,000,000  options to purchase  shares of its common  stock.  As of December 1,
2002,  25,391,298  shares of common  stock  were  outstanding,  and no shares of
preferred  stock were  outstanding.  This amount of outstanding  shares excludes
53,620,023  shares issued into escrow on December 2, 2002,  as collateral  for a
note payable by NeoMedia to an unrelated  investor.  The shares are  restricted,
and the note  holder  does not have  title  to the  securities  unless  NeoMedia
defaults on the note, which matures on May 1, 2003. The shares are therefore not
deemed to be outstanding.  None of our shares of preferred stock are outstanding
as of the date of this prospectus.

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.

        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:

                                       65



        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,
which are being registered for sale hereby.

        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

                                       66



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 1, 2002 there were  outstanding  warrants  and options to
purchase 7,705,090 and 8,755,219, shares of our common stock, respectively, with
exercise prices ranging from $0.00 to $15.00. 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 June 6, 2002, NeoMedia shareholders approved the 2002 Option Plan.
Under this plan,  NeoMedia is authorized to grant to employees,  directors,  and
consultants  up to  10,000,000  options  to share  of its  common  stock.  As of
November 20, 2002, we had issued 6,415,000 options under the 2002 plan, of which
3,250,000 had been exercised.

        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

                                       67



stock fell below $0.12,  and has not closed above $0.12 since.  As a result,  no
options were  exercised  under the terms of the program and we did not recognize
any expense  relating to the  repricing  program  during the first six months of
2002.

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.

        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.

                                       68



                                  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 year ended December 31, 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 years  ended  December  31,  2000 and 1999,
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.

        The  financial  statements  of  Qode.com,   Inc.  (A  Development  Stage
Enterprise)  at  December  31,  1999 and for the  period  from  March  29,  1999
(inception)  through  December  31,  1999,  appearing  in  this  Prospectus  and
Registration  Statement  have been  audited  by Ernst & Young  LLP,  independent
certified  public  accountants,  as set  forth in their  report  thereon  (which
contain an explanatory  paragraph  describing  conditions that raise substantial
doubt about  NeoMedia's  ability to continue as a going  concern as described in
Note 1 to the financial statements) appearing elsewhere herein, and are included
in reliance  upon such report given on the  authority of such firm as experts in
accounting and auditing.

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 issued 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.

                                       69


                           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.

                                       70



                          INDEX OF FINANCIAL STATEMENTS

Qode.com Inc. financial statements for the year ending
 December 31, 2000..........................................................F-1

Qode.com, Inc. financial statements for Period from
 March 29, 1999 (inception) to December 31, 1999...........................F-19

Pro-forma financial information............................................F-36

NeoMedia Technologies, Inc. consolidated financial
  statements for the years ended December 31, 2001,
  2000 and 1999,...........................................................F-41

NeoMedia Technologies, Inc. consolidated financial
 statements for the nine months ended September 30,
 2002 and 2001.............................................................F-68

                                       71



This is a copy of the audit report  previously  issued by Arthur Andersen LLP in
connection  with  Qode.com,  Inc.'s filing for the year ended December 31, 2000.
This audit report has not been  reissued by Arthur  Andersen  LLP in  connection
with this registration statement. See Exhibit 23.4 for further discussion.

                              FINANCIAL INFORMATION

Report of Independent Certified Public Accountants

To Qode.com, Inc.:

We have audited the  accompanying  balance  sheet of  Qode.com,  Inc. (a Florida
corporation in the  development  stage) as of December 31, 2000, and the related
statements   of   operations,   changes  in  redeemable   preferred   stock  and
stockholders'  deficit,  and cash flows for the year then ended and the  related
statements of operations and cash flows for the period from inception (March 29,
1999) to December 31, 2000. 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  audit.  We did  not  audit  the  financial
statements of Qode.com, Inc. for the period from inception to December 31, 1999.
Such  statements are included in the cumulative  inception to December 31, 2000,
totals of the statements of operations and cash flows and reflect total revenues
and net  loss of zero  percent  and 13  percent,  respectively,  of the  related
cumulative totals. Those statements were audited by other auditors, whose report
has been furnished to us, and our opinion,  insofar as it relates to amounts for
the period from  inception  to December  31,  1999,  included in the  cumulative
totals, is based solely upon the report of the other auditors.

We conducted our audit 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 audit and the  report of the other  auditors
provide a reasonable basis for our opinion.

In our  opinion,  based on our audit and the report of the other  auditors,  the
financial statements referred to above present fairly, in all material respects,
the  financial  position of  Qode.com,  Inc. as of December  31,  2000,  and the
results of its operations and its cash flows for the year then ended and for the
period from  inception to December  31,  2000,  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 1 to the
financial  statements,  the Company has suffered  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 regard to these matters
are also  described  in Note 1. The  financial  statements  do not  include  any
adjustments that might result from the outcome of this uncertainty.

/s/ ARTHUR ANDERSEN LLP

Tampa, Florida,
May 4, 2001 (except with respect to the matter discussed in Note 13, as to which
the date is June 30, 2001)

                                      F-1



                                 QODE.COM, INC.
                        (A Development Stage Enterprise)
                        BALANCE SHEET - DECEMBER 31, 2000

                                        ASSETS                          Amount
                                                                    ------------
CURRENT ASSETS:
  Cash and cash equivalents                                           $   18,686
  Accounts receivable                                                      6,041
  Inventory                                                              218,690
  Other current assets                                                    13,499
                                                                    ------------
   Total current assets                                                  256,916

PROPERTY AND EQUIPMENT, net                                              875,263

CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net                            2,359,932

DEPOSITS                                                                  39,539
                                                                    ------------
   Total assets                                                      $ 3,531,650
                                                                    ============

                                      F-2



                                 QODE.COM, INC.
                        (A Development Stage Enterprise)
                        BALANCE SHEET - DECEMBER 31, 2000
                                   (continued)

LIABILITIES, REDEEMABLE PREFERRED STOCK AND
 STOCKHOLDERS' DEFICIT                                                  Amount
                                                                     -----------
CURRENT LIABILITIES:
  Accounts payable                                                   $   982,610
  Dividends payable                                                       94,119
  Accrued expenses                                                       425,103
  Current portion of notes payable                                     3,617,323
  Current portion of capital lease obligations                           368,574
  Loans from officers                                                    224,740
                                                                     -----------
   Total current liabilities                                           5,712,469

NOTES PAYABLE, net of current portion                                      5,857

CAPITAL LEASE OBLIGATIONS, net of current portion                        168,176
                                                                     -----------
   Total liabilities                                                   5,886,502
                                                                     -----------
COMMITMENTS AND CONTINGENCIES

SERIES A 15% CUMULATIVE CONVERTIBLE REDEEMABLE
  PREFERRED STOCK, $.0001 par value;   3,000,000                       2,480,991
   shares authorized,  2,044,560  shares issued
   and outstanding, liquidation value of $2,502,641

STOCKHOLDERS' DEFICIT:
  Common stock, $.0001 par value; 25,000,000 shares                          802
   authorized, 8,023,000 shares issued and outstanding
  Additional paid-in capital - common stock                            1,927,313
  Series U  convertible preferred stock, $.0001 par value;                   150
  1,500,000 shares authorized, issued and outstanding
  Additional paid-in capital - preferred stock                         2,999,850
  Accumulated deficit                                                (9,763,958)
                                                                     -----------

   Total stockholders' deficit                                       (4,835,843)
                                                                     -----------

   Total liabilities, redeemable preferred stock and
    stockholders' deficit                                           $ 3,531,650
                                                                    ============

       The accompanying notes are an integral part of this balance sheet.

                                      F-3



                                 QODE.COM, INC.
                        (A Development Stage Enterprise)
                             STATEMENT OF OPERATIONS
               FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD
       FROM MARCH 29, 1999 (DATE OF INCEPTION), THROUGH DECEMBER 31, 2000

                                                                   CUMULATIVE
                                                                      FROM
                                                                   INCEPTION
                                                                 MARCH 29, 1999
                                                   YEAR ENDED          TO
                                                  DECEMBER 31,     DECEMBER 31
                                                      2000            2000
                                                ---------------  --------------

REVENUE                                         $    211,952     $     211,952

COST OF GOODS SOLD                                   213,345           213,345
                                                ---------------  --------------
GROSS MARGIN                                         (1,393)           (1,393)

COSTS AND EXPENSES:
  Research and development                         1,109,686         1,505,928
  Sales and marketing                                556,541           598,516
  General and administrative                       5,839,413         6,686,825
                                                ---------------  --------------
   Total costs and expenses                        7,505,640         8,791,269

NET INTEREST EXPENSE                               1,008,938           971,296
                                                ---------------  --------------

NET LOSS                                         (8,515,971)       (9,763,958)

PREFERRED STOCK DIVIDENDS                          (356,203)         (552,200)

ACCRETION OF BENEFICIAL CONVERSION
 FEATURE ON PREFERRED STOCK                         (15,296)          (20,010)
                                                ---------------  --------------
Net LOSS AVAILABLE TO COMMON
 STOCKHOLDERS                                   $(8,887,470)     $(10,336,168)
                                                ===============  ==============

NET LOSS PER SHARE - BASIC AND DILUTED          $     (1.11)    $      (1.29)
                                                ===============  ==============

WEIGHTED AVERAGE NUMBER OF COMMON SHARES           8,023,000        8,018,071
                                                ===============  ==============


        The accompanying notes are an integral part of these statements.

                                      F-4



                                 QODE.COM, INC.
                        (A Development Stage Enterprise)
  STATEMENT OF CHANGES IN REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
                      FOR THE YEAR ENDED DECEMBER 31, 2000



                          ADDITIONAL                             ADDITIONAL
                           SERIES A                                PAID-IN
                          REDEEMABLE                               CAPITAL           SERIES U
                          PREFERRED          COMMON STOCK        FOR COMMON       PREFERRED STOCK
                            STOCK        SHARES       AMOUNT        STOCK       SHARES       AMOUNT
                         ------------   ---------   ----------   -----------    ---------   ---------
                                                                          
BALANCE, December 31,
  1999                   $  2,154,711   8,023,000         $802   $  (49,557)           --   $      --
  Issuance of 19,560
   shares of Series A
   preferred stock in
   exchange for
   services                    48,900          --           --            --           --          --
  Issuance of Series U
   preferred stock                 --          --           --            --    1,500,000         150
  Issuance of 372,780
   warrants in
   exchange for
   services                        --          --           --     1,126,790           --          --
  Issuance of 326,666
   warrants attached
   with notes payable              --          --           --       675,681           --          --
  Issuance of employee
   stock options with
   exercise price
   below market value              --          --           --       150,216           --          --
  Re-pricing of
   employee stock
   options                         --          --           --       395,682           --          --
  Series A preferred
   stock dividends            262,084          --           --     (262,084)           --          --
  Series U preferred
   stock dividends                 --           --           --     (94,119)           --          --
  Accretion of
   beneficial
   conversion
  feature on preferred
   stock                       15,296           --           --     (15,296)           --          --
  Net loss                         --           --           --           --           --          --
                         ------------   ----------   ----------  -----------    ---------  ----------
BALANCE, December 31,
  2000                     $2,480,991    8,023,000         $802  $ 1,927,313    1,500,000  $      150
                         ============   ==========   ==========  ===========    =========  ==========


                               ADDITIONAL
                                PAID-IN
                                CAPITAL
                                  FOR                              TOTAL
                               PREFERRED       ACCUMULATED      STOCKHOLDER'S
                                 STOCK           DEFICIT           DEFICIT
                              -----------      -----------      -------------
BALANCE, December 31,
  1999                                 --      $(1,247,987)     $ (1,296,742)
  Issuance of 19,560
   shares of Series A
   preferred stock in
   exchange for
   services                            --               --                --
  Issuance of Series U
   preferred stock              2,999,850               --         3,000,000
  Issuance of 372,780
   warrants in
   exchange for
   services                            --               --         1,126,790
  Issuance of 326,666
   warrants attached
   with notes payable                  --               --           675,681
  Issuance of employee
   stock options with
   exercise price
   below market value                  --               --           150,216
  Re-pricing of
   employee stock
   options                             --               --           395,682
  Series A preferred
   stock dividends                     --               --         (262,084)
  Series U preferred
   stock dividends                     --               --          (94,119)
  Accretion of
   beneficial
   conversion feature
   on preferred stock                  --               --          (15,296)
  Net loss                             --      (8,515,971)       (8,515,971)
                             ------------   --------------    --------------
BALANCE, December 31,
  2000                        $ 2,999,850    $ (9,763,958)     $ (4,835,843)
                             ============   ==============    ==============

           The accompanying notes are integral part of this statement.

                                      F-5



                                 QODE.COM, INC.
                        (A Development Stage Enterprise)
                             STATEMENT OF CASH FLOWS
               FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD
       FROM MARCH 29, 1999 (DATE OF INCEPTION), THROUGH DECEMBER 31, 2000


                                                                                          CUMULATIVE
                                                                                             FROM
                                                                                          INCEPTION
                                                                                          (MARCH 29,
                                                                                            1999)
                                                                           YEAR ENDED         TO
                                                                          DECEMBER 31,   DECEMBER 31
                                                                              2000           2000
                                                                         -------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
                                                                                   
   Net loss                                                               $ (8,515,971)  $(9,763,958)
   Adjustments to reconcile net loss to net cash used in operating
     activities-
     Depreciation and amortization                                              417,410       434,932
     Series A preferred stock issued for services                                48,900        48,900
     Warrants issued in exchange for services                                 1,126,790     1,884,627
     Stock options issued with exercise price below market value                150,216       150,216
     Expense related to the re-pricing of employee stock options                395,682       395,682
     Changes in assets and liabilities-
      Accounts receivable                                                       (6,041)       (6,041)
      Inventory                                                               (218,690)     (218,690)
      Other current assets                                                        4,652      (13,499)
      Deposits                                                                  (9,310)      (39,539)
      Accounts payable                                                          831,022       982,610
      Accrued expenses                                                          377,857       425,103
                                                                           ------------  ------------
        Net cash used in operating activities                               (5,397,483)   (5,719,657)
                                                                           ------------  ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                          (382,222)     (509,013)
  Capitalization of software development costs                              (2,498,752)   (2,498,752)
                                                                           ------------  ------------

   Net cash used in investing activities                                    (2,880,974)   (3,007,765)
                                                                           ------------  ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of notes payable and detachable warrants             4,298,861     3,623,180
  Proceeds from loans from officers                                             151,407       224,740
  Principal repayments of capital lease                                       (125,612)     (125,612)
  Proceeds from the issuance of common stock                                         --        23,800
  Proceeds from the issuance of Series A redeemable preferred stock net              --     2,000,000
   of issuance costs of $25,000
  Proceeds from issuance of Series U convertible preferred stock              3,000,000     3,000,000
                                                                           ------------  ------------

   Net cash provided by financing activities                                  7,324,656     8,746,108
                                                                           ------------  ------------

NET DECREASE IN CASH AND CASH EQUIVALENTS                                     (953,801)        18,686

CASH AND CASH EQUIVALENTS, beginning of year                                    972,487            --
                                                                           ------------  ------------

CASH AND CASH EQUIVALENTS, end of year                                    $      18,686  $     18,686
                                                                           ============  ============


                                      F-6



                                 QODE.COM, INC.
                         A Development Stage Enterprise
                             STATEMENT OF CASH FLOWS
                      FOR THE YEAR ENDED DECEMBER 31, 2000
             AND THE PERIOD FROM MARCH 29, 1999 (DATE OF INCEPTION),
                            THROUGH DECEMBER 31, 2000
                                   (continued)



                                                                                         CUMULATIVE
                                                                                             FROM
                                                                                          INCEPTION
                                                                                          (MARCH 29,
                                                                                            1999)
                                                                           YEAR ENDED         TO
                                                                          DECEMBER 31,   DECEMBER 31,
                                                                              2000           2000
                                                                          ------------  ------------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
                                                                                   
  Cash paid for interest                                                   $    180,000  $    160,189

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
  Accretion of redeemable preferred stock                                  $     15,296        20,010
  Accrued dividends on Series A preferred stock                            $    262,084       458,081
  Accrued dividends on Series U preferred stock                            $     94,119        94,119
  Property and equipment acquired under capital lease                      $    662,362       662,362



        The accompanying notes are an integral part of these statements.

                                      F-7



                                 QODE.COM, INC.
                        (A Development Stage Enterprise)
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 2000


1       NATURE OF BUSINESS ORGANIZATION

Qode.com, Inc. (Qode.com or the Company) commenced operations on March 29, 1999,
and is  incorporated  in the State of Florida.  Qode.com is a development  stage
company, as defined in Statement of Financial Accounting Standards (SFAS) No. 7,
"Accounting and Reporting By Development Stage Enterprises". The Company intends
to provide  manufacturers,  retailers,  advertisers  and users a unique tool for
Website  navigation  through the use of imbedded  standard bar codes and Uniform
Product Codes (UPC). It is the Company's mission to develop,  operate,  maintain
and promote the use of Qode.com technologies to enable any bar code to interface
with their technology.

The Company's financial  statements have been prepared assuming that the Company
will  continue as a going  concern.  The Company has  incurred  losses since its
inception and during its development  stage as it has devoted  substantially all
of its  efforts  toward  building  network  infrastructure,  internal  staffing,
developing systems,  expanding into new markets, building a proprietary database
and raising  capital.  The Company has generated  little  revenue to date and is
subject  to a number of risks,  including  dependence  on key  individuals,  the
ability  to  demonstrate  technological  feasibility,  and the  need  to  obtain
adequate additional financing necessary to fund the development and marketing of
its products and  services,  and customer  acceptance.  These  conditions  raise
substantial  doubt about the Company's  ability to continue as a going  concern.
The financial  statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and  classification  of  liabilities  that may results  from the outcome of this
uncertainty.

2       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF 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 and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

For purposes of reporting  cash flows,  the Company  considers all highly liquid
investments  purchased  with an original  maturity of three months or less to be
cash equivalents.

INVENTORY

Inventory is stated at the lower of cost or market, and at December 31, 2000 was
comprised of QoderTM  handheld  scanning  systems.  Cost is determined using the
weighted average method.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost less accumulated depreciation. Repairs
and  maintenance  are charged to expense as incurred.  Depreciation  is computed
using the  straight-line  method over the estimated  useful lives of the related
assets.  Computer  hardware and purchased  software are being depreciated over a
three-year  period,  and  furniture  and fixtures are being  depreciated  over a
five-year period.

Depreciation expense was $278,590 for the year ended December 31, 2000.

CAPITALIZED SOFTWARE DEVELOPMENT COSTS

In  accordance  with the  American  Institute of  Certified  Public  Accountants
Statement  of Position  No.  98-1,  "Accounting  for Costs of Computer  Software
Developed or Obtained for Internal Use," all costs related to the development or
purchase  of  internal  use  software  other  than  those  incurred  during  the

                                      F-8



application  development  stage are to be expensed as incurred.  Costs  incurred
during the  application  development  stage are required to be  capitalized  and
amortized  over the  useful  life of the  software.  The  Company  has  expensed
$1,109,686  in research and  development  costs for the year ended  December 31,
2000. The Company has capitalized  $2,498,752 in software  development costs for
the year ended December 31, 2000. Amortization expense was $138,820 for the year
ended December 31, 2000.

REDEEMABLE PREFERRED STOCK

Redeemable preferred stock is carried at the net consideration to the Company at
time of  issuance,  increased  by accrued and unpaid  cumulative  dividends  and
periodic  accretion to redemption value using the interest  method.  Accrued and
unpaid  dividends  and  redemption  accretion  are  affected by charges  against
retained earnings,  or, in the absence of retained earnings,  additional paid-in
capital.

REVENUE RECOGNITION

Revenue  is  generated  from the sale of Qode's  proprietary  hand held bar code
scanners. Revenue is recognized when the product is delivered to the customer.

INCOME TAXES

In accordance with Statement of Financial  Accounting  Standards (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, 2000.

COMPUTATION OF NET LOSS PER SHARE

Basic and diluted  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 common stock  equivalents  from the  calculation of
diluted net loss per share  because  these  securities  are  anti-dilutive.  The
shares  excluded from the calculation of diluted net loss per share and reserved
for future issuance are detailed in the table below:

                                                               2000
                                                          -------------
                 Outstanding stock OPTIONS                  1,540,511
                 Outstanding warrants                       1,229,146
                 Shares issuable on conversion of notes
                   payable                                  6,800,000
                 Shares issuable on conversion of Series
                   A preferred stock                        4,049,701

Shares  issuable on  conversion of notes  payable were  calculated  based on the
terms of the notes as if they were converted on December 31, 2000.

FINANCIAL INSTRUMENTS

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

CONCENTRATION OF CREDIT RISK

Revenue was generated from the selling of barcode scanners with approximately 91
percent of those sales to one customer.

ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company has adopted SFAS No. 123, "Accounting for Stock-Based compensation."
The provisions of SFAS 123 allow  companies to either expense the estimated fair
value of stock options or to continue to follow the  intrinsic  value method set

                                      F-9



forth in Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees"  (APB 25), but disclose the pro forma effects on net income
or loss as if the fair value had been expensed. The Company has elected to apply
APB 25 in accounting for its employee stock options and, accordingly  recognizes
compensation expense for the difference between the fair value of the underlying
common stock and the grant price of the option at the measurement date.

RECENT ACCOUNTING PRONOUNCEMENTS

In  June  1998  the  FASB  issued  SFAS  No.  133,  "Accounting  for  Derivative
Instruments  and Hedging  Activities",  as amended by SFAS No. 137 and SFAS 138.
SFAS No. 133, as amended,  establishes  accounting  and reporting  standards for
derivative  instruments,  including certain derivative  instruments  embedded in
other  contracts,  and for  hedging  activities.  It  requires  that  an  entity
recognize all  derivatives  as either assets of liabilities in the balance sheet
and  measure  those  instruments  at fair  value.  The  adoption  of  these  new
accounting  standards did not have an impact on the Company's financial position
or results of operations.

On December 3, 1999 the Securities and Exchange  Commission (SEC) staff released
Staff  Accounting  Bulletin  (SAB)  No.  101,  "Revenue  Recognition".  This SAB
provides guidance on the recognition,  presentation and disclosure of revenue in
financial statements.  The Company implemented SAB No. 101 for the quarter ended
June 30, 2000. It did not have an impact on the Company's results of operations.

COMPREHENSIVE INCOME

For the year ended  December 31,  2000,  there were no  differences  between the
balance sheet and income statement and therefore no comprehensive income.

3       LOANS FROM OFFICERS

Between October and December 2000,  several of the Company's officers elected to
defer their salaries due to cash flow  difficulties  experienced by the Company.
The total amount deferred was $83,154.

