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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, 2003

                                       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 402
            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:

                                                Name of each exchange
              Title of Each Class                on which registered
        ----------------------------       -------------------------------
        Common Stock, par value $.01       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
$2,400,000.

         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 January 30, 2004 ($0.11) was  $20,676,000.
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 27, 2004, there were outstanding  278,900,410  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  "PaperClickTM"  brand name. The
primary focus of the Company is to develop and commercialize  such technologies.
The  Company  has  also  developed  an  extensive  patent   portfolio   covering
convergence of the physical world and the Internet.

      The Company has adopted a code of ethics,  as required by the rules of the
SEC. 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

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

         - NeoMedia Internet Switching Software (NISS), and

         - NeoMedia Consulting and Integration Services (NCIS)

      NISS  (physical  world-to-Internet  offerings) is the core business and is
based in the United States,  with  development and operating  facilities in Fort
Myers,  Florida.  NISS  develops and supports the  Company's  physical  world to
Internet core technology,  including  NeoMedia's linking "switch" and NeoMedia's
application  platforms.  NISS also manages the Company'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 the Company was organized.  This unit resells client-server equipment
and related software, and general and specialized  consulting services.  Systems
integration  services also identifies prospects for custom applications based on
NeoMedia's products and services. These operations are based in Lisle, Illinois.

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,

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<PAGE>

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.

     NeoMedia  also  has  the  following  wholly-owned  subsidiaries:   NeoMedia
Migration,  Inc.,  incorporated  in  Delaware;   Distribuidora  Vallarta,  S.A.,
incorporated in Guatemala;  NeoMedia Technologies of Canada, Inc.,  incorporated
in Canada;  NeoMedia Tech,  Inc.,  incorporated in Delaware;  NeoMedia EDV GMBH,
incorporated   in  Austria;   NeoMedia   Technologies   Holding   Company  B.V.,
incorporated in the Netherlands;  NeoMedia  Technologies de Mexico S.A. de C.V.,
incorporated in Mexico;  NeoMedia Migration de Mexico S.A. de C.V., incorporated
in Mexico;  NeoMedia  Technologies do Brazil Ltd.,  incorporated in Brazil,  and
NeoMedia Technologies UK Limited, incorporated in the United Kingdom. In January
2004, the Company established NeoMedia Micro Paint Repair, Inc. in Nevada.


Recent Developments

AirClic, Inc.

     On July 3, 2001,  NeoMedia entered into a non-binding letter of intent with
AirClic,  Inc.,  which  contemplated  an intellectual  property  cross-licensing
transaction  between  NeoMedia  and  AirClic.  Under the terms of the  letter of
intent,  AirClic was to provide  NeoMedia with bridge  financing of  $2,000,000,
which was to be paid to  NeoMedia in  installments.  On July 11,  2001,  AirClic
advanced  $500,000 in bridge  financing  to NeoMedia in return for a  promissory
note secured by all of NeoMedia's assets. During the negotiation of a definitive
set of agreements,  the parties decided not to proceed with the  cross-licensing
transaction.  AirClic then initiated two lawsuits against NeoMedia, one of which
was dismissed, the other of which was settled (see "Legal Proceedings").

     On October 3, 2003, the Company paid AirClic the principal plus interest in
the  approximate  amount of $610,000.  On December 5, 2003,  the Company paid an
additional  $115,000 in legal fees and entered into a settlement  agreement with
AirClic  under  which  the  suit  was  dismissed.  The  Company  has no  further
obligation relating to this matter.

     On January 23, 2004, NeoMedia filed a patent  infringement  lawsuit against
AirClic,  Scanbuy, Inc., and LScan Technologies,  Inc. The suit claims that each
of the parties has  manufactured,  or has  manufactured for it, and has used, or
actively  induced  others to use,  technology  which  allows  customers to use a
built-in UPC bar code scanner to scan individual  items and access  information.
The  Complaint  states  that  AirClic,  Scanbuy  and LScan  have had  actual and
constructive notice of the existence of the patents-in-suite,  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.  NeoMedia's  Complaint
seeks compensatory damages for infringement by AirClic,  Scanbuy and LScan, with
those  damages  to be  trebled  due to the  willful  and  wanton  nature  of the
infringement.  NeoMedia  also  seeks to  preliminarily  and  permanently  enjoin
AirClic, Scanbuy and LScan from their infringing activities

Brandkey Systems Corp. Patent License

     During May 2002,  NeoMedia  granted a personal,  worldwide,  non-exclusive,
limited   intellectual   property   licensing   agreement  to  Brandkey  Systems
Corporation.  Brandkey paid the Company a $50,000  licensing  fee at signing,  a
$25,000  minimum  royalty  in  2003,  and  is  obligated  to  pay  2.5%  of  all
royalty-based revenues earned by Brandkey,  with minimum royalties of $50,000 in
2004, and $75,000 in 2005 and after.




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Loch Energy, Inc.

     On March 7, 2003,  NeoMedia  announced  that it had reached an agreement in
principal to acquire and merge with Loch Energy,  Inc.,  an oil and gas provider
based in Humble, Texas.

     On October 1, 2003,  NeoMedia  discovered  that the royalty  interest  from
future sales of oil owned by Loch were  oversold,  which would likely  result in
materially  lower  projected  available  cashflow from Loch's  operations.  This
projected  available  cashflow was the basis for the acquisition.  On October 3,
2003,  NeoMedia  cancelled the  Memorandum of Terms signed on March 7, 2003, and
terminated the acquisition and merger proceedings.

