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

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

                                  FORM 10 - QSB
                                   (Mark One)
             [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

                                       OR

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

                         COMMISSION FILE NUMBER 0-21743

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

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

2201 SECOND STREET, SUITE 402, FORT MYERS, FLORIDA               33901
     (Address of Principal Executive Offices)                 (Zip Code)

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


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


         As of October 25, 2004,  there were 371,137,314  outstanding  shares of
the issuer's Common Stock.

<PAGE>

                         PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

                                                                   SEPTEMBER 30,
                                                                       2004
                                                                   ------------
ASSETS

Current assets:
        Cash and cash equivalents                                    $  1,732
        Trade accounts receivable, net of allowance for
          doubtful accounts of $54                                        208
        Inventories, net of allowance for obsolete &
          slow-moving inventory of $13                                    111
        Prepaid expenses and other current assets                         432
                                                                     --------
        Total current assets                                            2,483

        Property and equipment, net                                       122
        Capitalized patents, net                                        2,229
        Capitalized and purchased software costs, net                      94
        Excess of purchase price over tangible assets of CSI            3,056
        Investment in IPoint-media, Ltd.                                1,000
        Other long-term assets                                            737
                                                                     --------
             Total assets                                            $  9,721
                                                                     ========
LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities:
        Accounts payable                                             $  1,667
        Amounts payable under settlement agreements                       477
        Liabilities of discontinued business unit                         664
        Sales taxes payable                                               131
        Accrued expenses                                                1,490
        Deferred revenues and other                                       475
        Investment payable                                              1,000
        Notes payable                                                   2,117
                                                                     --------
             Total current liabilities                                  8,021
                                                                     --------
Shareholders' equity:
        Preferred stock, $0.01 par value, 25,000,000 shares
          authorized, none issued and outstanding                          --
        Common stock, $0.01 par value, 1,000,000,000 shares
          authorized, 390,382,372 shares issued and
          361,204,990 outstanding                                       3,612
        Additional paid-in capital                                     81,012
        Deferred stock-based compensation                                (458)
        Accumulated deficit                                           (81,640)
        Accumulated other comprehensive loss - foreign
          currency translation adjustment                                 (47)
        Treasury stock, at cost, 201,230 shares of common stock          (779)
                                                                     --------
        Total shareholders' equity                                      1,700
                                                                     --------
             Total liabilities and shareholders' equity              $  9,721
                                                                     ========

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


                                       2
<PAGE>

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

<TABLE>
<CAPTION>
                                                                       THREE MONTHS ENDED SEPTEMBER 30,
                                                                       -------------------------------
                                                                            2004             2003
                                                                       -------------    -------------
<S>                                                                    <C>              <C>
NET SALES:
        License fees                                                   $          96    $          69
        Resale of software and technology equipment and service fees             138              392
        Micro paint repair products and services                                 237               --
                                                                       -------------    -------------
        Total net sales                                                          471              461
                                                                       -------------    -------------
COST OF SALES:
        License fees                                                              79               76
        Resale of software and technology equipment and service fees             147              378
        Micro paint repair products and services                                 151               --
                                                                       -------------    -------------
        Total cost of sales                                                      377              454
                                                                       -------------    -------------

GROSS PROFIT (LOSS)                                                               94                7

        Sales and marketing expenses                                             514              146
        General and administrative expenses                                      516            1,940
        Research and development costs                                           114               78
                                                                       -------------    -------------

        Loss from operations                                                  (1,050)          (2,157)

OTHER INCOME (EXPENSE)
        Gain (loss) on extinguishment of debt                                      6              (24)
        Amortization of debt discount                                           (334)              --
        Interest expense, net                                                    (62)             (24)
                                                                       -------------    -------------

NET LOSS                                                                      (1,440)          (2,205)

        Other comprehensive loss:
           Foreign currency translation adjustment                               (31)              --
                                                                       -------------    -------------

COMPREHENSIVE LOSS                                                     $      (1,471)   $      (2,205)
                                                                       =============    =============

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

WEIGHTED AVERAGE NUMBER OF COMMON SHARES--BASIC AND DILUTED              342,990,471      151,698,465
                                                                       =============    =============
</TABLE>


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


                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                      NINE MONTHS ENDED SEPTEMBER 30,
                                                                      -------------------------------
                                                                           2004             2003
                                                                      -------------    -------------
<S>                                                                   <C>              <C>
NET SALES:
       License fees                                                   $         256    $         338
       Resale of software and technology equipment and service fees             501            1,671
       Micro paint repair products and services                                 512               --
                                                                      -------------    -------------
       Total net sales                                                        1,269            2,009
                                                                      -------------    -------------
COST OF SALES:
       License fees                                                             249              227
       Resale of software and technology equipment and service fees             480            1,566
       Micro paint repair products and services                                 376               --
                                                                      -------------    -------------
       Total cost of sales                                                    1,105            1,793
                                                                      -------------    -------------

GROSS PROFIT (LOSS)                                                             164              216

       Sales and marketing expenses                                           1,461              407
       General and administrative expenses                                    1,293            3,409
       Research and development costs                                           354              243
                                                                      -------------    -------------

       Loss from operations                                                  (2,944)          (3,843)

OTHER INCOME (EXPENSE)
       Gain (loss) on extinguishment of debt                                    129              (24)
       Amortization of debt discount                                         (2,500)              --
       Interest expense, net                                                   (178)            (193)
                                                                      -------------    -------------

NET LOSS                                                                     (5,493)          (4,060)

       Other comprehensive loss:
          Foreign currency translation adjustment                               (47)              --
                                                                      -------------    -------------

COMPREHENSIVE LOSS                                                    $      (5,540)   $      (4,060)
                                                                      =============    =============

LOSS PER SHARE--BASIC AND DILUTED                                     $       (0.02)   $       (0.05)
                                                                      =============    =============

WEIGHTED AVERAGE NUMBER OF COMMON SHARES--BASIC AND DILUTED             324,471,293       89,440,869
                                                                      =============    =============
</TABLE>


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


                                       4
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                          NINE MONTHS ENDED
                                                                                            SEPTEMBER 30,
                                                                                          ------------------
                                                                                            2004       2003
                                                                                          -------    -------
<S>                                                                                       <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net loss                                                                            ($5,493)   ($4,060)
      Adjustments to reconcile net loss to net cash used in operating activities:
      Amortization of discount on note payable                                              2,500         --
      Depreciation and amortization                                                           367        368
      Provision for doubtful accounts                                                          24
      Expense (decrease of fair value) for repriced options                                  (240)       748
      Fair value of expense portion of stock-based
        compensation granted for professional services                                        545        442
      Interest expense allocated to debt                                                        3         75
      Discount related to issuance of employee common stock                                    --        688
      Loss on payment of accounts payable in stock                                             --         24
      (Increase)/decrease in value of life insurance policies                                  17        (10)
      Changes in operating assets and liabilities
        Trade accounts receivable, net                                                         (8)       149
        Inventory                                                                             (54)        --
        Other current assets                                                                   90        217
        Accounts payable, amounts due under financing agreements, liabilities in excess
          of assets of discontinued business unit, accrued expenses and stock liability    (1,211)      (395)
        Deferred revenue other current liabilities                                            (40)      (303)
                                                                                          -------    -------
          Net cash used in operating activities                                            (3,500)    (2,057)
                                                                                          -------    -------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Capitalization of software development and purchased intangible assets                 (109)       (22)
      Acquisition of property and equipment                                                  (103)       (42)
                                                                                          -------    -------
        Net cash used in investing activities                                                (212)       (64)
                                                                                          -------    -------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Net proceeds from issuance of common stock, net of issuance costs of $620 in 2004
        and $308 in 2003                                                                    5,926      2,409
      Net proceeds from cash advances payable through the issuance of common stock             --      1,135
      Net proceeds from exercise of stock options and warrants                                581        340
      Borrowings under notes payable and long-term debt                                     8,000         75
      Repayments on notes payable and long-term debt                                       (6,687)      (260)
      Transfer to restricted cash for long-term debt                                           --       (600)
      Cash paid to acquire CSI International, Inc. (net of cash acquired)                  (2,390)        --
                                                                                          -------    -------
        Net cash provided by financing activities                                           5,430      3,099
                                                                                          -------    -------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                       (47)        --