On November 28, 2000, the Company issued  promissory notes to officers  totaling
$135,000,  with an interest rate of 6.09 percent. The principal and interest are
payable on February 26, 2001

4       PROPERTY AND EQUIPMENT

Property and equipment consists of the following as of December 31, 2000:

                                                                 2000
                                                             ------------
           Computer hardware and purchased software          $  1,139,578
           Furniture and fixtures                                  31,797
                                                             ------------
                                                                1,171,375
           Less- Accumulated depreciation                       (296,112)
                                                             ------------
                                                             $    875,263
                                                             ============

5       NOTES PAYABLE

CONVERTIBLE NOTES

On January 18, 2000, the Company entered into a note purchase  agreement with an
investor for $3,000,000,  with an interest rate of 12 percent. The principal and
interest were due July 17, 2000.  The principal and interest are  convertible at
the option of the holder upon or after a $10 million  financing.  The conversion
rate is 85 percent of the price per share in the financing.  In connection  with
this note,  200,000  warrants  were issued  with an exercise  price of $4.50 per
share for the Company's common stock. These warrants may be exercised at anytime
following the closing of a $10 million  financing  and expire  January 17, 2005.
The Company  allocated  the  proceeds  from the issuance of the note between the
note and  warrants  based on the  relative  fair value  method.  The  difference
between the face amount of the note and the amount  allocated to it was recorded
as a discount, and amortized to interest expense over the life of the note.

                                      F-10



On August 1, 2000,  the Company  extended  this note to November  17,  2000.  As
additional  consideration for the extension of the note, the Company reduced the
exercise  price of the 200,000  warrants  to $1.00.  The  additional  expense of
$63,180 that resulted from the re-pricing was charged to interest expense. As of
December 31, 2000, the note had not been repaid.

During 2000,  the Company  entered into four separate  note purchase  agreements
with  investors  totaling  $400,000  with  interest  rates  of 12  percent.  The
principal  and  interest on three of the notes were due October 9, 2000  through
November 4, 2000, and principal and interest on the other note is due January 6,
2001.  The  principal and interest are  convertible  at the option of the holder
upon or after a $7 million  financing.  The conversion rate is 85 percent of the
price per  share in the  financing.  In  connection  with  these  notes,  26,666
warrants were issued with an exercise price of $2.00 per share for the Company's
common stock.  These warrants may be exercised at anytime  following the closing
of a $7 million  financing.  The  proceeds  from the issuance of these notes and
warrants  were  allocated  between the two using the relative fair value method.
The resulting  discount on the notes was amortized to interest  expense over the
life of the notes.

OTHER NOTE PAYABLE

During March 2000,  the Company  entered into a note  agreement in the amount of
$42,500, bearing interest at a rate of 11 percent per year and expiring on March
15,  2002,  to  finance  its phone  system.  The note is  secured  by  telephone
equipment.

On November 28, 2000 and December 14, 2000,  the Company  signed two  promissory
notes in the amounts of $20,000 and $200,000, bearing interest at a rate of 6.09
percent and 15 percent per year,  with  principal and accrued  interest  payable
February 26, 2001 and January 28, 2001,  respectively.  In  connection  with the
December 14, 2000 note,  100,000  warrants were issued with an exercise price of
$.50 per share for the Company's  common stock.  These warrants may be exercised
at  anytime  following  the  closing  of the Next  Financing,  as defined in the
warrant agreement. The proceeds from the issuance of this note and warrants were
allocated  between the two using the relative fair value  method.  The resulting
discount on the note is being amortized to interest expense over the life of the
note.

Notes payable consists of the following:

                                                                     AMOUNT
                                                                  ------------
        Convertible notes, interest bearing at 12% per annum      $  3,400,000
        Note payable, interest bearing at 11% per annum, due
          in monthly installments through March 2002                    27,679
        Note payable, unsecured interest bearing at 6.09% per
          annum, due February 2001                                      20,000
        Note payable, unsecured interest bearing at 15% per
          annum, due January 2001                                      200,000
                                                                  ------------

        Total notes payable                                          3,647,679

        Less discount                                                 (24,499)
        Less- Current portion                                      (3,617,323)
                                                                  ------------

        Notes payable, net of current portion                       $    5,857
                                                                  ============

AS OF DECEMBER 31, 2000 THERE WAS $197,740 OF ACCRUED INTEREST.

                                      F-11



6       INCOME TAXES

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

                                             2000
                                         ------------
                    Current               $         -
                    Deferred                        -
                                         ------------
                    Income tax            $         -
                    expense


The net amounts of deferred tax assets recorded in the balance sheet at December
31, 2000, are as follows:

                                                                      2000
                                                                  ------------
        Deferred tax asset:
          Depreciation of property and equipment                   $   17,901
          Start-up costs                                              199,566
          Net operating loss carryforward                           3,443,643
          Less- Valuation allowance                                (3,661,110)
                                                                  ------------
           Total deferred tax asset                                $      --
                                                                  ============
        Deferred tax liabilities:                                  $      --
                                                                  ============

           Total net deferred taxes                                $      --
                                                                  ============

SFAS No. 109  requires a valuation  allowance  to reduce the deferred tax assets
reported  if, based on the weight of the  evidence,  it is more likely than not,
that some portion or all of the deferred tax assets will not be realized.  After
consideration  of all the evidence,  both positive and negative,  management has
determined  that a  $3,661,110  valuation  allowance  at  December  31,  2000 is
necessary  to reduce the deferred tax assets to the amount that will more likely
than not be realized. The change in the valuation allowance for the current year
is  $3,194,880.  At December 31, 2000,  the Company has  available net operating
loss carryforwards of $9,151,323, which expire in the year 2020 and 2019.

A reconciliation of income taxes computed at the U.S. federal statutory tax rate
to income tax expense for the year ended December 31, 2000, is as follows:

                                                         2000
                                                     ------------

          Taxes at the U.S. statutory rate           $(2,895,430)
          State taxes, net of federal benefit           (309,129)
          Nondeductible items                               9,679
          Change in valuation allowance                 3,194,880
                                                     ------------

            Total income tax expense                 $          -
                                                     ============

7       COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

The Company is not presently a party to any significant litigation. From time to
time,  however,  the Company is involved in various legal actions arising in the
normal course of business, which the Company believes will not materially affect
the financial position or results of operations.

                                      F-12



EMPLOYMENT CONTRACTS

The Company has  employment  contracts with William  Carpenter,  Greg Miller and
Michael Miller beginning November 1, 2000.

Future payments under the above employment contracts are:

                               2001          $   450,000
                               2002              450,000
                               2003              375,000
                                             -----------

                               Total         $ 1,275,000
                                             ===========

CAPITAL LEASE OBLIGATIONS

During April 2000, the Company acquired computer  equipment for $662,362 under a
capital  lease,  expiring on April 26, 2002.  Accumulated  depreciation  on this
equipment was approximately $166,000 at December 31,2001

Future  minimum  lease  payments  on capital  lease  obligations  as of December
31,2000, are as follows:

          YEAR                                                       AMOUNT
          --------------------------------------------------      -----------
          2001                                                    $  415,358
          2002                                                       173,519
                                                                  -----------
                                                                     588,877
          Less - Amount representing interest on
           obligations under capital leases (15%)                    (52,127)
          Current portion of capital lease obligations              (368,574)
                                                                  -----------
          Capital lease obligations, net of current portion       $  168,176
                                                                  ===========
OPERATING LEASE OBLIGATIONS

The Company leases its office  facility under a  non-cancelable  operating lease
expiring in March 2005. Rental expense, net of sub-lease income, was $73,036 for
the year ended December 31, 2000.

Lease commitments under this non-cancelable  operating leases as of December 31,
2000, are as follows:

                      YEAR ENDING           AMOUNT
                      -------------     --------------
                      2001               $    391,399
                      2002                    233,876
                      2003                    154,905
                      2004                    117,768
                      2005                      5,103
                                        --------------
                                         $    903,051
                                        ==============

                                      F-13



8       PREFERRED STOCK

SERIES A 15% CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK

The  Board of  Directors  (the  Board)  has  authorized  the  issuance  of up to
3,000,000  shares of Series A 15 percent $.0001 par value,  voting,  cumulative,
redeemable, convertible preferred stock (the Series A Preferred Stock). Series A
Preferred  Stock is convertible at any time at the option of the holder prior to
the closing of a Public Offering, as defined in the agreement, or within 20 days
following receipt of a Notice of Redemption,  as defined in the agreement,  into
the Company's  common stock for each share of the Series A Preferred  Stock held
plus accrued and unpaid dividends on the Series A Preferred Shares. The Series A
Preferred Stock has a liquidation  preference of $1 per share and is mandatorily
redeemable on April 15, 2004.

In June 2000, the Company  issued 19,560 shares of the Series A Preferred  Stock
at $2.50 per share for services rendered.

Dividends on the Series A Preferred Stock accrue,  on a daily basis,  commencing
on the date of  issuance  at an  interest  rate of 15 percent  per annum and are
payable on a semi-annual  basis. The Company,  at its option,  may pay dividends
either in cash or by the  issuance  of  additional  shares of Series A Preferred
Stock.  Aggregate  cumulative  dividends in arrears at December 31, 2000 totaled
$458,081,  and are included in Series A 15 % cumulative  convertible  redeemable
preferred stock on the accompanying balance sheet.

SERIES U CONVERTIBLE PREFERRED STOCK

The Board has authorized  the issuance of up to 1,500,000  shares of Series U, 8
percent $.0001 par value, voting,  cumulative,  convertible preferred stock (the
Series U Preferred  Stock).  Series U Preferred Stock is convertible at any time
at the option of the holder prior to the closing of a Public  Offering  into the
Company's  common stock for each share of the Series U Preferred Stock held plus
accrued and unpaid dividends on the Series U Preferred  Shares.  Between May and
October 2000, the Company issued 1,500,000 at $2 per share, with proceeds to the
Company of $3,000,000.

Dividends on the Series U Preferred Stock accrue,  on a daily basis,  commencing
on the date of  issuance  at an  interest  rate of 8  percent  per annum and are
payable on a semi-annual  basis. The Company,  at its option,  may pay dividends
either in cash or by the  issuance  of  additional  shares of Series U Preferred
Stock.  Aggregate  cumulative dividends in arrears at December 31, 2000, totaled
$94,119.

9       COMMON STOCK

The Company is  authorized  to issue up to  25,000,000  shares of its $.0001 par
value common stock.  During 2000,  no shares of common stock were issued.  As of
December 31, 2000, 8,023,000 shares were issued and outstanding.

10      STOCK BASED COMPENSATION

STOCK WARRANTS GRANTED IN EXCHANGE FOR SERVICES

During 2000, the Company granted 372,780 warrants,  with exercise prices ranging
from  $1.00  to $4.50  per  share,  to  consultants  for  certain  advisory  and
consulting  services.  The warrants  vest  immediately  upon issuance and can be
exercised over a five-year period.  In August 2000,  250,000 warrants granted at
$4.50 were re-priced to $1.00 per share.  In September  2000,  100,000  warrants
granted at $1.50 were  re-priced  to $0.01 per share.  The Company  valued these
warrants,  and their re-pricing,  at $1,126,790 in accordance with SFAS 123, and
recognized the entire amount in 2000 as general and  administrative  expenses in
the accompanying statement of operations.

STOCK WARRANTS GRANTED ATTACHED TO DEBT AGREEMENTS

During 2000, the Company granted 326,666 warrants,  with exercise prices ranging
from $.50 to $4.50,  attached to various  debt  agreements.  The  warrants  vest
immediately  upon  issuance and can be exercised  over a five-year  period.  The
Company applied APB Opinion No. 14,  "Accounting  for Convertible  Debt and Debt
Issued  with Stock  Purchase  Warrants",  and  accounted  for the portion of the
proceeds of the debt issued with warrants,  which was allocable to the warrants,
as  additional  paid-in  capital  based  on  the  relative  fair  values  of the
securities at the time of issuance,  and also  recognized a discount on the debt
as a result.

                                      F-14



In September 2000, 200,000 warrants granted at $4.50 were re-priced to $1.00 per
share in connection  with an extension of the term date of the debt. The Company
valued the  re-pricing at $63,180,  and  recognized the entire amount in 2000 as
interest expense in the accompanying statement of operations.

Warrant activity for the year ended December 31, 2000, is as follows:

           Balance December 31, 1999                 529,700
           Issued                                    699,446
           Exercised                                       -
           Expired                                         -
                                                  ------------

           Balance December 31, 2000               1,229,146
                                                  ============

The  following  table  summarizes  information  about  warrants  outstanding  at
December 31, 2000, all of which are exercisable:

                                                         WEIGHTED
                                                          AVERAGE
                                                         REMAINING
                                           NUMBER OF    CONTRACTUAL    WEIGHTED
                                          OUTSTANDING      LIFE        EXERCISE
    RANGE OF EXERCISE AVERAGE PRICES        WARRANTS      (YEARS)        PRICE

    $0.01 to $0.50                          200,000           3.3        $0.26
    $1.00                                   527,780           4.2        $1.00
    $1.50                                   429,700           3.8        $1.50
    $2.00                                    26,666           4.3        $2.00
    $2.50                                    45,000           4.2        $2.50
                                        -----------   -----------    ---------
                                          1,229,146           3.9        $1.13
                                        ===========   ===========    =========

STOCK OPTIONS

The Board approves all issuances of stock options. All stock options expire five
years from the grant date. In general,  options vest and become  exercisable one
third on the one year  anniversary of the date of grant,  and the remainder vest
evenly over the two years subsequent to that date.

The following table summarizes stock option activity for the year ended December
31, 2000:

                                                       2000
                                                     WTD AVG
                                                     OPTIONS         EXERCISE
                                                    (IN 000'S)         PRICE
                                                  --------------    ----------

          Outstanding at Beginning of Year                 881      $    1.36
            Granted                                      1,000           1.10
            Exercised                                       --           0.00
            Forfeited                                    (340)           1.63
                                                  --------------    ----------
          Outstanding at end of year                     1,541      $    1.15
                                                  ==============    ==========
          Vested Options                                   846      $    0.56

          Remaining Options available for Grant          3,459

                                      F-15



In June 2000,  the Company  reduced the  exercise  price on all its  outstanding
stock options.  As a result,  the Company  recognized  $395,682 in  compensation
expense in 2000 for the  vested  portion of these  options,  and will  recognize
$933,568 in subsequent periods as these options vest.

The Company  accounts for issuances to employees under APB 25, and  accordingly,
$545,898 of compensation expense, including the amount discussed above, has been
recognized for the year ended December 31, 2000.

SFAS 123 requires pro forma  information  regarding net income as if the Company
has accounted for its employee stock options under the fair value method of that
statement.  The fair value for these  options was estimated at the date of grant
using the Black-Scholes option pricing model with the following assumptions: (i)
risk-free  interest rate of 6 percent,  which  approximates  the four-year  U.S.
Treasury Bill rate at the date of grant,  (ii) dividend yield of 0 percent (iii)
expected  volatility  of 80  percent  (iv) and an average  expected  life of the
option of four years.

For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized to expense over the options'  vesting  period.  The  Company's  pro
forma information is as follows:

                                                          YEAR ENDED
                                                         DECEMBER 31,
                                                             2000
                                                        --------------
                 Net loss:
                   As reported                            $(8,515,971)
                   SFAS 123 pro forma                     $(8,902,427)

The  following  table  summarizes  the  weighted  average  fair value of options
granted to employees during the year ended December 31, 2000:

                                                                   2000
                                                              --------------
                 Stock Price Greater than Exercise Price
                    Weighted Average Fair Value                    $2.98

                 Stock Price Equal to Exercise Price
                   Weighted Average Fair Value                     $0.84

                 Stock Price Less than Exercise Price
                   Weighted Average Fair Value                     $0.82

The  following  table  summarizes  information  about  Company's  stock  options
outstanding as of December 31, 2000:

                         OPTIONS OUTSTANDING              OPTIONS EXERCISABLE
                        ---------------------            ---------------------
            AVG.        SHARES
          RANGE OF    OUTSTANDING   WTD. AVG   WTD. AVG     OPTIONS
          EXERCISE     EXERCISE    REMAINING   EXERCISE   EXERCISABLE   WTD.
           PRICES     (IN 000'S)      LIFE       PRICE    (IN 000'S)    PRICE
         ----------  ------------  ----------  ---------  -----------  --------
               $.25           350         3.5      $0.25         239      $0.25
               $.50           371         4.3      $0.50         341      $0.50
               $.75           375         4.2      $0.75         185      $0.75
              $1.00
           to $1.50           445         4.4      $1.05          81      $1.26
                     ------------  ----------  ---------  -----------  --------
                            1,541                                846      $0.56
                     ============                         ===========  ========

                                      F-16



11      RELATED PARTIES

The Company's  primary legal  counsel  holds  3,200,000  shares of the Company's
common  stock in trust for the law firm's  partners.  During  2000,  the Company
recorded expenses of approximately $123,000 related to services performed by its
primary legal counsel. The Company owed its primary legal counsel  approximately
$61,000 at December 31, 2000.

During 2000, Q Productions,  Inc., whose owners also own 4,800,000 shares of the
Company,  provided various information  technology services to the Company.  The
Company  recorded   approximately  $930,364  in  expenses  related  to  services
performed  by Q  Productions,  Inc. for the year ended  December  31, 2000.  The
Company owed Q Productions,  Inc. approximately $171,000 at December 31, 2000. Q
Productions, Inc. rented space from Qode.com in 2000 for $43,167 in total.

During 2000, the Company granted 20,000 warrants with an exercise price of $1.00
per share to Q Productions, Inc.

The Company has issued several promissory notes to officers (see Note 3).

12      SUBSEQUENT EVENTS

On January 11, 2001, the Company entered into a note purchase  agreement with an
investor for $300,000,  with an interest  rate of 18 percent.  The principal and
interest are due March 1, 2001.

In January  2001,  the Company  entered into a short-term  loan  agreement  with
NeoMedia  Technologies,  Inc. ("NeoMedia") for the amount of $440,000.  The note
was  forgiven in March 2001 upon the  acquisition  of  substantially  all of the
Company's assets by NeoMedia.

On March 1, 2001, NeoMedia purchased all of the assets of the Company other than
cash  including  but not limited to,  contracts,  customer  lists,  licenses and
intellectual  property.  In consideration for these assets, the Company received
1,676,500  shares of  NeoMedia's  Common  Stock.  In addition,  NeoMedia  issued
274,699  of its  Common  Stock to  certain  creditors  of the  Company,  for the
repayment of $1,561,037 of debt,  forgave the $440,000  short-term note due from
the Company (see above paragraph),  and assumed approximately  $1,407,000 of the
Company's  liabilities.  The 1,676,500 shares paid to the Company are to be held
in escrow for one year, and are subject to downward  adjustment,  based upon the
achievement of certain  performance  targets over the period of March 1, 2001 to
February 28, 2002.

Notes  payable as of  December  31,  2000 that were not  acquired as part of the
March 1, 2001 sale totaled 3,000,000 as of December 31, 2000.

13      SUBSEQUENT EVENTS

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. Qode.com,  Inc. has
consulted  with legal counsel and will be opposing the Chapter 7 proceeding  and
plans to proceed under Chapter 11, U.S. Code to reorganize its debts.

                                      F-17



FINANCIAL STATEMENTS

Qode.com, Inc.
(A Development Stage Enterprise)
Period  from March 29,  1999  (inception)  to  December  31, 1999 with Report of
Independent Certified Public Accountants

                                      F-18



                                 QODE.COM, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                              FINANCIAL STATEMENTS

           PERIOD FROM MARCH 29, 1999 (INCEPTION) TO DECEMBER 31, 1999

                                    CONTENTS

Report of Independent Certified Public Accountants                       F-20

Audited Financial Statements
Balance Sheet                                                            F-21
Statement of Operations                                                  F-22
Statement of Changes in
Redeemable Preferred Stock and Stockholders' Deficit                     F-23
Statement of Cash Flows                                                  F-24
Notes to Financial Statements                                            F-25

                                      F-19



               Report of Independent Certified Public Accountants

The Stockholders and Board of Directors Qode.com, Inc.

We have audited the accompanying  balance sheet of Qode.com,  Inc. (the Company)
(A  Development  Stage  Enterprise)  as of  December  31,  1999 and the  related
statement of operations,  and statement of changes in redeemable preferred stock
and stockholders' deficit, and statement of cash flows for the period from March
29, 1999 (inception)  through December 31, 1999. 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 audit.

We conducted our audit 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 audit  provides 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 Qode.com,  Inc. at December 31,
1999,  and the results of its operations and its cash flows for the period March
29, 1999  (inception)  through  December 31, 1999, in conformity with accounting
standards generally accepted in the United States.

The accompanying  financial  statements have been prepared  assuming the Company
will  continue  as a going  concern.  As more  fully  described  in Note 1,  the
Company, which is in the developmental stages has incurred a net operating loss,
experienced  negative cash flow from  operations and has a net capital  deficit.
These conditions raise substantial doubt about the Company's ability to continue
as a going  concern.  Management's  plans in regards to these  matters  are also
described in Note 1. The financial  statements do not include any adjustments to
reflect the possible future effects on the  recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.

                                                 /s/ ERNST & YOUNG LLP
West Palm Beach, Florida

July 21, 2000,
except for the  seventh and eighth  paragraphs  of Note 8, as to which the dates
are June 30, 2001 and July 22, 2002, respectively

                                      F-20



                                 QODE.COM, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                                  BALANCE SHEET
                                DECEMBER 31, 1999

  Assets
  Current assets:
  Cash and cash equivalents                                      $   972,487
  Other current assets                                                18,151
                                                                ------------
     Total current assets                                            990,638

  Property and equipment, net                                        109,269
  Deposits                                                            30,229
                                                                ------------
     Total assets                                                $ 1,130,136
                                                                ============
Liabilities, redeemable preferred stock and
 stockholders' deficit
 Current liabilities:
   Accounts payable                                              $  151,588
   Accrued expenses                                                  47,246
   Due to officers                                                   73,333
                                                                ------------
     Total current liabilities                                      272,167

  15% cumulative convertible redeemable preferred
  stock, $.0001 par value, 3,000,000 shares authorized,
  2,025,000 shares issued and outstanding, liquidation
  value of $2,221,000                                             2,154,711

Commitments
  Stockholders' deficit:
   Common stock, $.0001 par value, 25,000,000 shares
   authorized, 8,023,000 shares issued and outstanding                  802
   Capital deficiency                                              (49,557)
   Deficit accumulated during the development stage             (1,247,987)
                                                                ------------
     Total stockholders' deficit                                (1,296,742)
                                                                ------------
     Total liabilities, redeemable preferred stock
     and stockholders' deficit                                  $ 1,130,136
                                                                ============

                             See accompanying notes.

                                      F-21



                                 QODE.COM, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                             STATEMENT OF OPERATIONS
           PERIOD FROM MARCH 29, 1999 (INCEPTION) TO DECEMBER 31, 1999

Costs and expenses:
  Research and development                                     $    396,242
  Sales and marketing                                                41,975
  General and administrative                                        847,412
                                                               ------------

  Total costs and expenses                                        1,285,629

Net interest income                                                (37,642)
                                                               ------------

Net loss                                                        (1,247,987)

Preferred dividends and redemption accretion                      (200,711)
                                                               ------------

Net loss applicable to common stockholders                     $(1,448,698)
                                                               ============

                             See accompanying notes.

