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 JUNE 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 July 30, 2004, there were 337,308,636 outstanding shares of the
issuer's Common Stock.

                                       1
<PAGE>

                        PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

                                                                       JUNE 30,
                                                                         2004
                                                                       ---------

ASSETS
Current assets:
       Cash and cash equivalents                                       $    327
       Trade accounts receivable, net of allowance for doubtful
         accounts of $46                                                    239
       Inventories, net of allowance for obsolete & slow-moving
         inventory of $13                                                    64
       Prepaid expenses and other current assets                            419
                                                                       --------
       Total current assets                                               1,049


       Property and equipment, net                                          115
       Capitalized patents, net                                           2,292
       Capitalized and purchased software costs, net                         85
       Excess of purchase price over tangible assets of CSI               3,056
       Other long-term assets                                               743
                                                                       --------

            Total assets                                               $  7,340
                                                                       ========

LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
       Accounts payable                                                $  1,829
       Amounts due under financing agreements                               102
       Amounts payable under settlement agreements                          537
       Liabilities of discontinued business unit                            664
       Sales taxes payable                                                  121
       Accrued expenses                                                   1,444
       Deferred revenues and other                                          603
       Notes payable, net of unamortized discount of $334                 1,302
                                                                       --------
            Total current liabilities                                     6,602

Long-term portion of amounts payable under settlement agreements,
  net of current portion                                                     24
                                                                       --------


            Total liabilities                                             6,626
                                                                       --------

Shareholders' deficit:
       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, 329,788,130 shares issued and 323,925,084
         outstanding                                                      3,239
       Additional paid-in capital                                        79,182
       Deferred stock-based compensation                                   (582)
       Deferred equity financing costs                                     (130)
       Accumulated deficit                                              (80,200)
       Accumulated other comprehensive loss - foreign currency
         translation adjustment                                             (16)
       Treasury stock, at cost, 201,230 shares of common stock             (779)
                                                                       --------
       Total shareholders' equity                                           714
                                                                       --------
            Total liabilities and shareholders' deficit                $  7,340
                                                                       ========


              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)

                                                   THREE MONTHS ENDED JUNE 30,
                                                  -----------------------------
                                                       2004           2003
                                                  -------------   -------------
NET SALES:
    License fees                                  $          88   $         160
    Resale of software and technology equipment
      and service fees                                      171             514
    Micro paint repair products and services
                                                            189              --
                                                  -------------   -------------
    Total net sales                                         448             674
                                                  -------------   -------------

COST OF SALES:
    License fees                                             81              75
    Resale of software and technology equipment
      and service fees                                      173             486
    Micro paint repair products and services                168              --
                                                  -------------   -------------
    Total cost of sales                                     422             561
                                                  -------------   -------------

GROSS PROFIT (LOSS)                                          26             113

    Sales and marketing expenses                            522             122
    General and administrative expenses                     399             750
    Research and development costs                          122              76
                                                  -------------   -------------

    Loss from operations                                 (1,017)           (835)
    Gain on extinguishment of debt                           (3)             --
    Amortization of debt discount                          (772)             --
    Interest expense, net                                   (39)           (117)
                                                  -------------   -------------

NET LOSS                                                 (1,831)           (952)

    Other comprehensive loss:
      Foreign currency translation adjustment                 6              --
                                                  -------------   -------------

COMPREHENSIVE LOSS                                $      (1,825)  $        (952)
                                                  =============   =============

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

WEIGHTED AVERAGE NUMBER OF COMMON SHARES--BASIC
  AND DILUTED                                       305,327,410      78,404,148
                                                  =============   =============


              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)

                                                     SIX MONTHS ENDED JUNE 30,
                                                   ----------------------------
                                                        2004           2003
                                                   ------------   -------------
NET SALES:
    License fees                                  $         160   $         269
    Resale of software and technology equipment
      and service fees                                      363           1,279
    Micro paint repair products and services                275              --
                                                  -------------   -------------
    Total net sales                                         798           1,548
                                                  -------------   -------------