NET INCREASE IN CASH AND CASH EQUIVALENTS                                                   1,671        978

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                 61         70
                                                                                          -------    -------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                                  $ 1,732    $ 1,048
                                                                                          =======    =======

SUPPLEMENTAL CASH FLOW INFORMATION:
      Interest paid/(received) during the period                                          $    50    $     6
      Income taxes paid                                                                        --         --
      Non-cash investing and financing activities:
        Reduction in accounts payable and accruals for debt paid in stock                     190         72
        Fair value of stock and warrants issued with debt                                      --         56
        Fair value of stock issued for services and deferred to future periods                585         64
        Fair value of shares issued to acquire CSI Int'l (net of costs of registration)       695         --
        Change in net assets resulting from acquisition of CSI (net of cash acquired)       3,090         --
        Gain on extinguishment of debt                                                        129         --
        Direct costs associated with Standby Equity Distribution Agreement                  1,447      5,693
</TABLE>

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


                                       5
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
         UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.   BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS

BASIS OF PRESENTATION

     The  condensed  consolidated  financial  statements  include the  financial
statements  of NeoMedia  Technologies,  Inc. and its  wholly-owned  subsidiaries
("NeoMedia" or the "Company"). The accompanying unaudited condensed consolidated
financial  statements have been prepared in accordance with the  instructions to
Form 10-QSB and do not include all of the information and footnotes  required by
accounting  principles  generally  accepted in the United  States of America for
complete  consolidated   financial  statements.   These  condensed  consolidated
financial  statements and related notes should be read in  conjunction  with the
Company's  Form  10-KSB for the fiscal  year ended  December  31,  2003.  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, 2004, the results of operations for the three-month and nine-month
periods  ended  September 30, 2004 and 2003,  and cash flows for the  nine-month
periods  ended  September 30, 2004 and 2003.  The results of operations  for the
three-month  and  nine-month  periods ended  September 30, 2004 and 2003 are not
necessarily  indicative  of the  results  which may be  expected  for the entire
fiscal year. All significant  intercompany  accounts and transactions  have been
eliminated in preparation of the condensed consolidated financial statements.


NATURE OF BUSINESS OPERATIONS

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

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

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

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

RECLASSIFICATIONS

     Certain  amounts in the 2003 condensed  consolidated  financial  statements
have been reclassified to conform to the 2004 presentation.


                                       6
<PAGE>

ACQUISITION OF CSI INTERNATIONAL, INC. ("CSI")

         On  February  6,  2004,   NeoMedia   acquired  100%  ownership  of  CSI
International,  Inc., of Calgary, Alberta, Canada, a private technology products
company in the micro  paint  repair  industry.  NeoMedia  paid a purchase  price
including  an  issuance of  7,000,000  shares of its common  stock,  and cash of
$2,500,000 in exchange for all outstanding shares of CSI. The shares were valued
at $0.10 per share, which was the market price of NeoMedia's common stock on the
Over-the-counter  Bulletin Board exchange around the acquisition date.  NeoMedia
also incurred direct costs of the business  combination  totaling $5,000,  which
are included in the purchase  price for purposes of allocating  assets  acquired
and liabilities assumed.

         The acquisition was accounted for under the purchase method. The actual
purchase  price was based on cash paid,  the fair value of NeoMedia stock around
the date of the  acquisition,  and direct costs associated with the combination.
The purchase price was allocated as follows:

                                                               (Dollars in
                                                                Thousands)
                                                              -------------
     Value of 7 Million Shares Issued ($0.10 per share)               $700
     Cash paid                                                       2,500
     Direct costs of acquisition                                         5
                                                              -------------
        Total Fair Value of Purchase Price                          $3,205
                                                              -------------

     Assets Purchased:
        Cash                                                          $115
        Accounts receivable, net                                        67
        Inventory                                                       54
        Other current assets                                            12
        Investments                                                     25
        Property, plant & equipment                                      8
        Excess of purchase price over net tangible assets            3,059
                                                              -------------
           Total Assets Purchased                                    3,340
                                                              -------------

     Less Liabilities Assumed:
        Accounts payable                                              (23)
        Accrued liabilities                                           (12)
        Notes payable                                                (100)
                                                              -------------
           Total Liabilities Assumed                                 (135)
                                                              -------------

         The  combination  is  being  accounted  for  as  a  purchase   business
combination as defined by Statement of Financial  Accounting  Standards No. 141,
Business  Combinations.  The allocation of the purchase price is preliminary and
is subject to revision as the Company continues to evaluate the allocations. The
Company has not amortized the excess of purchase price over net tangible  assets
since the allocation is not yet final.  With limited  operation  history of CSI,
the Company  expects to evaluate the results of  operations of CSI in the coming
months in order to accurately  finalize the  allocation.  The Company expects to
finalize  this  process in the second  half of 2004.  If the excess of  purchase
price over net tangible  assets is determined to be allocated fully or partially
to intangible assets with definite lives upon final allocation, the Company will
determine the economic useful lives based on its best estimate and amortize such
assets  accordingly.  The  Company  will  continue  to  evaluate  this asset for
impairment until such time as the purchase price allocation is final.


                                       7
<PAGE>

         The accompanying  consolidated statement of operations presented herein
contains  the  results of  operations  for CSI for the period  February 6, 2004,
through September 30, 2004.

         Pro-forma  results of operations as if NeoMedia and CSI had combined as
of January 1, 2004 are as follows:

<TABLE>
<CAPTION>
                                    THREE MONTHS ENDED SEPTEMBER 30, 2004            NINE MONTHS ENDED SEPTEMBER 30, 2004
                                 --------------------------------------------     --------------------------------------------
                                                      (A)                                                (A)
                                                   PRO-FORMA                                          PRO-FORMA
                                              CSI   ADJUST-        PRO-FORMA                   CSI     ADJUST-       PRO-FORMA
                                  NEOMEDIA   INT'L   MENTS         COMBINED        NEOMEDIA   INT'L     MENTS        COMBINED
                                 ----------- ----- ---------     ------------     ---------- ------- ----------     ----------
<S>                             <C>           <C>       <C>      <C>           <C>           <C>      <C>          <C>
Total net sales                        $471   --        --   (A)        $471        $1,269                    (A)       $1,333
                                                                                                574      (510)

Loss from operations               ($1,050)   --        --   (A)    ($1,050)       ($2,944)  (1,011)      985 (A)      ($2,970)

Net loss                           ($1,440)   --        --   (A)    ($1,440)       ($5,493)  (1,011)      985 (A)      ($5,519)

Net loss per share-basic and
diluted                             ($0.00)                          ($0.00)        ($0.02)                   (A)       ($0.02)
Weighted average number of
   common shares - basic and
   diluted                     342,990,471              --      342,990,471    324,471,293            919,708 (B)  325,391,001
</TABLE>


Pro-forma Adjustments

(A) - Adjustments are to reflect operations of CSI from February 6, 2004 through
      September 30, 2004, which are included in NeoMedia's operations for the
      three months ended September 30, 2004.

(B) - To adjust weighted average shares outstanding as if the 7,000,000 shares
      issued as part of the purchase price of CSI on February 6, 2004, had been
      issued on January 1, 2004


         Pro-forma  results of operations as if NeoMedia and CSI had combined as
of January 1, 2003 are as follows:

<TABLE>
<CAPTION>
                                     THREE MONTHS ENDED SEPTEMBER 30, 2003           NINE MONTHS ENDED SEPTEMBER 30, 2003
                                  --------------------------------------------    -------------------------------------------
                                                        (A) (A)
                                                     PRO-FORMA                                        PRO-FORMA
                                               CSI    ADJUST-       PRO-FORMA                  CSI    ADJUST-      PRO-FORMA
                                   NEOMEDIA   INT'L    MENTS        COMBINED      NEOMEDIA    INT'L    MENTS       COMBINED
                                  ----------- ------ ----------     ----------    ---------- -------- --------     ----------
<S>                               <C>          <C>          <C>       <C>        <C>            <C>  <C>          <C>
Total net sales                         $461   $158         --           $619        $2,009     $426       --         $2,435
Income (loss) from operations        ($2,157)   $28         --        ($2,129)      ($3,843)     $37       --        ($3,806)
Net income (loss)                    ($2,205)   $28         --        ($2,177)      ($4,060)     $37       --        ($4,023)
Net loss per share-basic and
diluted                               ($0.01)                          ($0.01)       ($0.05)                          ($0.04)
Weighted average number of
   common shares - basic and
   diluted                       151,698,465         7,000,000 (C) 158,698,465   89,440,869         7,000,000(C)  96,440,869
</TABLE>

