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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

(Mark One)

               |X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   For the Fiscal Year Ended December 31, 2000

                                       OR

             |_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

             For the transition period ____________ to___________ .

                         Commission File Number 0-21743

                           NEOMEDIA TECHNOLOGIES, INC.
                 (Name of Small Business Issuer in Its Charter)

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

       2201 Second Street, Suite 600
             Fort Myers, Florida                              33901
   (Address of Principal Executive Offices)                 (Zip Code)

          Issuer's Telephone Number (Including Area Code) 941-337-3434

         Securities Registered Under Section 12(b) of the Exchange Act:

                                                        Name of each exchange
               Title of Each Class                       on which registered
           Common Stock, par value $.01                Nasdaq Small Cap Market

     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
|_|

     Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB |X|

     Issuer's consolidated revenue for its most recent fiscal year was
$27,565,000.

     The aggregate market value of the voting stock held by non-affiliates of
the issuer based on the price at which shares of common stock closed on March
30, 2001 ($5.00) was $64,952,150. Determination of stock ownership by
non-affiliates is made solely for purposes of responding to the requirements of
the form and the registrant is not bound by this determination for any other
purpose.

     As of March 30, 2001, there were outstanding 17,160,273 shares of the
issuer's Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant's definitive Proxy Statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, which will be
filed with the Commission subsequent to the date hereof (the "Proxy Statement"),
are incorporated by reference into Part III of the Form 10-KSB.

================================================================================
<PAGE>

                                     PART I

ITEM 1. BUSINESS

General

     NeoMedia Technologies, Inc. (the "Company") believes that the physical
world and the electronic information associated with it are highly complementary
aspects of a common media space. The Company's mission is to invent, develop and
commercialize technologies and products that effectively link the physical world
to the Internet, to provide clear functional value for the Company's end-users,
competitive advantage for our business partners and return-on-investment for our
investors.

     During the past five years, the Company has successfully developed an
extensive portfolio of intellectual property to establish and protect our rights
in this developing market. We have recently licensed our patent portfolio to a
competitor to generate non-dilutive funding for commercialization of our
technology and to help legitimize and develop this new market. During the same
period, NeoMedia has developed its own technology to support the development of
commercial applications by third parties. During the past year this early market
appears to be validating with the introduction of several new competitors.
NeoMedia expects to compete with these competitors on the strength of our
technology and through the leverage of our patents.

     In addition to and complementary with this technology, NeoMedia will
continue to develop products that will allow our customers to seamlessly bridge
the electronic and physical worlds. The first new product to be introduced in
2001, the Qode Universal Commerce Solution(TM), enables commerce and advertising
promotion to consumers.

Company Structure

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

          NeoMedia Application Services (NAS) (formerly known as NeoMedia ASP),
          and

          NeoMedia Consulting and Integration Services (NCIS) (formerly known as
          NeoMedia SI)

     NAS is the Company's core business and is based in the US, with development
and operating facilities in Fort Myers, Florida and contracted network support
provided in the greater Washington D.C. metropolitan area. NAS develops and
supports all of the Company's print to Internet technology as well as its suite
of application service provider services including its linking "switch" and its
application platforms. NAS also provides the contract systems integration
resources needed to design and build custom customer solutions predicated on the
Company's infrastructure technology.

     NCIS is the original business line upon which the Company was organized.
NCIS resells client-server equipment and related software. The unit also
provides general and specialized consulting services targeted at software driven
print applications, and especially at process automation of production print
facilities through its Integrated Document Factory (IDF) solution. NCIS also
identifies prospects for custom applications based on the NeoMedia's NAS
products and services. The operations are based in Lisle, Illinois and Monterey,
Mexico.
<PAGE>

Company History

     NeoMedia Technologies, Inc. ("NeoMedia"), was incorporated under the laws
of the State of Delaware on July 29, 1996, to acquire by tax-free merger
Dev-Tech Associates, Inc. ("Dev-Tech"), NeoMedia's predecessor, which was
organized in Illinois in December 1989. In March 1996, Dev-Tech's common stock
was split, with an aggregate of 2,551,120 shares of common stock being issued in
exchange for the 164 then issued and outstanding shares of common stock. On
August 5, 1996, NeoMedia acquired all of the shares of Dev-Tech in exchange for
the issuance of shares of NeoMedia's common stock to Dev-Tech's stockholders
("Dev-Tech Merger").

     NeoMedia also has the following wholly-owned subsidiaries: NeoMedia
Migration, Inc., incorporated in Deleware; Distribuidora Vallarta, S.A.,
incorporated in Guatemala; NeoMedia Technologies of Canada, Inc., incorporated
in Canada; NeoMedia Tech, Inc., incorporated in Delaware; NeoMedia EDV GMBH,
incorporated in Austria; NeoMedia Technologies Holding Company B.V.,
incorporated in the Netherlands; NeoMedia Technologies de Mexico S.A. de C.V.,
incorporated in Mexico; NeoMedia Migration de Mexico S.A. de C.V., incorporated
in Mexico; NeoMedia Technologies do Brazil Ltd., incorporated in Brazil, and
NeoMedia Technologies UK Limited, incorporated in the United Kingdom.

Recent Developments

     In March of 2001 the Company acquired the assets of Qode.com, Inc., a
Web-based commerce facilitation service, which brings manufacturers,
distributors and potential customers together and then motivates them to buy
from both e-commerce and bricks and mortar channels through the patent-pending
system of promotion and incentive. The Qode system represents over three years
of development effort to create a comprehensive database of commercial products
and services. Coupled with NeoMedia's capability to tie in print media
promotions in the form of catalogs and coupons as well as newspaper and magazine
advertising, the Qode Universal Commerce Solution has the potential to provide
early revenue from a compelling transaction application that will complement the
Company's existing switch infrastructure service.

     In October of 2000 the Company entered into an agreement with a competitor,
Digital:Convergence Corporation (DC), granting it a worldwide, non-exclusive
license of the Company's extensive patent portfolio for directly linking
documents, objects, transaction and voice commands to the internet. The
agreement provides for annual license fees over a period of ten (10) years in
excess of $100 million through a combination of cash and equity.

     In November of 2000 the Company and Universidad Regiomontana of Monterrey,
Mexico announced the integration of PaperClick EnterpriseTM print-to-web
enabling technology into the University's "Visual University 2000" Program.

     In December of 2000 the Company and Instituto Tecnologico y de Estudios
Superiores de Monterrey of Monterrey, Mexico announced the integration of
PaperClick Enterprise into everyday student life.

     In January of 2001 the Company and NYCO Products Company of Countryside, IL
announced the adoption by NYCO of the Company's PaperClick Enterprise
print-to-internet enabling technology for NYCO's product information. This
application is targeted at the $839 billion chemical manufacturing marketplace.
According to the 1997 Economic Census Report, there are 27,026 chemical
manufacturers in the United States subject to OSHA regulations, and therefore
potential users of this PaperClick Application.

     In January of 2001 the Company entered into an agreement with A.T. Cross
Company, a major international manufacturer of fine writing instruments and pen
computing products, granting a worldwide, non-exclusive license of the Company's
patents surrounding the manufacture, use, and sale of devices used in
print-to-internet technologies.
<PAGE>

     In February of 2001 the Company won Best of Show at the Internet World
Wireless 2001 in the "Commerce" category. According to the IWW announcement,
this award exemplifies the Company's outstanding achievements as a business
leader in the internet marketplace, and represents broad industry recognition
and appreciation of the Company's achievements.

     In March of 2001 the Company was granted its fourth patent (U.S. Patent No.
6199048) in nineteen months by the United States Patent and Trademark Office.
The new patent extends the Company's IP Portfolio with additional claims,
including voice link to the web.

Industry Overview

     NeoMedia Application Services

     The goal of the NeoMedia Application Services business segment is to drive
transactions to the NeoMedia switch (a background computer process to link print
to the Internet). The Company's switching platform is a state-of-the-art, open
and extensible cross-media tool serving customers in a variety of industrial,
commercial and educational applications. The business segment is also
responsible for licensing the Company's intellectual property to others as a
means of promoting this new market as well as providing a revenue and cash
resource to the company. The Company has been developing its print-to-Internet
technology and offerings since 1996 and thus considers itself a pioneer in this
industry. In the past year, the Company has seen similar technologies and
concepts emerge in the marketplace, and thus interpets these events as a
positive validation of the print-to-Internet concept.

     The most high-profile marketer of physical-to-Internet switching
technologies to date has been Digital:Convergence Corporation ("DC"). Their
product launch consisted of a business-to-consumer (B2C) effort that included
the mass distribution of a tethered scanner (Cue:Cat) and their CRQ client
software via RadioShack outlets as a complement to a "Cue-enabled" catalog. DC
bundled the scanner and software with fall 2000 issues of Wired and Forbes
magazines. Additionally, Parade magazine (a Sunday newspaper supplement) and the
Dallas Morning News implemented Cue codes and encouraged readers to go to
RadioShack for their free software and scanner. DC's technology to date has
focused on print-to-Internet convergence; however, their solution includes
additional technologies such as TV-to-web convergence.

     In January 2001, AirClic (Formerly AirClic Connect) announced the
acquisition of ConnectThings and the resulting formation of AirClic. AirClic's
service offering is a wireless network that includes a web code registry, switch
directory and transfer function. Aimed at wireless devices such as cell phones,
PDAs, pagers and cable TV set-top boxes, the system acts as switching technology
not unlike NeoMedia's. Investment partners include Symbol Technologies,
Ericsson, Motorola and Goldman Sachs Group. AirClic has received, as part of a
broader strategic relationship, a license to proprietary intellectual property
from Symbol Technologies relating to scanning devices, technology and
applications.

     Combined press from Digital:Convergence and AirClic is expected to continue
to raise prospect and consumer awareness of physical-to-web convergence. The
Company believes the key to adoption of print-to-Internet technologies in the
marketplace will be in the development of real-world applications that provide
the end user a valuable experience. The Company's service offering, however,
differs from those of DC and AirClic in that, unlike their products and
services, the Company (i) does not require the use of a proprietary or specified
device and (ii) the Company offers its service on a "private label" basis. Thus,
the Company is positioned to provide highly customized solutions that preserve
the customer's brand and also provide tailored solutions to fit the customer
needs.

     The Company projects that as awareness continues to rise, and these and
other companies bring viable solutions to market, adoption of this emerging
technology will take hold.
<PAGE>

     NeoMedia Consulting and Integration Services

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

     Proprietary products, such as NeoMedia encoders, systems integration
services and Integrated Document Factory solutions offer a competitive value-add
to our NCIS business. The NCIS division has unique offerings, which, to the
extent that they meet market needs, offer the potential for growth in this
industry.

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


Strategy

     NeoMedia has spent the past five years inventing and patenting the now
confirmed "space" of linking the physical and internet environments, and
developing and implementing five generations of continuously refined switch
technology that seamlessly bridges these environments.

     The Company is now entering a new phase of operations. With the market
being validated with the emergence of other competitors, the Company is turning
its attention to the next stage of market development in this space and the
creation and operation of service applications providing complete product
solutions to traditional businesses with offerings related to such fields as
commerce, publishing, extended media publishing, e-learning and others.

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

Products/Services

     NeoMedia Application Services

            Metered Switching Services (MSS)

                  The Company's ASP switching platform is a state-of-the-art
                  open publishing solution serving customers in a variety of
                  industrial, commercial and educational applications. The MSS
                  service will provide switching service on an annual contract
                  basis for an initial configuration fee and a usage based
                  transaction fee (charge per click).

            PaperClick(TM) Service

                  PaperClick Service is a web-based virtual portal
                  (www.paperclick.com) for publishers and advertisers. It allows
                  them to create their own links to web pages and print a
                  PaperClick code that consists of a number or word as well as a
                  barcode. Users type the short PaperClick code or scan a
                  PaperClick barcode to connect directly to Web-related
                  information. Using PaperClick codes, publishers are able to
                  extend printed story scope with links to interactive content,
                  and at the same time, deliver display ads, classified ads,
                  directories, or direct marketing material. Advertisers can
                  provide to potential customers direct access to a web page
                  that can provide more information on the product, provide
                  instant e-commerce to buy the product or even show videos
                  about the product. Demographic information can be compiled and
                  marketed to the publishers and advertisers.
<PAGE>

            PaperClick Enterprise(TM)

                  PaperClick Enterprise is the enhanced version of PaperClick
                  featuring the ability to create an unlimited number of
                  PaperClick codes. Profiled Routing allows publishers to tailor
                  content according to reader profile information, control bar
                  display options, and measure commercial effectiveness through
                  Demographic Reporting.

            PaperClick ToGo(TM) for Wireless Devices

                  PaperClick ToGo (www.paperclick.com) provides direct access to
                  the World Wide Web via cell phones and personal data
                  assistants (PDAs) employing wireless markup protocol (WAP).
                  PaperClick ToGo converts any URL address, regardless of
                  length, into a short telephone number-like PaperClick code.
                  Use of the shorter PaperClick numeric codes provides simple
                  and direct access to the Internet from small hand held devices
                  with limited keypads. PaperClick ToGo compliments PaperClick
                  for Publishers and Advertisers, giving consumers a convenient
                  way to access Internet information using cellular service.

            PaperClick ToGo(TM) for Palm Operating System (OS)

                  PaperClick ToGo for Palm OS allows convenient capture and
                  storage of PaperClick codes on a Palm Pilot (or any Palm OS
                  device) at any time or location. After returning to a PC, the
                  codes automatically transfer at synchronization of the Palm
                  Pilot. This freeware application is a standard Palm OS
                  application that works with Palm's Graffiti language and the
                  Palm's pop-up keyboards, in addition to the built-in numeric
                  keypad included on the main screen.

            PaperData(TM)

                  PaperData(TM) is a technology that addresses the problem of
                  converting a digital file into a print image while maintaining
                  all of the attributes of the file. During the process of
                  converting a digital file to a print image, valuable
                  information regarding attributes of the data itself are lost,
                  such as font specifications, file identifiers, spreadsheet
                  formulas and database references. In order to access an
                  original digital document, the reader must either copy the
                  original file to digital media (a computer disk) and then
                  distribute it, or transfer the file over a data network
                  (email). The PaperData technology allows users to directly
                  embed a digital data file via a barcode on a printed document.
                  This document can then be transmitted as a piece of paper
                  would. The new user can scan the barcode and the digital
                  version of the document is launched. This technology makes it
                  possible for barcodes on paper to act as computer disks. The
                  pre-production design of PaperData(TM) is complete, but the
                  production design and future commercialization has not yet
                  occurred.

            NeoSure(TM)

                  NeoSure(TM) is a technology for protecting negotiable printed
                  commercial documents, such as checks, money orders, coupons,
                  food stamps and gift certificates, from counterfeit and
                  forgery. This patent-pending technology incorporates
                  NeoMedia's NeoLink(TM) and PaperData(TM) technologies with
                  U.S. Checks patented UV-Smart(TM) paper stock identification
                  techniques and an on-line registration database. When used
                  concurrently, this system verifies that a document is
                  authentic, has not been modified and that the transaction has
                  not been duplicated. The system can also be used to automate
                  the processing of printed transactional documents, such as
                  checks and gift certificates, as well as link documents to
                  specific individuals for specific transactions in order to
                  prevent unauthorized use. NeoMedia has filed several extensive
                  patent applications on the use of NeoSure(TM) and other
                  related technologies for linking, securing and promoting
                  web-commerce from print media, such as coupons, catalogs and
                  direct mail. The preproduction design of NeoSure(TM) is
                  complete, but the production design and future
                  commercialization has not yet occurred.
<PAGE>

     NeoMedia Consulting and Integration Services

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

            Product Sales and Equipment Re-sales

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

            Integrated Document Factory (IDF)

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

            System Integration Services

                  Systems Integration Services is responsible for customer
                  identification, pre and post sales relationship support,
                  proposals, and account management surrounding custom
                  application development for solutions involving the metered
                  switch services (MSS). These customized solutions are built
                  and integrated via the NAS business unit of the Company.

Strategic Relationships

     NeoMedia Application Services

     In this segment, the Company has a number of strategic relationships,
including Solar, A.T. Cross, NYCO and several large organizations in Latin
America including several prestigious universities. During 2000,
Digital:Convergence Corporation, Inc. entered into a patent license agreement
with NeoMedia. This customer accounted for 28.2% of the Company's total revenue
and 96.1% of NeoMedia NAS revenue in 2000. The Company is aggressively pursuing
numerous opportunities for its products and services.

     In January 2001, the Company entered into patent license with A.T. Cross
Company (Cross), a major international manufacturer of fine writing instruments
and pen computing products. Cross obtained the rights under NeoMedia's print-to
Internet patents for personal portable scanning devices used to link bar codes
on documents and other physical consumer goods to corresponding Internet
content. Cross will pay a royalty per device to NeoMedia for license rights
granted under this agreement
<PAGE>

     NeoMedia Consulting and Integration Services

     In this segment the Company provides services and products to a spectrum of
customers, ranging from closely held companies to Fortune 500 companies. For the
years ended December 31, 2000 and 1999, one customer, Ameritech Services, Inc.
("Ameritech"), accounted for 29.9% and 23.9%, respectively, of NeoMedia NCIS
revenue. The Company expects sales to Ameritech as a percentage of total sales
to decline in the future. Furthermore, the Company does not have a written
agreement with Ameritech and, therefore, there are no contractual provisions to
prevent Ameritech from terminating its relationship with the Company at any
time. Accordingly, the loss of this customer, or a significant reduction by it
in buying the products and services offered by NeoMedia, absent diversification,
would materially and adversely affect of NeoMedia NCIS's revenues and results of
operations. In addition, a single supplier provides the equipment and software,
which is re-marketed to this customer. Accordingly, the loss of this supplier
would materially adversely affect NeoMedia NCIS. For these reasons, the Company
is seeking, and continues to seek, to diversify its sources of revenue and
vendors from whom it purchases.