PaperClick Business Partnerships

         On September 8, 2003,  NeoMedia  announced  its  PaperClick  for Camera
CellphonesTM, a mobile version of the Company's PaperClickTM software that links
physical objects to the Internet.  On October 30, 2003,  NeoMedia  announced its
go-to-market strategy for PaperClick for Camera Cellphones, under which consumer
product  manufacturers  and retailers will register their product codes, such as
Universal  Product Codes ("UPC") and European Article  Numbering  ("EAN") codes,
with a "click  management  services"  provider,  who will activate and route the
codes to the proper  location on the Internet.  Consumers  with  PaperClick  for
Camera  CellphonesTM and mobile web access can then take a picture of registered
barcodes and be immediately linked to an Internet location of the manufacturer's
or retailer's  choice.  To this end, NeoMedia signed an agreement with 12Snap UK
Ltd. in January 2004,  under which 12Snap will market and promote the PaperClick
for Camera CellphonesTM  technology in Europe.  NeoMedia has also signed letters
of intent  with  Seven  Worldwide  to enter  into  contracts  to  provide  click
management  services  in Europe,  and with  iCoupon  and  Digital Rum to provide
marketing  and  promotion   services   associated  with  PaperClick  for  Camera
CellphonesTM.  NeoMedia has engaged Big Gig Strategies and SRP Consulting  Group
LLC to act as agents to  promote  and sell the  offering  in Europe  and the US,
respectively.

Secure Source Technologies, Inc.

      On  October 8, 2003,  NeoMedia  acquired  Secure  Source  Technologies,  a
provider  of  security   solutions  and  covert  security   technology  for  the
manufacturing  and financial  services  industries,  in exchange for 3.5 million
shares of NeoMedia's  common stock.  With the purchase of SST, NeoMedia acquired
additional patents that complement its existing intellectual property portfolio,
as well as a security software platform, and computer equipment.

BSD Software/Triton Global Business Services

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



                                       3
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Virgin Entertainment Group

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

CSI International, Inc.

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

Industry Overview

     NeoMedia Internet Switching Software

      The goal of NeoMedia's  Internet Switching Software business segment is to
promote mass adoption of the Company's switch and background computer process to
link physical world objects to the Internet. The Company's switching platform is
a state-of-the-art open and extensible  cross-media publishing tool that applies
to  customers  in  a  variety  of  industrial,   commercial,   and   educational
applications. This business segment is also responsible for licensing NeoMedia's
intellectual  property to others as a means of promoting this new market as well
as providing a revenue and cash  resource.  The Company has been  developing its
physical  world-to-Internet  technology  and offerings  since 1996 and considers
itself an innovator and pioneer in this industry. In the past several years, the
Company has seen similar  technologies  and concepts emerge in the  marketplace,
and sees these events as a positive validation of the physical world-to-internet
concept.

      The Company believes the key to the adoption of physical world-to-Internet
technologies  in the  marketplace  will  be in the  development  of  real  world
applications  that  provide  the end user a  valuable  experience.  The  Company
believes  that  camera-enabled  cellular  telephones  are a key  device  in  the
development of the market.  The Company's  product and service  offerings differ
from those of its  competitors  in that,  unlike their  products  and  services,
NeoMedia's products do not require the use of a proprietary or specified device,
and NeoMedia  offers its service on a private label basis.  Management  believes
that the Company is positioned to provide  solutions  that preserve a customer's
brand and also provide tailored solutions to fit the customer needs.



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<PAGE>

NeoMedia Consulting and Integration Services

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

      Proprietary  products,  such as  NeoMedia  encoders,  offer a  competitive
value-add to the  Company's  NCIS  business.  The Company  believes  that it has
unique offerings, which, to the extent that they meet market needs, should offer
the potential for growth in this  industry.  In addition,  the Company's  recent
addition of Storage  Area  Network  Solutions  allows it to  participate  in the
higher-margin area of the open systems marketplace.

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

Strategy

       NeoMedia has spent the past seven years  developing and patenting the now
confirmed  space  of  linking  the  physical  and  Internet  environments,   and
developing and  implementing  five  generations of  continuously  refined switch
technology that bridge these  environments.  The Company recently  announced its
PaperClick  for Camera Cell  PhonesTM  product and  go-to-market  strategy.  The
Company  is  strategically  pursuing  potential  licensees  of the  PaperClickTM
switching  platform,  as well as intellectual  property licensing  opportunities
with  organizations  attempting  to  commercialize  physical   world-to-Internet
technology, such as Symbol Technologies, A.T. Cross Company and Brandkey Systems
Corporation.

Products/Services

     NeoMedia Internet Switching Software

     Resolution  Server Software.  The Resolution  Server Software is NeoMedia's
server software suite used to map PaperClick Identifiers(TM), and UPC, EAN, ISBN
and SKU codes on physical objects (products) to URL addresses on the Internet or
to data on other computer networks.

     Client  Software.  Client  Software is installed  on personal  computers or
wireless  communication  devices (i.e. camera phones, PDA's, etc.) enabling them
to read and  store  identifiers  and  display  the  corresponding  web  content.
Identifiers  currently recognized by NeoMedia's suite of Client Software include
PaperClick codes,  UPC/EAN codes, and ISBN codes.  NeoMedia  anticipates  adding
support for additional  types of identifiers  in the future.  For  organizations
wishing to create "closed systems",  NeoMedia offers customized  versions of the
Client  Software with the  licensee's  brand  identity,  rather than the generic
PaperClick brand identity.