Pro-forma Adjustments

(C) - To adjust weighted average shares outstanding as if the 7,000,000 shares
      issued as part of the purchase price of CSI on February 6, 2004, had been
      issued on January 1, 2003


                                       8
<PAGE>

STANDBY EQUITY DISTRIBUTION AGREEMENT WITH CORNELL CAPITAL PARTNERS, LP
("CORNELL")

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

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

     During  the  nine  months  ended  September  30,  2004,  the  Company  sold
87,787,740  shares of its  common  stock to  Cornell  under the  Standby  Equity
Distribution  Agreement.  The following table  summarizes  funding received from
Cornell during the nine months ended September 30, 2004:

<TABLE>
<CAPTION>
                                           THREE             THREE           THREE             NINE
                                           MONTHS           MONTHS           MONTHS           MONTHS
                                           ENDED             ENDED           ENDED             ENDED
                                          MARCH 31,         JUNE 30,      SEPTEMBER 30,     SEPTEMBER 30,
                                            2004             2004             2004             2004
                                        ------------     ------------     ------------     ------------
<S>                                     <C>              <C>              <C>              <C>
Number of shares sold to Cornell          21,282,203       29,819,873       36,685,664       87,787,740

Gross Proceeds from sale of shares
  to Cornell                            $  2,332,000     $  2,308,000     $  2,734,270        7,374,270
Less: discounts and fees*                   (500,000)        (465,000)        (483,000)      (1,448,000)
                                        ------------     ------------     ------------     ------------
   Net Proceeds from sale of shares
     to Cornell                         $  1,832,000     $  1,843,000     $  2,251,270     $  5,926,270
                                        ------------     ------------     ------------     ------------
</TABLE>

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


                                       9
<PAGE>

PROMISSORY NOTES PAYABLE TO CORNELL

     On January 20, 2004, the Company  borrowed from Cornell the gross amount of
$4,000,000  before  Cornell  discounts  and  fees.  Of the  $4,000,000  funding,
$2,500,000 was used to fund the  acquisition of CSI  International,  Inc. during
February 2004. Cornell withheld a $315,000 retention fee related to the issuance
of stock to pay off the debt in the future.  The Company  paid this note in full
during the third quarter of 2004.

     On April 8, 2004,  the Company  borrowed  from  Cornell the gross amount of
$1,000,000  before  Cornell  discounts  and  fees.  Cornell  withheld  a $76,000
retention  fee  related  to the  issuance  of  stock  to pay off the debt in the
future. The Company paid this note in full during the third quarter of 2004.

     On July 2, 2004,  the Company  borrowed  from  Cornell the gross  amount of
$1,000,000  before  Cornell  discounts  and  fees.  Cornell  withheld  a $76,000
retention  fee  related  to the  issuance  of  stock  to pay off the debt in the
future. The Company paid this note in full during the third quarter of 2004.

     On August 6, 2004,  the Company  borrowed  from Cornell the gross amount of
$2,000,000 before Cornell  discounts and fees.  Cornell withheld a retention fee
of $153,000  related to the issuance of stock to pay off the debt in the future.
As of  September  30, 2004,  the Company had not made any  payments  against the
principal. The note matures on December 13, 2004. The note accrues interest at a
rate of 12% per annum,  increasing to 14% per annum upon  maturity,  if not paid
off. The Company has the option to repay any remaining  principal of the note in
cash.  The Company  expects to pay the  remaining  note  balance by applying the
proceeds  from  the  sale  of  stock  under  the  terms  of the  Standby  Equity
Distribution Agreement toward the outstanding principal on the notes.

     The Company also granted to Cornell 40,000,000  warrants to purchase shares
of NeoMedia stock with an exercise price of $0.05 per share during January 2004.
In April  2004,  the Company  filed a Form SB-2 to  register  40 million  shares
underlying  warrants  granted to Cornell in  connection  with a promissory  note
issued  by the  Company  to  Cornell.  In May 2004,  the Form SB-2 was  declared
effective  by the  Securities  and  Exchange  Commission.  The fair value of the
warrants using the  Black/Scholes  pricing model was  $5,000,000.  In accordance
with  APB 14,  "Accounting  for  Convertible  Debt and Debt  Issued  with  Stock
Purchase  Warrants",  the Company has compared  the relative  fair values of the
warrants  and the face value of the  notes,  and has  allocated  a value of $2.5
million to the warrants. Of the $2.5 million, $2 million was allocated to the $4
million note issued in January 2004 and $0.5 million against the $1 million note
in April 2004. The $2.5 million was recorded as a discount  against the carrying
value  of the  note.  The  $2.5  million  that  was  allocated  to the  notes is
considered a discount on the promissory  notes, and therefore was amortized over
the life of the notes using the effective  interest  method,  in accordance with
Staff Accounting  Bulletin No. 77, Topic 2.A.6,  "Debt Issue Costs" of SFAS 141,
"Business  Combinations".  Accordingly,  the Company recorded an amortization of
discount of $334,000 and  $2,500,000  related to the  warrants  during the three
months and nine months ended September 30, 2004, respectively.


                                       10
<PAGE>

iPOINT-MEDIA LTD.

         On September 7, 2004,  NeoMedia and iPoint-media Ltd.  ("iPoint-media")
of Tel Aviv,  Israel,  entered  into a business  development  agreement  whereby
NeoMedia will provide the following services to iPoint-media:

    -    NeoMedia and iPoint-media  will jointly pursue select  opportunities in
         the areas of  distributing  video,  audio and data over an  interactive
         broadband media access platform.

    -    NeoMedia  may  serve  as a  reseller  of  iPoint-media's  products  and
         services in North America on a  non-exclusive  basis with special focus
         on the government (including state and local).

    -    NeoMedia  will  seek to  introduce  iPoint-media  to  NeoMedia's  other
         channel and alliance partners which may have interest in doing business
         with iPoint-media.

            o     NeoMedia and iPoint-media  will reciprocate  contracts to each
                  of  the   respective   parties'   partners   and  clients  for
                  opportunities  of  synergy  where  reseller  of  finder's  fee
                  compensation may apply.

            o     NeoMedia will make available  appropriate resources for market
                  analysis and tactical evaluations for achieving business goals
                  surrounding iPoint-media operations in North America.

            o     NeoMedia   will   provide   resources   in  order  to   market
                  iPoint-media   technology  in  strategic   industry  verticals
                  including government and telecommunications.

            o     NeoMedia    will    contribute    sales    activities,    both
                  conceptual/planning  and  direct,  for  iPoint-media  products
                  including branding and repackaging initiatives,  if desired by
                  iPoint,  to further advance  distribution of the  iPoint-media
                  product suite.

            o     NeoMedia will supply  resources to manage accounts and perform
                  post  sale  support  activities  for  iPoint-media  technology
                  implementations.

    -    Where  appropriate,  NeoMedia  will support  iPoint-media's  efforts to
         assist in  securing  approvals  for  iPoint-media's  technology  within
         appropriate government and industry standards groups.

         In exchange for entering into the service agreement,  NeoMedia received
7% ownership in iPoint-media, consisting of 28,492 shares of iPoint-media common
stock.  NeoMedia  had not  performed  any  services  under the  agreement  as of
September 30, 2004.

         In addition to the business development agreement, NeoMedia acquired an
additional 10% ownership of iPoint-media,  consisting of 40,704 shares of common
stock,  for $1  million  cash.  The $1  million  investment  is being  funded to
NeoMedia in the form of a note payable to Cornell Capital Partners in the amount
of $1,085,000,  with net proceeds to NeoMedia of $1,000,000. The note was funded
on October 18, 2004, and the funds were subsequently transferred to iPoint. As a
result,  as of September  30, 2004,  NeoMedia  has  recorded an  "Investment  in
IPoint-media,  Ltd" of $1,000,000  in the  accompanying  condensed  consolidated
balance  sheet,  and  "Investment  payable" of  $1,000,000  in the  accompanying
condensed consolidated balance sheet.

         iPoint-media  was  founded  in April  2001 as a spin  off from  Imagine
Visual Dialog LTD,  whose  shareholders  include  Israeli-based  Nisko group,  a
leading Israeli holding company,  Singapore-based  Keppel T&T, and marketing and
advertising  group  WPP.   iPoint-media   specializes  in  Customer  Interaction
Management  and is the  world's  1st  developer  of IP Video  Call  Centers  for
Deutsche  Telecom.  Muki Geller,  the founder of Imagine Visual  Dialog,  is the
founder,  President & CEO of iPoint-media.  iPoint-media is located in Tel Aviv,
Israel,   with  a  European   customer   support  center  in  The   Netherlands.
iPoint-media's  mission is to become the video access  platform and  application
engine of choice for service providers.