COST OF SALES:
    License fees                                            170             151
    Resale of software and technology equipment
      and service fees                                      333           1,188
    Micro paint repair products and services                225              --
                                                  -------------   -------------
    Total cost of sales                                     728           1,339
                                                  -------------   -------------

GROSS PROFIT (LOSS)                                          70             209

    Sales and marketing expenses                            947             261
    General and administrative expenses                     777           1,469
    Research and development costs                          240             165
                                                  -------------   -------------

    Loss from operations                                 (1,894)         (1,686)
    Gain on extinguishment of debt                          123              --
    Amortization of debt discount                        (2,166)             --
    Interest expense, net                                  (116)           (169)
                                                  -------------   -------------

NET LOSS                                                 (4,053)         (1,855)

    Other comprehensive loss:
      Foreign currency translation adjustment               (16)             --
                                                  -------------   -------------

COMPREHENSIVE LOSS                                $      (4,069)  $      (1,855)
                                                  =============   =============

LOSS PER SHARE--BASIC AND DILUTED                 $       (0.01)  $       (0.03)
                                                  =============   =============

WEIGHTED AVERAGE NUMBER OF COMMON SHARES--BASIC
  AND DILUTED                                       287,733,421      57,796,124
                                                  =============   =============


              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)

                                                              SIX MONTHS ENDED
                                                                  JUNE 30,
                                                             ------------------
                                                               2004       2003
                                                             -------    -------
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                                 ($4,053)   ($1,855)
    Adjustments to reconcile net loss to net cash
    used in operating activities:
    Amortization of discount on note payable                   2,166         --
    Depreciation and amortization                                263        247
    Stock issued to reacquire rights under a contract             24
    Fair value of expense portion of stock-based
      compensation granted for professional services             381        348
    Interest expense allocated to debt                             3         60
    Discount related to common stock issuance                     --         65
    (Increase)/decrease in value of life insurance
      policies                                                    11         (8)
    Increase (decrease) of fair value of repriced
      options                                                   (243)       204
    Changes in operating assets and liabilities
      Trade accounts receivable, net                             (39)       100
      Inventory                                                   (7)        --
      Other current assets                                        64        101
      Accounts payable, amounts due under financing
        agreements, liabilities in excess of assets of
        discontinued business unit, accrued expenses
        and stock liability                                     (919)      (120)
      Deferred revenue other current liabilities                  88        (81)
                                                             -------    -------
       Net cash used in operating activities                  (2,261)      (939)
                                                             -------    -------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Capitalization of software development and
      purchased intangible assets                                (74)       (19)
    Acquisition of property and equipment                        (81)       (40)
                                                             -------    -------
      Net cash used in investing activities                     (155)       (59)
                                                             -------    -------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Net proceeds from issuance of common stock, net
      of issuance costs of $391                                3,675      1,170
    Net proceeds from exercise of stock options and
      warrants                                                   581         71
    Borrowings under notes payable and long-term debt          5,000         --
    Repayments on notes payable and long-term debt            (4,168)      (160)
    Cash paid to acquire CSI International, Inc. (net
      of cash acquired)                                       (2,390)        --
                                                             -------    -------
      Net cash provided by financing activities                2,698      1,081
                                                             -------    -------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                          (16)        --

NET INCREASE IN CASH AND CASH EQUIVALENTS                        266         83

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

CASH AND CASH EQUIVALENTS, END OF PERIOD                     $   327    $   153
                                                             =======    =======
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         37
      Fair value of stock issued for services and
        deferred to future periods                               585         --
      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                             123         --
      Direct costs associated with Standby Equity
        Distribution Agreement                                   965         --