     PaperClick Linking Services.

     PaperClick Linking Services(TM) are simple and powerful.  Simple - consumer
product  companies doing  advertising and promotions simply pay for "activation"
of UPC, EAN, ISBN and other bar codes on their  products and printed  materials.
When  clicked  with  a  PaperClick-enabled  device,  these  identifiers  provide
easy-to-use  and  accurate  links  between  products and  consumers.  Powerful -
instead of sending out broad hit-or-miss TV or magazine campaigns to the masses,
consumer product companies may offer focused  campaigns  tailored to individuals
based on their  demographics  captured  when they use the  system.  The  Company
believes  that the  result is a seamless  technique  for brand  managers,  media
buyers,  and major  enterprises  to roll out  targeted  messages  directly  from
packaged  products,  print ads,  editorials,  direct mail,  or from a variety of
labels and printed materials, directly to customers worldwide.



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     PaperClick Linking Services include Click Management Services(TM) - ongoing
management of the PaperClick Access Infrastructure(TM) through NeoMedia's United
States and  European  partners  on behalf of clients.  Specifically,  NeoMedia's
partners  will

     o    Handle the hosting,  setup and ongoing  management  of the  PaperClick
          Resolution Server hardware, software, and database.

     o    Manage  new  releases  of  the  software  and  access  to   NeoMedia's
          internally controlled PaperClick Global Routing Server.

     o    Assist clients in establishing  and  maintaining the linkages  between
          codes and web sites.

     o    Consult with clients on the proper  preparation of web-based  material
          for display on mobile and wireless devices.

     With Click Management  Services as the single source,  from initial rollout
through full implementation, links can be dynamically changed, and integrity and
reliability of clicks  ensured,  all without  requiring  brand managers or other
organizations to make large investments in staff, training or infrastructure.

     Seven  Worldwide  has signed a Letter of Intent to complete a contract with
NeoMedia to offer Click  Management  Services  to consumer  products  companies.
Seven Worldwide is a $424 million  company with 60 years of experience  bringing
brands and associated  graphics to markets for clients including several Fortune
500 companies.  Upon  completion of the contract,  NeoMedia and Seven  Worldwide
intend to manage  authentication  and  authorization  of "clicks" to Internet or
other  network  content  and intend to offer  separately  demographic  reporting
services and consulting for project implementation and management.

     PaperClick  Linking Services fall into two broad  categories:  Services for
existing industry codes, and services for created codes.

         (A) Linking Services For Existing Industry Codes:

                  On  a  fee-per-link  basis,  consumer  product  companies  may
             activate or  "PaperClick-enable"  the existing industry codes on or
             in all their existing  products or other printed  materials.  These
             codes may then be "clicked" or "read" by PaperClick-enabled devices
             and   immediately   linked  to  specific   promotions,   additional
             information,  in-depth  editorials,  or even  on-line  purchase and
             promotion  fulfillment functions on the Internet or other networks.
             Consumer  product  companies  determine what  information they want
             linked.

                  At present,  PaperClick supports the enabling of existing UPC,
             EAN,  and  ISBN  barcodes.   NeoMedia  plans  to  add  support  for
             additional types of industry-standard identifiers in the future.

                  (B) Linking Services For Created Codes:

                  Created codes are  appropriate for situations in which clients
             wish to take advantage of the power of the PaperClick  system,  but
             do not have existing codes,  such as UPC, EAN or ISBN barcodes,  on
             the   products,   materials  or  items  that  they  would  like  to
             PaperClick-enable.

                  On a fee-per-link basis, consumer product companies can create
             and activate  PaperClick Codes on or in all their products or other
             printed materials. These codes may then be "clicked" or "read" by a


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             PaperClick-enabled   device  and  immediately  linked  to  specific
             promotions,  additional information,  in-depth editorials,  or even
             on-line  purchase  and  promotion   fulfillment  functions  on  the
             Internet or other networks.  Consumer product  companies  determine
             what information they want linked.

                  The   fee   includes   all   benefits   as   offered   through
             PaperClick(TM)  Linking Services for Existing Product Codes through
             NeoMedia's US and European partners - Click Management Services. In
             addition,  Click  Management  Services will consult with clients on
             how to best  integrate  created  codes into their  products  and/or
             materials,  ensuring  that they will be able to be properly read by
             PaperClick-enabled devices.

    Intellectual Property Licensing.

     The Company  currently  holds six U.S.  patents  relating  to the  physical
world-to-Internet  marketplace,  and an additional six patents acquired with the
purchase  of Secure  Source  Technologies  related  to  document  security.  The
Company's  core   physical-world-to-Internet   patent   portfolio   (Patent  No.
5,933,829,  No. 5,978,773,  No. 6,108,656, No. 6,199,048, No. 6,434,561, and No.
6,542,933)  is  comprised  of "system and method"  patents that cover the use of
machine-readable  data for information  retrieval.  Among the  identifiers  that
could be classified as machine-readable are  PaperClick-enabled(TM) 2D barcodes,
1D barcodes,  UPC/EAN barcodes,  magnetic stripes,  OCR/ICR,  RFID,  smartcards,
numbers,  hot words, and voice. The Company intends to license this intellectual
property  portfolio  to  companies  endeavoring  to tap  the  potential  of this
emerging  market.  To date,  the Company has entered into such  agreements  with
Digital:Convergence,  A.T.  Cross  Company,  Symbol  Technologies,  and Brandkey
Systems  Corporation.  During 2002,  the Company  entered into an agreement with
Baniak  Pine and  Gannon,  a law  firm  specializing  in  patent  licensing  and
litigation,  under  which  the firm  will  represent  NeoMedia  in  seeking  out
potential licensees of NeoMedia's patent portfolio.