                                       11
<PAGE>

OPTION REPRICING PROGRAM

      During May 2003,  the Company  re-priced  approximately  8.0 million stock
options under a 6-month repricing program.  Under the terms of the program,  the
exercise price for outstanding  options under the Company's 2002, 1998, and 1996
Stock  Option  Plans was  restated  to $0.01 per share.  During  June 2004,  the
deadline for the option repricing was extended to December 31, 2004 by the Stock
Option  Committee of  NeoMedia's  Board of Directors.  In  accordance  with FASB
Interpretation,  FIN 44,  "Accounting for Certain  Transactions  Involving Stock
Transactions",  the award has been  accounted  for as variable from May 19, 2003
through the period ended  September 30, 2004. The closing price of the Company's
common stock on September 30, 2004, June 30, 2004,  March 31, 2004, and December
31, 2003 was $0.068,  $0.067,  $0.09, and $0.137 per share,  respectively.  As a
result, the Company recorded a charge/(reduction)  to general and administrative
expense of ($163,000), ($80,000), and $3,000 during the three months ended March
31, 2004,  June 30, 2004, and September 30, 2004,  respectively.  The adjustment
was  recorded in order to reflect the  increase/(decrease)  of the fair value of
options still unexercised under the repricing program under variable accounting.


OTHER EVENTS

     On August 31,  2004,  the  Company's  Board of Directors  named  Charles T.
Jensen as the Company's permanent Chief Executive Officer. Jensen, president and
Chief  Operating  Officer of NeoMedia  since June 2002, had also been acting CEO
since that time. Jensen joined NeoMedia in 1995 as Chief Financial Officer,  and
acted in that capacity until June 2002.

     On August 30, 2004, the Company entered into a consulting agreement with an
unrelated third party, under which the consultant provides tax advisory services
to the Company.  As consideration  for the contract,  the Company issued 183,129
shares of common  stock to the  consultant.  The fair  value of the stock at the
time of issuance was $13,000. The Company recognized $13,000 in expense relating
the contract during the nine months ended September 30, 2004.

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

     On July 30, 2004, the Company  entered into a consulting  agreement with an
unrelated  third party,  under which the consultant  agreed to provide sales and
marketing services relating to the Company's  PaperClick business for the period
from July 2004 through  September 2004. As consideration  for the contract,  the
Company issued 258,104 shares of common stock to the consultant.  The fair value
of the stock at the time of issuance was $18,000.  The Company  recognized  this
amount as sales and marketing  expense  during the three months ended  September
30, 2004.

     On June 25, 2004,  the Company  issued  322,228  shares of its common stock
valued at $24,000, plus $8,000 cash to an unrelated distributor of the Company's
micro paint repair  products,  in exchange for the forfeiture by the distributor
of exclusive distribution rights in the greater Edmonton,  Alberta, Canada area.
The  distributor  had  purchased  the  exclusivity   rights  in  1992  from  CSI
International, Inc.

     On February 6, 2004, the Company  entered into a consulting  agreement with
an unrelated  third party,  under which the  consultant  will provide  sales and
marketing  services  relating to the Company's  Micro Paint business unit over a
period of three years.  As  consideration  for the contract,  the Company issued


                                       12
<PAGE>

6,055,556  options with an exercise price of $0.01 to the  consultant.  The fair
value of the  options  at the time of  issuance  was  $550,000.  The  Company is
recognizing  the fair value as sales and marketing  expense over the term of the
contract (three years). Accordingly, the Company recognized $50,000 and $131,000
in  expense  relating  the  contract  during  the  three and nine  months  ended
September 30, 2004, respectively.

     During January 2004, the Company  entered into a consulting  agreement with
James J. Keil, a member of the  Company's  board of  directors,  for  consulting
services  to be  provided  over  a  period  of six  months  in  connection  with
NeoMedia's  sales  strategies  and  processes.  The  contract  calls for monthly
payments  of $4,500  during the term of the  contract.  The  Company  recognized
$27,000 in general and  administrative  expense  relating to the contract during
the nine months ended September 30, 2004.


SUBSEQUENT EVENTS

     On October 18, 2004, the Company  borrowed from Cornell the gross amount of
$1,085,000 before Cornell  discounts and fees.  Cornell withheld a retention fee
of $85,000  related to the  issuance of stock to pay off the debt in the future.
The note matures on January 20, 2005. The note accrues interest at a rate of 12%
per annum,  increasing  to 14% per annum  upon  maturity,  if not paid off.  The
Company has the option to repay any remaining principal of the note in cash. The
Company  expects to pay the remaining note balance by applying the proceeds from
the sale stock  under the terms of the  Standby  Equity  Distribution  Agreement
toward the outstanding principal on the notes. The Company invested the proceeds
from the note in iPoint pursuant to the investment  agreement  between  NeoMedia
and iPoint (see "iPoint-Media Ltd." for description of agreement).

     On October 27 2004, NeoMedia announced that it had entered into a marketing
alliance with Science Applications  International  Corporation (SAIC) to jointly
establish,  launch,  promote  and manage the new  worldwide  mobile  "PaperClick
WordRegistry,"  a linking and  switching  platform for use on  Web-enabled  cell
phones and PDA's.  When used with PaperClick  Mobile  Go-Window,  NeoMedia's new
wireless  product  which  creates a text-entry  window on a phone or PDA screen,
registered  words (or  registered  phrases) are entered to bring up an automatic
link to specific targeted products and promotions.  No date has been set for the
launch of the WordRegistry.



                                       13
<PAGE>

PRO-FORMA INFORMATION REQUIRED BY SFAS 148

     At  September  30,  2004,  the  Company  has  five   stock-based   employee
compensation  plans (the 2003 Stock  Incentive Plan, the 2003 Stock Option Plan,
the 2002 Stock  Option  Plan,  the 1998 Stock  Option  Plan,  and the 1996 Stock
Option Plan).  The Company  accounts for those plans under the  recognition  and
measurement  principles  of APB Opinion No. 25,  Accounting  for Stock Issued to
Employees,  and related  Interpretations.  No stock-based employee  compensation
cost is reflected in net loss, except when options granted under those plans had
an exercise price less than the market value of the  underlying  common stock on
the date of grant.  The following  table  illustrates the effect on net loss and
loss per share if the Company had applied the fair value recognition  provisions
of  FASB  Statement  No.  123,  Accounting  for  Stock-Based  Compensation,   to
stock-based employee compensation.

<TABLE>
<CAPTION>
                                             THREE MONTHS ENDED             NINE MONTHS ENDED
                                                SEPTEMBER 30,                 SEPTEMBER 30,
                                          --------------------------    ---------------------------
                                                2004         2003             2004         2003
                                                ----         ----             ----         ----
<S>                                            <C>         <C>               <C>          <C>
Net Loss, as reported                          ($1,440)    ($2,205)          ($5,493)     ($4,060)
Compensation recognized under APB 25                --         623                 9          623
Compensation recognized under SFAS 123            (372)       (925)           (1,073)      (1,361)
                                          --------------------------    ---------------------------
   Pro-forma net loss                          ($1,812)    ($2,507)          ($6,557)     ($4,798)
                                          ==========================    ===========================

Net Loss per share:
Basic and diluted - as reported                 ($0.00)     ($0.01)           ($0.02)      ($0.05)
                                          ==========================    ===========================
Basic and diluted - pro-forma                   ($0.01)     ($0.02)           ($0.02)      ($0.05)
                                          ==========================    ===========================
</TABLE>

SEGMENT REPORTING

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

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

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

       NeoMedia Micro Paint Repair (NMPR) is the business unit  encompassing the
Company's  recently-acquired  CSI International micro paint repair line. NMPR is
attempting  to  commercialize  its  micro-paint  repair  solution.  The  Company
completed its acquisition of CSI on February 6, 2004


       The Company's reportable segments are strategic business units that offer
different technology and marketing strategies.  NCIS operates principally in the
United States.  NISS operates  principally in the United States and Europe. NMPR
is headquartered  in Ft. Myers,  Florida,  and currently sells into Canada,  the
United  States,  Australia,  and New  Zealand.  During the three and nine months
ended September 30, 2004,  NeoMedia  derived 44% and 36%,  respectively,  of its
revenue from customers based in Canada.