Sales and Marketing

     NeoMedia Application Services

     The Company's focus is on identifying and providing strategies for
applications that drive high-volume, high-margin traffic through either or a
combination of the Metered Switch Services, Paperclick TM products and the Qode
Universal Commerce Solution. Specific efforts will be directed towards
strategizing solutions that will continually increase the number of users, and
ensure value for every participant in the value chain. In addition to direct
sales, NeoMedia NAS has a network of resellers (both agents and VARs) that are
trained to sell the NAS products. The division is currently working on
partnerships and other agent relationships to collectively supplement the
Company's internal sales and marketing staff.

     NeoMedia Consulting and Integration Services

     NCIS markets its products and services, as well as those for which it acts
as a re-marketer, primarily through its direct sales force, which was composed
of 8 personnel as of December 31, 2001. In addition, the business unit also
relies upon its strategic alliances with industry leaders to help market its
products and services, provide lead referrals and establish informal
co-marketing arrangements. Representatives of the Company attend seminars and
trade shows, both as speakers and participants, to help market its products and
services. In addition, NCIS has two agents in the United States that sell its
products and services.

Research and Development

     NeoMedia Application Services

     NeoMedia NAS believes that its success in the internet environment depends
upon its ability to quickly develop new products and services, as well as make
enhancements to its existing products. NeoMedia NAS employed 24 and 19 persons
in the area of product development as of December 31, 2000 and December 31,
1999, respectively. During the years ended December 31, 2000 and 1999, NeoMedia
NAS incurred total software development costs of $2,888,000 and $1,722,000,
respectively, of which $1,787,639 and $807,000, respectively, were capitalized
as software development costs and $1,101,000 and $915,000, respectively, were
expensed as research and development costs. In March 2001, 16 additional
employees were added to the product development area as part of the Qode asset
acquisition.
<PAGE>

      NeoMedia Consulting and Integration Services

      All significant research and development relating to NeoMedia NCIS
products was discontinued at the end of 1999 when the Company discontinued its
Y2K business. All employees that were in this area were reassigned or released
during the fourth quarter of 1999. If further research or development of NCIS
products is needed, it will be performed by the NAS division or outside
contractors.


Intellectual Property Rights

     The Company received its first patent from the U.S. Patent and Trademark
Office in August 1999. The patent, number 5,933,829, was allowed for the process
invented by the Company for "automatic access of electronic information through
secure machine-readable codes on printed documents." The Company received its
second patent, number 5,978,773, in November 1999. The patent was allowed for
the broad and innovative process that allows familiar print media such as
magazines, catalogs, advertisements, even product labels themselves, to become
the user interface to the Web. The Company's third U.S. patent, 6,108,656, which
issued in August 2000, is a continuation of 5,933,829 and contains additional
claims that broaden scope and coverage. The Company's fourth patent, 6,199,048,
issued on March 6, 2001 and is a continuation of 5,978,773. The 6,199,048 patent
substantially extends the Company's patent coverage to address voice portals,
multi-media and web portal applications.

     In addition to these issued patents the Company continues to aggressively
develop, acquire and obtain a substantial portfolio of domestic and
international patent applications that include broad claims that apply to its
core business and markets. The Company's recent acquisition of the assets of
Qode.com, Inc. in March 2001 included numerous patent applications in related
areas which the Company is now pursuing through both US and foreign filings.

     The Company's proprietary technology based on these patents enables
everyone, regardless of training or experience, to easily access the World Wide
Web on the Internet. These patents and their related proprietary technologies,
along with other pending applications, enhance the use of the Internet for
E-commerce by making it much more user-friendly, as well as secure. The Company
also has numerous other domestic and international patents and continuations
pending in these and other related areas.

     The Company relies upon its patents, copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions, all of which
afford only limited protection, to protect its proprietary technology and
products. Although the Company takes steps to protect its trade secrets, such as
requiring employees with access to the Company's proprietary information to
execute confidentiality and non-disclosure agreements, it may be possible for
unauthorized parties to copy or reverse engineer all or part of any one of the
Company's proprietary technology and products. Furthermore, just as there can be
no assurance that a misappropriation of the Company's proprietary technology and
products will not occur, there can be no assurance that copyright, trademark and
trade secret laws will be available in all circumstances to protect the
Company's rights. In addition, although the laws of the United States may
protect the Company's proprietary rights in its technology and products, the
laws of foreign countries where the Company's products may be used may not
protect its proprietary rights at all or to the same extent as the laws of the
United States.

     The Company does not believe that its proprietary technology and software
products infringe upon the rights of any third parties; however, there can be no
assurance that a third party will not in the future claim infringement by the
Company. Similarly, infringement claims could be asserted against products and
technologies which the Company licenses from third parties.

     The Company may provide some of its software products to end users using
non-exclusive, non-transferable licenses which provide that the licensee may use
the software solely for internal operations on designated computers at specific
sites or by a specified number of users. The Company generally does not make
source codes available for its software products.
<PAGE>

     Due to the difficulty of doing so, the Company has never policed, nor has
it ever attempted to police, the unauthorized use of its software products. Even
though piracy of the Company's proprietary rights could materially adversely
affect it, the Company believes that the threat of piracy, or the unavailability
of protection under applicable laws, is less significant to its competitive and
financial well being than its ability to respond to the rapid change in
technology which characterizes the computer industry.

Competition

     NeoMedia Application Services

     The markets in which the Company competes are relatively new. Recent
entrants into the print-to-Internet market include Digital:Convergence
Corporation, Digimarc, and AirClic. The Company has a significant portfolio of
both invented and acquired patents to support its proprietary technologies and
provide a barrier to entry for potential competitors. Additional competitive
comparisons are described in the "Industry Overview" section of this document.

     NeoMedia Consulting and Integration Services.

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

Product Liability Insurance

     The Company has never had any product liability claim asserted against it.
However, the Company could be subject to product liability claims in connection
with the use of the products and services that it sells. There can be no
assurance that the Company would have sufficient resources to satisfy any
liability resulting from these claims or would be able to have its customers
indemnify or insure the Company against such claims. Although the Company
maintains insurance against such claims, there can be no assurance that such
coverage will be adequate in terms and scope to protect the Company against
material adverse effects in the event of a successful claim.

Government Regulation

     Existing or future legislation could limit the growth of use of the
Internet, which would curtail the Company's revenue growth. Statutes and
regulations directly applicable to Internet communications, commerce and
advertising are becoming more prevalent. Congress recently passed laws regarding
children's online privacy, copyrights and taxation. The law remains largely
unsettled, even in areas where there has been legislative action. It may take
years to determine whether and how existing laws governing intellectual
property, privacy, libel and taxation apply to the Internet, e-commerce and
online advertising. In addition, the growth and development of e-commerce may
prompt calls for more stringent consumer protection laws, both in the United
States and abroad.

     The Company's website allows for the storage of demographic data from our
users. The European Union recently adopted a directive addressing data privacy
that may limit the collection and use of certain information regarding Internet
users. This directive may limit our ability to collect and use information in
certain European countries. In addition, the Federal Trade Commission and
several state governments have investigated the use by certain Internet
companies of personal information. The Company could incur significant
additional expenses if new regulations regarding the use of personal information
are introduced or if our privacy practices are investigated.
<PAGE>

Environmental Protection Compliance

     The Company has no knowledge of any federal, state or local environmental
compliance regulations which affect its business activities. The Company has not
expended any capital to comply with any environmental protection statutes and
does not anticipate that such expenditures will be necessary in the future.


Employees

     As of December 31, 2000, the Company employed 81 persons. Of the 81
employees, 51 are located at the Company's headquarters in Fort Myers, FL, 19 at
other domestic locations and 11 are located outside the United States. Of the 81
employees, 35 are dedicated to NeoMedia NAS, 29 are dedicated to NeoMedia NCIS,
and 24 provide shared services used by both business units. None of the
Company's employees are represented by a labor union or bound by a collective
bargaining agreement. The Company believes that its employee relations are good.

     In March 2001, the Company added an additional 45 employees with the
purchase of the assets of Qode.com, Inc.

     The Company's success depends to a significant extent on the performance of
its senior management and certain key employees. Competition for highly skilled
employees, including sales, technical and management personnel, is intense in
the computer industry. The Company's failure to attract additional qualified
employees or to retain the services of key personnel could materially adversely
affect the Company's business.

Safe Harbor Provision of the Private Securities Litigation Act of 1995

     The Company operates in a dynamic and rapidly changing environment that
involves numerous risks and uncertainties. The market for software products is
generally characterized by rapidly changing technology, frequent new product
introductions and changes in customer requirements which can render existing
products obsolete or unmarketable. The statements contained in this document
that are not historical facts may be forward-looking statements (as such term is
defined in the rules promulgated pursuant to the Securities Exchange Act of
1934) that are subject to a variety of risks and uncertainties more fully
described in the Company's filings with the Securities and Exchange Commission.
The forward-looking statements are based on the beliefs of the management of the
Company, as well as assumptions made by, and information currently available to,
the Company's management. Accordingly, these statements are subject to
significant risks, uncertainties and contingencies which could cause the
Company's actual growth, results, performance and business prospects and
opportunities in 2001 and beyond to differ materially from those expressed in,
or implied by, any such forward-looking statements. Wherever possible, words
such as "anticipate," "plan," "expect," "believe," "estimate," and similar
expressions have been used to identify these forward-looking statements, but are
not the exclusive means of identifying such statements. These risks,
uncertainties and contingencies include, but are not limited to, the Company's
limited operating history on which expectations regarding its future performance
can be based, competition from, among others, high technology companies that
have greater financial, technical and marketing resources and distribution
capabilities than the Company, the availability of sufficient capital, the
effectiveness of the Company's efforts to control operating expenses, the
Company's ability to sell its products and general economic and business
conditions affecting the Company and its customers in the United States and
other countries in which the Company sells and anticipates to sell its products
and services. The Company is not obligated to update or revise these
forward-looking statements to reflect new events or circumstances.
<PAGE>

ITEM 2.  Description of Properties

     The Company's principal executive, development and administrative office is
located at 2201 Second Street, Suite 600, Fort Myers, Florida 33901. The Company
occupies approximately 15,000 square feet under terms of a written lease from an
unaffiliated party which expired on January 31, 2001. The Company signed a
renewal for three years at this facility during the first quarter of 2001. The
Company has a sales facility at 2150 Western Court, Suite 230, Lisle, Illinois
60532, where the Company occupies approximately 6,000 square feet under the
terms of a written lease from an unaffiliated party expiring on October 31,
2003.

     The Company also leases office space in two international locations. These
offices are primarily used for its sales and consulting efforts.

     The Company believes that its existing office space is adequate to meet its
current and short-term requirements.

     In March 2001, the Company added an additional 8,388 square feet office
lease at 4850 N. State Rd. 7, Suite 104, Ft. Lauderdale, Florida with the
purchase of the assets of Qode.com, Inc. The lease expires in March, 2005.

ITEM 3.  Legal Proceedings

     The Company is not presently a party to any litigation. From time to time,
however, the Company is involved in various legal actions arising in the normal
course of business.

ITEM 4.  Submission of Matters to a Vote of Security Holders

     No matters were submitted to a vote of the Company security holders during
the fourth quarter of the year ended December 31, 2000.
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS

      (a) Market Information. NeoMedia's common stock and warrants began trading
on The Nasdaq Small Cap Stock MarketSM under the symbol "NEOM" on November 25,
1996, the date of its initial public offering. Prior to such time there was no
established public trading market for NeoMedia's common stock. The Company
common stock also trades on the Frankfurt Stock Exchange.

      Set forth below is the range of high and low sales prices for the common
stock and warrants for the periods indicated as reported by NASDAQ. The
quotations do not include retail markups, markdowns or commissions and may not
represent actual transactions.

    Type of Security      Period Ended                 High               Low
    ----------------      ------------                 ----               ---

    Common Stock          March 31, 1999            $  5.25             $2.75
                          June 30, 1999             $  7.25             $4.03
                          September 30, 1999        $  9.88             $5.50
                          December 31, 1999         $  7.00             $4.25
                          March 31, 2000            $ 14.50             $5.69
                          June 30, 2000             $ 11.13             $5.00
                          September 30, 2000        $  6.75             $4.13
                          December 31, 2000         $  6.50             $1.94

     NeoMedia's stock price has been and will continue to be subject to
significant volatility. Past financial performance should not be considered a
reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods. If revenues
or earnings in any quarter fail to meet expectations of the investment
community, there could be an immediate and significant impact on NeoMedia's
stock price. In addition, NeoMedia's stock price may be affected by broader
market trends that may be unrelated to NeoMedia's performance.

     (b) Holders. As of March 30, 2001, there were 158 registered shareholders
and approximately 3,000 beneficial shareholders of record of NeoMedia's common
stock. NeoMedia believes that it has a greater number of shareholders because a
substantial number of NeoMedia's common stock is held of record in street name
by broker-dealers for their customers.

     (c) Dividends. As of March 30, 2001, NeoMedia has not paid any dividends on
its common stock and does not expect to pay a cash dividend in the foreseeable
future, but intends to devote all funds to the operation of its businesses. As
of March 30, 2001, NeoMedia has a letter of credit with Bank One, Chicago,
Illinois, the terms of which require Bank One's written permission prior to the
declaration of cash dividends.

     (d) Recent Issuances of Securities. In November 1998, NeoMedia borrowed
$500,000, in two separate notes from unrelated third parties. These notes were
due in November, 1999 with an interest rate of 20%. One $250,000 note was
extended until January 6, 2000, and the other was extended until February 25,
2000. These notes were secured by 375,000 shares of NeoMedia's common stock by
placing them in an escrow account. These shares were considered issued but not
outstanding for 1999. As part of obtaining the financing, 37,500 stock warrants,
exercisable at $2.00 per share, were issued to the lender. These warrants were
exercised in February 2000. During 2000, both notes have been repaid and the
375,000 shares securing the notes have been released from escrow and retired by
the Company.
<PAGE>

     In January, 1999, the Company issued 82,372 shares of the Company's Common
Stock to a related party at a price of $3.03 per share. In connection with the
sale, the Company also issued 8,237 warrants with an exercise price of $3.04.

     In January, 1999, the Company issued 145,000 shares of the Company's Common
Stock at a price of $3.50 per share to unrelated parties. In connection with the
sale, the Company also issued 7,286 warrants with an exercise price of $3.50 and
170,000 warrants with an exercise price of $2.13.

     In January, 1999, the Company issued 42,857 shares of the Company's Common
Stock at a price of $3.50 per share to a related party. In connection with the
sale, the Company also issued 4,286 warrants with an exercise price of $3.50.

     In February, 1999, the Company issued 250,000 shares of the Company's
Common Stock at a price of $4.00 per share to an unrelated party. In connection
with the sale, the Company also issued 100,000 warrants with an exercise price
of $5.00.

     In April, 1999, the Company issued 1,000,000 shares of the Company's Common
Stock at a price of $3.45 per share to an unrelated party. In connection with
the sale, the Company also issued 175,000 warrants with an exercise price of
$3.45.

     In May, 1999, the Company issued 65,000 shares of the Company's Common
Stock at a price of $4.75 per share to an unrelated party. In connection with
the sale, the Company also issued 6,500 warrants with an exercise price of
$5.00.

     In June, 1999, the Company issued 250,000 shares of the Company's Common
Stock at a price of $4.00 per share to an unrelated party. In connection with
the sale, the Company also issued 120,000 warrants with an exercise price of
$7.00.

     In September, 1999, the Company issued 210,000 shares of the Company's
Common Stock at a price of $7.00 per share to an unrelated party.

     In September, 1999, the Company issued 275,231 shares of the Company's
Common Stock at a price of $5.75 per share to an unrelated party. In connection
with the sale, the Company also issued 27,523 warrants with an exercise price of
$6.75.

     In October, 1999, the Company issued 15,000 shares of the Company's Common
Stock at a price of $4.38 per share to an unrelated party. In connection with
the sale, the Company also issued 1,500 warrants with an exercise price of
$4.38.

     In November, 1999, the Company issued 143,334 shares of the Company's
Common Stock at a price of $3.75 per share to an unrelated party. In connection
with the sale, the Company also issued 5,067 warrants with an exercise price of
$5.50, 1,267 warrants with an exercise price of $4.75, 5,333 warrants with an
exercise price of $4.67, and 2,667 warrants with an exercise price of $5.84.

     In January, 2000, the Company issued 301,368 shares of the Company's Common
Stock at a price of $3.75 per share to an unrelated party. In connection with
the sale, the Company also issued 12,571 warrants with an exercise price of
$7.19, 5,400 warrants with an exercise price of $6.44, and 12,166 warrants with
an exercise price of $7.37.

     In February, 2000, the Company issued 39,535 shares of the Company's common
stock at a price of $6.88 per share to an unrelated party. In connection with
the sale, the Company also issued 2,500 warrants with an exercise price of
$12.74 and 1,454 warrants with an exercise price of $9.56.
<PAGE>

     In February, 2000, the Company issued 50,000 shares of the Company's Common
Stock at a price of $6.00 per share to an unrelated party. In connection with
the sale, the Company also issued 2,982 warrants with an exercise price of
$10.06.

     In March, 2000, the Company issued 1,000,000 shares of the Company's Common
Stock at a price of $7.50 per share to an unrelated party. In connection with
the sale, the Company also issued 225,000 warrants with an exercise price of
$7.50 and 125,000 warrants with an exercise price of $15.00.

     In March, 2001, the Company issued 21,500 shares of the Company's Common
Stock at a price of $3.40 per share to an unrelated party.

     In March, 2001, the Company issued 156,250 shares of the Company's Common
Stock at a price of $3.20 per share to an unrelated party.

     In March, 2001, the Company issued 61,380 shares of the Company's Common
Stock at a price of $3.41 per share to an unrelated party.

     In March, 2001, the Company issued 51,000 shares of the Company's Common
Stock at a price of $3.40 per share to an unrelated party.

     In March, 2001, the Company issued 250,000 shares of the Company's Common
Stock at a price of $3.40 per share to an unrelated party.