              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 June 30,
2004, the results of operations for the three-month and six-month  periods ended
June 30, 2004 and 2003, and cash flows for the six-month  periods ended June 30,
2004 and 2003.  The results of  operations  for the  three-month  and  six-month
periods  ended  June 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 June 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 JUNE 30, 2004                        SIX MONTHS ENDED JUNE 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              $448      --        -- (A)        $448          $798    $339      ($275) (A)                     $862
 Loss from operations      ($1,017)     --        -- (A)     ($1,017)      ($1,894)  ($589)      $563  (A)                  ($1,920)
 Net loss                  ($1,831)     --        -- (A)     ($1,831)      ($4,053)  ($589)      $563  (A)                  ($4,079)
 Net loss per share-
   basic and diluted        ($0.01)                           ($0.01)       ($0.01)                    (A)                   ($0.01)
 Weighted average
   number of common
   shares - basic
   and diluted         305,327,410                --     305,327,410   287,733,421          7,000,000  (B)              294,733,421
</TABLE>

Pro-forma Adjustments

(A) - Adjustments   are to reflect  operations  of  CSI  from  February  6, 2004
      through June 30, 2004, which are included in NeoMedia's operations for the
      three months ended June 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 JUNE 30, 2003                       SIX MONTHS ENDED JUNE 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              $674     $141           --              $815         $1,548      $268          --             $1,816
 Income (loss) from
   operations                ($835)      $7           --             ($828)       ($1,686)       $9          --            ($1,677)
 Net income (loss)           ($952)      $7           --             ($945)       ($1,855)       $9          --            ($1,846)
 Net loss per share-
  basic and diluted         ($0.01)                                 ($0.01)        ($0.03)                                  ($0.03)
 Weighted average
  number of common
  shares - basic and
  diluted               78,404,148             7,000,000 (C)    85,404,148     57,796,124             7,000,000 (C)     64,796,124
</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 six months  ended June 30, 2004,  the Company  sold  51,102,076
shares of its common  stock to Cornell  under the  Standby  Equity  Distribution
Agreement.  The following table summarizes  funding received from Cornell during
the six months ended June 30, 2004:

                                         THREE         THREE           SIX
                                         MONTHS        MONTHS         MONTHS
                                         ENDED         ENDED          ENDED
                                       MARCH 31,      JUNE 30,       JUNE 30,
                                          2004          2004           2004
                                     ------------   ------------   ------------

Number of shares sold to Cornell       21,282,203     29,819,873     51,102,076

Gross Proceeds from sale of shares
  to Cornell                         $  2,332,000   $  2,308,000   $  4,640,000

Less: discounts and fees*                (500,000)      (465,000)      (965,000)
                                     ------------   ------------   ------------
  Net Proceeds from sale of shares
    to Cornell                       $  1,832,000   $  1,843,000   $  3,675,000
                                     ------------   ------------   ------------


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


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. As of June 30, 2004, the Company had
reduced  the balance  payable on the note to  $480,000.  During  July 2004,  the
Company paid the remaining balance on the note.

                                       9
<PAGE>

      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.  As of June 30, 2004,  the Company had not made any payment  against the
principal.  As of July 23, 2004, the Company had reduced the balance on the note
to $800,000.  The note matures on October 5, 2004, after which the Company has a
60-day period in which to cure any defaults  without  penalty.  The note accrues
interest  at a rate of 24%  beginning  only upon  expiration  of the 60-day cure
period  after  maturity.  The  Company  has the  option to repay  any  remaining
principal of either 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.

      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 has not made any payments  against the principal.  The note
matures on  September  30,  2004.  The note  accrues  interest  at a rate of 12%
beginning  only upon maturity  (after  September 30, 2004).  The Company has the
option to repay any  remaining  principal  of either  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 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 being  allocated to the
notes is considered a discount on the promissory  notes,  and therefore is being
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 $772,000 and $2,166,000  related to the warrants
during the three months and six months ended June 30, 2004, respectively,.

