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

                                   FORM 10-KSB

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

                   For the Fiscal Year Ended December 31, 2005

                                       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.
                      (Exact Name of 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) 239-337-3434

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

    Title of Each Class                              Name of each exchanged
Common Stock, par value $.01                           on which registere
                                                Over-the-Counter Bulletin Board

      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-X 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-K
or any amendment to this Form 10-K |_|

      Issuer's  consolidated  revenue  for  its  most  recent  fiscal  year  was
$2,156,000.

      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 the
Over-the-Counter  Bulleting Board on February 28, 2006 ($0.39) was $210,089,000.
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 February 28, 2006, there were outstanding  601,789,324 shares of the
issuer's Common Stock.

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                                     PART I

              CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

      This Form  10-KSB  contains  forward-looking  statements  and  information
relating to NeoMedia Technologies,  Inc. ("NeoMedia" or "the Company"). NeoMedia
intends to identify forward-looking statements in this prospectus by using words
such as  "believes,"  "intends,"  "expects,"  "may," "will,"  "should,"  "plan,"
"projected,"    "contemplates,"    "anticipates,"    "estimates,"    "predicts,"
"potential,"  "continue," or similar terminology.  These statements are based on
the Company's  beliefs as well as assumptions the Company made using information
currently  available to us. The Company  undertakes  no  obligation  to publicly
update or revise  any  forward-looking  statements,  whether  as a result of new
information,  future events, or otherwise.  Because these statements reflect the
Company's  current views  concerning  future events,  these  statements  involve
risks,  uncertainties,   and  assumptions.  Actual  future  results  may  differ
significantly from the results discussed in the forward-looking statements.

ITEM 1.  DESCRIPTION OF BUSINESS

General

      NeoMedia develops proprietary  technologies that link physical information
and  objects to the  Internet  marketed  under the  "PaperClick(R)"  brand name.
NeoMedia has also developed an extensive patent portfolio  covering  convergence
of the physical world and the Internet.

      During  2005,   NeoMedia   continued  its  efforts  to  commercialize  its
PaperClick and Micro Paint Repair businesses both in North America and overseas.
As part  of the  commercialization  efforts,  NeoMedia  began  to  implement  an
aggressive  growth  campaign  focusing  on  expansion  through  acquisition  and
globalization.  As a result, during the first quarter of 2006 NeoMedia completed
acquisitions  of Mobot,  Inc.,  12Snap AG, Sponge Ltd.,  and Gavitec AG, and BSD
Software, Inc., and also signed a letter of intent to acquire Hip Cricket, Inc.
(see below for additional discussion of acquisitions)

      The Company has adopted a code of ethics,  as required by the rules of the
SEC (attached as exhibit 10.55  hereto).  This code of ethics  applies to all of
the Company's  directors,  officers and employees.  The code of ethics,  and any
amendments to, or waivers from, the code of ethics, is available in print, at no
charge, to any stockholder who requests such information.

Company Structure

      During the year ended  December 31,  2005,  NeoMedia  was  structured  and
evaluated by its Board of Directors and  Management as three  distinct  business
units:

      -     NeoMedia Internet Switching Software (NISS),

      -     NeoMedia Micro Paint Repair (NMPR)

      -     NeoMedia Consulting and Integration Services (NCIS), and

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

                                       1
<PAGE>

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

      NCIS is the  original  business  line upon which the Company was  founded.
This unit resells client-server  equipment and related software, and general and
specialized  consulting  services.  As a result of decreased  demand for systems
integration  products,  and  increased  consolidation  and  competition  in  the
industry in general,  during 2005 resources  allocated to the NCIS business unit
were increasingly used in sales and business development efforts associated with
the NISS business  unit.  During  February 2006,  NeoMedia's  Board of Directors
elected  to  formally  wind down the NCIS  business  unit.  As a result,  during
February 2006,  NeoMedia  closed its Lisle,  Illinois  facility out of which the
NCIS business unit was based. NeoMedia does, however, plan to continue servicing
existing contracts and customers.

      Following the completion of the acquisitions of 12Snap,  Sponge,  Gavitec,
Mobot and during the first quarter of 2006, NeoMedia expects to operate as three
business units during 2006:

            -     NeoMedia    Mobile    (NMM)    -    encompassing    NeoMedia's
                  physical-world-to-internet  and mobile marketing  technologies
                  branded under PaperClick, 12Snap, Sponge, Gavitec and Mobot

            -     NeoMedia Micro Paint Repair (NMPR)

            -     NeoMedia  Telecom Services (NTS) - encompassing the BSD/Triton
                  business line

Company History

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

      As of December  31, 2005,  NeoMedia  also has the  following  wholly-owned
subsidiaries:  NeoMedia  Micro  Paint  Repair,  Inc.,  incorporated  in  Nevada;
NeoMedia  Migration,  Inc.,  incorporated in Delaware;  Distribuidora  Vallarta,
S.A., incorporated in Guatemala (a dormant subsidiary); NeoMedia Technologies of
Canada,  Inc.,  incorporated  in Canada (a dormant  subsidiary);  NeoMedia Tech,
Inc.,  incorporated  in  Delaware  (a dormant  subsidiary);  NeoMedia  EDV GMBH,
incorporated in Austria (a dormant  subsidiary);  NeoMedia  Technologies Holding
Company B.V.,  incorporated in the Netherlands (a dormant subsidiary);  NeoMedia
Technologies  de  Mexico  S.A.  de  C.V.,  incorporated  in  Mexico  (a  dormant
subsidiary);  NeoMedia Migration de Mexico S.A. de C.V.,  incorporated in Mexico
(a dormant subsidiary);  NeoMedia  Technologies do Brazil Ltd.,  incorporated in
Brazil  (a  dormant   subsidiary);   and  NeoMedia   Technologies   UK  Limited,
incorporated  in the United  Kingdom (a dormant  subsidiary).  In October  2004,
NeoMedia established  NeoMedia Telecom Services,  Inc. in Nevada for the purpose
of acquiring BSD. In October 2004, NeoMedia established Mobot Acquisition,  Inc.
in Delaware for the purpose of acquiring Mobot.  Subsequent to the completion of
the  acquisition  of Mobot in February  2006,  the name of this  subsidiary  was
changed to Mobot, Inc.

      During the first quarter of 2006,  NeoMedia  also  acquired  12Snap AG and
Gavitec AG, both incorporated in Germany,  and Sponge Ltd.,  incorporated in the
United Kingdom.

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Recent Developments

     $27 Million Preferred Stock Sale

      On February 17, 2006,  NeoMedia entered into an investment  agreement (the
"Investment Agreement") with Cornell Capital Partners, LP ("Cornell").  Pursuant
to the Investment Agreement, the Company issued and sold to Cornell Twenty-Seven
Million  Dollars (US  $27,000,000)  of Series C Preferred  Shares (the "Series C
Preferred Shares"),  of which (i) Three Million Two Hundred Eight Thousand Seven
Hundred Two Dollars  ($3,208,702)  were  purchased by Cornell for  consideration
solely consisting of surrendering that certain  promissory note, dated March 30,
2005 in the original  principal  amount of Ten Million Dollars (US  $10,000,000)
issued in the name of Cornell,  (ii) Eighteen  Million Seven Hundred  Ninety-One
Thousand Two Hundred  Ninety-Eight  Dollars (US  $18,791,298)  were purchased by
additional funding (consisting of $16,791,298 of immediately available funds and
$2,000,000 of  securities)  from Cornell as of February 17, 2006, and (iii) Five
Million Dollars (US $5,000,000)  shall be purchased by an additional  funding by
Cornell on the date a registration  statement  filed by the Company  pursuant to
the terms of that certain investor registration rights agreement, dated February
17, 2006 by and between  the  Company and Cornell is declared  effective  by the
U.S.  Securities  and  Exchange  Commission.  The Series C Preferred  Shares are
convertible into shares of the Company's common stock, par value $0.01 per share
in  accordance  with  the  terms of the  Company  certificate  of  designations,
preferences, and rights of the Series C Preferred Shares.

      In  addition,  pursuant  to the  terms of the  Investment  Agreement,  the
Company issued to Cornell (i) a warrant to purchase twenty million  (20,000,000)
shares  of  NeoMedia  common  stock  exercisable  for a period  of 5 years at an
exercise  price of $0.50 per  share;  (ii) a  warrant  to  purchase  twenty-five
million  (25,000,000) shares of common stock exercisable for a period of 5 years
at an exercise price of $0.40 per share;  and (iii) a warrant to purchase thirty
million  (30,000,000) shares of common stock exercisable for a period of 5 years
at an exercise price of $0.35 per share.

      On February 17, 2006,  the Company and Cornell  entered into an assumption
agreement,  whereby  Cornell  sold and  assigned  to the Company  those  certain
promissory  notes  issued by Pick Ups Plus,  Inc.,  dated  September  30,  2003,
October 13, 2004,  June 6, 2005, and August 4, 2005, in the aggregate  principal
amount of $1,365,000 and accrued interest of $246,232 for a purchase price equal
to One Million Six Hundred Eleven  Thousand Two Hundred  Thirty-One  Dollars and
78/100 (US $1,611,231.78).

      On February 17, 2006,  the Company and Cornell  entered into an assignment
of common stock, whereby Cornell sold and assigned to the Company twenty million
(20,000,000)  shares of common  stock,  par value $0.001 per share,  of Pick Ups
Plus,  Inc. for a purchase  price equal to Three Hundred  Eighty-Eight  Thousand
Seven Hundred Sixty-Eight Dollars and 22/100 (US $388,768.22).

      Acquisition of Mobot, Inc.

      On February 9, 2006,  NeoMedia and Mobot, Inc.  (www.mobot.com)  ("Mobot")
signed a definitive  merger  agreement under which NeoMedia  acquired all of the
outstanding  shares of Mobot in exchange for  $3,500,000  cash and $6,500,000 in
shares of NeoMedia  common stock.  The $6,500,000  stock portion of the purchase
price is represented by 16,931,493  shares of NeoMedia common stock,  calculated
by dividing $6,500,000 by the volume-weighted  average closing price of NeoMedia
common stock for the ten day up to and  including  February 8, 2006. On February
17,  2006,  NeoMedia  and  Mobot  completed  the  closing  requirements  and the
acquisition became effective. As of December 31, 2005, NeoMedia had loaned Mobot
$1,500,000, which was forgiven upon the effective closing date.

                                       3
<PAGE>

      Mobot is a pioneer in visual search and recognition technology designed to
make marketing  effective and innovative using mobile devices.  Launched in 2004
to help companies cultivate rewarding relationships with the world's 1.5 billion
mobile phone users,  Mobot gives marketers,  content  providers and carriers the
tools to make it easy for any  consumer  with a camera  phone to  interact  with
their offerings.

      Acquisition of 12Snap AG

      On  February  10,  2006,  NeoMedia  and  12Snap  AG  ("12Snap")  signed  a
definitive sale and purchase  agreement under which NeoMedia acquired all of the
outstanding  shares of 12Snap in exchange for $2,500,000 cash and $19,500,000 in
shares of NeoMedia common stock.  The $19,500,000  stock portion of the purchase
price is represented by 49,294,581  shares of NeoMedia common stock,  calculated
by dividing $19,500,000 by the volume-weighted average closing price of NeoMedia
common stock for the ten day up to and  including  February 9, 2006. On February
28,  2006,  NeoMedia  and 12Snap  completed  the  closing  requirements  and the
acquisition became effective.

      12snap AG is a non-public  incorporated  company  headquartered  in Munich
with branches in Dusseldorf,  New York, London, Milan,  Stockholm and Vienna. As
an expert in innovative  marketing and entertainment  for mobile phones,  12snap
combines know-how in mobile  applications,  mobile loyalty and mobile marketing.
In the mobile  marketing  space,  12snap  creates and  implements  national  and
pan-European  mobile marketing  campaigns for international  brands;  its mobile
loyalty business unit offers customer loyalty programs for companies and brands,
and its mobile  applications  business  unit is the center for  development  and
software.  12snap  sells and  licenses a wide  spectrum of mobile  solutions  to
satisfy the demands of the current  growing market and the new uses of the third
mobile phone  generation  from dynamic video services and  multiplayer  games to
personalized  messaging  applications.  12snap has 75  employees,  and  services
companies including  McDonald's,  MTV(R),  Coca-Cola,  Ferrero,  Wella,  adidas,
Unilever and Gillette(R).

      Acquisition of Sponge Ltd.

      On February 20, 2006,  NeoMedia and Sponge  Limited  ("Sponge")  of London
(www.spongegroup.com)  signed a definitive share purchase  agreement under which
NeoMedia  acquired  all of the  outstanding  shares of Sponge  in  exchange  for
(pound)3,450,000   (approximately   $6   million)   cash  and   (pound)6,550,000
(approximately   $11.4  million)  in  shares  of  NeoMedia  common  stock.   The
(pound)6,550,000   stock  portion  of  the  purchase  price  is  represented  by
29,696,745   shares  of   NeoMedia   common   stock,   calculated   by  dividing
(pound)6,550,000 by the volume-weighted average closing price of NeoMedia common
stock for the ten days up to and including  February 8, 2006. The agreement also
calls for  Sponge to earn an  additional  (pound)2,500,000  (approximately  $4.4
million) in the form of NeoMedia  common stock if,  during the  two-year  period
beginning at closing,  the Sponge  business earns in excess of  (pound)1,300,000
(approximately  $2.3 million) in net profits. On February 23, 2006, NeoMedia and
Sponge completed the closing requirements and the acquisition became effective.

      Founded  in 2001,  Sponge  has  grown to  become a U.K.  market  leader in
providing mobile applications to agencies and media groups, and gain recognition
as one of  Europe's  top  independent  developers  of  mobile  applications  and
content.  Today,  Sponge counts more than 40 agencies,  including WPP, Aegis and
BBH,  as  clients,  and  supplies  services  for  over 100  world-class  brands,
including Coca Cola(R),  Heineken(R) and Diageo. Sponge also supplies a range of
mobile services to media groups,  including News International,  Trinity Mirror,
Endemol and IPC.

                                       4
<PAGE>

      Acquisition of Gavitec AG

      On February 17, 2006,  NeoMedia  and Gavitec AG  ("Gavitec")  of Wurselen,
Germany  (www.gavitec.com) signed a definitive sale and purchase agreement under
which NeoMedia acquired all of the outstanding shares of Gavitec in exchange for
$1,800,000  cash  and  $5,400,000  in  shares  of  NeoMedia  common  stock.  The
$5,400,000  stock  portion of the purchase  price is  represented  by 13,660,511
shares of  NeoMedia  common  stock,  calculated  by dividing  $5,400,000  by the
volume-weighted  average closing price of NeoMedia common stock for the ten days
up to and  including  February  16, 2006.  On February  23,  2006,  NeoMedia and
Gavitec completed the closing requirements and the acquisition became effective

      Gavitec was founded in 1997 as a specialized  provider and manufacturer of
products and solutions for mobile marketing and mobile  information  technology.
As  a  technology  leader  in  code-reading  systems  and  software  for  mobile
applications, Gavitec offers its clients standardized or individual solutions in
the areas of mobile marketing,  mobile ticketing,  mobile couponing,  and mobile
payment systems.

      Acquisition of BSD Software, Inc.

      On December 21, 2004,  NeoMedia signed a merger  agreement to acquire BSD.
On March 21, 2006,  NeoMedia and BSD completed the  requirements  to closing and
the  acquisition  became  effective.  After  exchange  of  shares  certificates,
NeoMedia  expects to issue  7,123,698  shares of its common stock in  connection
with the acquisition.

      BSD, operating under its trade name of Triton Global Business Services, is
a customer service-oriented  organization providing telephone services to direct
customers  and   telecommunications   companies   (including   clearing  houses,
alternative operator service providers,  local exchange carriers,  long distance
voice and data  providers,  wireless  carriers),  both within North  America and
internationally.

      Letter of Intent to Acquire Hip Cricket

      On February 16, 2006,  NeoMedia  signed a non-binding  letter of intent to
acquire HipCricket,  Inc.  ("HipCricket") of Essex, CT  (www.hipcricket.com)  in
exchange for $500,000 cash and $4,000,000 of NeoMedia  common stock.  The letter
of intent is  subject to due  diligence  and  signing  of a  mutually  agreeable
definitive purchase agreement by both parties.

      HipCricket is a leading mobile  marketing  firm that provides  innovative,
custom solutions to broadcasters and brand  marketers.  Today,  HipCricket works
with five of the top 10 radio  groups in the U.S.  as well as with some 40 major
brand   marketers.   HipCricket   combines  senior   marketing   expertise  with
state-of-the-art  mobile  and  event  marketing  technologies  to offer  clients
unprecedented   interactivity  with  their  consumers,   viewers,  listeners  or
customers on a one-to-one personal level.

      $100 Million Standby Equity Distribution Agreement with Cornell

      On March 30,  2005,  NeoMedia and Cornell  entered  into a Standby  Equity
Distribution Agreement under which Cornell agreed to purchase up to $100 million
of NeoMedia's common stock over a two-year period, with the timing and amount of
the purchase at NeoMedia's discretion. The maximum amount of each purchase would
be $2,000,000 with a minimum of five business days between advances.  The shares
would be valued at 98% of the  lowest  closing  bid price  during  the  five-day
period following the delivery of a notice of purchase by NeoMedia,  and NeoMedia
would pay 5% of the gross proceeds of each purchase to Cornell. As a commitment

                                       5
<PAGE>

fee for Cornell to enter into the agreement, NeoMedia issued 50 million warrants
to Cornell with an exercise price of $0.20 per share, and a term of three years,
and also  paid a cash  commitment  fee of $1  million.  NeoMedia  also  issued 4
million warrants with an exercise price of $0.229 to an independent  third party
as a fee  for  negotiating  and  structuring  the  Standby  Equity  Distribution
Agreement.

      iPoint-Media Ltd.

      On September 7, 2004,  NeoMedia and iPoint-media Ltd.  ("iPoint-media") of
Tel Aviv, Israel, entered into a business development agreement. In exchange for
entering  into  the  service  agreement,   NeoMedia  received  7%  ownership  in
iPoint-media,  consisting of 28,492  shares of  iPoint-media  common  stock.  In
addition to the business development agreement,  NeoMedia acquired an additional
10% ownership of iPoint-media,  consisting of 40,704 shares of common stock, for
$1 million cash. During 2005, iPoint-media recapitalized such that each share of
its  stock  was  exchanged  for 100  shares.  As a  result,  NeoMedia  now holds
6,919,680 shares of iPoint-media common stock.  NeoMedia's  ownership percentage
remains unchanged at 17%.

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

      On October 26, 2004, NeoMedia announced that it would issue its first-ever
stock dividend with the  distribution of common shares of  iPoint-media  Ltd. of
Tel  Aviv  as  a  property  dividend.  NeoMedia  will  distribute  approximately
2,043,500  shares of  iPoint-media's  common stock to NeoMedia  shareholders  of
record as of November 17, 2004. The date of the property  dividend  payment will
be   announced   after  the   Securities   and  Exchange   Commission   declares
iPoint-media's Form SB-2 registration statement effective.

      During the year ended December 31, 2005, NeoMedia recognized an impairment
charge  considered to be other than  temporary of $530,000 to the carrying value
of its investment in iPoint-media common stock.

      Patent  Developments

      On January 23, 2004, NeoMedia filed a patent infringement  lawsuit against
AirClic,  Inc.  During July 2005,  NeoMedia and AirClic  settled the case out of
court,  with  AirClic  agreeing  to  compensate  NeoMedia  for past  and  future
activities.  AirClic  did not  receive  a  license  to use  NeoMedia's  patented
PaperClick(R) technology.

      On January 2, 2004, NeoMedia filed a patent  infringement  lawsuit against
Virgin(R)   Entertainment  Group,  Inc.,  Virgin  Megastore  Online  and  Virgin
Megastore  (collectively,  "Virgin").  During  June  2005,  NeoMedia  and Virgin
settled the case out of court, with Virgin agreeing to purchase a license to use
NeoMedia's patented PaperClick(R) technology platform through 2016.

      On March 29, 2004,  Scanbuy  filed suit  against  NeoMedia in the Southern
District of New York  alleging  that NeoMedia  infringed  Scanbuy's  copyrights,
violated the Lanham Act and  committed  deceptive  trade  practices and tortious
interference.  During October 2005, the copyright  charges were dismissed by the
court.  On April 20, 2004,  NeoMedia  re-filed  its suit against  Scanbuy in the
Southern  District of New York alleging patent  infringement.  Scanbuy filed its
answer on June 2, 2004.  NeoMedia filed its answer and  affirmative  defenses on
July 23, 2004.  The parties are currently  engaged in discovery in both of these
actions.  Management cannot predict the outcome of the matter, however, believes
it has adequate defense strategies.  The Company plans to vigorously defend this
matter.  An adverse outcome to this suit could have a material adverse effect on
NeoMedia's business plan and expected future revenue from patent licensing.

                                       6
<PAGE>

      On April 12, 2005, NeoMedia acquired four  search-oriented  patents issued
in the U.S.  and  pending in Europe and Japan from  LoyaltyPoint  Inc.  for $1.5
million  cash and 10%  royalties  on all future sales for a period of ten years.
The first patent (U.S.  6,430,554 B1) covers technology that uses uniquely-coded
objects,  such as consumer goods to automatically  generate an online search for
information related to those objects or goods from a computer, PDA, mobile phone
or other device.  The second  patent (U.S.  6,651,053 B1) is an extension of the
first,  covering additional mechanisms for performing such searches using mobile
devices.  The third patent  (U.S.  6,675,165  B1) covers uses of  location-based
technology to deliver  content that is based both on a particular  advertisement
and the geographic  location in which the  advertisement is located.  The fourth
patent (U.S.  6,766,363 B1) covers  techniques for providing  information to end
users based on objects, goods or other items depicted in external media, such as
video, audio, film or printed matter.


      On May 13,  2005,  the  European  Patent  Office  (EPO) issued a Notice of
Allowance  based  on  proceedings  conducted  during  April  2005 in The  Hague.
Recognition by the EPO extends the patents for NeoMedia's  core technology - the
use of bar codes and other unique  identifiers to automatically  link to content
on  the  Internet  -  to  Austria,  Belgium,  France,  Germany,   Liechtenstein,
Luxembourg, the Netherlands, Sweden, Switzerland and the United Kingdom.

      On February 1, 2006,  the U.S.  Patent and  Trademark  Office issued a new
patent to NeoMedia  covering the capture and processing of bar codes  explicitly
from camera cell  phones.  The patent  (U.S.  Patent No.  6,993,573)  explicitly
describes and patents  NeoMedia's method of capturing the image of a bar code by
the camera device on a Web-enabled cell phone, and processing the bar code so as
to deliver the appropriate  URL - or Web-based  information - to the user's cell
phone screen.

      PaperClick(R) Developments

      On September 30, 2005,  NeoMedia entered into a mobile marketing  alliance
and co-marketing  agreement with advertising agency Arnold Worldwide ("Arnold"),
centered on NeoMedia's patented PaperClick(R) technology platform. The agreement
calls for Arnold and  NeoMedia  to work  together to develop  opportunities  and
marketing  campaigns utilizing  PaperClick.  NeoMedia will provide technical and
sales support for presentations,  marketing programs and campaigns conceived and
developed by Arnold for its clients.

      On July 12,  2005,  NeoMedia  entered  into a  consulting  agreement  with
Silicon Space,  Inc., under which Silicon Space developed portions of NeoMedia's
PaperClick(R)  WordRegistry  interface,  for which  NeoMedia  paid Silicon Space
approximately  $53,000 in fees during the year ended December 31, 2005.  Silicon
Space replaces Science Applications International, Inc., who NeoMedia engaged in
October 2004 on a contingency  basis to build and host the  interface.  NeoMedia
intends to host the WordRegistry internally upon its completion.

      On April 18, 2005,  NeoMedia  announced  that it named Martin N. Copus,  a
global and  interactive  marketing  executive  who has  worked  with many of the
world's leading brands,  as its COO and to the  newly-created  position of chief
executive of its PaperClick  wireless  business unit. Prior to joining NeoMedia,
Mr.  Copus was  Managing  Director  of 12Snap UK, an  internationally-acclaimed,
award-winning  mobile marketing company focusing on wireless channels,  where he
led development and  implementation of interactive  marketing programs for major
blue-chip companies including  McDonald's(R),  Kellogg(R),  Procter & Gamble(R),
Coca-Cola(R),  Safeway(R),  Budweiser(R),  and  20th  Century  Fox(R).  Prior to
running  the  U.K.   operations  of  12Snap,  Mr.  Copus's  background  included
assignments as executive  director of Huntsworth PLC, a marketing services group
listed on the main board of the London Stock Exchange;  Worldwide Board Director
of Interpublic  Group's Ammirati Puris Lintas  advertising unit; and senior vice
president of Leo Burnett Company Inc., Chicago,  responsible for its Marlboro(R)
USA  advertising  and  marketing  services  account.  Mr.  Copus holds a B.A. in
marketing and an M.A. in modern languages, both from Oxford University.

                                       7
<PAGE>

      On March 18, 2005,  NeoMedia and Foote Cone & Belding ("FCB"),  a division
of FCB Worldwide LLC and part of the Interpublic Group of Companies, Inc. (NYSE:
IPG), entered into a co-marketing agreement surrounding NeoMedia's PaperClick(R)
technology platform. The agreement calls for FCB to work with NeoMedia to create
and develop  opportunities and programs  utilizing  PaperClick(R),  to integrate
PaperClick  into  marketing  campaigns  for new  and  existing  clients,  and to
facilitate   the   introduction   of  NeoMedia  and  PaperClick  in  the  mobile
telecommunications  industry.  NeoMedia will provide technical and sales support
for presentations and marketing programs co-developed for FCB clients, work with
FCB to explore and create marketing  opportunities and solutions,  and introduce
FCB to its business customers,  including brand managers.  FCB and NeoMedia will
team up for  co-marketing  and sales  efforts in the U.S., as well as in Europe,
the Middle East, Africa and Latin America.

      On March 10, 2005,  NeoMedia and  Intactis  Software,  Inc., a provider of
Check  21  software  products  and  solutions  for the  small-  to  medium-sized
financial  institution  market,  entered into a business  development  agreement
under  which  the two  companies  will  develop a  database  lookup  system  for
validating  codes  printed on  negotiable  instruments  (checks).  In  addition,
NeoMedia invested $250,000 in Intactis convertible  preferred stock and warrants
to own up to 25% of Intactis.  Intactis  also placed an order for an initial 100
copies of  NeoMedia's  PaperClick  Print  Encoder  software  for which  NeoMedia
recognized $30,000 revenue during 2005. During the year ended December 31, 2005,
NeoMedia  recognized an impairment  charge  considered  other than  temporary of
$250,000 to the carrying  value of its investment in Intactis since the carrying
value exceeded its fair value as estimated by management. As of the date of this
report, management does not expect to invest any more capital into Intactis.

      On December 13, 2004, NeoMedia introduced  PaperClick(R)  Mobile Marketing
Services,  a tool that allows global marketers and advertising  agencies to have
one-on-one  contact with consumers through cell phones and other mobile wireless
devices.  PaperClick(R) Mobile Marketing Services delivers real-time promotional
content,  which can be updated and changed by marketers,  while giving consumers
one-click  e-commerce  buying power. The latest addition to the Mobile Marketing
Services suite lets users of a wide range of already-in-use  camera phones "take
pictures" of special created codes on packages and promotional items and connect
in one-click to marketing  information.  First  available for Nokia(R) Series 60
mobile phones,  the new capability  complements the launch of the  PaperClick(R)
Mobile Go-Window(TM) during 2004 and PaperClick(R) for Camera Cell Phones(TM) in
2003.

      Micro Paint Repair Developments

      On  February  28,  2006,  NeoMedia  signed a  10-year  exclusive  supplier
agreement with Automart,  a Beijing-based joint venture operating under the laws
of the People's Republic of China  specializing in automobile sales,  financing,
insurance  and  repair.  Automart  is the  brand  name of  Jinche  Yingang  Auto
Technological  Services  Limited,  with  which  NeoMedia  signed a  distribution
agreement in August 2005. The new agreement  expands on the previous  agreement,
giving Automart the exclusive rights to distribute NeoMedia's micro paint repair
products to their own stores and others  throughout China, Hong Kong, Macao, and
Taiwan,  and also  guaranteeing  that Automart will purchase at least 70% of its
non-micro  paint  products  through  NeoMedia as its  distributor.  NeoMedia has
signed  distribution  agreements  with  DuPont and PPG,  and intends to become a
distributor of other automotive aftermarket products to Automart.

      On December 20, 2005, NeoMedia executed a definitive supply agreement with
E.I.  DuPont de Nemours  (Belgium) BVBA of Belgium  ("DuPont"),  a subsidiary of
E.I. DuPont,  under which NeoMedia will distribute  DuPont's automobile refinish
paint  throughout  the  People's  Republic  of China.  The  agreement  calls for
NeoMedia to serve as a  non-exclusive  distributor of DuPont products to Beijing
Sino-US Jinche Yingang Auto  Technological  Services  Limited  ("Jinche") in the
People's Republic of China. NeoMedia previously signed a distribution  agreement
with Jinche under which Jinche will  distribute and use  NeoMedia's  micro paint
repair products at its automotive service facilities throughout China.

                                       8
<PAGE>

      On February  17,  2006,  in  connection  with the $27 million  convertible
preferred  funding  arrangement with Cornell,  NeoMedia was assigned  20,000,000
shares of Pick Ups Plus ("PUPS") common stock.  NeoMedia had previously acquired
8,333,333  shares of PUPS common  stock  directly  from PUPS,  in  exchange  for
$250,000 cash.

      On  December  14,  2005,  NeoMedia  executed  a  definitive   distribution
agreement with PPG  Industries'  PPG Shanghai  Trading Co. Ltd.  ("PPG"),  under
which NeoMedia will distribute automotive  aftermarket products produced by PPG.
The Agreement calls for NeoMedia to serve as a non-exclusive  distributor of PPG
products to Jinche in the People's Republic of China.

      On October 4, 2005, NeoMedia signed a definitive distribution agreement to
bring its NeoMedia Micro Paint Repair  business to  Scandinavia.  The agreement,
signed with WITHO-AS of Oslo, Norway  ("WITHO-AS"),  calls for WITHO-AS to serve
as an exclusive  distributor of NeoMedia's micro paint repair products,  systems
and licenses to automotive service facilities  throughout  Denmark,  Sweden, and
Norway. Based in Oslo, Norway, WITHO-AS is a new company formed to specialize in
products and services  involving micro paint repairs for automobiles in Denmark,
Sweden and Norway.

      On September 27, 2005, NeoMedia signed a definitive distribution agreement
to bring its NeoMedia  Micro Paint Repair  business to Mexico and Latin America,
as well as be a  distributor  of  other  automotive  aftermarket  products.  The
agreement,  signed with  Micropaint de Mexico,  S.A.  ("Micropaint  de Mexico"),
calls  for  Micropaint  de  Mexico  to  serve  as an  exclusive  distributor  of
NeoMedia's  micro paint  repair  products,  systems and  licenses to  automotive
service facilities throughout Mexico and Latin America. The agreement also calls
for  Micropaint  de Mexico to buy  certain  automotive  aftermarket  repair  and
environmental  protection products from NeoMedia.  Founded earlier this year and
based in  Monterrey,  Mexico,  Micropaint  de Mexico  specializes  in  providing
automotive aftermarket products throughout Mexico and Latin America.

      On August 30, 2005, NeoMedia signed a distribution  agreement with Jinche,
under which Jinche will act as a distributor  of  automotive  products in China.
Jinche is a Beijing  PRC-registered  company  specializing in automobile  sales,
financing,  insurance  and repair.  NeoMedia  will supply  Jinche with its micro
paint repair products, as well as various other automotive  aftermarket products
from other manufacturers.

      On February 25, 2005, NeoMedia signed two non-binding letters of intent to
acquire up to 100% of Automotive  Preservation,  Inc.  ("AP"),  a distributor of
automotive  paint and accessory  products,  from AP's parent company,  PUPS. The
first letter of intent  calls for  NeoMedia to  initially  acquire 30% of AP for
$1,600,000,  to be paid  $600,000  in  cash,  $554,000  in  shares  of  NeoMedia
restricted  common  stock,  and $446,000  through the  assumption  of AP debt by
NeoMedia.  Under the second letter of intent, upon completion of the acquisition
of the initial 30% of AP by NeoMedia,  NeoMedia would have the option to acquire
an additional 30% of AP for $1,650,000, payable in shares of NeoMedia restricted
common  stock.  The second  letter of intent also gives  NeoMedia  the option to
purchase the final 40% of AP for either:  (i)  $2,200,000,  payable in shares of
NeoMedia  restricted  common stock,  if NeoMedia  exercises this right within 12
months of  acquiring  the second 30% of AP, or (ii) a price  equivalent  to AP's
previous  quarter  EBITDA  multiplied  by  8,  payable  in  shares  of  NeoMedia
restricted  common stock.  Both letters of intent are non-binding and subject to
due  diligence by NeoMedia and AP. On  September  21, 2005,  the BOD approved to
change the deal  structure for the  acquisition of AP, so that the Company would
acquire only 30% of AP for a total purchase price of $1.6 million of which $600K
would be paid in cash and $446K would be paid  through the  assumption  of debt,
and $554K through the issuance of restricted  Neomedia stock.  Neomedia will not
acquire the remaining 70% of AP under the new structure.

                                       9
<PAGE>

Industry Overview

NeoMedia Mobile

      NeoMedia  Mobile (NMM)  business unit  encompasses  all the  technologies,
products and services  designed to connect the physical  world to the electronic
world,  with consumer,  enterprise,  educational and governmental  applications.
Being an early  pioneer in the wireless  solutions  industry,  NeoMedia has been
developing  its PaperClick  platform and  applications  since 1996.  During that
time,  NeoMedia  has also  established  an extensive  portfolio of  intellectual
property.

      The  original  commercial  use of the  PaperClick  technology  depended on
utilizing a scanning  device (e.g.  pen with scanner) to de-code  printed codes,
which it would  then link via PC to the  Internet  to  enable  the  consumer  to
retrieve   extensive   information   on  the  Internet.   With  the  advent  and
proliferation  of the cell phone,  NeoMedia  realized  the immense  potential to
reach consumers  anywhere and anytime with a device that they carried with them.
This was further augmented by the escalation of camera phones in the marketplace
over the past several years. With the PaperClick platform, cell phone users (and
users of other mobile devices such as personal  digital  assistants) are able to
directly  access the  mobile  internet  in one step,  via  "texting,,  "keying,"
"clicking" on printed barcodes or smartcodes, or "keying" in keywords or product
on their cell phones.

      To accelerate  NeoMedia's entry into the fast-growing and lucrative mobile
marketing  marketplace,  NeoMedia  has made a number of  several  key  strategic
acquisitions  already in 2006:  Boston-based visual recognition  provider Mobot,
London-based  applications developer Sponge, Aachen (Germany) based code-reading
specialist  Gavitec  and  Munich-based  award-winning  mobile  marketing  agency
12Snap.  All of these  companies  have proven track  records in creating  highly
innovative wireless marketing  solutions that they have successfully  introduced
into the market,  on behalf of numerous  household name consumer goods and media
companies in the US, across Europe, and in Asia/Pacific  including Australia and
Japan.

      NeoMedia  anticipates  further growth in the mobile marketing  industry to
come from several factors:

            (1)   The  increased  growth  of  mobile   subscribers,   and  those
                  subscribers accessing the Internet.  According to the Cellular
                  Telecommunications  &  Internet  Association  (CTIA)  and  the
                  Mobile  Marketing   Association  (MMA),  there  are  over  1.9
                  billion-plus  phones in use  worldwide--more  than TVs and PCs
                  combined,  and, that by the end of 2008, it is projected  that
                  more than 600 million phone users will have Internet access.

            (2)   Improvements in Infrastructure.  The penetration of high speed
                  GPRS networks is increasing  bandwidths,  which in turn allows
                  more  complex  application   development,   faster  speed  and
                  enhanced  user  experience,   resulting  in  mobile  customers
                  embracing   mobile   content  in  ever  greater   numbers  and
                  complexity.  NeoMedia's  12snap  unit,  for  example,  is  now
                  offering  consumers in Germany  personalized  screensavers and
                  animations for their handsets..

            (3)   Enhanced  Handset  Functionality.  Color  screens  and  camera
                  phones are driving sales of mobile devices in the  replacement
                  market.  Worldwide, 295 million camera phones were sold during
                  2005,  and that  number  is  expected  to grow to  almost  750
                  million by 2009 (Source: Gartner Dataquest, November 2005). No
                  less than three products in NeoMedia's  arsenal of solutions -
                  PaperClick,    Gavitec's   Lavasphere   and   Mobot's   visual
                  recognition  product  are  technologies  that are  designed to
                  bring enhanced user  experience to consumers via the camera in
                  their wireless handsets.  Additionally, in early 2006 NeoMedia
                  obtained  a further  U.S.  patent  covering  the  capture  and
                  processing of bar codes explicitly from camera cell phones.

                                       10
<PAGE>

      The  Japanese  and  European  marketplaces  are  leading the way in mobile
marketing  usage  and  acceptance.  In  Japan,  the use of 2D  "smart  codes" in
advertising and marketing has become  increasingly  more popular with subscriber
levels now approaching  10million  consumers.  Northwest Airlines recently ran a
30' billboard of a smart code in downtown  Tokyo,  promoting one of its Japanese
routes;  according  to The Wall Street  Journal,  "For  Northwest,  of St. Paul,
Minnesota - which last month filed for bankruptcy protection in the face of high
labor  costs,  soaring oil prices and  intense  competition  - the [smart  code]
campaign is a chance to boost its  Japanese  presence  and its  reputation  as a
technology leader."

      In Europe,  two specific  areas where mobile  marketing has already proven
successful  are  SMS  (text)  and  MMS  (picture   messaging)  mobile  marketing
campaigns.  There,  40% of brands surveyed have already  deployed text messaging
campaigns and 18% have deployed MMS campaigns  (Source:  Airwide  Solutions Feb.
2006). This study also showed that by 2008, 89% of brands expect to use wireless
marketing  campaigns  to reach their  audience,  and in five years 52% expect to
spend between 5% and 25% of their marketing  budget on the "Third Screen" as the
cell phone is now being described in marketing circles.  NeoMedia,  by acquiring
Sponge,  Mobot,  12Snap  and  Gavitec in  particular,  has  overnight  become an
innovative  global  leader in creating and  executing  mobile  campaigns  and in
developing  related content.  From campaigns that 7% of the population take part
in - as was the case with a recent Walkers  (Frito-Lay)  promotion in the UK run
by its Sponge unit - to 12snap  winning four  prestigious  Lions at the renowned
Cannes  Advertising  Festival,   NeoMedia  has  added  companies  with  wireless
solutions of the highest  standard to accompany  its  groundbreaking  PaperClick
technology, driving recognition as one of the lead players in its industry.