     NeoMedia Consulting and Integration Services

     NCIS  is a  group  of  highly  skilled  application  developers  thoroughly
familiar  with  systems  integration,  storage  networks,  and other  associated
technologies who contract to develop custom applications for clients.

System integration  project management & consulting services are offered through
NeoMedia's NCIS business unit. These services fall into two broad categories:

     A.   For implementation of PaperClick(TM)Platform Software

     B.   For development and implementation of Customized Applications


          (A)  Services for implementation of PaperClick(TM) Platform Software

               The  NCIS  business  unit is  comprised  of the  executive  team,
               technical  team,  and project  managers to establish and deploy a
               common set of processes and  templates,  presenting an organized,
               unified  implementation from each project manager. These reusable
               project management  components enable fast,  efficient PaperClick
               project  deployment.  Key functions of the NCIS business unit are
               to:

               o    Create PaperClick Implementation Vision.

               o    Develop  methodology  including  updating and  deployment of
                    best practices.

               o    Facilitate  team  communication  through  common  processes,
                    deliverables, and terminology.



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               o    Support a common repository so that prior project management
                    deliverables   can  be  candidates   for  reuse  by  similar
                    projects.

               o    Provide clients (and internal management) continual training
                    to build core project management competencies,  a common set
                    of experiences, and an understanding of PaperClick technical
                    development.

               o    Track status of  PaperClick  projects,  and provide  project
                    visibility to management in a common and consistent manner.

                    Services    complementary    to   a    PaperClick    project
               implementation are also provided.  They may consist of consulting
               or  hardware  services  that  are  part of the  project,  such as
               additional  servers,  network  configurations  etc.,  or  totally
               separate  from the project due to a parallel  need.  Services may
               also include  continuation and maintenance of completed projects.
               Post implementation change orders, training, and code alterations
               are  handled  through  this  division  of the System  Integration
               Business Unit.

          (B)  Services  for  development  and   implementation   of  Customized
               Applications:

               NeoMedia's  NCIS  business  assists  clients  in  developing  and
               implementing their own customized PaperClick applications.

     Storage Area  Networks  (SAN).  SAN is a Storage  Management  solutions and
consultancy  consisting  of tools  and  services  that  insure  data  integrity,
efficiency and  accessibility,  achieved through moving data backup,  access and
archival  functions off of traditional  Local Area Networks (LANs) and Wide Area
Networks  (WANs)  that are  added on to a highly  reliable  independent  managed
network.

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

Strategic Relationships

     NeoMedia Internet Switching Software

     In January 2001, the Company  entered into a patent license with A.T. Cross
Company, a major international  manufacturer of fine writing instruments and pen
computing  products.  A.T. Cross Company obtained the rights under the Company's
physical  world-to-Internet  patents for personal portable scanning devices used
to  link  bar  codes  on  documents  and  other   physical   consumer  goods  to
corresponding Internet content. A.T. Cross Company will pay a royalty per device
to the Company for license  rights  granted under this  agreement.  To date, the
Company has not recognized any revenue relating to this contract.

     In  May  2001,   the  Company   entered  into  an  agreement   with  Symbol
Technologies,  Inc., granting Symbol a worldwide,  non-exclusive  license of its
patents  surrounding  the  sale and use of  scanning  devices  used in  physical
world-to-Internet  technologies.  Symbol  will pay the  Company  a  royalty  per
qualified  device  shipped.  To date, the Company has not recognized any revenue
relating to this contract.



                                       8
<PAGE>

     During January 2002, the Company engaged Baniak Pine and Gannon,  a Chicago
law firm  specializing in intellectual  property  licensing and litigation.  The
firm  will  assist  the  Company  in  seeking  out  potential  licensees  of its
intellectual property portfolio, including any resulting litigation.

     During May 2002, the Company granted a personal, worldwide,  non-exclusive,
limited   intellectual   property   licensing   agreement  to  Brandkey  Systems
Corporation.  Brandkey paid the Company a $50,000 upfront licensing fee in 2002,
a  $25,000  royalty  in  2003,  and is  obligated  to  pay  2.5%  of all  future
royalty-based revenues earned by Brandkey,  with minimum royalties of $50,000 in
2004, and $75,000 in 2005 and after.

     During  September  2003,  NeoMedia  engaged  Big  Gig  Strategies  and  SRP
Consulting  Group LLC as agents to promote and sell the Company`s  PaperClickTM
and  PaperClick  for Camera  CellphonesTM  technology,  products and services in
Europe and the US, respectively.

     During January 2004, the Company contracted with Seven Worldwide to provide
European click  management  services for its PaperClick for Camera  CellphonesTM
technology, and also signed letters of intent with Seven Worldwide to enter into
contracts to provide click management  services in Europe,  and with iCoupon and
Digital  Rum  to  provide  marketing  and  promotion  services  associated  with
PaperClick for Camera CellphonesTM.