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 June 30,  2004.  The closing  price of the  Company's
common stock on June 30, 2004, March 31, 2004, and December 31, 2003 was $0.067,
$0.09, and $0.137 per share,  respectively.  As a result, the Company recorded a
reduction to general and  administrative  expense of $163,000 and $80,000 during
the three  months  ended March 31, 2004 and June 30, 2004.  The  adjustment  was
recorded  in order to reflect the  decrease  of the fair value of options  still
unexercised under the repricing program under variable accounting.

                                       10
<PAGE>

OTHER EVENTS

      On June 25, 2004,  the Company  issued  322,228 shares of its common stock
valued at $24,000, plus $8,000 cash to 540608 Alberta Ltd., a distributor of the
Company's micro paint repair products,  in exchange for the forfeiture by 540608
Alberta Ltd. of exclusive distribution rights in the greater Edmonton,  Alberta,
Canada area.  540608 Alberta Ltd. 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
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 $81,000 in expense
relating the contract during the six months ended June 30, 2004.

      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 six months ended June 30, 2004.

                                       11
<PAGE>

PRO-FORMA INFORMATION REQUIRED BY SFAS 148

      At June 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     SIX MONTHS ENDED
                                              JUNE 30,              JUNE 30,
                                        -------------------   -------------------
                                          2004       2003       2004       2003
                                        --------   --------   --------   --------
<S>                                      <C>          <C>      <C>        <C>
Net Loss, as reported                    ($1,831)     ($952)   ($4,053)   ($1,855)
Compensation recognized under APB 25           5         --          9         --
Compensation recognized under SFAS 123      (368)      (118)      (711)      (236)
                                        -------------------   -------------------
  Pro-forma net loss                     ($2,194)   ($1,070)   ($4,755)   ($2,091)
                                        ===================   ===================

Net Loss per share:
Basic and diluted - as reported           ($0.01)    ($0.01)    ($0.01)    ($0.03)
                                        ===================   ===================
Basic and diluted - pro-forma             ($0.01)    ($0.01)    ($0.02)    ($0.04)
                                        ===================   ===================
</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 six months ended June 30,
2004, NeoMedia derived 32% of its revenue from customers based in Canada.

                                       12
<PAGE>

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

                                                    (in thousands)
                                        --------------------------------------
                                        THREE MONTHS ENDED   SIX MONTHS ENDED
                                              JUNE 30,            JUNE 30,
                                        ------------------  ------------------
                                          2004      2003      2004      2003
                                        --------  --------  --------  --------
NET SALES:
   NeoMedia Consulting &
     Integration Services                   $230      $662      $481    $1,523
   NeoMedia Internet Switching Service        29        12        42        25
   NeoMedia Micro Paint Repair               189        --       275        --
                                        ------------------  ------------------
                                            $448      $674      $798    $1,548
                                        ------------------  ------------------

NET LOSS:
   NeoMedia Consulting &
     Integration Services                  ($227)    ($726)    ($483)    ($154)
   NeoMedia Internet Switching Service      (436)     (226)     (841)   (1,701)
   NeoMedia Micro Paint Repair              (396)       --      (563)       --
   Amortization of Cornell Debt
     Discount                               (772)       --    (2,166)       --
                                        ------------------  ------------------
                                         ($1,831)    ($952)  ($4,053)  ($1,855)
                                        ------------------  ------------------

IDENTIFIABLE ASSETS:
   NeoMedia Consulting &
     Integration Services                   $223
   NeoMedia Internet Switching Service     2,352
   NeoMedia Micro Paint Repair             3,263
   Corporate                               1,502
                                        --------
                                          $7,340
                                        --------

                                       13
<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 PaperClick(TM) 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.  To this end,  NeoMedia has signed four  intellectual
      property licenses since inception, and also acquired additional patents as
      part of its acquisition of Secure Source Technologies, Inc. during 2003.