     In March, 2001, holders of the Company's warrants exercised 170,000
warrants at a price of $2.13 per share.

     The above issuance's of securities were made by the Company in reliance on
an exemption from registration contained in Section 4(2) of the Securities Act
of 1933, as amended, as offerings not involving a public offering.


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS

Overview

     During 2000, the company's continued focus was aimed toward its NeoMedia
Application Service (NAS) business. NAS consists of the patented PaperClickTM
technology that enables users to link directly from the physical to the digital
world. The Company entered into a significant patent license agreement with
Digital:Convergence Corporation (DC). The Company has also signed several
PaperClickTM license agreements with domestic and international companies that
demonstrate the versatility of the technology. 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 the Company's end-users, competitive advantage for their business partners
and return-on-investment for their investors.
<PAGE>

Results of Operations for the Year Ended December 31, 2000 as Compared to the
Year Ended December 31, 1999

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

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

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

     Sales and marketing. A portion of the compensation to the sales and
marketing staff constitutes salary and is fixed in nature and the remainder of
this compensation, which is paid as a commission, is directly related to sales
volume. Sales and marketing expenses decreased $0.3 million, or 4.4%, to $6.5
million for the year ended December 31, 2000 from $6.8 million for the year
ended December 31, 1999, due to a decrease in NeoMedia's NAS direct sales force,
offset by personnel additions in marketing.

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

     Research and development. During the year ended December 31, 2000, NeoMedia
charged to expense $1,101,000 of research and development expenses, an increase
of $114,000 or 11.6% compared to $986,000 charged to expense for the year ended
December 31, 1999. This increase was due to increased resources directed toward
the development of the ASP business. To the extent the Company can obtain
additional capital, it will continue to make significant investments in research
and development.
<PAGE>

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

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


Liquidity and Capital Resources


      Net cash used in operating activities for the year ended December 31, 2000
and 1999, was $6.8 million and $7.0 million, respectively. During 2000, trade
accounts receivable inclusive of costs in excess billings increased $1.0
million, while accounts payable, accrued expenses and deferred revenue increased
$1.1 million. During 1999, trade accounts receivable inclusive of costs in
excess of billings decreased $2.5 million, while accounts payable, accrued
expenses and deferred revenue decreased $1.7 million. NeoMedia's net cash flow
used in investing activities for the years ended December 31, 2000 and 1999, was
$2.6 million and $2.1 million, respectively. This increase resulted from higher
capitalized software development costs coupled with an increase in acquisition
costs related to long-term and intangible assets.

     During the years ended December 31, 2000 and 1999 the Company's net loss
totaled approximately $5,409,000 and $10,472,000, respectively. As of December
31, 2000 the Company had accumulated losses from operations of approximately
$37,875,000, had working capital of approximately $8,426,000, and approximately
$4,453,000 in unrestricted cash balances.

     Management believes it will need to raise additional capital as well as
reduce expenses to sustain the Company's operations in 2001. The failure of
management to accomplish these initiatives will adversely effect the Company's
business, financial conditions, and results of operations and its ability to
continue as a going concern.
<PAGE>

     Subsequent to December 31, 2000, the Company has undertaken the following
initiatives:

 .    Through March 30, 2001, the Company has raised $1,535,500 from private
     placements.

 .    Through March 30, 2001, the Company has raised $361,250 from the exercise
     of stock warrants.

 .    Through March 30, 2001, the Company has raised $138,585 from the exercise
     of employee stock options.

 .    Unrestricted cash on hand as of March 30, 2001, was approximately $2.4
     million.

     NeoMedia anticipates that its existing cash balances and funds available
from borrowings under its existing financing agreement will have to be
supplemented with additional funds, through loans and / or capital
contributions, to finance NeoMedia's operations in 2001. During the first
quarter of 2001, the Company has successfully obtained approximately $1.5
million of equity financing and approximately $500,000 from the exercise of
stock options and warrants. The Company intends to obtain additional equity
financing. Management believes that this additional financing will be sufficient
to sustain operations for the remainder of 2001, however, there can be no
assurances that these additional financings will be obtained. 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.

Recently Issued Accounting Pronouncements

     In June of 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The FASB later issued in June 1999 SFAS No.
137, which deferred the effective date for SFAS No. 133 to all fiscal years
beginning after June 15, 2000, with earlier application encouraged. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity to recognize all derivatives as
either assets of liabilities in the statement of financial position and measure
those instruments at fair value. The adoption of SFAS No. 133 did not have a
material impact on the Company's financial position or results of operations.

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


ITEM 7.  FINANCIAL STATEMENTS

     The Financial Statements to this Form 10-KSB are attached commencing on
page F-2.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURES

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

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To NeoMedia Technologies, Inc.:

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

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

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

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


                                                         /s/ ARTHUR ANDERSEN LLP

Tampa, Florida
March 30, 2001
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                                -----------------------------
                                                                                   2000              1999
                                                                                -----------      ------------
<S>                                                                             <C>              <C>
ASSETS
Current assets:
   Cash and cash equivalents..............................................      $     4,453      $      2,460
   Restricted cash........................................................              750               944
   Short-term investments.................................................               --               150
   Trade accounts receivable, net of allowance for doubtful
      accounts of $484 in 2000 and $888 in 1999...........................            4,370             3,419
   Digital Convergence receivable.........................................            5,144                --
   Costs and estimated earnings in excess of billings on
      uncompleted contracts...............................................               89                --
   Inventories............................................................              116                57
   Prepaid expenses and other current assets..............................              946               264
                                                                                -----------      ------------

         Total current assets.............................................           15,868             7,294
                                                                                -----------      ------------

Property and equipment, net...............................................              365               545
Digital Convergence receivable, net of current portion....................           10,288                --
Prepaid - Digital Convergence.............................................            4,116                --
Intangible assets, net....................................................            9,043             5,296
Other long-term assets....................................................              914               522
                                                                                -----------      ------------

         Total assets.....................................................      $    40,594      $     13,657
                                                                                ===========      ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable.......................................................      $     2,301      $      4,892
   Accrued expenses.......................................................            2,691               720
   Stock liability........................................................               --             1,863
   Current portion of long-term debt......................................              137               625
   Sales taxes payable....................................................              261               454
   Billings in excess of costs and estimated earnings on
      uncompleted contracts...............................................               49               131
   Deferred revenues - Digital Convergence................................            1,543                --
   Deferred revenues......................................................              449               265
   Other..................................................................               11                11
                                                                                -----------      ------------

         Total current liabilities........................................            7,442             8,961
                                                                                -----------      ------------

Long-term debt, net of current portion....................................              539               676
Long-term deferred revenues - Digital Convergence.........................           13,503                --
                                                                                -----------      ------------

         Total liabilities................................................           21,484             9,637
                                                                                -----------      ------------

Shareholders' equity:
   Preferred stock, $.01 par value, 10,000,000 shares
      authorized, none issued or outstanding..............................               --                --
   Common stock, $.01 par value, 50,000,000 shares
      authorized, 14,460,384 shares issued and outstanding
      in 2000 and 12,398,389 shares issued and
      12,023,389 outstanding in 1999......................................              145               119
   Additional paid-in capital.............................................           57,619            36,367
   Accumulated deficit....................................................          (37,875)          (32,466)
   Treasury stock, at cost, 201,230 shares of common stock................             (779)               --
                                                                                -----------      ------------

         Total shareholders' equity.......................................           19,110             4,020
                                                                                -----------      ------------

            Total liabilities and shareholders' equity....................      $    40,594      $     13,657
                                                                                ===========      ============
</TABLE>

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

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                    Years Ended December 31,
                                                                                 ----------------------------
                                                                                      2000           1999
                                                                                 -------------   ------------
<S>                                                                               <C>            <C>
NET SALES:

   License fees..............................................................     $      8,417   $      2,430
   Resales of software and technology equipment and service fees.............           19,148         22,826
                                                                                 -------------   ------------

         Total net sales.....................................................           27,565         25,256
                                                                                 -------------   ------------

COST OF SALES:

   License fees..............................................................            1,296          1,790
   Resales of software and technology equipment and service fees.............           17,237         20,680
                                                                                 -------------   ------------

         Total cost of sales.................................................           18,533         22,470
                                                                                 -------------   ------------

GROSS PROFIT.................................................................            9,032          2,786

Sales and marketing expenses.................................................            6,504          6,765
General and administrative expenses..........................................            7,010          5,281
Research and development costs...............................................            1,101            986
                                                                                 -------------   ------------

Loss from operations.........................................................           (5,583)       (10,246)
Interest (income) expense, net...............................................             (174)           226
                                                                                 -------------   ------------

NET LOSS.....................................................................    $     (5,409)   $    (10,472)
                                                                                 =============   ============

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

Weighted average number of common shares--basic and diluted...................      13,931,104     10,377,478
                                                                                 =============   ============
</TABLE>

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

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                   Years Ended December 31,
                                                                                 --------------------------
                                                                                     2000          1999
                                                                                 ------------   -----------
<S>                                                                              <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................................   $    (5,409)   $  (10,472)
Adjustments to reconcile net loss to net cash used in operating activities:
   Depreciation and amortization..............................................          2,336         2,029
   Loss on disposal of property and equipment.................................             58            --
   Fair value of stock based compensation granted for
      professional services...................................................            437            28
   Changes in operating assets and liabilities
      Trade accounts receivable, net..........................................          1,548         2,271
      Digital Convergence receivable..........................................        (2,767)            --
      Costs and estimates earnings in excess of billings on
         uncompleted contracts................................................           (89)           222
      Other current assets....................................................          (121)           382
      Other long-term assets..................................................          (194)            --
      Accounts payable, accrued expenses and stock liability..................        (2,676)        (1,286)
      Billings in excess of costs and estimates earnings on
         uncompleted contracts................................................           (82)           131
      Deferred revenue........................................................            184          (391)
      Other current liabilities...............................................             --            76
                                                                                 ------------   -----------
         Net cash used in operating activities................................        (6,775)       (7,010)
                                                                                 ------------   -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of software development and purchased intangible assets........        (2,317)       (1,470)
Increase in cash surrender value of life insurance............................          (199)         (522)
Acquisition of property and equipment.........................................          (123)         (127)
                                                                                 ------------   -----------

         Net cash used in investing activities................................        (2,639)       (2,119)
                                                                                 ------------   -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock
     net of  issuance costs of $74 in 2000 and $148 in 1999...................          9,203         8,172
Net proceeds from exercise of stock warrants..................................          2,877            75
Net proceeds from exercise of stock options...................................            537         1,061
Common stock repurchased......................................................          (779)            --
Borrowings under notes payable and long-term debt.............................             --         2,000
Change in restricted cash.....................................................            194         (194)
Repayments on notes payable and long-term debt................................          (625)         (125)
                                                                                 ------------   -----------

         Net cash provided by financing activities............................         11,407        10,989
                                                                                 ------------   -----------

NET INCREASE IN CASH
   AND CASH EQUIVALENTS.......................................................          1,993         1,860
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR..................................          2,460           600
                                                                                 ------------   -----------

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

SUPPLEMENTAL CASH FLOW INFORMATION:
   Interest paid during the year .............................................           $170          $146
   Non-cash investing and financing activities:
      Daystar assets purchased with shares of common stock....................          3,520            --
      Conversion of short-term debt to equity.................................             --         2,000
      Issuance costs for shares issued through private placements.............             96           112
      Stock liability due upon issuance of patent.............................             --         1,863
      Warrants issued for DC license contract.................................          4,704            --
      Deferred revenue relating to DC license contract........................         15,432            --
</TABLE>

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

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                                                                            Total
                                           Common Stock         Additional                        Treasury Stock            Share-
                                      ----------------------     Paid-in     Accumulated   ----------------------------    holders'
                                         Shares        Amount    Capital       Deficit        Shares          Amount        Equity
                                      -----------  ----------- -----------  -------------  ---------------  -----------  -----------
<S>                                   <C>          <C>         <C>          <C>            <C>              <C>          <C>
BALANCE, DECEMBER 31, 1998........      8,699,080         $87     $25,168       ($21,994)          ---            ---        $3,261

Exercise of employee options......        611,854           6       1,055            ---           ---            ---         1,061
Issuance of common stock
   through private placement,
   net of $260 of issuance
   costs..........................      1,978,794          20       8,039            ---           ---            ---         8,059
Fair value of warrants issued for
   professional services rendered             ---         ---          28            ---           ---            ---            28
Exercise of warrants..............        231,764           1          74            ---           ---            ---            75
Fair value of stock granted in
   conjunction with financing.....        501,897           5       2,003            ---           ---            ---         2,008
Net Loss..........................            ---         ---         ---        (10,472)          ---            ---       (10,472)
                                      -----------  ----------- -----------  -------------  ---------------  -----------  -----------
BALANCE, DECEMBER 31, 1999........     12,023,389         119      36,367        (32,466)          ---            ---         4,020
                                      -----------  ----------- -----------  -------------  ---------------  -----------  -----------
Exercise of employee options......        182,787           2         535            ---           ---            ---           537
Issuance of common stock through
   private placement, net of
   $170 of issuance costs.........      1,415,279          15       9,188            ---           ---            ---         9,203
Fair value of options issued for
   professional services rendered             ---         ---         253            ---           ---            ---           253
Fair value of stock issued for
   professional services
   rendered.......................         21,500           1         183            ---           ---            ---           184
Fair value of options issued
   related to license agreement
   with Digital Convergence.......            ---         ---       4,704            ---           ---            ---         4,704
Exercise of warrants..............        495,600           5       2,872            ---           ---            ---         2,877
Stock issued to purchase assets           321,829           3       3,517            ---           ---            ---         3,520
Treasury Stock, at cost...........            ---         ---         ---            ---       201,230           (779)         (779)
Net Loss..........................            ---         ---         ---         (5,409)          ---            ---        (5,409)
                                      -----------  ----------- -----------  -------------  ---------------  -----------  -----------
BALANCE, DECEMBER 31, 2000........     14,460,384        $145     $57,619       ($37,875)      201,230          ($779)      $19,110
                                      ===========  =========== ===========  =============  ===============  ===========  ===========
</TABLE>

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

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS

Basis of Presentation

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

Nature of Business Operations

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

          NeoMedia Application Services (NAS) (formerly known as NeoMedia ASP),
          and

          NeoMedia Consulting and Integration Services (NCIS) (formerly known as
          NeoMedia SI)

NeoMedia Application Services (NAS)

     NAS is the Company's core business and is based in the US, with development
and operating facilities in Fort Myers, Florida and contracted network support
provided in the greater Washington D.C. metropolitan area. NAS develops and
supports all of the Company's core technology as well as its suite of
application service provider services including its linking "switch" and its
application platforms including PaperClick(TM). NAS also provides the contract
systems integration resources needed to design and build custom customer
solutions predicated on the Company's infrastructure technology.
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


1.    BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS---(Continued)

NeoMedia Consulting and Integration Services (NCIS)

         NCIS is the original business line upon which the Company was
organized. NCIS resells client-server equipment and related software. The unit
also provides general and specialized consulting services targeted at software
driven print applications, and especially at process automation of production
print facilities through the efforts of its Integrated Document Factory (IDF)
consulting team. NCIS also identifies prospects for custom applications based on
the NeoMedia's NAS products and services. The operations are based in Lisle,
Illinois and Monterey, Mexico.


2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

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

Estimates

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

Revenue Recognition

      License fees, represent revenue from the licensing of NeoMedia's
proprietary software tools, applications products and intellectual property.
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.

<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES---(Continued)

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

      Software and technology equipment resale revenue is recognized when all of
the components necessary to run software or hardware have been shipped and only
insignificant post-delivery obligations remain. Historically, product returns
and allowances have been insignificant. Service revenues include maintenance
fees for providing system updates for software products, user documentation and
technical support and are recognized over the life of the contract. Software
license revenue from long-term contracts has been recognized on a percentage of
completion basis, along with the associated services being provided. Other
service revenues, including training and consulting, are recognized as the
services are performed.

      On October 18, 2000, NeoMedia entered into a ten-year license agreement
with Digital:Convergence Corporation (DC). The contract specifies
non-refundable, minimum royalties of $10 million each year payable in a
combination of cash and DC common stock. Additional royalties may be due
dependent on whether DC's annual gross revenues exceed certain thresholds. The
royalties are being recognized as revenue evenly over the life of the ten-year
contract. During 2000, the company recognized $5 million for royalties earned
before contract execution (paid in cash in 2000) and $2.5 million of the annual
minimum royalities ($2 million was received in DC stock in the first quarter of
2001).

     In addition, DC is required to issue NeoMedia shares of its common stock,
valued at approximately $15.4 million. This receivable and the related deferred
revenue are included in the accompanying consolidated balance sheet as Digital
Convergence receivable and deferred revenues - Digital Convergence. The stock is
payable on October 18, 2001, and if not paid on that date, the amount must be
paid in cash in three equal installments on the one, two and three year
anniversary of the date of contract execution. The deferred revenue related to
the DC stock receivable are being recognized as revenue evenly over the life of
the ten-year contract. During 2000, $386,000 related to the DC stock was
recognized as revenue.

     As an incentive for DC to enter the contract, NeoMedia granted DC 1.4
million warrants for the purchase of NeoMedia's common stock, valued at
approximately $4.7 million. The value related to these warrants is included in
the accompanying consolidated balance sheet as prepaid expenses and other
current assets and prepaid to Digital Convergence. The warrants were 100 percent
vested and immediately exercisable at the date of grant. As of December 31,
2000, all 1.4 million warrants were still outstanding. The value of these
warrants is being recognized as contra-revenue evenly over the life of the
contract. During 2000, $118,000 of contra-revenue related to the warrants
granted to DC was recognized as contra-revenue.