      NeoMedia Micro Paint Repair

      NMPR has made great strides over the past year to become a global supplier
to the automotive  rejuvenation  market. NMPR now offers a comprehensive line of
products and  services  needed for  complete  interior  and exterior  automotive
rejuvenation,  expanding  from its initial  business in the light  collision and
automotive  paint  repair  industry.  NMPR also offers its clients  full service
training at its corporate  headquarters in Fort Myers,  Florida or onsite at its
clients' places of business.

      Focused on quality,  efficiency,  innovativeness and environmentally sound
products and technologies,  NMPR offers its clients expert solutions intended to
increase their productivity and profits while helping them to deliver a positive
experience  to the end  consumer.  NMPR's  products  are  positioned  to augment
traditional  paint  repair  methods  commonly  used  in body  shops,  as well as
allowing non-body shop operations to expand their service offerings.

      NeoMedia Telecom Services

      Triton  was  incorporated  in  April  1998 as a next  generation  Internet
Protocol (IP) enabled provider of live and automated  operator calling services,
e-Business  support,   billing  and  clearinghouse   functions  and  information
management  services to  telecommunications,  internet  and  e-business  service
providers. Triton was acquired by NeoMedia in March 2006, at which time NeoMedia
established the NeoMedia Telecom Services (NTS) business unit, consisting solely
of Triton's business.

      NTS' technology  platforms are capable of providing its customers with the
ability to integrate  traditional  telephony services,  internet information and
subscription  services and e-Commerce  transactions and place the charges on the
billing medium of the end users' choice.

                                       11
<PAGE>

Strategy

      NeoMedia Mobile

      NeoMedia has spent the past decade as a pioneer in the now confirmed space
of linking the physical world to the electronic world, developing, patenting and
implementing  four  generations of continuously  refined switch  technology that
bridges these environments.

      During  the  past  two  and  a  half  years,   NeoMedia   has   introduced
PaperClick(R)  for  Camera  Cell  Phones  and  the  PaperClick(R)  GoWindow  and
CodeWindow,  to capitalize on the rapidly  emerging mobile  marketing sector and
using  it as a  basis  from  which  to  demonstrate  the  effectiveness  of  its
PaperClick  platform.  With this industry positioned for rapid worldwide growth,
NeoMedia believes its poised to gain global market share, both from its patented
PaperClick  direct-to-web  platform  and from the  platforms,  applications  and
services of its recent acquisitions.

      The acquisitions of Mobot, Sponge, Gavitec and 12Snap have placed NeoMedia
into a leadership  position in the wireless solutions  industry.  Taken together
with NeoMedia's  patented  PaperClick(R)  platform,  NeoMedia  offers  marketers
end-to-end  solutions to market to their  target  audiences  via mobile  devices
through SMS (text  messaging),  MMS (multimedia  messaging),  direct-to-Internet
GoWindow(TM),  and CodeWindow(TM),  Visual Recognition,  and 1-D barcode and 2-D
smartcode recognition.

      NeoMedia  intends  to gain  market  share in the global  mobile  marketing
industry  through  organic  growth from  existing  markets and new and  existing
clients,  together with geographic growth in new and expanding markets. With the
combination  of  platforms,  services,  content and  applications  now available
through  NeoMedia,  each NMM  business  sub-unit  has the  ability  to offer its
existing client base ever more  sophisticated  and innovative  mobile  marketing
services and solutions.  With the growth of cell phone usage world-wide,  and by
having many global brands such as McDonald's,  Coca-Cola, adidas and Unilever as
existing  clients,  NeoMedia  intends  to bring  mobile  marketing  services  to
additional  geographic  regions  around the globe,  notwithstanding  the immense
potential in the  virtually  untapped  mobile  marketing  industry in the United
States, which is about 1-2 years behind Europe and Japan in its maturity.

      Beyond  consumer  goods,  the  PaperClick  platform  is also an  effective
platform for other industry  markets and can be utilized  through other devices,
such as personal computers. As such, NeoMedia is pursuing opportunities in areas
as diverse as homeland  security,  banking,  search,  food  labeling,  inventory
tracking and multiple enterprise  applications--from affinity programs to mobile
service solutions to complete company management systems.

      NeoMedia Micro Paint Repair

      NeoMedia Micro Paint Repair (NMPR) offers its clients a "one-stop shop" to
obtain a comprehensive  line of  technologically  and  environmentally  advanced
products and processes for interior and exterior  automotive  rejuvenation.  Its
proprietary Micro Paint Repair system can dramatically  reduce costs for current
auto body  repair  facilities,  or create a new profit  center for  auto-related
businesses  that do not currently  offer paint repair.  Likewise,  NMPR can help
automotive  repair businesses offer  complementary  services beyond micro paint,
not only  through  its  product  line,  but also  through  training on how to do
additional interior and exterior repairs.

      NMPR markets its comprehensive  automotive rejuvenation system to a myriad
of  automotive  industry  businesses,  from auto  dealers to body shops to glass
repair shops,  and more.  Two  facilities,  NMPR's  headquarters  in Fort Myers,
Florida and its Canadian head office in Calgary,  Alberta offer repairs directly
to customers, and on-site training to business clients.

                                       12
<PAGE>

      Geographically,  outside of the United  States  NeoMedia  has expanded its
micro  paint  repair  offering  into:  China  through  partnerships  with Jinche
(Automart), DuPont and PPG; Scandinavia, through its distribution agreement with
WI-THO  AS in  Norway;  Mexico  and  Latin  America,  through  its  distribution
agreement  with  Micropaint  de  Mexico;   Australia/New   Zealand,   through  a
distribution  agreement  with Micro Paint Systems  (Australasia)  Limited of New
Zealand; and Canada, through a distribution agreement with MDA Co-Auto.


      NeoMedia Telecom Services

      NTS is a fully  implemented  alternate  billing  agent  within  the  Local
Exchange Carriers (LEC's) billing system in Canada.  NTS's vision is to continue
expanding its live and automated operator service capability  focusing on making
emerging web-based information and transaction services easier to access and pay
for. NTS has aligned itself to provide  globally  accessible  products,  coupled
with  sophisticated  proprietary  technology,  allowing  it to offer this global
marketplace fully-integrated or unbundled solutions.  NeoMedia believes that the
future  growth of the  industry  is largely  based  upon the  ability of service
providers  to  offer  multiple  billing  options  for  consumer   services  thus
increasing market penetration.

Products/Services

NeoMedia Mobile

      Mobile Marketing

      Through the  acquisitions  of Mobot,  Sponge,  Gavitec and 12Snap in early
2006,  NeoMedia Mobile (NMM) now offers  complete  end-to-end  mobile  marketing
products and services.  This  includes:  the  proprietary  PaperClick(R)  Mobile
Marketing Service; mobile content & application development, including the Mobot
proprietary visual matching  platform;  complete campaign  management  including
execution and campaign analysis; and CRM (customer relationship management).

      Clients  can  choose  from any or all  delivery  options  offered  through
NeoMedia  for  their  mobile  marketing  campaigns:  SMS (text  messaging),  MMS
(multimedia messaging), GoWindow(TM),  CodeWindow(TM), Visual Recognition, or 1D
and 2D Bar Code Recognition.

      PaperClick(R) Mobile Marketing Service

      PaperClick(R)  is a  mobile  marketing  service,  based  on  the  patented
PaperClick  technology  platform,  which  enables  brand  managers  and  product
manufacturers  to market  directly to their target  customers via their portable
devices such as mobile phones and PDAs.

      By entering a word or phrase  (e.g.:  brand name or tagline) into a mobile
device using the PaperClick(R) GoWindow; by entering a numeric product code into
a mobile device using the PaperClick(R)  CodeWindow; or by clicking on a barcode
or smart code on product packaging or marketing  collateral using  PaperClick(R)
for Camera  Phones,  a consumer  can  retrieve  tailored Web content in a single
step, even to pages deep-linked within a website. PaperClick bypasses long URLs,
search engines or  difficult-to-navigate  phone menus by linking directly from a
word or code to  mobile  commerce,  rebates,  contests,  coupons,  registration,
instructional videos, ad tracking, polling, customer profiling and more.

      The PaperClick solution consists of:

                                       13
<PAGE>

      o     Word Registration and Activation
            1.    Registration of brand names and taglines in the  PaperClick(R)
                  WordRegistry(TM).  The WordRegistry is the official repository
                  for PaperClick Keywords;
            2.    Bidding for  non-trademarked  generic  keywords  (e.g.,  cola,
                  burger,  car),  which will be auctioned to the highest  bidder
                  via the PaperClick WordRegistry; and
            3.    Activation  of  brand  names,   taglines  and  non-trademarked
                  keywords by linking them to mobile web content  using the Link
                  Manager Software.
      o     New Code Activation.  NeoMedia can create custom smartcodes to print
            on product packaging or literature, a subway poster, a direct mailer
            or other  marketing  collateral.  Consumers with a camera phone then
            click on the code to link directly to Web content  designated by the
            product's manufacturer.
      o     Existing Code Activation. As with new smartcodes,  PaperClick(R) can
            link already-existing product codes, such as UPC, EAN, JAN, and ISBN
            codes, to tailored Web content.

      Upon activation,  the PaperClick platform also provides the following word
management tools:

      o     Link Manager Software. Software for a PC that allows a product owner
            to link keywords and codes to a specific URL;
      o     Handset  Software.  Device  software  required  for a mobile  device
            customers to read activated codes and keywords; and
      o     Enterprise  Reporting.  Allows product owner of keywords or codes to
            track the number of consumer "hits" by code, date and time.

      Other value-added services:

      o     Click Management Services
            -     Link Manager  Service.  Management of the linking of all words
                  and codes on behalf of a product owner; and
            -     Code  Verification.  Testing of each code to ensure that it is
                  printed properly and that it links to the correct URL.
      o     Web Content  Creation  Services.  Assistance in creating Web content
            for mobile devices in XHTML, WAP and other mobile formats.
      o     Mobile Marketing  Campaign  Services.  Assistance in creating mobile
            advertising campaigns using products with PaperClick(R) technology.
      o     Customized  Reporting.  Customized  reporting  and data  mining that
            allows  product  owners  to  receive  additional  data  about  their
            marketing campaigns.
      o     Server Software.  For companies  managing a large number of codes or
            keywords,  server software is available that allows clients to store
            the links within their organization's network.

     Content & Application Development

      12snap and Sponge,  acquired as  subsidiaries of NeoMedia during the first
quarter of 2006, are recognized  leaders in content and application  development
for mobile  marketing.  Between them they have  developed and  implemented  over
20,000  applications  and tens of  thousands  of content  items for use by major
brands  in Europe  and the  U.S.,  activating  over 4  billion  products  in the
process.  Their platforms are highly scalable and capable of running hundreds of
campaigns simultaneously.

      The  NMM  business  sub-units  typically  retain  the IP  for  custom-made
applications,  therefore the  applications  can be "re-skinned" for use by other


                                       14
<PAGE>

clients quickly and efficiently.  Some applications are  server-based,  some are
handset-based  while others still are handset-based but server-linked.  Delivery
mechanisms are via SMS, MMS, WAP-push link with subsequent download,  Bluetooth,
infrared, IVR or direct to Web.

      Sponge's  proprietary core  applications  suite,  Text Generator,  deploys
applications for clients quickly and efficiently in a user-friendly environment,
with all applications offering a wide range of monitoring and performance tools.
Clients  access  their  own-labeled  environment  via  an  internet-enabled  PC,
enabling them to setup , edit, terminate and report on all their applications.

      Examples of Sponge's applications include:

      o     Games.  Multilevel  single-player  games  (e.g.  adventure,  sports,
            arcade),  Bluetooth  multiplayer  games (e.g. Mud Racer,  Madagascar
            Multiplayer) as well as web and mobile  convergence games (e.g. Fish
            Snapper, Coke Music Summer Games).
      o     Competitions.  Various formats (e.g. multiple choice,  tie-breakers,
            free text entry).
      o     Feedbacks.  Clients are able to sort  feedback  and  quickly  target
            selected responses for publication.
      o     Votes.  Rapid  implementation  of voting formats with unlimited vote
            options,,  generating  real-time voting patterns with the ability to
            block multiple votes.
      o     Text to Win.  Entrants get code and short message  number to text in
            to win a variety of prizes;  client options  include  multiple prize
            groups, caps on prizes, win ratio management,  prize draws,  varying
            start and end dates by prize group and email  alerts when prizes are
            won
      o     Reverse  Auction.  Turnkey  reverse  auction  promotions,  where the
            lowest   unique   bid  is  the   ultimate   winner.
      o     SMS- or  MMS-to-Postcard.  Customers send in recipient's address and
            greeting  message,  which  is  matched  to a  postcard  and  sent to
            recipient.
      o     Intelligent Offline Client.  (European Patent Pending).  Serves as a
            mobile  content and  application  portal (i.e.  an offline  browser)
            which remains  installed as a handset-based  application on a mobile
            phone.
      o     Messenger.  Provides  all  the  functions  of an  instant  messaging
            application on PCs.
      o     The Cam. Allows customers to enrich photos taken with a camera phone
            by combining them with pre-defined characters.

      12snap's Content Management  Platform offers dynamic content creation.  In
numerous mobile marketing  programs this platform has delivered tens of millions
of content pieces to end users.

      Examples of Mobile Content Include:

      o     Wallpaper
      o     Ring Tones
      o     Music
      o     Mobile Web-Based Information
      o     Mobile Cards

      Mobot Proprietary Visual Matching Service

      With Mobot's proprietary visual recognition technology,  consumers use the
camera in their phone to snap on a brand  advertisement,  an editorial page in a
magazine,  or even a product in a catalog,  whereby visual  matching  technology
identifies  their picture and connects  them  directly to relevant  information.
Fast and easy for  consumers,  it's a  powerful  tool for any media  company  or
marketer.

                                       15
<PAGE>

      Designed to allow seamless integration, Mobot requires no modifications to
existing visual media -- no keywords,  phone numbers, URLs, short codes, product
codes, or bar codes are necessary.  Mobot visual matching technology "reads" the
image and delivers a wide range of responses to the consumer.

      Gavitec Platforms & Applications

      Lavasphere for Smartphones

      This software  solution - specifically  designed for smartphones and based
on the  award-winning  Lavasphere  technology - enables  mobile camera phones to
read 2D-codes (such as Data Matrix and QR codes) as well as traditional barcodes
with  the  integrated  digital  camera,  even  during  preview   (Zero-Click(TM)
live-stream decoding).

      Using the mobile phone, the user can retrieve information contained within
a QR smartcode  for  example,  or link  directly to a specific web page,  access
services,  retrieve real-time information or place orders. To use Lavasphere(R),
no additional hardware is required. This set of ultra-small footprint algorithms
is designed to be integrated into any current and future series 60 camera phones
with Symbian server-client architecture.

      Lavasphere for Smartphone is the ideal solution to turn a smartphone  into
a universal personnel code reader and provides many mobile applications:

      o     M-Commerce
      o     Mobile marketing and advertising
      o     Access to multimedia HTML, XHTML, WAP information and services
      o     Print-to-web integration
      o     Content linking
      o     Data collection
      o     E-Ticketing
      o     Price comparison
      o     Logistics

      EXIO

      EXIO is an advanced and complete  solution,  including  printer,  display,
keypad  and  GSM/GPRS  module - able to read and  process  two-dimensional  (2D)
smartcode  symbologies such as Data Matrix from mobile phone displays as well as
printed one-dimensional (1D) barcodes.

      Thanks   to  a   high-speed   Digital   Signal   Processor   (DSP)  and  a
high-resolution  camera,  EXIO automatically  recognizes  smartcodes sent as SMS
(text) or MMS (picture message) to any compatible mobile phone.

      EXIO has been designed for various direct marketing  applications  such as
mobile ticketing,  mobile couponing, mobile payment and mobile loyalty programs,
and is therefore the ideal  off-the-shelf  solution for  innovative  application
areas such as m-Commerce, 1-to-1-communication, entertainment and retail trade.

      MD-20

      MD-20  is  a  high-performance  OEM  code  reader  providing  unparalleled
flexibility in scanning  two-dimensional (2D) smartcode symbologies such as Data
Matrix  from  mobile  phone  displays  as well as printed  one-dimensional  (1D)
barcodes.

                                       16
<PAGE>

      Designed to be embedded directly into OEM devices,  the new MD-20 features
a  high-resolution  video camera with CMOS sensor and  specialized  code reading
algorithms  allowing automatic detection of 2D smartcodes sent as MMS or Picture
SMS to mobile phones. Equipped with a high-speed digital signal processor (DSP),
it reads  smartcodes with extreme accuracy and rapidity.  Offering  Ethernet and
supporting RS-232 for data connection,  the new MD-20 can be directly  connected
to any host system to process the decoded information.

      The MD-20 enables device manufacturers as well as third-party providers to
maximize  their  business.  By  implementing  MD-20 into their  product  design,
manufacturers  and  system   integrators  can  enhance  the  attractiveness  and
complement the functionality of their products with significant added value. The
MD-20 creates competitive  advantages through marketing  differentiation as well
as to enhance company's image for innovation.

      Thanks to its  compact  size,  speed and  flexibility,  MD-20 is the ideal
high-performance   fixed-position   smartcode   reader   for  a  wide  range  of
applications where mobile code reading,  mobile couponing,  mobile ticketing and
mobile marketing are required,  thus enabling the phone to be used as the single
universal mobile device.

      The MD-20 can be  integrated,  for  example,  into a terminal or an access
control system to permit quick and easy access to users.  It can be also used to
validate  all sorts of  tickets,  such as  admission  tickets or  transportation
tickets and also to redeem vouchers,  to get a discount, or to pay for a product
or service.

      Mobile Marketing Campaign Management

      Through  NeoMedia,  marketers  and  agencies can get  full-service  mobile
marketing account  management  including campaign reporting and integration into
media-led campaigns (TV, radio, print,  outdoor,  direct,  events,  etc.). Those
marketers  looking for a full end-to-end  creative solution would likely turn to
12snap.  Those  marketers  who wish to add mobile  marketing  to their  existing
marketing  strategy  while  utilizing  their  existing  agencies  would  turn to
PaperClick,  Mobot, Gavitec or Sponge, depending on their technology or campaign
requirements, or the geographical footprint of their desired market or campaign.

      Customer Relationship Management

      Gavitec,  Sponge and 12snap have customer  relationship  management  (CRM)
platforms  that  utilize  the  mobile  phone to  build  loyalty  among  clients,
establishing long-term customer relationships and a stable revenue base.

      12snap's 12CRM platform includes design,  data analysis,  content creation
and ongoing program  management.  It also includes a mobile couponing  solution,
utilizing  Gavitec  readers,  that  allows  marketers  to send out  personalized
coupons that link directly to a consumer's mobile phone, making it impossible to
redeem the coupon multiple times.

      Sponge's  CRM  application  includes  list  management,   opt-in  database
functionality and messaging scheduling.

      Enterprise & Niche Market Products and Services

      NMM has a unique competitive  advantage of holding  intellectual  property
for the numerous products, services and platforms mentioned above that allows it
entry into established  broad-based  markets as well as many more niche industry
opportunities.  From homeland security to banking to inventory  tracking to food
labeling, NMM has the solutions ready to customize and implement.

                                       17
<PAGE>

      NeoMedia Micro Paint Repair

      NMPR offers both its own unique  product line and acts as a distributor of
other companies' products to round out its comprehensive  offering to automotive
rejuvenation businesses worldwide. The products offered through NMPR include:

      NMPR  Paint  System.  NMPR  offers a license to use its  proprietary  NMPR
            Paint System,  along with a training  program and ongoing  technical
            support   relating  to  the  system.   The  system  itself  utilizes
            proprietary  technology to repair cosmetic automobile damage such as
            chips,  scratches,   spots,  blemishes  and  oxidized  paint.  While
            competitive paint repair products utilize a mechanical fix, the NMPR
            system  chemically  alters the paint to make the repair invisible to
            the naked eye, even with the most lustrous metal flake and pearlized
            auto  paints.  Repairs can be completed in a fraction of the time of
            conventional methods, and all of NMPR's products are free of harmful
            icocyanates.

      NMPR  Paint System  Products.  NMPR supplies the products  necessary for a
            paint system  operator to implement an NMPR Paint  System.  Products
            include NMPR's  proprietary  chemicals,  auto paint and  application
            hardware.

      NMPR  Specialty  Products.  NMPR  offers a variety  of  non-paint  related
            specialty  products,   including  paintless  dent  repair,  interior
            cleaning,  corrosion  protection,  windshield  repair  and  warranty
            programs.

      NMPR  Auto  Rejuvenation  Services.  NMPR  currently  operates  two repair
            facilities,  one in its headquarters  office in Fort Myers,  Florida
            and the other in its Canadian head office in Calgary,  Alberta.  The
            facilities utilize the NMPR Paint System and other auto rejuvenation
            services to make cosmetic  repairs to automobiles  for  dealerships,
            rental car companies and consumers.

      NMPR  Auto Rejuvenation Training. NMPR offers complete training on its own
            proprietary micropaint system,  paintless dent repair and other auto
            rejuvenation  services to clients of all sizes in its  facilities in
            Fort Myers,  Florida and Calgary,  Alberta, and at client locations.
            In early 2006, NMPR  specialists  trained partner Jinche in China on
            the  NeoMedia  Micro Paint Repair  system in 30 of Jinche's  Beijing
            facilities initially.

      Other Automotive Aftermarket Products. In some geographies, NMPR serves as
            a  distributor  of  other  automotive  aftermarket  products  from a
            variety of manufacturers, such as DuPont and PPG.


      NeoMedia Telecom Services

      NTS has sophisticated  proprietary software and hardware services that are
capable of processing call records for  telecommunications  companies worldwide.
They track and process  bills for a wide range of services,  from local and long
distance operator services as well as paging, voice mail, caller ID, phone cards
and other "ease of access"  0+Plus  dialing  solutions.  NTS has also  developed
flat-fee  billing  solutions that it believes will benefit  Internet content and
service providers. With the addition of services for the Internet community, NTS
anticipates  that it will be able to meet the needs of an even broader  range of
communications companies.

      NTS's products and services include, in the operator/agent  service field:
global and domestic  origination,  hospitality  providers,  payphone  providers,


                                       18
<PAGE>

directory assistance,  North America service,  international  service,  enhanced
information  services,   e-business  support  services,  e-commerce  transaction
support,  "Click-2-Talk" web-based voice routing, and call center ASP solutions.
NTS's   billing   services   include:   North   American  LEC  billing,   online
subscription-based billing, and web-based transaction billing (e-commerce).

Strategic Relationships

      NeoMedia Mobile

      The initial  business sub unit within NeoMedia  Mobile (NMM),  PaperClick,
and the recent strategic acquisitions to NMM, Sponge, Mobot, Gavitec and 12snap,
have all developed strategic relationships to leverage their capabilities across
new geographic and product markets.

      In February 2006,  NeoMedia entered into a strategic alliance with Italian
mobile   marketing   pioneer   Mobedia   (www.mobedia.it).   The  new  strategic
relationship with NeoMedia is a co-marketing partnership agreement, which allows
Mobedia  to   integrate   NeoMedia's   direct-to-mobile-internet   PaperClick(R)
technology into all of its campaigns.  Mobedia was founded in Milan in July 2005
by a group of  ex-Unilever  marketers.  With a  collective  network of  business
relationships  covering  a wide  range of  sectors,  from fast  moving  consumer
packaged goods to network operators, and from media to advertising and promotion
agencies,  Mobedia is  positioned  to expand its mobile  marketing  offerings in
Italy and across southern Europe.

      In October 2005,  NeoMedia  entered into a mobile  marketing  alliance and
co-marketing agreement with Arnold Worldwide,  one of the largest and best-known
advertising  agencies in the U.S. and  globally.  The  agreement  has Arnold and
NeoMedia  working  together to develop  opportunities  and  marketing  campaigns
utilizing the PaperClick platform.

      In March  2005,  NeoMedia  and Foote  Cone & Belding,  a  division  of FCB
Worldwide  LLC,  entered into a  co-marketing  agreement  centered on NeoMedia's
patented PaperClick(R) technology platform. The agreement calls for Foote Cone &
Belding's FCBi unit to work with NeoMedia to develop opportunities and marketing
campaigns utilizing PaperClick,  and facilitate the introduction of NeoMedia and
PaperClick  in  the  mobile  telecommunications   industry.   NeoMedia  provides
technical  and  sales   support  for   presentations   and  marketing   programs
co-developed  for FCBi  clients  and is working  with FCBi to explore and create
marketing opportunities and innovative solutions for its business customers.

      In March 2005, NeoMedia also entered into a business development agreement
with  Intactis  Software,  Inc.,  a provider of Check 21 software  products  and
solutions for the small- to medium-sized  financial  institution  market,  under
which the two  companies  committed  to  develop a  database  lookup  system for
validating codes printed on negotiable instruments (checks).

      During 2005,  Gavitec and PostFinance,  the largest Swiss bank for private
customers, started a project with system integrator Unisys and numerous partners
in the retail sector (Migros, COOP, SBB, McDonald's,  Interdiscount,  Mobilezone
and  PostShops)  enabling  customers  to pay easily  and safely by mobile  phone
instead of EC-card - the first mobile macro-payment system worldwide.

      During 2005, Gavitec also signed a distribution  agreement with Philippine
company  Omniprime Corp, a leading supplier of full service solutions to various
industries throughout Asia, and by this expanded the distribution of its product
lines of code scanners to the Far East region.

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<PAGE>

      Gavitec concluded three further business  co-operations during 2005: first
with RegiSoft Ltd., leading developer of innovative VAS solutions for the mobile
market  place,  then with REA Card  GmbH,  market  leader for  cashless  payment
systems and lastly with Clicktivities AG, supplier of digital premium solutions.
The  cooperation  agreement  with RegiSoft Ltd.  focuses on the  integration  of
Gavitec hardware  solutions and RegiSoft's  World Trade Server(TM)  (WTS(TM)) to
provide customers with complete and integrated  products and services for mobile
marketing,   mobile  ticketing  and  mobile  couponing.   Gavitec  and  the  two
subsidiaries  of REA Systeme GmbH,  REA Card GmbH and  FunkTicket  AG, intend to
bundle  their  competencies  and  products  in order to enable  secure  and easy
payments by mobile  phones.  In addition,  they plan to develop a  hybrid-system
which combines Gavitec scanners with REA terminals to one single payment system.
In  conjunction  with  Clicktivities  AG,  Gavitec  plans to address  the mobile
marketing segment by offering customized digital solutions for eBusinness.

      In November  2005,  Mobot  announced an agreement with the Light Agency to
use and  distribute  its visual  search and  recognition  technology  for mobile
phones,  exclusively  to the grocery  sector in the UK. This adds an  additional
dimension onto an already running program based on a unique partnership  between
The Light Agency,  Jacksons  Stores,  a  Sainsbury's  Plc company and nearly 200
brands. Consumers participating in this program can "shop, scan, and save" while
in the grocery store through texting and now by snapping and sending information
through their mobile phones, based on an advertisement in the store.

      NeoMedia  has on ongoing  relationship  with  Baniak  Pine and  Gannon,  a
Chicago law firm specializing in intellectual property licensing and litigation.
The firm assists NeoMedia in seeking out potential licensees of its intellectual
property portfolio,  including any resulting litigation.  Baniak Pine and Gannon
currently represents NeoMedia in its lawsuit against Scanbuy.

      During 2004 and 2005,  NeoMedia  engaged key partners  around the world to
assist in the  anticipated  roll-out of the  PaperClick(R)  family of  products.
During such time NeoMedia has partnered with  affiliates and resellers,  such as
Big Gig Strategies (United Kingdom),  Relyco and IT-Global (United States), AURA
Digital  Communications  (Australia),  E&I Marketing  (Taiwan),  Deusto Sistemas
(Spain), and Jorge Christen and Partners LLP (Mexico).

      NeoMedia Micro Paint Repair

      On August 30, 2005, NeoMedia signed a distribution  agreement with Jinche,
under which Jinche will act as a distributor  of  automotive  products in China.
Jinche is a Beijing  PRC-registered  company  specializing in automobile  sales,
financing,  insurance,  repair,  and  accessories  through its Automart  branded
facilities. NeoMedia will supply Jinche with its micro paint repair products, as
well as various other automotive  aftermarket products from other manufacturers.
In early 2006,  NeoMedia  strengthened  this relationship to a 10-year exclusive
agreement  to supply  micro paint and related  products and to supply 70% of the
macro paint sales at Jinche's Automart-branded  facilities.  Conversely,  Jinche
gets sole  distributorship of NeoMedia products in China, Hong Kong & Taiwan for
this 10-year period.

      An  additional  goal of the NMPR  business  unit is to act as the  premier
supplier and distributor of automotive aftermarket products. To this end, during
2005  NeoMedia  signed  agreements  to  distribute  DuPont  and  PPG  paint  and
aftermarket products to Jinche.

      To  achieve  a  global  supplier  status,   the  NMPR  business  unit  has
established  agreements  with  distributors  in other  key  geographies  to help
promote, sell and distribute its micro paint repair system and products.  During
2004 and 2005, NeoMedia has enlisted the following distributors:

                                       20
<PAGE>

      o     Micro Paint Systems Australasia (Australia and New Zealand)
      o     WI-THO AS (Scandinavia)
      o     Micropaint de Mexico (Mexico)
      o     MDA Co-Auto (Canada)
      o     Restex (USA)

      During  2005  NeoMedia  also  signed  two  non-binding  Letters  of Intent
outlining steps for NeoMedia to acquire an interest in Auto Preservation,  Inc.,
a wholly-owned subsidiary of Cincinnati-based Pickups Plus.

NeoMedia Telecom Services

      NTS has developed and secured strategic alliances within the industry that
it believes  are key to the  successful  service and  maintenance  of its client
support   systems  and  the  delivery  of  advanced   features.   The  strategic
partnerships  are expected to promote global  solutions with billing as the core
function or source of revenue.  NTS  continually  enhances and  streamlines  its
service  offerings to remain  competitive  in an evolving  marketplace.  NTS has
completed the development of a state-of-the-art IP e-commerce platform described
below for future deployment.

            Next  Generation   IP-Enabled  Operator  Services  Platform.   NTS's
            International Operator Services Platform, which is not yet deployed,
            has been created by integrating  hardware and software  applications
            from  Cisco's  IP  Gateway,   CosmoCom's  IP-based  Next  Generation
            CosmoCall  Universe  Platform,  and the Enhanced  Operator  Services
            ("EOS")  from   Intelis.   CosmoCall   Universe  is  a   multimedia,
            multi-channel   call   center   system  that  goes  far  beyond  the
            capabilities of traditional call center technology. Traditional call
            centers are based on  circuit-switched  automatic call  distributors
            ("ACDs"),  and support only voice telephone calls. CosmoCall has all
            the  capabilities  of a  modern  telephone  call  center,  but  as a
            multimedia, multi-channel interaction center, CosmoCall supports not
            only voice telephone calls,  but also live multimedia  communication
            sessions  via  the  Internet.  Integrated  together  these  products
            provide NTS the capability to launch  web-based  services as well as
            support for traditional telephony including collect, third party and
            calling card supported calls.

            NTS's  Telco  Grade  Billing   Platform.   Highland  Lakes  Software
            ("Highland")  is an  independent  global  service  provider for core
            billing  services for  competitive  LECs ("CLECs") and LECs. NTS has
            been able to  achieve  continued  market  penetration  by  employing
            Highlands'  core  billing  software  at  the  root  of  its  billing
            infrastructure.  NeoMedia  expects that  Highland  will  continue to
            provide billing solutions to NTS as the industry matures and demands
            more  technically  enhanced  functionality.  NTS works  closely with
            Highland to provide extended electronic billing services to meet the
            demands of service  providers  and the Internet  end-user.  With the
            coordination of Highland  engineers,  NTS has developed  proprietary
            modules  to  enhance  allowable  billing  types  and to  provide  an
            effective  direct billing  service as well as an aggressive  revenue
            recovery service for our customers.

Sales and Marketing

      NeoMedia Mobile

      NeoMedia  Mobile (NMM) has worked to establish a global  network of direct
salespeople, affiliates and business development personnel to market, upsell and
cross-sell its suite of products and services.  Its core target markets across a
number of geographic  regions  including:  the U.S., the U.K.,  Germany,  Italy,
Scandinavia,  Central &  Eastern  Europe,  and in  Asia/Pacific:  Japan,  Korea,
Singapore Australia.

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<PAGE>

      Core markets for the sales force include:

      Brand  Marketers and Marketing  Services  Agencies.  NeoMedia  markets its
      robust suite of end-to-end (and  everything in between)  mobile  marketing
      products   and   services  to  both   agencies,   who  maintain  the  main
      relationships  with major brands while the NeoMedia business units creates
      and manages the wireless  marketing  campaign portion of the relationship,
      and directly to  brand/product  marketers where there is a higher level of
      wireless experience or expertise..

      Media. NMM supplies applications and services, such as competitions, votes
      and alerts to media  companies  operating in the TV, radio and print media
      industries.

      Network  Operators/Carriers & Handset Manufacturers.  There are a range of
      applications and platforms that are suited directly for network  operators
      or  carriers  and  the  handset   manufacturers   who  supply  them;  many
      applications  are custom  developed at the request of these  operators and
      manufacturers.

      Retailers. In addition to mobile marketing campaigns carried out on behalf
      of major  retailers  in a variety  of  markets  by the  NeoMedia  Wireless
      companies,  Gavitec's EXIO and MD20 products  represent the next evolution
      in point-of-sale equipment offering m-coupons and m-commerce.

      Enterprise  Clients,  Government  & Education.  The robust and  innovative
      platforms,  on which many of the products  offered by NeoMedia run, can be
      customized to work in numerous other  environments  and in many industries
      including finance, security, tracking and labeling.

NeoMedia Micro Paint Repair

      NeoMedia  markets its Micro Paint Repair  products and services  primarily
through a direct sales force, as well as a worldwide network of distributors and
agents.  During 2004 and 2005,  NeoMedia Micro Paint Repair signed  distribution
agreements to bring its products to China, Australia, New Zealand,  Scandinavia,
Mexico and Latin America, in addition to its existing  distribution  channels in
the US and Canada.

NeoMedia Telecom Services

      Direct  sales  and  strategic  sales  alliances  are used as the  business
strategy for NTS as it continues to grow.

      As  a  provider  of  billing,  clearinghouse  and  information  management
services  to the  telecommunications  industry,  NTS has  attempted  to position
itself to take  advantage  of the  current  disarray  in the  telecommunications
sector. Historically many of the international collect calling and international
billing and clearing contracts have been controlled by intermediary agents.

      NTS's  sales  team is  segmented  between  target  customer  segments  and
geography (domestic and international).

      NTS  anticipates   that  initially,   incremental   business   development
representatives  will be added  to  target  North  American  carriers  including
clearing  houses,   alternative  operator  service  providers,   local  exchange
carriers, long distance voice and data providers, wireless carriers and internet
and  e-business  service  providers.  While this will involve  primarily  direct
marketing and selling, it is anticipated that alliances can be established where
NTS's  products and services can be positioned as part of a bundled  offering in
conjunction with other complementary services.

                                       22
<PAGE>

Customers and Clients

      NeoMedia Mobile

      PaperClick.  To date,  NeoMedia  has  licensed  its patents to, or settled
patent-related  lawsuits with,  Digital:Convergence,  A.T. Cross Company, Symbol
Technologies,  Brandkey Systems  Corporation,  Virgin  Entertainment  Group, and
AirClic,  Inc. NeoMedia intends to pursue additional  license  agreements of its
patent  portfolio  in the future,  in addition  to enabling  consumer  brand and
enterprise organization campaigns and projects.

      With the  acquisitions  of Mobot,  Sponge,  Gavitec and 12Snap  during the
first  quarter of 2006,  NeoMedia has added an extensive  list of major  clients
including:

      Mobot.  Major brands utilizing  Mobot's visual  recognition  technology to
      date include L'Oreal,  Samsung and Saturn. Media clients include ELLEgirl,
      VIBE and JANE  magazines,  together  with music  label WEA  (Warner  Music
      Group's U.S. sales and retail marketing company)

      Sponge.  Major agency clients  include WPP, Aegis and BBH, while brand and
      telco  clients  include  Walkers  Crisps   (Frito-Lay),   NEC,  Coca-Cola,
      Heineken,  Diageo,  Vodafone and  Unilever.  Major media groups  utilizing
      Sponge's  multi-application  platform include Endemol, IPC, Trinity Mirror
      and News International.

      Gavitec. Network  provider/carrier clients include T-Mobile,  Vodafone and
      Telefonica,  together  with mobile  handset  manufacturers:  Motorola  and
      Nokia. IT Leader clients comprise Hewlett Packard, Ericsson Mobility World
      and Unisys,  to name but three,  while  content  providers  such as Warner
      Music  International  and RTL Enterprises,  European  solutions  providers
      including xsmart,  Dimoco, ucp morgen,  RegiSoft,  and Top Solutions,  and
      access management  systems company  SkiData(TM) are all represented on the
      Gavitec roster.

      12snap. Major brand clients to have used 12snap's  award-winning  platform
      and  creativity  include  Sony PS2,  Nokia,  Coca-Cola,  McDonald's,  MTV,
      Unilever,  Gillette,  Ferrero, Wella, Vodafone,  adidas, Procter & Gamble,
      and Kellogg's

NeoMedia Micro Paint Repair

      The customer base for the NMPR business unit consists of auto dealerships,
general automotive repair shops, collision shops, rental car agencies, and other
automotive  service facilities in Canada,  the US, China,  Scandinavia,  Mexico,
Latin America and Australia/New Zealand.

NeoMedia Telecom Services (BSD/Triton)

      Triton is a customer  service-oriented  organization  providing  telephone
services  to  direct  customers  and  telecommunications   companies  (including
clearing  houses,   alternative  operator  service  providers,   local  exchange
carriers,  long distance  voice and data  providers,  wireless  carriers),  both
within North America and  internationally.  Triton has also  developed  flat-fee
billing  solutions  that it believes will benefit  Internet  content and service
providers.  With the  addition of services for the  Internet  community,  Triton
anticipates  that it will be able to meet the needs of an even broader  range of
communications companies.