      On September 8, 2003,  NeoMedia  announced its  PaperClick for Camera Cell
      Phones(TM) 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-Window(TM),  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-Window(TM)  currently works with
      Palm(TM) Tungsten C PDA, the Handspring(TM)  Treo 270 and 600 Smartphones,
      Pocket PC(R),  and the Java MIDP 2.0 (Mobile  Independent  Device Profile)
      standard.

      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,  SRP Consulting,  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.

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

                                       14
<PAGE>

      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 (SYSTEMS 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.

ACQUISITIONS

      CSI  INTERNATIONAL,  INC.  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 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 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

                                       15
<PAGE>

      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,  and  allowance for
bad debt. 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
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

                                       16
<PAGE>

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 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

                                       17
<PAGE>

            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 JUNE 30, 2004 AS COMPARED TO
THE THREE MONTHS ENDED JUNE 30, 2003

      Net sales.  Total net sales for the three  months ended June 30, 2004 were
$448,000,  which  represented a decrease of $226,000,  or 34%, from $674,000 for
the three months ended June 30, 2003.  This  decrease  primarily  resulted  from
reduced resales of Sun Microsystems  equipment due to increased  competition and
general economic  conditions,  offset by an increase in sales resulting from the
acquisition of the Company's  micro paint repair  business unit.  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.  NeoMedia could
also  realize  increased  license  fees if pending  court  cases  involving  its
intellectual property are resolved in NeoMedia's favor.

      License  fees.  License  fees were $88,000 for the three months ended June
30,  2004,  compared  with  $160,000 for the three months ended June 30, 2003, a
decrease of $72,000,  or 45%. The decrease was due to lower sales of  internally
developed software licenses in 2004.  NeoMedia could realize a material increase
in  license  fees  over the next 12  months  if the  Company  is  successful  in
implementing its PaperClick  go-to-market strategy.  NeoMedia could also realize
increased  license  fees 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 $343,000,  or
67%,  to  $171,000  for the three  months  ended June 30,  2004,  as compared to
$514,000  for the three  months ended June 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 June 30,
2004, rather than the three months ended June 30, 2003.

      Micro paint  repair  products  and  services.  Sales of micro paint repair
products  and services  were  $189,000 for the three months ended June 30, 2004.
NeoMedia  acquired  this business on February 6, 2004, so there were no sales of
micro paint repair  products and services during the three months ended June 30,
2003.  NeoMedia  expects  sales of micro paint  repair  products and services to
increase during 2004 as the Company implements its business to rollout its Micro
Paint Repair solution.

                                       18
<PAGE>

      Cost of license  fees.  Cost of  license  fees was  $81,000  for the three
months ended June 30, 2004, an increase of $6,000,  or 8%, compared with $75,000
for the three months ended June 30, 2003.  The increase  resulted from increased
amortization of capitalized patent costs during 2004.

      Cost of resales.  Cost of resales was  $173,000 for the three months ended
June 30, 2004, a decrease of $313,000,  or 64%,  compared  with $486,000 for the
three months ended June 30, 2003. The decrease  resulted from decreased  resales
in 2004 compared with 2003.  Cost of resales as a percentage of related  resales
was 101% in 2004,  compared  to 95% 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 $168,000 for the three months ended June 30,
2004. NeoMedia acquired this business on February 6, 2004, so there were no cost
of sales of micro paint repair  products  and  services  during the three months
ended June 30,  2003.  Cost of micro paint  repair  products  and  services as a
percentage of related sales was 89%. 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.  NeoMedia  also  expects  cost of  sales as a
percentage of sales to decrease over the next 12 months as the Company continues
to implement its rollout of its higher-margin Micro Paint Repair products.

      Gross Profit. Gross profit was $26,000 for the three months ended June 30,
2004, a decrease of $87,000,  or 77%, compared with gross profit of $113,000 for
the three months ended June 30, 2003.  This decrease was primarily the result of
reduced resales of Sun Microsystems  equipment due to increased  competition and
general economic conditions.