      In total, during 2000, the Company recognized approximately $7.8 million
of revenue related to this contract. This revenue is included in license fees in
the accompanying consolidated statement of operations.
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES---(Continued)


      On January 31, 2001, NeoMedia gave notice of breach to DC under the
license agreement entered into on October 18, 2000, as a result of not receiving
any portion of the $3 million of cash and $2 million of cash or DC stock for
royalties due as of January 31, 2001. On February 24, 2001, NeoMedia agreed to
waive the breach by DC and grant an extension of time for payment of the cash
portion of the royalties to April 24, 2001, in exchange for a promissory note
with principal amount of $3 million, bearing interest of 10 percent, maturing on
the earlier of the date upon which DC completes an equity or debt financing (or
combination thereof) aggregating in excess of $25 million, or April 24, 2001.
All principal and unpaid interest is due at maturity. NeoMedia received the $2
million of DC stock during the first quarter of 2001.

      The following table summarizes the effect of the DC transaction on the
Company's financial statements:
<TABLE>
<CAPTION>
                                                                       (Dollars in            Accounting
                                                                        thousands)             Treatment
                                                                        ----------             ---------
     ASSETS
     ------
<S>                                                                     <C>               <C>
Trade accounts receivable..........................................     $   2,500         To be paid in cash
                                                                                          or DC stock
Digital Convergence receivable.....................................         5,144         To be paid in cash
                                                                                          or DC stock
Digital Convergence receivable, net of current portion.............        10,288         To be paid in cash
                                                                                          or DC stock
Prepaid expenses (current portion).................................           470         Recognized as contra-revenue
                                                                                          over contract life
Prepaid DC (long-term portion).....................................         4,116         Recognized as contra-revenue
                                                                                          over contract life

     LIABILITIES
     -----------
                                                                                          Recoginized as
 Deferred revenues - DC............................................         1,543         revenue over
                                                                                          contract life
                                                                                          Recoginized as
 Long term deferred revenues - DC..................................        13,503         revenue over
                                                                                          contract life

      STATEMENT OF OPERATIONS
      -----------------------
License fees from annual royalties.................................         7,500         Recognized as
                                                                                          revenue in 2000
License fees from DC stock.........................................           386         Recognized as
                                                                                          revenue in 2000
License fees - contra revenue for NeoMedia warrants to DC..........          (118)        Recognized as contra -
                                                                                          revenue in 2000
</TABLE>

Annual net license fees related to the DC contract are $11,073,000.


<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES---(Continued)

Inventories

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

Property and Equipment

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

      Depreciation expense was $263,000 and $367,000 for the years ended
December 31, 2000 and 1999, respectively.

Intangible Assets

      Intangible assets consist of capitalized software development costs,
patents, and an acquired customer list.

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

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES---(Continued)

      Intangible assets activity for the years ended December 31, 2000 and 1999
was as follows:

                                                      December 31,
                                                      ------------
                                                 2000             1999
                                            -------------    -------------

      Beginning Balance                     $      5,296        $   3,729
      Additions                                    5,837            3,229
      Amortization/Write-offs                     (2,090)          (1,662)
                                            -------------       ---------
      Ending Balance                        $      9,043        $   5,296
                                            =============       =========


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

      Amortization expense was $2,073,000 and $1,662,000 for the years ended
December 31, 2000 and 1999, respectively.


Evaluation of Long-Lived Assets

      The Company periodically performs an evaluation of the carrying value of
its long-lived assets, including intangible assets, in accordance with SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". This evaluation consists primarily of a comparison to
the future undiscounted net cash flows from the associated assets in comparison
to the carrying value of the assets. As of December 31, 2000, the Company is of
the opinion that no impairment of its long-lived assets has occurred.


Income Taxes

In accordance with SFAS No. 109, "Accounting for Income Taxes", income taxes are
accounted for using the assets and liabilities approach. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities, and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be recognized. The Company has
recorded a 100% valuation allowance as of December 31, 2000 and 1999.
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)


Computation of Net Loss Per Share

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

                                        December 31, 2000      December 31, 1999
                                        -----------------      -----------------
      Outstanding Stock Options........     4,294,000              3,418,000
      Outstanding Warrants.............     3,968,000              2,676,000

Financial Instruments

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


Concentrations of Credit Risk

      Financial instruments that potentially subject NeoMedia to concentrations
of credit risk consist primarily of trade accounts receivable with customers.
Credit risk is generally minimized as a result of the large number and diverse
nature of NeoMedia's customers, which are located throughout the United States.
NeoMedia extends credit to its customers as determined on an individual basis
and has included an allowance for doubtful accounts of $484,000 and $888,000 in
its December 31, 2000 and 1999 consolidated balance sheets, respectively.
NeoMedia had net sales to one major customer in the telecommunications industry
(Ameritech) of $5,824,000 and $5,843,000 during the years ended December 31,
2000 and 1999, respectively, resulting in trade accounts receivable of $229,000
and $225,000 as of December 31, 2000 and 1999, respectively. In addition, a
single company supplies the equipment and software, which is re-marketed to this
customer. Accordingly, the loss of this supplier would materially adversely
affect NeoMedia NCIS. Revenue generated from the remarketing of computer
software and technology equipment has accounted for a significant percentage of
NeoMedia's revenue. Such sales accounted for approximately 66% and 78% of
NeoMedia's revenue for the years ended December 31, 2000 and 1999, respectively.
Neomedia had license fees to one major customer (DC) of $7,768,000 during the
year ended December 31, 2000, resulting in an accounts receivable of $2,500,000
as of December 31, 2000. Revenue generated from this licensing agreement has
accounted for a significant percentage of Neomedia's revenue. Such sales
accounted for approximately 28% of Neomedia's revenue for the year ended
December 31, 2000.


Reclassifications

      Certain reclassifications have been made to the 1999 financial statements
to conform to the 2000 presentation.
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)

Comprehensive Income

     For the years ended December 31, 2000 and 1999, the Company did not have
other comprehensive income and therefore has not included a statement of
comprehensive income in the accompanying financial statements.

Recent Accounting Pronouncements

     In June of 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The FASB later issued in June 1999 SFAS No.
137, which deferred the effective date for SFAS No. 133 to all fiscal years
beginning after June 15, 2000, with earlier application encouraged. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets of liabilities in the balance sheet and measure those instruments
at fair value. The adoption of SFAS No. 133 did not have an impact on the
Company's financial position or results of operations.

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

3.    LIQUIDITY

      During the years ended December 31, 2000 and 1999 the Company's net loss
totaled approximately $5,409,000 and $10,472,000 respectively. As of December
31, 2000 the Company had an accumulated deficit of approximately $37,875,000 and
approximately $750,000 in restricted cash balances. The Company's unrestricted
cash balance at March 30, 2001 was approximately $2,400,000 (unaudited).

     Management believes it will need to raise additional capital as well as
reduce expenses to sustain the Company's operations in 2001. The failure of
management to accomplish these initiatives will adversely affect the Company's
business, financial conditions, and results of operations and its ability to
continue as a going concern.

      Subsequent to December 31, 2000, the following events have occurred:

 .             On January 31, 2001, NeoMedia gave notice of breach to DC under
              the license agreement entered into on October 18, 2000, as a
              result of not receiving any portion of the $3 million of cash and
              $2 million of cash or DC stock for royalties due as of January 31,
              2001. On February 24, 2001, NeoMedia agreed to waive the breach by
              DC and grant an extension of time for payment of the cash portion
              of the royalties to April 24, 2001, in exchange for a promissory
              note with principal amount of $3 million, bearing interest of 10
              percent, maturing on the earlier of the date upon which DC
              completes an equity or debt financing (or combination thereof)
              aggregating in excess of $25 million, or April 24, 2001. All
              principal and unpaid interest is due at maturity. NeoMedia
              received the $2 million of DC stock during the first quarter of
              2001.

 .    During the first quarter 2001, the Company received proceeds of $499,835
     from the exercise of options/warrants.

 .    During the first quarter of 2001, the Company raised $1,535,500 from the
     sale of previously unissued common stock to unrelated third parties.

     NeoMedia anticipates that its existing cash balances and funds available
from borrowings under its existing financing agreement will have to be
supplemented with additional funds, through loans and / or capital
contributions, to finance NeoMedia's operations in 2001. During the first
quarter of 2001, the Company has successfully obtained approximately $1.5
million of equity financing and approximately $500,000 from the exercise of
stock options and warrants. The Company intends to obtain additional equity
financing. Management believes that this additional financing will be sufficient
to sustain operations for the remainder of 2001, however, there can be no
assurances that these additional financings will be obtained. 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.

4.   CONTRACT ACCOUNTING

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

<TABLE>
<CAPTION>
                                                                  2000                  1999
                                                                  ----                  ----
<S>                                                           <C>                  <C>
Costs Incurred on Contracts..............................     $    321             $     828
Profit to Date...........................................        1,087                   980
                                                           -----------          ------------
    Total Costs and Estimated Earnings...................        1,408                 1,808
Less - Billings to Date..................................       (1,368)               (1,939)
                                                           -----------          ------------
    Costs and Estimated Earnings in Excess of Billings...     $     40             $    (131)
                                                           ===========          ============
</TABLE>
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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


<TABLE>
<CAPTION>
                                                                        2000                 1999
                                                                        ----                 ----
<S>                                                             <C>                     <C>
Costs and Estimated Earnings in Excess of Billings.......       $         89            $     ---
Billing in Excess of Costs and Estimated Earnings.........               (49)                (131)
                                                                 ------------           ---------
Costs and Estimated Earnings in Excess of Billings, Net         $         40            $    (131)
                                                                ============            =========
</TABLE>

5.    PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                                       2000       1999
                                                                       ----       ----
                                                                        (In thousands)
<S>                                                                 <C>         <C>
      Furniture and fixtures.....................................   $     314   $     420
      Leasehold improvements.....................................         124         124
      Equipment..................................................         504       1,290
                                                                    ---------   ---------
            Total................................................         942       1,834
      Less accumulated depreciation..............................       (577)     (1,289)
                                                                    ---------   ---------
      Total property and equipment, net..........................   $     365   $     545
                                                                    =========   =========
</TABLE>

6.    INTANGIBLE ASSETS

      As of December 31, 2000 and 1999, intangible assets consisted of the
following:
<TABLE>
<CAPTION>
                                                                        2000       1999
                                                                        ----       ----
                                                                         (In thousands)
<S>                                                                  <C>         <C>
      Capitalized and purchased software costs..................     $   6,418   $   4,663
      Customer list.............................................         1,143       1,155
      Repurchased license rights and other......................         3,520         ---
      Patents and related costs.................................         3,026       2,672
                                                                     ---------   ---------
            Total...............................................        14,107       8,490
      Less accumulated amortization.............................       (5,064)     (3,194)
                                                                     ---------   ---------
      Total intangible assets, net..............................     $   9,043   $   5,296
                                                                     =========   =========
</TABLE>

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

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


7.    FINANCING AGREEMENTS

      The Company has an agreement with a commercial finance company that
provides short-term financing for certain computer hardware and software
purchases. Under the agreement, there are generally no financing charges for
amounts paid within 30 or 45 days, depending on the vendor used to source the
product. Under this agreement there are two separate lines of credit. The first
line has credit availability of $750,000. The second line has credit
availability of up to $2,000,000, based upon the Company's customer credit
rating. Borrowings are collateralized by all inventory, property and equipment,
and accounts receivable. In addition, as of December 31, 2000 and 1999, a
$750,000 letter of credit was issued to the benefit of the commercial finance
company. At December 31, 2000 and 1999, Neomedia collateralized this letter with
a restricted cash balance of $750,000. As of December 31, 2000 and 1999, amounts
due under this financing agreement included in accounts payable were $1,101,000
and $1,509,000, respectively.

8.    LONG-TERM DEBT

      As of December 31, 2000 and 1999, long-term debt consisted of the
following:

<TABLE>
<CAPTION>
                                                                                           2000       1999
                                                                                        ---------   ---------
                                                                                            (In thousands)
<S>                                                                                     <C>         <C>
      Note payable to International Digital Scientific, Inc. (IDSI),
         non-interest bearing with interest imputed at 9%,
         due with minimum monthly installments of $16,000 through March 2005......      $     816   $   1,008

      Note payable, interest bearing at 20% per annum, $250,000 due January 2000
         and $250,000 due February 2000, secured by 375,000 shares of previously
         unissued Company common stock placed in escrow. Subsequent to the
         repayment of the note in 2000, these shares were removed from escrow
         and returned to the Company..............................................             --        500
                                                                                        ---------   ---------

            Subtotal..............................................................            816       1,508

      Less: unamortized discount..................................................          (140)       (207)
                                                                                        ---------   ---------

            Total long-term debt..................................................            676       1,301

      Less: current portion.......................................................          (137)       (625)
                                                                                        ---------   ---------

      Long-term debt, net of current portion......................................      $     539   $     676
                                                                                        =========   =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                            (In thousands)
                                                                                            --------------
<S>                                                                                          <C>
      2001.................................................................................   $     192
      2002.................................................................................         192
      2003.................................................................................         192
      2004.................................................................................         192
      2005.................................................................................          48
                                                                                              ---------
      Total................................................................................   $     816
                                                                                              ---------
</TABLE>
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


      In October 1994, the Company purchased, via seller financing, certain
computer software from IDSI. The aggregate purchase price was $2,000,000 and was
funded by the seller with an uncollateralized note payable, without interest, in
an amount equal to the greater of: (i) 5% of the collected gross revenues of
NeoMedia Migration for the preceding month; or (ii) the minimum installment
payment as defined, until paid in full. The minimum installment payment is the
amount necessary to provide an average monthly payment for the most recent
twelve month period of $16,000 per month. The present value of $2,000,000
discounted at 9% (the Company's then incremental borrowing rate) for 125 months
was approximately $1,295,000, the capitalized cost of the assets acquired. The
discount is being accreted to interest expense over the term of the note. The
software acquired was amortized over its estimated useful life of three years.
As of December 31, 2000 and 1999, the balance of the note payable, net of
unamortized discount, was $676,000 and $801,000, respectively.

9.    INCOME TAXES

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

<TABLE>
<CAPTION>
                                                                                           2000       1999
                                                                                        ---------   ---------
                                                                                            (In thousands)

<S>                                                                                     <C>         <C>
      Current.....................................................................      $      --   $      --
      Deferred....................................................................             --          --
                                                                                        ---------   ---------
      Income tax expense/(benefit)................................................      $      --   $      --
                                                                                        =========   =========
</TABLE>


      As of December 31, 2000 and 1999, the types of temporary differences
between the tax basis of assets and liabilities and their financial reporting
amounts which gave rise to deferred taxes, and their tax effects were as
follows:

<TABLE>
<CAPTION>
                                                                                           2000       1999
                                                                                        ---------   ---------
                                                                                            (In thousands)
<S>                                                                                     <C>         <C>
      Accrued employee benefits...................................................      $      30   $      31
      Provisions for doubtful accounts............................................            182         337
      Deferred revenue............................................................             13          --
      Capitalized software development costs......................................            284          98
      Net operating loss carryforwards (NOL)......................................         15,021      12,724
      Research and Development Credit.............................................             --          91
      Accruals....................................................................            864          51
      Other.......................................................................             17           8
      Alternative minimum tax credit carryforward.................................             45          45
                                                                                        ---------   ---------
      Total deferred tax assets...................................................         16,456      13,385
      Valuation Allowance.........................................................       (16,456)    (13,385)
                                                                                        ---------   ---------
      Net deferred income tax asset...............................................      $      --   $      --
                                                                                        =========   =========
</TABLE>

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

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


9.    INCOME TAXES--(Continued)


      For the years ended December 31, 2000 and 1999, the income tax benefit
differed from the amount computed by applying the statutory federal rate of 34%
as follows:

<TABLE>
<CAPTION>
                                                                     2000            1999
                                                                 ----------       -----------
                                                                       (In thousands)
<S>                                                              <C>               <C>
      Benefit at federal statutory rate....................      $  (1,839)        $ (3,561)
      State income taxes, net of federal...................           (196)            (380)
      Foreign income taxes, net of federal.................             --               61
      Exercise of non-qualified stock options..............           (176)          (1,874)
      Permanent and other..................................           (860)             (12)
      Change in valuation allowance........................          3,071            5,766
                                                                 ---------        ---------
      Income tax expense/(benefit).........................      $      --        $      --
                                                                 =========        =========
</TABLE>


      As of December 31, 2000, NeoMedia had net operating loss carryforwards for
federal tax purposes totaling approximately $40 million which may be used to
offset future taxable income, or, if unused expire between 2011 and 2020. As a
result of certain of NeoMedia's equity activities occurring during the year
ended December 31, 1997, NeoMedia anticipates that the annual usage of its pre
1998 net operating loss carryforwards may be further restricted pursuant to the
provisions of Section 382 of the Internal Revenue Code.
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


10.    TRANSACTIONS WITH RELATED PARTIES

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

      During the year ended December 31, 1999, the Company leased from a
director of the Company a trade show booth for rental payments totaling $31,000.
The lease expired during 1999.

      In January 1999, the spouse of a director of the Company purchased 82,372
shares of the Company's common stock from NeoMedia at a price of $3.03 per
share. In January 1999, a director of the Company purchased 42,857 shares of the
Company's common stock from NeoMedia at a price of $3.50 per share. As part of
these purchases, the spouse of the director received a total of 8,237 warrants
to purchase stock at $3.04 per share and the director received 4,286 warrants to
purchase stock at $3.50 per share.

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

      In April 2000, the Company paid professional fees in the amount of $8,000
to a director of the Company for consulting services rendered.

      In June 1999, NeoMedia sold a license for the right to utilize NeoMedia's
Neolink Information Server to Daystar, a company owned in part by an officer and
a board member of NeoMedia, for $500,000. In April 2000, in anticipation of a
potential acquisition of the Company (which subsequently did not occur),
NeoMedia purchased substantially all the assets of Daystar, a related party,
including the rights to the license it sold to Daystar in 1999, for
approximately $3.5 million of NeoMedia's common stock. The assets purchased were
recorded in intangible assets at approximately $3.5 million on the accompanying
consolidated balance sheets.