                                       23
<PAGE>

Competition

      NeoMedia Mobile

      Through the  combination  of all its  business  sub units:  PaperClick(R),
Sponge,  Mobot, Gavitec and 12snap,  NeoMedia believes its NMM business unit has
positioned  itself to compete as a global leader in mobile marketing  solutions.
The  individual  business  units,  prior to  acquisition,  were already known as
leaders  in their  own  respective  marketplaces,  so taken  together,  NeoMedia
believes  itself now to be one of the most  experienced  and  successful  global
end-to-end mobile marketing solutions providers in the world.

      However,  within the mobile marketing industry there are numerous players,
many of which  are just  beginning  to  appear,  who offer  parts of the  mobile
marketing equation.

      Traditional  agencies  are  starting  to add  mobile  campaigns  to  their
clients'  overall  marketing mix,  often at the request of the client.  However,
many of these  agencies  turn to  different  companies  to provide  content  and
applications, and to the aggregators who have the relationship with the wireless
carriers to obtain the short codes for SMS and MMS messaging. It is important to
note that the PaperClick platform transcends  messaging services since, once the
PaperClick technology is on a mobile phone, there is only one step to access the
mobile web--via  keyword or numeric entry into the GoWindow(R) or  CodeWindow(R)
or by clicking on a barcode or smartcode with the camera in a handset.

      In the European  market,  where mobile marketing has been embraced by many
large  brands  (and  poised to grow  exponentially--see  Industry  Section)  and
numerous consumers, the competition is quite fragmented by geographic region and
by product and service  offerings.  For  example,  while  Flytxt,  Aerodeon  and
Enpocket have  traditionally  competed with NeoMedia companies Sponge and 12snap
in the UK mobile  marketing  marketplace,  Mindmatics has provided the principal
competition in Germany. Additionally, Spielplatz.cc is one of the larger premium
players in  Germany,  Austria and  Switzerland.  Also,  Austria-based  DIMICO is
focused on premium SMS connectivity and messaging.

      In  general,  due to the  relative  immaturity  of  the  mobile  marketing
industry,  small players have sprung up offering very  specialized  products and
services.  This is even more  pronounced in the U.S. where mobile  marketing has
mostly been confined to text-to-vote applications.

      As the mobile marketing industry matures,  NeoMedia expects  consolidation
as industry leaders emerge.  Moreover,  NeoMedia believes its well positioned at
the onset due to the intellectual property, including many patents, on which its
products  and  services  are  based.  NeoMedia  expects  that  its  intellectual
property,  coupled with its early  aggregation  of proven market  leaders,  will
serve as a competitive advantage as this market rapidly matures.

      NeoMedia Micro Paint Repair.

      NeoMedia's   competitors  in  the  micro  paint  repair  industry  consist
primarily of suppliers of traditional  paint repair methods,  such as automotive
paint  manufacturers.  Various  ancillary  competitors  exist in the  automotive
paintless dent repair, window repair, interior repair, etc. markets.

      NeoMedia Telecom Services

      Competitors of the NTS business unit fall into two major  categories:  (1)
Third Party Billing Companies,  and (2) Alternative  Operator Services Providers
("AOSPs").

                                       24
<PAGE>

            Third  Party  Billing  Companies.   The  majority  of  clearinghouse
            competitors are United States-based or are part of an incumbent LEC.
            NTS believes that its position as an independent  Canadian operation
            makes it unique  among  those in the third party  billing  market in
            North   America.   NTS  may  not  be  able  to  compete  with  large
            telecommunication  providers  on a revenue  scale,  but NTS believes
            that it does have the ability to meet the evolving  telecom market's
            needs  quickly  and  efficiently.  Most  of  these  competitors  are
            restricted from entering the Canadian  marketplace due to regulatory
            issues.  This  means  that  these  competitors  can also  become NTS
            customers in certain segments of their business,  particularly  when
            it comes to providing  services to all outside  competitors who wish
            to bill for Canadian Services.

            AOSPs. In addition to providing  sophisticated billing and clearing,
            the technology  platform currently being developed will allow NTS to
            compete with  carriers and  companies  providing  live and automated
            operator  services  both   domestically  and,  with   multi-language
            capabilities,  on an  international  basis.  In addition to specific
            AOSPs,  the  majority  of the LECs in the  United  States and Canada
            provide operator services as part of their core offerings.  In 1997,
            the Federal  Communications  Commission ruled that in order to be an
            eligible telecommunications carrier a service provider would have to
            provide   the  basic   universal   services   as  laid  out  in  the
            Telecommunications Act of 1996, including: voice grade access to the
            PSTN, single party service, access to emergency service (i.e., 911),
            and access to both operator services and directory assistance (i.e.,
            411). While telecommunication carriers are mandated to provide these
            services, they do not have to provide these services themselves. NTS
            believes  that this  provides  opportunity  for NTS to look to these
            competitors  as  prospective  customers  for  its  AOSP  and  future
            IP-enabled   service  offerings.   NTS's   Canadian-based  low  cost
            infrastructure,    fewer   regulatory   encumbrances   than   United
            States-based  carriers  and the  ability to provide a  fully-bundled
            suite of  services  on a single  IP  enabled  platform  allows it to
            compete for both traditional services as well as future services.

Product Liability

      The Company has never had any product liability claim asserted against it.
Currently the Company maintains product liability insurance, but there can be no
guarantee  that such policy will be  sufficient to cover any claims made against
the Company.

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.

      Certain of the Company's proprietary  technology allows for the storage of
demographic  data from  NeoMedia's  users. In 2000, the European Union adopted a
directive  addressing  data  privacy  that may limit the  collection  and use of
certain  information  regarding  Internet  users.  This  directive may limit the
Company's  ability to collect and use  information  collected  by the  Company's
technology  in certain  European  countries.  In  addition,  the  Federal  Trade
Commission and several state  governments  have  investigated the use by certain
Internet companies of personal information.  The Company could incur significant
additional expenses if new regulations regarding the use of personal information
are introduced or if the Company's privacy practices are investigated.

                                       25
<PAGE>

Environmental Protection Compliance

      The  Company's  Micro  Paint  Division  operations  are  subject to normal
environmental  protection regulations.  Compliance with federal, state and local
provisions  which have been  enacted  or adopted  regulating  the  discharge  of
materials into the environment,  or otherwise  relating to the protection of the
environment,  is not  expected  to  have a  material  effect  upon  the  capital
expenditures,  earnings or the  competitive  position of the  Company.  However,
environmental  requirements  are  constantly  changing,  and it is  difficult to
predict  the  effect of  future  requirements  on the  Company.  Company  policy
requires  that  all  operations  fully  meet  or  exceed  legal  and  regulatory
requirements.  As of the date of this  report,  the  Company is not aware of any
non-compliance matters.

Employees

      As of December 31, 2005, the Company employed 51 persons, of which 25 were
located at the Company's headquarters in Fort Myers, Florida, 7 at the Company's
Lisle,  Illinois office (which was subsequently  closed during the first quarter
of 2006), 9 at the NeoMedia's  micro paint repair facility in Ft, Myers Florida,
9 at the Company's Calgary,  Alberta, Canada office, and 1 remote employee. 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.

      The Company's  success depends on 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 2006 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 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.


                                       26
<PAGE>

                                  RISK FACTORS


                           Risks Specific To NeoMedia

                      Risks Related to NeoMedia's Business

NeoMedia has Historically Lost Money and Losses May Continue

      NeoMedia has incurred substantial losses since inception,  and anticipates
continuing to incur  substantial  losses for the  foreseeable  future.  NeoMedia
incurred a loss of $9,147,000  and  $7,230,000  for the years ended December 31,
2005 and 2004,  respectively.  NeoMedia's  accumulated losses were approximately
$92,524,000 as of December 31, 2005. As of December 31, 2005 and 2004,  NeoMedia
had a working  capital  deficit  of  approximately  $4,874,000  and  $2,597,000,
respectively.  NeoMedia had  stockholders'  equity of $4,227,000  and $4,392,000
December  31,  2005 and  2004,  respectively.  NeoMedia  generated  revenues  of
$2,156,000  and  $1,700,000  for the years  ended  December  31,  2005 and 2004,
respectively.  In addition,  during the years ended  December 31, 2005 and 2004,
NeoMedia  recorded  negative  cash  flows  from  operations  of  $7,309,000  and
$4,650,000,  respectively.  To  succeed,  NeoMedia  must  develop new client and
customer  relationships  and  substantially  increase  its revenue  derived from
improved products and additional  value-added  services.  NeoMedia has expended,
and to the extent it has available  financing,  NeoMedia  intends to continue to
expend, substantial resources to develop and improve its products,  increase its
value-added services and to market its products and services.  These development
and marketing  expenses must be incurred well in advance of the  recognition  of
revenue.  As  a  result,  NeoMedia  may  not  be  able  to  achieve  or  sustain
profitability.

NeoMedia's  Independent  Registered  Public  Accounting  Firm Have  Added  Going
Concern   Language  To  Their  Report  On  NeoMedia's   Consolidated   Financial
Statements, Which Means That NeoMedia May Not Be Able To Continue Operations

      The  report  of  Stonefield  Josephson,   Inc.,   NeoMedia's   independent
registered  public  accounting  firm,  with respect to  NeoMedia's  consolidated
financial statements and the related notes for the years ended December 31, 2005
and 2004,  indicates  that, at the date of their  report,  NeoMedia had suffered
significant  recurring  losses from  operations and its working  capital deficit
raised  substantial  doubt about its  ability to  continue  as a going  concern.
NeoMedia's consolidated financial statements do not include any adjustments that
might result from this uncertainty.

There is Limited Information Upon Which Investors Can Evaluate NeoMedia's
Business Because The Physical-World-to-Internet Market Has Existed For Only A
Short Period Of Time

      The  physical-world-to-Internet  market in which  NeoMedia  operates  is a
recently developed market.  Further,  NeoMedia has conducted  operations in this
market only since March 1996.  Consequently,  NeoMedia has a relatively  limited
operating  history upon which an investor may base an  evaluation  of NeoMedia's
primary business and determine  NeoMedia's  prospects for achieving its intended
business objectives.  To date, NeoMedia has sold its  physical-world-to-Internet
products to only 12 companies. NeoMedia is prone to all of the risks inherent to
the establishment of any new business venture,  including  unforeseen changes in
its business  plan.  An investor  should  consider the  likelihood of NeoMedia's
future  success  to be  highly  speculative  in light of its  limited  operating
history in its  primary  market,  as well as the  limited  resources,  problems,
expenses,  risks, and complications frequently encountered by similarly situated
companies    in   new   and   rapidly    evolving    markets,    such   as   the
physical-world-to-Internet  space. To address these risks,  NeoMedia must, among
other things:

                                       27
<PAGE>

            o     maintain and increase its client base;

            o     implement and successfully  execute its business and marketing
                  strategy;

            o     continue to develop and upgrade its products;

            o     continually update and improve service offerings and features;

            o     respond  to  industry  and  competitive  developments;  and

            o     attract, retain, and motivate qualified personnel.

      NeoMedia may not be successful in addressing  these risks.  If NeoMedia is
unable to do so, its business,  prospects,  financial condition,  and results of
operations would be materially and adversely affected.

NeoMedia's future success depends on the timely introduction of new products and
the acceptance of these new products in the marketplace.

      Rapid  technological  change and  frequent new product  introductions  are
typical for the markets NeoMedia serves.  NeoMedia's  future success will depend
in large part on continuous, timely development and introduction of new products
that address evolving market requirements.  To the extent that NeoMedia fails to
introduce  new  and  innovative  products,  it  may  lose  market  share  to its
competitors,  which may be difficult to regain. Any inability, for technological
or other  reasons,  to  successfully  develop and introduce  new products  could
materially and adversely affect NeoMedia's business.

NeoMedia's  Common Stock Is Deemed To Be "Penny  Stock,"  Which May Make It More
Difficult For Investors To Sell Their Shares Due To Suitability Requirements

      NeoMedia's  common  stock is deemed  to be  "penny  stock" as that term is
defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934, as
amended.  These  requirements  may reduce the  potential  market for  NeoMedia's
common  stock by reducing the number of  potential  investors.  This may make it
more difficult for investors in NeoMedia's  common stock to sell shares to third
parties or to otherwise dispose of them. This could cause NeoMedia's stock price
to decline. Penny stocks are stock:

            o     with a price of less than $5.00 per share;

            o     that are not traded on a "recognized" national exchange;

            o     whose prices are not quoted on the NASDAQ automated  quotation
                  system  (NASDAQ  listed  stock  must still have a price of not
                  less than $5.00 per share); or

            o     in issuers with net  tangible  assets less than $2 million (if
                  the issuer has been in continuous operation for at least three
                  years) or $10 million  (if in  continuous  operation  for less
                  than three  years),  or with average  revenues of less than $6
                  million for the last three years.

      Broker-dealers  dealing in penny stocks are required to provide  potential
investors  with a  document  disclosing  the  risks of penny  stocks.  Moreover,
broker-dealers  are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor.

                                       28
<PAGE>

NeoMedia is Uncertain Of The Success Of Its Internet Switching Software Business
Unit  And The  Failure  Of This  Unit  Would  Negatively  Affect  The  Price  Of
NeoMedia's Stock

      NeoMedia  provides products and services that provide a link from physical
objects,  including printed material,  to the Internet.  NeoMedia can provide no
assurance that:

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

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

            o     the products NeoMedia develops will obtain market acceptance.

      In the event that the Internet  Switching  Software  business  unit should
never achieve profitability, that NeoMedia's current product offerings should so
suffer, or that NeoMedia's products fail to obtain market acceptance, NeoMedia's
business,  prospects,  financial  condition,  and results of operations would be
materially adversely affected.

A Large Percentage Of NeoMedia's Assets Are Intangible  Assets,  Which Will Have
Little Or No Value If NeoMedia's Operations Are Unsuccessful

      At December 31, 2005 and 2004, approximately 48% and 49%, respectively, of
NeoMedia's total assets were intangible assets,  consisting  primarily of rights
related  to  NeoMedia's  patents,  other  intellectual  property,  and excess of
purchase  price over fair market  value paid for CSI  International,  Inc.  (now
NeoMedia Micro Paint Repair). If NeoMedia's  operations are unsuccessful,  these
assets will have little or no value, which would materially adversely affect the
value of NeoMedia's  stock and the ability of NeoMedia's  stockholders to recoup
their investments in NeoMedia's capital stock.

NeoMedia's Physical-World-To-Internet Marketing Strategy Has Not Been Tested And
May Not Result In Success

      To  date,  NeoMedia  has  conducted  limited  marketing  efforts  directly
relating to NeoMedia's NISS business unit. All of NeoMedia's  marketing  efforts
have been largely  untested in the  marketplace,  and may not result in sales of
NeoMedia's products and services. To penetrate the markets in which it competes,
NeoMedia  will have to exert  significant  efforts to create  awareness  of, and
demand for, its  products and  services.  With respect to  NeoMedia's  marketing
efforts conducted directly,  NeoMedia intends to expand its sales staff upon the
receipt of sufficient  operating capital.  NeoMedia's failure to further develop
NeoMedia's  marketing  capabilities and successfully  market NeoMedia's products
and  services  would  have a material  adverse  effect on  NeoMedia's  business,
prospects, financial condition, and results of operations.

NeoMedia's  Internally Developed Systems Are Inefficient And May Put NeoMedia At
A Competitive Disadvantage

      NeoMedia  uses  internally  developed  technologies  for a portion  of its
systems  integration   services,   as  well  as  the  technologies  required  to
interconnect its clients' and customers'  physical-world-to-Internet systems and
hardware with its own. As NeoMedia  develops these systems in order to integrate
disparate  systems  and  hardware on a  case-by-case  basis,  these  systems are
inefficient and require a significant  amount of customization.  Such client and
customer-specific  customization  is time  consuming  and  costly  and may place
NeoMedia at a competitive  disadvantage  when compared to competitors  with more
efficient systems.

                                       29
<PAGE>

NeoMedia Could Fail to Attract Or Retain Key Personnel

      NeoMedia's  future  success  will  depend in large part on its  ability to
attract, train, and retain additional highly skilled executive level management,
creative, technical, and sales personnel. Competition is intense for these types
of personnel from other technology companies and more established organizations,
many of which  have  significantly  larger  operations  and  greater  financial,
marketing,  human,  and other  resources than NeoMedia has.  NeoMedia may not be
successful in attracting and retaining qualified personnel on a timely basis, on
competitive terms, or at all. NeoMedia's failure to attract and retain qualified
personnel  could  have a material  adverse  effect on its  business,  prospects,
financial condition, and results of operations.

NeoMedia  Depends Upon Its Senior  Management  And Their Loss Or  Unavailability
Could Put NeoMedia At A Competitive Disadvantage

      NeoMedia's success depends largely on the skills of certain key management
and technical personnel,  including Charles T. Jensen,  NeoMedia's President and
Chief Executive  Officer,  Charles W. Fritz,  NeoMedia's founder and Chairman of
the Board of Directors,  Martin N. Copus, NeoMedia's Chief Operating Officer and
head of the NMM business unit, and David A. Dodge,  NeoMedia's  Chief  Financial
Officer.  The loss of the services of Messrs.  Jensen,  Fritz,  Copus,  or Dodge
could materially harm NeoMedia's business because of the cost and time necessary
to replace and train a  replacement.  Such a loss would also  divert  management
attention away from operational  issues.  NeoMedia does not presently maintain a
key-man life insurance policy on Messrs. Jensen, Fritz, Copus, or Dodge.

NeoMedia May Be Unsuccessful  In Integrating Its Recently  Completed and Pending
Acquisitions With Its Current Business

      The success of the acquisitions of Mobot, 12Snap, Sponge, Gavitec, and BSD
could depend on the ability of NeoMedia's  executive management to integrate the
business plan of each company with NeoMedia's  overall business plan. Failure to
properly  integrate  the business  could have a material  adverse  effect on the
expected  revenue and  operations of the  acquisitions,  as well as the expected
return on investment for NeoMedia.

NeoMedia May Be Unable To Protect Its  Intellectual  Property  Rights And May Be
Liable For Infringing The Intellectual Property Rights Of Others

      NeoMedia's success in the  physical-world-to-Internet  and the value-added
systems  integration  markets  is  dependent  upon its  proprietary  technology,
including patents and other intellectual property, and on the ability to protect
proprietary  technology and other  intellectual  property  rights.  In addition,
NeoMedia  must conduct its  operations  without  infringing  on the  proprietary
rights of third  parties.  NeoMedia also intends to rely upon  unpatented  trade
secrets and the know-how and expertise of its employees, as well as its patents.
To protect its proprietary technology and other intellectual property,  NeoMedia
relies  primarily on a  combination  of the  protections  provided by applicable

                                       30
<PAGE>

patent,   copyright,   trademark,   and  trade   secret   laws  as  well  as  on
confidentiality   procedures  and  licensing  arrangements.   Although  NeoMedia
believes  that  it  has  taken  appropriate  steps  to  protect  its  unpatented
proprietary rights, including requiring that its employees and third parties who
are   granted   access  to   NeoMedia's   proprietary   technology   enter  into
confidentiality  agreements,  NeoMedia  can  provide  no  assurance  that  these
measures will be sufficient to protect its rights against third parties.  Others
may   independently   develop  or  otherwise   acquire  patented  or  unpatented
technologies or products similar or superior to NeoMedia's.

      NeoMedia  licenses  from third  parties  certain  software  tools that are
included in  NeoMedia's  services and  products.  If any of these  licenses were
terminated,  NeoMedia  could be required to seek  licenses for similar  software
from other third parties or develop these tools internally.  NeoMedia may not be
able to obtain  such  licenses  or develop  such tools in a timely  fashion,  on
acceptable  terms,  or at  all.  Companies  participating  in the  software  and
Internet  technology  industries are frequently involved in disputes relating to
intellectual  property.  NeoMedia  may in the future be  required  to defend its
intellectual property rights against infringement,  duplication,  discovery, and
misappropriation  by third  parties or to defend  against  third party claims of
infringement.  Likewise,  disputes  may  arise in the  future  with  respect  to
ownership of technology  developed by employees who were previously  employed by
other  companies.  Any such  litigation or disputes  could result in substantial
costs to, and a diversion of effort by, NeoMedia. An adverse determination could
subject NeoMedia to significant  liabilities to third parties,  require NeoMedia
to seek licenses from, or pay royalties to, third parties,  or require  NeoMedia
to develop appropriate alternative technology. Some or all of these licenses may
not be available to NeoMedia on acceptable  terms or at all, and NeoMedia may be
unable to develop alternate  technology at an acceptable price or at all. Any of
these  events  could  have a material  adverse  effect on  NeoMedia's  business,
prospects, financial condition, and results of operations.

NeoMedia Is Exposed To Product  Liability  Claims And An  Uninsured  Claim Could
Have A Material  Adverse  Effect On NeoMedia's  Business,  Prospects,  Financial
Condition, And Results Of Operations, As Well As The Value Of NeoMedia's Stock

      Many of NeoMedia's projects are critical to the operations of its clients'
businesses. Any failure in a client's information system could result in a claim
for   substantial   damages   against   NeoMedia,   regardless   of   NeoMedia's
responsibility for such failure. NeoMedia could, therefore, be subject to claims
in connection with the products and services that it sells.  NeoMedia  currently
maintains product liability insurance. There can be no assurance that:

            o     NeoMedia  has  contractually  limited its  liability  for such
                  claims adequately or at all; or

            o     NeoMedia  would  have  sufficient  resources  to  satisfy  any
                  liability resulting from any such claim.

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

NeoMedia Will Not Pay Cash Dividends and Investors May Have To Sell Their Shares
In Order To Realize Their Investment

      NeoMedia has not paid any cash  dividends on its common stock and does not
intend to pay cash  dividends in the  foreseeable  future.  NeoMedia  intends to
retain  future  earnings,  if  any,  for  reinvestment  in the  development  and
marketing of NeoMedia's products and services.  As a result,  investors may have
to sell their shares of common stock to realize their investment.

                                       31
<PAGE>

Some Provisions Of NeoMedia's  Certificate of Incorporation And bylaws May Deter
Takeover Attempts, Which May Limit The Opportunity Of NeoMedia's Stockholders To
Sell Their Shares At A Premium To The Then-Current Market Price

      Some of the  provisions of NeoMedia's  Certificate  of  Incorporation  and
bylaws could make it more difficult for a third party to acquire NeoMedia,  even
if doing so might be  beneficial to NeoMedia's  stockholders  by providing  them
with the  opportunity  to sell  their  shares at a premium  to the  then-current
market  price.  On December 10, 1999,  NeoMedia's  Board of Directors  adopted a
stockholders  rights plan and  declared a  non-taxable  dividend of one right to
acquire Series A Preferred Stock of NeoMedia, par value $0.01 per share, on each
outstanding  share of  NeoMedia's  common  stock to  stockholders  of  record on
December  10,  1999 and each share of common  stock  issued  thereafter  until a
pre-defined hostile takeover date. The stockholder rights plan was adopted as an
anti-takeover measure,  commonly referred to as a "poison pill." The stockholder
rights  plan was  designed to enable all  stockholders  not engaged in a hostile
takeover attempt to receive fair and equal treatment in any proposed takeover of
NeoMedia and to guard against partial or two-tiered  tender offers,  open market
accumulations,  and other  hostile  tactics  to gain  control of  NeoMedia.  The
stockholders  rights  plan was not  adopted in response to any effort to acquire
control of NeoMedia at the time of adoption.  This stockholders  rights plan may
have the effect of rendering more difficult, delaying, discouraging, preventing,
or rendering  more costly an  acquisition  of NeoMedia or a change in control of
NeoMedia. Certain of NeoMedia's directors,  officers and principal stockholders,
Charles W. Fritz,  William E. Fritz and The Fritz Family Limited Partnership and
their  holdings  were  exempted  from the  triggering  provisions  of NeoMedia's
"poison  pill" plan,  as a result of the fact that,  as of the plan's  adoption,
their holdings might have otherwise triggered the "poison pill".

      In addition,  NeoMedia's Certificate of Incorporation authorizes the Board
of Directors to designate and issue preferred stock, in one or more series,  the
terms  of  which  may be  determined  at the time of  issuance  by the  Board of
Directors,  without  further  action by  stockholders,  and may  include  voting
rights,  including  the  right  to  vote  as a  series  on  particular  matters,
preferences as to dividends and liquidation,  conversion, redemption rights, and
sinking fund provisions.

      NeoMedia is authorized to issue a total of 25,000,000  shares of Preferred
Stock, par value $0.01 per share. NeoMedia has no present plans for the issuance
of any preferred stock.  However, the issuance of any preferred stock could have
a material  adverse effect on the rights of holders of NeoMedia's  common stock,
and, therefore,  could reduce the value of shares of NeoMedia's common stock. In
addition,  specific rights granted to future holders of preferred stock could be
used to restrict NeoMedia's ability to merge with, or sell NeoMedia's assets to,
a third party.  The ability of the Board of Directors to issue  preferred  stock
could have the  effect of  rendering  more  difficult,  delaying,  discouraging,
preventing,  or rendering  more costly an acquisition of NeoMedia or a change in
NeoMedia's control thereby preserving control by the current stockholders.

Existing  Shareholders Will Experience  Significant  Dilution when the Investors
Convert  Their  Preferred  Stock to Common Stock or When the  Investor  Exercise
Their Warrants and Received  Common Stock Shares Under the Investment  Agreement
with the Investors

      The  issuance  of shares of common  stock  pursuant to the  conversion  of
preferred stock or exercise of warrants pursuant to our transaction with certain
investors  described  in  this  filing  or any  other  future  equity  financing
transaction will have a dilutive impact on our  stockholders.  As a result,  our
net income or loss per share could  decrease in future  periods,  and the market

                                       32
<PAGE>

price of our common stock could decline. In addition,  the lower our stock price
is,  the more  shares of  common  stock we will  have to issue  pursuant  to the
conversion of our preferred  stock and exercise of warrants.  If our stock price
is lower, then our existing  stockholders would experience greater dilution.  We
cannot  predict the actual  number of shares of common stock that will be issued
underlying our preferred  stocks and warrants;  however,  existing  stockholders
could experience significant dilution of their ownership of the Company.

                      Risks Relating To NeoMedia's Industry


The Security of the  Internet  Poses Risks To The Success Of  NeoMedia's  Entire
Business

      Concerns   over  the  security  of  the  Internet  and  other   electronic
transactions, and the privacy of consumers and merchants, may inhibit the growth
of the Internet and other online  services  generally,  especially as a means of
conducting commercial transactions,  which may have a material adverse effect on
NeoMedia's physical-world-to-Internet business.

NeoMedia  Will Only Be Able To Execute Its  Physical-World-To-Internet  Business
Plan If Internet Usage and Electronic Commerce Continue To Grow

      NeoMedia's  future  revenues  and any  future  profits  are  substantially
dependent  upon the  widespread  acceptance  and use of the  Internet and camera
devices on mobile  telephones.  If use of the  Internet  and  camera  devices on
mobile  telephones does not continue to grow or grows more slowly than expected,
or if  the  infrastructure  for  the  Internet  and  camera  devices  on  mobile
telephones does not  effectively  support the growth that may occur, or does not
become a viable commercial  marketplace,  NeoMedia's  physical-world-to-Internet
business, and therefore NeoMedia's business, prospects, financial condition, and
results of operations,  could be materially adversely affected.  Rapid growth in
the use of,  and  interest  in,  the  Internet  and  camera  devices  on  mobile
telephones is a recent  phenomenon,  and may not continue on a lasting basis. In
addition,  customers may not adopt,  and continue to use mobile  telephones as a
medium of information  retrieval or commerce.  Demand and market  acceptance for
recently  introduced  services and products over the mobile Internet are subject
to a high level of  uncertainty,  and few services and products  have  generated
profits. For NeoMedia to be successful, consumers and businesses must be willing
to accept  and use novel and cost  efficient  ways of  conducting  business  and
exchanging information.

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

                                       33
<PAGE>

NeoMedia May Not Be Able To Adapt As The  Internet,  Physical-World-To-Internet,
Equipment  Resales  And  Systems  Integrations  Markets,  And  Customer  Demands
Continue To Evolve

      NeoMedia   may  not  be  able  to  adapt  as  the  mobile   Internet   and
physical-world-to-Internet  markets  and  consumer  demands  continue to evolve.
NeoMedia's  failure to respond in a timely manner to changing market  conditions
or client  requirements  would have a material  adverse  effect on its business,
prospects,  financial condition, and results of operations.  The mobile Internet
and physical-world-to-Internet markets are characterized by:

            o     rapid technological change;

            o     changes in user and customer requirements and preferences;

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

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

      NeoMedia's success will depend, in part, on its ability to:

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

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

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

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

NeoMedia's  Competitors  In The Micro  Paint  Repair  Industry  Could  Duplicate
NeoMedia's Proprietary Processes

      NeoMedia's  success  in the  micro  paint  repair  industry  depends  upon
proprietary  chemical  products  and  processes.  There  is  no  guarantee  that
NeoMedia's competitors will not duplicate NeoMedia's proprietary processes.


NeoMedia May Not Be Able To Compete Effectively In Markets Where Its Competitors
Have More Resources

      While the market for  physical-world-to-Internet  technology is relatively
new, it is already highly  competitive and characterized by an increasing number
of entrants that have introduced or developed  products and services  similar to
those offered by NeoMedia. NeoMedia believes that competition will intensify and
increase in the near future. NeoMedia's target market is rapidly evolving and is
subject to continuous technological change. As a result,  NeoMedia's competitors
may be better  positioned  to  address  these  developments  or may  react  more
favorably  to these  changes,  which  could  have a material  adverse  effect on
NeoMedia's business, prospects, financial condition, and results of operations.

                                       34
<PAGE>

      Some of NeoMedia's  competitors  have longer operating  histories,  larger
customer bases,  longer  relationships with clients,  and significantly  greater
financial,  technical,  marketing, and public relations resources than NeoMedia.
Based on total assets and annual  revenues,  NeoMedia is  significantly  smaller
than its two largest competitors in the physical-world-to-Internet industry, the
primary  focus of  NeoMedia's  business.  If NeoMedia  competes with its primary
competitors for the same geographical or institutional  markets, their financial
strength could prevent  NeoMedia from capturing those markets.  NeoMedia may not
successfully  compete  in any  market  in  which  it  conducts  or  may  conduct
operations.  Many of NeoMedia's  competitors in the Micro Paint Repair  business
have a longer  operating  history in the industry,  as well as access to greater
financial resources. NeoMedia may not be able to penetrate markets or market its
products   as   effectively   as   NeoMedia's   better-funded   more-established
competitors.

In The Future  There Could Be  Government  Regulations  And Legal  Uncertainties
Which Could Harm NeoMedia's Business

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

      Certain of  NeoMedia's  proprietary  technology  allows for the storage of
demographic  data from  NeoMedia's  users. In 2000, the European Union adopted a
directive  addressing  data  privacy  that may limit the  collection  and use of
certain   information   regarding  Internet  users.  This  directive  may  limit
NeoMedia's  ability to  collect  and use  information  collected  by  NeoMedia's
technology  in certain  European  countries.  In  addition,  the  Federal  Trade
Commission and several state  governments  have  investigated the use by certain
Internet  companies of personal  information.  NeoMedia could incur  significant
additional expenses if new regulations regarding the use of personal information
are introduced or if NeoMedia's privacy practices are investigated.

      Certain  of  NeoMedia's   micro  paint   solutions  could  be  subject  to
environmental regulations.

                                       35
<PAGE>

ITEM 2.  Description of Properties

      NeoMedia's principal executive,  development and administrative  office is
located at 2201 Second Street,  Suite 600, Fort Myers,  Florida 33901.  NeoMedia
occupies approximately 12,000 square feet under terms of a written lease from an
unaffiliated  party which  expires on July 31, 2008,  with monthly rent totaling
approximately $18,000.

      The Company  maintains a production and product  development  facility for
its Micro Paint Repair  Business  unit in Calgary,  Alberta,  Canada,  occupying
approximately  4,000  square  feet  under the terms of a written  month-to-month
lease from an affiliated party with monthly rent totaling $2,400.

      The   Company   maintains   a   training,   demonstrations,    production,
distribution,  and retail services  facility for its Micro Paint Repair Business
unit in Ft. Myers, Florida, occupying approximately 10,000 square foot under the
terms of a written  lease from an  unaffiliated  party  expiring on February 28,
2008, with monthly rent totaling approximately $9,000.

      During 2005,  NeoMedia  occupied a sales  facility at 2150 Western  Court,
Suite 230, Lisle,  Illinois  60532,  occupying  approximately  6,000 square feet
under the terms of a written  month-to-month  lease from an  unaffiliated  party
with monthly rent totaling  approximately $4,000. During February 2006, NeoMedia
cancelled the lease and centralized the operations from this facility to its Ft.
Myers, FL headquarters.

      The  Company  believes  that  existing  office  space is  adequate to meet
current and short-term requirements for its operations in the United States.

ITEM 3.  Legal Proceedings

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

Scanbuy, Inc.

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

      On April 20,  2004,  NeoMedia  re-filed  its suit  against  Scanbuy in the
Southern  District of New York alleging patent  infringement.  Scanbuy filed its
answer on June 2, 2004.  NeoMedia filed its answer and  affirmative  defenses on
July 23, 2004. Discovery is ongoing.

                                       36
<PAGE>

Other Litigation

      On May 2, 2005, three shareholders of BSD Software, Inc. filed a complaint
against BSD and NeoMedia,  claiming  that the purchase  price as outlined in the
purchase  agreement  between  NeoMedia  and BSD is too low. The  plaintiffs  are
seeking unspecified  damages and injunctive relief against the merger.  NeoMedia
has moved to dismiss the complaint as frivolous. The case is still pending.

      On October  19,  2005,  Wachovia  Bank,  N.A.  filed a  complaint  against
NeoMedia in the twentieth judicial circuit court of Lee County, Florida, seeking
payment  of  $97,000  of rent from  previous  years.  NeoMedia  has  placed  the
requested funds into escrow with the court, pending resolution of the matter.

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

      On December 16, 2005, NeoMedia held its annual meeting of shareholders, at
which the following matters were ratified:

            o     Each of Charles T. Jensen, Charles W. Fritz, William E. Fritz,
                  A.  Hayes  Barclay,  and  James J.  Keil  were  re-elected  as
                  directors

            o     Stonefield  Josephson,  Inc. was named as NeoMedia's  auditors
                  for the fiscal year ended December 31, 2005, and

            o     The 2005 Stock  Option Plan,  which  contains up to 60 million
                  shares underlying future option issuances, was adopted.

      The number of votes cast for each matter were:

<TABLE>
<CAPTION>

                                                                                              Broker
Matter                           For               Against             Withheld              Non-votes           Total
---------------            ---------------     ---------------      ---------------       ---------------    ---------------

<S>                        <C>                 <C>                  <C>                   <C>                <C>

Matter #1
---------
Barclay, A. Hayes            428,582,677                  --           5,069,186                  --         433,651,863
Fritz, Charles W             429,204,100                  --           4,447,763                  --         433,651,863
Fritz, William E             428,974,763                  --           4,677,100                  --         433,651,863
Jensen, Charles T            428,701,413                  --           4,950,450                  --         433,651,863
Keil, James J                428,500,377                  --           5,151,486                  --         433,651,863
Matter #2
---------
Ratification of
Stonefield
Josephson, Inc. as
independent auditors         432,186,015             864,437             601,411                  --         433,651,863
Matter #3
---------
2005 Stock Option
Plan                         122,359,392          17,803,875           1,279,861         292,208,735         433,651,863

</TABLE>


                                       37
<PAGE>



      PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      (a) Market  Information.  The  Company's  shares trade on the OTC Bulletin
Board  under the  symbol  "NEOM." As of  December  31,  2005,  the  Company  had
467,601,717 common shares outstanding.

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

                                                            (U.S. $)
                                                -------------------------------
           2004                                      HIGH              LOW
      --------------                            --------------   --------------
      First Quarter                               $   0.16           $   0.14
      Second Quarter                                  0.11               0.05
      Third Quarter                                   0.12               0.06
      Fourth Quarter                                  0.30               0.06

           2005                                      HIGH              LOW
      --------------                            --------------   --------------
      First Quarter                               $   0.29           $   0.22
      Second Quarter                              $   0.72           $   0.19
      Third Quarter                               $   0.51           $   0.32
      Fourth Quarter                              $   0.45           $   0.28

      (b) Holders.  As of December 31,  2005,  NeoMedia had an estimated  13,500
recordholders of common stock.

      (c) Dividends.  The Company has not declared or paid any cash dividends on
its common stock during the years ended  December 31, 2004 or 2005.  The Company
will base any  issuance of dividends  upon its  earnings,  financial  condition,
capital  requirements  and other  factors  considered  important by its board of
directors.  Delaware law and the Company's  certificate of  incorporation do not
require the board of directors  to declare  dividends  on the  Company's  common
stock.  The Company  expects to retain all  earnings,  if any,  generated by its
operations  for  the  development  and  growth  of its  business  and  does  not
anticipate paying any dividends to its stockholders for the foreseeable future.

     On October  26,  2004,  NeoMedia  announced  that it would issue a property
dividend  with the  distribution  of common shares of  iPoint-media  Ltd. of Tel
Aviv.  The date of the property  dividend  payment  will be announced  after the
United  States  Securities  and  Exchange  Commission  declares   iPoint-media's
registration  statement on Form SB-2  effective.  iPoint-media  filed their SB-2
(Registration No. 333-126342) on July 1, 2005, and amended the filing on January
12, 2006.

      (d) Recent Issuances of Unregistered Securities.

      On July 26, 2005, the Company issued to Newbridge Securities, an unrelated
party, 44,723 shares of common stock in exchange for placement agent services to
be provided in connection with NeoMedia's Standby Equity Distribution  Agreement
with Cornell Capital  Partners.  The shares were valued at $0.41,  which was the
market price at the time of issuance.

                                       38
<PAGE>

      On June 25,  2004,  the Company  issued to Marvin  Tkachuk,  an  unrelated
distribution  agent,  322,228 shares of common stock in exchange for exclusivity
rights under a distribution  contract.  The shares were valued at $0.074,  which
was the market price at the time of the agreement.

      On June 9, 2004,  the Company  issued to Stanton  Hill, a current  outside
consultant and former president of CSI  International,  Inc.,  518,185 shares of
common stock as payment for debt  acquired  with the purchase by NeoMedia of CSI
in February 2004.  The shares were valued at $0.061,  which was the market price
at the time of the agreement.