                                       14
<PAGE>

       Consolidated  net sales,  net operating  losses for the  three-month  and
nine-month periods ended September 30, 2004 and 2003, and identifiable assets as
of September 30, 2004, were as follows:

<TABLE>
<CAPTION>
                                                                    (in thousands)
                                                    -----------------------------------------------
                                                     THREE MONTHS ENDED        NINE MONTHS ENDED
                                                        SEPTEMBER 30,            SEPTEMBER 30,
                                                    ----------------------    ---------------------
                                                        2004       2003          2004       2003
                                                        ----       ----          ----       ----
<S>                                                     <C>        <C>           <C>      <C>
NET SALES:
      NeoMedia Consulting & Integration Services         $230       $448          $711     $1,971
      NeoMedia Internet Switching Service                   4         13            46         38
      NeoMedia Micro Paint Repair                         237         --           512         --
                                                    ----------- ----------    ---------- ----------
                                                         $471       $461        $1,269     $2,009
                                                    ----------- ----------    ---------- ----------

NET LOSS:
      NeoMedia Consulting & Integration Services        ($189)   ($1,855)        ($682)   ($3,310)
      NeoMedia Internet Switching Service                (482)      (350)       (1,326)      (750)
      NeoMedia Micro Paint Repair                        (421)        --          (985)        --
      Amortization of Cornell Debt Discount              (348)        --        (2,500)        --
                                                    ----------- ----------    ---------- ----------
                                                      ($1,440)   ($2,205)      ($5,493)   ($4,060)
                                                    ----------- ----------    ---------- ----------

IDENTIFIABLE ASSETS:
      NeoMedia Consulting & Integration Services         $264
      NeoMedia Internet Switching Service               2,332
      NeoMedia Micro Paint Repair                       3,313
      Corporate                                         3,812
                                                    -----------
                                                       $9,721
                                                    -----------
</TABLE>



                                       15
<PAGE>

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

OVERVIEW

NISS (PHYSICAL-WORLD-TO-INTERNET OFFERINGS) BUSINESS UNIT DEVELOPMENTS.

       Over the past several years,  NeoMedia's  focus has been aimed toward the
       commercialization of its Internet Switching Systems (NISS) business unit.
       NISS consists of the patented PaperClickTM  technology that enables users
       to link directly from the physical to the digital  world,  as well as the
       patents  surrounding  certain  physical-world-to-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 its  end-users,
       competitive     advantage    for    their    business     partners    and
       return-on-investment for their investors.

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

       On October 30, 2003, NeoMedia unveiled the go-to-market  strategy for its
       PaperClick suite of products.  Over the past several months, NeoMedia has
       signed  contracts  with  several key partners  outlined in the  strategy,
       including  agents Big Gig Strategies and SRP  Consulting,  resellers AURA
       Digital   Communications   and   Relyco,   systems   integrator   Science
       Applications  International  Corporation (SAIC), and European advertising
       agency  12Snap.  In June  2004,  NeoMedia  entered  into a  collaborative
       agreement  with  Intel  Corporation  for  NeoMedia's   PaperClick  mobile
       connectivity  platform to operate on the recently introduced Intel PXA27x
       processor family-based cellular phones.

       On June 3, 2004,  NeoMedia  announced that it signed a teaming  agreement
       with IPSO,  an  integrator  of  proprietary  solutions  developed  by its
       provider  companies  for  financial  institution  members and a leader in
       meeting Check 21 standards.  Enacted by Congress and signed into law last
       year,  Check  21  requires  banks to begin  accepting  substitute  checks
       (called IRDs for image replacement  documents) in lieu of original checks
       as of October 29, 2004.  NeoMedia and IPSO could partner on proposals and
       presentations surrounding Check 21.

       During October 2004,  NeoMedia and SAIC entered into a marketing alliance
       to jointly establish, launch, promote and manage the new worldwide mobile
       "PaperClick  WordRegistry,"  a linking and switching  platform for use on
       Web-enabled  cell  phones and  PDA's.  When used with  PaperClick  Mobile
       Go-Window,  NeoMedia's  new wireless  product  which creates a text-entry
       window on a phone or PDA screen, registered words (or registered phrases)
       are entered to bring up an automatic link to specific  targeted  products
       and promotions. No date has been set for the launch of the WordRegistry.


                                       16
<PAGE>

NMPR (MICRO PAINT REPAIR) BUSINESS UNIT DEVELOPMENTS.

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

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

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

       On July 7, 2004,  NeoMedia  announced the appointment of Arthur W. Gilfus
       to the  newly-created  position of global vice president of sales for the
       Micro Paint Repair Business Unit.

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

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

NCIS (SYTEMS INTEGRATION) BUSINESS UNIT DEVELOPMENTS.

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


SEC INQUIRY

     During 2003,  NeoMedia received requests from the SEC's Southeast  Regional
Office  for  certain  documents  including  those  concerning  negotiations  and
arrangements with certain strategic  partners and consultants,  patents,  recent
issuances  of  securities,  investor  relations,  and  the  stock  ownership  by
NeoMedia's  officers and directors.  NeoMedia  responded  promptly and fully and
will  cooperate  with any further  requests.  The SEC's  letter  states that the
staff's  inquiry is informal and should not be construed as an indication of any
violation of law or as a reflection on any person, entity, or security.


                                       17
<PAGE>

ACQUISITIONS

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

     BSD  SOFTWARE,  INC.  On December 9, 2003,  NeoMedia  signed a  non-binding
     letter of intent  ("LOI") to acquire Triton Global  Business  Services Inc.
     and its parent  company,  BSD Software Inc.  (Pink Sheets:  BSDS),  both of
     Calgary,  Alberta, Canada. The LOI outlined terms, including an exchange of
     one share of NeoMedia  common stock for each share of BSD Software,  not to
     exceed 40 million shares.  The transaction is dependent on due diligence by
     both companies,  approval by NeoMedia's Board of Directors,  BSD Software's
     Board of Directors and shareholders, and any required regulatory approvals.
     Triton,  formed  in  1998  and  acquired  by BSD in  2002,  is an  Internet
     Protocol-enabled  provider of live and automated operator calling services,
     e-business  support,  billing and  clearinghouse  functions and information
     management services to telecommunications,  Internet and e-business service
     providers. The companies are currently completing their due diligence.

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

CRITICAL ACCOUNTING POLICIES

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

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


                                       18
<PAGE>

judgments made in determining the estimated  useful lives assigned to each class
of assets  acquired  can also  significantly  affect  NeoMedia's  net  operating
results.

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

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

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

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

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

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

         (2)  Revenue  for  resale of  software  and  technology  equipment  and
              service fee is recognized based on guidance provided in Securities
              and Exchange  Commission (SEC) Staff Accounting  Bulletin No. 104,
              "Revenue  Recognition  in Financial  Statements,"  as amended (SAB
              104).   Software  and  technology   equipment  resale  revenue  is
              recognized when all of the components necessary to run software or


                                       19
<PAGE>

              hardware have been shipped. Service revenues including maintenance
              fees for  providing  system  updates for software  products,  user
              documentation  and technical  support are recognized over the life
              of the contract. Software license revenue from long-term contracts
              has been  recognized on a percentage of  completion  basis,  along
              with  the  associated  services  being  provided.   Other  service
              revenues, including training and consulting, are recognized as the
              services  are  performed.  NeoMedia  uses  stand-alone  pricing to
              determine an element's vendor specific  objective  evidence (VSOE)
              in order to allocate an arrangement  fee amongst various pieces of
              a  multi-element  contract.  NeoMedia  records  an  allowance  for
              uncollectible   accounts  on  a   customer-by-customer   basis  as
              appropriate.