11.   COMMITMENTS AND CONTINGENCIES

      NeoMedia leases its office facilities and certain office and computer
equipment under various operating leases. These leases provide for minimum rents
and generally include options to renew for additional periods. For the years
ended December 31, 2000 and 1999, NeoMedia's rent expense was $1,067,000 and
$1,268,000, respectively.
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


11.   COMMITMENTS AND CONTINGENCIES--(Continued)

      The following is a schedule of the future minimum lease payments under
non-cancelable operating leases as of December 31, 2000:


<TABLE>
<CAPTION>
                                                                           Payments
                                                                           --------
                                           (In thousands)
<S>                                                                       <C>
      2001...............................................                  $    595
      2002...............................................                       329
      2003...............................................                       116
      2004...............................................                        22
      2005...............................................                         1
                                                                           --------
      Total..............................................                  $  1,063
                                                                           ========
</TABLE>

      NeoMedia has entered into various employment and consulting agreements
which require an aggregate of approximately $176,000 in annual payments. These
employment and consulting agreements extend to various dates through 2001. These
agreements also provide for the payment of severance and other benefits under
certain conditions.

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

<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


12.   DEFINED CONTRIBUTION SAVINGS PLAN

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

13.   EMPLOYEE STOCK OPTION PLAN

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

      Effective March 27, 1998, NeoMedia adopted the 1998 Stock Option Plan
making available for grant to employees of NeoMedia options to purchase up to
8,000,000 shares of NeoMedia's common stock. The stock option committee of the
board of directors has the authority to determine to whom options will be
granted, the number of options, the related term, and exercise price. The option
exercise price may be less than the fair market value per share of NeoMedia's
common stock on the date of grant. Options granted during 2000 and 1999 were
granted at an exercise price equal to fair market value on the date of grant.
Options generally vest 20% upon grant and 20% per year thereafter. The options
expire ten years from the date of grant.

      Effective January 1, 1996, NeoMedia adopted SFAS No. 123, "Accounting for
Stock-Based Compensation" which defines a fair-value based method of accounting
for an employee stock option or similar equity instrument and encourages all
entities to adopt that method of accounting for all of their employee stock
compensation plans. However, SFAS 123 also allows an entity to continue to
measure compensation cost for stock-based compensation plans using the
intrinsic-value method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). Entities
electing to continue using the accounting method in APB 25 must make pro forma
disclosures of net income and earnings per share as if the fair-value method of
accounting had been adopted. Because NeoMedia elected to continue using the
accounting method in APB 25, no compensation expense was recognized in the
consolidated statements of operations for the years ended December 31, 2000 and
1999 for stock-based employee compensation.

      For grants in 2000 and 1999, the following assumptions were used: (i) no
expected dividends; (ii) a risk-free interest rate of 6% for 2000 and 5% for
1999; (iii) expected volatility of 80% for 2000 and 70% for 1999 and (iv) an
expected life of 4 years for options granted in 2000 and in 1999. The fair-value
was determined using the Black-Scholes option-pricing model.
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



      The estimated fair value of grants of stock options and warrants to
non-employees of NeoMedia is charged to expense in the consolidated financial
statements. These options vest in the same manner as the employee options
granted under the 1998 Stock Option Plan.

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


                                                     2000          1999
                                                     ----          ----
Net Loss
   As reported..........................            $5,409        $10,472
   Pro forma............................            $7,498        $11,731

Net loss per share
   As reported..........................             $0.39          $1.01
   Pro forma............................             $0.54          $1.13
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


13.   EMPLOYEE STOCK OPTION PLAN--(Continued)

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

<TABLE>
<CAPTION>
                                                                         2000                    1999
                                                                 --------------------   ---------------------
                                                                             Weighted               Weighted
                                                                              Average                Average
                                                                             Exercise               Exercise
                                                                  Shares       Price      Shares      Price
                                                                 ---------   --------   ---------   ---------
                                                              (In thousands)          (In thousands)
<S>                                                                  <C>     <C>            <C>     <C>
      Outstanding at beginning of year........................       3,418   $   4.43       3,164   $    4.40
      Granted.................................................       1,192       4.87       1,721        4.71
      Exercised...............................................       (170)       2.83       (599)        1.77
      Forfeited...............................................       (146)       5.78       (868)        5.79
                                                                 ---------   --------   ---------   ---------
      Outstanding at end of year..............................       4,294   $   4.71       3,418   $    4.43
                                                                 =========   ========   =========   =========
      Options exercisable at year-end.........................       2,140                  1,398
      Weighted-average fair value of options
         granted during the year..............................   $    3.05              $    2.68
      Available for grant at the end
         of the year..........................................       4,116                  5,162
</TABLE>

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

<TABLE>
<CAPTION>
                                  Options Outstanding                                  Options Exercisable
   -----------------------------------------------------------------------       ----------------------------
                                                Weighted-        Weighted-                          Weighted-
                                                 Average          Average                            Average
        Range of                 Number         Remaining        Exercise            Number         Exercise
     Exercise Prices           Outstanding  Contractual Life       Price           Exercisable        Price
   ------------------       --------------- ----------------     ---------       ---------------    --------
                             (In thousands)                                      (In thousands)
<S>           <C>                   <C>        <C>               <C>                    <C>         <C>
   $   -- to  $   .84               190        5.2 years         $     .84              190         $     .84
     1.88 to     2.91               485        7.8 years              2.65              321              2.60
     3.00 to     4.91             1,932        8.8 years              3.93              713              3.82
     5.00 to     7.88             1,415        8.3 years              6.14              748              6.31
     8.00 to    10.88               272        8.5 years              9.22              168              9.08
   ------------------            ------        ---------         ---------           ------         ---------
    $ .84 to  $ 10.88             4,294        8.3 years         $    4.71            2,140         $    4.66
   ==================             =====        =========         =========            =====         =========
</TABLE>

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

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


13.   EMPLOYEE STOCK OPTION PLAN--(Continued)

      In October 2000, the Company issued 80,000 stock options to buy shares of
the Company's common stock to an outside consultant at a price of $4.13 per
share for consulting services rendered, and recognized approximately $253,000 in
expense in the accompanying 2000 consolidated financial statements. These stock
options vest in the same manner as the employee options granted under the 1998
Stock Option Plan. All these stock options were outstanding at December 31,
2000. Of these stock options, 16,000 were vested at December 31, 2000.

Warrants

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



Balance December 31, 1998                1,639,832

     Warrants issued                     1,118,630

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

Balance December 31, 1999                2,676,362

     Warrants issued                     1,787,073

     Warrants exercised                    495,600
                                         ---------

Balance December 31, 2000                3,967,835
                                         =========


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

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

<TABLE>
<CAPTION>
                                                             Weighted
                                                              Average             Weighted
                                                             Remaining            Average
                             Range of      Number of        Contractual           Exercise
                         Exercise Prices  Outstanding       Life (Years)            Price
                         ---------------  -----------       ------------          --------
<S>                                        <C>                   <C>               <C>
                           $0.10 - $5.50     633,907             1.9               $  2.62
                           $5.51 - $6.99   1,547,923             4.5               $  6.02
                           $7.00 - $9.99   1,490,523             1.5               $  7.95
                         $10.00 - $15.00     295,482             1.8               $ 12.17
                                           ---------             ---               -------
                                           3,967,835             2.8               $  6.66
                                           =========             ===               =======
</TABLE>
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


14.   SEGMENT INFORMATION

      Beginning with the year ended December 31, 1999, the Company adopted SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131). SFAS 131 supersedes Financial Accounting Standards Board's SFAS No.
14, "Financial Reporting for Segments of a Business Enterprise." SFAS 131
establishes standards for the way that business enterprises report information
about operating segments in annual financial statements. SFAS 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers.

      The Company is organized into two business segments: (a) Neomedia
Application Services (NAS), and (b) Neomedia Consulting and Integration Services
(NCIS). Performance is evaluated and resources allocated based on specific
segment requirements and measurable factors. Management uses the Company's
internal statements of operations to evaluate each business unit's performance.
Assets of the business units are not available for management of the business
segments nor for disclosure.

      Operational results for the two segments for the years ended December 31,
2000 and 1999 are presented below:

<TABLE>
<CAPTION>
                                                                   NAS             NCIS           Consolidated
                                                              ------------      -----------       ------------
      Year Ended December 31, 2000
<S>                                                           <C>               <C>              <C>
      Net Sales.........................................      $      8,083      $    19,482      $     27,565
      Net Loss..........................................           (4,225)          (1,184)           (5,409)

      Year Ended December 31, 1999
      Net Sales.........................................      $        795      $    24,461      $     25,256
      Net Loss..........................................           (5,916)          (4,556)          (10,472)
</TABLE>

15.   COMMON STOCK

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

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

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


16.  SUBSEQUENT EVENTS

     On March 1, 2001, the Company acquired substantially all of the assets of
     Qode.com, Inc., a commerce-enabling company that delivers promotions to
     consumers over the internet through its Qode Universal Commerce
     Solution.(TM) The Qode system is comprised of a directory of products and
     retailers, enhanced with Qode's proprietary Product DNA(TM), and coupled
     with a product search engine. The Qode Solution is licensable, and is
     designed to increase revenues, traffic and loyalty to internet websites.

     In consideration for these assets, the Company issued 1,676,500 shares of
     the Company's common stock to Qode.com, Inc., issued 274,699 of the
     Company's Common Stock to certain debtholders of Qode.com, Inc., forgave a
     $440,000 short term note to the Company, and assumed $836,000 of Qode.com,
     Inc. payables. The 1,676,500 shares paid to Qode.com, Inc. are to be held
     in escrow for one year, and are subject to downward adjustment, based upon
     the achievement of certain performance targets over the period of March 1,
     2001 to February 28, 2002. As a result of the acquisition, the Company
     acquired substantially all of Qode's assets, including but not limited to
     the Qode Universal Commerce Solution, customer lists, licenses,
     intellectual property and certain contracts.

<PAGE>

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT

      The information required in response to this item is incorporated by
reference to the registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.


<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

The information required in response to this item is incorporated by reference
to the registrant's Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required in response to this item is incorporated by reference
to the registrant's Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required in response to this item is incorporated by reference
to the registrant's Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits

      (1) The following exhibits required by Item 601 of Regulation S-B to be
filed herewith are hereby incorporated by reference:

   Exhibit
     No.       Description

     3.1  Restated Certificate of Incorporation of DevSys, Inc. (Incorporated by
          reference to Exhibit 3.3 to NeoMedia's Registration Statement, No.
          333-5534 (the "Registration Statement")).
     3.2  By-laws of DevSys, Inc. (Incorporated by reference to Exhibit 3.4 to
          NeoMedia's Registration Statement).
     3.3  Certificate of Amendment to Certificate of Incorporation of DevSys,
          Inc. changing its name to NeoMedia Technologies, Inc. (Incorporated by
          reference to Exhibit 3.13 to NeoMedia's Registration Statement).
     3.4  Form of Certificate of Amendment to Certificate of Incorporation of
          NeoMedia Technologies, Inc. authorizing a reverse stock split
          (Incorporated by reference to Exhibit 3.14 to NeoMedia's Registration
          Statement).
     4.1  Form of Certificate for Common Stock of DevSys, Inc. (Incorporated by
          reference to Exhibit 4.1 to NeoMedia's Registration Statement).
     4.2  Form of Joseph Charles' Warrant Agreement (Incorporated by reference
          to Exhibit 4.2 to NeoMedia's Registration Statement).
     4.3  Form of Principal Stockholder's Warrant (Incorporated by reference to
          Exhibit 4.6 to NeoMedia's Registration Statement).
     4.4  Form of Placement Agent's Warrant for the Purchase of Shares of Common
          Stock and Warrants (Incorporated by reference to Exhibit 4.8 to
          NeoMedia's Registration Statement).
     4.5  Form of Warrant to Charles W. Fritz (Incorporated by reference to
          Exhibit 4.10 to NeoMedia's Form 10-KSB for the year ended December 31,
          1997)


<PAGE>

     Exhibit
     No.       Description


     4.6  Form of Warrant to Dominick & Dominick, Incorporated (Incorporated by
          reference to Exhibit 4.11 to NeoMedia's Form 10-KSB for the year ended
          December 31, 1997)
     4.7  Form of Warrant to Compass Capital, Inc. (Incorporated by reference to
          Exhibit 4.12 to NeoMedia's Form 10-KSB for the year ended December 31,
          1997)
     4.8  Form of Warrant to Thornhill Capital, L.L.C. (Incorporated by
          reference to Exhibit 4.10 to NeoMedia's Form 10-KSB for the year ended
          December 31, 1997)
     4.9  Form of Warrant to Southeast Research Partners, Inc. (Incorporated by
          reference to Exhibit 4.14 to NeoMedia's Form 10-KSB for the year ended
          December 31, 1997)
     4.10 Form of Warrant to Joseph Charles & Associates, Inc. (Incorporated by
          reference to Exhibit 4.15 to NeoMedia's Form 10-KSB for the year ended
          December 31, 1997)
     10.1 Form of Nonsolicitation and Confidentiality Agreement (Incorporated by
          reference to Exhibit 10.2 to NeoMedia's Registration Statement).
     10.2 Employment Agreement dated May 1, 1996 between Dev-Tech Associates,
          Inc. and Charles W. Fritz (Incorporated by reference to Exhibit 10.3
          to NeoMedia's Registration Statement).
     10.3 Employment Agreement dated April 1, 1996 between Dev-Tech Associates,
          Inc. and Robert T. Durst, Jr. (Incorporated by reference to Exhibit
          10.4 to NeoMedia's Registration Statement).
     10.4 Employment Agreement dated May 1, 1996 between Dev-Tech Associates,
          Inc. and Charles T. Jensen (Incorporated by reference to Exhibit 10.5
          to NeoMedia's Registration Statement).
     10.5 Dev-Tech Associates, Inc. Annual Incentive Plan for Management
          (Incorporated by reference to Exhibit 10.43 to NeoMedia's Registration
          Statement).
     10.6 Dev-Tech Associates, Inc. 401(k) Plan and amendments thereto
          (Incorporated by reference to Exhibit 10.50 to NeoMedia's Registration
          Statement).
     10.7 First Amendment and Restatement of NeoMedia Technologies, Inc. 1996
          Stock Option Plan (As Established Effective February 1, 1996, and as
          amended through November 18, 1996) (Incorporated by reference to
          Exhibit 10.60 to NeoMedia's Registration Statement).
     10.8 Agreement of Lease Between First Union National Bank of Florida and
          NeoMedia Technologies, Inc. Dated November 27, 1996 (Incorporated by
          reference to Exhibit 10.43 to NeoMedia's Form 10-KSB for the year
          ended December 31, 1996).
     10.9 Agreement for Wholesale Financing (Security Agreement) Between IBM
          Credit Corporation and NeoMedia Technologies, Inc. Dated February 20,
          1997 (Incorporated by reference to Exhibit 10.47 to NeoMedia's Form
          10-KSB for the year ended December 31, 1996).
    10.10 Collateralized Guaranty Between IBM Credit Corporation and NeoMedia
          Migration, Inc. Dated February 20, 1997 (Incorporated by reference to
          Exhibit 10.48 to NeoMedia's Form 10-KSB for the year ended December
          31, 1996).
    10.11 NeoMedia Technologies, Inc. 1998 Stock Option Plan (Incorporated by
          reference to Appendix A to NeoMedia's Form 14A Filed on February 18,
          1998).
    10.12 Amendment to NeoMedia Technologies 1998 Stock Option Plan
          (Incorporated by reference to text of NeoMedia form 14A filed on July
          2, 1999)
    10.13 Employment Agreement dated August 2, 1999 between NeoMedia
          Technologies, Inc. and William Goins (incorporated by reference to
          exhibit 10.32 of NeoMedia's Form 10-KSB for the year ended December
          31, 1999.)
    10.14 Licensing Agreement between Digital:Convergence Corporation and
          NeoMedia Technologies, Inc. (Incorporated by reference to Exhibit 10.1
          of NeoMedia Form 10-QSB filed on October 30, 2000)
    10.15 Sale and Purchase Agreement between Qode.com, Inc. and NeoMedia
          Technologies, Inc. (Incorporated by reference to Exhibit 10.1 of
          NeoMedia Form 8K filed on March 15, 2001)
       21 Subsidiaries (Incorporated by reference to description of Company's
          subsidiaries contained in Part I, Item I of this form 10-KSB.


<PAGE>

     (2)  The following exhibits required by Item 601 of Regulation S-B are
          hereby filed herewith:


     Exhibit
       No.        Description
       ---        -----------

      3.5   Form of Certificate of Amendment to Restated Certificate of
            Incorporation of NeoMedia Technologies, Inc. increasing authorized
            capital and creating preferred stock.
     23.1   Consent of Arthur Andersen LLP

(b)   Reports on Form 8-K

      Form 8-K filed October 30, 2000 to report Licensing Agreement between
      Digital: Convergence Corporation and NeoMedia Technologies, Inc.

      Form 8-K filed March 16, 2001 to report the acquisition of substantially
      all of the assets of Qode.com, Inc.

<PAGE>

                                   SIGNATURES

      In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized in the City of Fort Myers, State of
Florida, on the 13th day of April, 2001.

                           NEOMEDIA TECHNOLOGIES, INC.
                           Registrant


                           By:                /s/ CHARLES W. FRITZ
                               -------------------------------------------------
                                    Charles W. Fritz, Chief Executive Officer
                                            and Chairman of the Board

      In accordance with the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on April 13, 2001.

<TABLE>
<CAPTION>
                   Signatures                                                 Title
                   ----------                                                 -----

<S>                                                  <C>
              /s/ CHARLES W. FRITZ                   Chief Executive Officer, Chairman of the
-----------------------------------------------        Board and Director
                Charles W. Fritz

              /s/ WILLIAM E. FRITZ                   Secretary and Director
-----------------------------------------------
                William E. Fritz

            /s/ ROBERT T. DURST, JR.                 Chief Technical Officer and Director
-----------------------------------------------
              Robert T. Durst, Jr.