      On March 8, 2004,  the Company  issued to Stone Street  Asset  Management,
LLC, 40,000,000 warrants to purchase shares of common stock at an exercise price
of $0.05 per share. The market price at the time of issuance was $0.11.

      On February 25, 2004,  the Company issued 103,199 shares of stock to David
Kaminer, as payment of past due professional services. The shares were valued at
$0.097. The market price at the time of the agreement was $0.102.

      On February 6, 2004, the Company issued  7,000,000  shares of common stock
to CSI International,  Inc.  shareholders in connection with NeoMedia's purchase
of CSI. The closing market price on the date of issuance was $0.10.

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

                                       39
<PAGE>


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

Overview

      During  2005,  NeoMedia  continued  its efforts to  commercialize  its two
primary lines of business, NeoMedia Mobile and NeoMedia Micro Paint Repair, both
in  North  America  and  overseas.  As  part of the  commercialization  efforts,
NeoMedia began to implement an aggressive  growth campaign focusing on expansion
through three major avenues: acquisition and globalization.

      To this end, during the second half of 2005 and the first quarter of 2006,
NeoMedia made the following strategic maneuvers:

      August 2005:     signed agreement to distribute Micro Paint products to
                       China via Jinche automotive group

      September 2005:  signed  agreement to distribute  Micro Paint  products to
                       Mexico and Latin America via Micropaint de Mexico

      October 2005:    signed letter of intent to acquire Mobot

      October 2005:    signed agreement to distribute Micro Paint products to
                       Scandinavia via WITHO-AS

      December  2005:  signed  agreements  to  distribute  DuPont  and PPG
                       automotive aftermarket products to Jinche in China

      February 2006:   completed  acquisitions  of Mobot  (US),  12Snap
                       (Europe), Gavitec (Europe), and Sponge (Europe); signed
                       letter of intent to acquire Hip Cricket;  completed $27
                       million  funding  to  finance  acquisitions  and future
                       growth

      March 2006:      completed  acquisition  of BSD  Software,  creating the
                       NeoMedia Telecom Services (NTS) business unit

Acquisitions

      During  2005 and the first  quarter  of 2006,  NeoMedia  has  aggressively
pursued  acquisitions  that will  confirm  its  presence  in the  global  mobile
marketing space. To this end, NeoMedia has completed, or agreed to complete, the
following acquisitions:

            12Snap AG. On February 10, 2006,  NeoMedia and 12Snap AG  ("12Snap")
      signed a  definitive  sale and  purchase  agreement  under which  NeoMedia
      acquired  all  of  the  outstanding  shares  of  12Snap  in  exchange  for
      $2,500,000 cash and  $19,500,000 in shares of NeoMedia  common stock.  The
      $19,500,000  stock  portion  of  the  purchase  price  is  represented  by
      49,294,581  shares  of  NeoMedia  common  stock,  calculated  by  dividing
      $19,500,000  by the  volume-weighted  average  closing  price of  NeoMedia
      common  stock for the ten days up to and  including  February 9, 2006.  On
      February 28, 2006, NeoMedia and 12Snap completed the closing  requirements
      and  the  acquisition   became  effective.   12snap  AG  is  a  non-public
      incorporated company  headquartered in Munich with branches in Dusseldorf,
      New York, London,  Milan,  Stockholm,  Romania and Vienna. As an expert in
      innovative marketing and entertainment for mobile phones,  12snap combines

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<PAGE>

      know-how in mobile applications,  mobile loyalty and mobile marketing.  In
      the mobile  marketing  space,  12snap creates and implements  national and
      pan-European  mobile marketing  campaigns for  international  brands;  its
      mobile  loyalty   business  unit  offers  customer  loyalty  programs  for
      companies  and brands,  and its mobile  applications  business unit is the
      center for  development  and  software.  12snap  sells and licenses a wide
      spectrum of mobile solutions to satisfy the demands of the current growing
      market and the new uses of the third mobile phone  generation from dynamic
      video   services  and   multiplayer   games  to   personalized   messaging
      applications.  12snap has 75 employees, and provides services to companies
      including McDonald's,  MTV(R), Coca-Cola, Ferrero, Wella, adidas, Unilever
      and Gillette(R).

            Sponge  Ltd. On  February  20,  2006,  NeoMedia  and Sponge  Limited
      ("Sponge")  of  London  (www.spongegroup.com)  signed a  definitive  share
      purchase  agreement  under which NeoMedia  acquired all of the outstanding
      shares  of Sponge  in  exchange  for  (pound)3,450,000  (approximately  $6
      million) cash and (pound)6,550,000 (approximately $11.4 million) in shares
      of  NeoMedia  common  stock.  The  (pound)6,550,000  stock  portion of the
      purchase  price is  represented  by 29,696,745  shares of NeoMedia  common
      stock,  calculated  by dividing  (pound)6,550,000  by the  volume-weighted
      average  closing price of NeoMedia common stock for the ten days up to and
      including February 8, 2006. The agreement also calls for Sponge to earn an
      additional  (pound)2,500,000  (approximately  $4.4 million) in the form of
      NeoMedia common stock if, during the two-year period beginning at closing,
      the Sponge  business  earns in excess of  (pound)1,300,000  (approximately
      $2.3  million) in net profits.  On February 23, 2006,  NeoMedia and Sponge
      completed the closing  requirements and the acquisition  became effective.
      Founded  in 2001,  Sponge  has  grown to  become a U.K.  market  leader in
      providing  mobile  applications  to agencies  and media  groups,  and gain
      recognition  as one of  Europe's  top  independent  developers  of  mobile
      applications  and  content.  Today,  Sponge  counts more than 40 agencies,
      including WPP, Aegis and BBH, as clients,  and supplies  services for over
      100 world-class  brands,  including Coca Cola(R),  Heineken(R) and Diageo.
      Sponge also supplies a range of mobile services to media groups, including
      News International, Trinity Mirror, Endemol and IPC

            Gavitec  AG.  On  February  17,   2006,   NeoMedia  and  Gavitec  AG
      ("Gavitec")  of Wurselen,  Germany  (www.gavitec.com)  signed a definitive
      sale and  purchase  agreement  under which  NeoMedia  acquired  all of the
      outstanding  shares  of  Gavitec  in  exchange  for  $1,800,000  cash  and
      $5,400,000  in shares of  NeoMedia  common  stock.  The  $5,400,000  stock
      portion of the  purchase  price is  represented  by  13,660,511  shares of
      NeoMedia   common  stock,   calculated  by  dividing   $5,400,000  by  the
      volume-weighted average closing price of NeoMedia common stock for the ten
      days up to and including February 16, 2006. On February 23, 2006, NeoMedia
      and Gavitec completed the closing  requirements and the acquisition became
      effective.  Gavitec  was  founded in 1997 as a  specialized  provider  and
      manufacturer  of products and  solutions  for mobile  marketing and mobile
      information technology. As a technology leader in code-reading systems and
      software for mobile applications,  Gavitec offers its clients standardized
      or individual solutions in the areas of mobile loyalty,  mobile ticketing,
      mobile couponing, and mobile payment systems

            Mobot,   Inc.  On  February  9,  2006,   NeoMedia  and  Mobot,  Inc.
      (www.mobot.com) ("Mobot") signed a definitive merger agreement under which
      NeoMedia  acquired all of the outstanding  shares of Mobot in exchange for
      $3,500,000  cash and  $6,500,000 in shares of NeoMedia  common stock.  The
      $6,500,000   stock  portion  of  the  purchase  price  is  represented  by
      16,931,493  shares  of  NeoMedia  common  stock,  calculated  by  dividing
      $6,500,000 by the volume-weighted average closing price of NeoMedia common
      stock for the ten day up to and  including  February 8, 2006.  On February
      17, 2006,  NeoMedia and Mobot completed the closing  requirements  and the
      acquisition  became  effective.  Mobot is a pioneer  in visual  search and
      recognition technology designed to make marketing effective and innovative
      using  mobile  devices.  Launched  in  2004 to  help  companies  cultivate
      rewarding  relationships  with the world's 1.5 billion mobile phone users,
      Mobot gives marketers, content providers and carriers the tools to make it
      easy  for  any  consumer  with a  camera  phone  to  interact  with  their
      offerings.

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<PAGE>

            BSD  Software,  Inc.  On March  21,  2006,  NeoMedia  completed  its
      acquisition of BSD Software,  Inc. of Calgary,  Alberta,  Canada. BSD owns
      90% of the outstanding shares of Triton Global Business Services,  Inc., a
      provider of live and automated  operator  calling  services and e-business
      support,  including  billing,  clearinghouse  and  information  management
      services, to companies in the telecommunications  industry. After exchange
      of shares certificates,  NeoMedia expects to issue 7,123,698 shares of its
      common stock in connection with the acquisition.

            Hip  Cricket,   Inc.  On  February  16,  2006,   NeoMedia  signed  a
      non-binding letter of intent to acquire HipCricket, Inc. ("HipCricket") of
      Essex,  CT   (www.hipcricket.com)   in  exchange  for  $500,000  cash  and
      $4,000,000 of NeoMedia  common  stock.  The letter of intent is subject to
      due  diligence  and signing of a mutually  agreeable  definitive  purchase
      agreement by both parties.  HipCricket is a leading mobile  marketing firm
      that  provides  innovative,  custom  solutions to  broadcasters  and brand
      marketers. Today, HipCricket works with five of the top 10 radio groups in
      the  U.S.  as well  as with  some 40  major  brand  marketers.  HipCricket
      combines senior marketing expertise with state-of-the-art mobile and event
      marketing  technologies to offer clients unprecedented  interactivity with
      their consumers,  viewers, listeners or customers on a one-to-one personal
      level.

            Auto  Preservation,  Inc. On February 25, 2005,  NeoMedia signed two
      non-binding  Letters  of  Intent  to  acquire  up to  100%  of  Automotive
      Preservation, Inc. ("AP"), a distributor of automotive paint and accessory
      products, from AP's parent company, PUPS. The first Letter of Intent calls
      for NeoMedia to  initially  acquire 30% of AP for  $1,600,000,  to be paid
      $600,000 in cash,  $554,000 in shares of NeoMedia restricted common stock,
      and $446,000  through the  assumption  of AP debt by  NeoMedia.  Under the
      second Letter of Intent, upon completion of the acquisition of the initial
      30% of AP by  NeoMedia,  NeoMedia  would  have the  option to  acquire  an
      additional  30%  of AP for  $1,650,000,  payable  in  shares  of  NeoMedia
      restricted  common stock.  The second Letter of Intent also gives NeoMedia
      the option to  purchase  the final 40% of AP for either:  (i)  $2,200,000,
      payable  in  shares of  NeoMedia  restricted  common  stock,  if  NeoMedia
      exercises  this right within 12 months of acquiring  the second 30% of AP,
      or (ii) a price equivalent to AP's previous  quarter EBITDA  multiplied by
      8, payable in shares of NeoMedia  restricted  common stock. Both Letter of
      Intent are non-binding and subject to due diligence by NeoMedia and AP. On
      September 21, 2005,  the BOD approved to change the deal structure for the
      acquisition  of AP, so that the Company would acquire only 30% of AP for a
      total  purchase price of $1.6 million of which $600K would be paid in cash
      and $446K would be paid through the  assumption of debt, and $554K through
      the issuance of restricted  Neomedia stock.  Neomedia will not acquire the
      remaining 70% of AP under the new structure.

Consulting & Integration Services Business Unit

      As part of the  acceleration of global  expansion in PaperClick and Paint,
as well as the  creation of the NTS business  unit through the BSD  acquisition,
NeoMedia  also  decided  in  February  2006 to wind  down  its  legacy  NeoMedia
Consulting & Integration  Services (NCIS) business unit. The NCIS unit consisted
of client-server  equipment and related software resales.  The resale market has
been  commoditized  over the past  several  years,  and  NeoMedia  believes  its
resources are better spent on the development and  commercialization of its NMM,
NMPR and NTS business units. Certain of the proprietary products associated with
the NCIS business,  such as PDF-417 and Maxicode print encoder software and WISP
migration  tools,  will be retained by NeoMedia  and  consolidated  with the NMM
unit.  NeoMedia will not pursue  additional  resales of hardware and software or
integration services.

                                       42
<PAGE>

Critical Accounting Policies

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

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

      According  to  SFAS  144,  a   long-lived   asset  should  be  tested  for
recoverability  whenever  events or changes in  circumstances  indicate that its
carrying  amount may not be  recoverable.  The  following  are  examples of such
events or changes in circumstances:

      -     A significant decrease in the market price of the asset
      -     A  significant  adverse  change in the extent or manner in which the
            asset is being used, or in its physical condition
      -     A  significant  adverse  change in legal  factors or in the business
            climate  that  could  affect the value of the  asset,  including  an
            adverse action or assessment by a regulator
      -     An  accumulation  of costs  significantly  in excess  of the  amount
            originally expected
      -     A current-period operating or cash flow loss combined with a history
            of operating or cash flow losses or a  projection  or forecast  that
            demonstrates continuing losses associated with the use of the asset
      -     A current  expectation that, more likely than not, the asset will be
            sold or otherwise  disposed of  significantly  before the end of its
            previously estimated useful life.

NeoMedia follows the two-step process outlined in SFAS 144 for determining if an
impairment charge should be taken: (1) the expected undiscounted  cashflows from
a particular  asset or asset group are compared to the  carrying  value;  if the
expected  undiscounted  cashflows  are  greater  than  the  carrying  value,  no
impairment is taken,  but if the expected  undiscounted  cashflows are less than
the carrying  value,  then (2) an impairment  charge is taken for the difference
between  the  carrying  value  and  the  expected  discounted   cashflows.   The

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<PAGE>

assumptions used in developing  expected cashflow estimates are similar to those
used in developing  other  information  used by NeoMedia for budgeting and other
forecasting  purposes.  In instances where a range of potential future cashflows
is  possible,  NeoMedia  uses  a  probability-weighted  approach  to  weigh  the
likelihood of those possible outcomes.  NeoMedia used a rate of 10% for purposes
of discounting cashflows in 2005.

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

      Inventory.  Inventories  are stated at lower of cost (using the  first-in,
first-out method) or market.  NeoMedia continually  evaluates the composition of
its  inventories  assessing  slow-moving  and ongoing  products and  maintains a
reserve for  slow-moving  and  obsolete  inventory  as well as related  disposal
costs.

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

      In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment".  Statement 123(R) will provide  investors and other users of financial
statements  with more complete and neutral  financial  information  by requiring
that the  compensation  cost relating to  share-based  payment  transactions  be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability  instruments issued.  Statement 123(R) covers a
wide range of share-based  compensation  arrangements  including  share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123,
Accounting  for  Stock-Based  Compensation,  and  supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as originally issued in
1995,  established  as preferable a  fair-value-based  method of accounting  for
share-based  payment  transactions  with  employees.   However,  that  Statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable  fair-value-based method been used. Public entities
(other than those filing as small  business  issuers)  will be required to apply
Statement  123(R) as of the first interim or annual reporting period that begins
after December 15, 2005.  The Company is currently  evaluating the impact of the
adoption of this Statement.

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

                                       44
<PAGE>

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

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

                  The basis for license fee revenue recognition is substantially
                  governed by American Institute of Certified Public Accountants
                  ("AICPA")   Statement  of  Position  97-2  "Software   Revenue
                  Recognition"  ("SOP  97-2"),  as  amended,  and  Statement  of
                  Position 98-9,  Modification  of SOP 97-2,  "Software  Revenue
                  Recognition,  With Respect to Certain Transactions.".  License
                  revenue is recognized  if persuasive  evidence of an agreement
                  exists,   delivery   has   occurred,   pricing  is  fixed  and
                  determinable, and collectibility is probable.

            (2)   Revenue for resale of software and  technology  equipment  and
                  service fee is  recognized  based on guidance  provided in SEC
                  Staff   Accounting   Bulletin   ("SAB")  No.   104,   "Revenue
                  Recognition  in Financial  Statements,"  as amended (SAB 104).
                  Software and technology equipment resale revenue is recognized
                  when  all of the  components  necessary  to  run  software  or
                  hardware  have  been  shipped.   Service  revenues   including
                  maintenance  fees for  providing  system  updates for software
                  products,   user   documentation  and  technical  support  are
                  recognized  over the life of the  contract.  Software  license
                  revenue from  long-term  contracts  has been  recognized  on a
                  percentage  of  completion  basis,  along with the  associated
                  services being  provided.  Other service  revenues,  including
                  training and  consulting,  are  recognized as the services are
                  performed.  NeoMedia uses stand-alone  pricing to determine an
                  element's vendor specific objective evidence ("VSOE") in order
                  to allocate an  arrangement  fee amongst  various  pieces of a
                  multi-element  contract.  NeoMedia  records an  allowance  for
                  doubtful   accounts   on  a   customer-by-customer   basis  as
                  appropriate.

                  In   December   2003,   the  SEC  issued  SAB  104,   "Revenue
                  Recognition." SAB 104 supersedes SAB 101, "Revenue Recognition
                  in  Financial  Statements."  SAB 104's  primary  purpose is to
                  rescind  accounting  guidance  contained in SAB 101 related to
                  multiple element revenue arrangements,  superseded as a result
                  of  the  issuance  of  EITF  00-21,  "Accounting  for  Revenue
                  Arrangements with Multiple  Deliverables."  Additionally,  SAB
                  104  rescinds  the  SEC's  Revenue  Recognition  in  Financial
                  Statements  Frequently Asked Questions and Answers (the "FAQ")
                  issued  with SAB 101 that had been  codified  in SEC Topic 13,
                  Revenue  Recognition.  Selected  portions of the FAQ have been
                  incorporated  into SAB 104.  While the  wording of SAB 104 has
                  changed to reflect the  issuance  of EITF  00-21,  the revenue
                  recognition  principles of SAB 101 remain largely unchanged by
                  the issuance of SAB 104,  which was effective  upon  issuance.
                  The adoption of SAB 104 did not impact NeoMedia's consolidated
                  financial statements.

                                       45
<PAGE>

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

      Income Tax  Valuation  Allowance.  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, 2005.

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<PAGE>

Results of  Operations  for the Year Ended  December 31, 2005 as Compared to the
Year Ended December 31, 2004

      Net  sales.  Total net sales for the year  ended  December  31,  2005 were
$2,156,000,  which represented a $456,000,  or 27%, increase from $1,700,000 for
the year  ended  December  31,  2004.  This  increase  primarily  resulted  from
increased  sales from the Company's Micro Paint Repair  business,  offset by the
reduced resales of Sun  Microsystems  equipment due to increased  competition in
that industry that led NeoMedia to wind down this business unit during the first
quarter of 2006.  NeoMedia could realize a material increase in revenue over the
next 12 months due to the recent acquisitions of Mobot, 12Snap, Sponge, Gavitec,
and BSD.  NeoMedia  could also  realize a material  increase in revenue over the
next 12 months if the Company is successful in  implementing  its  PaperClick(R)
go-to-market  strategy,  if  pending  court  cases  involving  its  intellectual
property  are  resolved  in  NeoMedia's   favor,  or  if  it  is  successful  in
implementing  the  expansion of the Micro Paint Repair  business unit into China
and other geographies.

      License fees.  License fees were $523,000 for the year ended  December 31,
2005,  compared with $343,000 for the year ended  December 31, 2004, an increase
of $180,000,  or 52%. The increase was primarily due to revenue  associated with
settlements  of  patent-related  lawsuits  in 2005.  NeoMedia  could  realize an
increase in license fees over the next 12 months due to the recent  acquisitions
of Mobot,  12Snap,  Sponge,  Gavitec,  and BSD, if the Company is  successful in
implementing its PaperClick(R)  go-to-market strategy, or if pending court cases
involving its intellectual property are resolved in NeoMedia's favor.

      Resales of software and technology  equipment and service fees. Resales of
software and  technology  equipment and service fees  decreased by $276,000,  or
44%, to $354,000 for the year ended  December 31, 2005,  as compared to $630,000
for the year ended  December 31, 2004.  This  decrease  primarily  resulted from
reduced resales of Sun Microsystems  equipment due to increased  competition and
general  downturn in the resale market over the past several years. As a result,
NeoMedia  formally  decided  to wind down this  business  unit  during the first
quarter of 2006, and as a result does not expect  additional  material  hardware
and software resales in 2006 and beyond. NeoMedia does however, plan to continue
servicing existing contracts and customers.

      Micro Paint  Repair  products  and  services.  Sales of Micro Paint Repair
products  and services  were  $1,279,000  for the year ended  December 31, 2005,
compared  with  $727,000 for the year ended  December  31, 2004,  an increase of
$552,000,  or 76%.  This  increase  is  primarily  due to the  expansion  of the
business unit into new markets such as China, Australia/New Zealand, Scandinavia
and Mexico.  NeoMedia  could  realize a material  increase in Micro Paint Repair
revenue if the Company is successful in continuing the expansion of the business
unit into China and other geographies.

      Cost of license fees. Cost of license fees was $453,000 for the year ended
December 31, 2005, an increase of $129,000,  or 40%,  compared with $324,000 for
the  year  ended  December  31,  2004.  The  increase  resulted  from  increased
amortization of capitalized patent costs during 2005 compared with 2004.

      Cost of resales of software and technology equipment and service.  Cost of
resales of software and  technology  equipment  and service was $206,000 for the
year ended  December 31, 2005, a decrease of  $398,000,  or 66%,  compared  with
$604,000  for the year ended  December  31, 2004.  The  decrease  resulted  from
decreased resales in 2005 compared with 2004. Cost of resales as a percentage of
related  resales was 58% in 2005,  compared to 96% in 2004. This decrease is due
to a reduction in 2005 of the hired  personnel  costs  associated with providing
service revenue.

      Cost of Micro Paint  Repair  products  and  services.  Cost of Micro Paint
Repair  products and services was $913,000 for the year ended December 31, 2005,
compared  with  $541,000 for the year ended  December  31, 2004,  an increase of
$372,000,  or 69%. This increase is in direct  correlation  of increased  sales.
Cost of micro paint repair  products  and  services as a  percentage  of related

                                       47
<PAGE>

sales was 71% in 2005,  compared to 74% in 2004.  NeoMedia expects cost of micro
paint repair  products and services to increase with Micro Paint Repair  revenue
over the next 12 months as the Company continues to expand globally.

      Gross  Profit.  Gross profit was $584,000 for the year ended  December 31,
2005, an increase of $353,000,  or 153%,  compared with gross profit of $231,000
for the year ended December 31, 2004.  This increase was primarily the result of
increased  sales and  corresponding  margin of the Company's  Micro Paint Repair
products and services.

      Sales and marketing.  Sales and marketing expenses were $4,186,000 for the
year ended December 31, 2005, compared to $2,046,000 for the year ended December
31, 2004, an increase of $2,140,000 or 105%.  This increase  resulted  primarily
from the  addition  of  sales  force  and cost  associated  with  marketing  and
promotion  of the  Company's  PaperClick(R)  and Micro  Paint  Repair  products.
NeoMedia expects sales and marketing expense to increase over the next 12 months
with the  continued  development  and expansion of the  PaperClick(R)  and Micro
Paint Repair  product  groups,  as well as the  acquisitions  of Mobot,  12Snap,
Sponge, Gavitec, and BSD.

      Impairment  charges.  During the year ended  December 31,  2005,  NeoMedia
recognized  an impairment  of an  intangible  asset of $335,000  relating to the
write-down of an intangible  asset.  During the year ended December 31, 2004, no
impairment  charges were taken.  The impairment  relates to the assets purchased
from Secure Source Technologies,  Inc. during 2003 that are part of the NeoMedia
Internet  Switching  Service (NISS)  business unit. The impairment is due to the
fact that the intangible  assets purchased are not generating any revenue at the
present time and NeoMedia's  management does not foresee these assets generating
revenue in the near term. The amount of impairment was determined by determining
the fair value of the intangible assets using the discounted cashflow method.

      General and administrative.  General and administrative expenses increased
by  $1,160,000,  or 52%, to  $3,375,000  for the year ended  December  31, 2005,
compared to  $2,215,000  for the year ended  December  31,  2004.  The  increase
resulted  primarily from additional  personnel and higher legal and professional
fees in 2005  resulting  from  registration  and  regulatory  filings.  NeoMedia
expects general and  administrative  expense to increase over the next 12 months
with the Mobot, 12Snap, Sponge, Gavitec, and BSD, and the continued expansion of
the PaperClick and Micro Paint business units.

      Research  and  development.  During  the year  ended  December  31,  2005,
NeoMedia  charged to expense  $934,000 of research  and  development  costs,  an
increase of $283,000 or 43% compared to $651,000 for the year ended December 31,
2004. The increase is primarily due to the addition of  development  staff hired
in  connection  with  the  commercialization  of the  PaperClick  product  line.
NeoMedia  expects  research and  development  costs to increase over the next 12
months with the continued  development  efforts of its  PaperClick(R)  and Micro
Paint Repair products and services, as well as with the addition of research and
development resources acquired with Mobot, 12Snap, Sponge and Gavitec.

      Gain on  extinguishment  of debt. During the year ended December 31, 2005,
NeoMedia recognized a gain on extinguishment of debt of $172,000, resulting from
the payment of debt at a discount to the book value of the debt,  an increase of
$32,000,  or 23%, compared with a gain on extinguishment of debt of $140,000 for
the year ended December 31, 2004. These gains resulted from a difference between
the cash or market  value of stock  issued to settle  the debt and the  carrying
value of the debt at the time of settlement.

      Impairment charge on investments. During the year ended December 31, 2005,
NeoMedia  recognized an  impairment  of  investment of $780,000  relating to the
write-down  of its  investment.  During the year ended  December  31,  2004,  no
impairment  charges were taken.  The  Impairment  relates to the  investment  in
iPoint-Media  Ltd.  ("iPoint")  for  $530,000  and the  investment  in  Intactis
Software,  Inc.  ("Intactis") for $250,000.  These investments are not part of a
specific business segment and as such are charged against the corporate segment.

                                       48
<PAGE>

The impairment  relating to iPont primarily results from a delay in registration
for the resale of the shares held by NeoMedia.  The impairment of the investment
in Intactis is a result of NeoMedia  management's  expectation  that  additional
investment or research and  development  resources would be required in order to
recoup the  initial  investment.  The amount of  impairment  for both iPoint and
Intactis was  determined by  determining  the fair value of the assets using the
discounted cashflow method.

      Amortization  of debt  discount.  During the year ended December 31, 2004,
NeoMedia recognized an amortization of debt issuance cost of $2,500,000 relating
to the fair value of warrants  granted to Cornell Capital Partners in connection
with promissory notes issued to Cornell by NeoMedia during January 2004.  During
the year ended  December  31,  2004,  NeoMedia  amortized  the full $2.5 million
discount value relating to the Cornell warrants, and as a result does not expect
to recognize such expense in the next 12 months.  During the year ended December
31, 2005, NeoMedia did not recognize any such expense.

      Interest expense.  Interest expense consists primarily of interest accrued
for creditors as part of financed  purchases,  past due balances,  notes payable
and interest earned on cash equivalent  investments.  Interest expense increased
by  $104,000,  or 55%, to  $293,000  for the year ended  December  31, 2005 from
$189,000  for the  year  ended  December  31,  2004,  due to  increased  expense
associated with interest on notes payable in 2005 compared with 2004.

      Net  Loss.  The  net  loss  for the  year  ended  December  31,  2005  was
$9,147,000,  which  represented a $1,917,000,  or 27% increase from a $7,230,000
loss for the year ended December 31, 2004. The increase resulted from impairment
charge of intangible assets in 2005, as well as increased selling,  general, and
administrative  expenses  associated  with the continued  commercialization  and
expansion of the PaperClick and micro Paint business units.

Liquidity and Capital Resources

      As of December 31, 2005, NeoMedia's cash balance was $2,291,000,  compared
to $2,634,000 at December 31, 2004.

      Net cash used in operating activities was approximately $6,509,000 for the
year ended  December  31,  2005,  compared  with  $4,650,000  for the year ended
December 31, 2004, an increase of $1,859,000, or 40%. The increase was primarily
due  to  increased  selling,   general,  and  administrative  expenses  in  2005
associated with the continued  commercialization and expansion of the PaperClick
and micro Paint business units,  and the continued  payment of accounts  payable
and accruals incurred in previous years.

      NeoMedia's net cash flow used in investing  activities for the years ended
December 31, 2005 and 2004,  was  $4,169,000 and  $3,642,000,  respectively,  an
increase of $527,000,  or 15%. The increase was primarily due to the acquisition
in 2005 of patents from Loyaltypoint,  Inc. for $1.4 million,  advances to Mobot
of $1.5 million and the investments in Intactis, Inc. and Pickups Plus, Inc.

      Net cash provided by financing activities for the years ended December 31,
2005 and 2004 was  $10,306,000  and  $10,925,000,  respectively,  a decrease  of
$619,000,  or 6%. The decrease was, due to fewer options and warrants  exercised
in 2005.

      During the years ended  December  31, 2005 and 2004,  NeoMedia's  net loss
totaled  $9,147,000  and  $7,230,000,  respectively.  As of December  31,  2005,
NeoMedia had accumulated  losses from  operations of $92,524,000,  had a working
capital deficit of $4,874,000, and $2,291,000 in cash balances.

      During February 2006,  NeoMedia's  Board of Directors  elected to formally
wind down the NCIS business unit. As a result,  during  February 2006,  NeoMedia
closed its Lisle,  Illinois  facility  out of which the NCIS  business  unit was
based.  NeoMedia plans to continue  servicing  existing contracts and customers.
NeoMedia management expects that the effect on cashflow will be positive,  since

                                       49
<PAGE>

the  majority of the  revenue  relating  to the NCIS  business  unit in 2005 was
derived from licenses of software products that will be retained in the NeoMedia
Mobile  Business Unit, and certain  overhead costs  associated with the business
unit were eliminated in the winding down process.

Going Concern

      The accompanying  consolidated  financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America,  which  contemplate  continuation  of the  Company as a going  concern.
However,  the Company has reported net losses of $9,197,000  and  $7,230,000 for
the years ended December 31, 2005 and 2004,  respectively and has an accumulated
deficit of  $92,574,000  as of December 31, 2005.  In addition,  the Company had
working  capital  deficit of  $4,874,000  as of December  31,  2005.  All of the
factors  discussed  above,  amongst others,  raise  substantial  doubt about the
Company's ability to continue as a going concern.

      If the  Company's  financial  resources are  insufficient  the Company may
require additional financing in order to execute its operating plan and continue
as a going concern. The Company cannot predict whether this additional financing
will be in the form of equity,  debt,  or another  form.  The Company may not be
able to obtain the necessary additional capital on a timely basis, on acceptable
terms, or at all. In any of these events, the Company may be unable to implement
its current plans for expansion,  repay its debt  obligations as they become due
or respond to competitive  pressures,  any of which  circumstances  would have a
material  adverse  effect on its business,  prospects,  financial  condition and
results of operations.  The financial  statements do not include any adjustments
relating to the recoverability and reclassification of recorded asset amounts or
amounts and reclassification of liabilities that might be necessary,  should the
Company be unable to continue as a going concern.

      During the first quarter of 2006,  NeoMedia received  approximately  $14.1
million net proceeds from the convertible  preferred stock sale to Cornell,  and
an  additional  $4 million  proceeds  received upon exercise of warrants held by
Cornell.  NeoMedia used $13.8 million of the proceeds to pay the cash portion of
the purchase price of Mobot,  Gavitec,  Sponge, and 12Snap.  NeoMedia expects to
receive an  additional  $6 million  proceeds  from the  exercise  of  additional
warrants held by Cornell, the exercise of which can be forced by NeoMedia if the
closing bid price of NeoMedia  stock is greater than $0.30 for five  consecutive
days, and NeoMedia will also receive an additional $5 million upon  registration
of the shares underlying the convertible preferred stock held by Cornell.

      NeoMedia intends to fund its growth and working capital  deficiencies from
the following sources during 2006 and beyond:

      Warrant Exercises

      On February 9, 2006,  Cornell  exercised  warrants to purchase  20,000,000
shares of NeoMedia  common stock,  par value $0.01 per share.  The warrants were
issued to Cornell  Capital on March 30,  2005 as a  commitment  fee for  Cornell
Capital entering into that certain Standby Equity Distribution Agreement,  dated
March 30, 2005 by and between NeoMedia and Cornell Capital.  The warrants had an
exercise price equal to $0.20 per share.  In connection with the exercise of the
20,000,000 Warrants, NeoMedia received proceeds of $4,000,000.  NeoMedia expects
to receive an  additional  $6 million  proceeds  from the exercise of additional
warrants held by Cornell, the exercise of which can be forced by NeoMedia if the
closing bid price of NeoMedia  stock is greater than $0.30 for five  consecutive
days.

                                       50
<PAGE>

      $27 Million Convertible Preferred Stock Sale

      On February 17, 2006,  NeoMedia entered into an investment  agreement with
Cornell.  Pursuant  to the  Investment  Agreement,  NeoMedia  issued and sold to
Cornell  Twenty-Seven  Million  Dollars (US  $27,000,000)  of Series C Preferred
Shares (the "Series C Preferred Shares"), of which (i) Three Million Two Hundred
Eight Thousand Seven Hundred Two Dollars  ($3,208,702) were purchased by Cornell
for  consideration  solely  consisting of surrendering  that certain  Promissory
Note,  dated  March 30,  2005 in the  original  principal  amount of Ten Million
Dollars (US  $10,000,000)  issued in the name of Cornell,  (ii) Eighteen Million
Seven  Hundred  Ninety-One  Thousand  Two  Hundred   Ninety-Eight   Dollars  (US
$18,791,298) were purchased by additional funding  (consisting of $16,791,298 of
immediately  available  funds and $2,000,000 of  securities)  from Cornell as of
February  17,  2006,  and (iii) Five Million  Dollars (US  $5,000,000)  shall be
purchased  by an  additional  funding  by  Cornell  on the  date a  registration
statement  filed by the Company  pursuant to the terms of that certain  Investor
Registration  Rights  Agreement,  dated  February  17,  2006 by and  between the
Company and Cornell is declared  effective by the U.S.  Securities  and Exchange
Commission.  The Series C Preferred  Shares are  convertible  into shares of the
Company's  common stock,  par value $0.01 per share in accordance with the terms
of the  Company  Certificate  of  Designations,  Preferences,  and Rights of the
Series C Preferred Shares.

      In  addition,  pursuant  to the  terms of the  Investment  Agreement,  the
Company issued to Cornell (i) a warrant to purchase twenty million  (20,000,000)
shares  of  NeoMedia  common  stock  exercisable  for a period  of 5 years at an
exercise  price of $0.50 per  share;  (ii) a  warrant  to  purchase  twenty-five
million  (25,000,000) shares of common stock exercisable for a period of 5 years
at an exercise price of $0.40 per share;  and (iii) a warrant to purchase thirty
million  (30,000,000) shares of common stock exercisable for a period of 5 years
at an exercise price of $0.35 per share.

      $100 million SEDA

      On March 30, 2005,  NeoMedia and Cornell Capital  Partners  entered into a
Standby Equity Distribution  Agreement under which Cornell agreed to purchase up
to $100  million of  NeoMedia's  common stock over a two-year  period,  with the
timing and amount of the purchase at NeoMedia's  discretion.  The maximum amount
of each  purchase  would be  $2,000,000  with a minimum  of five  business  days
between advances. NeoMedia expects to file a registration statement with the SEC
during 2006 to register the shares  underlying  the $100 million 2005 SEDA.  The
2005 SEDA  would  become  available  at the time the SEC  declares  effective  a
registration statement containing such shares. As a commitment fee for the SEDA,
NeoMedia  issued to Cornell 50 million  warrants to purchase  shares of NeoMedia
common stock at an exercise price of $0.20 per share.  20 million of the Cornell
warrants were exercised in February 2006, generating $4 million cash proceeds to
NeoMedia.

      Should these financing sources fail to materialize,  management would seek
alternate  funding  sources  through  sale of  common  and/or  preferred  stock.
Management's plan is to secure adequate funding to bridge the profitability from
the Company's  PaperClick  business,  intellectual  property portfolio and Micro
Paint Repair business.

      There can be no  assurances  that the  market  for  NeoMedia's  stock will
support  the sale of  sufficient  shares  of  NeoMedia's  common  stock to raise
sufficient  capital  to sustain  operations  for such a period,  or that  actual
revenue  will  meet  management's  expectations.  If  necessary  funds  are  not
available,  NeoMedia's  business and  operations  would be materially  adversely
affected and in such event,  NeoMedia  would  attempt to reduce costs and adjust
its business plan.

                                       51
<PAGE>


Contractual Obligations

The  following  table  presents  the  Company's  contractual  obligations  as of
December 31, 2005, over the next five years and thereafter:

                               Payments by Period
                                 (in thousands)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                          Less
                                                          Than        1-3        4-5      After 5
                                              Amount     1 Year      Years      Years       Years
                                              ------     ------      ------     ------     ------
<S>                                          <C>         <C>         <C>        <C>        <C>

Vendor Settlements & Agreements              $   24      $   24      $   --     $   --     $   --
Operating Leases                                805         330         475         --         --
Short Term Debt                               3,015       3,015          --         --         --
                                             ------      ------      ------     ------     ------
     Total Contractual Cash Obligations      $3,844      $3,369      $  475     $   --     $   --
                                             ======      ======      ======     ======     ======
</TABLE>

Intangible Assets

NeoMedia  periodically  performs  impairment  tests  on each  of its  intangible
assets,  which  include  goodwill,  capitalized  patent costs,  repair  chemical
formulations  and  proprietary  process,  customer  base  and  trademarks,   and
capitalized and purchased  software  costs. In doing so, NeoMedia  evaluates the
carrying  value of each  intangible  asset  with  respect  to  several  factors,
including  historical revenue generated from each intangible asset,  application
of the assets in NeoMedia's  current business plan, and projected cashflow to be
derived from the asset.

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

      According  to  SFAS  144,  a   long-lived   asset  should  be  tested  for
recoverability  whenever  events or changes in  circumstances  indicate that its
carrying  amount may not be  recoverable.  The  following  are  examples of such
events or changes in circumstances:

      -     A significant decrease in the market price of the asset
      -     A  significant  adverse  change in the extent or manner in which the
            asset is being used, or in its physical condition
      -     A  significant  adverse  change in legal  factors or in the business
            climate  that  could  affect the value of the  asset,  including  an
            adverse action or assessment by a regulator
      -     An  accumulation  of costs  significantly  in excess  of the  amount
            originally expected
      -     A current-period operating or cash flow loss combined with a history
            of operating or cash flow losses or a  projection  or forecast  that
            demonstrates continuing losses associated with the use of the asset
      -     A current  expectation that, more likely than not, the asset will be
            sold or otherwise  disposed of  significantly  before the end of its
            previously estimated useful life.