              In December 2003, the Securities and Exchange  Commission  ("SEC")
              issued  Staff  Accounting   Bulletin  ("SAB")  No.  104,  "Revenue
              Recognition." SAB 104 supersedes SAB 101, "Revenue  Recognition in
              Financial  Statements."  SAB 104's  primary  purpose is to rescind
              accounting  guidance  contained  in SAB 101  related  to  multiple
              element  revenue  arrangements,  superseded  as a  result  of  the
              issuance of EITF 00-21,  "Accounting for Revenue Arrangements with
              Multiple Deliverables."  Additionally,  SAB 104 rescinds the SEC's
              Revenue  Recognition  in  Financial  Statements  Frequently  Asked
              Questions  and Answers  ("the  FAQ")  issued with SAB 101 that had
              been  codified  in SEC Topic  13,  Revenue  Recognition.  Selected
              portions of the FAQ have been incorporated into SAB 104. While the
              wording of SAB 104 has  changed to reflect  the  issuance  of EITF
              00-21,  the  revenue  recognition  principles  of SAB  101  remain
              largely  unchanged by the issuance of SAB 104, which was effective
              upon  issuance.  The  adoption  of SAB  104  did  not  impact  the
              consolidated financial statements.

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


RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED  SEPTEMBER 30, 2004 AS COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 2003

     Net sales.  Total net sales for the three months ended  September  30, 2004
were $471,000,  which  represented an increase of $10,000,  or 2%, from $461,000
for the three months ended  September  30, 2003.  This  increase  resulted  from
revenue  generated by the Company's micro paint repair business unit acquired in
February  2004.  This  increase  in micro  paint  revenue  was offset by reduced
resales of Sun Microsystems  equipment due to increased  competition and general
economic conditions. NeoMedia could realize an increase in license fees over the
next 12 months if the  Company is  successful  in  implementing  its  PaperClick
go-to-market  strategy,  or if pending court cases  involving  its  intellectual
property  are  resolved  in  NeoMedia's  favor.  NeoMedia  could also  realize a
material  increase in micro paint repair revenue if the Company is successful in
implementing its business plan for that business unit.

     License  fees.  License  fees  were  $96,000  for the  three  months  ended
September 30, 2004,  compared with $69,000 for the three months ended  September
30, 2003,  an increase of $27,000,  or 39%. The increase was due to higher sales
of internally  developed  software  licenses in 2004.  NeoMedia could realize an
increase in license fees over the next 12 months if the Company is successful in
implementing  its PaperClick  go-to-market  strategy,  or if pending court cases
involving its intellectual property are resolved in NeoMedia's favor.


                                       20
<PAGE>

     Resales of software and technology  equipment and service fees.  Resales of
software and  technology  equipment and service fees  decreased by $254,000,  or
65%, to $138,000 for the three months ended  September  30, 2004, as compared to
$392,000 for the three months ended September 30, 2003. This decrease  primarily
resulted  from reduced  resales of Sun  Microsystems  equipment due to increased
competition and general  economic  conditions.  NeoMedia  intends to continue to
pursue additional resales of equipment,  software and services. NeoMedia expects
resales  to more  closely  resemble  the  results  for the  three  months  ended
September 30, 2004, rather than the three months ended September 30, 2003.

     Micro paint  repair  products  and  services.  Sales of micro paint  repair
products and services  were  $237,000 for the three months ended  September  30,
2004. NeoMedia acquired this business on February 6, 2004, and as a result there
were no sales of micro  paint  repair  products  and  services  during the three
months ended September 30, 2003.  NeoMedia could realize a material  increase in
micro paint repair  revenue if the Company is  successful  in  implementing  its
business plan for that business unit.

     Cost of license fees. Cost of license fees was $79,000 for the three months
ended  September 30, 2004, an increase of $3,000,  or 4%,  compared with $76,000
for the three  months ended  September  30, 2003.  The  increase  resulted  from
increased amortization of capitalized patent costs during 2004.

     Cost of resales of software and technology equipment and service fees. Cost
of resales of software and  technology  equipment  and service fees was $147,000
for the three months ended  September 30, 2004, a decrease of $231,000,  or 61%,
compared  with  $378,000  for the three  months ended  September  30, 2003.  The
decrease  resulted from  decreased  resales in 2004 compared with 2003.  Cost of
resales as a percentage of related resales was 107% in 2004,  compared to 96% in
2003.  This  increase is due to revenue  declining  more  rapidly than the fixed
portion of costs of resales. NeoMedia expects costs of resales to fluctuate with
the mix of sales of equipment, software, and services over the next 12 months.

     Cost of micro  paint  repair  products  and  services.  Cost of micro paint
repair  products and services was $151,000 for the three months ended  September
30, 2004.  NeoMedia  acquired this business on February 6, 2004, and as a result
there were no cost of sales of micro paint repair  products and services  during
the three months ended  September 30, 2003.  Cost of micro paint repair products
and services as a percentage of related sales was 64%.  NeoMedia expects cost of
micro paint repair  products and services to increase over the next 12 months as
revenue continues to increase with the roll-out.

       Gross  Profit.  Gross  profit  was  $94,000  for the three  months  ended
September  30,  2004,  an increase of $87,000,  or 1,243%,  compared  with gross
profit of $7,000 for the three months ended  September  30, 2003.  This increase
was primarily the result of increased sales of higher-margin  micro paint repair
products and internally developed software licenses during 2004.

     Sales and  marketing.  Sales and  marketing  expenses were $514,000 for the
three months ended September 30, 2004, compared to $146,000 for the three months
ended  September  30, 2003,  an increase of $368,000 or 252%.  The increase is a
result of the addition of the micro paint business sales force in February 2004,
and cost associated with marketing and promotion of the Company's PaperClick and
micro paint repair  products.  NeoMedia  expects sales and marketing  expense to
increase over the next 12 months with the continued  development and anticipated
rollout of the PaperClick and Micro Paint Repair product suites.

     General and administrative.  General and administrative  expenses decreased
by  $1,424,000,  or 73%, to $516,000 for the three months  ended  September  30,
2004,  compared to $1,940,000 for the three months ended September 30, 2003. The
decrease  resulted  primarily from non-cash  expenses  relating to the Company's
option repricing program,  expense for stock options issued with exercise prices
below market price, and higher stock-based  professional service expense in 2003


                                       21
<PAGE>

as compared with 2004.  NeoMedia expects general and  administrative  expense to
increase  over  the  next  12  months  with  the  recent   acquisition   of  CSI
International and the potential acquisition of BSD Software.

     Research and development. During the three months ended September 30, 2004,
NeoMedia  charged to expense  $114,000 of research  and  development  costs,  an
increase  of  $36,000 or 46%  compared  to $78,000  for the three  months  ended
September  30,  2003.  The  increase  is  primarily  due to the  addition of one
developer  and  development  computer  systems  during  2004.  NeoMedia  expects
research  and  development  costs to  increase  over the next 12 months with the
continued  development  efforts,  and  the  anticipated  rollout  of  NeoMedia's
PaperClick product suite.

     Gain on  extinguishment of debt. During the six months ended June 30, 2004,
NeoMedia  recognized a gain on  extinguishment of debt of $6,000, an increase of
$30,000 or 125%  compared  to a loss of $24,000  during the three  months  ended
September 30, 2003.  These gains resulted from a difference  between the cash or
market value of stock  issued to settle the debt and the  carrying  value of the
debt at the time of settlement.


     Amortization of debt discount.  During the three months ended September 30,
2004,  NeoMedia  recognized  an  amortization  of debt issuance cost of $334,000
relating to the  amortization  of the fair value of warrants  granted to Cornell
Capital  Partners  in  connection  with  promissory  notes  issued to Cornell by
NeoMedia during January 2004. NeoMedia did not recognize any such expense during
the three  months  ended  September  30,  2003.  During  the nine  months  ended
September  30, 2004,  NeoMedia  amortized the full $2.5 million  discount  value
relating to the Cornell  warrants,  and as a result does not expect to recognize
such expense in the next 12 months.

     Interest expense.  Interest expense consists  primarily of interest accrued
for creditors as part of financed  purchases,  past due balances,  notes payable
and interest earned on cash equivalent  investments.  Interest expense increased
by $38,000,  or 158%,  to $62,000 for the three months ended  September 30, 2004
from  $24,000 for the three  months  ended  September  30,  2003,  due to higher
expense associated with notes payable in 2004 compared with 2003.