              /s/ CHARLES T. JENSEN                  Chief Financial Officer, Treasurer and Director
-----------------------------------------------
                Charles T. Jensen

              /s/ A. HAYES BARCLAY                   Director
-----------------------------------------------
                A. Hayes Barclay

                /s/ JAMES J. KEIL                    Director
-----------------------------------------------
                  James J. Keil

                 /s/ PAUL REECE                      Director
                   Paul Reece

               /s/ JOHN A. LOPIANO                   Director
-----------------------------------------------
                 John A. Lopiano
</TABLE>

<PAGE>

     Subsequent to December 31, 2000, the Company has undertaken the following
initiatives:

     .    Through March 30, 2001, the Company has raised $1,535,500 from private
          placements.

     .    Through March 30, 2001, the Company has raised $361,250 from the
          exercise of stock warrants.

     .    Through March 30, 2001, the Company has raised $138,585 from the
          exercise of employee stock options.

     .    Unrestricted cash on hand as of March 30, 2001, was approximately $2.4
          million.


Recently Issued Accounting Pronouncements


     In June of 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The FASB later issued in June 1999 SFAS No.
137, which deferred the effective date for SFAS No. 133 to all fiscal years
beginning after June 15, 2000, with earlier application encouraged. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity to recognize all derivatives as
either assets of liabilities in the statement of financial position and measure
those instruments at fair value. The adoption of SFAS No. 133 did not have a
material impact on the Company's financial position or results of operations.

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


ITEM 7.  FINANCIAL STATEMENTS

     The Financial Statements to this Form 10-KSB are attached commencing on
page F-2.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURES

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

                                      F-1
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To NeoMedia Technologies, Inc.:

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

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

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

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 15 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and the current cash position of the Company raises substantial
doubt about its ability to continue as a going concern. Management's plans in
regards to these matters are also described in Note 15. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.


                                        /s/ ARTHUR ANDERSEN LLP

Tampa, Florida
March 30, 2001

                                      F-2
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                                -----------------------------

                                                                                   2000              1999
                                                                                -----------      ------------
<S>                                                                             <C>              <C>
ASSETS
Current assets:
Cash and cash equivalents ...............................................       $  4,453          $  2,460
   Restricted cash ......................................................            750               944
   Short-term investments ...............................................             --               150
   Trade accounts receivable, net of allowance for doubtful
      accounts of $484 in 2000 and $888 in 1999 .........................          4,370             3,419
   Digital Convergence receivable .......................................          5,144                --
   Costs and estimated earnings in excess of billings on
      uncompleted contracts .............................................             89                --
   Inventories ..........................................................            116                57
   Prepaid expenses and other current assets ............................            946               264
                                                                                --------          --------
         Total current assets ...........................................         15,868             7,294
                                                                                --------          --------
Property and equipment, net .............................................            365               545
Digital Convergence receivable, net of current portion ..................         10,288                --
Prepaid - Digital Convergence ...........................................          4,116                --
Intangible assets, net ..................................................          9,043             5,296
Other long-term assets ..................................................            914               522
                                                                                --------          --------
         Total assets ...................................................       $ 40,594          $ 13,657
                                                                                ========          ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable .....................................................       $  2,301          $  4,892
   Accrued expenses .....................................................          2,691               720
   Stock liability ......................................................             --             1,863
   Current portion of long-term debt ....................................            137               625
   Sales taxes payable ..................................................            261               454
   Billings in excess of costs and estimated earnings on
      uncompleted contracts .............................................             49               131
   Deferred revenues - Digital Convergence ..............................          1,543                --
   Deferred revenues ....................................................            449               265
   Other ................................................................             11                11
                                                                                --------          --------
         Total current liabilities ......................................          7,442             8,961
                                                                                --------          --------
Long-term debt, net of current portion ..................................            539               676
Long-term deferred revenue - Digital Convergence ........................         13,503                --
                                                                                --------          --------
         Total liabilities ..............................................         21,484             9,637
                                                                                --------          --------
Shareholders' equity:
   Preferred stock, $.01 par value, 10,000,000 shares
      authorized, none issued or outstanding ............................             --                --
   Common stock, $.01 par value, 50,000,000 shares
      authorized, 14,460,384 shares issued and outstanding
      in 2000 and 12,398,389 shares issued and
      12,023,389 outstanding in 1999 ....................................            145               119
   Additional paid-in capital ...........................................         57,619            36,367
   Accumulated deficit ..................................................        (37,875)          (32,466)
   Treasury stock, at cost, 201,230 shares of common stock ..............           (779)               --
                                                                                --------          --------
         Total shareholders' equity .....................................         19,110             4,020
                                                                                --------          --------
            Total liabilities and shareholders' equity ..................       $ 40,594          $ 13,657
                                                                                ========          ========
</TABLE>

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

                                      F-3
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)


<TABLE>
<CAPTION>

                                                                          Years Ended December 31,
                                                                          ---------------------------------
                                                                                      2000           1999
                                                                              -------------    ------------
<S>                                                                            <C>              <C>
NET SALES:

   License fees .........................................................      $     8,417      $     2,430
   Resales of software and technology equipment and service fees ........           19,148           22,826
                                                                               -----------      -----------

         Total net sales ................................................           27,565           25,256
                                                                               -----------      -----------


COST OF SALES:

   License fees .........................................................            1,296            1,790
   Resales of software and technology equipment and service fees ........           17,237           20,680
                                                                               -----------      -----------

         Total cost of sales ............................................           18,533           22,470
                                                                               -----------      -----------


GROSS PROFIT ............................................................            9,032            2,786


Sales and marketing expenses ............................................            6,504            6,765
General and administrative expenses .....................................            7,010            5,281
Research and development costs ..........................................            1,101              986
                                                                               -----------      -----------

Loss from operations ....................................................           (5,583)         (10,246)
Interest (income) expense, net ..........................................             (174)             226
                                                                               -----------      -----------

NET LOSS ................................................................      $    (5,409)     $   (10,472)
                                                                               ===========      ===========


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


Weighted average number of common shares--basic and diluted .............       13,931,104       10,377,478
                                                                               ===========      ===========
</TABLE>

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

                                      F-4
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                  Years Ended December 31,
                                                                                 ------------------------------
                                                                                          2000          1999
                                                                                       --------        --------
<S>                                                                                    <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .........................................................................     $ (5,409)       $(10,472)
Adjustments to reconcile net loss to net cash used in operating activities:
   Depreciation and amortization .................................................        2,336           2,029
   Loss on disposal of property and equipment ....................................           58              --
   Fair value of stock based compensation granted for
      professional services ......................................................          437              28
   Changes in operating assets and liabilities
      Trade accounts receivable, net .............................................        1,548           2,271
      Digital Convergence receivable .............................................       (2,767)             --
      Costs and estimates earnings in excess of billings on
         uncompleted contracts ...................................................          (89)            222
      Other current assets .......................................................         (121)            382
      Other long-term assets .....................................................         (194)             --
      Accounts payable, accrued expenses and stock liability .....................       (2,676)         (1,286)
      Billings in excess of costs and estimates earnings on
         uncompleted contracts ...................................................          (82)            131
      Deferred revenue ...........................................................          184            (391)
      Other current liabilities ..................................................           --              76
                                                                                       --------        --------
         Net cash used in operating activities ...................................       (6,775)         (7,010)
                                                                                       --------        --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of software development and purchased intangible assets ...........       (2,317)         (1,470)
Increase in cash surrender value of life insurance ...............................         (199)           (522)
Acquisition of property and equipment ............................................         (123)           (127)
                                                                                       --------        --------
         Net cash used in investing activities ...................................       (2,639)         (2,119)
                                                                                       --------        --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock
     net of  issuance costs of $74 in 2000 and $148 in 1999 ......................        9,203           8,172
Net proceeds from exercise of stock warrants .....................................        2,877              75
Net proceeds from exercise of stock options ......................................          537           1,061
Common stock repurchased .........................................................         (779)             --
Borrowings under notes payable and long-term debt ................................           --           2,000
Change in restricted cash ........................................................          194            (194)
Repayments on notes payable and long-term debt ...................................         (625)           (125)
                                                                                       --------        --------
         Net cash provided by financing activities ...............................       11,407          10,989
                                                                                       --------        --------

NET INCREASE IN CASH
   AND CASH EQUIVALENTS ..........................................................        1,993           1,860
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR .....................................        2,460             600
                                                                                       --------        --------
CASH AND CASH EQUIVALENTS, END OF YEAR ...........................................     $  4,453        $  2,460
                                                                                       ========        ========

SUPPLEMENTAL CASH FLOW INFORMATION:
   Interest paid during the year .................................................     $    170        $    146
   Non-cash investing and financing activities:
      Daystar assets purchased with shares of common stock .......................        3,520              --
      Conversion of short-term debt to equity ....................................           --           2,000
      Issuance costs for shares issued through private placements ................           96             112
      Stock liability due upon issuance of patent ................................           --           1,863
      Warrants issued for license contract .......................................        4,704              --
      Deferred revenue relating to license contract ..............................       15,432              --
</TABLE>

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

                                      F-5
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                        (In thousands, except share data)

<TABLE>
<CAPTION>

                                                  Common Stock        Additional                    Treasury Stock         Total
                                             ----------------------    Paid-in    Accumulated    --------------------- Shareholders'
                                                Shares     Amount      Capital       Deficit      Shares      Amount       Equity
                                             ----------  ----------   ----------  -----------    ---------   --------- ------------
<S>                                         <C>            <C>         <C>         <C>           <C>         <C>       <C>
BALANCE, DECEMBER 31, 1998 ................   8,699,080         $87      $25,168     ($21,994)         ---         ---       $3,261

Exercise of employee options ..............     611,854           6        1,055          ---          ---         ---        1,061
Issuance of common stock through
   private placement, net of $260 of
   issuance costs .........................   1,978,794          20        8,039          ---          ---         ---        8,059
Fair value of warrants issued for
   professional services rendered .........         ---         ---           28          ---          ---         ---           28
Exercise of warrants ......................     231,764           1           74          ---          ---         ---           75
Fair value of stock granted in
   conjunction with financing .............     501,897           5        2,003          ---          ---         ---        2,008
Net Loss ..................................         ---         ---          ---      (10,472)         ---         ---      (10,472)
                                             ----------  ----------   ----------  -----------    ---------   --------- ------------
BALANCE, DECEMBER 31, 1999 ................  12,023,389         119       36,367      (32,466)         ---         ---        4,020
                                             ----------  ----------   ----------  -----------    ---------   --------- ------------

Exercise of employee options ..............     182,787           2          535          ---          ---         ---          537
Issuance of common stock through
   private placement, net of $170 of
   issuance costs .........................   1,415,279          15        9,188          ---          ---         ---        9,203
Fair value of warrants issued for
   professional services rendered .........         ---         ---          253          ---          ---         ---          253
Fair value of stock issued for professional
   services rendered ......................      21,500           1          183          ---          ---         ---          184
Fair value of warrants issued
   related to license agreement
   with Digital Convergence ...............         ---         ---        4,704          ---          ---         ---        4,704
Exercise of warrants ......................     495,600           5        2,872          ---          ---         ---        2,877
Stock issued to purchase assets ...........     321,829           3        3,517          ---          ---         ---        3,520
Treasury Stock, at cost ...................                                                        201,230        (779)        (779)
Net Loss ..................................         ---         ---          ---       (5,409)         ---         ---       (5,409)
                                             ----------  ----------   ----------  -----------    ---------   --------- ------------
BALANCE, DECEMBER 31, 2000 ................  14,460,384        $145      $57,619     ($37,875)     201,230       ($779)     $19,110
                                             ==========  ==========   ==========   ==========   ==========  ==========   ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.

                                      F-6
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS

Basis of Presentation

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

Nature of Business Operations

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

          NeoMedia Application Services (NAS) (formerly named NeoMedia ASP), and

          NeoMedia Consulting and Integration Services (NCIS) (formerly named
          NeoMedia SI)

NeoMedia Application Services (NAS)

     NAS is the Company's core business and is based in the US, with development
and operating facilities in Fort Myers, Florida and contracted network support
provided in Herndon, Virginia. NAS develops and supports all of the Company's
core technology as well as its suite of application service provider services
including its linking "switch" and its application platforms including
PaperClick(TM) and the Qode Service. NAS also provides the contract systems
integration resources needed to design and build custom customer solutions
predicated on the Company's infrastructure technology.

                                      F-7
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


1.    BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS---(Continued)

NeoMedia Consulting and Integration Services (NCIS)

     NCIS is the original business line upon which the Company was organized.
NCIS resells client-server equipment and related software. The unit also
provides general and specialized consulting services targeted at software driven
print applications, and especially at process automation of production print
facilities through the efforts of its Integrated Document Factory (IDF)
consulting team. NCIS also identifies prospects for custom applications based on
the NeoMedia's NAS products and services. The operations are based in Lisle,
Illinois and Monterey, Mexico.


2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

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

Estimates

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

Revenue Recognition

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

                                      F-8
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES---(Continued)

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

     Software and technology equipment resale revenue is recognized when all of
the components necessary to run software or hardware have been shipped and only
insignificant post-delivery obligations remain. Historically, product returns
and allowances have been insignificant. Service revenues include maintenance
fees for providing system updates for software products, user documentation and
technical support and are recognized over the life of the contract. Software
license revenue from long-term contracts has been recognized on a percentage of
completion basis, along with the associated services being provided. Other
service revenues, including training and consulting, are recognized as the
services are performed.

     On October 18, 2000, NeoMedia entered into a ten-year license agreement
with Digital:Convergence Corporation (DC). The contract specifies
non-refundable, minimum royalties of $10 million each year payable in a
combination of cash and DC common stock. Additional royalties may be due
dependent on whether DC's annual gross revenues exceed certain thresholds.

     In addition, DC is required to issue NeoMedia shares of its common stock,
valued at approximately $15.4 million. This receivable and the related deferred
revenue are included in the accompanying consolidated balance sheet as Digital
Convergence receivable and deferred revenues. The stock is payable on October
18, 2001, and if not paid on that date, the amount must be paid in cash in three
equal installments on the one, two and three year anniversary of the date of
contract execution. The royalties and the deferred revenue related to the DC
stock receivable are being recognized as revenue evenly over the life of the
ten-year contract.

     As an incentive for DC to enter the contract, NeoMedia granted DC 1.4
million warrants for the purchase of NeoMedia's common stock, valued at
approximately $4.7 million. The value related to these warrants is included in
the accompanying consolidated balance sheet as prepaid expenses and other
current assets and prepaid to Digital Convergence. The warrants were 100 percent
vested and immediately exercisable at the date of grant. As of December 31,
2000, all 1.4 million warrants were still outstanding. The value of these
warrants is being recognized as contra-revenue evenly over the life of the
contract.

     In total, during 2000, the Company recognized approximately $7.8 million of
revenue related to this contract. This amount includes $5 million for royalties
earned before contract execution and which was paid in cash, $2.5 million of the
annual minimum royalities, of which $2 million was received in DC stock in the
first quarter of 2001. $386,000 related to the DC stock and $118,000 of
contra-revenue related to the warrants granted to DC. This revenue is included
in license fees in the accompanying consolidated statement of operations.

                                      F-9
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES---(Continued)


     On January 31, 2001, NeoMedia gave notice of default to DC under the
license agreement entered into on October 18, 2000, as a result of not receiving
any portion of the $3 million of cash and $2 million of cash or DC stock for
royalties due as of January 31, 2001. On February 24, 2001, NeoMedia agreed to
waive the default by DC and grant an extension of time for payment of the cash
portion of the royalties to April 24, 2001, in exchange for a promissory note
with principal amount of $3 million, bearing interest of 10 percent, maturing on
the earlier of the date upon which DC completes an equity or debt financing (or
combination thereof) aggregating in excess of $25 million, or April 24, 2001.
All principal and unpaid interest is due at maturity. NeoMedia received the $2
million of DC stock during the first quarter of 2001.



<TABLE>
<CAPTION>

                                                                  (Dollars in     Accounting
                                                                   thousands)      Treatment
                                                                   ----------     ----------
     ASSETS
     ------
<S>                                                              <C>           <C>
                                                                                Recoginize as
Digital Convergence receivable...............................      $   5,144    revenue over
                                                                                contract life
                                                                                Recoginize as
Digital Convergence receivable, net of current portion.......         10,288    revenue over
                                                                                contract life
Prepaids (current portion of warrants to DC).................            470    Recognize as
                                                                                contra-revenue
                                                                                over contract life
Prepaid warrants to DC.......................................          4,116    Recognize as
                                                                                contra-revenue
                                                                                over contract life

     LIABILITIES
     -----------
                                                                                Recoginize as
 Deferred revenue - DC.......................................          1,543    revenue over
                                                                                contract life
                                                                                Recoginize as
 Long term deferred revenue - DC.............................         13,503    revenue over
                                                                                contract life

      INCOME STATEMENT
      ----------------

License revenue from annual royalties........................          7,500    Recognized as
                                                                                revenue in 2000
License revenue from DC stock................................            386    Recognized as
                                                                                revenue in 2000
License revenue - contra for warrants in NeoMedia to DC......           (118)   Recognized as contra -
                                                                                revenue in 2000
</TABLE>

                                      F-10
<PAGE>

           NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES--(Continued)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES---(Continued)


Inventories

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

Property and Equipment

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

     Depreciation expense was $263,000 and $367,000 for the years ended December
31, 2000 and 1999, respectively.

Intangible Assets

     Intangible assets consist of capitalized software development costs,
patents, and an acquired customer list.

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

                                     F-11
<PAGE>

                 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES---(Continued)


     Intangible assets activity for the years ended December 31, 2000 and 1999
was as follows:

                                                  December 31,
                                                ----------------
                                             2000              1999
                                          ---------         ---------

     Beginning Balance                    $   5,296         $   3,729
     Additions                                5,837             3,229
     Amortization/Write-offs                 (2,090)           (1,662)
                                          ---------         ---------
     Ending Balance                       $   9,043         $   5,296
                                          =========         =========


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

     Amortization expense was $2,073,000 and $1,662,000 for the years ended
December 31, 2000 and 1999, respectively.