                                       52
<PAGE>

      NeoMedia follows the two-step process outlined in SFAS 144 for determining
if an impairment charge should be taken: (1) the expected undiscounted cashflows
from a particular  asset or asset group are compared to the carrying  value;  if
the expected  undiscounted  cashflows  are greater than the carrying  value,  no
impairment is taken,  but if the expected  undiscounted  cashflows are less than
the carrying  value,  then (2) an impairment  charge is taken for the difference
between  the  carrying  value  and  the  expected  discounted   cashflows.   The
assumptions used in developing  expected cashflow estimates are similar to those
used in developing  other  information  used by NeoMedia for budgeting and other
forecasting  purposes.  In instances where a range of potential future cashflows
is  possible,  NeoMedia  uses  a  probability-weighted  approach  to  weigh  the
likelihood of those possible outcomes. NeoMedia generally uses a rate of 10% for
purposes of discounting cashflows.

Financing Agreements

      As of  December  31,  2005 and 2004,  NeoMedia  was party to a  commercial
financing  agreement  with GE Access  that  provides  short-term  financing  for
certain  computer  hardware  and software  purchases.  This  arrangement  allows
NeoMedia  to re-sell  high-dollar  technology  equipment  and  software  without
committing cash resources to financing the purchase.  Due to the discontinuation
of the NCIS business unit,  NeoMedia  expects to terminate the agreement  during
2006.  There were no amounts  payable  under this  agreement  as of December 31,
2005.

Effect Of Recently Issued Accounting Pronouncements

      In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment".  Statement 123(R) will provide  investors and other users of financial
statements  with more complete and neutral  financial  information  by requiring
that the  compensation  cost relating to  share-based  payment  transactions  be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability  instruments issued.  Statement 123(R) covers a
wide range of share-based  compensation  arrangements  including  share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123,
Accounting  for  Stock-Based  Compensation,  and  supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as originally issued in
1995,  established  as preferable a  fair-value-based  method of accounting  for
share-based  payment  transactions  with  employees.   However,  that  Statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable  fair-value-based method been used. Public entities
(other than those filing as small  business  issuers)  will be required to apply
Statement  123(R) as of the first interim or annual reporting period that begins
after December 15, 2005. Management is currently evaluating the impact SFAS 123R
will have on our consolidated financial statements.

      In March  2005,  the SEC  released  Staff  Accounting  Bulletin  No.  107,
"Share-Based  Payment" ("SAB 107"), which provides interpretive guidance related
to the interaction between SFAS 123(R) and certain SEC rules and regulations. It
also provides the SEC staff's views regarding  valuation of share-based  payment
arrangements.  In April  2005,  the SEC amended  the  compliance  dates for SFAS
123(R),  to allow  companies to implement the standard at the beginning of their
next fiscal year,  instead of the next reporting period beginning after June 15,
2005.  Management  is currently  evaluating  the impact SAB 107 will have on our
consolidated financial statements.

                                       53
<PAGE>

      In May 2005,  the FASB issued FASB Statement No. 154,  Accounting  Changes
and Error Corrections. This new standard replaces APB Opinion No. 20, Accounting
Changes,  and FASB  Statement  No. 3,  Reporting  Accounting  Changes in Interim
Financial Statements, and represents another step in the FASB's goal to converge
its standards with those issued by the IASB. Among other changes,  Statement 154
requires   that  a  voluntary   change  in   accounting   principle  be  applied
retrospectively  with all prior period financial statements presented on the new
accounting  principle,  unless it is  impracticable to do so. Statement 154 also
provides that (1) a change in method of  depreciating or amortizing a long-lived
nonfinancial asset be accounted for as a change in estimate (prospectively) that
was effected by a change in accounting  principle,  and (2) correction of errors
in previously issued financial  statements should be termed a "restatement." The
new standard is effective for  accounting  changes and correction of errors made
in fiscal  years  beginning  after  December 15,  2005.  Early  adoption of this
standard is permitted for  accounting  changes and  correction of errors made in
fiscal years beginning after June 1, 2005.

      In June 2005, the Emerging Issues Task Force, or EITF, reached a consensus
on Issue 05-6,  Determining the Amortization Period for Leasehold  Improvements,
which requires that leasehold improvements acquired in a business combination or
purchased subsequent to the inception of a lease be amortized over the lesser of
the  useful  life of the  assets  or a term  that  includes  renewals  that  are
reasonably  assured at the date of the business  combination  or purchase.  EITF
05-6 is effective for periods beginning after July 1, 2005. We do not expect the
provisions  of this  consensus  to have a material  impact on the our  financial
position, results of operations or cash flows.

      In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement  Obligations"  ("FIN 47"). FIN 47 provides guidance
relating to the identification of and financial  reporting for legal obligations
to perform an asset retirement activity. The Interpretation requires recognition
of a liability for the fair value of a conditional  asset retirement  obligation
when incurred if the liability's fair value can be reasonably estimated.  FIN 47
also defines  when an entity would have  sufficient  information  to  reasonably
estimate  the fair value of an asset  retirement  obligation.  The  provision is
effective no later than the end of fiscal years ending after  December 15, 2005.
The  Company  will adopt FIN 47 and does not believe  the  adoption  will have a
material impact on its consolidated  financial position or results of operations
or cash flows.

      In February 2006, the Financial Accounting Standards Board issued SFAS No.
155,  "Accounting  for Certain Hybrid  Financial  Instruments -- an amendment of
FASB  Statements  No. 133 and 140." SFAS No. 155  simplifies  the accounting for
certain hybrid  financial  instruments,  eliminates the FASB's interim  guidance
which provides that beneficial interests in securitized financial assets are not
subject  to  the  provisions  of  SFAS  No.  133,   "Accounting  for  Derivative
Instruments  and Hedging  Activities,"  and  eliminates  the  restriction on the
passive  derivative  instruments  that a qualifying  special-purpose  entity may
hold. SFAS No. 155 is effective for all financial instruments acquired or issued
after the beginning of an entity's first fiscal year that begins after September
15, 2006,  however,  early  adoption is permitted  for  instruments  acquired or
issued after the  beginning of an entity's  fiscal year in 2006.  The Company is
evaluating the impact of this new  pronouncement  to its financial  position and
results of operations or cash flows.

                                       54
<PAGE>


ITEM 7.   FINANCIAL STATEMENTS

      The Financial  Statements  to this Form 10-KSB are attached  commencing on
page F-1.

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

      None.

ITEM 8A.  CONTROLS AND PROCEDURES

There  were  no  policy  reviews,   improvements  of  documentation  or  general
improvement in the state of internal  controls that led to any change during the
fiscal  year,  or  subsequent  to the end of the fiscal year through the date of
this  Form  10-KSB,  that  materially  affected  or were  reasonably  likely  to
materially affect, internal controls over financial reporting

Evaluation of Disclosure  Controls and  Procedures.  As of the end of the period
covered  by this  report,  the  Company  carried  out an  evaluation,  under the
supervision  and with the  participation  of the Company's  Principal  Executive
Officer and Principal  Financial Officer, of the effectiveness of the design and
operation of the Company's  disclosure  controls and  procedures.  The Company's
disclosure controls and procedures are designed to provide a reasonable level of
assurance  of  achieving  the  Company's  disclosure  control  objectives.   The
Company's  Principal  Executive  Officer and  Principal  Financial  Officer have
concluded that the Company's  disclosure  controls and procedures  are, in fact,
effective at this reasonable assurance level as of the end of period covered. In
addition,  the Company  reviewed its internal  controls,  and there have been no
significant  changes in its  internal  controls or in other  factors  that could
significantly  affect  those  controls  subsequent  to the  date of  their  last
evaluation  or from the end of the  reporting  period  to the date of this  Form
10-KSB.

Changes in Internal Controls. In connection with the evaluation of the Company's
internal  controls  during the  Company's  year ended  December  31,  2005,  the
Company's  Principal  Executive  Officer and  Principal  Financial  Officer have
determined  that there were no changes to the Company's  internal  controls over
financial reporting that have materially  affected,  or are reasonably likely to
materially  effect,  the Company's  internal  controls over financial  reporting
during the year ended December 31, 2005, or subsequent to the date of their last
evaluation,  or from the end of the  reporting  period  to the date of this Form
10-KSB.

                                       55
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors and Shareholders
Neomedia Technologies, Inc.
Fort Myers, Florida

We  have  audited  the  accompanying  consolidated  balance  sheet  of  Neomedia
Technologies,  Inc. and  subsidiaries  as of December 31, 2005,  and the related
consolidated  statements of operations  and  comprehensive  loss,  shareholders'
equity,  and cash  flows  for the two  years in the  period  then  ended.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Neomedia  Technologies,  Inc.  and  subsidiaries  at  December  31, 2005 and the
consolidated  results of their operations and their cash flows for the two years
in the period then ended in  conformity  with  accounting  principles  generally
accepted in the United States.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated  financial statements,  the Company's significant operating losses,
negative  cash  flows  from   operations  and  working   capital  deficit  raise
substantial doubt about its ability to continue as a going concern. Management's
plans  regarding  these matters also are  described in Note 1. The  consolidated
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.

/s/ Stonefield Josephson, Inc.
Irvine, California
March 2, 2006


                                      F-1
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                        (IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>
                                                                                            DECEMBER 31 2005
                                                                                            ----------------
<S>                                                                                                <C>
ASSETS
Current assets:
     Cash and cash equivalents                                                                     $   2,291
     Trade accounts receivable, net of allowance for doubtful accounts of $203                           341
     Inventories                                                                                         423
     Investment in marketable securities                                                                 104
     Prepaid expenses and other current assets                                                           151
                                                                                                   ---------
     Total current assets                                                                              3,310

     Leasehold improvements & property and equipment, net                                                236
     Capitalized patents, net                                                                          3,134
     Micro paint chemical formulations and proprietary process, net                                    1,450
     Goodwill                                                                                          1,099
     Other Intangible assets, net                                                                        246
     Cash surrender value of life insurance policy                                                       769
     Advances to Mobot, Inc.                                                                           1,500
     Other long-term assets                                                                              667
                                                                                                   ---------

          Total assets                                                                             $  12,411
                                                                                                   =========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                                              $   1,574
     Accrued expenses                                                                                  1,844
     Amounts payable under settlement agreements                                                          97
     Sales taxes payable                                                                                  80
     Deferred revenues and other                                                                         898
     Liabilities of discontinued business unit                                                           676
     Notes payable                                                                                     3,015
                                                                                                   ---------
          Total current liabilities                                                                    8,184
                                                                                                   ---------


Shareholders' equity:
     Preferred stock, $0.01 par value, 25,000,000 shares authorized, none issued
       and outstanding                                                                                    --
     Common stock, $0.01 par value, 1,000,000,000 shares authorized,
       475,387,910 shares issued and 467,601,717 outstanding                                           4,676
     Additional paid-in capital                                                                      106,456
     Deferred stock-based compensation                                                                  (169)
     Deferred equity financing costs                                                                 (13,256)
     Accumulated deficit                                                                             (92,524)
     Accumulated other comprehensive loss                                                               (177)
     Treasury stock, at cost, 201,230 shares of common stock                                            (779)
                                                                                                   ---------
     Total shareholders' equity                                                                        4,227
                                                                                                   ---------
          Total liabilities and shareholders' equity                                               $  12,411
                                                                                                   =========
</TABLE>

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


                                      F-2
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31,
                                                                      ------------------------------
                                                                          2005              2004
                                                                      -------------    -------------
<S>                                                                   <C>              <C>
NET SALES:
       License fees                                                   $         523    $         343
       Resale of software and technology equipment and service fees             354              630
       Micro paint repair products and services                               1,279              727
                                                                      -------------    -------------
       Total net sales                                                        2,156            1,700
                                                                      -------------    -------------

COST OF SALES:
       License fees                                                             453              324
       Resale of software and technology equipment and service fees             206              604
       Micro paint repair products and services                                 913              541
                                                                      -------------    -------------
       Total cost of sales                                                    1,572            1,469
                                                                      -------------    -------------

GROSS PROFIT                                                                    584              231

OPERATING EXPENSES:
       Sales and marketing expenses                                           4,186            2,046
       Impairment charge                                                        335               --
       General and administrative expenses                                    3,375            2,215
       Research and development costs                                           934              651
                                                                      -------------    -------------

       Loss from operations                                                  (8,246)          (4,681)
       Gain on extinguishment of debt                                           172              140
       Impairment charge on investments                                        (780)              --
       Amortization of debt discount                                             --           (2,500)
       Interest expense, net                                                   (293)            (189)
                                                                      -------------    -------------

NET LOSS                                                                     (9,147)          (7,230)

       Other comprehensive loss:
          Unrealized gain/loss on marketable securities                        (146)              --
          Foreign currency translation adjustment                                29              (60)
                                                                      -------------    -------------

COMPREHENSIVE LOSS                                                    $      (9,264)   $      (7,290)
                                                                      =============    =============

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

WEIGHTED AVERAGE NUMBER OF COMMON SHARES--BASIC AND DILUTED             451,857,851      329,362,127
                                                                      =============    =============
</TABLE>

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


                                      F-3
<PAGE>

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


<TABLE>
<CAPTION>
                                                                                               YEAR ENDED
                                                                                               DECEMBER 31,
                                                                                          --------------------
                                                                                            2005        2004
                                                                                          --------    --------
<S>                                                                                       <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net loss                                                                            ($ 9,147)   ($ 7,230)
      Adjustments to reconcile net loss to net cash used in operating activities:
      Amortization of discount on note payable                                                  --       2,500
      Depreciation and amortization                                                            735         674
      Impairment charge                                                                      1,115          --
      Provision for doubtful accounts                                                          157          24
      Expense (decrease of fair value) for repriced options                                     --         104
      Fair value of expense portion of stock-based
               compensation granted for professional services                                  733         626
      Interest expense allocated to debt                                                        --           3
      (Increase)/decrease in value of life insurance policies                                  (42)         (1)
      Decrease in fair value of marketable securities                                           --          --
      Decrease of fair value of repriced options                                                --          --
      Changes in operating assets and liabilities
        Trade accounts receivable, net                                                        (216)        (82)
        Inventory                                                                             (308)        (58)
        Other current assets                                                                   173          68
        Accounts payable, amounts due under financing agreements, liabilities in excess
          of assets of discontinued business unit, accrued expenses and stock liability        (93)     (1,277)
        Deferred revenue other current liabilities                                             384          (1)
                                                                                          --------    --------
          Net cash used in operating activities                                             (6,509)     (4,650)
                                                                                          --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Advances to Mobot, Inc.                                                               (1,500)
      Investments                                                                             (500)     (1,000)
      Acquisition of patents                                                                (1,400)
      Acquisition related costs                                                               (168)         --
      Capitalization of software development and purchased intangible assets                  (359)       (141)
      Acquisition of property and equipment                                                   (242)       (111)
      Cash paid to acquire CSI International, Inc. (net of cash acquired)                       --      (2,390)
                                                                                          --------    --------

        Net cash used in investing activities                                               (4,169)     (3,642)
                                                                                          --------    --------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Net proceeds from issuance of common stock, net of issuance costs of $115
        in 2005 and $620 in 2004                                                             8,572       7,906
      Net proceeds from exercise of stock options and warrants                                 923       2,687
      Borrowings under notes payable and long-term debt                                      9,932       9,085
      Repayments on notes payable and long-term debt                                        (8,121)     (8,753)
      Cash commitment fee for $100 million Standby Equity Distribution Agreement            (1,000)         --
                                                                                          --------    --------
        Net cash provided by financing activities                                           10,306      10,925
                                                                                          --------    --------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                         29         (60)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                          (343)      2,573

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                               2,634          61
                                                                                          --------    --------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                                  $  2,291    $  2,634
                                                                                          ========    ========

SUPPLEMENTAL CASH FLOW INFORMATION:
      Interest paid/(received) during the period                                          $     47    $    111
      Income taxes paid                                                                         --          --
      Non-cash investing and financing activities:
        Reduction in accounts payable and accruals due to debt paid with shares
          of common stock                                                                       --         190
        Reduction of note payable paid in stock                                                 --          32
        Fair value of stock issued for services and deferred to future periods                 239         653
        Fair value of shares issued to acquire CSI Int'l (net of costs of registration)         --         695
        Change in net assets resulting from acquisition of CSI (net of cash acquired)           --       3,090
        Gain on extinguishment of debt                                                         172         140
        Direct costs associated with Standby Equity Distribution Agreement
          and Equity Line of Credit                                                          1,204       2,216
</TABLE>

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

                                      F-4
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                        (IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>
                                               COMMON STOCK
                               -------------------------------------------
                                                                                                                ACCUMULATED
                                                                                                   DEFERRED     -----------
                                                                ADDITIONAL       DEFERRED           EQUITY         OTHER
                                                                 PAID-IN          STOCK            FINANCING   COMPREHENSIVE
                                  SHARES           AMOUNT        CAPITAL       COMPENSATION          COSTS          LOSS
                               -----------      ----------     -----------     ------------        ---------   -------------

<S>                            <C>             <C>             <C>             <C>              <C>              <C>
BALANCE, DECEMBER 31, 2003     243,991,257     $     2,440     $    71,565     ($      282)              --      $         0

Shares issued to
Cornell Capital
Partners under ELOC
and SEDA                       112,743,417           1,127           6,864              --               --               --

Exercise of stock
options                         12,860,616             129              43              --               --               --

Exercise of stock
warrants                        51,510,000             515           2,000              --               --               --

Fair value stock,
options, & warrants
issued for
professional services
rendered                         2,013,375              20             785              --               --               --

Stock issued to pay
past due liabilities             2,406,388              24             242              --               --               --

Stock issued in
connection with
acquisition of CSI
International                    7,000,000              70             625              --               --               --

Expense associated
with option repricing                   --              --             104              --               --               --
Fair value of
warrants issued with
debt                                    --              --           2,500              --               --               --

Change in Deferred
Stock Compensation                      --              --              --            (163)              --               --

Comprehensive loss -
foregin currency
translation adjustment                  --              --              --              --               --              (60)

Net Loss                                --              --              --              --               --               --
                               -----------     -----------     -----------      -----------      ----------      -----------
BALANCE, DECEMBER 31, 2004     432,525,053     $     4,325     $    84,728            (445)              --      ($       60)

Shares issued to
Cornell Capital
Partners under SEDA             26,435,512             264           8,177              --               --               --

Deferred financing
cost associated with
$100 million SEDA                   44,723              --          12,256              --          (13,256)              --

Exercise of stock
options                          7,953,650              80             837              --               --               --

Exercise of stock
warrants                            50,000               1               5              --               --               --

Fair value stock,
options, & warrants
issued for
professional services
rendered                           592,779               6             453              --               --               --

Change in Deferred
Stock Compensation                      --              --              --             276               --               --

Comprehensive loss -
foregin currency
translation adjustment                  --              --              --              --               --               29

Comprehensive loss -
unrealized loss on
marketable securities                   --              --              --              --               --             (146)

Net Loss                                --              --              --              --               --               --

BALANCE, DECEMBER 31, 2005     467,601,717     $     4,676     $   106,456     ($      169)     ($   13,256)     ($      177)
                               ===========     ===========     ===========      ===========      ==========      ===========
</TABLE>


<TABLE>
<CAPTION>
                                                        TREASURY STOCK
                                                    ------------------------
                                                                                     TOTAL
                               ACCUMULATED                                        SHAREHOLDER
                                 DEFICIT             SHARES           AMOUNT         EQUITY
                               -----------          -------          -------      -----------

<S>                            <C>                  <C>         <C>              <C>
BALANCE, DECEMBER 31, 2003     ($   76,147)         201,230     ($      779)     ($    3,203)

Shares issued to
Cornell Capital
Partners under ELOC
and SEDA                                --               --              --            7,991

Exercise of stock
options                                 --               --              --              172

Exercise of stock
warrants                                --               --              --            2,515

Fair value stock,
options, & warrants
issued for
professional services
rendered                                --               --              --              805

Stock issued to pay
past due liabilities                    --               --              --              266

Stock issued in
connection with
acquisition of CSI
International                           --               --              --              695

Expense associated
with option repricing                   --               --              --              104
Fair value of
warrants issued with
debt                                    --               --              --            2,500

Change in Deferred
Stock Compensation                      --               --              --             (163)

Comprehensive loss -
foregin currency
translation adjustment                  --               --              --              (60)

Net Loss                            (7,230)              --              --           (7,230)
                              -------------        --------     ------------     ------------
BALANCE, DECEMBER 31, 2004     ($   83,377)         201,230     ($      779)     $     4,392

Shares issued to
Cornell Capital
Partners under SEDA                     --               --              --            8,441

Deferred financing
cost associated with
$100 million SEDA                       --               --              --           (1,000)

Exercise of stock
options                                 --               --              --              917

Exercise of stock
warrants                                --               --              --                6

Fair value stock,
options, & warrants
issued for
professional services
rendered                                --               --              --              459

Change in Deferred
Stock Compensation                      --               --              --              276

Comprehensive loss -
foregin currency
translation adjustment                  --               --              --               29

Comprehensive loss -
unrealized loss on
marketable securities                   --               --              --             (146)

Net Loss                            (9,147)              --              --           (9,147)
                              -------------        --------     ------------     ------------
BALANCE, DECEMBER 31, 2005     ($   92,524)         201,230     ($      779)     $     4,227
                              =============        ========     ============     ============
</TABLE>


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


                                      F-5
<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 (a dormant  subsidiary);  NeoMedia  Technologies  of
Canada, Inc. incorporated in Canada (a dormant subsidiary);  NeoMedia Tech, Inc.
incorporated in Delaware;  NeoMedia EDV GmbH  incorporated in Austria (a dormant
subsidiary);  NeoMedia  Technologies  Holding  Company B.V.  incorporated in the
Netherlands (a dormant subsidiary); NeoMedia Technologies de Mexico S.A. de C.V.
incorporated in Mexico (a dormant subsidiary); NeoMedia Migration de Mexico S.A.
de C.V. incorporated in Mexico (a dormant subsidiary);  NeoMedia Technologies do
Brasil Ltd. incorporated in Brazil (a dormant subsidiary); NeoMedia Technologies
UK Limited incorporated in the United Kingdom (a dormant  subsidiary);  NeoMedia
Micro Paint Repair, Inc. a Nevada corporation; NeoMedia Telecom Services, Inc. a
Nevada corporation  established for the purpose of completing the acquisition of
BSD Software,  Inc.; and Mobot, Inc., a Delaware corporation established for the
purpose of completing  the  acquisition  of Mobot,  Inc.,  and are  collectively
referred  to  as  "NeoMedia"  or  the  "Company".   The  consolidated  financial
statements  of NeoMedia  are  presented  on a  consolidated  basis for all years
presented.  All significant  intercompany  accounts and  transactions  have been
eliminated in preparation of the consolidated financial statements.

       The accompanying  consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America,  which  contemplate  continuation  of the  Company as a going  concern.
However,  the Company has reported net losses of $9,147,000  and  $7,230,000 for
the years ended December 31, 2005 and 2004, respectively, and has an accumulated
deficit of  $92,524,000  as of December 31, 2005.  In addition,  the Company had
working  capital  deficit of  $4,874,000  as of December  31,  2005.  All of the
factors  discussed  above,  amongst others,  raise  substantial  doubt about the
Company's ability to continue as a going concern.

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

     Should these financing  sources fail to materialize,  management would seek
alternate  funding  sources  through  sale of  common  and/or  preferred  stock.
Management's plan is to secure adequate funding to bridge to profitability  from
the Company's PaperClick(R) business,  intellectual property portfolio and Micro
Paint Repair business.


                                      F-6
<PAGE>
NATURE OF BUSINESS OPERATIONS

       During 2005,  NeoMedia was structured as three distinct  business  units:
NeoMedia Internet Software Service (NISS),  NeoMedia  Consulting and Integration
Services (NCIS), and NeoMedia Micro Paint Repair (NMPR).

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

            NCIS  (systems   integration  service  offerings)  is  the  original
      business  line upon  which  NeoMedia  was  organized.  This  unit  resells
      client-server  equipment and related software, and general and specialized
      consulting  services.  During the first quarter of 2006, NeoMedia formally
      decided  to wind down  this  business  unit.  To the  extent  practicable,
      NeoMedia will attempt to sell  additional  licenses of its propriety print
      encoder and migration  software  products,  but will not pursue additional
      hardware and software resales.

            NMPR  (Micro  Paint   Repair   offerings)   is  the  business   unit
      encompassing  the  proprietary  paint and chemical  line acquired from CSI
      International  in 2004.  This business also acts as a distributor of other
      manufacturers'  automotive  aftermarket  products to customers  around the
      world.


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ESTIMATES

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

CASH AND CASH EQUIVALENTS

      For the  purposes  of the  consolidated  balance  sheet  and  consolidated
statements of cash flows, all highly liquid investments with original maturities
of three months or less are considered cash  equivalents.  The Company maintains
bank  accounts with  balances  which,  at times,  may exceed  federally  insured
limits. The Company has not experienced any losses on such accounts. The Company
believes it is not exposed to any significant risk on bank deposit accounts.  As
of December 31, 2005, the Company had cash balances of $2,191,000 which were not
insured by the FDIC.

FINANCIAL INSTRUMENTS

      The  carrying   amount  of  the  Company's  cash   equivalents,   accounts
receivable, prepaid expenses, other current assets, cash surrender value of life
insurance policy,  accounts payable and accrued  expenses,  accrued salaries and
benefits, and payables to merchants approximates their estimated fair values due
to the short-term maturities of those financial instruments.

      Rates  currently  available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.


                                      F-7
<PAGE>
ACCOUNTS RECEIVABLE

      The Company  reports  accounts  receivable at net  realizable  value.  The
Company's terms of sale provide the basis for when accounts become delinquent or
past due. The Company  provides an allowance for doubtful  accounts equal to the
estimated  uncollectible  amounts. The Company's estimate is based on historical
collection experience and a review of the current status of accounts receivable.
Receivables  are generally  charged off and sent to a  collections  agency after
ninety  days past due. It is at least  reasonably  possible  that the  Company's
estimate of the allowance for doubtful accounts will change in the near-term. At
December 31, 2005, the allowance for doubtful accounts was $203,000.

INVENTORIES

      Inventories are stated at the lower of cost or market, and at December 31,
2005 was comprised of micro paint repair products.  Cost is determined using the
first-in,  first-out  method.  At December 31, 2005 and December 31, 2004, there
was no reserve.

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.  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.  The cost of normal
maintenance  and  repairs  is  charged  to  operations  as  incurred.   Material
expenditures,  which  increase  the  life  of  an  asset,  are  capitalized  and
depreciated over the estimated remaining life of the asset.

The estimated service lives of property and equipment are as follows:

           Furniture and fixtures           7 years
           Computer equipment               3 to 5 years

CAPITALIZED PATENTS

      Patents (including  patents pending and intellectual  property) are stated
at cost, less accumulated amortization. Patents are generally amortized over the
shorter of the estimated useful lives or contractual  lives ranging from five to
seventeen years.

MICRO PAINT CHEMICAL FORMULATIONS AND PROPRIETARY PROCESSES

      Micro  Paint  Repair  chemical   formulations  and  proprietary  processes
consists  of the  estimated  fair value of the  formulations  acquired  from CSI
International,  Inc.  that are used in  NeoMedia's  Micro Paint Repair  business
unit. The estimated fair value was determined using an independent  appraisal of
the assets and  liabilities  acquired  in the  transaction.  This value is being
amortized using the  straight-line  method over its estimated  useful life of 10
years.


                                      F-8
<PAGE>
GOODWILL

      Goodwill  consists  of the  excess  of the  purchase  price  paid  for CSI
International, Inc. over the identifiable net assets and liabilities acquired at
fair value. Goodwill was determined using an independent appraisal of the assets
and liabilities  acquired in the  transaction.  Goodwill was not assigned a life
and  will be  tested  for  impairment  as  defined  by  Statement  of  Financial
Accounting  Standards  No. 144,  "Accounting  for the  Impairment or Disposal of
Long-Lived Assets."

OTHER INTANGIBLE ASSETS

      Other  intangible  assets  consists  of  customer  contracts,  copyrighted
material and acquired software  products,  which are amortized over the expected
life of the product, generally three to five years.

INVESTMENTS

     Investments  included  in other  long term  assets  consist  of  NeoMedia's
investments in iPoint-media and Intactis Software, Inc.

      On September 7, 2004,  NeoMedia  acquired 17%  ownership of  iPoint-media,
consisting  of 69,196  shares of common  stock,  for $1 million  cash.  NeoMedia
recorded the investment at cost. iPoint-Media Ltd. ("iPoint-media"), distributes
video,  audio  and data  over IP  networks.  As a result  of the delay by iPoint
-media in  registering  the  shares  held by  NeoMedia,  during  the year  ended
December 31, 2005 NeoMedia  recognized an impairment of $530,000  related to the
excess of the carrying value of the investment  over the estimated fair value as
determined by management  using the weighted  average  probability  method.  The
impairment  loss is included in the statement of  operations  for the year ended
December 31, 2005.

   Pertinent financial  information reported by iPoint-media on its Form SB-2 is
as follows:

                             Nine Months
                                Ended                 Years Ended
                            September 30,            December 31,
                                 2005             2004           2003
                             (Unaudited)      --------       --------
                            ------------
Revenues                      $    44          $   514        $   618
Net loss                       (1,148)          (1,397)          (551)

Total Assets                  $   302          $ 1,124
Stockholders' deficit          (1,488)            (340)

     On March 10,  2005,  NeoMedia  invested  $250,000 in  exchange  for 250,000
shares of Intactis  non-voting  convertible  preferred stock. In connection with
the  investment,  NeoMedia  received a warrant to purchase  up to an  additional
50,000 shares of Intactis. During the year ended December 31, 2005 NeoMedia took
an  impairment  of  the  carrying  value  of the  investment  of  $250,000.  The
impairment  loss is included in the statement of  operations  for the year ended
December 31, 2005.


                                      F-9
<PAGE>

      On February 25,2005,  NeoMedia invested $250,000 in exchange foe 8,333,333
shares of Pick Ups Plus,  Inc.  common  stock.  During the year  ended  December
31,2005,  NeoMedia  recognized a temporary loss in the fair value of $146,000 as
an adjustment  through other  comprehensive  loss in the statement of operations
and comprehensive loss.

     On February 25, 2005,  NeoMedia signed two non-binding letters of intent to
acquire up to 100% of Automotive  Preservation,  Inc.  ("AP"),  a distributor of
automotive  paint and accessory  products,  from AP's parent company,  PUPS. The
first letter of intent  calls for  NeoMedia to  initially  acquire 30% of AP for
$1,600,000,  to be paid  $600,000  in  cash,  $554,000  in  shares  of  NeoMedia
restricted  common  stock,  and $446,000  through the  assumption  of AP debt by
NeoMedia.  Under the second letter of intent, upon completion of the acquisition
of the initial 30% of AP by NeoMedia,  NeoMedia would have the option to acquire
an additional 30% of AP for $1,650,000, payable in shares of NeoMedia restricted
common  stock.  The second  letter of intent also gives  NeoMedia  the option to
purchase the final 40% of AP for either:  (i)  $2,200,000,  payable in shares of
NeoMedia  restricted  common stock,  if NeoMedia  exercises this right within 12
months of  acquiring  the second 30% of AP, or (ii) a price  equivalent  to AP's
previous  quarter  EBITDA  multiplied  by  8,  payable  in  shares  of  NeoMedia
restricted  common stock.  Both letters of intent are non-binding and subject to
due  diligence by NeoMedia and AP. On  September  21, 2005,  the BOD approved to
change the deal  structure for the  acquisition of AP, so that the Company would
acquire only 30% of AP for a total purchase price of $1.6 million of which $600K
would be paid in cash and $446K would be paid  through the  assumption  of debt,
and $554K through the issuance of restricted  Neomedia stock.  Neomedia will not
acquire the remaining 70% of AP under the new structure.


EVALUATION OF LONG-LIVED ASSETS

      NeoMedia  periodically performs impairment tests on each of its intangible
assets,  which  include  goodwill,  capitalized  patent costs,  repair  chemical
formulations  and  proprietary  process,  customer  base  and  trademarks,   and
capitalized and purchased  software  costs. In doing so, NeoMedia  evaluates the
carrying  value of each  intangible  asset  with  respect  to  several  factors,
including  historical revenue generated from each intangible asset,  application
of the assets in NeoMedia's  current business plan, and projected cashflow to be
derived from the asset.

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

      According  to  SFAS  144,  a   long-lived   asset  should  be  tested  for
recoverability  whenever  events or changes in  circumstances  indicate that its
carrying  amount may not be  recoverable.  The  following  are  examples of such
events or changes in circumstances:

      -     A significant decrease in the market price of the asset
      -     A  significant  adverse  change in the extent or manner in which the
            asset is being used, or in its physical condition
      -     A  significant  adverse  change in legal  factors or in the business
            climate  that  could  affect the value of the  asset,  including  an
            adverse action or assessment by a regulator
      -     An  accumulation  of costs  significantly  in excess  of the  amount
            originally expected
      -     A current-period operating or cash flow loss combined with a history
            of operating or cash flow losses or a  projection  or forecast  that
            demonstrates continuing losses associated with the use of the asset
      -     A current  expectation that, more likely than not, the asset will be
            sold or otherwise  disposed of  significantly  before the end of its
            previously estimated useful life.


                                      F-10
<PAGE>
      NeoMedia follows the two-step process outlined in SFAS 144 for determining
if an impairment charge should be taken: (1) the expected undiscounted cashflows
from a particular  asset or asset group are compared to the carrying  value;  if
the expected  undiscounted  cashflows  are greater than the carrying  value,  no
impairment is taken,  but if the expected  undiscounted  cashflows are less than
the carrying  value,  then (2) an impairment  charge is taken for the difference
between  the  carrying  value  and  the  expected  discounted   cashflows.   The
assumptions used in developing  expected cashflow estimates are similar to those
used in developing  other  information  used by NeoMedia for budgeting and other
forecasting  purposes.  In instances where a range of potential future cashflows
is  possible,  NeoMedia  uses  a  probability-weighted  approach  to  weigh  the
likelihood of those possible outcomes.  NeoMedia used a rate of 10% for purposes
of discounting cashflows in 2005.

      The impairment  charge included in operations during the fourth quarter of
2005  for  $335,000   relates  to  the  assets   purchased  from  Secure  Source
Technologies,  Inc. during 2003 that are part of the NeoMedia Internet Switching
Service  (NISS)  business  unit.  The  impairment  is due to the  fact  that the
intangible  assets  purchased are not generating any revenue at the present time
and NeoMedia's  management does not foresee these assets  generating  revenue in
the near term. The amount of impairment  was determined by determining  the fair
value of the intangible assets using the discounted cashflow method.

      The impairment charge after loss from operations during the fourth quarter
of 2005 for $780,000 relates to the investment in iPoint-Media  Ltd.  ("iPoint")
for $530,000 and the  investment in Intactis  Software,  Inc.  ("Intactis")  for
$250,000.  These  investments are not part of a specific business segment and as
such are charged  against the corporate  segment.  . The impairment  relating to
iPont primarily  results from a delay in  registration  fro resale of the shares
held by NeoMedia.  The  impairment of the  investment in Intactis is a result of
NeoMedia  management's  expectation  that additional  investment or research and
development  resources  would  be  required  in  order  to  recoup  the  initial
investment. The amount of impairment for both iPoint and Intactis was determined
by  determining  the fair  value of the  assets  using the  discounted  cashflow
method.

AMOUNTS DUE UNDER SETTLEMENT AGREEMENTS

      NeoMedia is party to various  settlement  agreements  with  certain of its
vendors  relating  to past  due  accounts  payable.  The  settlement  agreements
generally call for monthly payment installments against such past due amounts.

REVENUE RECOGNITION

      During  2005 and  2004,  NeoMedia  derived  revenues  from  three  primary
sources:  (1) license revenues,  (2) resale of software and technology equipment
and service fee revenues, and (3) Micro Paint Repair sales.

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

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


                                      F-11
<PAGE>
      (2) Revenue for resale of software and  technology  equipment  and service
fee is  recognized  based  on  guidance  provided  in  Securities  and  Exchange
Commission  ("SEC") Staff Accounting  Bulletin No. 104, "Revenue  Recognition in
Financial  Statements," as amended (SAB 104). Software and technology  equipment
resale  revenue  is  recognized  when  all of the  components  necessary  to run
software or hardware have been shipped.  Service  revenues  include  maintenance
fees for providing system updates for software products,  user documentation and
technical  support and are  recognized  over the life of the contract.  Software
license revenue from long-term  contracts has been recognized on a percentage of
completion  basis,  along with the  associated  services being  provided.  Other
service  revenues,  including  training and  consulting,  are  recognized as the
services are  performed.  The Company uses  stand-alone  pricing to determine an
element's vendor specific  objective  evidence  ("VSOE") in order to allocate an
arrangement  fee amongst various pieces of a  multi-element  contract.  NeoMedia
records an allowance for uncollectible accounts on a customer-by-customer  basis
as appropriate.

      (3) NeoMedia's  Micro Paint Repair business unit derives revenue from: (a)
the right to use NeoMedia's  proprietary  Micro Paint Repair  system,  (b) paint
products and services, (c) training, and (d) technical support.

            (a)   Paint  system  revenue  is a one-time  fee paid by  NeoMedia's
                  customer to use NeoMedia's  proprietary  paint system,  and is
                  deferred  and  recognized   over  the  expected  life  of  the
                  relationship, which was estimated at one year during 2005.
            (b)   Paint product and service  revenue is recognized when products
                  are shipped or when services are performed.
            (c)   Training   revenue  is   recognized   upon   completion  of  a
                  company-certified training course.
            (d)   Technical  support revenue is recognized on a monthly basis as
                  support services are provided.

SHIPPING AND HANDLING COSTS

         Shipping  and  handling  costs  are  passed  through  to the  Company's
customers,  and are recorded as revenue with the  associated  costs  recorded as
cost of goods sold.

RESEARCH AND DEVELOPMENT

         Costs  associated  with the  planning and  designing  phase of software
development,  including  coding and testing  activities,  and related  overhead,
necessary   to   establish   technological    feasibility   of   the   Company's
internally-developed   software   products,   are  classified  as  research  and
development and expensed as incurred.