                                      F-22



                                 QODE.COM, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                       STATEMENT OF CHANGES IN REDEEMABLE
                    PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
           PERIOD FROM MARCH 29, 1999 (INCEPTION) TO DECEMBER 31, 1999


                             REDEEMABLE                                           DEFICIT
                                TOTAL                                           ACCUMULATED
                              PREFERRED                                          DURING THE        TOTAL
                            STOCKHOLDERS'     COMMON STOCK         CAPITAL      DEVELOPMENT    STOCKHOLDERS'
                               STOCK         SHARES     AMOUNT    DEFICIENCY       STAGE          DEFICIT
                            -------------  ---------  ---------- ------------  -------------  ---------------
                                                                            
Issuance of common
  stock on March 29,
  1999 (inception)           $       --    8,000,000        $800  $       --    $         --   $        800
Issuance of redeemable
  preferred stock with
  detachable warrants
  valued at $46,000,
  net of issuance
  costs of $25,000            1,954,000           --          --      46,000              --         46,000
Issuance of common
  stock                              --       23,000           2      22,998              --         23,000
Issuance of warrants
  in  exchange for
  services                           --           --          --      82,156              --         82,156
Preferred dividends
  and redemption
  accretion                     200,711           --          --   (200,711)                      (200,711)

Net loss                             --           --          --          --     (1,247,987)    (1,247,987)
                            -------------  ---------  ---------- ------------  -------------  ---------------
Balance at December
  31, 1999                   $2,154,711    8,023,000    $    802  $ (49,557)    $(1,247,987)   $(1,296,742)
                            =============  =========  ========== ============  =============  ===============


                             See accompanying notes.

                                      F-23




                                 QODE.COM, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                             STATEMENT OF CASH FLOWS
           PERIOD FROM MARCH 29, 1999 (INCEPTION) TO DECEMBER 31, 1999

                                                                                    
Operating activities
  Net loss                                                                             $ (1,247,987)
  Adjustments to reconcile net loss to net cash used in operating activities:
   Depreciation and amortization                                                              17,522
   Issuance of warrants in exchange for services                                              82,156
   Changes in assets and liabilities:
     Other current assets                                                                   (18,151)
     Deposits                                                                               (30,229)
     Accounts payable                                                                        151,588
     Accrued expenses                                                                         47,246
     Due to officers                                                                          73,333
                                                                                       -------------
      Net cash used in operating activities                                                (924,522)
                                                                                       -------------
  Investing activities
   Purchases of property and equipment                                                     (126,791)
                                                                                       -------------
     Net cash used in investing activity                                                   (126,791)
                                                                                       -------------
Financing activities
   Proceeds from the issuance of redeemable preferred stock,
    net of issuance costs of $25,000                                                       2,000,000
   Proceeds from the issuance of common stock                                                 23,800
                                                                                       -------------
     Net cash provided by financing activities                                             2,023,800
                                                                                       -------------

Net increase in cash and cash equivalents                                                    972,487
   Cash at beginning of period                                                                    --
                                                                                       -------------

     Cash at end of period                                                              $    972,487
                                                                                       =============
Supplemental disclosure of cash flow information Interest paid                          $        171
     Noncash financing and investing activities
      Accrued dividends on redeemable preferred stock                                   $    195,997
      Accretion of redeemable preferred stock                                           $      4,714


                             See accompanying notes.

                                      F-24



                                 QODE.COM, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                          NOTES TO FINANCIAL STATEMENTS
           PERIOD FROM MARCH 29, 1999 (INCEPTION) TO DECEMBER 31, 1999

1. NATURE OF BUSINESS

ORGANIZATION

Qode.com,  Inc.  (the  Company)  commenced  operations  on March 29, 1999 and is
incorporated in the state of Florida.  Qode.com is a development  stage company,
as  defined  in  Statement  of  Financial  Accounting  Standards  (SFAS)  No. 7,
Accounting and Reporting By Development Stage  Enterprises.  The Company intends
to provide manufactures, retailers, advertisers, and users a unique tool for Web
site  navigation by the use of imbedded  standard bar codes and Uniform  Product
Codes  (UPC).  It is the  Company's  mission to develop,  operate,  maintain and
promote the use of  Qode.com  technologies  to enable any bar code to  interface
with their technology.

The  Company  has  incurred  losses  since  its  inception  as  it  has  devoted
substantially  all  of  its  efforts  toward  building  network  infrastructure,
internal staffing,  developing systems,  expanding into new markets,  building a
proprietary  database and raising capital.  The Company has generated no revenue
to date  and is  subject  to a  number  of  risks  similar  to  those  of  other
development  stage  companies,  including  dependence  on key  individuals,  the
ability  to  demonstrate  technological  feasibility,  and the  need  to  obtain
adequate additional financing necessary to fund the development and marketing of
its products and services, and customer acceptance.

The Company's financial  statements have been prepared assuming that the Company
will continue as a going concern.  The Company has a limited  operating  history
and intends to  significantly  increase its operational  expenses in fiscal year
2000 to pursue  certain  sales  and  marketing  plans.  These  conditions  raise
substantial  doubt about the Company's  ability to continue as a going  concern.
The financial  statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and  classification  of  liabilities  that may results  from the outcome of this
uncertainty.  In  fiscal  year  2000,  the  Company  plans to  raise  additional
financing from private equity  financing.  The Company  entered into a financing
agreement  subsequent  to  year  end  that  will  provide  the  Company  with an
additional $3 million, see Note 8.

                                      F-25



                                 QODE.COM, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF 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 and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

For purposes of reporting  cash flows,  the Company  considers all highly liquid
investments  purchased  with an original  maturity of three months or less to be
cash equivalents.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost.  Depreciation  is computed  using the
straight-line  method over the  estimated  useful  lives of the related  assets.
Computer  hardware and software are being  depreciated  over a three year period
and furniture and fixtures are being depreciated over a five year period.

SOFTWARE DEVELOPMENT COSTS

In  accordance  with the AICPA SOP No.  98-1,  Accounting  for Costs of Computer
Software  Developed  or Obtained  for  Internal  Use,  all costs  related to the
development  or purchase  of internal  use  software  other than those  incurred
during the application  development stage are to be expensed as incurred.  Costs
incurred during the application development stage are required to be capitalized
and  amortized  over the useful life of the  software.  The Company has incurred
$259,480  in  software  development  costs for the period  from  March 29,  1999
(inception)  through  December 31, 1999.  All costs have been expensed since the
Company has not entered the  application  development  stage as of December  31,
1999.

                                      F-26



                                 QODE.COM, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INCOME TAXES

The Company accounts for income taxes under the liability method, which requires
the  establishment  of a deferred tax asset or liability for the  recognition of
future  deductions  or  taxable  amounts,  and  operating  loss  and tax  credit
carryforwards.  Deferred tax expense or benefit is recognized as a result of the
change in the deferred  asset or liability  during the year. If  necessary,  the
Company will establish a valuation allowance to reduce any deferred tax asset to
an amount which will, more likely than not, be realized.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to a concentration of
credit  risk  consist  principally  of cash and cash  equivalents.  The  Company
maintains its cash and cash equivalents with high quality financial institutions
to mitigate this credit risk.

REDEEMABLE PREFERRED STOCK

Redeemable preferred stock is carried at the net consideration to the Company at
time of  issuance  (fair  value),  increased  by accrued  and unpaid  cumulative
dividends and periodic  accretion to redemption value using the interest method.
Accrued and unpaid  dividends and  redemption  accretion are affected by charges
against  retained  earnings,  or, in the absence of retained  earnings,  paid-in
capital (capital deficiency).

ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company has adopted Statement of Financial  Accounting  Standards (SFAS) No.
123, Accounting for Stock-Based  Compensation.  The provisions of SFAS 123 allow
companies  to either  expense the  estimated  fair value of stock  options or to
continue to follow the  intrinsic  value method set forth in  Accounting  Public
Bulletin (APB) Opinion 25, Accounting for Stock Issued to Employees but disclose
the pro  forma  effects  on net  income  or loss as if the fair  value  had been
expensed. The Company has elected to apply APB 25 in accounting for its employee
stock  options  and,  accordingly,   recognizes  compensation  expense  for  the
difference  between the fair value of the underlying  common stock and the grant
price of the option at the date of grant.

                                      F-27



                                 QODE.COM, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

                                                            DECEMBER 31,
                                                                1999
                                                            ------------

         Computer hardware and software                     $   120,791
         Furniture and fixtures                                   6,000
                                                            ------------
                                                                126,791
         Less accumulated depreciation                         (17,522)
                                                            ------------
                                                            $   109,269
                                                            ============

Depreciation and amortization  expense was $17,939 for the period from March 29,
1999 (inception) to December 31, 1999.

4. INCOME TAXES

The net amounts of deferred tax assets recorded in the balance sheet at December
31, 1999 are as follows:

                                                                1999
                                                            ------------
         Deferred tax asset:
           Net operating loss carryforward                  $   469,050
         Less valuation allowance                             (466,230)
                                                            ------------
            Total deferred tax asset                        $     2,820
         Deferred tax liabilities:
           Fixed assets                                     $   (2,820)
                                                            ------------
            Total net deferred taxes                        $         -
                                                            ============

FASB 109  requires  a  valuation  allowance  to reduce the  deferred  tax assets
reported  if,  based on the weight of the  evidence,  it is more likely than not
that some portion or all of the deferred tax assets will not be realized.  After
consideration  of all the evidence,  both positive and negative,  management has
determined that a $466,230 valuation allowance at December 31, 1999 is

                                      F-28



                                 QODE.COM, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. INCOME TAXES (CONTINUED)

necessary  to reduce the deferred tax assets to the amount that will more likely
than not be realized. The change in the valuation allowance for the current year
is $466,230.  At December 31, 1999, the Company has available net operating loss
carryforwards of $1,246,478, which expire in the year 2019.

A reconciliation of income taxes computed at the U.S. federal statutory tax rate
to income tax expense for the year ended December 31, 1999 is as follows:

                                                                1999
                                                            ------------
         Taxes at the U.S. statutory rate                   $  (424,315)
         State taxes, net of federal benefit                    (44,975)
         Nondeductible items                                       3,060
         Change in valuation allowance                           466,230
                                                            ------------
           Total income tax expense                         $          -
                                                            ============

5. COMMITMENTS

The Company leases its office  facility under a  non-cancelable  operating lease
expiring  March 2005.  Rental  expense was $19,711 for the period from March 29,
1999 (inception) to December 31, 1999.

Lease commitments under these non-cancelable operating leases as of December 31,
1999 are as follows:

                            2000          $  100,656
                            2001             104,682
                            2002             108,876
                            2003             113,238
                            2004             117,768
                                         -----------
                                          $  545,220
                                         ===========

                                      F-29



                                 QODE.COM, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. STOCKHOLDERS' EQUITY

15% CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED STOCK SERIES A

The Board of Directors has authorized the issuance of up to 3,000,000  shares of
Series A 15% $.0001  par value,  voting,  cumulative,  redeemable,  convertible,
preferred stock (the Preferred Stock) which may be issued in series from time to
time with such designations, rights, preferences and limitations as the Board of
Directors may declare by resolution.  In May 1999, the Company issues  2,025,000
shares of Preferred  Stock at $1.00 per share,  less issuance  costs of $25,000.
One detachable  warrant was attached to each share of the Preferred  Stock.  The
Preferred  Stock was recorded at $1,954,000,  net of the value of the detachable
warrants which was estimated to be $46,000.  The detachable warrants were valued
in  accordance  with SFAS No.  123 at $.23 per share  and are  convertible  into
common stock at $1.50 per share.  The Preferred Stock is convertible at any time
at the  option of the  holder  prior to the  closing  of a Public  Offering,  as
defined in the  agreement,  or within 20 days  following  receipt of a Notice of
Redemption,  as defined in the  agreement,  into the Company's  common stock for
each share of the Preferred Stock held plus accrued and unpaid  dividends on the
Series A Preferred Shares.  The Preferred Stock has a liquidation  preference of
$1 per share and is mandatorily redeemable on April 15, 2004. As of December 31,
1999, all 2,025,000 shares of the Preferred Stock and related 202,500 detachable
warrants remain outstanding.

Dividends on the preferred stock accrue on a daily basis  commencing on the date
of  issuance  at an  interest  rate  of 15%  per  annum  and  are  payable  on a
semi-annual basis. The Company,  at its option, may pay dividends either in cash
or by the issuance of additional  shares of Series A Preferred Stock.  Aggregate
cumulative dividends in arrears at December 31, 1999 totaled $195,997.

COMMON STOCK

The Company is  authorized  to issue up to  20,000,000  shares of its $.0001 par
value common stock. On March 29, 1999  (inception) the Company  received $800 by
issuing 8,000,000 shares of its common stock to its founders.

                                      F-30



                                 QODE.COM, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. STOCKHOLDERS' EQUITY (CONTINUED)

Additionally,  the Company  issued  13,000  shares of common  stock to a Company
employee in lieu of  relocation  expense  reimbursement  of $13,000,  and 10,000
shares of common stock to an executive recruiter for a corporate staffing fee of
$10,000. These amounts were expensed.

STOCK OPTIONS AND WARRANTS GRANTED IN EXCHANGE FOR SERVICES

During 1999, the Company  granted 327,200 common stock warrants with an exercise
price of $1.50 per share to  consultants  for certain  advisory  and  consulting
services  performed  during the  Company's  start-up  phase.  The warrants  vest
immediately  upon  issuance  and can be exercised  over a five year period.  The
Company  valued the  warrants at $82,156 in  accordance  with SFAS No. 123,  and
recognized  the entire  amount as a general  and  administrative  expense in the
accompanying   statement  of  operations.   The  Company  had  327,200  warrants
outstanding at December 31, 1999.

During 1999,  the Company  granted  400,000 in common stock  options to purchase
shares of common stock at an exercise  price of $.10 per share to an  investment
advisor in exchange for investment  advisory  services.  The options  expired on
June 30,  2000  without  being  exercised  and  accordingly  no expense has been
recorded.

STOCK OPTIONS

In 1999,  the Company's  Board of Directors and  stockholders  approved the 1999
Equity  Compensation  Plan (the Plan).  The Plan  provides  for the  issuance of
incentive  stock options,  nonqualified  stock options and  restricted  stock to
directors,  officers,  and key employees of the Company as well as  non-employee
directors,  advisors,  and  consultants.  The Board  administers  the Plan.  The
Company has  reserved  5,000,000  shares of common  stock to be issued under the
Plan.

The exercise price (as established by the Board) of the stock options granted is
in excess of fair market value of the Company's  Common Stock on the date of the
grant. All stock options expire five years from the grant date in 2004.  Options
granted under the Plan are exercisable as determined by the Board.

                                      F-31



                                 QODE.COM, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. STOCKHOLDERS' EQUITY (CONTINUED)

The following table  summarizes  stock option activity for the period from March
29, 1999 (inception) to December 31, 1999:

                                                                   WEIGHTED
                                                                    AVERAGE
                                                      NUMBER OF    EXERCISE
                                                       SHARES        PRICE
                                                     -----------  -----------
      Outstanding at March 29, 1999 (inception)               -     $      -
          Granted                                       880,600         1.36
          Exercised                                           -            -
          Forfeited                                           -            -
                                                     -----------  -----------
      Outstanding at December 31, 1999                  880,600     $   1.36
                                                     ===========  ===========

At December 31, 1999,  142,642 options are  exercisable,  at a weighted  average
exercise price of $1.28 per share. The  weighted-average  remaining  contractual
life of the options is 4.7 years.

During 1999,  all of the stock  options  issued were granted to employees of the
Company.  The Company  accounts  for  issuances  to  employees  under APB 25 and
accordingly,  no compensation cost has been recognized for the period from March
29, 1999 (inception) to December 31, 1999.

SFAS No.  123  requires  pro forma  information  regarding  net income as if the
Company has accounted for its employee stock options under the fair value method
of that Statement. The fair value for these options was estimated at the date of
grant  using  the   Black-Scholes   option  pricing  model  with  the  following
assumptions: risk-free interest rates equal to the three-year U.S. Treasury Bill
rate on the grant date,  dividend yield of 0%, expected volatility of 81.1%, and
an average expected life of the option of three years.

                                      F-32



                                 QODE.COM, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. STOCKHOLDERS' EQUITY (CONTINUED)

For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized to expense over the options'  vesting period.  All employee options
granted to date vest over a one to three year period.  The  Company's  pro forma
information is as follows:

                                                              PERIOD
                                                        FROM MARCH 29, 1999
                                                            (INCEPTION)
                                                       TO DECEMBER 31, 1999
                                                       --------------------
                  Net loss:
                    As reported                            $(1,247,987)
                    SFAS No. 123 pro forma                 $(1,305,831)

The  weighted  average  fair value of options  granted to  employees  during the
period  from March 29, 1999 to December  31, 1999 for which the  estimated  fair
value of the  stock is less than the  exercise  price is $0.29  per  share.  The
weighted  average fair value of options  granted to employees  during the period
from March 29, 1999 to December 31, 1999 for which the  estimated  fair value of
the stock equals the exercise price is $0.47 per share.

SHARES RESERVED FOR FUTURE ISSUANCE

At December 31, 1999, the Company has reserved the following shares of stock for
issuance:

                 Common stock                                  11,977,000
                 Convertible preferred stock                      975,000
                                                             ------------
                                                               12,952,000
                                                             ============

                                      F-33



                                 QODE.COM, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. RELATED PARTIES

The Company's  primary legal  counsel  holds  3,200,000  shares of the Company's
common stock in trust for the firm's partners. During 1999, the Company recorded
expenses of approximately  $32,000 related to services  performed by its primary
legal counsel.  The Company owed its primary legal counsel  approximately $3,000
at December 31, 1999.

During  1999,  Q  Productions,  Inc.  provided  various  information  technology
services to the Company. Two owners of Q Productions,  Inc. also aggregately own
4,800,000 shares of the Company. The Company recorded  approximately $129,000 in
expenses related to services performed by Q Productions, Inc. The Company owed Q
Productions, Inc. approximately $97,000 at December 31, 1999.

8. SUBSEQUENT EVENTS

On January 18, 2000,  the Company issued a convertible  subordinated  promissory
note  for $3  million  with a  fixed  interest  rate  of  12% to  Novus  Holding
Corporation.  Principal  and accrued  interest on the note are payable  upon the
earlier  of a) the  day  immediately  following  the  closing  of  financing  or
successive financings which cumulatively aggregate proceeds of $10,000,000 or b)
180 days from the date of the note. The debt is convertible into common stock at
a price equal to 85% of the  purchase  price per share paid by  investors in the
next financing or successive financings of $5,000,000 or more.

On February 11, 2000,  the Company  entered into a letter of intent with a major
supplier to produce  portable bar code scanning devices in exchange for payments
ranging from $32,000,000 to $35,000,000 over a 16 month period  commencing April
28, 2000 through August 1, 2001.

On March 15,  2000,  the Company  entered into a two year term note with a major
lender.  The principal amount of the note was $42,500 with a fixed interest rate
of 11%.  Principal  and  interest  payments  of $1,984 are due  monthly  through
maturity on March 15, 2002.

On March 24, 2000, the Company  obtained a letter of credit for $1,400,000  with
the lender of their term note.

                                      F-34



                                 QODE.COM, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. SUBSEQUENT EVENTS (CONTINUED)

On March 27,  2000,  the Company  entered  into a  consulting  agreement  with a
consultant  for a five month period in return for 250,000  common stock  options
convertible  into the Company's  common  stock.  The options have a term of five
years and an exercise price of $2 per share.  125,000  options vest 45 days from
the   commencement  of  the  agreement  based  on  the  fulfillment  of  certain
contractual  obligations.  The remaining  125,000  options vest 90 days from the
commencement of the agreement  based on the  fulfillment of certain  contractual
obligations.  Additionally,  the Company will pay the consultants  $100,000 over
the period of the contract.

On May 22,  2000,  the Board of Directors  authorized  the issuance of 1,500,000
shares of Series U Convertible  Preferred Stock (the Series U Preferred  Stock).
Dividends on the preferred stock accrue on a daily basis  commencing on the date
of issuance at an interest rate of 8% per annum. The Series U Preferred Stock is
convertible  at any time at the option of the holder  prior to the  closing of a
Public  Offering,  as defined in the agreement,  into one share of the Company's
common stock for each share of the Company's  Series U Preferred Stock held plus
accrued and unpaid dividends on the Series U Preferred  Shares.  In the event of
the closing of the next  financing of $4,000,000 or more within 90 days from the
authorization  of the  Series U  Preferred  Stock,  the  holder of the  Series U
Preferred  Stock shall have the right to convert  all Series U Preferred  Shares
into a number of shares of stock issued in the next financing  which  represents
the  equivalent  amount for the  consideration  paid for the Series U  Preferred
Stock.  The Series U Preferred  Stock has a liquidation  preference of $2.00 per
share.  On May 22, 2000, the Company  entered into an agreement for the issuance
of 1,500,000 shares of Series U Preferred Stock in exchange for $3,000,000.  The
shares will be issued in three separate  financings.  The initial 500,000 shares
are to be issued on the date of the agreement. The next 500,000 shares are to be
issued  upon the  Company  meeting  certain  performance  goals  defined  in the
agreement.  The  remaining  500,000  shares are to be issued,  not earlier  than
August 1, 2000 nor later than October 15, 2000, upon the Company meeting certain
performance goals defined in the agreement.

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. Qode.com,  Inc. has
consulted  with legal counsel and will be opposing the Chapter 7 proceeding  and
plans to proceed under Chapter 11, U.S. Code, to reorganize its debts.

On July 22, 2002,  Qode.com,  Inc.  filed for  bankruptcy  under Chapter 7, U.S.
Bankruptcy Code.

                                      F-35



                         PRO FORMA FINANCIAL INFORMATION

The unaudited pro forma condensed combined  statements of operations give effect
to the  acquisition  by NeoMedia  Technologies,  Inc. of the assets of Qode.com,
Inc.  The pro forma  condensed  combined  statement of  operations  for the year
December  31, 2000 gives effect to the  acquisition  as if it had occurred as of
January 1, 2000,  combining the results of NeoMedia  Technologies,  Inc. for the
year ended  December 31, 2000 with those of the same period for  Qode.com,  Inc.
The pro-forma  condensed  combined  statement of  operations  for the year ended
December 31, 2001,  gives effect to the  acquisition as if it had occurred as of
January 1, 2001,  combining the results of NeoMedia  Technologies,  Inc. for the
year  ended  December  31,  2001  with  those  of  Qode.com,  Inc.  through  the
acquisition  date. The pro forma  adjustments are based on estimates,  available
information and certain  assumptions that management deems appropriate.  The pro
forma  financial data do not purport to represent what our results of operations
would  actually have been if such  transactions  had occurred on those dates and
are not necessarily  representative  of our results of operations for any future
period.  The pro forma financial  statements  should be read in conjunction with
the  separate  historical   financial   statements  and  footnotes  of  NeoMedia
Technologies, Inc. and Qode.com, Inc.