      Sales and  marketing.  Sales and marketing  expenses were $522,000 for the
three  months  ended June 30,  2004,  compared to $122,000  for the three months
ended June 30, 2003,  an increase of $400,000 or 328%.  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.

      General and administrative.  General and administrative expenses decreased
by  $351,000,  or 47%, to $399,000  for the three  months  ended June 30,  2004,
compared to $750,000  for the three  months  ended June 30,  2003.  The decrease
resulted primarily from a decrease in stock-based  professional services expense
in 2004 compared with 2003, as well as a reduction to general and administrative
expense of $80,000 relating to the Company's option repricing program during the
three months ended June 30, 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 June 30, 2004,
NeoMedia  charged to expense  $122,000 of research  and  development  costs,  an
increase of $46,000 or 61%  compared to $76,000 for the three  months ended June
30,  2003.  The  increase is primarily  due to the  addition of  developers  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.

      Amortization  of debt  discount.  During the three  months  ended June 30,
2004,  NeoMedia  recognized  an  amortization  of debt issuance cost of $772,000
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

                                       19
<PAGE>

the  three  months  ended  June 30,  2003.  NeoMedia  expects  to  recognize  an
additional $334,000 expense related to this discount during the third quarter of
2004,  at which time the discount  will be fully  amortized  and no more expense
will be recorded.

      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 $78,000,  or 67%, to $39,000  for the three  months  ended June 30, 2004 from
$117,000  for the three  months  ended June 30,  2003,  due to  reduced  expense
associated with vendor settlements and debt in 2004 compared with 2003.

      Net  Loss.  The net loss for the  three  months  ended  June 30,  2004 was
$1,831,000,  which  represented an increase of $879,000,  or 92% from a $952,000
loss for the three months ended June 30, 2003. The increase  resulted  primarily
from the non-cash  amortization  of debt  issuance  cost to funding  provided By
Cornell Capital Partners during the three months ended June 30, 2004, as well as
reduced  resales of software and  technology  equipment and service fees in 2004
compared with 2003.  These items were partially offset by a reduction to general
and administrative expense during 2004.

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

      Net  sales.  Total net sales for the six months  ended June 30,  2004 were
$798,000,  which represented a decrease of $750,000, or 48%, from $1,548,000 for
the six months  ended June 30,  2003.  This  decrease  primarily  resulted  from
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.  NeoMedia could also realize increased license
fees if pending court cases involving its intellectual  property are resolved in
NeoMedia's favor.

      License fees. License fees were $160,000 for the six months ended June 30,
2004,  compared with $269,000 for the six months ended June 30, 2003, a decrease
of $109,000, or 41%. The decrease was due to lower sales of internally developed
software licenses in 2004. NeoMedia could realize a material increase in license
fees over the next 12 months if the Company is  successful in  implementing  its
PaperClick go-to-market strategy.  NeoMedia could also realize increased license
fees 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 $916,000,  or
72%,  to  $363,000  for the six  months  ended June 30,  2004,  as  compared  to
$1,279,000  for the six months  ended June 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 six months ended June 30,
2004, rather than the six months ended June 30, 2003.

      Micro paint  repair  products  and  services.  Sales of micro paint repair
products  and  services  were  $275,000  for the six months ended June 30, 2004.
NeoMedia  acquired  this business on February 6, 2004, so there were no sales of
micro paint repair  products  and services  during the six months ended June 30,
2003.  NeoMedia  expects  sales of micro paint  repair  products and services to
increase during 2004 as the Company implements its business to rollout its Micro
Paint Repair solution.

                                       20
<PAGE>

      Cost of license fees. Cost of license fees was $170,000 for the six months
ended June 30, 2004, an increase of $19,000,  or 13%, compared with $151,000 for
the six  months  ended June 30,  2003.  The  increase  resulted  from  increased
amortization of capitalized patent costs during 2004.