     NeoMedia Consulting and Integration Services

         Through this segment,  the Company provides  services and products to a
spectrum of  customers,  ranging  from  closely  held  companies  to Fortune 500
companies.  For the year ended  December 31, 2002,  one customer,  SBC/Ameritech
Services,  Inc.,  accounted  for  36% of the  Company's  revenue.  During  2003,
SBC/Ameritech  centralized  its  purchasing  function,  resulting  in a material
decrease in sales to  SBC/Ameritech.  For the year ended December 31, 2003 sales
to  SBC/Ameritech  accounted for only 4% of the Company's  revenue.  The Company
expects sales to  SBC/Ameritech  as a percentage  of total sales to decline,  or
potentially  stop  altogether,  in 2004.  The  Company  does not have a  written
agreement with Ameritech and, therefore,  there are no contractual provisions to
prevent  Ameritech from  terminating  its  relationship  with the Company at any
time. In addition, a single supplier supplies the equipment and software,  which
is  re-marketed  to this  customer.  Accordingly,  the loss of this  customer or
supplier could  materially  adversely  affect  NeoMedia's  business,  prospects,
financial condition, and results of operations.  For these reasons,  NeoMedia is
seeking,  and continue to seek,  to diversify its sources of revenue and vendors
from whom it purchases.

Sales and Marketing

     NeoMedia Internet Switching Software

     PaperClickTM.  During 2003, NeoMedia  implemented an agent strategy to sell
and market its PaperClick  suite of products.  To this end, during 2003 NeoMedia
engaged Big Gig Strategies  and SRP Consulting  Group LLC as an agent to promote
and sell the  Company's  PaperClickTM  and  PaperClick  for Camera  CellphonesTM
technology,  products  and  services  in Europe and the US,  respectively.  Also
during 2003, the Company reached a partnering  agreement with Tibbs  Information
Systems,  Inc.,  under which the two companies  intend to team up to compete for
government  and  homeland  security  projects.   NeoMedia  will  contribute  its
Physical-world-to-Internet   platform,   intellectual   property,  and  industry
know-how.  No  assurances  can be given  that any  successful  association  will
result.



                                       9
<PAGE>

     NeoMedia Consulting and Integration Services

     The Company,  through its systems integration services segment, markets its
products  and  services,  as well as those for  which it acts as a  re-marketer,
primarily  through a direct sales force,  which was composed of four individuals
as of December  31,  2003.  In  addition,  this  business  unit also relies upon
strategic  alliances  to  help  market  products  and  services,   provide  lead
referrals,   and  establish  informal  co-marketing   arrangements.   NeoMedia's
representatives   attend  seminars  and  trade  shows,   both  as  speakers  and
participants,  to help market products and services. In addition,  this business
segment has three agents in the United States that sell NeoMedia's  products and
services.

Customers

     NeoMedia Internet Switching Software

      PaperClickTM.  NeoMedia's  customers  for its  physical  world-to-Internet
offerings have included  Amway,  Solar  Communications,  Inc., and NYCO Products
Company.

      Intellectual Property Licensing.  To date, the Company has entered into IP
licensing agreements with Digital:Convergence  Corporation,  A.T. Cross Company,
Symbol Technologies,  and Brandkey Systems  Corporation.  The Company intends to
pursue additional license agreements in the future.

     NeoMedia Consulting and Integration Services

      The Company provides  equipment and software reselling and integration and
automation  consulting  services  to a variety  of  customers  across a range of
industries,   including  telecommunications,   insurance,   financial  services,
manufacturing, government entities, and more.

Research and Development

     NeoMedia Internet Switching Software

     NISS employed 2 persons in the area of product  development  as of December
31, 2003 and 2002.  During the years  ended  December  31,  2003 and 2002,  NISS
incurred   total   software   development   costs  of  $332,000  and   $775,000,
respectively, none of which were capitalized as software development costs.

      NeoMedia Consulting and Integration Services

     Any  future  research  or  development  of  products  relating  to the NCIS
business unit will be performed by the application  services division or outside
contractors.

Intellectual Property Rights

     The Company'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 its  ability  to
protect its proprietary  technology and other  intellectual  property rights. In
addition,  the Company must conduct its  operations  without  infringing  on the
proprietary  rights of third  parties.  The  Company  also  intends to rely upon
unpatented  trade  secrets and the know-how and expertise of its  employees.  To
protect its proprietary  technology and other intellectual property, the Company
relies  primarily on a  combination  of the  protections  provided by applicable
patent,   copyright,   trademark,   and  trade  secret  laws,   as  well  as  on
confidentiality  procedures  and  licensing  arrangements.  The  Company has six
patents for its physical  world-to-Internet  technology,  and an additional  six
patents  acquired  with the purchase of Secure  Source  Technologies  related to
document  security.  The  Company  also has several  trademarks  relating to its
proprietary software products.



                                       10
<PAGE>

Competition

     NeoMedia Internet Switching Software

         Although,    the   Company   has   been    developing    its   physical
world-to-Internet   technology   and   offerings   since  1996,   the   physical
world-to-Internet market in which the Company competes is relatively new. In the
past  year,  new   technologies  and  concepts  have  emerged  in  the  physical
world-to-Internet  space.  The Company views the increased  development of other
products in this space as a validation of the physical world-to-Internet concept
and believes that the increased  promotion of these products and services by the
Company and other companies in this space,  including AirClic,  Inc., will raise
consumer awareness of this technology, resulting in a larger market. The Company
believes   that  the   significant   portfolio  of  physical   world-to-Internet
technologies  that it has  developed  over the last five  years  will  provide a
barrier to entry for most potential competitors.

      NeoMedia Consulting and Integration Services.

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

Product Liability

         The Company has never had any product  liability claim asserted against
it. Currently the Company does not maintain insurance against such claims, which
could result in material adverse effects in the event of a successful claim.