STOCK BASED COMPENSATION

      The Company  accounts for  stock-based  compensation  in  accordance  with
Accounting Principles Board ("APB") Opinion No. 25. "Accounting for Stock Issued
to  Employees,"  and complies  with the  disclosure  provisions  of SFAS No. 123
"Accounting for Stock-Based  Compensation."  Under APB No. 25, compensation cost
is recognized  over the vesting period based on the excess,  if any, on the date
of grant of the fair value of the Company's shares over the employee's  exercise
price.  When the exercise  price of the option is less than the fair value price
of the  underlying  shares on the grant date,  deferred  stock  compensation  is
recognized  and amortized to expense in  accordance  with  Financial  Accounting
Standards  Board ("FASB")  Interpretation  No. 44 over the vesting period of the
individual options. Accordingly, if the exercise price of the Company's employee
options equals or exceeds the market price of the underlying  shares on the date
of grant no compensation expense is recognized.  Options or shares awards issued
to non-employees and directors are valued using the Black-Scholes  pricing model
and expensed over the period services are provided.


                                      F-13
<PAGE>

      In  December  2002,  the  FASB  issued  SFAS  No.  148,   "Accounting  for
Stock-Based Compensation-Transition and Disclosure," which amends, SFAS No. 123,
"Accounting for Stock-Based  Compensation,"  to provide  alternative  methods of
transition  for a voluntary  change to the fair value based method of accounting
for stock-based  employee  compensation.  In addition,  SFAS No. 148 expands the
disclosure requirements of SFAS No. 123 to require more prominent disclosures in
both annual and interim financial  statements about the method of accounting for
stock-based employee  compensation and the effect of the method used on reported
results.  The  transition  provisions  of SFAS No. 148 are  effective for fiscal
years ended after December 15, 2002. The transition  provisions do not currently
have an impact on the Company's  consolidated  financial position and results of
operations as the Company has not elected to adopt the fair  value-based  method
of accounting  for  stock-based  employee  compensation  under SFAS No. 123. The
disclosure provisions of SFAS No. 148 are effective for financial statements for
interim  periods  beginning  after  December 15, 2002.  The Company  adopted the
disclosure requirements in the first quarter of 2003.

      The Company  accounts for its stock option plans under the recognition and
measurement  principles  of APB Opinion No. 25,  Accounting  for Stock Issued to
Employees,  and related  Interpretations.  No stock-based employee  compensation
cost is reflected in net loss, except when options granted under those plans had
an exercise price less than the market value of the  underlying  common stock on
the date of grant.  The following  table  illustrates the effect on net loss and
loss per share if the company had applied the fair value recognition  provisions
of  FASB  Statement  No.  123,  Accounting  for  Stock-Based  Compensation,   to
stock-based employee compensation.

                                               YEARS ENDED
                                               DECEMBER 31,
                                         ---------------------
(in 000's, except share data)               2005        2004
                                         ---------   ---------

Net Loss, as reported                    ($ 9,147)   ($ 7,230)
Compensation recognized under APB 25           --          --
Compensation recognized under SFAS 123     (4,124)     (1,445)
                                         --------    --------
   Pro-forma net loss                    ($13,271)   ($ 8,675)
                                         ========    ========

Net Loss per share:
Basic and diluted - as reported          ($  0.02)   ($  0.02)
                                         ========    ========
Basic and diluted - pro-forma            ($  0.03)   ($  0.03)
                                         ========    ========

      For grants in 2005 and 2004, the following  assumptions  were used: (i) no
expected  dividends;  (ii) a risk-free  interest  rate of 4.5%;  (iii)  expected
volatility  ranging from 385% to 434% in 2005 and from 438% to 451% in 2004, and
(iv) an expected life of the shorter of 3 years or the stated life of the option
for options  granted in 2005 and 2004. The  fair-value was determined  using the
Black-Scholes option-pricing model.

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

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, 2005.


                                      F-14
<PAGE>
TRANSLATION OF FOREIGN CURRENCY

      The functional  currency of the Company's  Micro Paint Repair  business is
the Canadian dollar.  Financial  statements from the Micro Paint Repair business
unit are  translated to United States dollars at the exchange rates in effect at
the balance sheet date for assets and  liabilities  and at average rates for the
period for revenues and expenses. Resulting exchange differences are accumulated
as a component of accumulated other comprehensive loss.

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, 2005    DECEMBER 31, 2004
                                   -----------------    -----------------
    Outstanding Stock Options          100,041,721           52,804,121
    Outstanding Warrants                71,375,000           18,825,000

RECLASSIFICATIONS

      Certain   reclassifications  have  been  made  to  the  2004  consolidated
financial statements to conform to the 2005 presentation.

RECENT ACCOUNTING PRONOUNCEMENTS

     In December 2004, the FASB issued SFAS No.123 (revised 2004),  "Share-Based
Payment".  Statement 123(R) will provide  investors and other users of financial
statements  with more complete and neutral  financial  information  by requiring
that the  compensation  cost relating to  share-based  payment  transactions  be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability  instruments issued.  Statement 123(R) covers a
wide range of share-based  compensation  arrangements  including  share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123,
Accounting  for  Stock-Based  Compensation,  and  supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as originally issued in
1995,  established  as preferable a  fair-value-based  method of accounting  for
share-based  payment  transactions  with  employees.   However,  that  Statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable  fair-value-based method been used. Public entities
(other than those filing as small  business  issuers)  will be required to apply
Statement  123(R) as of the first interim or annual reporting period that begins
after December 15, 2005. Management is currently evaluating the impact SFAS 123R
will have on our consolidated financial statements.

      In March  2005,  the SEC  released  Staff  Accounting  Bulletin  No.  107,
"Share-Based  Payment" ("SAB 107"), which provides interpretive guidance related
to the interaction between SFAS 123(R) and certain SEC rules and regulations. It
also provides the SEC staff's views regarding  valuation of share-based  payment
arrangements.  In April  2005,  the SEC amended  the  compliance  dates for SFAS
123(R),  to allow  companies to implement the standard at the beginning of their
next fiscal year,  instead of the next reporting period beginning after June 15,
2005.  Management  is currently  evaluating  the impact SAB 107 will have on our
consolidated financial statements.


                                      F-15
<PAGE>
      In May 2005,  the FASB issued FASB Statement No. 154,  Accounting  Changes
and Error Corrections. This new standard replaces APB Opinion No. 20, Accounting
Changes,  and FASB  Statement  No. 3,  Reporting  Accounting  Changes in Interim
Financial Statements, and represents another step in the FASB's goal to converge
its standards with those issued by the IASB. Among other changes,  Statement 154
requires   that  a  voluntary   change  in   accounting   principle  be  applied
retrospectively  with all prior period financial statements presented on the new
accounting  principle,  unless it is  impracticable to do so. Statement 154 also
provides that (1) a change in method of  depreciating or amortizing a long-lived
nonfinancial asset be accounted for as a change in estimate (prospectively) that
was effected by a change in accounting  principle,  and (2) correction of errors
in previously issued financial  statements should be termed a "restatement." The
new standard is effective for  accounting  changes and correction of errors made
in fiscal  years  beginning  after  December 15,  2005.  Early  adoption of this
standard is permitted for  accounting  changes and  correction of errors made in
fiscal years beginning after June 1, 2005.

       In June  2005,  the  Emerging  Issues  Task  Force,  or EITF,  reached  a
consensus  on Issue 05-6,  Determining  the  Amortization  Period for  Leasehold
Improvements,  which requires that leasehold improvements acquired in a business
combination  or purchased  subsequent  to the  inception of a lease be amortized
over the  lesser  of the  useful  life of the  assets  or a term  that  includes
renewals that are reasonably assured at the date of the business  combination or
purchase. EITF 05-6 is effective for periods beginning after July 1, 2005. We do
not expect the provisions of this consensus to have a material impact on the our
financial position, results of operations or cash flows.

      In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement  Obligations"  ("FIN 47"). FIN 47 provides guidance
relating to the identification of and financial  reporting for legal obligations
to perform an asset retirement activity. The Interpretation requires recognition
of a liability for the fair value of a conditional  asset retirement  obligation
when incurred if the liability's fair value can be reasonably estimated.  FIN 47
also defines  when an entity would have  sufficient  information  to  reasonably
estimate  the fair value of an asset  retirement  obligation.  The  provision is
effective no later than the end of fiscal years ending after  December 15, 2005.
The  Company  will adopt FIN 47 and does not believe  the  adoption  will have a
material impact on its consolidated  financial position or results of operations
or cash flows.

      In February 2006, the Financial Accounting Standards Board issued SFAS No.
155,  "Accounting  for Certain Hybrid  Financial  Instruments -- an amendment of
FASB  Statements  No. 133 and 140." SFAS No. 155  simplifies  the accounting for
certain hybrid  financial  instruments,  eliminates the FASB's interim  guidance
which provides that beneficial interests in securitized financial assets are not
subject  to  the  provisions  of  SFAS  No.  133,   "Accounting  for  Derivative
Instruments  and Hedging  Activities,"  and  eliminates  the  restriction on the
passive  derivative  instruments  that a qualifying  special-purpose  entity may
hold. SFAS No. 155 is effective for all financial instruments acquired or issued
after the beginning of an entity's first fiscal year that begins after September
15, 2006,  however,  early  adoption is permitted  for  instruments  acquired or
issued after the  beginning of an entity's  fiscal year in 2006.  The Company is
evaluating the impact of this new  pronouncement  to its financial  position and
results of operations or cash flows.

3. STANDBY EQUITY  DISTRIBUTION  AGREEMENTS  WITH CORNELL CAPITAL  PARTNERS,  LP
("CORNELL")

     On October 27,  2003,  the Company and Cornell  entered  into a $20 million
Standby Equity Distribution  Agreement (the "2003 SEDA"). The agreement provides
for a maximum "draw" of $280,000 per week, not to exceed  $840,000 in any 30-day
period,  and Cornell  will  purchase up to $20 million of the  Company's  common
stock over a two-year period.  As a commitment fee for Cornell to enter into the
2003 SEDA,  the Company  issued 10 million  warrants to Cornell with an exercise
price of $0.05  per  share,  and a term of five  years.  Cornell  exercised  the
warrants in January 2004, resulting in $500,000 cash receipts to the Company. In
November 2003, the Company  registered  200 million shares  underlying  this $20
million 2003 SEDA. In April 2004,  the Company  registered 40 million  shares of
common  stock  underlying  warrants  granted  to Cornell  in  connection  with a
promissory note issued by the Company to Cornell (see "Promissory  Notes Payable
to Cornell" below).


                                      F-16
<PAGE>
      On March 30,  2005,  NeoMedia and Cornell  entered  into a Standby  Equity
Distribution  Agreement (the "2005 SEDA") under which Cornell agreed to purchase
up to $100  million of NeoMedia  common stock over a two-year  period,  with the
timing and amount of the purchase at NeoMedia's  discretion.  The maximum amount
of each  purchase  would be  $2,000,000  with a minimum  of five  business  days
between  advances.  The shares would be valued at 98% of the lowest  closing bid
price during the five-day period  following the delivery of a notice of purchase
by NeoMedia, and NeoMedia would pay 5% of the gross proceeds of each purchase to
Cornell.  Concurrent with the SEDA,  NeoMedia  entered into an escrow  agreement
with  Cornell  and an escrow  agent,  under  which the escrow  agent holds in an
escrow account shares of NeoMedia common stock, and the cash paid by Cornell for
such shares,  issued pursuant to an advance under the SEDA. The shares and funds
can only be released  upon receipt by the escrow  agent of a joint  disbursement
instruction  signed  by  NeoMedia  and  Cornell.  NeoMedia  expects  to  file  a
registration  statement with the SEC to register the shares  underlying the 2005
SEDA.  The 2005  SEDA  would  become  available  at the  time  the SEC  declares
effective a registration statement containing such shares.

      As a  commitment  fee for  Cornell to enter  into the 2005 SEDA,  NeoMedia
issued 50 million warrants to Cornell with an exercise price of $0.20 per share,
and a term of three years, and also paid a cash commitment fee of $1 million. If
shares of  NeoMedia's  common  stock  underlying  the  warrant are covered by an
effective  registration  statement  and if the closing  bid price of  NeoMedia's
common stock is above $0.30 for five  consecutive  business  days,  NeoMedia may
force conversion of the warrant. NeoMedia also issued 4 million warrants with an
exercise  price of $0.227 to a consultant as a fee in  connection  with the 2005
SEDA.  As of March 31, 2005,  NeoMedia  recorded the $12.3 million fair value of
the warrants to "Deferred equity financing costs" and, upon effectiveness of the
2005 SEDA, will amortize this amount to additional paid-in capital straight-line
over the two-year life of the 2005 SEDA. 20 million  warrants were  exercised in
February 2006, generating $4 million cash proceeds to NeoMedia.

     During the years ended December 31, 2005,  the Company sold  26,435,512 and
112,743,417  shares of its  common  stock to Cornell  under the 2003  SEDA.  The
following table summarizes  funding received from Cornell during the years ended
December 31, 2005 and 2004:

                                                      YEAR ENDED DECEMBER 31,
                                                 ------------------------------
                                                      2005             2004
                                                 -------------    -------------
Number of shares sold to Cornell                    26,435,512      112,743,417

Gross Proceeds from sale of shares to Cornell    $   9,527,000    $  10,123,000
Less: discounts and fees*                           (1,022,000)      (1,967,000)
                                                 -------------    -------------
   Net Proceeds from sale of shares to Cornell   $   8,505,000    $   8,156,000
                                                 -------------    -------------

* Pursuant to the terms of the 2003 SEDA , stock is valued at 98% of the lowest
closing bid price during the week it was sold.


                                      F-17
<PAGE>
4. PROPERTY AND EQUIPMENT

      As  of  December  31,  2005,  property  and  equipment  consisted  of  the
following:

                                                 (dollars
                                               in thousands)
                                               -------------
                                                    2005
                                                   -----
Furniture and fixtures                             $ 305
Equipment                                            250
Autos                                                 39
Leasehold improvements                                55
                                                   -----
        Total                                        649
Less: accumulated depreciation
     Furniture and fixtures                         (268)
     Equipment                                      (119)
     Autos                                           (10)
        Leasehold improvements                       (16)
                                                   -----
        Total property and equipment, net          $ 236
                                                   =====

      Depreciation expense was $109,000 and $66,000 for the years ended December
31, 2005 and 2004, respectively.

5. INTANGIBLE ASSETS

      As of December 31, 2005, intangible assets consisted of the following:

                                                 (dollars
                                               in thousands)
                                               -------------
                                                    2005
                                                  ------
Patents and related costs, net                    $3,134
Micro paint repair chemical formulations
   and proprietary process, net                    1,450
Goodwill                                           1,099
Other intangible assets, net                         246
                                                  ------
        Total                                     $5,929
                                                  ======


      Capitalized  patent  activity for the year ended  December 31, 2005 was as
follows:

                                                 (dollars
                                               in thousands)
                                               -------------
                                                    2005
                                                  ------
Beginning balance, net of accumulated
    amortization of $1,471                       $ 2,174
Additions                                          1,651
Impairment charge                                   (335)
Amortization                                        (356)
                                                 -------
   Ending balance                                $ 3,134
                                                 =======


                                      F-18
<PAGE>
      Amortization  expense of capitalized patents was $356,000 and $321,000 for
the years ended December 31, 2005 and 2004,  respectively.  The weighted-average
amortization  period of  capitalized  patents as of December  31, 2005 was 14.25
years.

      The  impairment  charge of $335,000  relates to the assets  purchased from
Secure  Source  Technologies,  Inc.  during  2003 that are part of the  NeoMedia
Internet  Switching  Service (NISS)  business unit. The impairment is due to the
fact that the intangible  assets purchased are not generating any revenue at the
present time and NeoMedia's  management does not foresee these assets generating
revenue in the near term. The amount of impairment was determined by determining
the fair value of the intangible assets using the discounted cashflow method.

      Capitalized  Micro Paint  Repair  chemical  formulations  and  proprietary
process activity for the year ended December 31, 2005 was as follows:

                                                                  (dollars
                                                                in thousands)
                                                                -------------
                                                                     2005
                                                                  -------
Beginning balance, net of accumulated amortization of $170        $ 1,630
Amortization                                                         (180)
                                                                  -------
   Ending balance                                                 $ 1,450
                                                                  =======

      Amortization  expense of Micro  Paint  Repair  chemical  formulations  and
proprietary  process was $180,000 and $170,000 for the years ended  December 31,
2005  and  2004,  respectively.  The  weighted-average  amortization  period  of
capitalized repair chemical  formulations and proprietary process as of December
31, 2005 was 9 years.

      Goodwill activity for the year ended December 31, 2005 was as follows:

                                                                  (dollars
                                                                in thousands)
                                                                -------------
                                                                     2005
                                                                  -------
Beginning balance                                                  $1,099
Additions                                                              --
                                                                   ------
   Ending balance                                                  $1,099
                                                                   ======

      Other intangible  assets activity for the year ended December 31, 2005 was
as follows:

                                                                  (dollars
                                                                in thousands)
                                                                -------------
                                                                     2005
                                                                  -------
Beginning balance, net of accumulated amortization of $567         $  221
Additions                                                          $  117
Amortization                                                          (92)
                                                                   ------
   Ending balance                                                  $  246
                                                                   ======

      Amortization expense of capitalized and purchased software costs and other
intangible assets was $92,000 and $117,000 for the years ended December 31, 2005
and 2004, respectively.  The weighted-average amortization period of capitalized
and purchased software costs as of December 31, 2005 was 5.3 years.


                                      F-19
<PAGE>

      As of December 31, 2005, the Company estimated future amortization expense
of capitalized patents and software for the next five years to be:

                                 (IN THOUSANDS)
                                 -------------
                        2006          $583
                        2007           544
                        2008           519
                        2009           450
                        2010           431

      The Company  performed its annual test for  impairment  on its  intangible
assets and  goodwill.  As a result of these  tests,  the Company  recognized  an
impairment of $335,000 on its capitalized patent costs. For the other intangible
assets and goodwill, no impairment existed as of December 31, 2005.

6. ALLOWANCE FOR DOUBTFUL ACCOUNTS AND INVENTORY RESERVE

      Allowance for doubtful  accounts  activity for the year ended December 31,
2005 was as follows:

                                           (dollars
                                         in thousands)
                                         -------------
                                              2005
                                             -----
Beginning balance                            $  46
Bad debt                                       205
Write-off of uncollectible accounts            (48)
                                             -----
Ending balance                               $ 203
                                             =====

      Inventory reserve for the year ended December 31, 2005 was $0.

7. FINANCING AGREEMENTS

         As of December  31, 2005 and 2004,  NeoMedia  was party to a commercial
financing  agreement  with GE Access  that  provides  short-term  financing  for
certain  computer  hardware  and software  purchases.  This  arrangement  allows
NeoMedia  to re-sell  high-dollar  technology  equipment  and  software  without
committing cash resources to financing the purchase.  Due to the discontinuation
of the NCIS business unit during the first quarter of 2006,  NeoMedia expects to
terminate the agreement  during 2006.  There were no amounts  payable under this
agreement as of December 31, 2005.

8. NOTES PAYABLE

         On March 30, 2005,  NeoMedia borrowed from Cornell the principal amount
of  $10,000,000  before  discounts and fees in the form of a secured  promissory
note.  Cornell  withheld  structuring  and escrow fees of $68,000 related to the
note. The note was originally scheduled to be repaid at a rate of $1,120,000 per
month  commencing May 1, 2005,  which was  subsequently  changed to $840,000 per
month,  continuing  until  principal  and  interest  are paid in full.  The note
accrues interest at a rate of 8% per annum on any unpaid principal. NeoMedia has
the  option  to  prepay  any  remaining  principal  of the note in cash  without
penalty.  In  connection  with the note,  NeoMedia  and Cornell  entered  into a
Security  Agreement under which the note is secured by all of NeoMedia's  assets
other  than  its  patents  and  patent  applications.   NeoMedia  also  escrowed
25,000,000 shares of its restricted common stock as security for the note. As of
December  31,  2005,  NeoMedia  had made  payments  of  $7,000,000  against  the
principal,  reducing the principal balance to $3,000,000.  During February 2006,
NeoMedia  satisfied  the  remaining  principal  plus interest due on the note in
connection with its $27 million convertible preferred stock sale to Cornell (see
"subsequent events").


                                      F-20
<PAGE>
         On August 6, 2004,  NeoMedia  borrowed from Cornell the gross amount of
$2,000,000  before  discounts  and fees.  Cornell  withheld  $153,000  as a fee.
NeoMedia paid this note in full during 2004.

         On July 2, 2004,  NeoMedia  borrowed  from  Cornell the gross amount of
$1,000,000  before  discounts  and  fees.  Cornell  withheld  $76,000  as a fee.
NeoMedia paid this note in full during 2004.

         On April 8, 2004,  NeoMedia  borrowed  from Cornell the gross amount of
$1,000,000  before  discounts  and  fees.  Cornell  withheld  $76,000  as a fee.
NeoMedia paid this note in full during 2004.

         On January 20, 2004, NeoMedia borrowed from Cornell the gross amount of
$4,000,000 before discounts and fees. Of the $4,000,000 funding,  $2,500,000 was
used to fund the  acquisition of CSI  International,  Inc. during February 2004.
Cornell withheld $315,000 as a fee. NeoMedia paid this note in full during 2004.
In  connection  with this note,  NeoMedia  also  granted  to Cornell  40,000,000
warrants to purchase  shares of NeoMedia  stock with an exercise  price of $0.05
per share. In April 2004,  NeoMedia  registered 40 million shares underlying the
warrants  granted to Cornell (and  subsequently  transferred by Cornell to Stone
Street  Asset  Management  LLC).  The  fair  value  of the  warrants  using  the
Black-Scholes  pricing  model  was  $5,000,000.   In  accordance  with  APB  14,
"Accounting for Convertible Debt and Debt Issued with Stock Purchase  Warrants",
NeoMedia compared the relative fair values of the warrants and the face value of
the notes,  and allocated a value of $2.5 million to the  warrants.  Of the $2.5
million,  $2 million was allocated to the $4 million note issued in January 2004
and $0.5 million against the $1 million note in April 2004. The $2.5 million was
recorded as a discount  against the carrying value of the note. The $2.5 million
that was  allocated  to the notes was  considered  a discount on the  promissory
notes,  and  therefore  was  amortized  over the  life of the  notes  using  the
effective interest method, in accordance with Staff Accounting  Bulletin No. 77,
Topic  2.A.6,  "Debt  Issue  Costs"  of  SFAS  141,   "Business   Combinations".
Accordingly, NeoMedia recorded an amortization of discount of $2,500,000 related
to the  warrants  during the year ended  December31,  2004.  Stone  Street Asset
Management LLC exercised the warrants  during  November  2004,  resulting in net
funds to NeoMedia of $2 million.

9. CONCENTRATIONS OF CREDIT RISK

      Financial  instruments that potentially subject NeoMedia to concentrations
of credit risk consist  primarily of trade accounts  receivable  with customers.
NeoMedia  extends  credit to its customers as determined on an individual  basis
and has included an allowance for doubtful  accounts of $203,000 in its December
31, 2005 consolidated balance sheet.

10. 2000 EXECUTIVE INCENTIVE

         During the year ended  December  31,  2004,  the  Company  satisfied  a
portion of its 2000 accrued executive incentive  obligation through the issuance
of common  stock to current and former  employees  who had  participated  in the
plan.  The Company  relieved  $160,000 of the liability  through the issuance of
approximately  1.5 million  shares  during the year ended  December 31, 2004. No
payments in cash or stock were made against this incentive during the year ended
December 31, 2005.  The excess of the fair value of the common stock issued over
the   outstanding   accrued   bonuses  was   included  in  the  gain  (loss)  on
extinguishment of debt.


                                      F-21
<PAGE>
11. COMPREHENSIVE LOSS

      Comprehensive  loss  consists  of net income  (loss)  and other  gains and
losses affecting  shareholders'  investment  that,  under accounting  principles
generally accepted in the United States,  are excluded from net income.  Changes
in the components of other comprehensive loss are as follows:

                                                   2005
                                                  -----
Beginning balance                                 $ (60)
Subtractions:
  Unrealized loss on marketable securities         (146)
Additions:
   Foreign currency translation adjustment           29
                                                  -----
Ending Balance                                    $(177)
                                                  =====

12. INCOME TAXES

      For the years ended  December 31, 2005 and 2004,  the components of income
tax expense were as follows:

                                           2005             2004
                                         -------          -------
                                                (In thousand)
Current                                  $    --          $    --
Deferred                                      --               --
Foreign                                       --               --
                                         -------          -------
   Income tax expense/(benefit)          $    --          $    --
                                         =======          =======

      As of  December  31,  2005 and 2004,  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:

                                                             2005        2004
                                                          --------    --------
                                                                (In thousand)
Provisions for doubtful accounts                          $    102    $     18
Capitalized software development costs and fixed assets        881         799
Net operating loss carryforwards (NOL)                      33,157      30,319
Accruals                                                       738         501
Write-off of long-lived assets                               2,516       2,070
State taxes                                                    151         156
Alternative minimum tax credit carryforward                     45          45
                                                          --------    --------
Total deferred tax assets                                   37,590      33,908
Valuation Allowance                                        (37,590)    (33,908)
                                                          --------    --------
   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  allowance has been established
against them.


                                      F-22
<PAGE>
      For the years ended  December  31,  2005 and 2004,  the income tax benefit
differed from the amount computed by applying the statutory  federal rate of 34%
as follows:

                                               2005              2004
                                            -------           -------
                                                  (In thousands)
Benefit at federal statutory rate           $(3,150)          $(2,458)
State income taxes, net of federal             (367)             (286)
Permanent and other, net                       (166)             (582)
Change in valuation allowance                 3,683             3,326
                                            -------           -------
   Income tax expense/(benefit)             $    --           $    --
                                            =======           =======

      As of December 31, 2005, NeoMedia had net operating loss carryforwards for
federal tax purposes  totaling  approximately  $80 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, NeoMedia anticipates that the
annual usage of its pre-1998 net operating loss carryforwards  should be further
restricted  pursuant to the  provisions  of Section 382 of the Internal  Revenue
Code.

13. TRANSACTIONS WITH RELATED PARTIES

     On November 1, 2005,  NeoMedia  acquired a used automobile for $17,000 from
Charles T. Jensen,  its President,  Chief Executive  Officer and a member of its
board of directors.

14. 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, 2005 and 2004,  NeoMedia's  rent  expense was  $303,000 and
$229,000, respectively.

      NeoMedia is party to various  payment  arrangements  with its vendors that
call for fixed  payments  on past due  liabilities.  NeoMedia  is also  party to
various consulting agreements that carry payment obligations into future years.

      The  following  is  a  schedule  of  the  future  minimum  payments  under
non-cancelable operating leases in effect as of December 31, 2005:

                                    PAYMENTS
                                 (IN THOUSANDS)
                                 --------------
                      2006             330
                      2007             340
                      2008             134
                Thereafter              --
                                      ----
                   Total              $804
                                      ====

      As of  December  31,  2005,  none of the  Company's  employees  were under
contract.  As of December 31, 2005, the Company was a party to various long-term
consulting agreements that are required to be paid in cash.


                                      F-23
<PAGE>
      NeoMedia does not carry any product liability insurance on its Micro Paint
Repair product line.

LEGAL PROCEEDINGS

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

     SCANBUY, INC.

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

     On April 20,  2004,  NeoMedia  re-filed  its suit  against  Scanbuy  in the
Southern  District of New York alleging patent  infringement.  Scanbuy filed its
answer on June 2, 2004.  NeoMedia filed its answer and  affirmative  defenses on
July 23, 2004. Discovery is ongoing.

         OTHER LITIGATION

      On May 2, 2005, three shareholders of BSD Software, Inc. filed a complaint
against BSD and NeoMedia,  claiming  that the purchase  price as outlined in the
purchase  agreement  between  NeoMedia  and BSD is too low. The  plaintiffs  are
seeking unspecified  damages and injunctive relief against the merger.  NeoMedia
has moved to dismiss the complaint as frivolous. The case is still pending.

      On October  19,  2005,  Wachovia  Bank,  N.A.  filed a  complaint  against
NeoMedia in the twentieth judicial circuit court of Lee County, Florida, seeking
payment  of  $97,000  of rent from  previous  years.  NeoMedia  has  placed  the
requested funds into escrow with the court, pending resolution of the matter.

15. 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.

16. STOCK OPTIONS AND WARRANTS

      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.


                                      F-24
<PAGE>
      Effective  March 27,  1998,  NeoMedia  adopted the 1998 Stock  Option Plan
making  available  for grant to employees of NeoMedia  options to purchase up to
8,000,000  shares of NeoMedia's  common stock. The stock option committee of the
board of  directors  has the  authority  to  determine  to whom  options will be
granted, the number of options, the related term, and exercise price. The option
exercise  price may be less than the fair market  value per share of  NeoMedia's
common stock on the date of grant. Options generally vest 20% upon grant and 20%
per year thereafter. The options expire ten years from the date of grant.

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

     Effective  September 24, 2003, NeoMedia adopted its 2003 Stock Option Plan.
The 2003 Stock Option Plan  provides for authority for the Board of Directors to
the grant  non-qualified  stock options with respect to a maximum of 150,000,000
shares of common  stock.  The  option  exercise  price may be less than the fair
market value per share of NeoMedia's  common stock on the date of grant, and may
be granted with any vesting schedule as approved by the stock option  committee.
On October  17,  2003,  NeoMedia  filed a Form S-8 to register  all  150,000,000
shares underlying the options in the 2003 Stock Option Plan.

     Effective  December 16, 2005,  NeoMedia adopted its 2005 Stock Option Plan.
The 2005 Stock Option Plan  provides for authority for the Board of Directors to
the grant  non-qualified  stock  options with respect to a maximum of 60,000,000
shares of common  stock.  The  option  exercise  price may be less than the fair
market value per share of NeoMedia's  common stock on the date of grant, and may
be granted with any vesting schedule as approved by the stock option  committee.
As of December  31, 2005,  NeoMedia has not  registered  the  60,000,000  shares
underlying the options in the 2005 Stock Option Plan.


                                      F-25
<PAGE>
                                            2005                2004
                                     -----------------   ------------------
                                              WEIGHTED             WEIGHTED
                                              AVERAGE              AVERAGE
                                              EXERCISE             EXERCISE
                                     SHARES    PRICE     SHARES     PRICE
                                     ------   --------   ------    --------
Outstanding at beginning of year     52,804   $  0.06    33,512    $  0.23
Granted                              58,510   $  0.28    32,752    $  0.10
Exercised                            (7,954)  $  0.11   (12,860)   $  0.23
Forfeited                            (3,319)  $  0.22      (600)   $  0.09
                                    -------   -------   -------    -------
   Outstanding at end of year       100,041   $  0.18    52,804    $  0.06
                                    =======   =======   =======    =======

Options exercisable at year-end      53,952              34,680

Weighted-average fair value
   of options granted during
   the year                           $0.28               $0.10

Available for grant at the
   end of the year                   26,682              81,873


      The following table summarizes  information about NeoMedia's stock options
outstanding as of December 31, 2005:

<TABLE>
<CAPTION>
                               Options Outstanding                                        Options Exercisable
   ------------------------------------------------------------------------------      --------------------------
                                                                        WEIGHTED-                       WEIGHTED-
                                                                         AVERAGE                         AVERAGE
      RANGE OF            NUMBER            WEIGHTED-AVERAGE            EXERCISE          NUMBER        EXERCISE
   EXERCISE PRICES     OUTSTANDING      REMAINING CONTRACTUAL LIFE        PRICE        EXERCISABLE        PRICE
   ---------------     -----------      --------------------------      ---------      -----------      ---------
     $-- to $0.10          29,744               7           years       $    0.02          29,537       $    0.02
     0.11 to 0.20          16,091               8           years       $    0.11           7,341       $    0.11
     0.21 to 0.30          29,575               9           years       $    0.24          10,900       $    0.24
     0.31 to 0.40          22,200               9           years       $    0.33           5,550       $    0.33
     0.41 to 0.50           2,410               9           years       $    0.41             603       $    0.41
    0.51 to 7.000              21               3           years       $    6.89              21       $    6.89
    -------------       ---------       ---------       ---------       ---------       ---------       ---------
    <S>                   <C>                   <C>                     <C>                <C>          <C>
    $-- to $7.000         100,041               8           years       $    0.18          53,952       $    0.12
    =============       =========       =========       =========       =========       =========       =========
</TABLE>


                                      F-26
<PAGE>
      During the years  ended  December  31,  2005 and 2004,  NeoMedia  made the
following option grants:

<TABLE>
<CAPTION>
                                               2005                                         2004
                             ---------------------------------------       ---------------------------------------
                                  RANGE OF           OPTIONS GRANTED           RANGE OF           OPTIONS GRANTED
        RECIPIENTS            EXERCISE PRICES         (In thousands)       EXERCISE PRICES         (In thousands)
------------------------     ----------------       ----------------       ----------------       ----------------
<S>                          <C>                              <C>          <C>                              <C>
Employees                    $0.227 to $0.516                 51,010       $0.062 to $0.128                 23,290
Non-employee directors       $0.239 to $0.328                  6,500       $0.010 to $0.075                  3,357
Non-employees                $          0.239                  1,000       $0.025 to $0.100                  6,105
                             ----------------       ----------------       ----------------       ----------------
   Total                     $0.227 to $0.516                 58,510       $0.010 to $0.128                 32,752
                             ----------------       ----------------       ----------------       ----------------
</TABLE>

OPTION-RELATED EXPENSE

      In January 2004,  the Company  issued 50,000  options to buy shares of the
Company's  common stock to an outside  consultant at a price of $0.025 per share
for consulting  services rendered to the Company.  The Company recognized $7,000
in general and administrative expense in the accompanying consolidated financial
statements for the year ended December 31, 2004.

      During the period  January  through June 2004,  the Company issued 106,674
options to buy shares of the Company's common stock to James J. Keil, an outside
director,  at a price of $0.01 per share for consulting services rendered to the
Company  during  that  time.  The  Company  recognized  $9,000  in  general  and
administrative expense in the accompanying consolidated financial statements for
the year ended December 31, 2004.

      In February 2004, the Company  issued  5,555,556  options to buy shares of
the  Company's  common stock to an outside  consultant,  at a price of $0.01 per
share for  consulting  services  rendered to the  Company's  Micro Paint  Repair
business  over a period of three  years from the date of  issuance.  The Company
recorded $550,000 as deferred stock compensation at the time of issuance, and is
recognizing  this  amount  over the  period of the  contract.  Accordingly,  the
Company  recognized  $182,000  in  general  and  administrative  expense  in the
accompanying  consolidated  financial statements for the year ended December 31,
2004.

      In February 2005, the Company  issued  1,000,000  options to buy shares of
the  Company's  common stock to two outside  consultants  with a strike price of
$0.239 per share for  consulting  services to be rendered to the Company  over a
two-year period. The Company  recognized  $103,000 in general and administrative
expense in the accompanying consolidated financial statements for the year ended
December 31, 2005.

         For the years ended  December 31, 2005 and 2004,  total  option-related
expense was $334,000 and $805,000, respectively.


                                      F-27
<PAGE>


WARRANTS

      Warrant activity as of December 31, 2005 and 2004 was as follows:

                                                              WEIGHTED AVERAGE
                                                               EXERCISE PRICE
                                                              ----------------
Warrants Outstanding as of December 31, 2003     26,195,000     $      0.38
     Warrants issued                             44,150,000     $      0.06
     Warrants exercised                         (51,510,000)    $      0.05
     Warrants expired                               (10,000)    $      6.54
                                                -----------     -----------

Warrants Outstanding as of December 31, 2004     18,825,000     $      0.52
     Warrants issued                             54,000,000     $      0.20
     Warrants exercised                             (50,000)    $      0.10
     Warrants expired                            (1,400,000)    $      6.00
                                                -----------     -----------

Warrants Outstanding as of December 31, 2005     71,375,000     $      0.17
                                                ===========     ===========

      The following table summarizes  information about warrants  outstanding at
December 31, 2005, all of which are exercisable:

                                                WEIGHTED-           WEIGHTED-
                                                 AVERAGE             AVERAGE
      RANGE OF             WARRANTS             REMAINING           EXERCISE
  EXERCISE PRICES         OUTSTANDING       CONTRACTUAL LIFE          PRICE

   $--- to $0.05            13,050,000        2.5     years           $0.01
    0.06 to 0.23            58,100,000        2.4     years           $0.20
    0.24 to 3.56               225,000        2.6     years           $3.47
---------------------    --------------    ------- ------------    ------------
   $--- to $6.00            71,375,000        2.5     years           $0.17
=====================    ==============    ======= ============    ============

      During January 2004, the Company granted to Cornell 40,000,000 warrants to
purchase  shares of NeoMedia stock with an exercise price of $0.05 per share, as
consideration  for the issuance of two promissory  notes by Cornell to NeoMedia.
The first  note was for a face  amount of $4  million  and was issued in January
2004;  the second was for a face amount of $1 million  issued in April 2004. The
fair value of the warrants using the Black/Scholes pricing model was $5 million.
In accordance with APB 14, "Accounting for Convertible Debt and Debt Issued with
Stock Purchase  Warrants",  the Company compared the relative fair values of the
warrants and the face value of the notes,  and allocated a value of $2.5 million
to the warrants. Of the $2.5 million, $2 million was allocated to the $4 million
note issued in January  2004 and $0.5  million  against  the $1 million  note in
April 2004.  The $2.5  million was  recorded as a discount  against the carrying
value  of the  note.  The  $2.5  million  that  was  allocated  to the  notes is
considered a discount on the promissory  notes, and therefore was amortized over
the life of the notes using the effective  interest  method,  in accordance with
Staff Accounting  Bulletin No. 77, Topic 2.A.6,  "Debt Issue Costs" of SFAS 141,
"Business  Combinations".  Accordingly,  the Company recorded an amortization of
discount of $2,500,000  related to the warrants  during the year ended  December
31, 2004.  The warrants  were  subsequently  assigned by Cornell to Stone Street
Asset  Management LLC. Stone Street Asset  Management LLC exercised the warrants
during November 2004, resulting in net funds to NeoMedia of $2 million.


                                      F-28
<PAGE>

      During  February 2004, the Company  granted  150,000  warrants to purchase
shares of NeoMedia  common stock at an exercise  price of $0.102 per share to an
outside consultant.  The Company recognized  approximately $15,000 in expense in
the 2004  consolidated  financial  statements  relating to the warrant issuance.
During February 2005, the holder exercised 50,000 of the warrants,  resulting in
proceeds  of  $5,100  to  NeoMedia.  The  remaining  100,000  warrants  were not
exercised as of December 31, 2005.