      Cost of resales.  Cost of resales was  $333,000  for the six months  ended
June 30, 2004, a decrease of $855,000,  or 72%, compared with $1,188,000 for the
six months ended June 30, 2003. The decrease  resulted from decreased resales in
2004 compared with 2003.  Cost of resales as a percentage of related resales was
92% in  2004,  compared  to 93% in  2003.  This  decrease  is due to a  slightly
increased mix of higher-margin  software  maintenance  products in 2004 compared
with 2003.  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  $225,000 for the six months ended June 30,
2004.  Cost of micro paint  repair  products  and  services as a  percentage  of
related sales was 82%.  NeoMedia  acquired this business on February 6, 2004, so
there were no cost of sales of micro paint repair  products and services  during
the six months ended June 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.  NeoMedia  also  expects  cost of  sales as a
percentage of sales to decrease over the next 12 months as the Company continues
to implement its rollout of its higher-margin Micro Paint Repair products.

      Gross  Profit.  Gross profit was $70,000 for the six months ended June 30,
2004, a decrease of $139,000, or 67%, compared with gross profit of $209,000 for
the six months ended June 30, 2003.  This  decrease was  primarily the result of
reduced resales of Sun Microsystems  equipment due to increased  competition and
general economic conditions.

      Sales and  marketing.  Sales and marketing  expenses were $947,000 for the
six months  ended June 30,  2004,  compared to $261,000 for the six months ended
June 30, 2003, an increase of $686,000 or 263%. 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.

      General and administrative.  General and administrative expenses decreased
by  $692,000,  or 47%,  to  $777,000  for the six months  ended  June 30,  2004,
compared to  $1,469,000  for the six months  ended June 30,  2003.  The decrease
resulted primarily from a decrease in stock-based  professional services expense
in 2004 compared with 2003, as well as a reduction to general and administrative
expense of $243,000  relating to the Company's option  repricing  program during
the six months ended June 30, 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 six months  ended June 30,  2004,
NeoMedia  charged to expense  $240,000 of research  and  development  costs,  an
increase of $75,000 or 45%  compared to $165,000  for the six months  ended June
30,  2003.  The  increase is primarily  due to the  addition of  developers  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 $123,000, resulting from
the  payment of debt at a discount to the book value of the debt.  NeoMedia  did
not recognize gain or loss on extinguishment of debt during the six months ended
June 30, 2003.

                                       21
<PAGE>

      Amortization of debt discount.  During the six months ended June 30, 2004,
NeoMedia recognized an amortization of debt issuance cost of $2,166,000 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 six
months ended June 30, 2003. NeoMedia expects to recognize an additional $334,000
expense related to this discount during the third quarter of 2004, at which time
the discount will be fully amortized and no more expense will be recorded.

      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  $53,000,  or 31%, to  $116,000  for the six months  ended June 30, 2004 from
$169,000  for the six  months  ended  June  30,  2003,  due to  reduced  expense
associated with vendor settlements and debt in 2004 compared with 2003.

      Net  Loss.  The net  loss  for the six  months  ended  June  30,  2004 was
$4,053,000,  which represented a $2,198,000,  or 118% increase from a $1,855,000
loss for the six months ended June 30, 2003.  The  increase  resulted  primarily
from the non-cash  amortization  of debt  issuance  cost to funding  provided By
Cornell Capital Partners during the three months ended June 30, 2004, as well as
reduced  resales of software and  technology  equipment and service fees in 2004
compared with 2003.  These items were partially offset by a reduction to general
and administrative expense during 2004.

LIQUIDITY AND CAPITAL RESOURCES

      Net cash used in operating  activities  was  $2,261,000 for the six months
ended June 30, 2004,  compared  with  $939,000 for the six months ended June 30,
2003.  NeoMedia's net cash flow used in investing  activities for the six months
ended June 30, 2004 and 2003 was $155,000 and  $59,000,  respectively.  Net cash
provided by financing activities for the six months ended June 30, 2004 and 2003
was $2,698,000 and $1,081,000, respectively.