Government Regulation

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


                                       11
<PAGE>

     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.

Environmental Protection Compliance

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

Employees

         As of December 31,  2003,  the Company  employed 14 persons.  Of the 14
employees,  7 are located at the Company's  headquarters in Fort Myers, Florida,
and 7 at other domestic locations.  Of the 14 employees,  3 are dedicated to the
Application  Services business unit, 7 are dedicated to the Systems  Integration
Services  business  unit,  and 4 provide  shared  services used by both business
units. None of the Company's employees are represented by a labor union or bound
by a collective  bargaining  agreement.  The Company  believes that its employee
relations are good.

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

Safe Harbor Provision of the Private Securities Litigation Act of 1995

         The Company operates in a dynamic and rapidly changing environment that
involves numerous risks and  uncertainties.  The market for software products is
generally  characterized  by rapidly changing  technology,  frequent new product
introductions  and changes in customer  requirements  which can render  existing
products  obsolete or  unmarketable.  The statements  contained in this document
that are not historical facts may be forward-looking statements (as such term is
defined in the rules  promulgated  pursuant to the  Securities  Exchange  Act of
1934)  that are  subject  to a variety  of risks and  uncertainties  more  fully
described in the Company's filings with the Securities and Exchange  Commission.
The forward-looking statements are based on the beliefs of the management of the
Company, as well as assumptions made by, and information currently available to,
the  Company's  management.   Accordingly,   these  statements  are  subject  to
significant  risks,  uncertainties  and  contingencies  which  could  cause  the
Company's  actual  growth,  results,  performance  and  business  prospects  and
opportunities  in 2004 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.



                                       12
<PAGE>
                                  RISK FACTORS

Risks Specific To NeoMedia

The Company Has Historically Lost Money and Losses May Continue

     The  Company has  incurred  substantial  losses  since its  inception,  and
anticipates  continuing to incur substantial losses for the foreseeable  future.
The Company  incurred a loss of $5,382,000  in the year ended  December 31, 2003
and $7,421,000 in the year ended  December 31, 2002.  The Company's  accumulated
losses were  approximately  $76,147,000  as of December 31, 2003. As of December
31, 2003 and 2002, the Company had a working capital  (deficit) of approximately
$(6,526,000)  and  $(8,985,000),  respectively.  The Company  had  stockholders'
deficit  of  $(3,203,000)  and  $(6,026,000)  at  December  31,  2003 and  2002,
respectively.  The Company  generated  revenues of $2,400,000 and $9,399,000 for
the years ended December 31, 2003 and 2002,  respectively.  In addition,  during
the years ended December 31, 2003 and 2002, the Company  recorded  negative cash
flows from operations of $3,191,000 and $535,000,  respectively. To succeed, the
Company  must develop new client and customer  relationships  and  substantially
increase its revenue derived from improved  products and additional  value-added
services. The Company has expended and to the extent it has available financing,
the Company 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, the Company may not
be able to achieve or sustain profitability.

The Company's Independent Accountants Have Added Going Concern Language To Their
Report On The Company's Financial  Statements,  Which Means That The Company May
Not Be Able To Continue Operations

     The  report  of  Stonefield  Josephson,  Inc.,  the  Company's  independent
auditors,  with respect to the Company's  financial  statements  and the related
notes for the years ended  December 31, 2003 and 2002,  indicates  that,  at the
date of their report,  the Company had suffered recurring losses from operations
and that the Company's current cash position raises  substantial doubt about its
ability to continue as a going concern.  The Company's  financial  statements do
not include any adjustments that might result from this uncertainty.

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

     The physical  world-to-Internet  market in which the Company  operates is a
recently developed market. Further, the Company has conducted operations in this
market only since March 1996. Consequently, the Company has a relatively limited
operating history upon which an investor may base an evaluation of the Company's
primary  business and  determine  the  Company's  prospects  for  achieving  its
intended  business  objectives.  To date,  the  Company  has  sold its  physical
world-to-Internet products to only 12 companies.  Further,  Digital:Convergence,
the Company's  primary customer for its physical  world-to-Internet  products in
2000, has filed Chapter 7 of the United States  Bankruptcy Code and is presently
being sued by the Company for default on a promissory note issued to the Company
in lieu of  payment.  The  Company 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 the Company's
future  success  to be  highly  speculative  in light of the  Company's  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 the early stages of development, particularly companies in
new and rapidly evolving markets, such as the physical  world-to-Internet space.
To address these risks, the Company must, among other things:



                                       13
<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 its service offerings and features;

     o    respond to industry and competitive developments; and

     o    attract, retain, and motivate qualified personnel.

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

The Company's Common Stock Is Subject to Price Volatility

     As a result of the emerging and evolving nature of the markets in which the
Company  competes,  as well as the current  nature of the public markets and the
Company's current financial  condition,  the Company believes that its operating
results  may  fluctuate  materially,  as a result  of  which  quarter-to-quarter
comparisons  of its  results of  operations  may not be  meaningful.  If in some
future  quarter,  whether as a result of such a fluctuation  or  otherwise,  the
Company's  results of  operations  fall  below the  expectations  of  securities
analysts and  investors,  the trading price of the Company's  common stock would
likely be materially and adversely affected.  An investor should not rely on the
Company's  results  of  any  interim  period  as an  indication  of  its  future
performance.  Additionally,  the Company's  quarterly  results of operations may
fluctuate  significantly in the future as a result of a variety of factors, many
of which are outside the Company's control. Factors that may cause the Company's
quarterly results to fluctuate include, among others:

     o    the Company's ability to retain existing clients and customers;

     o    the Company's ability to attract new clients and customers at a steady
          rate;

     o    the Company's ability to maintain client satisfaction;

     o    the Company's  ability to motivate  potential clients and customers to
          acquire and implement new technologies;

     o    the extent to which the Company's products gain market acceptance;

     o    the timing and size of client and customer purchases;

     o    introductions of products and services by competitors;

     o    price competition in the markets in which the Company competes;

     o    the  pricing of hardware  and  software  that the  Company  resells or
          integrates into its products;

     o    the level of use of the Internet and online  services,  as well as the
          rate of market acceptance of physical world-to-Internet marketing;

     o    the  Company's   ability  to  upgrade  and  develop  its  systems  and
          infrastructure in a timely and effective manner;



                                       14
<PAGE>

     o    the  Company's   ability  to  attract,   train,   and  retain  skilled
          management, strategic, technical, and creative professionals;

     o    the amount  and timing of  operating  costs and  capital  expenditures
          relating to the expansion of the Company's business,  operations,  and
          infrastructure;

     o    unanticipated  technical,  legal,  and  regulatory  difficulties  with
          respect to use of the Internet; and

     o    general  economic  conditions  and  economic  conditions  specific  to
          Internet technology usage and electronic commerce.

The Company'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

     The  Company'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.
These  requirements  may reduce the potential  market for the  Company's  common
stock by  reducing  the  number of  potential  investors.  This may make it more
difficult for  investors in the  Company's  common stock to sell shares to third
parties or to otherwise  dispose of them.  This could cause the Company'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 $2.0  million (if the
          issuer has been in  continuous  operation for at least three years) or
          $10.0 million (if in continuous  operation for less than three years),
          or with average  revenues of less than $6.0 million for the last three
          years.

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

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

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

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

     o    the Company's 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 the Company develops will obtain market acceptance.

     In the event that the  Internet  Switching  Software  business  unit should
never achieve profitability, that the Company's current product offerings should


                                       15
<PAGE>

so suffer, or that the Company's products fail to obtain market acceptance,  the
Company's business,  prospects,  financial condition,  and results of operations
would be materially adversely affected.

The Company's Success is Dependent Upon The Resale Of Software And Equipment For
Revenue;  A  Reduction  In These  Sales Would  Materially  Adversely  Affect The
Company's Operations And The Price Of Its Stock

     During the years ended December 31, 2003 and 2002, the Company  derived 83%
and 95%, respectively,  of its revenues from the resale of computer software and
technology  equipment.  A loss or a  reduction  of  this  revenue  would  have a
material  adverse  effect  on  the  Company's  business,  prospects,   financial
condition,  and results of operations,  as well as its stock price.  The Company
can provide no assurance that:

     o    the market for its products and services will continue;

     o    the Company  will be  successful  in marketing  these  products due to
          competition and other factors;

     o    the Company will  continue to be able to obtain  short-term  financing
          for the purchase of the products that it resells; or

     o    the Company's  relationship with companies whose products and services
          the Company sells will continue,  including its relationship  with Sun
          Microsystems Computer Company.

     Further,  the Company  believes that the  technology  and equipment  resale
business is becoming a  commodity  industry  for  products  undifferentiated  by
value-added  proprietary  elements and services. A large number of companies act
as re-marketers of another party's products,  and therefore,  the competition in
this area is intense.  Resale  operations are also being compressed as equipment
manufacturers  consolidate their distribution  channels. In some instances,  the
Company, in acting as a re-marketer, may compete with the original manufacturer.
An inability to effectively compete and generate revenues in this industry would
have a material adverse effect on the Company's business,  prospects,  financial
condition, and results of operations.

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

     At December 31, 2003,  approximately 65% of the Company's total assets were
intangible  assets,  consisting  primarily of rights  related to its patents and
other intellectual property. If the Company's operations are unsuccessful, these
assets will have little or no value, which will materially  adversely affect the
value of the Company's stock and the ability of its stockholders to recoup their
investments in the Company's capital stock.

The Company's ISS Business Unit  Marketing  Strategy Has Not Been Tested And May
Not Result In Success

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

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

     The Company 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 the  Company  developed  these  systems  in order to
integrate  disparate systems and hardware on a case-by-case basis, these systems
are inefficient and require a significant  amount of customization.  Such client
and customer specific  customization is time-consuming  and costly and may place
the Company at a competitive disadvantage when compared to competitors with more
efficient systems.


                                       16
<PAGE>

The Company Could Fail to Attract Or Retain Key Personnel

     The  Company'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 the Company has. The Company may not
be successful in attracting and retaining qualified personnel on a timely basis,
on  competitive  terms,  or at all. The Company's  failure to attract and retain
qualified  personnel  would  have a  material  adverse  effect on its  business,
prospects,  financial  condition,  and results of operations  will be materially
adversely affected.

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

     The  Company's  success  depends  largely  on the  skills  of  certain  key
management and technical personnel,  including Charles T. Jensen, its President,
Chief Executive Officer and Chief Operating  Officer,  and Charles W. Fritz, the
Company's  founder  and  Chairman  of the  Board of  Directors.  The loss of the
services of Mr. Jensen or Mr. Fritz could materially harm the Company'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. The
Company  does not  presently  maintain a key-man  life  insurance  policy on Mr.
Jensen or Mr. Fritz.