PURCHASE PRICE

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.  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 June 30, 2002.

                                      F-36



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  309,773,  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-37



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. Qode.com,  Inc. has
converted the proceedings to Chapter 11, U.S. Code to re-organize its debts.

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,  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 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 June
30,  2002,  the Company  had $1.3  million of  liabilities  relating to the Qode
system on its books.

                                      F-38



                                 QODE.COM, INC.

Pro-forma Condensed Combined  Consolidated  Statement of Operations For the year
ended December 31, 2000 (In thousands, except per share data)



                                                                                      PRO-FORMA      PRO-FORMA
                                                            NEOMEDIA     QODE.COM     ADJUSTMENT     COMBINED
                                                          -----------   ----------   ------------   -----------
                                                                                        
Revenue
  License fees                                            $     8,417   $       --   $         --   $     8,417
  Resales of software and technology equipment and
   service fees                                                19,148          212             --        19,360
                                                           ----------   ----------   ------------   -----------
   Total Revenue                                               27,565          212             --        27,777
                                                           ----------   ----------   ------------   -----------
Cost of goods sold
  License fees                                                  1,296           --             --         1,296
  Resales of software and technology                           17,237          213             --        17,450
                                                           ----------   ----------   ------------   -----------
   Total cost of goods sold                                    18,533          213             --        18,746
                                                           ----------   ----------   ------------   -----------

Gross profit                                                    9,032          (1)             --         9,031

Selling & marketing expense                                     6,504          557             --         7,061
General & administrative expense                                7,010        5,839        (27)(a)        12,822
Research & development expense                                  1,101        1,110             --         2,211
                                                           ----------   ----------   ------------   -----------
Loss from operations                                          (5,583)      (7,507)             27      (13,063)

Interest expense/(income)                                       (174)        1,009             --          835
                                                           ----------   ----------   ------------   -----------

Net loss                                                      (5,409)      (8,516)             27      (13,898)

Dividends & accretion                                              --          371             --           371
                                                           ----------   ----------   ------------   -----------

Net income applicable to common stockholders              $   (5,409)   $  (8,887)   $         27   $  (14,269)
                                                           ==========   ==========   ============   ===========

Loss per share                                            $    (0.39)   $   (1.11)                  $    (1.00)
                                                           ==========   ==========                  ===========

Weighted average shares outstanding                        13,931,104    8,023,000                   14,205,803
                                                           ==========   ==========                  ===========

Pro-forma adjustments

(a)     adjustment of amortization of assets


                                      F-39





                                     NEOMEDIA TECHNOLOGIES, INC.
                  PRO-FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
                                FOR THE YEAR ENDED DECEMBER 31, 2001
                                (IN THOUSANDS, EXCEPT PER SHARE DATA)

                                                                        PRO-FORMA         PRO-FORMA
                                             NEOMEDIA      QODE.COM    ADJUSTMENTS        COMBINED
                                             --------      --------    -----------        ----------
                                                                             
Revenue
 License fees                                $    576    $       86   $         -        $       662
 Resales of software and technology
 equipment and service fees                     7,566             -             -              7,566
                                          -----------    ----------   ------------       ------------
  Total revenue                                 8,142            86             -              8,228

Cost of goods sold
 License Fees                                   2,355            34             -              2,389
 Resales of software and technology
 equipment and service fees                     6,511             -             -              6,511
                                          -----------    ----------   ------------       ------------
  Total cost of goods sold                      8,866            34             -              8,900

Gross profit                                    (724)            52             -              (672)

Selling & marketing expense                     2,519            16             -              2,535
General & administrative expense                4,772         1,064        276(a)              6,112
Research & development expense                    549            20             -                569
Loss on impairment of assets                    2,871             -             -              2,871
Write-off of Digital
 Convergence license contract                   7,354             -             -              7,354
                                          -----------    ----------   ------------       ------------

Loss from operations                         (18,789)       (1,048)         (276)           (20,113)


Interest expense/(income)                        (21)           111         14(b)                104
                                          -----------    ----------   ------------       ------------

Net Loss                                     (18,768)       (1,159)         (290)           (20,217)

Loss from operations
 of discontinued business units               (3,613)             -             -            (3,613)
Loss on disposal of discontinued
 business units, including provision of
 $503 for losses during phase-out period      (3,088)             -             -            (3,088)
                                          -----------    ----------   ------------       ------------

Net loss applicable to common
 shareholders                             $  (25,469)    $  (1,159)   $     (290)        $  (26,918)
                                          ===========    ==========   ============       ============

Loss per share                            $    (1.55)    $   (0.14)                      $    (1.64)
                                          ===========    ==========                      ============

Weighted average shares outstanding        16,410,246     8,023,000                       16,456,029
                                          ===========    ===========                     ============


Pro-forma adjustments
---------------------
(a) - adjustment of amortization of assets
(b) - adjustment of interest expense

                                      F-40



This is a copy of the audit report  previously  issued by Arthur Andersen LLP in
connection  with  Qode.com,  Inc.'s filing for the year ended December 31, 2000.
This audit report has not been  reissued by Arthur  Andersen  LLP in  connection
with this registration statement. See Exhibit 23.4 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-41



               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  sheet  of  Neomedia
Technologies,  Inc. (a Delaware corporation) and subsidiaries as of December 31,
2001,  and the related  consolidated  statements  of  operations,  stockholders'
equity  and cash flows for the year 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 audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit 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 audit provides 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. and subsidiaries as of December 31, 2001, and the results of
its  operations  and its cash flows for the year 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
and current  cash flow  position  raise  substantial  doubt about its ability to
continue  as a going  concern.  The  consolidated  financial  statements  do not
include any adjustments that might result from the outcome of this uncertainty.

/s/ STONEFIELD JOSEPHSON, INC.
---------------------------------
Irvine, California
March  28, 2002

                                      F-42



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



                                                                      DECEMBER 31,
                                                                ------------------------
                                                                    2001         2000
                                                                -----------  -----------
                                                                       
ASSETS
  Current assets:
   Cash and cash equivalents                                    $       134  $      4,453
  Restricted cash                                                        --           750
  Short-term investments                                                 --            --
  Trade accounts receivable, net of allowance for
   doubtful accounts of $65 and $484 in 2001 and 2000                 2,583         4,370
  Digital Convergence receivable                                         --         5,144
  Costs and estimated earnings in excess of billings
   on uncompleted contracts                                              43            89
  Inventories                                                           197           116
  Assets held for sale                                                  210            --
  Prepaid expenses and other current assets                             582           946
                                                                 ----------   -----------
   Total current assets                                               3,749        15,868

  Property and equipment, net                                           205           365
  Digital Convergence receivable, net of current
   portion                                                               --        10,288
  Prepaid - Digital Convergence                                          --         4,116
  Capitalized patents, net                                            2,500         2,661
  Capitalized and purchased software costs and other
   intangible assets, net                                             1,828         6,382
  Other long-term assets                                                757           914
                                                               ------------  ------------
   Total assets                                                $      9,039  $     40,594
                                                               ============  ============
LIABILITIES AND SHAREHOLDERS' EQUITY
  Current liabilities:
  Accounts payable                                             $      2,886   $     1,187
  Amounts due under financing agreements                              2,283         1,114
  Accrued expenses                                                    1,922         2,691
  Stock liability                                                        --            --
  Current portion of long-term debt                                     149           137
  Note Payable                                                          750            --
  Sales taxes payable                                                   135           261
  Billings in excess of costs and estimated earnings
   on uncompleted contracts                                              13            49
  Deferred revenues - Digital Convergence                                --         1,543
  Deferred revenues                                                     767           449
  Other                                                                   7            11
                                                               ------------  ------------
   Total current liabilities                                          8,912         7,442

  Long-term debt, net of current portion                                390           539
  Long-term deferred revenue - Digital Convergence                       --        13,503
                                                               ------------  ------------
   Total liabilities                                                  9,302        21,484
                                                               ------------  ------------
  Shareholders' equity:
  Preferred stock, $.01 par value, 10,000,000 shares
   authorized,  452,289 issued and outstanding in
   2001, none issued and outstanding in 2000                              5            --
  Additional paid-in capital, preferred  stock                          878            --
  Common stock, $.01 par value, 50,000,000 shares
   authorized, 20,446,343 shares issued and 18,804,917
   outstanding in 2001, 14,460,384 shares issued and
   outstanding in 2000                                                  188           145
  Additional paid-in capital                                         63,029        57,619
  Stock subscriptions receivable                                      (240)            --
  Accumulated deficit                                              (63,344)      (37,875)
  Treasury stock, at cost, 201,230 shares of common
   stock                                                              (779)         (779)
                                                               ------------  ------------
   Total shareholders' equity                                         (263)        19,110
                                                               ------------  ------------

   Total liabilities and shareholders' equity                  $      9,039  $     40,594
                                                               ============  ============

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



                                      F-43



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



                                                                    YEARS ENDED DECEMBER 31,
                                                              ---------------------------------------
                                                                  2001          2000          1999
                                                              ----------    -----------    ----------
                                                                                  
NET SALES:
License fees                                                  $      576    $     8,417    $    2,430
Resales of software and technology
  equipment and service fees                                       7,566         19,148        22,826
                                                              ----------    -----------    ----------
  Total net sales                                                  8,142         27,565        25,256
                                                              ----------    -----------    ----------
COST OF SALES:
License fees                                                       2,355          1,296         1,790
Resales of software and technology
  equipment and service fees                                       6,511         17,237        20,680
                                                              ----------    -----------    ----------
  Total cost of sales                                              8,866         18,533        22,470
                                                              ----------    -----------    ----------

GROSS PROFIT                                                       (724)          9,032         2,786

Sales and marketing expenses                                       2,519          6,504         6,765
General and administrative expenses                                4,772          7,010         5,281
Research and development costs                                       549          1,101           986
Loss on impairment of assets                                       2,871             --            --
Loss on Digital:Convergence license contract                       7,354             --            --
                                                              ----------    -----------    ----------

Loss from operations                                            (18,789)        (5,583)      (10,246)
Interest (income) expense, net                                      (21)          (174)           226
Loss from continuing operations                                 (18,768)        (5,409)      (10,472)
Discontinued operations (Note 1):
  Loss from operations of discontinued
   business unit                                                 (3,613)             --            --
  Loss on disposal of discontinued business
   unit, including provision of $439 in
   2001 for operating losses during
   phase-out period                                              (3,088)             --            --
                                                              ----------    -----------    ----------

NET LOSS                                                       $(25,469)    $   (5,409)      (10,472)
                                                              ==========    ===========    ==========
NET LOSS PER SHARE FROM CONTINUING
  OPERATIONS - BASIC AND DILUTED                            $     (1.14)    $    (0.39)    $   (1.01)
                                                              ==========    ===========    ==========

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

NET LOSS PER SHARE--BASIC AND DILUTED                       $     (1.55)    $    (0.39)    $   (1.01)
                                                              ==========    ===========    ==========

Weighted average number of common
  shares--basic and diluted                                   16,410,246     13,931,104    10,377,478
                                                              ==========    ===========    ==========


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


                                                   F-44


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

                                                                      YEARS ENDED DECEMBER 31,
                                                                -------------------------------------
                                                                  2001          2000          1999
                                                               ---------    -----------   -----------

                                                                                 
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                       $(25,469)    $   (5,409)   $  (10,472)
Adjustments to reconcile net loss to net cash used in
  operating activities:
Depreciation and amortization                                      3,369          2,336         2,029
Loss on disposal of discontinued business units                    2,649             --            --
Loss on disposal of and impairment of assets                       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                            947             --            --
Fair value of stock based compensation granted for
  professional services                                               69            437            28
Changes in operating assets and liabilities
Trade accounts receivable, net                                     (709)          1,548         2,271
Digital Convergence receivable                                                  (2,767)            --
Prepaid - Digital Convergence                                        118             --            --
Costs and estimates earnings in excess of billings on
  uncompleted contracts                                               46           (89)           222
Other current assets                                               (109)          (121)           382
 Other long-term assets                                               --          (194)            --
Accounts payable, accrued expenses and stock liability             2,502        (2,676)       (1,286)
Billings in excess of costs and estimates earnings on
  uncompleted contracts                                             (36)           (82)           131
Deferred revenue                                                     318            184         (391)
Other current liabilities                                            (4)             --            76
                                                               ---------    -----------   -----------
  Net cash used in operating activities                          (5,202)        (6,775)       (7,010)
                                                               ---------    -----------   -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of software development and purchased
  intangible assets                                              (2,883)        (2,317)       (1,470)
(Increase)/decrease in value of life insurance policies              158          (199)         (522)
Acquisition of property and equipment                               (81)          (123)         (127)
                                                               ---------    -----------   -----------
  Net cash used in investing activities                          (2,806)        (2,639)       (2,119)
                                                               ---------    -----------   -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock, net of
  issuance costs of $149 in 2001, $74 in 2000, and $148
  in 1999                                                          1,638          9,203         8,172
Net proceeds from exercise of stock warrants                       1,045          2,877            75
Net proceeds from exercise of stock options                          138            537         1,061
Common stock repurchased                                              --          (779)            --
Borrowings under notes payable and long-term debt                    504             --         2,000
Change in restricted cash                                            750            194         (194)
Repayments on notes payable and long-term debt                     (386)          (625)         (125)
                                                               ---------    -----------   -----------
  Net cash provided by financing activities                        3,689         11,407        10,989
                                                               ---------    -----------   -----------

NET INCREASE IN CASH AND CASH EQUIVALENTS                        (4,319)          1,993         1,860

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                       4,453          2,460           600
                                                               ---------    -----------   -----------

CASH AND CASH EQUIVALENTS, END OF YEAR                         $     134    $     4,453   $     2,460
                                                               =========    ===========   ===========

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid/(received) during the year                       $    (61)$   $       170   $       146

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            --
Conversion of short-term debt to equity                               --             --         2,000
Issuance costs for shares issued through private placement           149             96           112
Stock liability due upon issuance of patent                           --             --         1,863
Warrants issued for license contract                                  --          4,704            --
Deferred revenue relating to license contract                         --         15,432            --


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

                                                 F-45



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

                                 Common Stock                         Preferred Stock                    Treasury Stock
                          ---------------------------             --------------------------             --------------
                                           Additional   Stock                     Additional                              Total
                                             Paid-in Subscription                  Paid-in   Accumulated               Stockholders'
                             Shares   Amount Capital  Receivable  Shares   Amount  Capital     Deficit   Shares  Amount   Equity
                          ----------- ------ -------  ---------- --------  ------  --------  ----------- ------- ------ -----------

                                                                                          
BALANCE, DECEMBER 31,
  1998                     8,699,080    $87  $25,168          -         -       -         -   ($21,994)        -      -      $3,261
Exercise of employee
   options                   611,854      6    1,055          -         -       -         -           -        -      -       1,061
Issuance of common stock
   through Private
   placement,  net of
   $260 of Issuance costs  1,978,794     20    8,039          -         -       -         -           -        -      -       8,059
Fair value of warrants
   issued for
   professional services
   rendered                        -      -       28          -         -       -         -           -        -      -          28
Exercise of warrants         231,764      1       74          -         -       -         -           -        -      -          75
Fair value of stock
   granted in Conjunction
   with financing            501,897      5    2,003          -         -       -         -           -        -      -       2,008
Net Loss                           -      -        -          -         -       -         -    (10,472)        -      -    (10,472)
                          ----------   ----  -------      -----   -------      --      ----   ---------  ------- ------    --------

BALANCE, DECEMBER 31,
  1999                    12,023,389   $119  $36,367          -         -       -         -   ($32,466)        -      -      $4,020
                          ----------   ----  -------      -----   -------      --      ----   ---------  ------- ------    --------
Exercise of employee
   options                   182,787      2      535          -         -       -         -           -        -      -         537
Issuance of common stock
   through Private
   placement, net of $170
   of Issuance costs       1,415,279     15    9,188          -         -       -         -           -        -      -       9,203
Fair value of warrants
   issued for
   Professional services
   rendered                        -      -      253          -         -       -         -           -        -      -         253
Fair value of  stock
   issued for
   professional Services
   rendered                   21,500      1      183          -         -       -         -           -        -      -         184
Fair value of warrants
   issued Related to
   license agreement With
   Digital Convergence             -      -    4,704          -         -       -         -           -        -      -       4,704
Exercise of warrants         495,600      5    2,872          -         -       -         -           -        -      -       2,877
Stock issued to purchase
   assets                    321,829      3    3,517          -         -       -         -           -        -      -       3,520
Treasury stock at cost             -      -        -          -         -       -         -           -  201,230   (779)      (779)
Net Loss                           -      -        -          -         -       -         -     (5,409)        -      -     (5,409)
                          ----------   ----  -------      -----   -------      --      ----   ---------  ------- ------    --------
BALANCE, DECEMBER 31,
  2000                    14,460,384   $145  $57,619          -         -       -         -   ($37,875)  201,230  ($779)    $19,110
                          ----------   ----  -------      -----   -------      --      ----   ---------  ------- ------    --------

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          -         -       -         -           -        -      -       1,878
Expense associated with
   warrant repricing               -      -      947          -         -       -         -           -        -      -         947
Fair value of options
   issued for
   Professional services
   rendered                        -      -       69          -         -       -         -           -        -      -          69
Exercise of Warrants         505,450      5    1,040          -         -       -         -           -        -      -       1,045
Stock issued to purchase
   assets                    309,773      3    1,373          -         -       -         -           -        -      -       1,376
Issuance of Preferred
   Stock for services              -      -        -          -   452,489       5       878           -        -      -         883
Stock Subscription
   Receivable                                             (240)                                                                (240)
Net Loss                           -      -        -          -         -       -         -    (25,469)        -      -     (25,469)
                          ----------   ----  -------      -----   -------      --      ----   ---------  ------- ------    --------
BALANCE, DECEMBER 31,
  2001                    18,804,917   $188  $63,029      (240)   452,489      $5      $878   ($63,344)  201,230 ($779)      ($263)
                          ----------   ----  -------      -----   -------      --      ----   ---------  ------- ------    --------


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

                                                               F-46




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) is the original business line upon
which the Company was 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.   Systems  integration   services  also  identifies
prospects for custom applications based on NeoMedia's products and services. 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

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

                                      F-47


third party  hardware and  software  products  and from  consulting,  education,
maintenance and post contract customer support services.

Under 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.

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.  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  held  in  escrow  as  contingent
compensation  will not be issued due to the business unit not attaining  certain
performance targets.

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, 2001.

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

                                      F-48



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 is July 1,
2001. At the end of the 12-month  measurement  period  (February 28, 2002),  the
final number of shares issued to Qode under the earn-out was 309,773,  allocated
as outlined in the table above.

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.


PROFORMA INFORMATION

Proforma  results of  operations  as though the  companies  had  combined at the
beginning of the period is as follows:

                                                          YEAR ENDED
                                                 ----------------------------
                                                 DECEMBER 31,    DECEMBER 31,
                                                    2001            2000
                                                 ------------    ------------
     Revenue                                     $     8,228     $    27,776
     Net Loss                                    $  (20,959)     $   (14,297)
     EPS - basic and diluted                     $    (1.28)     $     (1.01)


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 final  contract  is  contingent  upon the  completion  of due
diligence and definitive  terms and  conditions  stated in the letter of intent.
The Company intends to sell the assets and liabilities of Qode, which consist of
all  inventory,  equipment and the ownership and operation of the  comprehensive
universal internet database along with the corresponding patents. The Finx Group
will 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.
As of December 31, 2001, the  transaction  had not been  consummated  due to the
encumbrance  of certain of  NeoMedia's  Qode-related  assets under the Company's
note  payable to Airclic,  Inc. The Finx group has taken  possession  of certain
Qode system assets and has taken over ongoing  expenses  related to the business
unit.  Management  believes  that the sale will be  completed  immediately  upon
resolution of Airclic litigation.  During the third and fourth quarters of 2001,
the company  recorded a $2.6  million  expense from the  write-down  of the Qode
assets/liabilities to the following net realizable value:

                                      F-49


                                                        DECEMBER 31, 2001
                                                     (BALANCES IN THOUSANDS)
                                                     -----------------------
                Inventory                                   $    144
                  Equipment                                      265
                  Intangible Assets                            1,027
                                                            --------
                Assets                                         1,436
                                                            --------
                  Accounts Payable                             1,108
                  Note Payable                                    15
                  Capital Lease                                  103
                                                            --------
                Liabilities                                    1,226
                                                            --------
                  Net Realizable Value                      $    210
                                                            ========


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.

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. Qode.com,  Inc. has
converted the proceedings to Chapter 11, U.S. Code to re-organize its debts.


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 US, 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 (see below).

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

                                      F-50


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:



                                                    DECEMBER 31,        MARCH 31,
                                                        2000              2000           WRITE-OFF
                                                      BALANCES          BALANCES       JUNE 30, 2001
                                                   ----------------  ---------------- ----------------
                                                                       (UNAUDITED)
                                                   ---------------------------------------------------
                                                                 (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 is a $7,354,000 non-cash charge to income during
the second  quarter,  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.

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.  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 us to AirClic,  some of
which is  patented  and others for which a patent  application  is  pending,  is
invalid and in the public domain. (see "Legal Proceedings" in Footnote 11)


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 our  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

                                      F-51


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.


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.


WARRANT REPRICING PROGRAM

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.


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 a exercise
price of $2.09.  However,  the warrants were not issued during 2001. The Company
does not intend to issue these warrants in 2002.


VALUATION AND RESERVES

Allowance for doubtful  accounts  activity for the years ended December 31, 2001
and 2000 was as follows:

                                                   (DOLLARS IN THOUSANDS)
                                                   ------------------------
                                                      2001           2000
                                                   ---------     ----------
   Beginning balance                               $     484     $     888
   Bad debt expense                                    (169)           303
   Write-off of uncollectible accounts                  (68)          (17)
   Collection of accounts previously written of        (182)          (75)
   Adjustment to general allowance                         -         (615)
                                                   ---------     ---------
     Ending balance                                $      65     $     484
                                                   =========     =========

INVENTORIES

Inventory  is stated at the lower of cost or market,  and at December  31, 2001,
2000 and 1999 was comprised of purchased  computer  technology  resale products.
Cost is determined using the first-in, first-out method.

                                      F-52


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  $249,000,  $263,000  and $367,000 for the years ended
December 31, 2001, 2000 and 1999 respectively.