      During  March 2004,  the Company  granted  4,000,000  warrants to purchase
shares of NeoMedia  common  stock at an exercise  price of $0.11 per share to an
outside  consultant  as a finder fee related to financing  received by NeoMedia.
The Company charged the fair value of the warrants of $440,000 as a reduction to
capital accounts. The warrants were not exercised as of December 31, 2005.

     During March 2005, in connection  with the signing of the $100 million SEDA
with Cornell,  NeoMedia  issued 50 million  warrants to Cornell with an exercise
price of $0.20 per  share,  and 4 million  warrants  with an  exercise  price of
$0.229 to an independent  third party as a fee for  negotiating  and structuring
the SEDA. The Company charged the fair value of the warrants of $12.3 million to
"Deferred  equity  financing  costs."  20 million  warrants  were  exercised  in
February 2006, generating $4 million cash proceeds to NeoMedia.

      During  October 2005,  1.4 million  outstanding  warrants with an exercise
price of $6.00 per share expired.

17. SEGMENT AND GEOGRAPHICAL 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.

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



                                      F-29
<PAGE>
      Operational  results for the three  segments for the years ended  December
31, 2005 and 2004 are presented below:

<TABLE>
<CAPTION>
                                                                         ------------------------
                                                                               (in thousands)
                                                                         ------------------------
                                                                         YEARS ENDED DECEMBER 31,
                                                                         ------------------------
                                                                            2005            2004
                                                                         --------        --------
NET SALES:
<S>                                                                      <C>             <C>
                        NeoMedia Consulting & Integration Services       $    633        $    910
                        NeoMedia Internet Switching Service                   244              63
                        NeoMedia Micro Paint Repair                         1,279             727
                                                                         --------        --------
                                                                         $  2,156        $  1,700
                                                                         --------        --------

NET LOSS:
                        NeoMedia Consulting & Integration Services       ($ 1,548)       ($   343)
                        NeoMedia Internet Switching Service                (2,020)         (1,312)
                        NeoMedia Micro Paint Repair                        (1,615)           (960)
                        Amortization of Cornell Debt Discount                  --          (2,500)

                        Corporate overhead                                 (3,964)         (2,115)
                                                                         --------        --------
                                                                         ($ 9,147)       ($ 7,230)
                                                                         --------        --------

IDENTIFIABLE ASSETS
                        NeoMedia Consulting & Integration Services       $    139
                        NeoMedia Internet Switching Service                 3,300
                        NeoMedia Micro Paint Repair                         3,675
                        Corporate                                           5,297
                                                                         --------
                                                                           12,411
                                                                         --------
</TABLE>


                                      F-30
<PAGE>
      Consolidated  net sales,  net operating  losses by geographic area for the
years ended December 31, 2005 and 2004,  and long-lived  assets by geographic as
of December 31, 2005, were as follows:

                                        (in thousands)
                                  -------------------------
                                    YEAR ENDED DECEMBER 31,
                                  -------------------------
                                     2005              2004
                                  -------           -------
NET SALES:
           United States          $ 1,445           $ 1,063
           Canada                     711               637
                                  -------           -------
                                  $ 2,156           $ 1,700
                                  -------           -------

NET LOSS:
           United States          ($8,250)          ($6,516)
           Canada                    (897)             (714)
                                  -------           -------
                                  ($9,147)          ($7,230)
                                  -------           -------

LONG-LIVED ASSETS
           United States          $ 4,658
           Canada                   2,775
                                  -------
                                  $ 7,433
                                  -------

18. COMMON STOCK

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

     On September  24, 2003,  the Company's  shareholders  voted to increase the
number of shares of common stock, par value $0.01 per share, that the Company is
authorized to issue from 200,000,000 to 1,000,000,000.

     On March 30,  2005,  NeoMedia  and Cornell  entered  into a Standby  Equity
Distribution  Agreement (the "2005 SEDA") under which Cornell agreed to purchase
up to $100  million of NeoMedia  common stock over a two-year  period,  with the
timing and amount of the purchase at NeoMedia's  discretion.  The maximum amount
of each  purchase  would be  $2,000,000  with a minimum  of five  business  days
between  advances.  The shares would be valued at 98% of the lowest  closing bid
price during the five-day period  following the delivery of a notice of purchase
by NeoMedia, and NeoMedia would pay 5% of the gross proceeds of each purchase to
Cornell.  Concurrent with the SEDA,  NeoMedia  entered into an escrow  agreement
with  Cornell  and an escrow  agent,  under  which the escrow  agent holds in an
escrow account shares of NeoMedia common stock, and the cash paid by Cornell for
such shares,  issued pursuant to an advance under the SEDA. The shares and funds
can only be released  upon receipt by the escrow  agent of a joint  disbursement
instruction  signed  by  NeoMedia  and  Cornell.  NeoMedia  expects  to  file  a
registration  statement with the SEC to register the shares  underlying the 2005
SEDA.  The 2005  SEDA  would  become  available  at the  time  the SEC  declares
effective a registration statement containing such shares.


                                      F-31
<PAGE>
         For the year ended December 31, 2005,  NeoMedia  granted 393,931 shares
as incentive and sign on bonuses to new hires. Accordingly,  NeoMedia recognized
expense of $125,000 for these issuances.

19. PREFERRED STOCK

         As of December 31, 2005, the Company's Preferred Stock was comprised of
25,000,000  shares,  par value  $0.01 per  share,  of which  200,000  shares are
designated as Series A Preferred Stock, none of which are issued or outstanding.
Additionally,  47,511 shares are  designated  as Series A Convertible  Preferred
Stock,  none of which  are  issued  and  outstanding,  and  100,000  shares  are
designated as Series B 12% Convertible Redeemable Preferred Stock, none of which
are issued and  outstanding.  In February 2006,  NeoMedia issued  $27,000,000 of
Series C Preferred Shares. See subsequent events for further information.

20. SUBSEQUENT EVENTS

WINDING DOWN OF NCIS BUSINESS UNIT

      On February 9, 2006, NeoMedia decided to wind down its NCIS business unit.
NeoMedia has  re-allocated  certain of the  resources  associated  with the NCIS
business   unit  to  NeoMedia   Mobile   business.   In   connection   with  the
discontinuation of the NCIS business unit,  NeoMedia closed its Lisle, IL office
during  February  2006.  NeoMedia  does,  however,  plan to  continue  servicing
existing  contracts and  customers.  As of December 31, 2005, the business units
had $633,000 in net sales, a net loss of $1,548,000 and  identifiable  assets of
$139,000.

FINANCING:

WARRANT EXERCISES

         On February 9, 2006, Cornell exercised warrants to purchase  20,000,000
shares of NeoMedia  common stock,  par value $0.01 per share.  The warrants were
issued to Cornell  Capital on March 30,  2005 as a  commitment  fee for  Cornell
Capital entering into that certain Standby Equity Distribution Agreement,  dated
March 30, 2005 by and between NeoMedia and Cornell Capital.  The warrants had an
exercise price equal to $0.20 per share.  In connection with the exercise of the
20,000,000 Warrants, NeoMedia received proceeds of $4,000,000.

$27 MILLION PREFERRED STOCK SALE

     On February 17, 2006,  NeoMedia  entered into an investment  agreement with
Cornell  Capital  Partners,  LP,  pursuant to which NeoMedia  issued and sold to
Cornell  Twenty-Seven  Million  Dollars (US  $27,000,000)  of Series C Preferred
Shares (the "Series C Preferred Shares"), of which (i) Three Million Two Hundred
Eight Thousand Seven Hundred Two Dollars  ($3,208,702) were purchased by Cornell
for  consideration  solely  consisting of surrendering  that certain  Promissory
Note,  dated  March 30,  2005 in the  original  principal  amount of Ten Million
Dollars (US  $10,000,000)  issued in the name of Cornell,  (ii) Eighteen Million
Seven  Hundred  Ninety-One  Thousand  Two  Hundred   Ninety-Eight   Dollars  (US
$18,791,298) were purchased by additional funding  (consisting of $16,791,298 of
immediately  available  funds and $2,000,000 of  securities)  from Cornell as of
February  17,  2006,  and (iii) Five Million  Dollars (US  $5,000,000)  shall be
purchased  by an  additional  funding  by  Cornell  on the  date a  registration
statement  filed by the Company  pursuant to the terms of that certain  Investor
Registration  Rights  Agreement,  dated  February  17,  2006 by and  between the
Company and Cornell is declared  effective by the U.S.  Securities  and Exchange
Commission.  The Series C Preferred  Shares are  convertible  into shares of the
Company's  common stock,  par value $0.01 per share in accordance with the terms
of the  Company  Certificate  of  Designations,  Preferences,  and Rights of the
Series C Preferred Shares.


                                      F-32
<PAGE>

     Some of the material  characteristics  of the Series C Preferred shares are
as follows:

            -     The shares accrue dividends at a rate of 8% per annum

            -     The  shares  receive  proceeds  of $1,000  per share  upon the
                  Company's liquidation, dissolution or winding up

            -     Each Series C Convertible  Preferred Share is convertible,  at
                  the option of the holder,  into shares of the Company's common
                  stock at the lesser of (i) Fifty Cents  ($0.50) or (ii) 97% of
                  the lowest closing bid price of the Company's common stock for
                  the thirty (30) trading days immediately preceding the date of
                  conversion.

            -     The shares have voting rights on an as converted basis

            -     Pursuant to the registration  rights  agreement,  in the event
                  that  NeoMEdia  does not file a  registration  to register the
                  common shares underlying the convertible preferred,  or if the
                  registration  is not  declared  effective  within  180 days of
                  filing of such  registration  statement,  then the  shares wil
                  accrue  liquidated  damages  in the  amount  of 1% of the face
                  value of the  convertible  instrument per month,  with a total
                  not to exceed $1.2 million

     In addition, pursuant to the terms of the Investment Agreement, the Company
issued to Cornell (i) a warrant to purchase twenty million  (20,000,000)  shares
of  NeoMedia  common  stock  exercisable  for a period of 5 years at an exercise
price of $0.50  per  share;  (ii) a  warrant  to  purchase  twenty-five  million
(25,000,000)  shares of common stock  exercisable  for a period of 5 years at an
exercise  price of $0.40  per  share;  and (iii) a warrant  to  purchase  thirty
million  (30,000,000) shares of common stock exercisable for a period of 5 years
at an exercise price of $0.35 per share.

     On February 17, 2006,  the Company and Cornell  entered into an  Assumption
Agreement,  whereby  Cornell  sold and  assigned  to the Company  those  certain
Promissory  Notes  issued by Pick Ups Plus,  Inc.,  dated  September  30,  2003,
October 13, 2004,  June 6, 2005, and August 4, 2005, in the aggregate  principal
amount of $1,365,000 and accrued  interest of  $246,231.78  for a purchase price
equal to One Million Six Hundred Eleven Thousand Two Hundred  Thirty-One Dollars
and 78/100 (US $1,611,231.78).

     On February 17, 2006, the Company and Cornell entered into an Assignment of
Common Stock,  whereby  Cornell sold and assigned to the Company  twenty million
(20,000,000)  shares of common  stock,  par value $0.001 per share,  of Pick Ups
Plus,  Inc. for a purchase  price equal to Three Hundred  Eighty-Eight  Thousand
Seven Hundred Sixty-Eight Dollars and 22/100 (US $388,768.22).


                                      F-33
<PAGE>
ACQUISITIONS:

ACQUISITION OF MOBOT, INC.

     On  February  9,  2006,  NeoMedia  and  Mobot.   (www.mobot.com)  signed  a
definitive merger agreement under which NeoMedia acquired all of the outstanding
shares of Mobot in exchange  for  $3,500,000  cash and  $6,500,000  in shares of
NeoMedia  common stock.  The  $6,500,000  stock portion of the purchase price is
represented  by  16,931,493  shares of  NeoMedia  common  stock,  calculated  by
dividing  $6,500,000 by the  volume-weighted  average  closing price of NeoMedia
common stock for the ten day up to and  including  February 8, 2006. On February
17,  2006,  NeoMedia  and  Mobot  completed  the  closing  requirements  and the
acquisition became effective.

     Mobot is a pioneer in visual search and recognition  technology designed to
make marketing  effective and innovative using mobile devices.  Launched in 2004
to help companies cultivate rewarding relationships with the world's 1.5 billion
mobile phone users,  Mobot gives marketers,  content  providers and carriers the
tools to make it easy for any  consumer  with a camera  phone to  interact  with
their offerings.

ACQUISITION OF 12SNAP AG

     On February 10, 2006,  NeoMedia and 12Snap AG of Munich signed a definitive
sale and purchase agreement under which NeoMedia acquired all of the outstanding
shares of 12Snap in exchange for  $2,500,000  cash and  $19,500,000 in shares of
NeoMedia common stock.  The  $19,500,000  stock portion of the purchase price is
represented  by  49,294,581  shares of  NeoMedia  common  stock,  calculated  by
dividing  $19,500,000 by the  volume-weighted  average closing price of NeoMedia
common stock for the ten day up to and  including  February 9, 2006. On February
28,  2006,  NeoMedia  and 12Snap  completed  the  closing  requirements  and the
acquisition became effective.

     12snap AG is a non-public incorporated company headquartered in Munich with
branches in Dusseldorf,  New York,  London,  Milan,  Stockholm and Vienna. As an
expert in  innovative  marketing and  entertainment  for mobile  phones,  12snap
combines know-how in mobile  applications,  mobile loyalty and mobile marketing.
In the mobile  marketing  space,  12snap  creates and  implements  national  and
pan-European  mobile marketing  campaigns for international  brands;  its mobile
loyalty business unit offers customer loyalty programs for companies and brands,
and its mobile  applications  business  unit is the center for  development  and
software.  12snap  sells and  licenses a wide  spectrum of mobile  solutions  to
satisfy the demands of the current  growing market and the new uses of the third
mobile phone  generation  from dynamic video services and  multiplayer  games to
personalized messaging  applications.  12snap has 75 employees,  and services to
companies including  McDonald's,  MTV(R),  Coca-Cola,  Ferrero,  Wella,  adidas,
Unilever and Gillette(R).

LETTER OF INTENT TO ACQUIRE HIP CRICKET

     On February 16, 2006,  NeoMedia  signed a  non-binding  letter of intent to
acquire HipCricket,  Inc.  ("HipCricket") of Essex, CT  (www.hipcricket.com)  in
exchange for $500,000 cash and $4,000,000 of NeoMedia  common stock.  The letter
of intent is  subject to due  diligence  and  signing  of a  mutually  agreeable
definitive purchase agreement by both parties.

         In  addition  to  signing  the  LOI,  NeoMedia  loaned  HipCricket  the
principal amount of $500,000 in the form of two unsecured  promissory notes. The
notes  accrue  interest  at a rate of 8% per  annum.  The notes  will be applied
toward the cash  portion of the  purchase  price  upon  signing of a  definitive
purchase  agreement  for the  acquisition  of all of the  outstanding  shares of
HipCricket by NeoMedia, as contemplated the LOI. In the event the acquisition is
not consummated, the notes will become due 90 days after termination of the LOI.
In the event the LOI is  terminated  and the notes are not repaid within 90 days
of such  cancellation,  the notes will convert into shares of HipCricket  common
stock.


                                      F-34
<PAGE>
      HipCricket is a leading mobile  marketing  firm that provides  innovative,
custom solutions to broadcasters and brand  marketers.  Today,  HipCricket works
with five of the top 10 radio  groups in the U.S.  as well as with some 40 major
brand   marketers.   HipCricket   combines  senior   marketing   expertise  with
state-of-the-art  mobile  and  event  marketing  technologies  to offer  clients
unprecedented   interactivity  with  their  consumers,   viewers,  listeners  or
customers on a one-to-one personal level.

ACQUISITION OF GAVITEC AG

     On  February  17,  2006,  NeoMedia  and  Gavitec  AG of  Wurselen,  Germany
(www.gavitec.com)  signed a definitive  sale and purchase  agreement under which
NeoMedia  acquired  all of the  outstanding  shares of Gavitec in  exchange  for
$1,800,000  cash  and  $5,400,000  in  shares  of  NeoMedia  common  stock.  The
$5,400,000  stock  portion of the purchase  price is  represented  by 13,660,511
shares of  NeoMedia  common  stock,  calculated  by dividing  $5,400,000  by the
volume-weighted  average closing price of NeoMedia common stock for the ten days
up to and  including  February  16, 2006.  On February  23,  2006,  NeoMedia and
Gavitec completed the closing requirements and the acquisition became effective

     Gavitec was founded in 1997 as a specialized  provider and  manufacturer of
products and solutions for mobile marketing and mobile  information  technology.
As  a  technology  leader  in  code-reading  systems  and  software  for  mobile
applications, Gavitec offers its clients standardized or individual solutions in
the areas of mobile marketing,  mobile ticketing,  mobile couponing,  and mobile
payment systems.

ACQUISITION OF SPONGE LTD.

     On   February   20,   2006,   NeoMedia   and   Sponge   Limited  of  London
(www.spongegroup.com)  signed a definitive share purchase  agreement under which
NeoMedia  acquired  all of the  outstanding  shares of Sponge  in  exchange  for
(pound)3,450,000   (approximately   $6   million)   cash  and   (pound)6,550,000
(approximately   $11.4  million)  in  shareS  OF  NeoMedia  common  stock.   The
(pound)6,550,000   stock  portion  of  the  purchase  price  is  represented  by
29,696,745   shares  of   NeoMedia   common   stock,   calculated   by  dividing
(pound)6,550,000 by the volume-weighted average closing price of NeoMedia common
stock for the ten days up to and including  February 8, 2006. The agreement also
calls for  Sponge to earn an  additional  (pound)2,500,000  (approximately  $4.4
million) in the form of NeoMedia  common stock if,  during the  two-year  period
beginning at closing,  the Sponge  business earns in excess of  (pound)1,300,000
(approximately  $2.3 million) in net profits. On February 23, 2006, NeoMedia and
Sponge completed the closing requirements and the acquisition became effective.

         Founded  in 2001,  Sponge has grown to become a U.K.  market  leader in
providing mobile applications to agencies and media groups, and gain recognition
as one of  Europe's  top  independent  developers  of  mobile  applications  and
content.  Today,  Sponge counts more than 40 agencies,  including WPP, Aegis and
BBH,  as  clients,  and  supplies  services  for  over 100  world-class  brands,
including Coca Cola(R),  Heineken(R) and Diageo. Sponge also supplies a range of
mobile services to media groups,  including News International,  Trinity Mirror,
Endemol and IPC.


                                      F-35
<PAGE>
ACQUISITION OF BSD SOFTWARE, INC.

      On March 21, 2006,  NeoMedia  completed its  acquisition  of BSD Software,
Inc. of Calgary,  Alberta,  Canada.  BSD owns 90% of the  outstanding  shares of
Triton Global Business Services, Inc., a provider of live and automated operator
calling services and e-business  support,  including billing,  clearinghouse and
information   management  services,  to  companies  in  the   telecommunications
industry.  After  exchange  of shares  certificates,  NeoMedia  expects to issue
7,123,698  shares  of its  common  stock in  connection  with  the  acquisition.
(Unaudited).

         The  acquisitions  of BSD,  Mobot, 12Snap, Gavitec, and  Sponge are not
reflected in the 2005 consolidated financial statements.  The proforma financial
information  as  required  by SFAS  141,  "Business  Combinations"  has not been
presented as much information was not immediately  practically  attainable.  The
Company  plans to file a Form 8-K/A  relating to these  acquisitions  which will
include  the  historical  financial  statements  of the acquired  companies  and
the required proforma information.

JINCHE AGREEMENT

         On February  28, 2006,  NeoMedia  signed a 10-year  exclusive  supplier
agreement with Automart,  a Beijing-based joint venture operating under the laws
of the People's Republic of China  specializing in automobile sales,  financing,
insurance  and  repair.  Automart  is the  brand  name of  Jinche  Yingang  Auto
Technological  Services  Limited,  with  which  NeoMedia  signed a  distribution
agreement in August 2005. The new agreement  expands on the previous  agreement,
giving Automart the exclusive rights to distribute NeoMedia's micro paint repair
products to their own stores and others  throughout China, Hong Kong, Macao, and
Taiwan,  and also  guaranteeing  that Automart will purchase at least 70% of its
non-micro  paint  products  through  NeoMedia as its  distributor.  NeoMedia has
signed  distribution  agreements  with  DuPont and PPG,  and intends to become a
distributor of other automotive aftermarket products to Automart.


                                      F-36
<PAGE>
                                    PART III

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


DIRECTORS AND EXECUTIVE OFFICERS

         As of February 28, 2006,  NeoMedia's  directors and executive  officers
were:


NAME                    AGE     POSITION
-----------------       ---     ------------------------------------------------
Charles W. Fritz         49     Chairman of the Board of Directors
Charles T. Jensen        62     President, Chief Executive Officer and Director
David A. Dodge           31     Vice-President and Chief Financial Officer
Martin N. Copus          51     Chief Operating Officer
William E. Fritz         75     Director
James J. Keil            78     Director
A. Hayes Barclay         74     Director

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

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

     CHARLES T. JENSEN was Chief Financial Officer, Treasurer and Vice-President
of NeoMedia from 1996 through 2002.  Mr. Jensen has been a Director  since 1996,
and currently is a member of the Compensation Committee. During 2002, Mr. Jensen
was promoted to President,  Chief Operating Officer,  and Acting Chief Executive
Officer.  During August 2004, Mr. Jensen was made Chief Executive Officer. Prior
to joining NeoMedia in November 1995, Mr. Jensen was Chief Financial  Officer of
Jack M. Berry,  Inc., a Florida  corporation  which grows and  processes  citrus
products, from December 1994 to October 1995, and at Viking Range Corporation, a
Mississippi  corporation  which  manufactures gas ranges,  from November 1993 to
December 1994.  From December 1992 to February 1994, Mr. Jensen was Treasurer of
Lin Jensen,  Inc., a Virginia  corporation  specializing  in ladies clothing and
accessories.  Prior to that,  from  January 1982 to March 1993,  Mr.  Jensen was
Controller and Vice-President of Finance of The Pinkerton Tobacco Co., a tobacco
manufacturer.  Mr.  Jensen holds a B.B.A.  in accounting  from Western  Michigan
University and is a Certified Public Accountant.


                                     III-1
<PAGE>
     DAVID A. DODGE joined NeoMedia in 1999 as the Financial  Reporting Manager.
Since then, Mr. Dodge has acted as NeoMedia's Director of Financial Planning and
Controller,  and currently holds the title of Vice President and Chief Financial
Officer.  Prior to joining NeoMedia in 1999, Mr. Dodge was an auditor with Ernst
& Young  LLP  for 2  years.  Mr.  Dodge  holds a B.A.  in  economics  from  Yale
University  and an M.S. in accounting  from the  University of Hartford,  and is
also a Certified Public Accountant.

     MARTIN N. COPUS joined NeoMedia in March 2005 as COO and chief executive of
the NeoMedia  Mobile  business unit.  Prior to joining  NeoMedia,  Mr. Copus was
Managing  Director  of 12Snap  UK, an  internationally-acclaimed,  award-winning
mobile marketing company focusing on wireless channels, where he led development
and  implementation  of  interactive  marketing  programs  for  major  blue-chip
companies   including   McDonald's(R),    Kellogg(R),   Procter   &   Gamble(R),
Coca-Cola(R),  Safeway(R),  Budweiser(R),  and  20th  CenTuRY  Fox(R).  Prior to
running  the  U.K.   operations  of  12Snap,  Mr.  Copus's  background  included
assignments as executive  director of Huntsworth PLC, a marketing services group
listed on the main board of the London Stock Exchange;  Worldwide Board Director
of Interpublic  Group's Ammirati Puris Lintas  advertising unit; and senior vice
president of Leo Burnett Company Inc., Chicago,  responsible for its Marlboro(R)
USA  advertising  and  marketing  services  account.  Mr.  Copus holds a B.A. in
marketing and an M.A. in modern languages, both from Oxford University.

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

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

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


                                     III-2
<PAGE>

ELECTION OF DIRECTORS AND OFFICERS

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

MEETINGS OF THE BOARD OF DIRECTORS

     During  the year  ended  December  31,  2005,  NeoMedia  held 5  directors'
meetings and each incumbent director attended more than seventy-five  percent of
the total of meetings of the Board of Directors  and the  Committees of which he
is a member.  The Board of  Directors  also acted 7 times by  unanimous  written
consent.

COMMITTEES OF THE BOARD OF DIRECTORS

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

     AUDIT  COMMITTEE.   The  Audit  Committee  is  responsible  for  nominating
NeoMedia's  independent  accountants  for  approval  by the Board of  Directors,
reviewing the scope, results and costs of the audit with NeoMedia's  independent
accountants,  and  reviewing  the  financial  statements,  audit  practices  and
internal controls of NeoMedia.  During 2005, members of the Audit Committee were
non-employee  directors  James J. Keil and A. Hayes  Barclay.  During 2005,  the
Audit Committee held 4 meetings. Due to financial constraints,  the Company does
not currently  have an audit  committee  financial  expert  serving on its audit
committee.

     COMPENSATION  COMMITTEE.  The  Compensation  Committee is  responsible  for
recommending compensation and benefits for the executive officers of NeoMedia to
the Board of  Directors  and for  administering  NeoMedia's  Incentive  Plan for
Management. Charles W. Fritz, Charles T. Jensen, and James J. Keil, were members
of NeoMedia's Compensation Committee during 2005. The Compensation Committee met
once and acted by unanimous written consent 2 times during 2005.

     STOCK OPTION COMMITTEE.  The Stock Option Committee,  which is comprised of
non-employee directors, is responsible for administering NeoMedia's Stock Option
Plans.  A. Hayes Barclay and James J. Keil are the current members of NeoMedia's
Stock Option  Committee.  During 2005,  the Stock Option  Committee met once and
acted by unanimous written consent 7 times.

         DIRECTOR COMPENSATION

     Outside directors are currently  compensated  through the issuance of stock
options from the  Company's  stock option  plans.  During  February  2005,  each
outside director received 1,000,000 options with an exercise price of $0.239 per
share (equal to the closing price on the date of  issuance),  and James J. Keil,
the  audit and  compensation  committee  chairperson,  received  and  additional
1,000,000  options with the same exercise  price.  During  December  2005,  each
outside  director  received 750,000 options with an exercise price of $0.328 per
share (equal to the closing price on the date of  issuance),  and James J. Keil,
the  audit and  compensation  committee  chairperson,  received  and  additional
250,000 options with the same exercise  price.  NeoMedia does not have a written
compensation policy for its outside directors at this time.

CODE OF ETHICS

      The Company has adopted a code of ethics,  as required by the rules of the
SEC (attached as exhibit 10.53 to the Company's Form 10-KSB as filed on March 5,
2005). This code of ethics applies to all of the Company's  directors,  officers
and employees.  The code of ethics,  and any amendments to, or waivers from, the
code of ethics,  is available in print,  at no charge,  to any  shareholder  who
requests such information.


                                     III-3
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

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

    Based solely on a review of the copies of such forms  furnished to NeoMedia,
NeoMedia  believes  that  during  2005 all  Section  16(a)  filing  requirements
applicable to NeoMedia's  officers,  directors and ten percent beneficial owners
were complied with.


                                     III-4
<PAGE>
    ITEM 10.  EXECUTIVE COMPENSATION

         The following table sets forth certain  information with respect to the
compensation  paid to (i) NeoMedia's  Chief  Executive  Officer and (ii) each of
NeoMedia's other executive  officers who received aggregate cash compensation in
excess of $100,000 for services rendered to NeoMedia  (collectively,  "the Named
Executive Officers") during the years ended December 31, 2005 and 2004:

<TABLE>
<CAPTION>
                                         ANNUAL COMPENSATION                                    LONG-TERM COMPENSATION
                              -----------------------------------------      ------------------------------------------------------
                                                               OTHER                         SECURITIES
                                                               ANNUAL         RESTRICTED     UNDERLYING
                                                              COMPENS-          STOCK         OPTIONS/      LTIP       ALL OTHER
        NAME AND                        SALARY       BONUS      ATION          AWARD(S)       SARS(1)      PAYOUTS   COMPENSATION
   PRINCIPAL POSITION          YEAR      ($)          ($)        ($)            ($)             (#)          ($)         ($)
-----------------------       ------  ----------    -------  ----------      -----------   -------------  --------- ---------------

<S>                            <C>      <C>          <C>      <C>            <C>           <C>            <C>       <C>
Charles T. Jensen              2005     197,500        --        --              --          6,000,000        --
   President and Chief         2004     175,386        --        --              --          4,000,000        --        386(2)
   Executive Officer

Charles W. Fritz               2005   $ 205,278        --        --              --          6,000,000        --
   Chairman of the Board       2004     175,355        --        --              --          4,000,000        --        355(2)

David A. Dodge                 2005   $ 141,733        --        --              --          4,500,000        --
   Vice President and          2004     122,396        --        --              --          2,000,000        --         --
   Chief Financial
Officer

Martin N. Copus (3)            2005   $ 184,076        --        --              --          5,000,000        --
   Chief Operating
Officer                        2004          --        --        --              --                 --        --         --



</TABLE>

(1)   Represents options granted under NeoMedia's 2003 Stock Option Plan granted
      at the  discretion of the Stock Option  Committee of  NeoMedia's  Board of
      Directors.

(2)   Includes  automobile  expenses   attributable  to  personal  use  and  the
      corresponding income tax effects.

(3)   Martin Copus joined NeoMedia in March 2005.

EMPLOYMENT AGREEMENTS

      No employment  agreements  are currently in place for any employees of the
Company.

INCENTIVE PLAN FOR MANAGEMENT

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


                                     III-5
<PAGE>
         To be eligible for  consideration  for inclusion in the Incentive Plan,
an employee must be on NeoMedia's  payroll for the last three months of the year
involved.  Death, total and permanent disability or retirement are exceptions to
such  minimum  employment,  and awards in such  cases are  granted on a pro-rata
basis. In addition, where employment is terminated due to job elimination, a pro
rata  award  may  be  considered.  Employees  who  voluntarily  terminate  their
employment,  or who are  terminated  by NeoMedia for  unacceptable  performance,
prior to the end of the year are not eligible to  participate  in the  Incentive
Plan.  All awards are subject to any  governmental  regulations in effect at the
time of payment.

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

         The  Company did not have a formal  incentive  plan for  management  in
place for the year ended December 31, 2005.

         During the years ended  December 31, 2005 and 2004, the Company paid $0
and  $159,000,  respectively,  in past  due  incentive  awards  relating  to its
executive incentive plan for fiscal 2000, through the issuance of common stock.

STOCK OPTION PLANS

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

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

         Effective  June 6, 2002,  NeoMedia  adopted its 2002 Stock  Option Plan
("2002 Stock Option  Plan").  The 2002 Stock Option Plan  provides for authority
for the Board of Directors to the grant non-qualified stock options with respect
to a maximum of 10,000,000  shares of common stock. All 10,000,000  options were
granted under NeoMedia's 2002 Stock Option Plan.

     Effective  September 24, 2003,  NeoMedia adopted its 2003 Stock Option Plan
("2003 Stock Option  Plan").  The 2003 Stock Option Plan  provides for authority
for the Board of Directors to the grant non-qualified stock options with respect
to a maximum  of  150,000,000  shares of common  stock.  On  October  17,  2003,
NeoMedia  filed a Form S-8 to register all  150,000,000  shares  underlying  the
options in the 2003 Stock Option Plan. As of December 31, 2005,  the Company had
issued approximately 128 million shares under the 2003 Stock Option Plan.

     Effective  December 16, 2005,  NeoMedia  adopted its 2005 Stock Option Plan
("2005 Stock Option  Plan").  The 2005 Stock Option Plan  provides for authority
for the Board of Directors to the grant non-qualified stock options with respect
to a maximum of 60,000,000 shares of common stock. The option exercise price may
be less than the fair market value per share of  NeoMedia's  common stock on the
date of grant,  and may be granted with any vesting  schedule as approved by the
stock option committee.  As of December 31, 2005, NeoMedia had not issued any of
the 60,000,000 options in the 2005 Stock Option Plan.


                                     III-6
<PAGE>
STOCK INCENTIVE PLAN

     Effective October 31, 2003, NeoMedia adopted the 2003 Stock Incentive Plan.
Under the terms of the Plan,  NeoMedia has set aside up to 30,000,000  shares of
common  stock to be issued to pay  compensation  and other  expenses  related to
employees,  former  employees,   consultants,  and  non-employee  directors.  On
November 3, 2003,  NeoMedia filed a Form S-8 to register all  30,000,000  shares
underlying  the options in the 2003 Stock  Incentive  Plan.  As of December  31,
2005,  the Company had issued  approximately  9.8 million  shares under the 2003
Stock Incentive Plan.

401(K) PLAN

      NeoMedia  maintains a 401(k)  Profit  Sharing  Plan and Trust (the "401(k)
Plan"). All employees of NeoMedia who are 21 years of age and who have completed
three months of service are  eligible to  participate  in the 401(k)  Plan.  The
401(k) Plan provides that each participant may make elective contributions of up
to 20% of such  participant's  pre-tax  salary (up to a  statutorily  prescribed
annual  limit,  which is $13,000  for 2004) to the  401(k)  Plan,  although  the
percentage elected by certain highly compensated participants may be required to
be lower.  All amounts  contributed to the 401(k) Plan by employee  participants
and earnings on these  contributions  are fully vested at all times.  The 401(k)
Plan also provides for matching and discretionary  contributions by NeoMedia. To
date, NeoMedia has not made any such contributions.


                                     III-7
<PAGE>
OPTIONS GRANTED IN THE LAST FISCAL YEAR

      The following presents certain  information on stock options for the Named
Executive Officers for the year ended December 31, 2005:

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

<S>                     <C>                <C>            <C>         <C>                  <C>             <C>
Charles T. Jensen       4,000,000          3.6%           $0.239      February 8, 2015     $  601,223      $1,523,618
                        2,000,000          1.8%           $0.328      December 16, 2015    $  412,555      $1,045,495
                       -----------     -------------                                       ----------      ----------
                        6,000,000          5.4%                                            $1,013,778      $2,569,113

Charles W. Fritz        4,000,000          3.6%           $0.239      February 8, 2015     $  601,223      $1,523,618
                        2,000,000          1.8%           $0.328      December 16, 2015    $  412,555      $1,045,495
                       -----------     -------------                                       ----------      ----------
                        6,000,000          5.4%                                            $1,013,778      $2,569,113

David A. Dodge          2,500,000          2.2%           $0.239      February 8, 2015     $  375,765      $  952,261
                        2,000,000          1.8%           $0.328      December 16, 2015    $  412,555      $1,045,495
                       -----------     -------------                                       ----------      ----------
                        4,500,000          4.0%                                            $  788,320      $1,997,756

Martin N. Copus         3,000,000          2.7%           $0.247      March 1, 2015        $  466,011      $1,180,963
                        2,000,000          1.8%           $0.328      December 16, 2015    $  412,555      $1,045,495
                       -----------     -------------                                       ----------      ----------
                        5,000,000          4.4%                                            $  878,566      $2,226,458
</TABLE>

                                     III-8
<PAGE>
AGGREGATE   OPTION/SAR  EXERCISES  IN  LAST  FISCAL  YEAR  AND  FISCAL  YEAR-END
OPTIONS/SAR VALUES

      The  following  table sets  forth  options  exercised  by  NeoMedia  Named
Executive  Officers  during the year ended December 31, 2005, and the number and
value of all unexercised options at fiscal year end.

<TABLE>
<CAPTION>
                                                         NUMBER OF UNEXERCISED
                           SHARES                        SECURITIES UNDERLYING             VALUE OF UNEXERCISED IN-
                          ACQUIRED                         OPTIONS/SARS AT                THE-MONEY OPTIONS/SARS AT
                           SHARES        VALUE            DECEMBER 31, 2005                 DECEMBER 31, 2005 (1)
NAMED                   ON EXERCISE    REALIZED     -------------------------------     ------------------------------
EXECUTIVE OFFICER           (#)           ($)        EXERCISABLE      UNEXERCISABLE     EXERCISABLE     UNEXERCISABLE
--------------------    -----------    ---------    ------------    ---------------     -----------    ---------------

<S>                        <C>        <C>              <C>              <C>                <C>              <C>
Charles T. Jensen               --            --      13,500,000        6,500,000       $3,393,000       $  583,000

Charles W. Fritz                --            --      15,010,000        6,500,000        3,776,740          583,000

David A. Dodge             600,000    $  194,100       3,725,000        4,375,000          705,025          315,875

Martin N. Copus                 --            --       2,000,000        3,000,000           85,500           85,500

</TABLE>

(1) Based on the  difference  between the closing  price of $0.304 of NeoMedia's
    common  stock as quoted on OTC  Bulletin  Board on December 30, 2005 and the
    exercise price of the option/SAR.


                                     III-9
<PAGE>
ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information regarding beneficial
ownership of NeoMedia's common stock as of February 28, 2006, (i) by each person
or entity  known by  NeoMedia  to own  beneficially  more than five  percent  of
NeoMedia's  Common  Stock,  (ii) by each of  NeoMedia's  directors and nominees,
(iii) by each executive  officer of NeoMedia  named in the Summary  Compensation
Table, and (iv) by all executive officers and directors of NeoMedia as a group.

<TABLE>
<CAPTION>
                                                              AMOUNT AND
                                                              NATURE OF
                              NAME AND ADDRESS OF             BENEFICIAL        PERCENT OF
       CLASS                    BENEFICIAL OWNER            OWNERSHIP (1)       CLASS (1)
--------------------    --------------------------------- ------------------ ----------------
<S>                     <C>                                      <C>              <C>
   Common Stock         Charles W. Fritz  (2)(3)                 30,920,555       5.0%
   Common Stock         William Fritz (2)(4)                     53,150,944       8.7%
   Common Stock         Charles T. Jensen (2)(5)                 15,501,500       2.5%
   Common Stock         David A. Dodge (2)(6)                     4,850,000         *
   Common Stock         A. Hayes Barclay (2)(7)                   3,155,000         *
   Common Stock         James J. Keil (2)(8)                      5,388,619         *
   Common Stock         Martin N. Copus (9)                       3,682,186         *
                                                          ------------------ ----------------

   Common Stock         Officers and Directors
                             as a Group (9 Persons) (10)        116,648,804       17.8%
                                                          ================== ================

</TABLE>

-------------------------
* - denotes ownership of less than one percent of issued and outstanding  shares
of NeoMedia's common stock.