     Net Loss.  The net loss for the three months ended  September  30, 2004 was
$1,440,000,  which  represented  a decrease of  $765,000,  or 35% from a loss of
$2,205,000 for the three months ended September 30, 2003. The decrease  resulted
primarily from expenses  relating to the Company's option repricing  program and
expense for stock  options  issued with  exercise  prices  below market price in
2003, combined with increased gross profit from the company's micro paint repair
business.  These items were offset by  increased  sales and  marketing  expenses
relating  to the rollout of the  Company's  micro  paint  repair and  PaperClick
business units.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 2004 AS COMPARED TO THE
NINE MONTHS ENDED JUNE 30, 2003

     Net sales.  Total net sales for the nine months  ended  September  30, 2004
were  $1,269,000,  which  represented  a  decrease  of  $740,000,  or 37%,  from
$2,009,000 for the nine months ended September 30, 2003. This decrease primarily
resulted  from reduced  resales of Sun  Microsystems  equipment due to increased
competition  and  general  economic  conditions,  offset by new  sales  from the
Company's  micro paint repair business  acquired during February 2004.  NeoMedia
could realize an increase in license fees over the next 12 months if the Company
is  successful in  implementing  its  PaperClick  go-to-market  strategy,  or if
pending  court  cases  involving  its  intellectual  property  are  resolved  in
NeoMedia's favor. NeoMedia could also realize a material increase in micro paint
repair  revenue if the Company is successful in  implementing  its business plan
for that business unit.


                                       22
<PAGE>

     License  fees.  License  fees  were  $256,000  for the  nine  months  ended
September 30, 2004,  compared with $338,000 for the nine months ended  September
30, 2003, a decrease of $82,000,  or 24%. The decrease was due to lower sales of
internally  developed  software  licenses  in 2004.  NeoMedia  could  realize an
increase in license fees over the next 12 months if the Company is successful in
implementing  its PaperClick  go-to-market  strategy,  or if pending court cases
involving its intellectual property are resolved in NeoMedia's favor.

     Resales of software and technology  equipment and service fees.  Resales of
software and technology  equipment and service fees decreased by $1,170,000,  or
70%, to $501,000 for the nine months ended  September  30, 2004,  as compared to
$1,671,000 for the nine months ended September 30, 2003. This decrease primarily
resulted  from reduced  resales of Sun  Microsystems  equipment due to increased
competition and general  economic  conditions.  NeoMedia  intends to continue to
pursue additional resales of equipment,  software and services. NeoMedia expects
resales to more closely resemble the results for the nine months ended September
30, 2004, rather than the nine months ended September 30, 2003.

     Micro paint  repair  products  and  services.  Sales of micro paint  repair
products and services  were  $512,000  for the nine months ended  September  30,
2004. NeoMedia acquired this business on February 6, 2004, and as a result there
were no sales of micro paint repair products and services during the nine months
ended  September 30, 2003.  NeoMedia could realize a material  increase in micro
paint repair revenue if the Company is successful in  implementing  its business
plan for that business unit.

     Cost of license fees. Cost of license fees was $249,000 for the nine months
ended September 30, 2004, an increase of $22,000, or 10%, compared with $227,000
for the nine months  ended  September  30,  2003.  The  increase  resulted  from
increased amortization of capitalized patent costs during 2004.

     Cost of resales of software and technology equipment and service fees. Cost
of resales of software and  technology  equipment  and service fees was $480,000
for the nine months ended September 30, 2004, a decrease of $1,086,000,  or 69%,
compared  with  $1,566,000  for the nine months ended  September  30, 2003.  The
decrease  resulted from  decreased  resales in 2004 compared with 2003.  Cost of
resales as a percentage of related  resales was 96% in 2004,  compared to 94% in
2003.  This  increase is due to revenue  declining  more  rapidly than the fixed
portion of costs of resales. NeoMedia expects costs of resales to fluctuate with
the mix of sales of equipment, software, and services over the next 12 months.

     Cost of micro  paint  repair  products  and  services.  Cost of micro paint
repair  products and  services was $376,000 for the nine months ended  September
30, 2004.  Cost of micro paint repair  products and services as a percentage  of
related sales was 73%.  NeoMedia acquired this business on February 6, 2004, and
as a result  there  were no cost of sales of micro  paint  repair  products  and
services during the nine months ended September 30, 2003.  NeoMedia expects cost
of micro paint repair  products and services to increase over the next 12 months
as revenue continues to increase with the roll-out.

       Gross  Profit.  Gross  profit  was  $164,000  for the nine  months  ended
September 30, 2004, a decrease of $52,000, or 24%, compared with gross profit of
$216,000  for the nine months  ended  September  30,  2003.  This  decrease  was
primarily  the result of reduced  resales of Sun  Microsystems  equipment due to
increased competition and general economic conditions, offset by profit form the
micro paint repair business acquired in February 2004.

     Sales and marketing.  Sales and marketing  expenses were $1,461,000 for the
nine months ended  September 30, 2004,  compared to $407,000 for the nine months
ended  September  30, 2003,  an increase of  $1,054,000  or 259%.  This increase
resulted primarily from the addition of  recently-acquired  micro paint business
sales force and cost  associated  with  marketing,  as well as  promotion of the
Company's PaperClick and Micro Paint Repair products. NeoMedia expects sales and
marketing  expense  to  increase  over the  next 12  months  with the  continued
development  and  anticipated  rollout of the  PaperClick and Micro Paint Repair
product suites.


                                       23
<PAGE>

     General and administrative.  General and administrative  expenses decreased
by  $2,116,000,  or 62%, to $1,293,000  for the nine months ended  September 30,
2004,  compared to $3,409,000 for the nine months ended  September 30, 2003. The
decrease  resulted  primarily from non-cash  expenses  relating to the Company's
option repricing program,  expense for stock options issued with exercise prices
below market price, and higher stock-based  professional service expense in 2003
as compared with 2004.  NeoMedia expects general and  administrative  expense to
increase  over  the  next  12  months  with  the  recent   acquisition   of  CSI
International and the potential acquisition of BSD Software

     Research and development.  During the nine months ended September 30, 2004,
NeoMedia  charged to expense  $354,000 of research  and  development  costs,  an
increase  of $111,000 or 46%  compared  to  $243,000  for the nine months  ended
September 30, 2003. The increase is primarily due to the addition of a developer
and development  computer  systems during 2004.  NeoMedia  expects  research and
development  costs  to  increase  over  the next 12  months  with the  continued
development  efforts,  and the  anticipated  rollout  of  NeoMedia's  PaperClick
product suite.

     Gain on  extinguishment of debt. During the nine months ended September 30,
2004,  NeoMedia  recognized  a gain  on  extinguishment  of  debt  of  $129,000,
resulting  from the payment of debt at a discount to the book value of the debt,
an increase of $153,000, or 638%, compared with a loss on extinguishment of debt
of $24,000 for the nine months ended  September 30, 2003.  These gains  resulted
from a difference between the cash or market value of stock issued to settle the
debt and the carrying value of the debt at the time of settlement.

     Amortization  of debt discount.  During the nine months ended September 30,
2004,  NeoMedia  recognized an  amortization of debt issuance cost of $2,500,000
relating to the fair value of warrants  granted to Cornell  Capital  Partners in
connection  with  promissory  notes issued to Cornell by NeoMedia during January
2004.  NeoMedia did not recognize any such expense  during the nine months ended
September 30, 2003.  During the nine months ended  September 30, 2004,  NeoMedia
amortized the full $2.5 million discount value relating to the Cornell warrants,
and as a result does not expect to recognize such expense in the next 12 months.

     Interest expense.  Interest expense consists  primarily of interest accrued
for creditors as part of financed  purchases,  past due balances,  notes payable
and interest earned on cash equivalent  investments.  Interest expense decreased
by $15,000, or 8%, to $178,000 for the nine months ended September 30, 2004 from
$193,000 for the nine months ended  September 30, 2003,  due to reduced  expense
associated with vendor settlements and debt in 2004 compared with 2003.

     Net Loss.  The net loss for the nine months  ended  September  30, 2004 was
$5,493,000,  which  represented a $1,433,000,  or 35% increase from a $4,060,000
loss for the nine  months  ended  September  30,  2003.  The  increase  resulted
primarily  from the  amortization  of debt  issuance cost of $2,500,000 in 2004,
offset by reduced general and administrative costs in 2004.

LIQUIDITY AND CAPITAL RESOURCES

     Net cash used in operating  activities  was  $3,500,000 for the nine months
September 30, 2004, compared with $2,057,000 for the nine months ended September
30, 2003.  NeoMedia's  net cash flow used in investing  activities  for the nine
months ended September 30, 2004 and 2003 was $212,000 and $64,000, respectively.
Net cash provided by financing  activities  for the nine months ended  September
30, 2004 and 2003 was $5,430,000 and $3,099,000, respectively.