CAPITALIZED AND PURCHASED SOFTWARE COSTS AND OTHER INTANGIBLE ASSETS

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, 2001 and 2000 was as
follows:

                                                        DECEMBER 31,
                                                --------------------------
                                                   2001            2000
                                                ----------     -----------
   Beginning Balance                            $    9,043     $    5,296
   Additions                                         2,493          5,837
   Intangible Assets Moved To "Assets Held         (1,027)            ---
     for Sale"
   Amortization/Write-offs                         (6,181)        (2,090)
                                                ----------     ----------
   Ending Balance                               $    4,328     $   9,043
                                                ==========     ==========


Amortization  expense  of  intangible  assets  was  $3,120,000   $2,073,000  and
$1,662,000 for the years ended December 31, 2001, 2000 and 1999, respectively.


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 $92,000,
$259,000,  and $0 for the  years  ended  December  31,  2001,  2000,  and  1999,

                                      F-53


respectively.  Net loss  allocated  to the  MLM/Affinity  program was  $832,000,
$1,075,000,  and $0 for the years  ended  December  31,  2001,  2000,  and 1999,
respectively.

EVALUATION OF LONG-LIVED ASSETS

The Company  periodically  performs an evaluation  of the carrying  value of its
long-lived assets,  including intangible assets, in accordance with SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed  Of".  This  evaluation  consists  primarily of a comparison  to the
future  undiscounted net cash flows from the associated  assets in comparison to
the carrying value of the assets. As of December 31, 2001, the Company is of the
opinion that no impairment of its long-lived assets has occurred.

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, 2001, 2000 and 1999.

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,    DECEMBER 31,    DECEMBER 31,
                                       2001            2000             2000
                                    ------------    ------------    ------------
      Outstanding Stock Options      4,214,000       4,294,000       3,418,000
      Outstanding Warrants           3,240,000       3,968,000       2,676,000


FINANCIAL INSTRUMENTS

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

CONCENTRATIONS OF CREDIT RISK

Financial  instruments that potentially  subject NeoMedia to  concentrations  of
credit risk  consist  primarily of trade  accounts  receivable  with  customers.
Credit risk is  generally  minimized as a result of the large number and diverse
nature of NeoMedia's customers,  which are located throughout the United States.
NeoMedia  extends  credit to its customers as determined on an individual  basis
and has included an allowance  for  doubtful  accounts of $65,000,  $484,000 and
$888,000 in its December 31, 2001,  2000 and 1999  consolidated  balance sheets,
respectively.   NeoMedia   had  net   sales  to  one  major   customer   in  the
telecommunications industry (Ameritech) of $2,983,000, $5,824,000 and $5,843,000
during the years ended December 31, 2001, 2000 and 1999, respectively, resulting
in trade accounts receivable of $1,499,000, $229,000 and $225,000 as of December
31, 2001, 2000 and 1999,  respectively.  In addition,  a single company supplies
the equipment and software, which is re-marketed to this customer.  Accordingly,
the loss of this customer or supplier would materially adversely affect NeoMedia
CIS. 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 73%, 66% and 78% of NeoMedia's revenue for the
years ended December 31, 2001, 2000 and 1999, 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 year ended December 31, 2001.

                                      F-54


RECLASSIFICATIONS

Certain  reclassifications  have  been  made  to the  1999  and  2000  financial
statements to conform to the 2001 presentation.


COMPREHENSIVE INCOME

For the years ended  December 31, 2001,  2000 and 1999, 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.
The Company is  considering  the  provisions  of SFAS No. 141 and No. 142 and at
present has not determined the impact of adopting SFAS No. 141 and SFAS No. 142.
The  Company  does not expect  the  adoption  to have a  material  impact to the
Company's financial position or results of operations.

In October 2001, the FASB recently  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. The Company does not expect the adoption to have a material
impact to the Company'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
the Company's financial position or results of operations.


3.    LIQUIDITY

During the years ended  December 31, 2001,  2000 and 1999 the Company's net loss
totaled approximately $25,469,000,  $5,409,000 and $10,472,000 respectively.  As
of December  31, 2001 the Company had an  accumulated  deficit of  approximately
$63,344,000  and  approximately  $134,000 in unrestricted  cash balances.  As of
December 31, 2001,  the working  capital was negative  $5,163,000  and cash flow
from operations was negative $5,202,000. The Company's unrestricted cash balance
as of March 12, 2002 was approximately $134,000 (unaudited).

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 or debt, or be
in 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.

                                      F-55


Subsequent  to December  31,  2001,  the Company has  undertaken  the  following
initiatives:

During  February 2002, the Company sold 19 million shares of its common stock at
$0.17 per share in exchange for  promissory  notes maturing at the earlier of i)
90 days  from the date of  issuance,  or ii) 30 days  from  registration  of the
shares. Proceeds from this transaction will be $3,230,000.

During March 2002, the Company repriced 1.2 million of its common stock warrants
for a period of six months.  During the term of the warrant  repricing  program,
participating holders are 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 NASDAQ  Small Cap Market on the  trading
date immediately preceding the date of exercise.

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.


4.   CONTRACT ACCOUNTING

NeoMedia   periodically   enters  into  long-term   software   development   and
consultation  agreements with certain  customers.  As of December 31, 2001, 2000
and 1999,  certain contracts were not completed and information  regarding these
uncompleted contracts was as follows:

                                                   2001           2000
                                                 ---------      ---------
     Costs Incurred on Contracts                 $      50      $     321
     Profit to Date                                     15          1,087
       Total Costs and Estimated Earnings               65          1,408
     Less - Billings to Date                          (35)        (1,368)
                                                 ---------      ---------
     Costs and Estimated Earnings in
       Excess of Billings                        $      30      $      40
                                                 =========      =========


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

                                                   2001            2000
                                                 ---------      ----------

     Costs and Estimated Earnings in Excess      $      43       $      89
       of Billings
     Billing in Excess of Costs and
       Estimated Earnings                             (13)            (49)
                                                 ---------       ---------
     Costs and Estimated Earnings in Excess
       of Billings, Net                          $      30       $      40
                                                 =========      ==========


                                      F-56



5.      PROPERTY AND EQUIPMENT

As of December 31, 2001, 2000 and 1999,  property and equipment consisted of the
following:

                                                 2001             2000
                                             ------------    ------------
                                                     (IN THOUSANDS)
     Furniture and fixtures                  $        643    $        314
     Leasehold improvements                           109             124
     Equipment                                        326             504
                                             ------------    ------------
       Total                                        1,078             942
     Less accumulated depreciation                  (608)           (577)
     Less property and equipment held               (265)             ---
       for sale
                                             ------------     -----------
     Total property and equipment, net       $        205     $       365
                                             ============     ===========


6.   CAPITALIZED PATENTS, CAPITALIZED AND PURCHASED SOFTWARE COSTS, AND OTHER
INTANGIBLE ASSETS

As of December 31, 2001 and 2000 , intangible assets consisted of the following:

                                                     2001            2000
                                                 ------------     -----------
                                                         (IN THOUSANDS)
     Capitalized and purchased software costs    $      8,520     $     6,418
     Customer list                                        ---           1,143
     Repurchased license rights and other                 ---           3,520
     Patents and related costs                          3,125           3,026
                                                 ------------     -----------
     Total                                             11,645          14,107
     Less accumulated amortization:
       Capitalized and purchased software costs       (5,665)         (3,590)
       Customer list                                        -           (609)
       Repurchased license rights and other                 -           (500)
       Patents and related costs                        (625)           (365)
     Less capitalized software included in
       "Assets held for sale"                         (1,027)               -
                                                 ------------     -----------
         Total intangible assets, net             $     4,328     $     9,043
                                                 ============     ===========

At December 31, 1999, the Company had a liability of $1,862,500 to the seller of
a patent  purchased  by the Company in 1998.  The  liability  was settled by the
Company in cash during 2000. The patent is being amortized over seventeen years.


7.      FINANCING AGREEMENTS

The Company has entered into two separate financing  agreements during the years
ended December 31, 2001 and 2000.

IBM  COMMERCIAL  CREDIT.  During the years ended December 31, 2001 and 2000, the
Company had an agreement  with IBM  Commercial  Credit that provided  short-term
financing  for certain  computer  hardware  and  software  purchases.  Under the
agreement,  there were 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 were two  separate  lines of credit.  The first line had credit
availability  of  $750,000.  The second  line had credit  availability  of up to
$2,000,000,  based upon the Company's  customer  credit rating.  Borrowings were
collateralized   by  all  inventory,   property  and  equipment,   and  accounts
receivable.  In addition,  as of December 31, 2000, a $750,000  letter of credit
was issued to the benefit of the  commercial  finance  company.  At December 31,
2000,  NeoMedia  collateralized  this letter with a  restricted  cash balance of
$750,000.  This line of credit  expired during 2001. As of December 31, 2001 and
2000, amounts due under this financing  agreement included in "Amounts due under
financing agreements" were $0 and $1,101,000, respectively.

                                      F-57


GE ACCESS. The Company has an agreement with GE Access 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
days.  Under this agreement  there are two separate  lines of credit.  The first
line has credit  availability  of up to $1,500,000 as of December 31, 2001.  The
second line has unlimited credit availability, based upon the Company's customer
credit rating.  Under this second agreement,  the financing company finances the
purchase  pending  credit  approval of  NeoMedia's  customer.  Payments are then
remitted  directly to the  finance  company,  at which time the finance  company
forwards  to  NeoMedia  the  Company's  margin  on  the  sale.   Borrowings  are
collateralized   by  all  inventory,   property  and  equipment,   and  accounts
receivable.  As of December 31, 2001 and 2000,  amounts due under this financing
agreement  included in "Amounts due under financing  agreements" were $2,283,000
and $13,000, respectively.


8.      LONG-TERM DEBT

As of December 31, 2001 and 2000, long-term debt consisted of the following:

                                                     2001            2000
                                                  ----------      ----------
                                                         (IN THOUSANDS)
      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               $     624      $     816
      Less:  unamortized discount                       (84)          (140)
                                                  ----------      ----------
       Total long-term debt                              540            676
      Less:  current portion                           (150)          (137)
                                                  ----------      ----------
      Long-term debt, net of current portion       $    390       $     539
                                                  ==========      ==========

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

                                              (IN THOUSANDS)
                                               ------------
                             2002              $        192
                             2003                       192
                             2004                       192
                             2005                        48
                             2006                      ----
                                               ------------

                             Total             $        624
                                               ------------


In October 1994, the Company purchased,  via seller financing,  certain computer
software from 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,  2001 and 2000,  the  balance of the note  payable,  net of
unamortized discount, was $540,000 and $676,000, respectively.


                                      F-58


9.      INCOME TAXES

For the years ended  December 31, 2001,  2000 and 1999, the components of income
tax expense were as follows:

                                                2001       2000       1999
                                             --------    --------   --------
                                                      (IN THOUSANDS)
        Current                              $     --    $     --   $     --
        Deferred                                   --          --         --
                                             --------    --------   --------
        Income tax expense/(benefit)         $     --    $     --   $     --
                                             ========    ========   ========


As of December  31,  2001,  2000 and 1999,  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:

                                                2001        2000         1999
                                             ----------  -----------  ----------
                                                        (IN THOUSANDS)
Accrued employee benefits                    $       62  $        30  $       31
Provisions for doubtful accounts                     26          182         337
Deferred revenue                                     --           13          --
Capitalized software development costs and          676          284          98
 fixed assets
Net operating loss carryforwards (NOL)           22,916       15,021      12,724
Research and Development Credit                      --           --          91
Accruals                                            470          864          51
Loss on disposal of Qode business unit            1,060           --          --
Other                                                --           17           8
Alternative minimum tax credit carryforward          45           45          45
                                             ----------   ----------  ----------
Total deferred tax assets                        25,255       16,456      13,385
Valuation Allowance                            (25,255)     (16,456)    (13,385)
                                             ----------   ----------  ----------
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, 2001,  2000 and 1999,  the income tax benefit
differed from the amount computed by applying the statutory  federal rate of 34%
as follows:

                                             2001        2000        1999
                                         ---------    ---------    ----------
                                                      (IN THOUSANDS)
  Benefit at federal statutory rate      $  (8,659)   $  (1,839)   $  (3,561)
  State income taxes, net of federal        (1,009)        (196)        (380)
  Foreign income taxes, net of federal           --           --           61
  Exercise of non-qualified stock
   options                                     (17)        (176)      (1,874)
  Permanent difference - write-off of
   Digital Convergence stock                  1,190           --           --
  Permanent and other, net                    (304)        (860)         (12)
  Change in valuation allowance               8,799        3,071        5,766
                                         ----------   ----------   ----------
  Income tax expense/(benefit)           $       --   $       --   $       --
                                         ==========   ==========   ==========


As of December  31, 2001,  NeoMedia had net  operating  loss  carryforwards  for
federal tax purposes totaling  approximately  $57.3 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 January 1999, Edna Fritz, spouse of William Fritz, purchased 82,372 shares of
the  Company's  common  stock at a price of $3.03 per share.  In  January  1999,
William Fritz purchased  42,857 shares of the Company's  common stock at a price

                                      F-59


of $3.50 per share. As part of these  purchases,  Edna Fritz received a total of
8,237  warrants to purchase  stock at $3.04 per share and William Fritz received
4,286 warrants to purchase stock at $3.50 per share.

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.

In July 1999,  the Company  paid  professional  fees in the amount of $73,000 to
James  J.  Keil,  a  director  of  the  Company,  for  services  related  to the
recruitment of the Company's President and Chief Operating Officer and one sales
representative.

During the years  ended  December  31, 1999 and 1998,  the  Company  leased from
William E. Fritz a trade show booth for rental  payments  totaling  $31,000  and
$34,000, respectively. The lease expired during 1999.

During each of the years ended  December 31, 2000 and 1999,  the Company  leased
office and  residential  facilities  from  related  parties for rental  payments
totaling $5,000 and $13,000, respectively. 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.

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.


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,  2001,  2000 and 1999,  NeoMedia's  rent  expense was  $1,246,000,
$1,067,000 and $1,268,000, respectively.

The  following  is a  schedule  of  the  future  minimum  lease  payments  under
non-cancelable operating leases as of December 31, 2001:

                                          PAYMENTS
                                       --------------
                                       (IN THOUSANDS)
                         2002           $      844
                         2003                  473
                         2004                   56
                         2005                    2
                         2006                   --
                                        ----------
                         Total          $    1,375
                                        ==========


Of the  $844,000  minimum  lease  payment  due in 2002,  approximately  $205,000
relates to leases for Qode Universal  Commerce  Solution  equipment that will be
assumed by the Finx Group,  Inc. upon consummation of The Finx Group's letter of
intent with the Company.

As of December 31, 2001,  none of the Company's  employees were under  contract.
Additionally,  the Company was not party to any long-term consulting  agreements
as of December 31, 2001.

                                      F-60


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.

On September 6, 2001, AirClic,  Inc.  ("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 by the Company 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 intellectual property,  including its core
physical  world-to-Internet  technologies.  If the  Company  is  deemed  to have
defaulted under the note, and does not pay the judgment,  AirClic,  which is one
of the NeoMedia's key competitors, could acquire the Company's core intellectual
property,  which would have a material adverse effect on the Company's business,
prospects,  financial  condition,  and  results of  operations.  The  Company is
vigorously  defending  this  lawsuit and has  interposed  counterclaims  against
AirClic.  The lawsuit is in its preliminary stages and, as such, at this time it
is  difficult  to assess the outcome.  Whether or not AirClic is  successful  in
asserting its claims that the Company breached certain  representations  made by
the Company in the note, the note became due and payable in accordance  with its
terms on January 11, 2002. Based on the cash currently available to the Company,
payment of the note and related interest would have a material adverse effect on
the  Company's  financial  condition.  If the  Company  fails to pay such  note,
AirClic could proceed against the Company's  intellectual  property securing the
note,  which would have a material  adverse  effect on the  Company's  business,
prospects,  financial  condition,  and  results of  operations.  The  Company is
aggressively  seeking  bridge  financing to enable it to pay the  principal  and
interest  remaining under the note following the resolution of the counterclaims
against AirClic.  The Company has not accrued any additional  liability over and
above the note payable and related accrued interest.

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  unenforceable.  Any declaration
that the  Company's  core  patented  or  patentable  technology  is invalid  and
unenforceable  would have a material  adverse effect on the Company's  business,
prospects,  financial  condition,  and  results of  operations.  The  Company is
vigorously  defending  against this lawsuit as well. The Company has not accrued
any liability in connection with this matter.

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.

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.  The  Company  believes  the claim is
without merit and is vigorously  defending itself.  Final outcome of this matter
is uncertain and a range of loss cannot reasonably be estimated. The Company has
accrued  approximately  $347,000 in severance and incentive  payments payable to
Mr. Goins. The Company has not accrued any additional  liability  related to the
suit.

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.  The Company
has entered  into a letter of intent with the Finx Group,  Inc. to sell  certain
assets and  liabilities  relating to Qode. As part of the letter of intent,  the
Finx Group will assume all  liabilities  up to $138,000  relating to the Ripfire
contract.   Accordingly,  the  Company  has  not  accrued  a  liability  in  the
accompanying  financial statements.  The Company,  along with the Finx Group, is
currently negotiating settlement of this matter.

On October 3, 2001,  Headway  Associates,  Ltd. filed a complaint for damages in
the Circuit  Court of the  Seventeenth  Judicial  Circuit  for  Broward  County,
Florida.  Headway  Associates,  Ltd. is seeking payment of all amounts due under
the terms the lease  agreement of the Ft.  Lauderdale  office of NeoMedia's Qode
business unit. The lease  commenced on March 3, 2000 and terminates on March 31,
2005. On February 25, 2002,  Headway agreed to accept $100,000 cash payment over

                                      F-61


a two-month  period for settlement of all past-due and future amounts owed under
the lease. This amount is accrued in the accompanying financial statements.

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  has entered  into a letter of intent with the Finx Group,  Inc. to sell
certain  assets  and  liabilities  relating  to Qode.  As part of the  letter of
intent,  the Finx Group will assume all  liabilities up to $530,000  relating to
the Orsus contract.  Accordingly, the Company has not accrued a liability in the
accompanying  financial statements.  The Company,  along with the Finx Group, is
currently negotiating settlement of this matter.

On March 20, 2002,  IOS Capital,  Inc.  filed a summons  seeking full payment of
approximately  $38,700  relating to past due and future payments under an office
equipment  lease.  The Company has returned the  equipment and intends to settle
the past due  amounts.  As of December  31,  2001,  the  Company had  recorded a
liability of approximately $10,000 relating to this matter.

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 granted during 2000 and 1999 were granted at
an  exercise  price  equal to fair  market  value 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  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, 2000 and 1999 for
stock-based employee compensation.

For grants in 2001, 2000 and 1999, the following  assumptions  were used: (i) no
expected dividends; (ii) a risk-free interest rate of 4.5% for 2001, 6% for 2000
and 5% for 1999;  (iii)  expected  volatility of 135% for 2001, 80% for 2000 and
70% for 1999 and (iv) an expected  life of 5 years for  options  granted in 2001
and 4 years for options  granted in 2000 and 1999. 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 the 1998 Stock Option Plan.

                                      F-62


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).

                                      2001          2000          1999
                                  ----------     ---------     ----------
    NET LOSS
     As reported.                 $   25,469     $   5,409     $   10,472
     Pro forma                    $   27,888     $   7,498     $   11,731
    NET LOSS PER SHARE
     As reported                  $     1.55     $    0.39     $     1.01
     Pro forma                    $     1.70     $    0.54     $     1.13


A summary of the status of NeoMedia's 1996 and 1998 stock option plans as of and
for the years ended December 31, 2001, 2000 and 1999 is as follows:




                                      2001                      2000                     1999
                          -------------------------- -------------------------- ------------------------
                                            WEIGHTED                   WEIGHTED                 WEIGHTED
                                            AVERAGE                    AVERAGE                  AVERAGE
                                           EXERCISE                   EXERCISE                  EXERCISE
                              SHARES         PRICE       SHARES         PRICE        SHARES      PRICE
                         ---------------   --------  --------------   --------- --------------  --------
                          (IN THOUSANDS)             (IN THOUSANDS)             (IN THOUSANDS)

                                                                              
   Outstanding at
     beginning of year             4,294   $   4.71           3,418   $    4.43         3,164   $   4.40
     Granted                       3,499       2.00           1,192        4.87         1,721       4.71
     Exercised                      (38)       3.60           (170)        2.83         (599)       1.77
     Forfeited                   (3,541)       4.13           (146)        5.78         (868)       5.79
                         ---------------   --------  --------------   --------- --------------  --------
   Outstanding at
     end of year                   4,214   $   2.96           4,294   $    4.71         3,418   $   4.43
                         ===============   ========  ==============   ========= ==============  =========


   Options exercisable
     at year-end                   2,452                      2,140                    1,398
   Weighted-average
     fair value of
     options granted
     during the year
     granted during
     the year                      $1.81                      $3.05                    $2.68
   Available for
     grant at the
     end of the year               4,158                      4,116                    5,162




The  following  table  summarizes  information  about  NeoMedia's  stock options outstanding
as of December 31, 2001:


                              OPTIONS OUTSTANDING                       OPTIONS EXERCISABLE
              ---------------------------------------------------    -------------------------
                                             WEIGHTED
                                             AVERAGED     WEIGHTED                   WEIGHTED
                RANGE OF                     REMAINING     AVERAGE                    AVERAGE
                EXERCISE         NUMBER     CONTRACTUAL   EXERCISE       NUMBER      EXERCISE
                 PRICES        OUTSTANDING     LIFE         PRICE     EXERCISABLE      PRICE
              -----------      -----------  -----------   ---------- ------------    ---------
                                   (IN THOUSANDS)                          (IN THOUSANDS)

                                                                   
              $--to $0.84            1,441    9.4 years   $     0.24          667    $    0.28
              1.88 to 2.91             767    8.0 years         2.52          429         2.52
              3.25 to 4.98           1,055    7.9 years         3.81          619         3.76
              5.06 to 7.88             836    7.2 years         6.15          632         6.25
              8.44 to 10.88            115    7.7 years         8.89          105         8.92
              ---------------  -----------  -----------   ----------  -----------    ---------
              $0.84 to $10.88        4,214    8.3 years   $     2.96        2,452    $    3.46
              ===============  ===========  ===========   ==========  ===========    ==========



In  December  1999,  the  Company  issued  20,000  options  to buy shares of the
Company's  common stock to an outside  consultant  at a price of $7.00 per share
for consulting services rendered,  and recognized $28,200 in expense in its 1999
consolidated financial statements.  These options vest in the same manner as the
employee  options  granted  under the 1998 Stock Option Plan.  All these options
were  outstanding  at December 31, 2000 and 1999.  Of these  options,  8,000 and
4,000 were vested at December 31, 2000 and 1999, respectively.

In  October  2000,  the  Company  issued  80,000  warrants  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  at December  31,  2001.  Of these
warrants, 16,000 were vested at December 31, 2001.

                                      F-63


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  vest 40% upon grant and the
remaining 60% one year from the grant date. As of December 31, 2001, all 150,000
warrants were outstanding and 60,000 were vested.