      During the six months  ended June 30, 2004 and 2003,  NeoMedia's  net loss
totaled $4,053,000 and $1,855,000,  respectively.  As of June 30, 2004, NeoMedia
had accumulated  losses from  operations of  $80,200,000,  had a working capital
deficit of $5,553,000, and $327,000 in cash balances.

      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 June 30, 2004,  NeoMedia had drawn $5 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.

                                       22
<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.

                                       23
<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 20, 2004,  NeoMedia  re-filed the suit against
AirClic in  Pennsylvania  and the suit  against  Scanbuy  in New York,  both for
patent  infringement.  AirClic  answered  and  counterclaimed  on May 13,  2004.
NeoMedia  filed is answer to AirClic's  counterclaim  on June 2, 2004.  NeoMedia
filed an amended  complaint  on July 1, 2004,  and AirClic  answered on July 20,
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 April 19,  2004,
AirClic  filed suit  against  NeoMedia in the Eastern  District of  Pennsylvania
claiming that some of the NeoMedia  patents are invalid.  NeoMedia  answered and
counterclaimed on May 18, 2004. AirClic answered NeoMedia's counterclaim on June
10, 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.

      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
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 August 20, 2001,  Ripfire,  Inc. filed suit against NeoMedia in the San
Francisco  County  Superior  Court seeking  payment of $138,000 under a software
license agreement entered into between NeoMedia and Ripfire in May 2001 relating

                                       24
<PAGE>

to implementation of the Qode Universal Commerce Solution. On September 6, 2002,
NeoMedia  settled  this suit for $133,000 of common  stock,  to be valued at the
time  of   registration  of  the  shares.   NeoMedia's   stock  was  trading  at
approximately $0.05 at that time. NeoMedia included for registration 2.7 million
shares in the name of Ripfire in its Form S-1 that was declared effective by the
SEC on February 14, 2003. NeoMedia's stock was trading at approximately $0.02 on
February 14, 2003.  The actual  number of shares to be issued to Ripfire per the
pricing outlined in the agreement was  approximately  9.8 million.  On March 31,
2003,  NeoMedia  issued  the 2.7  million  shares of common  stock that had been
registered  in the S-1 to Ripfire.  During  April 2004,  the Company and Ripfire
settled this matter for cash payments totaling $30,000. NeoMedia had a remaining
accrued  liability of $15,000 relating to this matter as of June 30, 2004, which
was paid in full during July 2004.

      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  $57,000  relating to this
matter as of June 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  $56,000  relating to this matter as of June 30,  2004,  which was
included in notes payable.

      On April 18, 2003, a former  participant in NeoMedia's  2001  self-insured
health plan sued  NeoMedia  to recover  approximately  $46,000 in unpaid  health
claims  from 2001.  On  December 1, 2003,  NeoMedia  settled  this suit for cash
payments  over a period of  approximately  one year.  NeoMedia  had a  remaining
balance of approximately $16,000 accrued as of June 30, 2004.

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.

                                       25
<PAGE>

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

      None.

ITEM 5. OTHER INFORMATION

      None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

      (A)   EXHIBITS:


EXHIBIT NO.   DESCRIPTION                             LOCATION
-----------   -------------------------------------   -----------------

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


      (B)   REPORTS ON FORM 8-K:

            On April 12, 2004,  the Company  filed an 8K/A to report the audited
            financial  statements  and  proforma  financial  statements  of  CSI
            International,  Inc., which became a wholly-owned  subsidiary of the
            Company effective February 6, 2004.

                                       26
<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:  August 2, 2004           By: /s/ Charles T. Jensen
                                  ---------------------------------------
                                  Charles T. Jensen, President, Acting
                                  Chief Executive Officer, Chief
                                  Operating Officer, and Director


  Date:  August 2, 2004           By: /s/ David A. Dodge
                                  ---------------------------------------
                                  David A. Dodge, Vice President,
                                  Chief Financial Officer, and Controller

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