Evaluation of Long-Lived Assets

     The Company periodically performs an evaluation of the carrying value of
its long-lived assets, including intangible assets, in accordance with SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". This evaluation consists primarily of a comparison to
the future undiscounted net cash flows from the associated assets in comparison
to the carrying value of the assets. As of December 31, 2000, the Company is of
the opinion that no impairment of its long-lived assets has occurred.


Income Taxes

In accordance with SFAS No. 109, "Accounting for Income Taxes", income taxes are
accounted for using the assets and liabilities approach. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities, and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be recognized. The Company has
recorded a 100% valuation allowance as of December 31, 2000 and 1999.

                                     F-12
<PAGE>

                 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)


Computation of Net Loss Per Share

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

                                         December 31, 2000     December 31, 1999
                                         -----------------     -----------------

     Outstanding Stock Options.......         4,294,000             3,418,000
     Outstanding Warrants............         3,968,000             2,301,000

Financial Instruments

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


Concentrations of Credit Risk

     Financial instruments that potentially subject NeoMedia to concentrations
of credit risk consist primarily of trade accounts receivable with customers.
Credit risk is generally minimized as a result of the large number and diverse
nature of NeoMedia's customers, which are located throughout the United States.
NeoMedia extends credit to its customers as determined on an individual basis
and has included an allowance for doubtful accounts of $484,000 and $888,000 in
its December 31, 2000 and 1999 consolidated balance sheets, respectively.
NeoMedia had net sales to one major customer in the telecommunications industry
(Ameritech) of $5,824,000 and $5,843,000 during the years ended December 31,
2000 and 1999, respectively, resulting in trade accounts receivable of $229,000
and $225,000 as of December 31, 2000 and 1999, respectively. In addition, a
single company supplies the equipment and software, which is re-marketed to this
customer. Accordingly, the loss of this supplier would materially adversely
affect NeoMedia SI. Revenue generated from the remarketing of computer software
and technology equipment has accounted for a significant percentage of
NeoMedia's revenue. Such sales accounted for approximately 66% and 78% of
NeoMedia's revenue for the years ended December 31, 2000 and 1999, respectively.
Neomedia had license fees to one major customer (DC) of $7,768,000 during the
year ended December 31, 2000, resulting in an accounts receivable of $2,768,000
as of December 31, 2000. Revenue generated from this licensing agreement has
accounted for a significant percentage of Neomedia's revenue. Such sales
accounted for approximately 28% of Neomedia's revenue for the year ended
December 31, 2000.


Reclassifications

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

                                     F-13
<PAGE>

                 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)


Recent Accounting Pronouncements

     In June of 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The FASB later issued in June 1999 SFAS No.
137, which deferred the effective date for SFAS No. 133 to all fiscal years
beginning after June 15, 2000, with earlier application encouraged. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets of liabilities in the balance sheet and measure those instruments
at fair value. The adoption of SFAS No. 133 did not have an impact on the
Company's financial position or results of operations.

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


3.   CONTRACT ACCOUNTING

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

<TABLE>
                                                                    2000          1999
                                                                    ----          ----
<S>                                                               <C>           <C>
Costs Incurred on Contracts ................................      $   321       $   828
Profit to Date .............................................        1,087           980
                                                                  -------       -------
    Total Costs and Estimated Earnings .....................        1,408         1,808
Less - Billings to Date ....................................       (1,368)       (1,939)
                                                                  -------       -------
    Costs and Estimated Earnings in Excess of Billings .....      $    40       $  (131)
                                                                  =======       =======
</TABLE>

                                     F-14
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



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



                                                                 2000      1999
                                                                 ----      ----
Costs and Estimated Earnings in Excess of Billings .......      $  89     $ ---
Billing in Excess of Costs and Estimated Earnings ........         49      (131)
                                                                -----     -----
Costs and Estimated Earnings in Excess of Billings, Net ..      $  40     $(131)
                                                                =====     =====



4.   PROPERTY AND EQUIPMENT

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

                                                            2000       1999
                                                         ---------   ---------
                                                             (In thousands)

     Furniture and fixtures........................      $     314   $     420
     Leasehold improvements........................            124         124
     Equipment.....................................            504       1,290
                                                         ---------   ---------
           Total...................................            942       1,834
     Less accumulated depreciation.................           (577)     (1,289)
                                                         ---------   ---------
     Total property and equipment, net.............      $     365   $     545
                                                         =========   =========

5.   INTANGIBLE ASSETS

     As of December 31, 2000 and 1999, intangible assets consisted of the
following:

                                                            2000       1999
                                                         ---------   ---------
                                                             (In thousands)
     Capitalized and purchased software costs......      $   6,418   $   4,663
     Customer list.................................          1,143       1,155
     Repurchased license rights and other..........          3,520         ---
     Patents and related costs.....................          3,026       2,672
                                                         ---------   ---------
           Total...................................         14,107       8,490
     Less accumulated amortization.................         (5,064)     (3,194)
                                                         ---------   ---------
     Total intangible assets, net..................      $   9,043   $   5,296
                                                         =========   =========

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

                                     F-15
<PAGE>

                 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



6.   FINANCING AGREEMENTS

     The Company has an agreement with a commercial finance company that
provides short-term financing for certain computer hardware and software
purchases. Under the agreement, there are generally no financing charges for
amounts paid within 30 or 45 days, depending on the vendor used to source the
product. Under this agreement there are two separate lines of credit. The first
line has credit availability of $750,000. The second line has credit
availability of up to $2,000,000, based upon the Company's customer credit
rating. Borrowings are collateralized by all inventory, property and equipment,
and accounts receivable. In addition, as of December 31, 2000, a $750,000 letter
of credit was issued to the benefit of the commercial finance company. At
December 31, 2000 and 1999, Neomedia collateralized this letter with a
restricted cash balance of $750,000 and $944,000, respectively. As of December
31, 2000 and 1999, amounts due under this financing agreement included in
accounts payable were $1,101,000 and $1,509,000, respectively.


7.   LONG-TERM DEBT

     As of December 31, 2000 and 1999, long-term debt consisted of the
following:

<TABLE>
                                                                                                     2000        1999
                                                                                                   -------     -------
<S>                                                                                               <C>          <C>
                                                                                                      (In thousands)
     Note payable to International Digital Scientific, Inc. (IDSI),
     non-interest bearing with interest imputed at 9%,
        due with minimum monthly installments of $16,000 through March 2005 ..............         $   816     $ 1,008

     Note payable, interest bearing at 20% per annum, $250,000 due January 2000
        and $250,000 due February 2000, secured by 375,000 shares of previously
        unissued Company common stock placed in escrow. Subsequent to the
        repayment of the note in 2000, these
          shares were removed from escrow and returned to the Company ....................              --         500
                                                                                                   -------     -------
           Subtotal ......................................................................             816       1,508
     Less: unamortized discount ..........................................................            (140)       (207)
                                                                                                   -------     -------
           Total long-term debt ..........................................................             676       1,301
     Less: current portion ...............................................................            (137)       (625)
                                                                                                   -------     -------
     Long-term debt, net of current portion ..............................................         $   539     $   676
                                                                                                   =======     =======
</TABLE>
     The long-term debt repayments for each of the next five fiscal years ending
December 31 are as follows:
<TABLE>
                                                                                            (In thousands)
                                                                                            --------------
<S>                                                                                          <C>
     2001.................................................................................   $     192
     2002.................................................................................         192
     2003.................................................................................         192
     2004.................................................................................         192
     2005.................................................................................          48
                                                                                             ---------
     Total................................................................................   $     816
                                                                                             ---------
</TABLE>

                                     F-16
<PAGE>

                 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


     In October 1994, the Company purchased, via seller financing, certain
computer software from IDSI. The aggregate purchase price was $2,000,000 and was
funded by the seller with an uncollateralized note payable, without interest, in
an amount equal to the greater of: (i) 5% of the collected gross revenues of
NeoMedia Migration for the preceding month; or (ii) the minimum installment
payment as defined, until paid in full. The minimum installment payment is the
amount necessary to provide an average monthly payment for the most recent
twelve month period of $16,000 per month. The present value of $2,000,000
discounted at 9% (the Company's then incremental borrowing rate) for 125 months
was approximately $1,295,000, the capitalized cost of the assets acquired. The
discount is being accreted to interest expense over the term of the note. The
software acquired was amortized over its estimated useful life of three years.
As of December 31, 2000 and 1999, the balance of the note payable, net of
unamortized discount, was $676,000 and $801,000, respectively.


8.   INCOME TAXES

     For the years ended December 31, 2000 and 1999, the components of income
tax expense were as follows:
                                                            2000          1999
                                                          --------     --------
                                                              (In thousands)
     Current .........................................    $     --     $     --
     Deferred ........................................          --           --
                                                          --------     --------
     Income tax expense/(benefit) ....................    $     --     $     --
                                                          ========     ========


     As of December 31, 2000 and 1999, the types of temporary differences
between the tax basis of assets and liabilities and their financial reporting
amounts which gave rise to deferred taxes, and their tax effects were as
follows:

                                                            2000         1999
                                                          --------     --------
                                                             (In thousands)
     Accrued employee benefits .......................    $     30     $     31
     Provisions for doubtful accounts ................         182          337
     Deferred revenue ................................          13           --
     Capitalized software development costs ..........         284           98
     Net operating loss carryforwards (NOL) ..........      15,021       12,724
     Research and Development Credit .................          --           91
     Accruals ........................................         864           59
     Other ...........................................          17           --
     Alternative minimum tax credit carryforward .....          45           45
                                                          --------     --------
     Total deferred tax assets .......................      16,456       13,385
     Valuation Allowance .............................     (16,456)     (13,385)
                                                          --------     --------
     Net deferred income tax asset ...................    $     --     $     --
                                                          ========     ========

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

                                     F-17
<PAGE>

                 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


8.   INCOME TAXES--(Continued)


     For the years ended December 31, 2000 and 1999, the income tax benefit
differed from the amount computed by applying the statutory federal rate of 34%
as follows:

                                                          2000           1999
                                                        -------        -------
                                                              (In thousands)
     Benefit at federal statutory rate .............     $(1,839)       $(3,561)
     State income taxes, net of federal ............        (196)           319
     Foreign income taxes, net of federal ..........          --             61
     Exercise of non-qualified stock options .......        (176)            --
     Permanent and other, net ......................        (860)            26
     Change in valuation allowance .................       3,071          3,154
                                                         -------        -------
     Income tax expense/(benefit) ..................     $   --         $    --
                                                         =======        =======


     As of December 31, 2000, NeoMedia had net operating loss carryforwards for
federal tax purposes totaling approximately $40 million which may be used to
offset future taxable income, or, if unused expire between 2011 and 2020. As a
result of certain of NeoMedia's equity activities occurring during the year
ended December 31, 1997, NeoMedia anticipates that the annual usage of its pre
1998 net operating loss carryforwards may be further restricted pursuant to the
provisions of Section 382 of the Internal Revenue Code.

     The valuation allowance for deferred tax assets increased by approximately
$176,000 due to the exercise of stock options, which will result in future tax
deductions. The related benefit is recorded to shareholders' equity as it is
realized.

                                     F-18
<PAGE>

                 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


9.   TRANSACTIONS WITH RELATED PARTIES

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

     During the year ended December 31, 1999, the Company leased from a director
of the Company a trade show booth for rental payments totaling $31,000. The
lease expired during 1999.

     In January 1999, the spouse of a director of the Company purchased 82,372
shares of the Company's common stock from NeoMedia at a price of $3.03 per
share. In January 1999, a director of the Company purchased 42,857 shares of the
Company's common stock from NeoMedia at a price of $3.50 per share. As part of
these purchases, the spouse of the director received a total of 8,237 warrants
to purchase stock at $3.04 per share and the director received 4,286 warrants to
purchase stock at $3.50 per share.

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

     In April 2000, the Company paid professional fees in the amount of $8,000
to a director of the Company for consulting services rendered.

     In June 1999, NeoMedia sold a license to operate, using NeoMedia's Neolink
Information Server to Daystar, a company owned in part by an officer and a board
member of NeoMedia, for $500,000. In April 2000, NeoMedia purchased
substantially all the assets of Daystar, including the rights to the license it
sold to Daystar in 1999, for approximately $3.5 million of NeoMedia's common
stock. The assets purchased were valued at approximately $3.5 million and are
included in other intangible assets on the accompanying consolidated balance
sheets.

10.  COMMITMENTS AND CONTINGENCIES

     NeoMedia leases its office facilities and certain office and computer
equipment under various operating leases. These leases provide for minimum rents
and generally include options to renew for additional periods. For the years
ended December 31, 2000 and 1999, NeoMedia's rent expense was $1,067,000 and
$1,268,000, respectively.

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

                                     F-19
<PAGE>

                 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


10.  COMMITMENTS AND CONTINGENCIES--(Continued)

     The following is a schedule of the future minimum lease payments under
non-cancelable operating leases as of December 31, 2000:


                                                           Payments
                                                           --------
                            (In thousands)
     2001............................................       $  595
     2002............................................          329
     2003............................................          116
     2004............................................           22
     2005............................................            1
                                                            ------
     Total...........................................       $1,063
                                                            ======

     NeoMedia has entered into various employment and consulting agreements
which require an aggregate of approximately $175,833 in annual payments. These
employment and consulting agreements extend to various dates through 2001. These
agreements also provide for the payment of severance and other benefits under
certain conditions.

                                     F-20
<PAGE>

                 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


11.  DEFINED CONTRIBUTION SAVINGS PLAN

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

12.  EMPLOYEE STOCK OPTION PLAN

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

     Effective March 27, 1998, NeoMedia adopted the 1998 Stock Option Plan
making available for grant to employees of NeoMedia options to purchase up to
8,000,000 shares of NeoMedia's common stock. The stock option committee of the
board of directors has the authority to determine to whom options will be
granted, the number of options, the related term, and exercise price. The option
exercise price may be less than the fair market value per share of NeoMedia's
common stock on the date of grant. Options granted during 2000 and 1999 were
granted at an exercise price equal to fair market value on the date of grant.
Options generally vest 20% upon grant and 20% per year thereafter. The options
expire ten years from the date of grant.

     Effective January 1, 1996, NeoMedia adopted SFAS No. 123, "Accounting for
Stock-Based Compensation" defines a fair-value based method of accounting for an
employee stock option or similar equity instrument and encourages all entities
to adopt that method of accounting for all of their employee stock compensation
plans. However, SFAS 123 also allows an entity to continue to measure
compensation cost for stock-based compensation plans using the intrinsic-value
method of accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Entities electing to
continue using the accounting method in APB 25 must make pro forma disclosures
of net income and earnings per share as if the fair-value method of accounting
had been adopted. Because NeoMedia elected to continue using the accounting
method in APB 25, no compensation expense was recognized in the consolidated
statements of operations for the years ended December 31, 2000 and 1999 for
stock-based employee compensation. Had compensation cost for NeoMedia's
stock-based compensation plan been determined using the fair-value method of
accounting, NeoMedia's net loss and loss per share would have been increased to
$7,498,000 or $0.54 per share in 2000, and $11,731,000 or $1.13 per share, in
1999.

     For grants in 2000 and 1999, the following assumptions were used: (i) no
expected dividends; (ii) a risk-free interest rate of 6% for 2000 and 5% for
1999; (iii) expected volatility of 80% for 2000 and 70% for 1999 and (iv) an
expected life of 4 years for options granted in 2000 and in 1999. The fair-value
was determined using the Black-Scholes option-pricing model.

                                     F-21
<PAGE>

                 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



     The estimated fair value of grants of stock options and warrants to
non-employees of NeoMedia is charged to expense in the consolidated financial
statements. These options vest in the same manner as the employee options
granted under the 1998 Stock Option Plan.

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


                                                             2000         1999
                                                             ----         ----
Net Loss
   As reported ........................................     $5,409      $10,472
   Pro forma ..........................................     $7,498      $11,731

Net loss per share
   As reported ........................................      $0.39        $1.01
   Pro forma ..........................................      $0.54        $1.13
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


12.  EMPLOYEE STOCK OPTION PLAN--(Continued)

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

<TABLE>
<CAPTION>

                                                                        2000                    1999
                                                                --------------------   ---------------------
                                                                            Weighted               Weighted
                                                                             Average                Average
                                                                            Exercise               Exercise
                                                                 Shares       Price      Shares      Price
                                                                ---------   --------   ---------   ---------
                                                             (In thousands)          (In thousands)
<S>                                                              <C>       <C>           <C>       <C>
     Outstanding at beginning of year........................       3,418   $   4.43       3,164   $    4.40
     Granted.................................................       1,192       4.87       1,721        4.71
     Exercised...............................................        (170)      2.83        (599)       1.77
     Forfeited...............................................        (146)      5.78        (868)       5.79
                                                                ---------   --------   ---------   ---------
     Outstanding at end of year..............................       4,294   $   4.71       3,418   $    4.43
                                                                =========   ========   =========   =========
     Options exercisable at year-end.........................       2,140                  1,398
     Weighted-average fair value of options
        granted during the year..............................   $    3.05              $    2.68
     Available for grant at the end
        of the year..........................................       4,116                  5,162
</TABLE>

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

<TABLE>
                                  Options Outstanding                                  Options Exercisable
   -----------------------------------------------------------------------       ----------------------------
                                                Weighted-        Weighted-                          Weighted-
                                                 Average          Average                            Average
        Range of                 Number         Remaining        Exercise            Number         Exercise
     Exercise Prices           Outstanding  Contractual Life       Price           Exercisable        Price
   ------------------       --------------- ----------------     ---------       ---------------    --------
                             (In thousands)                                      (In thousands)
<S>           <C>            <C>            <C>                  <C>              <C>               <C>
   $   -- to  $   .84               190        5.2 years         $     .84              190         $     .84
     1.88 to     2.91               485        7.8 years              2.65              321              2.60
     3.00 to     4.91             1,932        8.8 years              3.93              713              3.82
     5.00 to     7.88             1,415        8.3 years              6.14              748              6.31
     8.00 to    10.88               272        8.5 years              9.22              168              9.08
   ------------------            ------        ---------         ---------           ------         ---------
    $ .84 to  $ 10.88             4,294        8.3 years         $    4.71            2,140         $    4.66
   ==================             =====        =========         =========            =====         =========
</TABLE>

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

                                      F-23
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


12.  EMPLOYEE STOCK OPTION PLAN--(Continued)

     In October 2000, the Company issued 80,000 warrants to buy shares of the
Company's common stock to an outside consultant at a price of $4.13 per share
for consulting services rendered, and recognized $252,700 in expense in its 2000
consolidated financial statements. These warrants vest in the same manner as the
employee options granted under the 1998 Stock Option Plan. All these warrants
were outstanding at December 31, 2000. Of these warrants, 16,000 were vested at
December 31, 2000.