WARRANTS

Warrant activity as of December 31, 2001, 2000 and 1999, is as follows:

                Balance December 31, 1998                  1,639,832

                  Warrants issued                          1,118,630

                  Warrants exercised                          82,100
                                                     ---------------

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


During 2000, the Company issued 1,400,000 warrants as part of a ten year license
of the Company's intellectual  property.  These warrants were immediately vested
and exercisable. The associated expense is being recognized over the life of the
contract.  During  2000,  $118,000  was  recorded as a reduction  of the license
revenue related to the contract.

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 Board of Directors  approved the issuance of 404,900  warrants
to an outside  consultant at an exercise price of $2.09. 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.

                                      F-64


The  following  table  summarizes  information  about  warrants  outstanding  at
December 31, 2001, all of which are exercisable:

                                                 WEIGHTED
                                                 AVERAGE
                                                REMAINING
                                               CONTRACTUAL       WEIGHTED
               RANGE OF         WARRANTS           LIFE          AVERAGE
            EXERCISE PRICES    OUTSTANDING       (YEARS)      EXERCISE PRICE
            -----------------  -----------     -----------    --------------
            $0.10 to $5.50            927             2.6          $ 2.51
            $5.51 to $6.99          1,558             3.5          $ 6.02
            $7.00 to $9.99            524             1.0          $ 8.04
            $10.00 to $15.00          231             1.1         $ 12.74
            -----------------  -----------     -----------    --------------
            $0.10 to $15.00         3,240             2.7          $ 5.82
                               ===========     ===========    ==============


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.

Operational  results for the two segments for the years ended December 31, 2001,
2000 and 1999 are presented below (in thousands):



                                                            NEOMEDIA ISS  NEOMEDIA CIS
                                                             (FORMERLY     (FORMERLY
                                                            NEOMEDIA ASP) NEOMEDIA SI)   CONSOLIDATED
                                                            ------------- ------------   ------------
                                                                                
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                                              $      8,083  $     19,482   $     27,565
     Net Loss                                                    (4,225)       (1,184)        (5,409)

YEAR ENDED DECEMBER 31, 1999
     Net Sales                                              $        795  $     24,461   $     25,256
     Net Loss                                                    (5,916)       (4,556)       (10,472)



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.

                                              F-65




                                           (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
                                ------------------------------------------------------------------
                                  TOTAL         FOURTH        THIRD         SECOND         FIRST
                                ---------      --------      --------      ---------      --------
                                                                           
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)

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 (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)

1999
----
Total net sales                   $25,256        $5,091        $5,019         $7,342        $7,804
Gross profit                       $2,786        ($156)         ($11)         $1,269        $1,684
(Loss) before income taxes
  and discontinued operations   ($10,472)      ($3,881)      ($2,937)       ($1,888)      ($1,766)
Net (loss)                      ($10,472)      ($3,881)      ($2,937)       ($1,888)      ($1,766)
Net (loss) per share:
  basic and diluted               ($1.01)       ($0.34)       ($0.27)        ($0.19)       ($0.20)




16.   COMMON STOCK

On October 24, 2001, the Company filed a proxy statement with the SEC to request
a shareholder vote to increase the number of the Company's  authorized shares of
common stock from  50,000,000  shares to 100,000,000  and increase the number of
the Company's  authorized  shares of preferred stock from  10,000,000  shares to
25,000,000.  The  shareholder  meeting  was  held on  December  11,  2001.  This
resolution  did not pass as a result of the  failure to secure  favorable  votes
from holders of a majority of the outstanding shares.

The proxy also requested  approval to sell 19,000,000  shares of common stock to
accredited  investors in exchange for limited recourse promissory notes accruing
interest at a rate of 6% per annum,  with a term of three months,  providing for
mandatory  repayment  of  principal in the amount of the proceeds of any sale of
the shares of common stock (or other  securities  or assets issued in respect of
such shares of common stock) purchased by means of such promissory  notes,  with
sole recourse  under the event of default under the  promissory  note limited to
recovery of the shares of common stock  purchased (or other assets or securities
issued in respect  thereof) by means of such  promissory  note.  This resolution
passed.  During the fourth quarter of 2001, the Company issued  3,000,000 of the
19,000,000 shares at $0.08 per share in exchange for limited recourse promissory
notes  as  described  above.  The  Company  has  recorded  a stock  subscription
receivable  of $240,000 as of December  31, 2001 with  respect to these  shares.
Subsequent to December 31, 2001, the Company has cancelled the 3,000,000  shares
issued in 2001 and re-issued them, along with 16,000,000 additional shares, at a
price of $0.17 per share, subject to the same terms described above.

During the year ended  December 31, 2001,  the Company  issued  through  private
placements  3,490,750  shares of the  Company's  Common  Stock for  proceeds  of
$1,637,000.

During the year ended  December 31, 2000,  the Company  issued  through  private
placements  1,415,279  shares of the  Company's  Common  Stock for  proceeds  of
$9,203,000. In connection with these private placements, the Company also issued
387,073 warrants with strike prices ranging from $6.00 to $12.74. These warrants
were immediately vested and have a life of three to five years.

                                      F-66



In 1999, an unrelated  third party  converted their $2.0 million note receivable
from the Company into shares of the  Company's  common stock at a price of $4.00
per share.  The unrelated  third party also  received  200,000  warrants.  These
warrants were 100% vested upon issuance. Of these warrants,  100,000 were issued
at $5.00 and 100,000 were issued at $7.00. All 200,000 warrants had a three-year
expiration and were subsequently exercised in 2000.

17.   PREFERRED STOCK

In June 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
estimated 36 million  worldwide  users.  The Company 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 B  Convertible
Preferred  Stock,  par value  $0.01 per share,  of the  500,000  total  Series B
Convertible  Preferred shares which we are authorized to issue, in consideration
for these  promotions.  Each share was  convertible  into one share of  NeoMedia
common  stock.  We  recorded  an  expense  of  $882,000   associated  with  this
transaction  in the  second  quarter  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,  Inc.  Subsequent  to December 31, 2001,  the Series B
Convertible  Preferred  Stock  issued to  About.com  automatically  converted to
452,289 shares of NeoMedia common stock on January 2, 2002.

18.     SUBSEQUENT EVENTS

Subsequent to December 31, 2001, the following events have occurred:

o       During  January  2002,  certain of the  Company'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, the  Company  filed its  response
        claiming that the Company 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.

o       During  February  2002, the Company sold 19 million shares of its common
        stock at $0.17 per share in exchange for  promissory  notes  maturing at
        the earlier of i) 90 days from the date of issuance, or ii) 30 days from
        registration  of the  shares.  During  2001,  the  Company  had issued 3
        million shares to unrelated  investors at $0.08 per share payable in the
        same manner. Those shares were cancelled and re-issued as part of the 19
        million share offering in 2002.

o       During February 2002, the Company issued  1,646,987 shares of its common
        stock to two separate  vendors as settlement of past due liabilities and
        future payments relating to equipment leases.

o       During  March  2002,  the Company  requested  a hearing  before a Nasdaq
        listing  qualifications  panel to review a staff determination issued by
        Nasdaq.  The  determination  indicated  that as of December 31, 2001 the
        Company did not comply  with either the minimum $2 million net  tangible
        assets or the minimum $2.5 million  stockholders' equity requirement for
        continued listing,  and that the company's shares were therefore subject
        to delisting. NeoMedia responded by requesting a hearing before a Nasdaq
        listing  panel  to  review  the  staff  determination.  The  hearing  is
        scheduled for April 18, 2002.

o       During March 2002, the Company  repriced 1.2 million of its common stock
        warrants  for a period of six  months.  During  the term of the  warrant
        repricing  program,  participating  holders  are  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 NASDAQ Small Cap Market on the trading date immediately preceding
        the date of exercise. We are accounting for the repricing using variable
        accounting at each reporting date, in accordance with FIN 44. Under this
        treatment, expense is recognized for unexercised stock warrants repriced
        below  market based on the closing  price of NeoMedia  stock on the last
        day  of  each  reporting  period.  Additionally,  if  any  warrants  are
        exercised  pursuant to he repricing  program,  expense is recognized for
        the difference between the market price of NeoMedia stock at the time of
        exercise and the restated exercise price.

                                      F-67


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



                                                                          SEPTEMBER 30,  DECEMBER 31,
                                                                              2002           2001
                                                                          -------------  ------------
                                                                           (UNAUDITED)    (AUDITED)
                                                                                   
ASSETS
Current assets:
Cash and cash equivalents                                                    $        9   $       134
Trade accounts receivable, net of allowance for doubtful account of $81
in 2002 and $65 in 2001                                                           3,230         2,583
Costs and estimated earnings in excess of billings on uncompleted
contracts                                                                             6            43
Inventories                                                                         141           197
Assets held for sale                                                                ---           210
Prepaid expenses and other current assets                                           786           582
                                                                          -------------  ------------

Total current assets                                                              4,172         3,749

Property and equipment, net                                                         121           205
Capitalized patents, net                                                          2,311         2,500
Capitalized and purchased software costs, net                                       184         1,828
Other long-term assets                                                              677           757
                                                                          -------------  ------------

Total assets                                                                $     7,465   $     9,039
                                                                          =============  ============

                                              F-68




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



                                                                          SEPTEMBER 30,  DECEMBER 31,
                                                                              2002           2001
                                                                          -------------  ------------
                                                                           (UNAUDITED)    (AUDITED)

                                                                                   
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable                                                           $      3,939  $      2,886
Amounts due under financing agreements                                            2,375         2,283
Liabilities in excess of assets of discontinued business unit                     1,489           ---
Accrued expenses                                                                  2,351         1,922
Current portion of long-term debt                                                   160           149
Notes payable                                                                       785           750
Sales taxes payable                                                                 356           135
Billings in excess of costs and estimated earnings on uncompleted
  contracts                                                                           2            13
Deferred revenues                                                                   913           767
Other                                                                                10             7
                                                                          -------------  ------------

Total current liabilities                                                        12,380         8,912

Long-term debt, net of current portion                                              268           390
                                                                          -------------  ------------

Total liabilities                                                                12,648         9,302
                                                                          -------------  ------------

Shareholders' equity:
Preferred stock, $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, $01 par value, 200,000,000 shares authorized, 26,782,724
  shares issued and 25,141,298 outstanding in 2002                                  251           188
Additional paid-in capital                                                       65,237        63,029
Stock subscription receivable                                                       ---         (240)
Deferred stock-based compensation                                                  (47)           ---
Accumulated deficit                                                            (69,845)      (63,344)
Treasury stock, at cost, 201,230 shares of common stock                           (779)         (779)
                                                                          -------------  ------------

Total shareholders' equity                                                      (5,183)         (263)
                                                                          -------------  ------------

Total liabilities and shareholders' equity                                  $     7,465   $     9,039
                                                                          =============  ============


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

                                                F-69



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



                                                                                  NINE MONTHS
                                                                              ENDED SEPTEMBER 30,
                                                                               2002           2001
                                                                           ------------    ----------
                                                                                     
NET SALES:
License fees                                                               $        303    $      522
Resale of software and technology equipment and service fees                      8,149         3,268
                                                                           ------------    ----------
Total net sales                                                                   8,452         3,790
                                                                           ------------    ----------
COST OF SALES:
License fees                                                                        764         1,996
Resale of software and technology equipment and service fees                      6,607         2,737
                                                                           ------------    ----------
Total cost of sales                                                               7,371         4,733
                                                                           ------------    ----------

GROSS PROFIT (LOSS)                                                               1,081         (943)

Sales and marketing expenses                                                        719         2,100
General and administrative expenses                                               3,556         3,409
Research and development costs                                                      683           280
Loss on impairment of assets                                                      1,003         2,871
Loss on Digital:  Convergence license contract                                      ---         7,354
                                                                           ------------    ----------

Loss from operations                                                            (4,880)      (16,957)
Interest expense (income), net                                                       99          (30)
                                                                           ------------    ----------

Loss from continuing operations                                                 (4,979)      (16,927)
Discontinued operations (Note 1):
Loss from operations of discontinued business unit                                  ---       (3,653)
Loss on disposal of discontinued business unit, including provision of
  $424 in 2001 for operating losses during phase-out period                     (1,523)       (3,197)
                                                                           ------------    ----------

NET LOSS                                                                   $    (6,502)    $ (23,777)
                                                                           ============    ==========

NET LOSS PER SHARE FROM CONTINUING OPERATIONS-
BASIC AND DILUTED                                                               $(0.24)      $ (1.12)
                                                                           ============    ==========

NET LOSS PER SHARE FROM DISCONTINUED OPERATIONS-
BASIC AND DILUTED                                                               $(0.07)      $ (0.45)
                                                                           ============    ==========

NET LOSS PER SHARE--BASIC AND DILUTED                                           $(0.31)      $ (1.57)
                                                                           ============    ==========

Weighted average number of common shares--basic and diluted                  20,736,080    15,142,312
                                                                           ============    ==========


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

                                              F-70



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



                                                                                 THREE MONTHS
                                                                              ENDED SEPTEMBER 30,
                                                                               2002           2001
                                                                           ------------    ----------
                                                                                     
NET SALES:
License fees                                                               $        150    $       92
Resale of software and technology equipment and service fees                      3,254           816
                                                                           ------------    ----------
Total net sales                                                                   3,404           908
                                                                           ------------    ----------
COST OF SALES:
License fees                                                                         80           668
Resale of software and technology equipment and service fees                      2,742           743
                                                                           ------------    ----------
Total cost of sales                                                               2,822         1,411
                                                                           ------------    ----------

GROSS PROFIT (LOSS)                                                                 582         (503)

Sales and marketing expenses                                                        207           721
General and administrative expenses                                                 996           818
Research and development costs                                                      150           137
Loss on impairment of assets                                                        ---         2,871
Loss from operations                                                              (771)       (5,050)
Interest expense (income), net                                                        2            22
                                                                           ------------    ----------

Loss from continuing operations                                                   (773)       (5,072)
Discontinued operations (Note 1):
Loss from operations of discontinued business unit                                  ---       (1,041)
Loss on disposal of discontinued business unit, including provision of
$424 in 2001 for operating losses during phase-out period                           ---       (3,197)
                                                                           ------------    ----------
NET LOSS                                                                   $      (773)    $  (9,310)
                                                                           ============    ==========

NET LOSS PER SHARE FROM CONTINUING OPERATIONS-
BASIC AND DILUTED                                                          $     (0.03)    $   (0.33)
                                                                           ============    ==========
NET LOSS PER SHARE FROM DISCONTINUED OPERATIONS-
BASIC AND DILUTED                                                          $        ---    $   (0.27)
                                                                           ============    ==========

NET LOSS PER SHARE--BASIC AND DILUTED                                      $     (0.03)    $   (0.60)
                                                                           ============    ==========

Weighted average number of common shares--basic and diluted                  22,979,755    15,570,693
                                                                           ============    ==========


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

                                                  F-71





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



                                                                  NINE MONTHS ENDED   SEPTEMBER 30,
                                                                        2002              2001
                                                                  ----------------  -----------------
                                                                              
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                          $        (6,502)  $        (23,777)
Adjustments to reconcile net loss to net cash used in
  operating activities:
Depreciation and amortization                                                  938              2,932
Loss on disposal of discontinued business unit                               1,523              2,773
Loss on impairment of assets                                                 1,003              2,871
Effect of Digital Convergence write-off                                        ---              7,354
Preferred stock issued to pay advertising expense                              ---                882
Expense associated with warrant repricing                                       38                845
Stock options and warrants granted for services                                383                 94
Changes in operating assets and liabilities:
Trade accounts receivable                                                    (610)              1,299
Prepaid - Digital:  Convergence                                                ---                118
Other current assets                                                           491              (167)
Accounts payable, amounts due under financing agreements,
  liabilities in excess of assets of discontinued business
  unit, and accrued expenses                                                 1,916              (235)
Deferred revenue                                                               148                174
Other current liabilities                                                        3               (11)
                                                                  ----------------  -----------------
Net cash used in operating activities                                        (669)            (4,848)
                                                                  ----------------  -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of patent costs, software development and
  purchased intangible assets                                                 (24)            (2,939)
(Increase)/decrease in value of life insurance policies                         80                (3)
Acquisition of property and equipment                                          ---               (81)
                                                                  ----------------  -----------------
Net cash used in investing activities                                           56            (3,023)
                                                                  ----------------  -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock net of $0 issuance
  costs in 2002 and $10 in 2001                                                198              1,637
Net proceeds from exercise of stock warrants                                    43              1,034
Net proceeds from exercise of stock options                                    272                139
Net proceeds from release of restricted cash held for line of
  credit                                                                       ---                750
Net proceeds from issuance of notes payable                                     21                500
Issuance of stock-based deferred compensation                                 (46)                ---
Repayments on notes payable and long-term debt                                 ---              (352)
                                                                  ----------------  -----------------
Net cash provided by financing activities                                      488              3,708
                                                                  ----------------  -----------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                         (125)            (4,163)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                   134              4,453
                                                                  ----------------  -----------------

CASH AND CASH EQUIVALENTS, SEPTEMBER 30, 2001                      $             9    $           290
                                                                  ================  =================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid/(received) during the nine months ended
  September 30 (net)                                              $           (66)    $          (31)
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
Issuance costs for shares issued through private placements                    ---                 10
Shares earned by Qode under purchase agreement                                 ---                 13
Common stock issued to settle debt                                              27                ---
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)
Accounts payable converted to note payable                                     ---                170


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

                                                 F-72


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.   The
accompanying  unaudited condensed  consolidated  financial  statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the  information  and  footnotes  required by generally  accepted  accounting
principles  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,
2001.  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, 2002,  and the results of operations for the three-
and nine-month periods ended September 30, 2002 and 2001, and cash flows for the
nine-month  period ended  September 30, 2002 and 2001. The results of operations
for  the  three-  and  nine-month  periods  ended  September  30,  2002  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 Service (NISS) and
NeoMedia Consulting and Integration Service (NCIS).

NEOMEDIA INTERNET SWITCHING SERVICE (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 its 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) 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 targeted at
software  driven  print  applications,   especially  at  process  automation  of
production print facilities  through its integrated  document factory  solution.
Systems  integration  services also identify  prospects for custom  applications
based on the  Company's  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.

RECLASSIFICATIONS

Certain  amounts in the 2001 condensed  consolidated  financial  statements have
been reclassified to conform to the 2002 presentation.

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

                                      F-73


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.
The Company 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. The Company does not expect the adoption to have a material
impact to the Company'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.

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. The Company does not expect the adoption to have a material impact
to the Company'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.

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-74


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  309,773,  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.

                                      F-75



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, the case
was converted to Chapter 7, U.S. 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,  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 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, 2002, the Company had $1.5 million of liabilities  relating to the
Qode system on its books.

IMPAIRMENT OF PAPERCLICK ASSET

During the  three-month  period ending June 30, 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.

OTHER EVENTS

During  January 2002,  certain of the Company'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,  the  Company  filed its  response  claiming  that the  Company  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.

During  January 2002,  NeoMedia  announced that it 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 the Company's patent portfolio.

During  February 2002, the Company sold 19 million shares of its common stock to
five individuals and two  institutional  unrelated parties at $0.17 per share in
exchange for promissory  notes maturing at the earlier of i) August 12, 2002, or
ii) 30 days from registration of the shares. Assuming full payment of the notes,
proceeds from this transaction would have been $3,230,000, of which $190,000 par
value was paid during the first quarter of 2002.  During August 2002,  the notes
matured without payment, and the Company  subsequently  cancelled the 19 million
shares issued in connection with such notes. The Company has accrued a liability
in the third  quarter of $190,000  relating to the par value paid in  connection
with the issuance of the shares.

During February 2002, the Company issued 1,646,987 shares of its common stock to
two separate  vendors as settlement of past due  liabilities and future payments
relating to equipment leases.

During March 2002, the Company repriced 1.2 million of its common stock warrants
for a period of six months.  During the term of the warrant  repricing  program,
participating holders are 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 the Company recognized approximately $38,000 in
expense  relating to the  repricing  during the nine months ended  September 30,
2002.

                                      F-76


On March 20, 2002,  IOS Capital,  Inc.  filed a summons  seeking full payment of
approximately  $38,700  relating to past due and future payments under an office
equipment  lease.  The Company  returned the equipment and settled the liability
for cash payments totaling $30,000.

During April 2002, the Company  repriced 7.4 million of its 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 are 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 the
Company's  common stock fell below $0.12,  and has not closed above $0.12 since.
As a result,  no options were  exercised  under the terms of the program and the
Company did not recognize any expense  relating to the repricing  program during
the nine  months  ended  September  30,  2002 due to  immaterial  effect  on the
financial statements.

On May 16,  2002,  the Company  received  notification  from the Nasdaq  Listing
Qualifications  Panel that its shares were delisted  effective May 17, 2002, due
to failure to meet  either the  minimum  net  tangible  assets  ($2,000,000)  or
minimum  stockholders'  equity ($2,500,000)  criteria for continued listing. The
Company's  shares  are  now  trading  on  the  Over-the-Counter  Bulletin  Board
("OTCBB").

During May 2002, the Company settled its lawsuit with William Goins,  its former
President and Chief Operating Officer (see "Legal Proceedings").  The Company is
obligated to make cash payments of $90,000  directly to the  plaintiff  from 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,  Mr. Goins was granted  360,000 options to purchase shares of NeoMedia
common  stock at an  exercise  price of  $0.08.  These  options  were  valued at
approximately  $36,000.  The Company had a remaining  liability of approximately
$72,000 as of September 30, 2002.

During May 2002,  the Company  entered  into an Equity Line of Credit  Agreement
with Cornell Capital Partners LP ("Cornell").  Under the terms of the agreement,
Cornell has agreed to purchase up to $5.0 million of NeoMedia  common stock over
the next two years at the Company's discretion.

During May 2002,  the  Company  granted a  personal,  worldwide,  non-exclusive,
limited   intellectual   property   licensing   agreement  to  Brandkey  Systems
Corporation.  Brandkey will pay the Company $50,000  upfront  licensing fee plus
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.  Royalty
revenue earned by the Company may not exceed $1.0 million in any given year. The
Company  recognized  approximately  $16,000 in revenue relating to this contract
during the nine months ended September 20, 2002.

On June 6, 2002, the Company held its annual meeting of  shareholders,  at which
shareholders  approved  proposals  to:  i.)  amend  NeoMedia's   Certificate  of
Incorporation  to increase the number of shares of authorized  common stock, par
value $.01, from 50,000,000 to 200,000,000  shares and to increase the number of
shares of  authorized  preferred  stock,  par value $0.01,  from  10,000,000  to
25,000,000;  and ii.)  implement  the 2002 Stock  Option  Plan,  under which the
Company is authorized to grant to employees,  directors,  and  consultants up to
10,000,000 options to purchase shares of its common stock.