(1)   Applicable  percentage  of  ownership  is based on  601,789,324  shares of
      common stock outstanding as of February 28, 2006, together with securities
      exercisable or  convertible  into shares of common stock within 60 days of
      February  28,  2006,  for  each  shareholder.   Beneficial   ownership  is
      determined in  accordance  with the rules of the  Securities  and Exchange
      Commission and generally  includes voting or investment power with respect
      to securities. Shares of common stock subject to securities exercisable or
      convertible into shares of common stock that are currently  exercisable or
      exercisable  within  60  days of  February  28,  2006,  are  deemed  to be
      beneficially  owned by the person holding such  securities for the purpose
      of computing  the  percentage  of  ownership  of such person,  but are not
      treated  as  outstanding  for the  purpose  of  computing  the  percentage
      ownership of any other  person.  The common stock is the only  outstanding
      class of equity securities of NeoMedia.

(2)   Address of the referenced individual is c/o NeoMedia  Technologies,  Inc.,
      2201 Second Street, Suite 600, Fort Myers, FL, 33901.

(3)   Charles W. Fritz is the Company's founder and the Chairman of the Board of
      Directors.  Shares  beneficially owned include 100 shares owned by each of
      Mr.  Fritz's four  children  for an  aggregate  of 400 shares,  15,500,000
      shares of common stock issuable upon exercise of options granted under the
      Company's  2003,  2002 and  1998  stock  option  plans,  1,510,000  shares
      issuable  upon  exercise of stock  warrants,  12,367,186  shares of common
      stock owned by Mr.  Charles W. Fritz  directly,  and  1,542,969  shares of
      common  stock held by the CW/LA II Family  Limited  Partnership,  a family
      limited partnership for the benefit of Mr. Fritz's family.

(4)   William E. Fritz, the Company's  corporate  secretary and a director,  and
      his wife, Edna Fritz, are the general partners of the Fritz Family Limited
      Partnership  and therefore each are deemed to be the beneficial  owners of
      the 1,511,742 shares held in the Fritz Family  Partnership.  As trustee of
      each of the Chandler R. Fritz 1994 Trust,  Charles W. Fritz 1994 Trust and
      Debra F.  Schiafone  1994  Trust,  William  E.  Fritz is  deemed to be the
      beneficial  owner of the 165,467  shares of NeoMedia held in these trusts.
      Additionally,  Mr. Fritz is deemed to own: 45,433,735 shares held directly
      by Mr.  Fritz  or his  spouse,  2,540,000  shares  to be  issued  upon the
      exercise of warrants held by Mr. Fritz or his spouse, and 3,500,000 shares
      to be issued upon the exercise of options held by Mr. Fritz or his spouse.

(5)   Charles T. Jensen is  President,  Chief  Operating  Officer,  Acting Chief
      Executive  Officer,  and a member  of the Board of  Directors.  Beneficial
      ownership  includes  15,500,000  shares  of  common  stock  issuable  upon
      exercise of options granted under NeoMedia's stock option plans, and 1,500
      shares owned by Mr. Jensen's sons.

(6)   David A. Dodge is Vice President, Chief Financial Officer, and Controller.
      Beneficial  ownership  includes  4,850,000 shares of common stock issuable
      upon exercise of options granted under NeoMedia's stock option plans.


                                     III-10
<PAGE>
(7)   A. Hayes Barclay is a member of the Board of Directors. Ownership includes
      3,150,000 shares of common stock issuable upon exercise of options granted
      under NeoMedia's stock option plans, and 5,000 shares owned by Mr. Barclay
      directly.

(8)   James J. Keil is a member of the Board of Directors.  Shares  beneficially
      owned  includes  3,500,000  shares  issuable  upon exercise of options and
      1,888,619 shares owned by Mr. Keil directly.

(9)   Martin N. Copus is Chief Operating Office.  Beneficial  ownership includes
      3,500,000 shares of common stock issuable upon exercise of options granted
      under  NeoMedia's stock option plans, and 182,186 shares held by Mr. Copus
      directly.

(10)  Includes an  aggregate  of  49,500,000  currently  exercisable  options to
      purchase  shares of common stock  granted  under  NeoMedia's  stock option
      plans,  4,050,000  currently  exercisable  warrants to purchase  shares of
      common stock, and 63,098,804 shares owned directly by NeoMedia's  officers
      and directors.



                                     III-11
<PAGE>

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      On November 1, 2005,  NeoMedia acquired a used automobile for $17,000 from
Charles T. Jensen,  its president,  chief executive  officer and a member of its
board of directors.  NeoMedia  believes the  transaction  was completed at arm's
length.

                                       III-12
<PAGE>

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:

<TABLE>
<CAPTION>

EXHIBIT NO.       DESCRIPTION                                                   LOCATION
-----------       -----------------------------------------------------------   ----------------------------------------------------
<S>               <C>                                                           <C>
3.1               Articles of  Incorporation of Dev-Tech  Associates,  Inc.     Incorporated   by  reference  to  Exhibit  3.1  to
                  and amendment thereto                                         Registrant's  Registration  Statement No. 333-5534
                                                                                as filed with the SEC on November 25, 1996

3.2               Bylaws of DevSys, Inc.                                        Incorporated   by  reference  to  Exhibit  3.2  to
                                                                                Registrant's  Registration  Statement No. 333-5534
                                                                                as filed with the SEC on November 25, 1996

3.3               Restated Certificate of Incorporation of DevSys, Inc.         Incorporated   by  reference  to  Exhibit  3.3  to
                                                                                Registrant's  Registration  Statement No. 333-5534
                                                                                as filed with the SEC on November 25, 1996

3.4               By-laws of DevSys, Inc.                                       Incorporated   by  reference  to  Exhibit  3.4  to
                                                                                Registrant's  Registration  Statement No. 333-5534
                                                                                as filed with the SEC on November 25, 1996

3.5               Articles  of Merger and  Agreement  and Plan of Merger of     Incorporated   by  reference  to  Exhibit  3.5  to
                  DevSys, Inc and Dev-Tech Associates, Inc.                     Registrant's  Registration  Statement No. 333-5534
                                                                                as filed with the SEC on November 25, 1996

3.6               Certificate of Merger of Dev-Tech  Associates,  Inc. into     Incorporated   by  reference  to  Exhibit  3.6  to
                  DevSys, Inc.                                                  Registrant's  Registration  Statement No. 333-5534
                                                                                as filed with the SEC on November 25, 1996

3.7               Articles of  Incorporation  of Dev-Tech  Migration,  Inc.     Incorporated   by  reference  to  Exhibit  3.7  to
                  and amendment thereto                                         Registrant's  Registration  Statement No. 333-5534
                                                                                as filed with the SEC on November 25, 1996

3.8               By-laws of Dev-Tech Migration, Inc.                           Incorporated   by  reference  to  Exhibit  3.8  to
                                                                                Registrant's  Registration  Statement No. 333-5534
                                                                                as filed with the SEC on November 25, 1996

</TABLE>

                                     III-13
<PAGE>

<TABLE>
<CAPTION>

EXHIBIT NO.       DESCRIPTION                                                   LOCATION
-----------       -----------------------------------------------------------   ----------------------------------------------------
<S>               <C>                                                           <C>
3.9               Restated   Certificate   of   Incorporation   of   DevSys     Incorporated   by  reference  to  Exhibit  3.9  to
                  Migration, Inc.                                               Registrant's  Registration  Statement No. 333-5534
                                                                                as filed with the SEC on November 25, 1996

3.10              Form of By-laws of DevSys Migration, Inc.                     Incorporated  by  reference  to  Exhibit  3.10  to
                                                                                Registrant's  Registration  Statement No. 333-5534
                                                                                as filed with the SEC on November 25, 1996

3.11              Form  of  Agreement   and  Plan  of  Merger  of  Dev-Tech     Incorporated  by  reference  to  Exhibit  3.11  to
                  Migration, Inc. into DevSys Migration, Inc.                   Registrant's  Registration  Statement No. 333-5534
                                                                                as filed with the SEC on November 25, 1996

3.12              Form of  Certificate  of  Merger of  Dev-Tech  Migration,     Incorporated  by  reference  to  Exhibit  3.12  to
                  Inc. into DevSys Migration, Inc.                              Registrant's  Registration  Statement No. 333-5534
                                                                                as filed with the SEC on November 25, 1996

3.13              Certificate of Amendment to Certificate of  Incorporation     Incorporated  by  reference  to  Exhibit  3.13  to
                  of   DevSys,   Inc.   changing   its  name  to   NeoMedia     Registrant's  Registration  Statement No. 333-5534
                  Technologies, Inc.                                            as filed with the SEC on November 25, 1996

3.14              Form  of  Certificate  of  Amendment  to  Certificate  of     Incorporated  by  reference  to  Exhibit  3.14  to
                  Incorporation of NeoMedia Technologies,  Inc. authorizing     Registrant's  Registration  Statement No. 333-5534
                  a reverse stock split                                         as filed with the SEC on November 25, 1996

3.15              Form of Certificate of Amendment to Restated  Certificate     Incorporated   by  reference  to  Exhibit  3.5  to
                  of   Incorporation   of   NeoMedia   Technologies,   Inc.     Registrant's  Annual  Report as filed with the SEC
                  increasing  authorized  capital  and  creating  preferred     on November 2, 2001
                  stock

10.1              Dev-Tech Associates, Inc. 1996 Stock Option Plan              Incorporated  by reference to Exhibit 10.44 to the
                                                                                Registrant's  Registration  Statement No. 333-5534
                                                                                as filed with the SEC on November 25, 1996

10.2              First Amendment and  Restatement of Dev-Tech  Associates,     Incorporated  by reference to Exhibit 10.45 to the
                  Inc. 1996 Stock Option Plan                                   Registrant's  Registration  Statement No. 333-5534
                                                                                as filed with the SEC on November 25, 1996

10.3              Form of Stock  Option  Agreement  - Dev-Tech  Associates,     Incorporated  by reference to Exhibit 10.46 to the
                  Inc.                                                          Registrant's  Registration  Statement No. 333-5534
                                                                                as filed with the SEC on November 25, 1996

</TABLE>

                                       III-14
<PAGE>

<TABLE>
<CAPTION>

EXHIBIT NO.       DESCRIPTION                                                   LOCATION
-----------       -----------------------------------------------------------   ----------------------------------------------------
<S>               <C>                                                           <C>
10.4              Dev-Tech Migration, Inc. 1996 Stock Option Plan               Incorporated  by reference to Exhibit 10.47 to the
                                                                                Registrant's  Registration  Statement No. 333-5534
                                                                                as filed with the SEC on November 25, 1996

10.5              First  Amendment and  Restatement of Dev-Tech  Migration,     Incorporated  by reference to Exhibit 10.48 to the
                  Inc.                                                          Registrant's  Registration  Statement No. 333-5534
                                                                                as filed with the SEC on November 25, 1996

10.6              Form of Stock  Option  Agreement  -  Dev-Tech  Migration,     Incorporated  by reference to Exhibit 10.49 to the
                  Inc.                                                          Registrant's  Registration  Statement No. 333-5534
                                                                                as filed with the SEC on November 25, 1996

10.7              Dev-Tech Associates, Inc. 401(k) Plan and amendments          Incorporated  by reference to Exhibit 10.50 to the
                                                                                Registrant's  Registration  Statement No. 333-5534
                                                                                as filed with the SEC on November 25, 1996

10.8              First    Amendment    and    Restatement    of   NeoMedia     Incorporated  by reference to Exhibit 10.60 to the
                  Technologies, Inc. 1996 Stock Option Plan                     Registrant's  Registration  Statement No. 333-5534
                                                                                as filed with the SEC on November 25, 1996
10.9              NeoMedia Technologies, Inc. 1998 Stock Option Plan            Incorporated  by  reference to Exhibit 10.9 to the
                                                                                Registrant's Form 10-KSB as filed on March 9, 2004

10.10             Amendment  to  NeoMedia  Technologies  1998 Stock  Option     Incorporated  by  reference  to Form  14A as filed
                  Plan                                                          with the SEC on July 2, 1999

10.11             Sale and Purchase  Agreement between  Qode.com,  Inc. and     Incorporated  by reference to Exhibit 10.48 to the
                  NeoMedia Technologies, Inc.                                   Registrant's  Current  Report on Form 8-K as filed
                                                                                with the SEC on March 15, 2001

10.12             Warrant repricing letter dated March 19, 2002                 Incorporated  by  reference  to Exhibit 1.2 to the
                                                                                Registrant's  Current  Report on Form 8-K as filed
                                                                                with the SEC on April 2, 2002

10.13             Option repricing letter dated April 3, 2002                   Incorporated  by  reference  to Exhibit 1.2 to the
                                                                                Registrant's  Current  Report on Form 8-K as filed
                                                                                with the SEC on April 15, 2002

</TABLE>

                                       III-15
<PAGE>

<TABLE>
<CAPTION>

EXHIBIT NO.       DESCRIPTION                                                   LOCATION
-----------       -----------------------------------------------------------   ----------------------------------------------------
<S>               <C>                                                           <C>
10.14             Intellectual   Property   licensing   agreement   between     Incorporated  by reference to Exhibit 10.18 to the
                  NeoMedia and A.T. Cross Company                               Registrant's  Form  S-1/A as filed with the SEC on
                                                                                April 24, 2002

10.15             Intellectual   Property   licensing   agreement   between     Incorporated  by reference to Exhibit 10.19 to the
                  NeoMedia and Symbol Technologies, Inc.                        Registrant's  Form  S-1/A as filed with the SEC on
                                                                                April 24, 2002

10.16             Sponsorship and Advertising  Agreement  between  NeoMedia     Incorporated  by reference to Exhibit 10.20 to the
                  and About.com, Inc.                                           Registrant's  Form  S-1/A as filed with the SEC on
                                                                                April 24, 2002

10.17             Letter   of   Intent   regarding    proposed    strategic     Incorporated  by reference to Exhibit 10.21 to the
                  transaction between NeoMedia and AirClic, Inc.                Registrant's  Form  S-1/A as filed with the SEC on
                                                                                April 24, 2002

10.18             Form of Promissory Note issued to AirClic, Inc.               Incorporated  by reference to Exhibit 10.22 to the
                                                                                Registrant's  Form  S-1/A as filed with the SEC on
                                                                                April 24, 2002

10.19             Form  of  Limited  Recourse  Promissory  Note  issued  in     Incorporated  by reference to Exhibit 10.23 to the
                  exchange for 19 Million Shares of Common Stock                Registrant's  Form  S-1/A as filed with the SEC on
                                                                                April 24, 2002

10.20             Nasdaq  Staff   Determination   Letter  with  respect  to     Incorporated  by reference to Exhibit 10.24 to the
                  de-listing  of  NeoMedia   securities   from  the  Nasdaq     Registrant's  Form  S-1/A as filed with the SEC on
                  SmallCap market                                               April 24, 2002

10.21             Revised warrant repricing letter dated April 3, 2002          Incorporated  by reference to Exhibit 10.25 to the
                                                                                Registrant's  Form  S-1/A as filed with the SEC on
                                                                                April 24, 2002

10.22             Equity  Line of  Credit  Agreement,  dated  May 6,  2002,     Incorporated  by reference to Exhibit 10.17 to the
                  between   NeoMedia   Technologies   and  Cornell  Capital     Registrant's  Quarterly  Report  on  Form  10-Q as
                  Partners, LP                                                  filed with the SEC on August 14, 2002

10.23             Nasdaq Staff delisting  notification letter dated May 16,     Incorporated  by reference to Exhibit 10.18 to the
                  2002                                                          Registrant's  Quarterly  Report  on  Form  10-Q as
                                                                                filed with the SEC on August 14, 2002

10.24             Settlement  Agreement  relating to  wrongful  termination     Incorporated  by reference to Exhibit 10.19 to the
                  lawsuit  brought by former  president and Chief Operating     Registrant's  Form  10-Q as filed  with the SEC on
                  Officer                                                       August 14, 2002

10.25             Mutual  settlement  agreement  by  and  between  NeoMedia     Incorporated  by reference to Exhibit 10.20 to the
                  Technologies and 2150 Western Court Company, LLC              Registrants  Form  10-Q as filed on  November  14,
                                                                                2002

</TABLE>

                                       III-16
<PAGE>

<TABLE>
<CAPTION>

EXHIBIT NO.       DESCRIPTION                                                   LOCATION
-----------       -----------------------------------------------------------   ----------------------------------------------------
<S>               <C>                                                           <C>
10.26             Mutual  settlement  agreement  by  and  between  NeoMedia     Incorporated  by reference to Exhibit 10.21 to the
                  Technologies and Ripfire, Inc.                                Registrants  Form  10-Q as filed on  November  14,
                                                                                2002

10.27             Mutual  settlement  agreement  by  and  between  NeoMedia     Incorporated  by reference to Exhibit 10.22 to the
                  Technologies and Wachovia Bank, N.A.                          Registrants  Form  10-Q as filed on  November  14,
                                                                                2002

10.28             Mutual  settlement  agreement  by  and  between  NeoMedia     Incorporated  by reference to Exhibit 10.23 to the
                  Technologies and Marianne LePera,  NeoMedia Technologies'     Registrants  Form  10-Q as filed on  November  14,
                  former General Counsel                                        2002

10.29             Equity  Line of  Credit  Agreement,  dated  February  11,     Incorporated  by reference to Exhibit 10.80 to the
                  2003,  between NeoMedia  Technologies and Cornell Capital     Registrants  Form S-1/A as filed on  February  14,
                  Partners                                                      2003

10.30             Form of Placement Agent  Agreement,  dated November 2002,     Incorporated  by reference to Exhibit 10.84 to the
                  between NeoMedia Technologies and Westrock Advisors, Inc.     Registrant's  Form S-1 as filed  on  February  12,
                                                                                2003

10.31             Form  of  Escrow Agreement, dated November 2002, between      Incorporated by reference to Exhibit 10.85 to  the
                  NeoMedia Technologies and Cornell Capital Partners            Registrant's  Form S-1 as  filed  on  February 12,
                                                                                2003

10.32             Form of  Registration  Rights  Agreement,  dated November     Incorporated  by reference to Exhibit 10.86 to the
                  2002,  between NeoMedia  Technologies and Cornell Capital     Registrant's  Form S-1 as filed  on  February  12,
                  Partners                                                      2003

10.33             Promissory  Note,   dated  February  23,  2001,   between     Incorporated  by reference to Exhibit 10.87 to the
                  Digital Convergence Corporation and NeoMedia                  Registrant's  Form S-1 as filed  on  February  12,
                                                                                2003

10.34             Termination  Agreement,  dated August 21,  2001,  between     Incorporated  by reference to Exhibit 10.88 to the
                  About.com and NeoMedia                                        Registrant's  Form S-1 as filed  on  February  12,
                                                                                2003

10.35             Memorandum  of  Terms to  merge,  dated  March  7,  2003,     Incorporated  by  reference  to Exhibit 3.1 to the
                  between NeoMedia and Loch Energy, Inc.                        Registrant's Form 8-K as filed on March 19, 2003

10.36             Binding  Letter of Intent to merge,  dated July 25, 2003,     Incorporated  by  reference to Exhibit 99.5 to the
                  between NeoMedia and Secure Source Technologies, Inc.         Registrant's  Form  10-QSB as filed on August  14,
                                                                                 2003

10.37              Definitive Merger  Agreement, dated October 3, 2003,         Incorporated by reference to  Exhibit  99.1 to the
                   between NeoMedia and Secure Source Technologies, Inc         Registrant's Form 8-K as filed on October 8, 2003

</TABLE>

                                       III-17
<PAGE>

<TABLE>
<CAPTION>

EXHIBIT NO.       DESCRIPTION                                                   LOCATION
-----------       --------------------------------------------------------      --------------------------------------------------
<S>               <C>                                                           <C>
10.38             Standby Equity Distribution Agreement,  dated October 27,     Incorporated  by reference to Exhibit 10.91 to the
                  2003, between NeoMedia and Cornell Capital Partners           Registrant's  Form SB-2/A as filed on December 19,
                                                                                2003

10.39             Form of  Placement  Agent  Agreement,  dated  October 27,     Incorporated  by reference to Exhibit 10.92 to the
                  2003,   between   NeoMedia   and   Newbridge   Securities     Registrant's  Form SB-2/A as filed on December 19,
                  Corporation                                                   2003

10.40             Form of Registration Rights Agreement,  dated October 27,     Incorporated  by reference to Exhibit 10.93 to the
                  2003, between NeoMedia and Cornell Capital Partners           Registrant's  Form SB-2/A as filed on December 19,
                                                                                2003

10.41             Form  of  Escrow  Agreement,   dated  October  27,  2003,     Incorporated  by reference to Exhibit 10.94 to the
                  between NeoMedia and Cornell Capital Partners                 Registrant's  Form SB-2/A as filed on December 19,
                                                                                2003

10.42             2003 Stock Compensation Plan                                  Incorporated  by  reference  to Exhibit 4.1 to the
                                                                                Registrant's Form S-8 as filed on October 31, 2003

10.43             Letter of  Intent to  acquire  CSI  International,  Inc.,     Incorporated  by  reference  to Exhibit 3.1 to the
                  dated November 8, 2003                                        Registrant's  Form 8-K as filed  on  November  13,
                                                                                2003

10.44             Letter of Intent to acquire  BSD  Software,  Inc.,  dated     Incorporated  by  reference  to Exhibit 3.1 to the
                  December 9, 2003                                              Registrant's  Form 8-K as filed  on  December  11,
                                                                                2003

10.45             Definitive  Merger  Agreement,  dated  February  6, 2004,     Incorporated  by  reference  to Exhibit 3.1 to the
                  between NeoMedia and CSI International, Inc.                  Registrant's  Form 8-K as filed  on  February  10,
                                                                                2004

10.46             $4 million  Promissory  note  payable to Cornell  Capital     Incorporated  by reference to Exhibit 10.49 to the
                  Partners, dated January 15, 2004                              Registrant's Form 10-KSB as filed on March 9, 2004

10.47             Form   of   Business   Development    Agreement   between     Incorporated  by  reference  to Exhibit 2.2 to the
                  NeoMedia  and iPoint-media                                    Registrant's  Form 8-K as filed on  September  17,
                                                                                2004

10.48             Form  of  Investment   Agreement   between  NeoMedia  and     Incorporated  by  reference  to Exhibit 2.3 to the
                  iPoint-media                                                  Registrant's  Form 8-K as filed on  September  17,
                                                                                2004

10.49             Form of Registration  Rights  Agreement  between NeoMedia     Incorporated  by  reference  to Exhibit 2.4 to the
                  and iPoint-media                                              Registrant's  Form 8-K as filed on  September  17,
                                                                                2004

10.50             Form of  Indemnification  Agreement  between NeoMedia and     Incorporated  by  reference  to Exhibit 2.5 to the
                  iPoint-media                                                  Registrant's  Form 8-K as filed on  September  17,
                                                                                2004

</TABLE>

                                       III-18
<PAGE>

<TABLE>
<CAPTION>

EXHIBIT NO.       DESCRIPTION                                                   LOCATION
-----------       --------------------------------------------------------      --------------------------------------------------
<S>               <C>                                                           <C>

10.51             Form of Merger  Agreement  among  NeoMedia  Technologies,     Incorporated  by  reference to Exhibit 16.1 to the
                  Inc., NeoMedia Telecom Services,  Inc., and BSD Software,     Registrant's  Form 8-K as filed  on  December  22,
                  Inc.                                                          2004

10.52             Form of Letters of Intent With Pickups Plus, Inc.             Incorporated  by  reference  to Exhibits  16.1 and
                                                                                16.2 to the  Registrant's  Form  8-K as  filed  on
                                                                                March 1, 2005
10.53             Form of NeoMedia's Policy Statement on Ethical Behavior       Incorporated  by reference to Exhibit 10.53 to the
                                                                                Registrant's Form 10-KSB as filed on March 7, 2005

10.54             Form of Term Sheet with Nextcode Corporation                  Incorporated  by reference to Exhibit 10.54 to the
                                                                                Registrant's Form 10-KSB as filed on March 7, 2005

10.55             Form of Letter of Intent With Shelron Group, Inc.             Incorporated  by reference to Exhibit 10.55 to the
                                                                                Registrant's Form 10-KSB as filed on March 7, 2005

10.56             Letter of extension of outside date between  NeoMedia and     Incorporated  by reference to Exhibit 10.56 to the
                  BSD                                                           Registrant's     Registration     Statement    No.
                                                                                333-123848  as filed with the SEC on  January  20,
                                                                                2006

10.57             Co-Marketing    Partner    Agreement   between   NeoMedia     Incorporated  by  reference to Exhibit 16.1 to the
                  Technologies,  Inc. and Foote Cone & Belding,  a division     Registrant's Form 8-K as filed on March 24, 2005
                  of FCB Worldwide L.L.C.

10.58             Standby  Equity  Distribution   Agreement,   dated  March     Incorporated  by  reference to Exhibit 16.1 to the
                  30,2005, between NeoMedia and Cornell                         Registrant's Form 8-K as filed on April 1, 2005

10.59             Placement Agent Agreement,  dated March 30, 2005, between     Incorporated  by  reference to Exhibit 16.2 to the
                  NeoMedia and Cornell                                          Registrant's Form 8-K as filed on April 1, 2005

10.60             Escrow Agreement,  dated March 30, 2005, between NeoMedia     Incorporated  by  reference to Exhibit 16.3 to the
                  and Cornell                                                   Registrant's Form 8-K as filed on April 1, 2005

10.61             Registration  Rights  Agreement,  dated  March 30,  2005,     Incorporated  by  reference to Exhibit 16.4 to the
                  between NeoMedia and Cornell                                  Registrant's Form 8-K as filed on April 1, 2005

10.62             Promissory Note,  dated March 30, 2005,  between NeoMedia     Incorporated  by  reference to Exhibit 16.5 to the
                  and Cornell                                                   Registrant's Form 8-K as filed on April 1, 2005

10.63             Security   Agreement,   dated  March  30,  2005,  between     Incorporated  by  reference to Exhibit 16.6 to the
                  NeoMedia and Cornell                                          Registrant's Form 8-K as filed on April 1, 2005

10.64             Patent Purchase  Agreement,  dated April 8, 2005, between     Incorporated  by  reference to Exhibit 16.1 to the
                  NeoMedia and Loyaltypoint, Inc.                               Registrant's Form 8-K as filed on April 13, 2005

10.65             Letter  Amending  Section 7.3(g) of the Merger  Agreement     Incorporated  by reference to Exhibit 10.65 to the
                  between NeoMedia and BSD                                      Registrant's     Registration     Statement    No.
                                                                                333-123848  as filed with the SEC on  January  20,
                                                                                2006

</TABLE>

                                     III-19
<PAGE>

<TABLE>
<CAPTION>

EXHIBIT NO.       DESCRIPTION                                                   LOCATION
-----------       --------------------------------------------------------      --------------------------------------------------
<S>               <C>                                                           <C>
10.66             Letter of extension of outside date between  NeoMedia and     Incorporated  by reference to Exhibit 10.66 to the
                  BSD                                                           Registrant's     Registration     Statement    No.
                                                                                333-123848  as filed with the SEC on  January  20,
                                                                                2006

10.67             Letter of extension of outside date between  NeoMedia and     Incorporated  by reference to Exhibit 10.67 to the
                  BSD                                                           Registrant's     Registration     Statement    No.
                                                                                333-123848  as filed with the SEC on  January  20,
                                                                                2006

10.68             Distribution Agreement between NeoMedia and Beijing           Incorporated  by  reference to Exhibit 16.1 to the
                  Sino-US Jinche Yingang Auto Technological Services            Registrant's Form 8-K as filed on August 31, 2005
                  Limited

10.69             Distribution Agreement between NeoMedia and Micropaint        Incorporated  by  reference to Exhibit 16.1 to the
                  de Mexico, S.A.                                               Registrant's  Form 8-K as filed on  September  29,
                                                                                2005

10.70             Distribution Agreement between NeoMedia and WITHO-AS          Incorporated  by  reference to Exhibit 16.1 to the
                                                                                Registrant's Form 8-K as filed on October 6, 2005

10.71             Second  Bridge  Loan  Agreement   between   NeoMedia  and     Incorporated  by reference to Exhibit 10.71 to the
                  Mobot                                                         Registrant's     Registration     Statement    No.
                                                                                333-123848  as filed with the SEC on  January  20,
                                                                                2006

10.72             Distribution   Agreement   between   NeoMedia   and   PPG     Incorporated  by  reference  to  Exhibit  16.1  to
                  Industries                                                    the  Registrant's  Form 8-K as  filed on  December
                                                                                15, 2005

10.73             Supply  Agreement  between NeoMedia and DuPont de Nemours     Incorporated  by  reference  to  Exhibit  16.1  to
                  (Belgium) BVBA                                                the  Registrant's  Form 8-K as  filed on  December
                                                                                21, 2005

10.74             Merger Agreement with Mobot, Inc.                             Incorporated  by  reference to Exhibit 16.1 to the
                                                                                Registrant's  Form 8-K as filed  on  February  10,
                                                                                2006

10.75             Sale and Purchase Agreement with 12Snap AG                    Incorporated  by  reference to Exhibit 16.1 to the
                                                                                Registrant's  Form 8-K as filed  on  February  14,
                                                                                2006

10.76             Form of Letter of Intent with HipCricket                      Incorporated  by  reference to Exhibit 16.1 to the
                                                                                Registrant's  Form 8-K as filed  on  February  17,
                                                                                2006

10.77             Sale and Purchase Agreement with Gavitec AG                   Incorporated  by  reference to Exhibit 16.1 to the
                                                                                Registrant's  Form 8-K as filed  on  February  21,
                                                                                2006

10.78             Sale and Purchase Agreement with Sponge Ltd.                  Incorporated  by  reference to Exhibit 16.1 to the
                                                                                Registrant's  Form 8-K as filed  on  February  22,
                                                                                2006

10.79             Sole  Agent  Agreement   between   NeoMedia  and  Beijing     Incorporated  by  reference to Exhibit 16.1 to the
                  Sino-US  Jinche  Yingang  Auto   Technological   Services     Registrant's Form 8-K as filed on March 2, 2006
                  Limited

</TABLE>

                                       III-20
<PAGE>

<TABLE>
<CAPTION>

EXHIBIT NO.       DESCRIPTION                                                   LOCATION
-----------       -----------------------------------------------------------   ----------------------------------------------------
<S>               <C>                                                           <C>
23.1              Consent  of  Stonefield  Josephson,   Inc.,   independent     Provided Herewith
                  auditors

31.1 - 31.4       Certifications                                                Provided Herewith

</TABLE>

      (b) Reports on Form 8-K

      NeoMedia  filed a report on Form 8-K on October 6, 2005,  with  respect to
Item 1.01,  reporting  that it had entered into a paint  distribution  agreement
with WI-THO AS, under which WI-THO AS would distribute NeoMedia's paint products
throughout Scandinavia.

      NeoMedia filed a report on Form 8-K on December 14, 2005,  with respect to
Item 1.01,  reporting  that it had entered into a paint  distribution  agreement
with PPG Industries' PPG Shanghai Trading Co. Ltd. ("PPG"), under which NeoMedia
would distribute automotive  aftermarket products produced by PPG and serve as a
non-exclusive distributor of PPG products to Beijing Sino-US Jinche Yingang Auto
Technological Services Limited in the People's Republic of China.

      NeoMedia filed a report on Form 8-K on December 20, 2005,  with respect to
Item 1.01,  reporting  that it had entered  into a paint supply  agreement  with
DuPont  de  Nemours  (Belgium)  BVBA  of  Belgium,  a  subsidiary  of IE  DuPont
("DuPont"),  under which NeoMedia would serve as a non-exclusive  distributor of
DuPont  products to Beijing Sino-US Jinche Yingang Auto  Technological  Services
Limited in the People's Republic of China.

      NeoMedia filed a report on Form 8-K on February 10, 2006,  with respect to
Item 8.01,  reporting that Cornell  Capital  Partners had exercised  warrants to
purchase  20,000,000 shares of NeoMedia common stock, par value $0.01 per share.
The  warrants  were issued to Cornell  Capital on March 30, 2005 as a commitment
fee for Cornell Capital  entering into that certain Standby Equity  Distribution
Agreement, dated March 30, 2006 by and between NeoMedia and Cornell Capital. The
warrants had an exercise price equal to $0.20 per share.  In connection with the
exercise of the 20,000,000 Warrants, NeoMedia received proceeds of $4,000,000.

      NeoMedia filed a report on Form 8-K on February 10, 2006,  with respect to
Item 1.01,  reporting  that it had signed a definitive  merger  agreement  under
which NeoMedia  acquired all of the outstanding  shares of Mobot in exchange for
$3,500,000 cash and $6,500,000 in shares of NeoMedia common stock.

      NeoMedia filed a report on Form 8-K on February 14, 2006,  with respect to
Item 1.01, reporting that it had signed a definitive sale and purchase agreement
under which  NeoMedia  acquired  all of the  outstanding  shares of 12Snap AG of
Munich,  Germany,  in exchange for $2,500,000  cash and $19,500,000 in shares of
NeoMedia common stock.

      NeoMedia filed a report on Form 8-K on February 20, 2006,  with respect to
Items 1.01 and 8.01, reporting that it had signed a non-binding letter of intent
to acquire  HipCricket,  Inc. of Essex,  CT in exchange  for  $500,000  cash and
$4,000,000  of NeoMedia  common  stock.  The 8-K also reported that NeoMedia had
loaned Hip Cricket  $250,000 in the form of an unsecured  promissory  note,  the
principal  and interest of which would be applied  toward the purchase  price in
the event the acquisition is completed.

                                     III-21

<PAGE>

      NeoMedia filed a report on Form 8-K on February 21, 2006,  with respect to
Items  1.01  and  3.02,  reporting  that  it  had  entered  into  a $27  million
convertible preferred stock sale agreement with Cornell Capital Partners.

      NeoMedia filed a report on Form 8-K on February 21, 2006,  with respect to
Item 1.01, reporting that it had signed a definitive sale and purchase agreement
under which  NeoMedia  acquired all of the  outstanding  shares of Gavitec AG of
Wurselen,  Germany in exchange for  $1,800,000  cash and $5,400,000 in shares of
NeoMedia common stock.

      NeoMedia filed a report on Form 8-K on February 21, 2006,  with respect to
Item 2.01,  reporting that it had completed all of the closing  requirements for
the acquisition of Mobot, Inc.

      NeoMedia filed a report on Form 8-K on February 22, 2006,  with respect to
Item 1.01,  reporting that it had signed a definitive  share purchase  agreement
under which it acquired all of the outstanding  shares of Sponge Ltd. Of London,
in  exchange  for   (pound)3,450,000   (approximately   $6  million)   cash  and
(pound)6,550,000  (approximately  $11.4  million) in shares of  NeoMedia  common
stock.   The   agreement   also   calls  for   Sponge  to  earn  an   additional
(pound)2,500,000  (approximately  $4.4  million) in the form of NeoMedia  common
stock if, during the two-year period  beginning at closing,  the Sponge business
earns in excess of (pound)1,300,000 (approximately $2.3 million) in net profits

      NeoMedia filed a report on Form 8-K on February 24, 2006,  with respect to
Item 2.01,  reporting that it had completed all of the closing  requirements for
the acquisitions of 12 Snap AG, Gavitec AG, and Sponge Ltd.

      NeoMedia filed a report on Form 8-K on March 2, 2006, with respect to Item
1.01,  reporting that it had signed a 10-year  exclusive  agreement with Beijing
Sino-US Jinche Yingang Auto Technological Services Limited.

      NeoMedia  filed a report on Form 8-K on March 22,  2006,  with  respect to
Item 1.01,  reporting that it had loaned an additional  $250,000 to Hip Cricket,
Inc., pursuant to the terms of a previously signed letter of intent.

      NeoMedia  filed a report on Form 8-K on March 23,  2006,  with  respect to
Item 2.01, reporting that it had closed its acquisition of BSD Software, Inc.

                                       III-22
<PAGE>

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

AUDIT FEES

      The  aggregate  fees  billed by  Stonefield  Josephson,  Inc.,  NeoMedia's
independent auditors,  for the audit of NeoMedia's annual consolidated financial
statements  and reviews of quarterly  financial  statements  for the years ended
December 31, 2005 and 2004 were $151,000 and $137,000, respectively.

AUDIT-RELATED FEES

      The  aggregate  fees  billed by  Stonefield  Josephson,  Inc.,  NeoMedia's
independent  auditors,  for assurance  and related  services for the years ended
December 31, 2005 and 2004 were $0 and $0, respectively.

TAX FEES

      The  aggregate  fees billed by Wiltshire,  Whitley,  Richardson & English,
NeoMedia's principal accountants for tax compliance,  advice, and planning, were
$0 and $9,000 for the years ended December 31, 2005 and 2004, respectfully.

ALL OTHER FEES

      The  aggregate  fees  billed  by  Stonefield  Josephson,  Inc.,  for other
products and services, primarily related to registration statements,  during the
years ended December 31, 2005 and 2004 were $60,000 and $0, respectively.

AUDIT COMMITTEE PRE-APPROVAL

      The  audit  committee  of  NeoMedia's  board  of  directors  approves  all
non-audit services provided by NeoMedia's primary accountants.

                                       III-23
<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 29th day of March, 2006.

                           NEOMEDIA TECHNOLOGIES, INC.
                           REGISTRANT


                           By:-------------------------------------------------
                              /s/ Charles T. Jensen, President, Chief Executive
                              Officer, and Director

      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 March 29, 2006.

<TABLE>
<CAPTION>

           SIGNATURES                                          TITLE                                        DATE
----------------------------------------      ----------------------------------------        --------------------------------------
<S>                                           <C>                                             <C>

------------------------------------          President, Chief Executive Officer, and
/s/ Charles T. Jensen                         Director                                        March 29, 2006

                                              Director                                        March 29, 2006
------------------------------------
/s/ William E. Fritz

                                              Chairman of the Board
------------------------------------
/s/ Charles W. Fritz                                                                          March 29, 2006

------------------------------------          Vice-President, Chief Financial
/s/ David A. Dodge                            Officer and principal accounting officer        March 29, 2006

                                              Director                                        March 29, 2006
------------------------------------
/s/ Hayes Barclay

                                              Director                                        March 29, 2006
------------------------------------
/s/ James J. Keil

</TABLE>

                                     10.54-1
<PAGE>