Warrants

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

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

Balance December 31, 1998            1,639,832
-------------------------------------------------
     Warrants issued                 1,118,630
-------------------------------------------------

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

-------------------------------------------------
Balance December 31, 1999            2,676,362
-------------------------------------------------

-------------------------------------------------
     Warrants issued                 1,787,073
-------------------------------------------------

-------------------------------------------------
     Warrants exercised                495,600
                                       -------
-------------------------------------------------

-------------------------------------------------
Balance December 31, 2000            3,967,835
                                     =========
-------------------------------------------------


During 2000, the Company issued 1,400,000 warrants as part of a ten year license
of the Company's intellectual property. These warrants were immediately vested
and exercisable. The associated expense is being recognized over the life of the
contract. During 2000, $117,600 was recorded as a reduction of the license
revenue related to the contract.

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

                                                    Weighted
                                                    Average           Weighted
                                                   Remaining          Average
         Range of                Number of        Contractual         Exercise
     Exercise Prices            Outstanding       Life (Years)         Price
 --------------------------   ---------------   ----------------    -----------

              $0.10 - $5.50      633,907               1.9             $ 2.62
              $5.51 - $6.99    1,547,923               4.5             $ 6.02
              $7.00 - $9.99    1,490,523               1.5             $ 7.95
            $10.00 - $15.00      295,482               1.8             $12.17
                                 -------               ---             ------
                               3,967,835               2.8             $ 6.66
                               =========               ===             ======


                                      F-24
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


13.  SEGMENT INFORMATION

     Beginning with the year ended December 31, 1999, the Company adopted SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131). SFAS 131 supersedes Financial Accounting Standards Board's SFAS No.
14, "Financial Reporting for Segments of a Business Enterprise." SFAS 131
establishes standards for the way that business enterprises report information
about operating segments in annual financial statements. SFAS 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers.

     The Company is organized into two business segments: (a) NeoMedia ASP, and
(b) NeoMedia SI. Performance is evaluated and resources allocated based on
specific segment requirements and measurable factors. Management uses the
Company's internal income statements to evaluate each business unit's
performance. Assets of the business units are not available for management of
the business segments nor for disclosure.

     Operational results for the two segments for the years ended December 31,
2000 and 1999 are presented below:

<TABLE>
<CAPTION>
                                                  NeoMedia ASP      NeoMedia SI      Consolidated
                                                  ------------      -----------      ------------
     <S>                                          <C>               <C>              <C>
     Year Ended December 31, 2000
     Net Sales..............................      $      8,083      $    19,482      $     27,565
     Net Loss...............................            (4,225)          (1,184)           (5,409)

     Year Ended December 31, 1999
     Net Sales..............................      $        795      $    24,461      $     25,256
     Net Loss...............................            (5,916)          (4,556)          (10,472)
</TABLE>



14.  COMMON STOCK

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

                                      F-25
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


14.  COMMON STOCK--(Continued)

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

15.  LIQUIDITY AND SUBSEQUENT EVENTS

     During the years ended December 31, 2000 and 1999 the Company's net loss
totaled approximately $5,409,000 and $10,472,000 respectively. As of December
31, 2000 the Company has an accumulated deficit of approximately $37,875,000 and
approximately $750,000 in restricted cash balances. The Company's unrestricted
cash balance at March 30, 2001 was approximately $2.4 million (unaudited).

     Management believes it will need to raise additional capital as well as
reduce expenses to sustain the Company's operations in 2001. The failure of
management to accomplish these initiatives will adversely affect the Company's
business, financial conditions, and results of operations and its ability to
continue as a going concern.


     Subsequent to December 31, 2000, the following events have occurred:

          .    During the first quarter 2001, the Company received proceeds of
               $499,835 from the exercise of options/warrants.

          .    During the first quarter of 2001, the Company raised $1,535,500
               from the sale of previously unissued common stock to unrelated
               third parties.

          .    On January 31, 2001, NeoMedia gave notice of default to DC under
               the license agreement entered into on October 18, 2000, as a
               result of not receiving any portion of the $3 million of cash and
               $2 million of cash or DC stock for royalties due as of January
               31, 2001. On February 24, 2001, NeoMedia agreed to waive the
               default by DC and grant an extension of time for payment of the
               cash portion of the royalties to April 24, 2001, in exchange for
               a promissory note with principal amount of $3 million, bearing
               interest of 10 percent, maturing on the earlier of the date upon
               which DC completes an equity or debt financing (or combination
               thereof) aggregating in excess of $25 million, or April 24, 2001.
               All principal and unpaid interest is due at maturity. NeoMedia
               received the $2 million of DC stock during the first quarter of
               2001.

                                      F-26
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



15.  LIQUIDITY AND SUBSEQUENT EVENTS--(Continued)


          .    On March 1, 2001, the Company acquired substantially all of the
               assets of Qode.com, Inc., a commerce-enabling company that
               delivers promotions to consumers over the internet through its
               Qode Universal Commerce Solution.(TM) The Qode system is
               comprised of a directory of products and retailers, enhanced with
               Qode's proprietary Product DNA(TM), and coupled with a product
               search engine. The Qode Solution is licensable, and is designed
               to increase revenues, traffic and loyalty to internet websites.


               In consideration for these assets, the Company issued 1,676,500
               shares of the Company's Common Stock to Qode.com, Inc., issued
               274,699 of the Company's Common Stock to certain debtholders of
               Qode.com, Inc., forgave a $440,000 short term note to the
               Company, and assumed $836,000 of Qode.com, Inc. payables. The
               1,676,500 shares paid to Qode.com, Inc. are to be held in escrow
               for one year, and are subject to downward adjustment, based upon
               the achievement of certain performance targets over the period of
               March 1, 2001 to February 28, 2002. As a result of the
               acquisition, the Company acquired substantially all of Qode's
               assets, including but not limited to, contracts, customer lists,
               licenses and intellectual property.

                                      F-27
<PAGE>

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
        PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

     The information required in response to this item is incorporated by
reference to the registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.

                                     III-1
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

The information required in response to this item is incorporated by reference
to the registrant's Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required in response to this item is incorporated by reference
to the registrant's Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required in response to this item is incorporated by reference
to the registrant's Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report.


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

     (1) The following exhibits required by Item 601 of Regulation S-B to be
filed herewith are hereby incorporated by reference:

   Exhibit
     No.       Description
   -------     -----------

     3.1       Restated Certificate of Incorporation of DevSys, Inc.
               (Incorporated by reference to Exhibit 3.3 to NeoMedia's
               Registration Statement, No. 333-5534 (the "Registration
               Statement")).

     3.2       By-laws of DevSys, Inc. (Incorporated by reference to Exhibit 3.4
               to NeoMedia's Registration Statement).

     3.3       Certificate of Amendment to Certificate of Incorporation of
               DevSys, Inc. changing its name to NeoMedia Technologies, Inc.
               (Incorporated by reference to Exhibit 3.13 to NeoMedia's
               Registration Statement).

     3.4       Form of Certificate of Amendment to Certificate of Incorporation
               of NeoMedia Technologies, Inc. authorizing a reverse stock split
               (Incorporated by reference to Exhibit 3.14 to NeoMedia's
               Registration Statement).

     4.1       Form of Certificate for Common Stock of DevSys, Inc.
               (Incorporated by reference to Exhibit 4.1 to NeoMedia's
               Registration Statement).

     4.2       Form of Joseph Charles' Warrant Agreement (Incorporated by
               reference to Exhibit 4.2 to NeoMedia's Registration Statement).

     4.3       Form of Principal Stockholder's Warrant (Incorporated by
               reference to Exhibit 4.6 to NeoMedia's Registration Statement).

     4.4       Form of Placement Agent's Warrant for the Purchase of Shares of
               Common Stock and Warrants (Incorporated by reference to Exhibit
               4.8 to NeoMedia's Registration Statement).

     4.5       Form of Warrant to Charles W. Fritz (Incorporated by reference to
               Exhibit 4.10 to NeoMedia's Form 10-KSB for the year ended
               December 31, 1997)


                                     III-2
<PAGE>

   Exhibit
     No.       Description
   -------     -----------

     4.6       Form of Warrant to Dominick & Dominick, Incorporated
               (Incorporated by reference to Exhibit 4.11 to NeoMedia's Form
               10-KSB for the year ended December 31, 1997)

     4.7       Form of Warrant to Compass Capital, Inc. (Incorporated by
               reference to Exhibit 4.12 to NeoMedia's Form 10-KSB for the year
               ended December 31, 1997)

     4.8       Form of Warrant to Thornhill Capital, L.L.C. (Incorporated by
               reference to Exhibit 4.10 to NeoMedia's Form 10-KSB for the year
               ended December 31, 1997)

     4.9       Form of Warrant to Southeast Research Partners, Inc.
               (Incorporated by reference to Exhibit 4.14 to NeoMedia's Form
               10-KSB for the year ended December 31, 1997)

     4.10      Form of Warrant to Joseph Charles & Associates, Inc.
               (Incorporated by reference to Exhibit 4.15 to NeoMedia's Form
               10-KSB for the year ended December 31, 1997)

     10.1      Form of Nonsolicitation and Confidentiality Agreement
               (Incorporated by reference to Exhibit 10.2 to NeoMedia's
               Registration Statement).

     10.2      Employment Agreement dated May 1, 1996 between Dev-Tech
               Associates, Inc. and Charles W. Fritz (Incorporated by reference
               to Exhibit 10.3 to NeoMedia's Registration Statement).

     10.3      Employment Agreement dated April 1, 1996 between Dev-Tech
               Associates, Inc. and Robert T. Durst, Jr. (Incorporated by
               reference to Exhibit 10.4 to NeoMedia's Registration Statement).

     10.4      Employment Agreement dated May 1, 1996 between Dev-Tech
               Associates, Inc. and Charles T. Jensen (Incorporated by reference
               to Exhibit 10.5 to NeoMedia's Registration Statement).

     10.5      Dev-Tech Associates, Inc. Annual Incentive Plan for Management
               (Incorporated by reference to Exhibit 10.43 to NeoMedia's
               Registration Statement).

     10.6      Dev-Tech Associates, Inc. 401(k) Plan and amendments thereto
               (Incorporated by reference to Exhibit 10.50 to NeoMedia's
               Registration Statement).

     10.7      First Amendment and Restatement of NeoMedia Technologies, Inc.
               1996 Stock Option Plan (As Established Effective February 1,
               1996, and as amended through November 18, 1996) (Incorporated by
               reference to Exhibit 10.60 to NeoMedia's Registration Statement).

     10.8      Agreement of Lease Between First Union National Bank of Florida
               and NeoMedia Technologies, Inc. Dated November 27, 1996
               (Incorporated by reference to Exhibit 10.43 to NeoMedia's Form
               10-KSB for the year ended December 31, 1996).

     10.9      Agreement for Wholesale Financing (Security Agreement) Between
               IBM Credit Corporation and NeoMedia Technologies, Inc. Dated
               February 20, 1997 (Incorporated by reference to Exhibit 10.47 to
               NeoMedia's Form 10-KSB for the year ended December 31, 1996).

     10.10     Collateralized Guaranty Between IBM Credit Corporation and
               NeoMedia Migration, Inc. Dated February 20, 1997 (Incorporated by
               reference to Exhibit 10.48 to NeoMedia's Form 10-KSB for the year
               ended December 31, 1996).

     10.11     NeoMedia Technologies, Inc. 1998 Stock Option Plan (Incorporated
               by reference to Appendix A to NeoMedia's Form 14A Filed on
               February 18, 1998).

     10.12     Amendment to NeoMedia Technologies 1998 Stock Option Plan
               (Incorporated by reference to text of NeoMedia form 14A filed on
               July 2, 1999)

     10.13     Employment Agreement dated August 2, 1999 between NeoMedia
               Technologies, Inc. and William Goins (incorporated by reference
               to exhibit 10.32 of NeoMedia's Form 10-KSB for the year ended
               December 31, 1999.)

     10.14     Licensing Agreement between Digital:Convergence Corporation and
               NeoMedia Technologies, Inc. (Incorporated by reference to Exhibit
               10.1 of NeoMedia Form 10-QSB filed on October 30, 2000)

     10.15     Sale and Purchase Agreement between Qode.com, Inc. and NeoMedia
               Technologies, Inc. (Incorporated by reference to Exhibit 10.1 of
               NeoMedia Form 8K filed on March 15, 2001)

     21        Subsidiaries (Incorporated by reference to description of
               Company's subsidiaries contained in Part I, Item I of this form
               10-KSB.


                                     III-3
<PAGE>

     (2)  The following exhibits required by Item 601 of Regulation S-B are
          hereby filed herewith:


     Exhibit
       No.        Description
     -------      -----------

     3.5      Form of Certificate of Amendment to Restated Certificate of
              Incorporation of NeoMedia Technologies, Inc. increasing authorized
              capital and creating preferred stock.

     23.1     Consent of Arthur Andersen LLP

     27.1     Article 5 Financial Data

(b)  Reports on Form 8-K

     Form 8-K filed October 30, 2000 to report Licensing Agreement between
     Digital: Convergence Corporation and NeoMedia Technologies, Inc.

     Form 8-K filed March 16, 2001 to report the acquisition of substantially
     all of the assets of Qode.com, Inc.

                                     III-4
<PAGE>

                                   EXHIBIT 3.5

                            CERTIFICATE OF AMENDMENT
                                       OF
                      RESTATED CERTIFICATE OF INCORPORATION
                                       OF
                           NEOMEDIA TECHNOLOGIES, INC.

     NEOMEDIA TECHNOLOGIES, INC., a corporation organized and existing under and
by virtue of the General Corporation law of the State of Delaware, as amended
(the "Company"), DOES HEREBY CERTIFY:

     FIRST: That the Board of Directors of the Company duly adopted resolutions
setting forth the proposed amendment to the Company's Restated Certificate of
Incorporation, and directed that such amendment be submitted to the stockholders
of the Company with the recommendation that the proposed amendment be approved
and adopted. The resolution setting forth the proposed amendment is as follows:

          RESOLVED, that Article IV of the Company's Restated Certificate of
     Incorporation be amended to read as follows:

               "The total number of shares of capital stock that the Corporation
          is authorized to issue be increased from 15,000,000 to 60,000,000,
          which are to be divided into two classes as follows:

               50,000,000 shares of common stock, par value $.01 per share; and

               10,000,000 shares of preferred stock, par value $.01 per share.

               The 10,000,000 shares of preferred stock may be issued in one or
          more series at such time or times and for such consideration as shall
          be authorized from time to time by the Board of Directors. The Board
          of Directors will be authorized to fix the designation of each series
          of preferred stock and the relative rights, preferences, limitations,
          qualifications, powers or restrictions thereof, including the number
          of shares comprising each series, the dividend rates, redemption
          rights, rights upon voluntary or involuntary liquidation, provisions
          with respect to a retirement or sinking fund, conversion rights,
          voting rights, if any, preemptive rights, other preferences,
          qualifications, limitations, restrictions and the special or relative
          rights of each series."

     SECOND: That thereafter, pursuant to resolution of its Board of Directors,
a special meeting of the stockholders of said corporation was duly called and
held, upon notice in accordance with Section 242 of the General Corporation Law
of the State of Delaware.

                                     III-5
<PAGE>

     THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of Delaware, as
amended.

     FOURTH: That the capital of the Company shall not be reduced under or by
reason of said amendment.

     IN WITNESS WHEREOF, the Company has caused this Certificate of Amendment of
Restated Certificate of Incorporation to be signed by its President, and
attested by its Secretary, this 27th day of March, 1998.

                                            NEOMEDIA TECHNOLOGIES, INC.


                                            By:        /s/Charles W. Fritz
                                               ---------------------------------
                                               Charles W. Fritz, President

ATTEST:

By:     /s/ William E. Fritz
   ---------------------------------
   William E. Fritz, Secretary

                                     III-6
<PAGE>

                                   SIGNATURES

     In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized in the City of Fort Myers, State of
Florida, on the 9th day of April, 2001.

                                            NEOMEDIA TECHNOLOGIES, INC.
                                            Registrant


                                            By:       /s/ CHARLES W. FRITZ
                                               ---------------------------------
                                               Charles W. Fritz, Chief Executive
                                               Officer and Chairman of the Board

     In accordance with the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on April 9, 2001.

      Signatures                                 Title
      ----------                                 -----

  /s/ CHARLES W. FRITZ          Chief Executive Officer, Chairman of the
--------------------------        Board and Director
    Charles W. Fritz

  /s/ WILLIAM E. FRITZ          Secretary and Director
--------------------------
    William E. Fritz

/s/ ROBERT T. DURST, JR.        Chief Technical Officer and Director
--------------------------
  Robert T. Durst, Jr.

  /s/ CHARLES T. JENSEN         Chief Financial Officer, Treasurer and Director
--------------------------
    Charles T. Jensen

  /s/ A. HAYES BARCLAY          Director
--------------------------
    A. Hayes Barclay

    /s/ JAMES J. KEIL           Director
--------------------------
      James J. Keil

     /s/ PAUL REECE             Director
--------------------------
       Paul Reece

   /s/ JOHN A. LOPIANO          Director
--------------------------
     John A. Lopiano

                                     III-7