On June 26, 2002, the Company announced that its chairman, Charles W. Fritz, had
been  granted  a 90-day  leave of  absence  from his  responsibilities  as Chief
Executive Officer by the company's Board, which,  concurrently,  elected Charles
T. Jensen president and Chief Operating Officer,  and also named him acting CEO.
The Company also announced that it had promoted David Dodge, its Controller,  to
Vice  President and Chief  Financial  Officer.  On September 23, 2002, Mr. Fritz
officially  resigned  his  duties as Chief  Executive  Officer.  He will  remain
Chairman of the Board of Directors and a part-time executive of the Company. Mr.
Jensen has assumed the role of acting CEO.

On August 9, 2002,  the  Company  settled its lawsuit  with 2150  Western  Court
L.L.C.,  the property manager for the Company's Lisle, IL, office, in which 2150
Western Court L.L.C. was seeking payment of past due rent plus possession of the
premises. 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  $61,000 relating to this matter as of
September 30, 2002.

                                      F-77


2.    LIQUIDITY AND CAPITAL RESOURCES

The accompanying  unaudited financial statements have been prepared assuming the
Company will continue as a going concern.  Accordingly, the financial statements
do not include any adjustments that might result from the Company's inability to
continue  as a going  concern.  Based on current  cash  balances  and  operating
budgets,  the Company  believes it will need to raise  operating  capital in the
next 30 days. If the Company's financial resources are insufficient, the Company
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.
The Company cannot predict whether additional  financing will be available,  its
form,  whether  equity or debt, or be in another form, or if the Company will be
successful  in  identifying  entities  with which it may  consummate a merger or
other corporate finance transactions.

3.    GOING CONCERN

The accompanying 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,  2002,  the  Company  has  not  been  able  to  generate
significant  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 the
Company 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 an offering of its common stock or alternative  sources
of financing.  However,  no  assurances  can be given as to the success of these
plans. The consolidated financial statements do not include any adjustments that
might result from the outcome of these uncertainties.

4.    SUBSEQUENT EVENTS

On October 28, 2002, the Company  settled its lawsuit with Wachovia Bank,  N.A.,
the  owner of the  building  in which the  Company's  headquarters  is  located.
Wachovia was seeking  payment of past due rents under its lease  agreement  with
the  Company.  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
$250,000 relating to this matter as of September 30, 2002.

On November 12, 2002,  the Company  settled the lawsuit with its former  General
Counsel  over  payment of the 2000  executive  incentive,  severance  and unpaid
vacation days in the amount of approximately  $154,000. The settlement calls for
cash payments totaling  approximately  $100,000 over a period of 10 months, plus
250,000  vested options to purchase  shares of the Company's  common stock at an
exercise price of $0.01 and a term of five years.

During November 2002, the Company 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;  William  E.  Fritz,  outside
director; and James J. Keil, outside director. The notes bear interest at a rate
of 15% per annum,  and mature at the  earlier of i.) four  months,  or ii.) that
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 the Company's  common stock at a 30% discount to either market
price upon closing,  or upon  conversion,  whichever is lower.  The Company will
also grant to the holders an additional  192,000 shares of the Company's  common
stock and 60,000  warrants to purchase  shares of the Company's  common stock at
$0.03 per share,  with a term of three years. In the event the Company  defaults
on the note, the Company will issue an additional 1,404,330 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.  (see  "Legal
Proceedings").

On November 12,  2002,  the Company and Cornell  terminated  the May 2002 Equity
Line of Credit  Agreement and entered into a new 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

                                      F-78


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.




                                      F-79



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:                             PROSPECTUS

[ ]  except the common stock offered by            -----------------------
this prospectus;

[ ]  in any jurisdiction in which the
offer or solicitation is not authorized;
                                              113,408,376 SHARES OF COMMON STOCK
[ ]  in any jurisdiction where the dealer
or other salesperson is not qualified to
make the offer or solicitation;
                                                 NEOMEDIA TECHNOLOGIES, INC.
[ ]  to any person to whom it is unlawful
to make the offer or solicitation; or
                                                        _____,  2002
[ ]    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.


                                     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      $        210
       Printing and Engraving Expenses                          $      2,500
       Accounting Fees and Expenses                             $     15,000
       Legal Fees and Expenses                                  $     50,000
       Miscellaneous                                            $     17,290

       TOTAL                                                    $     85,000


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 December 2, 2002,  Jerald Eicke was issued  4,000,000  shares of common
stock in exchange for consulting  services rendered.  The shares of common stock
were priced at $0.05 totaling a value of $200,000.

      On December 2, 2002, NeoMedia 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,  NeoMedia  entered into a
Pledge  Agreement,  dated  December  2, 2002,  by and between  NeoMedia  and the
Investor under which  NeoMedia  issued  53,620,020  shares of common stock to an
unrelated  third party as collateral  for the  Promissory  Note. In the event of
default,  the third party would issue the shares to the  Investor,  and NeoMedia
would  issue  additional  shares as required  to  increase  Mr.  Kesselbrenner's
ownership  of  securities  of  NeoMedia  to  equal  51%  of  its   fully-diluted
outstanding shares at the time of such default.


                                      II-1


      On November 12, 2002, NeoMedia and Cornell Capital Partners terminated the
May 2002 Equity Line of Credit  Agreement  and entered into a new 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 NeoMedia'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 advance by NeoMedia.  NeoMedia will pay 5%
of the gross proceeds of each purchase to Cornell as a commission.  According to
the terms of the agreement, NeoMedia cannot draw on the line of credit until the
shares  underlying  the agreement are registered for trading with the Securities
and Exchange  Commission.  Cornell  Capital  received a one-time  commitment fee
payable  in  2,000,000  shares  of  our  common  stock.  Additionally,  Westrock
Advisors,  Inc. was paid a fee of 62,500 shares of  NeoMedia's  common stock for
acting as the placement agent.

      In September 2002,  NeoMedia issued  1,161,402 shares of common stock upon
exercise of outstanding  options by an unrelated  consultant at a price of $0.01
per share. The gross proceeds of such transaction were approximately $12,000.

      In August 2002,  NeoMedia  issued  900,000  shares of common stock to 2150
Western  Court  L.L.C,  the landlord of its 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 July,  August and  September  2002, we issued an aggregate of 3,000,000
shares of our  common  stock  upon the  exercise  of  outstanding  options  by a
consultant at a price of $0.01 per share. The gross proceeds of such transaction
were $30,000.

      In July 2002, we issued  575,980  shares of common stock upon the exercise
of outstanding options by an unrelated consultant at a price of $0.01 per share.
The gross proceeds of such transaction were approximately $6,000.

      In June 2002,  we issued  900,000  shares of common stock to two unrelated
consultants  as payment for  consulting  services to be performed from June 2002
through June 2003. There were no cash proceeds to us in these transactions.

      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 May 2002, we issued an aggregate of 200 shares of our common stock upon
the  exercise  of  outstanding  options by an  employee  at a price of $0.12 per
share. The gross proceeds of such transaction were $24.

      During  April 2002,  NeoMedia  repriced  7.4  million of its 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  are
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
the  Company's  common  stock fell below  $0.12,  and has not closed above $0.12
since. As a result, no options were exercised under the terms of the program and
NeoMedia did not recognize any expense relating to the repricing  program during
the nine  months  ended  September  30,  2002 due to  immaterial  effect  on the
financial statements.

      In April  2002,  we issued an  aggregate  of 140,775  shares of our common
stock upon the  exercise  of  outstanding  warrants  by Charles  W.  Fritz,  its
Chairman and Chief Executive  Officer,  at a price of $0.12 per share. Mr. Fritz
subsequently  sold the  shares  into the  market.  The  gross  proceeds  of such
transaction were  approximately  $17,000.  In accordance with Section 16(b), all
proceeds from the sales were retained by us.

      In April 2002,  we issued an aggregate  of 1,962,255  shares of our common
stock upon the exercise of  outstanding  options by two  unrelated  parties at a
price  of  $0.12  per  share.  The  gross  proceeds  of  such  transaction  were
approximately $235,000.

      In April 2002, we issued an aggregate of 40,000 shares of our common stock
upon the exercise of outstanding  options by James J. Keil, an outside director.
Mr.  Keil  purchased  25,000  shares at an  exercise  price of $0.135 and 15,000
shares at $0.20.  The gross  proceeds  of such  transaction  were  approximately
$6,000.

      During  March 2002,  NeoMedia  repriced  1.2  million of its common  stock
warrants  for a period of six months.  During the term of the warrant  repricing
program, participating holders are entitled to exercise qualified warrants at an

                                      II-2


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
$38,000 in expense  relating  to the  repricing  during  the nine  months  ended
September 30, 2002.

      In March  2002,  we issued an  aggregate  of 228,675  shares of our common
stock upon the exercise of outstanding warrants by an unrelated party at a price
of $0.12 per share. The gross proceeds of such  transaction  were  approximately
$27,000.

      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 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,  NeoMedia  issued 55,000 shares of its 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 September 2001, we issued 150,000 options to buy shares of common stock
at a price of $0.20 per share for consulting services.

      In July 2001,  we issued an aggregate of 11,300 shares of our common stock
upon the  exercise of  outstanding  warrants at a price of $2.00 per share.  The
gross proceeds of such  transaction  were $23,000.  The warrants were originally
issued to one unrelated party for professional services provided to us.

      In June 2001,  we issued  warrants  to purchase  404,900  shares of common
stock with an exercise price of $2.09 for consulting services.

      In June 2001,  we issued an  aggregate of 4,100 shares of our common stock
upon the exercise of  outstanding  warrants at a price of $2.00 per share.  The+
gross proceeds of such  transaction  were $8,000.  The warrants were  originally
issued to one unrelated party for professional services provided to us.

      In May 2001, we issued an aggregate of 320,050  shares of our common stock
upon the  exercise of  outstanding  warrants at a price of $2.00 per share.  The
gross proceeds of such transaction  were $641,000.  The warrants were originally
issued  to one  related  party  in  exchange  for  forgiveness  of debt  and one
unrelated party for professional services provided to us.

      In April 2001,  we issued  warrants to  purchase  50,000  shares of common
stock at a price of $0.01  per  share to an  outside  institution  for  services
performed.

      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.

                                      II-3


      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 2001, we issued  170,000 shares of our common stock issuable upon
the exercise of outstanding warrants held by a foreign  institutional  unrelated
party,  originally  issued  in  connection  with the  transaction  described  in
paragraph 4, above. The gross proceeds of such  transaction  were  approximately
$362,000.

      In October  2000, we issued  warrants to purchase  80,000 shares of common
stock at a price of $4.13 per share for consulting services.

      In October 2000, we issued warrants to purchase 1,400,000 shares of common
stock at a price of  $6.00  per  share  to  Digital:Convergence  Corporation  as
consideration for a 10-year intellectual property license agreement.

      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 March  2000,  we issued  187,500  shares of our  common  stock upon the
exercise  of  outstanding  warrants  at a price of $7.38  per  share.  The gross
proceeds of such transaction were  approximately  $1,383,000.  The warrants were
originally issued as payment for professional services provided to us.

      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.

      In December 1999, we issued  options to purchase  150,000 shares of common
stock at a price of $0.20 per share for consulting services.

      In November  1999, we issued an aggregate of 143,334  shares of our common
stock at a price of $3.75  per  share to two  individual  and two  institutional
unrelated  parties.  In connection with the sale, we also issued an aggregate of
5,067 warrants with an exercise price of $5.50,  1,267 warrants with an exercise
price of $4.75,  5,333  warrants  with an  exercise  price of  $4.67,  and 2,667
warrants with an exercise price of $5.84. The gross proceeds of such transaction
were approximately $538,000. In connection with the sale, we paid commissions of
approximately $35,000.

      In October 1999, we issued 15,000 shares of our common stock at a price of
$4.38 per share to an individual  unrelated  party. In connection with the sale,
we also  issued  1,500  warrants  with an  exercise  price of  $4.38.  The gross
proceeds of such transaction were approximately $66,000.

      In September  1999, we issued an aggregate of 210,000 shares of our common
stock at a price of $7.00 per share to one  foreign  individual  and two foreign
institutional  unrelated  parties.  The gross proceeds of such  transaction were


                                      II-4


approximately $1,470,000. In connection with the sale, we issued as a commission
105,000  warrants to purchase shares of our common stock at an exercise price of
$6.00 per share to a foreign institutional investor.

      In September  1999, we issued an aggregate of 275,231 shares of our common
stock at a price of $5.75 per share to two  individual  and three  institutional
unrelated  parties.  In connection with the sale, we also issued an aggregate of
27,523  warrants  with an exercise  price of $6.75.  The gross  proceeds of such
transaction were approximately  $1,583,000. In connection with the sale, we paid
commissions  of $30,000 cash,  and also issued 11,172 shares of its common stock
valued at $6.19 per share and 10,000  warrants to purchase  shares of our common
stock at an exercise price of $6.19 per share.

      In June 1999, we issued  250,000  shares of our common stock at a price of
$4.00 per share to A.T. Cross Company,  an unrelated  party.  In connection with
the sale, we also issued 100,000  warrants with an exercise price of $7.00.  The
gross proceeds of such transaction were approximately $1,000,000.

      In May 1999,  we issued an aggregate of 65,000  shares of our common stock
at a price of $4.75 per share to two individual unrelated parties. In connection
with the sale,  we also issued an aggregate of 6,500  warrants  with an exercise
price of $5.00.  The  gross  proceeds  of such  transaction  were  approximately
$309,000.  In connection with the sale, we paid  commissions of $3,375 cash plus
3,250  warrants to purchase  shares of our common stock at an exercise  price of
$5.00 per share.

      In April 1999,  we issued an aggregate  of 1,000,000  shares of our common
stock at a price of $3.45 per share to two foreign individual  unrelated parties
and four institutional unrelated parties, three of which were foreign. The gross
proceeds of such transaction were approximately  $3,450,000.  In connection with
the sale, we issued as a commission  175,000  warrants to purchase shares of our
common stock at an exercise price of $3.45 per share to a foreign  institutional
unrelated party.

      In April 1999,  we issued  warrants to  purchase  50,000  shares of common
stock at a price of $0.01  per  share to an  outside  institution  for  services
performed.

      In February  1999, we issued 250,000 shares of our common stock at a price
of $4.00 per share to A.T. Cross Company, an unrelated party. In connection with
the sale, we also issued 100,000  warrants with an exercise price of $5.00.  The
gross proceeds of such transaction were $1,000,000.

      In January and February, 1999, we issued an aggregate of 145,000 shares of
our common stock at a price of $3.50 per share to six unrelated parties,  two of
which were foreign institutions,  two of which were foreign individuals, and two
of which were domestic individuals.  In connection with the sale, we also issued
an  aggregate  of 3,000  warrants  with an  exercise  price of $3.50.  The gross
proceeds of such transaction were approximately $507,500. In connection with the
sale, we also issued as a commission  280,000 warrants to purchase shares of our
common stock at an exercise price of $2.13 per share to five of the purchasers.

      In January 1999, we issued 42,857 shares of our common stock at a price of
$3.50 per share to an individual  related party. In connection with the sale, we
also issued 4,286 warrants with an exercise  price of $3.50.  The gross proceeds
of such transaction were approximately $150,000.

      In  January  1999,  we  issued  82,372  shares of our  common  stock to an
individual  related party at a price of $3.04 per share.  In connection with the
sale, we also issued 8,237 warrants with an exercise  price of $3.04.  The gross
proceeds of such transaction were approximately $250,000.

      In January 1999, we issued  warrants to purchase  230,000 shares of common
stock at a price of  $2.13  per  share to an  outside  consultant  for  services
performed.

      In  November  1998,  we  borrowed  $500,000,  in two  separate  notes from
unrelated third parties. These notes were due in November, 1999 with an interest
rate of 20%. One $250,000 note was extended until January 6, 2000, and the other
was extended until February 25, 2000. These notes were secured by 375,000 shares
of our common  stock by placing  them in an escrow  account.  These  shares were
considered  issued  but not  outstanding  for  1999.  As part of  obtaining  the
financing, 37,500 stock warrants, exercisable at $2.00 per share, were issued to
the lender.  These warrants were exercised in February 2000.  During 2000,  both
notes were repaid and the 375,000  shares  securing the notes have been released
from escrow and retired by us.


                                      II-5


      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-6



EXHIBITS


EXHIBIT NO.   DESCRIPTION                                       LOCATION
-----------   -----------                                       --------

                                                          
3.1           Articles of Incorporation of Dev-Tech             Incorporated by reference to Exhibit
              Associates, Inc. and amendment thereto            3.1 to Registrant's Registration
                                                                Statement No. 333-5534 as 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 Incorporation of          Incorporated by reference to Exhibit
              DevSys, Inc.                                      3.3 to 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 and Plan of      Incorporated by reference to Exhibit
              Merger of DevSys, Inc and Dev-Tech Associates,    3.5 to Registrant's Registration
              Inc.                                              Statement No. 333-5534 as filed with
                                                                the SEC on November 25, 1996

3.6           Certificate of Merger of Dev-Tech Associates,     Incorporated by reference to Exhibit
              Inc. into DevSys, Inc.                            3.6 to Registrant's Registration
                                                                Statement No. 333-5534 as filed with
                                                                the SEC on November 25, 1996

3.7           Articles of Incorporation of Dev-Tech             Incorporated by reference to Exhibit
              Migration, Inc. and amendment thereto             3.7 to Registrant's Registration
                                                                Statement No. 333-5534 as filed with
                                                                the SEC on November 25, 1996

3.8           By-laws of Dev-Tech Migration, Inc.               Incorporated by reference to Exhibit
                                                                3.8 to Registrant's Registration
                                                                Statement No. 333-5534 as filed with
                                                                the SEC on November 25, 1996

3.9           Restated Certificate of Incorporation of DevSys   Incorporated by reference to Exhibit
              Migration, Inc.                                   3.9 to Registrant's Registration
                                                                Statement No. 333-5534 as filed with
                                                                the SEC on November 25, 1996

3.10          Form of By-laws of DevSys Migration, Inc.         Incorporated by reference to Exhibit
                                                                3.10 to Registrant's Registration
                                                                Statement No. 333-5534 as filed with
                                                                the SEC on November 25, 1996

                                               II-7





EXHIBIT NO.   DESCRIPTION                                       LOCATION
-----------   -----------                                       --------

                                                          
3.11          Form of Agreement and Plan of Merger of           Incorporated by reference to Exhibit
              Dev-Tech Migration, Inc. into DevSys Migration,   3.11 to Registrant's Registration
              Inc.                                              Statement No. 333-5534 as filed with
                                                                the SEC on November 25, 1996

3.12          Form of Certificate of Merger of Dev-Tech         Incorporated by reference to Exhibit
              Migration, Inc. into DevSys Migration, Inc.       3.12 to Registrant's Registration
                                                                Statement No. 333-5534 as filed with
                                                                the SEC on November 25, 1996

3.13          Certificate of Amendment to Certificate of        Incorporated by reference to Exhibit
              Incorporation of DevSys, Inc. changing its name   3.13 to Registrant's Registration
              to NeoMedia Technologies, Inc.                    Statement No. 333-5534 as filed with
                                                                the SEC on November 25, 1996

3.14          Form of Certificate of Amendment to Certificate   Incorporated by reference to Exhibit
              of Incorporation of NeoMedia Technologies, Inc.   3.14 to Registrant's Registration
              authorizing a reverse stock split                 Statement No. 333-5534 as filed with
                                                                the SEC on November 25, 1996

3.15          Form of Certificate of Amendment to Restated      Incorporated by reference to Exhibit
              Certificate of Incorporation of NeoMedia          3.5 to Registrant's Annual Report as
              Technologies, Inc. increasing authorized          filed with the SEC on November 2,
              capital and creating preferred stock              2001

4.1           Form of Certificate for Common Stock of DevSys,   Incorporated by reference to Exhibit
              Inc.                                              4.1 to the Registrant's Registration
                                                                Statement No. 333-5534 as filed with
                                                                the SEC on November 25, 1996

4.2           Form of Joseph Charles' Warrant Agreement         Incorporated by reference to Exhibit
                                                                4.2 to the Registrant's Registration
                                                                Statement No. 333-5534 as filed with
                                                                the SEC on November 25, 1996

4.3           Form of Private Placement Financing Converted     Incorporated by reference to Exhibit
              Securities Registration Rights Agreement          4.4 to the Registrant's Registration
                                                                Statement No. 333-5534 as filed with
                                                                the SEC on November 25, 1996

4.4           Form of 10% Unsecured Subordinate Convertible     Incorporated by reference to Exhibit
              Promissory Note                                   4.5 to the Registrant's Registration
                                                                Statement No. 333-5534 as filed with
                                                                the SEC on November 25, 1996

4.5           Form of Principal Stockholder's Warrant           Incorporated by reference to Exhibit
                                                                4.6 to the Registrant's Registration
                                                                Statement No. 333-5534 as filed with
                                                                the SEC on November 25, 1996

4.6           Form of Placement Agent's Registration Rights     Incorporated by reference to Exhibit
              Agreement                                         4.7 to the Registrant's Registration
                                                                Statement No. 333-5534 as filed with
                                                                the SEC on November 25, 1996

                                               II-8





EXHIBIT NO.   DESCRIPTION                                       LOCATION
-----------   -----------                                       --------

                                                          
4.7           Form of Placement Agent's Warrant for the         Incorporated by reference to Exhibit
              Purchase of Shares of Common Stock and Warrants   4.8 to the Registrant's Registration
                                                                Statement No. 333-5534 as filed with
                                                                the SEC on November 25, 1996

4.8           Form of Warrant Agreement and Warrant             Incorporated by reference to Exhibit
                                                                4.9 to the Registrant's Registration
                                                                Statement No. 333-5534 as filed with
                                                                the SEC on November 25, 1996

4.9           NeoMedia Technologies, Inc. 1998 Stock Option     Incorporated by reference to
              Plan                                              Appendix A to the Registrant's Form
                                                                14A as filed with the SEC on
                                                                February 18, 1998

4.10          Form of Warrant to Charles W. Fritz               Incorporated by reference to Exhibit
                                                                4.10 to the Registrant's
                                                                Registration Statement on Form
                                                                10-KSB as filed with the SEC on
                                                                March 31, 1998

4.11          Form of Warrant to Dominick & Dominick,           Incorporated by reference to Exhibit
              Incorporated                                      4.11 to the Registrant's Annual
                                                                Report on Form 10-KSB as filed with
                                                                the SEC on March 31, 1998

4.12          Form of Warrant to Compass Capital LLC            Incorporated by reference to Exhibit
                                                                4.12 to the Registrant's Annual
                                                                Report on Form 10-KSB as filed with
                                                                the SEC on March 31, 1998

4.13          Form of Warrant to Thornhill Capital, LLC         Incorporated by reference to Exhibit
                                                                4.13 to the Registrant's Annual
                                                                Report on Form 10-KSB as filed with
                                                                the SEC on March 31, 1998