     During the nine months ended  September 30, 2004 and 2003,  NeoMedia's  net
loss totaled $5,493,000 and $4,060,000,  respectively. As of September 30, 2004,
NeoMedia had accumulated  losses from  operations of $81,640,000,  had a working
capital deficit of $5,538,000, and $1,732,000 in cash balances.


                                       24
<PAGE>

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

     NeoMedia may obtain up to $20 million over the next year and a half through
its Standby Equity Distribution  Agreement with Cornell Capital Partners.  As of
September  30, 2004,  NeoMedia had drawn $7 million  against the Standby  Equity
Distribution  Agreement in the form of promissory notes which may be repaid from
the proceeds of sale of common stock.

     In addition,  if the average  closing bid price of NeoMedia's  common stock
for any five day period  exceeds  $0.10,  NeoMedia  may force the exercise of 40
million warrants held by Cornell, resulting in additional cash to the Company of
$2 million.  In the  absence of any major  sales from its Micro Paint  Repair or
PaperClick  products,  management  believes  that it has  sufficient  funding to
sustain  operations  through  December  31,  2004,  however,  there  can  be  no
assurances  that the  market  for  NeoMedia's  stock  will  support  the sale of
sufficient  shares of  NeoMedia's  common stock to raise  sufficient  capital to
sustain  operations  for  such a  period,  or  that  actual  revenue  will  meet
management's  expectations.  If necessary  funds are not  available,  NeoMedia's
business  and  operations  would be  materially  adversely  affected and in such
event, NeoMedia would attempt to reduce costs and adjust its business plan.



                                       25
<PAGE>

ITEM 3.  CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE  CONTROLS AND  PROCEDURES.  NeoMedia's  Chief Executive
Officer and Chief  Financial  Officer,  after  evaluating the  effectiveness  of
NeoMedia's   "disclosure  controls  and  procedures"  (as  defined  in  Sections
13a-14(c)  of the  Securities  Exchange Act of 1934) as of the end of the period
reported  in  this  annual  report  (the  "Evaluation  Date"),   concluded  that
NeoMedia's  disclosure  controls and  procedures  were effective and designed to
ensure that  material  information  relating to  NeoMedia  and its  consolidated
subsidiaries  is  accumulated  and would be made known to them by others  within
those  entities as  appropriate  to allow timely  decisions  regarding  required
disclosures.

CHANGES  IN  INTERNAL  CONTROLS.  NeoMedia  does  not  believe  that  there  are
significant  deficiencies  in the design or operation  of its internal  controls
that could adversely affect its ability to record, process, summarize and report
financial  data.  Although  there  were no  significant  changes  in  NeoMedia's
internal  controls or in other  factors  that could  significantly  affect those
controls  subsequent to the Evaluation Date,  NeoMedia's senior  management,  in
conjunction  with its Board of Directors,  continuously  reviews overall company
policies  and  improves  documentation  of  important  financial  reporting  and
internal  control matters.  NeoMedia is committed to continuously  improving the
state of its internal controls, corporate governance and financial reporting.

LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS.  NeoMedia's management,  including
the Chief Executive  Officer and Chief Financial  Officer,  does not expect that
its disclosure or internal  controls will prevent all errors or fraud. A control
system, no matter how well conceived and operated,  can provide only reasonable,
not  absolute,  assurance  that the  objectives  of the control  system are met.
Further,  the design of a control  system  must  reflect the fact that there are
resource  constraints,  and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in a cost-effective  control
system, misstatements due to error or fraud may occur and not be detected.



                                       26
<PAGE>

                          PART II -- OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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

     AIRCLIC, INC., SCANBUY, INC., AND LSCAN TECHNOLOGIES, INC.

     On January 23, 2004, NeoMedia filed a patent  infringement  lawsuit against
AirClic,  Inc.,  Scanbuy,  Inc.,  and LScan  Technologies,  Inc. in the Northern
District of Illinois, claiming that each of the parties has manufactured, or has
manufactured for it, and has used, or actively induced others to use, technology
which allows customers to use a built-in UPC bar code scanner to scan individual
items  and  access  information,  thereby  infringing  NeoMedia's  patents.  The
complaint states that on information and belief, AirClic, Scanbuy and LScan have
had actual and constructive notice of the existence of the patents-in-suit, and,
despite such notice, failed to cease and desist their acts of infringement,  and
continue to engage in acts of infringement of the patents-in-suit.  On April 15,
2004,  the court  dismissed  the suit  against  AirClic  and Scanbuy for lack of
personal jurisdiction.

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

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

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


       VIRGIN ENTERTAINMENT GROUP

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


                                       27
<PAGE>

activities.  The complaint seeks compensatory damages for Virgin's infringement,
with those  damages to be trebled due to the  willful  and wanton  nature of the
infringement. NeoMedia also seeks to preliminarily and permanently enjoin Virgin
from its infringing activities. Virgin answered NeoMedia's complaint on March 1,
2004.

      OTHER LITIGATION

      On September 12, 2002,  R. R.  Donnelley & Sons Company filed a summons in
the  Circuit  Court of The  Twentieth  Judicial  Circuit in and for Lee  County,
Florida,  seeking  payment of  approximately  $92,000  in past due  professional
services  bills,  plus interest and attorney  fees.  During July 2003,  NeoMedia
settled  the suit for cash  payments  over a period of  approximately  one year.
NeoMedia had an accrued  liability  of  approximately  $27,000  relating to this
matter as of September 30, 2004.

      On October 28, 2002,  Merrick & Klimek,  P.C.,  filed a complaint  against
NeoMedia seeking payment of  approximately  $170,000 in past due legal services.
The amount in question is subject to an unsecured  promissory  note that matured
unpaid on February 28, 2002. On May 1, 2003,  NeoMedia settled the suit for cash
payments totaling  approximately  $196,000,  to be paid at a rate of $30,000 per
quarter  until the balance is satisfied.  NeoMedia had a remaining  liability of
approximately  $54,000  relating to this matter as of September 30, 2004,  which
was included in notes payable.


ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS (A), (B), (C) AND (D)

         None.


ITEM 3.  DEFAULT UPON SENIOR SECURITIES

         (a) NeoMedia is in default on an unsecured promissory note payable held
by Merrick & Klimek,  P.C. During 2002, Merrick & Klimek, P.C. sued NeoMedia for
nonpayment  of the note.  During  2003,  the two  parties  settled  the suit and
NeoMedia is making installment payments against the balance through December 31,
2004.



                                       28
<PAGE>

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

         On September 14, 2004,  NeoMedia  filed a proxy  statement in which the
Company  is  asking  its  shareholders  to vote on the  re-election  of  current
directors. The meeting is schedule for October 29, 2004.


ITEM 5.  OTHER INFORMATION

         None.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)      EXHIBITS:

<TABLE>
<CAPTION>
EXHIBIT NO.    DESCRIPTION                                             LOCATION
-----------    -----------                                             --------
<S>            <C>                                                     <C>
31.1           Certification by Chief Executive Officer pursuant to    Provided herewith
               15 U.S.C. Section 7241, as adopted pursuant to
               Section 302 of the Sarbanes-Oxley Act of 2002

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

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

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

         (b)      REPORTS ON FORM 8-K:

         NeoMedia filed a Form 8-K on September 17, 2004,  reporting that it had
entered into a business development  agreement with, and invested $1 million in,
iPoint-media Ltd., in exchange for 17% ownership in iPoint-media.

         NeoMedia  filed a Form 8-K on  September  7, 2004,  reporting  that its
Board of Directors  named  Charles T. Jensen as the  Company's  permanent  Chief
Executive Officer.


                                       29
<PAGE>

                                   SIGNATURES

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


                                  NEOMEDIA TECHNOLOGIES, INC.
                                  Registrant

   Date:  November 4, 2004        By: /s/ Charles T. Jensen
          ----------------        ------------------------------
                                  Charles T. Jensen, President, Chief Executive
                                  Officer, Chief Operating Officer, and Director


   Date:  November 4, 2004        By: /s/ David A. Dodge
          ----------------        ---------------------------
                                   David A. Dodge, Vice President,
                                   Chief Financial Officer, and Controller



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