4.14          Form of Warrant to Southeast Research Partners,   Incorporated by reference to Exhibit
              Inc.                                              4.14 to the Registrant's Annual
                                                                Report on Form 10-KSB as filed with
                                                                the SEC on March 31, 1998

4.15          Form of Warrant to Joseph Charles & Associates,   Incorporated by reference to Exhibit
              Inc.                                              4.15 to the Registrant's Annual
                                                                Report on Form 10-KSB as filed with
                                                                the SEC on March 31, 1998

5.1           Opinion re:  Legality                             Provided herewith

10.1          Form of "Lock Up" Agreement to be entered into    Incorporated by reference to Exhibit
              by NeoMedia and its Officers, Directors, and      10.1 to the Registrant's
              Shareholders                                      Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.2          Form of Nonsolicitation and Confidentiality       Incorporated by reference to Exhibit
              Agreement                                         10.2 to the Registrant's
                                                                Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.3          Employment Agreement, dated May 1, 1996 between   Incorporated by reference to Exhibit
              Dev-Tech Associates, Inc. and Charles W. Fritz    10.3 to the Registrant's
                                                                Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

                                               II-9





EXHIBIT NO.   DESCRIPTION                                       LOCATION
-----------   -----------                                       --------

                                                          
10.4          Employment Agreement, dated April 1, 1996         Incorporated by reference to Exhibit
              between Dev-Tech Associates, Inc. and Robert T.   10.4 to the Registrant's
              Durst, Jr.                                        Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.5          Employment Agreement, dated May 1, 1996,          Incorporated by reference to Exhibit
              between Dev-Tech Associates, Inc. and Charles     10.5 to the Registrant's
              T. Jensen                                         Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.6          Lease Agreement dated September 1, 1994 for 112   Incorporated by reference to Exhibit
              South Tryon Street, Charlotte, North Carolina     10.6 to the Registrant's
                                                                Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.7          Lease dated August 29, 1995 for 280 Shuman        Incorporated by reference to Exhibit
              Boulevard, Naperville, Illinois                   10.8 to the Registrant's
                                                                Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.8          Promissory Note, dated as of December 31, 1994,   Incorporated by reference to Exhibit
              in the principal amount of $413,000 from          10.9 to the Registrant's
              Dev-Tech Associates, Inc. payable to William E.   Registration Statement No. 333-5534
              Fritz                                             as filed with the SEC on November
                                                                25, 1996

10.9          Promissory Note, dated as of December 31, 1994,   Incorporated by reference to Exhibit
              in the principal amount of $75,000 from           10.10 to the Registrant's
              Dev-Tech Associates, Inc. payable to Dev-Mark,    Registration Statement No. 333-5534
              Inc.                                              as filed with the SEC on November
                                                                25, 1996

10.11         Promissory Note, dated as of December 31, 1994,   Incorporated by reference to Exhibit
              in the principal amount of $90,000 from           10.12 to the Registrant's
              Dev-Tech Migration, Inc. payable to William E.    Registration Statement No. 333-5534
              Fritz                                             as filed with the SEC on November
                                                                25, 1996

10.12         Promissory Note, dated as of December 31, 1994,   Incorporated by reference to Exhibit
              in the principal amount of $10,000 from           10.13 to the Registrant's
              Dev-Tech Migration, Inc. payable to Charles W.    Registration Statement No. 333-5534
              Fritz                                             as filed with the SEC on November
                                                                25, 1996

10.13         Demand Promissory Note, dated as of December 9,   Incorporated by reference to Exhibit
              1994, in the principal amount of $500,000 from    10.14 to the Registrant's
              Dev-Tech Migration, Inc. payable to Dev-Tech      Registration Statement No. 333-5534
              Associates, Inc.                                  as filed with the SEC on November
                                                                25, 1996

10.14         Promissory Note, dated as of December 28, 1995,   Incorporated by reference to Exhibit
              in the principal amount of $450,000 from          10.15 to the Registrant's
              Dev-Tech Migration, Inc. payable to Charles W.    Registration Statement No. 333-5534
              Fritz                                             as filed with the SEC on November
                                                                25, 1996

10.15         Promissory Note, dated as of January 2, 1996,     Incorporated by reference to Exhibit
              in the principal amount of $360,000 from          10.16 to the Registrant's
              Dev-Tech Associates, Inc. to Dev-Tech             Registration Statement No. 333-5534
              Migration, Inc.                                   as filed with the SEC on November
                                                                25, 1996

                                               II-10





EXHIBIT NO.   DESCRIPTION                                       LOCATION
-----------   -----------                                       --------

                                                          
10.16         Promissory Note, dated as of January 2, 1996,     Incorporated by reference to Exhibit
              in the principal amount of $472,000 from          10.17 to the Registrant's
              William E. Fritz to Dev-Tech Associates, Inc.     Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.17         Promissory Note, dated as of January 2, 1996,     Incorporated by reference to Exhibit
              in the principal amount of $750,000 from          10.18 to the Registrant's
              Dev-Tech Migration, Inc. to Charles W. Fritz      Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.18         Promissory Note, dated as of December 31, 1994,   Incorporated by reference to Exhibit
              in the principal amount of $46,748 from           10.19 to the Registrant's
              Dev-Tech Migration, Inc. to Brandon Edenfield     Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.19         Promissory Note, dated as of June 19, 1995, in    Incorporated by reference to Exhibit
              the principal amount of $20,000 from Dev-Tech     10.20 to the Registrant's
              Migration, Inc. to Brandon Edenfield              Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.20         Security Agreement, dated as of December 9        Incorporated by reference to Exhibit
              1994, between Dev-Tech Associates, Inc. and       10.21 to the Registrant's
              Dev-Tech Migration, Inc                           Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.21         Agreement for Wholesale Financing (Security       Incorporated by reference to Exhibit
              Agreement), dated October 20, 1992, to IBM        10.35 to the Registrant's
              Credit Corporation from Dev-Tech Associates,      Registration Statement No. 333-5534
              Inc.                                              as filed with the SEC on November
                                                                25, 1996

10.22         Guaranty from Gen-Tech, Inc. to IBM Credit        Incorporated by reference to Exhibit
              Corporation                                       10.36 to the Registrant's
                                                                Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.23         Guaranty from Dev-Mark, Inc. to IBM Credit        Incorporated by reference to Exhibit
              Corporation                                       10.37 to the Registrant's
                                                                Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.24         Amendment to Agreement for Wholesale Financing    Incorporated by reference to Exhibit
              and Addendum to Agreement for Wholesale           10.38 to the Registrant's
              Financing                                         Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.25         Assignment Agreement, dated September 15, 1994,   Incorporated by reference to Exhibit
              from Dev-Tech Associates, Inc. to IBM Credit      10.39 to the Registrant's
              Corporation                                       Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.26         Guaranty dated October 20, 1992 to IBM Credit     Incorporated by reference to Exhibit
              Corporation from Charles W. Fritz                 10.40 to the Registrant's
                                                                Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996
                                               II-11





EXHIBIT NO.   DESCRIPTION                                       LOCATION
-----------   -----------                                       --------

                                                          
10.27         Collateralized Guaranty, dated August 16, 1994,   Incorporated by reference to Exhibit
              to IBM Credit Corporation from Charles W.         10.41 to the Registrant's
              Fritz, as Guarantor                               Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.28         Collateralized Guaranty, dated August 16, 1994,   Incorporated by reference to Exhibit
              to IBM Credit Corporation from Dev-Mark, Inc.     10.42 to the Registrant's
                                                                Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.29         Dev-Tech Associates, Inc. Annual Incentive Plan   Incorporated by reference to Exhibit
              for Management                                    10.43 to the Registrant's
                                                                Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.30         Dev-Tech Associates, Inc. 1996 Stock Option Plan  Incorporated by reference to Exhibit
                                                                10.44 to the Registrant's
                                                                Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.31         First Amendment and Restatement of Dev-Tech       Incorporated by reference to Exhibit
              Associates, Inc. 1996 Stock Option Plan           10.45 to the Registrant's
                                                                Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.32         Form of Stock Option Agreement - Dev-Tech         Incorporated by reference to Exhibit
              Associates, Inc.                                  10.46 to the Registrant's
                                                                Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.33         Dev-Tech Migration, Inc. 1996 Stock Option Plan   Incorporated by reference to Exhibit
                                                                10.47 to the Registrant's
                                                                Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.34         First Amendment and Restatement of Dev-Tech       Incorporated by reference to Exhibit
              Migration, Inc.                                   10.48 to the Registrant's
                                                                Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.35         Form of Stock Option Agreement - Dev-Tech         Incorporated by reference to Exhibit
              Migration, Inc.                                   10.49 to the Registrant's
                                                                Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.36         Dev-Tech Associates, Inc. 401(k) Plan and         Incorporated by reference to Exhibit
              amendments                                        10.50 to the Registrant's
                                                                Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.37         Engagement Letter, dated March 13, 1995, with     Incorporated by reference to Exhibit
              Compass Capital, Inc. and Amendments thereto      10.51 to the Registrant's
                                                                Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996
                                               II-12





EXHIBIT NO.   DESCRIPTION                                       LOCATION
-----------   -----------                                       --------

                                                          
10.38         Mutual General Release and Stock Purchase         Incorporated by reference to Exhibit
              Agreement with the Estate of Thomas Ruberry       10.52 to the Registrant's
                                                                Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.39         Form of "Lock-Up" Agreement with Bridge           Incorporated by reference to Exhibit
              Financing Selling Stockholders and Form of        10.53 to the Registrant's
              Addendum to Subscription Agreement                Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

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 11, 1996 between   Incorporated by reference to Exhibit
              NeoMedia Technologies, Inc. and E-Stamp           10.59 to the Registrant's
              Corporation                                       Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.42         First Amendment and Restatement of NeoMedia       Incorporated by reference to Exhibit
              Technologies, Inc. 1996 Stock Option Plan         10.60 to the Registrant's
                                                                Registration Statement No. 333-5534
                                                                as filed with the SEC on November
                                                                25, 1996

10.43         Agreement of Lease, dated November 27, 1996,      Incorporated by reference to Exhibit
              between First Union National Bank of Florida      10.43 to the Registrant's Annual
              and NeoMedia Technologies, Inc.                   Report on Form 10-KSB as filed with
                                                                the SEC on March 27, 1997

10.44         Sublease Agreement between NeoMedia               Incorporated by reference to Exhibit
              Technologies, Inc. and Lancaster Annuity          10.44 to the Registrant's Annual
              Services Company dated November 8, 1996           Report on Form 10-KSB as filed with
                                                                the SEC on March 27, 1997

10.45         Agreement for Sale of Assets between Basic        Incorporated by reference to Exhibit
              Developments, Inc. and Meja Sistemas C.A. and     10.45 to the Registrant's Annual
              NeoMedia Technologies, dated February 12, 1997    Report on Form 10-KSB as filed with
                                                                the SEC on March 27, 1997

10.46         Master Lease between William E. Fritz and         Incorporated by reference to Exhibit
              NeoMedia Technologies, Inc., dated November 6,    10.46 to the Registrant's Annual
              1996                                              Report on Form 10-KSB as filed with
                                                                the SEC on March 27, 1997

10.47         Agreement for Wholesale Financing, dated          Incorporated by reference to Exhibit
              February 20, 1997, between IBM Credit             10.47 to the Registrant's Annual
              Corporation and NeoMedia Technologies, Inc.       Report on Form 10-KSB as filed with
                                                                the SEC on March 27, 1997

10.48         Collateralized Guaranty, dated February 20,       Incorporated by reference to Exhibit
              1997, between IBM Credit Corporation and          10.48 to the Registrant's Annual
              NeoMedia Technologies, Inc.                       Report on Form 10-KSB as filed with
                                                                the SEC on March 27, 1997

10.49         Lease by and between American National Bank and   Incorporated by reference to Exhibit
              Trust Company of Chicago and NeoMedia             10.50 to the Registrant's Quarterly
              Technologies, Inc., February 25, 1997             Report on Form 10-QSB as filed with
                                                                the SEC on March 31, 1997

                                               II-13





EXHIBIT NO.   DESCRIPTION                                       LOCATION
-----------   -----------                                       --------

                                                          
10.50         Letter Agreement by and between Dominick &        Incorporated by reference to Exhibit
              Dominick, Incorporated and NeoMedia               10.51 to the Registrant's Quarterly
              Technologies, Inc. dated March 20, 1997           Report on Form 10-QSB as filed with
                                                                the SEC on June 30, 1997

10.51         Stock Purchase Agreement dated August 30, 1997    Incorporated by reference to Exhibit
              by and between NeoMedia Technologies, Inc. and    99.1 to the Registrant's Current
              George Luntz and Gerald L. Willis                 Report on Form 8-K as filed with the
                                                                SEC on September 25, 1997

10.52         Registration Rights Agreement dated September     Incorporated by reference to Exhibit
              25, 1997 by and between NeoMedia Technologies,    99.2 to the Registrant's Current
              Inc., Gerald L. Willis and George G. Luntz        Report on Form 8-K as filed with the
                                                                SEC on September 25, 1997

10.53         Consulting Agreement dated August 30, 1997 by     Incorporated by reference to Exhibit
              and between NeoMedia Technologies, Inc. and       99.3 to the Registrant's Current
              George Luntz                                      Report on Form 8-K as filed with the
                                                                SEC on September 25, 1997

10.54         Employment Agreement dated August 30, 1997 by     Incorporated by reference to Exhibit
              and between NeoMedia Technologies, Inc. and       99.4 to the Registrant's Current
              George Luntz                                      Report on Form 8-K as filed with the
                                                                SEC on September 25, 1997

10.55         Termination of Collaterized Guaranty between      Incorporated by reference to Exhibit
              IBM Credit Corporation, Gen-Tech, Inc. and        10.49 to the Registrant's Annual
              Dev-Mark, Inc., dated February 5, 1997            Report on Form 10-KSB as filed with
                                                                the SEC on March 27, 1997

10.56         Purchase Agreement dated December 31, 1998, by    Incorporated by reference to Exhibit
              and between NeoMedia Technologies, Inc. and       10.30 to the Registrant's Annual
              Solar Communications, Inc.                        Report on Form 10-KSB as filed with
                                                                the SEC on April 15, 1999

10.57         NeoMedia Technologies, Inc. 1998 Stock Option     Incorporated by reference to
              Plan                                              Appendix A of the Registrant's Form
                                                                14A as filed with the SEC on
                                                                February 18, 1998

10.58         Amendment to NeoMedia Technologies 1998 Stock     Incorporated by reference to Form
              Option Plan                                       14A as filed with the SEC on July 2,
                                                                1999

10.59         Employment Agreement dated August 2, 1999         Incorporated by reference to Exhibit
              between NeoMedia Technologies, Inc. and William   10.32 to the Registrant's Annual
              Goins                                             Report on Form 10-KSB as filed with
                                                                the SEC on March 30, 2000

10.60         Licensing Agreement between Digital Convergence   Incorporated by reference to Exhibit
              Corporation and NeoMedia Technologies, Inc.       10.1 to the Registrant's Quarterly
                                                                Report on Form 10-QSB as filed with
                                                                the SEC on October 30, 2000

10.61         Sale and Purchase Agreement between Qode.com,     Incorporated by reference to Exhibit
              Inc. and NeoMedia Technologies, Inc.              10.48 to the Registrant's Current
                                                                Report on Form 8-K as filed with the
                                                                SEC on March 15, 2001

10.62         Warrant repricing letter dated March 19, 2002     Incorporated by reference to Exhibit
                                                                1.2 to the Registrant's Current
                                                                Report on Form 8-K as filed with the
                                                                SEC on April 2, 2002

10.63         Option repricing letter dated April 3, 2002       Incorporated by reference to Exhibit
                                                                1.2 to the Registrant's Current
                                                                Report on Form 8-K as filed with the
                                                                SEC on April 15, 2002

                                               II-14





EXHIBIT NO.   DESCRIPTION                                       LOCATION
-----------   -----------                                       --------

                                                          
10.64         Intellectual Property licensing agreement         Incorporated by reference to Exhibit
              between NeoMedia and A.T. Cross Company           10.18 to the Registrant's Form S-1/A
                                                                as filed with the SEC on April 24,
                                                                2002

10.65         Intellectual Property licensing agreement         Incorporated by reference to Exhibit
              between NeoMedia and Symbol Technologies, Inc.    10.19 to the Registrant's Form S-1/A
                                                                as filed with the SEC on April 24,
                                                                2002

10.66         Sponsorship and Advertising Agreement between     Incorporated by reference to Exhibit
              NeoMedia and About.com, Inc.                      10.20 to the Registrant's Form S-1/A
                                                                as filed with the SEC on April 24,
                                                                2002

10.67         Letter of Intent regarding proposed strategic     Incorporated by reference to Exhibit
              transaction between NeoMedia and AirClic, Inc.    10.21 to the Registrant's Form S-1/A
                                                                as filed with the SEC on April 24,
                                                                2002

10.68         Form of Promissory Note issued to AirClic, Inc.   Incorporated by reference to Exhibit
                                                                10.22 to the Registrant's Form S-1/A
                                                                as filed with the SEC on April 24,
                                                                2002

10.69         Form of Limited Recourse Promissory Note issued   Incorporated by reference to Exhibit
              in exchange for 19 Million Shares of Common       10.23 to the  Registrant's Form S-1/A
              Stock                                             as filed with the SEC on April 24,
                                                                2002

10.70         Nasdaq Staff Determination Letter with respect    Incorporated  by reference to Exhibit
              to de-listing of NeoMedia securities from the     10.24 to the Registrant's Form S-1/A
              Nasdaq SmallCap market                            as filed with the SEC on April 24,
                                                                2002

10.71         Revised warrant repricing letter dated April 3,   Incorporated by reference to Exhibit
              2002                                              10.25 to the Registrant's Form S-1/A
                                                                as filed with the SEC on April 24,
                                                                2002

10.72         Equity Line of Credit Agreement, dated May 6,     Incorporated by reference to Exhibit
              2002, between NeoMedia Technologies and Cornell   10.17 to the Registrant's Quarterly
              Capital Partners, LP                              Report on Form 10-Q as filed with
                                                                the SEC on August 14, 2002

10.73         License Agreement, dated October 18, 2000,        Incorporated by reference to Exhibit
              between Digital Convergence Corporation and       10.1 to the Registrants Form 10-QSB
              NeoMedia                                          as filed on October 30, 2000

10.74         Nasdaq Staff delisting notification letter        Incorporated by reference to Exhibit
              dated May 16, 2002                                10.18 to the Registrant's Quarterly
                                                                Report on Form 10-Q as filed with
                                                                the SEC on August 14, 2002

10.75         Settlement Agreement relating to wrongful         Incorporated  by reference to Exhibit
              termination  lawsuit  brought  by  former         10.19 to the Registrant's Form 10-Q
              president and Chief Operating Officer             as filed with the SEC on August 14,
                                                                2002

10.76         Mutual settlement agreement by and between        Incorporated by reference to Exhibit
              NeoMedia Technologies and 2150 Western Court      10.20 to the Registrants Form 10-Q
              Company, LLC                                      as filed on November 14, 2002

10.77         Mutual settlement agreement by and between        Incorporated by reference to Exhibit
              NeoMedia Technologies and Ripfire, Inc.           10.21 to the Registrants Form 10-Q
                                                                as filed on November 14, 2002

                                               II-15





EXHIBIT NO.   DESCRIPTION                                       LOCATION
-----------   -----------                                       --------

                                                          
10.78         Mutual settlement agreement by and between        Incorporated by reference to Exhibit
              NeoMedia Technologies and Wachovia Bank, N.A.     10.22 to the Registrants Form 10-Q
                                                                as filed on November 14, 2002

10.79         Mutual settlement agreement by and between        Incorporated by reference to Exhibit
              NeoMedia Technologies and Marianne LePera,        10.23 to the Registrants Form 10-Q
              NeoMedia Technologies' former General Counsel     as filed on November 14, 2002

10.80         Revised Equity Line of Credit Agreement,          Incorporated  by reference to Exhibit
              dated November 11, 2002, between NeoMedia         10.24 to the Registrants Form 10-Q
              Technologies and Cornell Capital Partners LP      as filed on November 14, 2002

10.81         Sponsorship and Advertising Agreement, dated      Incorporated by reference to Exhibit
              May 23, 2001, between About.com and NeoMedia      23.7 to the Registrants Form S-1/A
                                                                as filed on November 16, 2001

10.82         Promissory Note dated December 2, 2002 between    Incorporated by reference to Exhibit
              Michael Kesselbrenner and NeoMedia                99.1 of the Registrant's Form 8-K as
                                                                filed with the SEC on December 12,
                                                                2002.

10.83         Pledge Agreement dated December 2, 2002,          Incorporated by reference to Exhibit
              between Michael Kesselbrenner and NeoMedia        99.2 of the Registrant's Form 8-K as
                                                                filed with the SEC on December 12,
                                                                2002.

10.84         Form of Placement Agent Agreement, dated          Provided herewith
              November 2002, between NeoMedia Technologies
              and Westrock Advisors, Inc.

10.85         Form of Escrow Agreement, dated November 2002,    Provided herewith
              between NeoMedia Technologies and Cornell
              Capital Partners

10.86         Form of Registration Rights Agreement, dated      Provided herewith
              November 2002, between NeoMedia Technologies
              and Cornell Capital Partners

10.87         Promissory Note, dated February 23, 2001,         Provided herewith
              between Digital Convergence Corporation and
              NeoMedia

10.88         Termination Agreement, dated August 21, 2001,     Provided herewith
              between About.com and NeoMedia

21.0          Subsidiaries                                      Incorporated by reference to Exhibit
                                                                21 of the Registrant's  Annual Report
                                                                on Form 10-K as filed on April 18, 2001.

23.1          Consent of Stonefield Johnson LLP                 Provided herewith

23.2          Consent of Ernst & Young, LLP                     Provided herewith

23.3          Consent of Kirkpatrick & Lockhart, LLP            Incorporated by reference to Exhibit
                                                                5.1 of this filing

23.4          Notice regarding consent of Arthur Andersen LLP   Provided herewith


                                               II-16
















                                     II-17


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-18


                                   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 S-1 and  authorized  this  registration
statement to be signed on our behalf by the undersigned, on December 19, 2002.

                                 NEOMEDIA TECHNOLOGIES, INC.


                                 By:  /s/ Charles T. Jensen
                                     ---------------------------------------
                                      Charles T. Jensen
                                      President, Chief Executive Officer,
                                      Chief Operating 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 19, 2002


/s/ William E. Fritz
--------------------   Director and Secretary                  December 19, 2002
William E. Fritz


/s/ Charles W. Fritz
--------------------   Chairman of the Board
Charles W. Fritz                                               December 19, 2002


/s/ David A. Dodge
--------------------   Vice-President, Chief Financial
David A. Dodge         Officer and Controller                  December 19, 2002


/s/ Hayes Barclay
--------------------   Director                                December 19, 2002
Hayes Barclay


/s/ James J. Keil
--------------------   Director                                December 19, 2002
James J. Keil



                                     II-19