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

     The Company's success in the physical world-to-Internet and the value-added
systems  integration  markets  is  dependent  upon its  proprietary  technology,
including  its patents and other  intellectual  property,  and on the  Company's
ability to protect its proprietary  technology and other  intellectual  property
rights. In addition,  the Company must conduct its operations without infringing
on the  proprietary  rights of third  parties.  The Company 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,  the Company  relies  primarily on a combination  of the
protections  provided by  applicable  patent,  copyright,  trademark,  and trade
secret laws as well as on confidentiality procedures and licensing arrangements.
The Company has six patents for its physical  world-to-Internet  technology, and
an  additional  six  patents   acquired  with  the  purchase  of  Secure  Source
Technologies  related  to  document  security.  The  Company  also  has  several
trademarks relating to its proprietary  products.  Although the Company believes
that it has  taken  appropriate  steps to  protect  its  unpatented  proprietary
rights, including requiring that its employees and third parties who are granted


                                       17
<PAGE>

access to its proprietary technology enter into confidentiality  agreements with
the Company,  the Company 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 those of the Company.

     The Company  licenses from third  parties  certain  software  tools that it
includes in its services and products. If any of these licenses were terminated,
the Company could be required to seek  licenses for similar  software from other
third parties or develop these tools internally.  The Company 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.  The Company 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, the Company.  An adverse  determination
could subject the Company to significant  liabilities to third parties,  require
the Company to seek  licenses  from,  or pay  royalties  to, third  parties,  or
require the Company to develop appropriate alternative  technology.  Some or all
of these licenses may not be available to the Company on acceptable  terms or at
all,  and the  Company  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 the Company's business, prospects, financial condition, and results of
operations.

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

     Many of the  Company'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  the  Company,  regardless  of the
Company's  responsibility  for such failure.  The Company could,  therefore,  be
subject to claims in connection  with the products and services that the Company
sells.  The Company does not currently  maintain  product  liability  insurance.
There can be no assurance that:

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

     o    the Company would have  sufficient  resources to satisfy any liability
          resulting from any such claim;

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

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

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



                                       18
<PAGE>

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

     Some of the provisions of the Company's  certificate of  incorporation  and
by-laws  could make it more  difficult for a third party to acquire the Company,
even if doing so might be beneficial to the Company's  stockholders by providing
them with the  opportunity  to sell their shares at a premium to the then market
price.  On  December  10,  1999,  the  Company'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 the Company'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  the   Company'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
the Company'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,  the Company'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, and redemption rights,
and sinking fund provisions.

     The  Company  is  authorized  to  issue a total  of  25,000,000  shares  of
Preferred Stock, par value $0.01 per share. The Company 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 the
Company's common stock, and, therefore,  could reduce the value of shares of the
Company'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 its 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
the Company or a change in the Company's control thereby  preserving  NeoMedia's
control by the current stockholders.



                                       19
<PAGE>

Risks Relating To The Company's Industry

The Security of the Internet Poses Risks To The Success Of The Company'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
the Company's physical world-to-Internet business.

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

     The  Company's  future  revenues and any future  profits are  substantially
dependent  upon the  widespread  acceptance  and use of the  Internet  and other
online services as an effective  medium of information  and commerce.  If use of
the Internet and other online  services  does not continue to grow or grows more
slowly than the Company  expects,  if the  infrastructure  for the  Internet and
other online services does not effectively support the growth that may occur, or
if the  Internet  and other  online  services do not become a viable  commercial
marketplace,  the Company's physical  world-to-Internet  business, and therefore
its business,  prospects,  financial condition, and results of operations, could
be materially  adversely affected.  Rapid growth in the use of, and interest in,
the Internet,  the Web, and online services is a recent phenomenon,  and may not
continue on a lasting basis. In addition,  customers may not adopt, and continue
to use,  the  Internet  and other  online  services  as a medium of  information
retrieval  or commerce.  Demand and market  acceptance  for recently  introduced
services  and  products  over  the  Internet  are  subject  to a high  level  of
uncertainty,  and few services  and products  have  generated  profits.  For the
Company 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  Internet and other
online services 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 the  Internet  and other  online
networks continue to experience significant growth in the number of users, their
frequency of use, or in their bandwidth requirements, the infrastructure for the
Internet and online  networks  may be unable to support the demands  placed upon
them.  In  addition,  the  Internet or other  online  networks  could lose their
viability  due to delays in the  development  or adoption of new  standards  and
protocols  required to handle increased levels of Internet  activity,  or due to
increased governmental regulation.  Significant issues concerning the commercial
and  informational  use  of  the  Internet  and  online  networks  technologies,
including  security,  reliability,  cost,  ease of use,  and quality of service,
remain unresolved and may inhibit the growth of Internet business solutions that
utilize  these  technologies.  Changes  in,  or  insufficient  availability  of,
telecommunications  services to support the  Internet or other  online  services
also could result in slower  response  times and  adversely  affect usage of the
Internet  and  other  online  networks  generally  and  the  Company's  physical
world-to-Internet product and networks in particular.



                                       20
<PAGE>

The   Company   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

     The  Company  may  not  be  able  to  adapt  as  the   Internet,   physical
world-to-Internet,  equipment  resales  and  systems  integration  markets,  and
consumer  demands  continue  to evolve.  The  Company'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  Internet,  physical  world-to-Internet,  equipment
resales, and systems integration markets are characterized by:

     o    rapid technological change;

     o    changes in user and customer requirements and preferences;

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

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

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

     o    enhance  and  improve  the  responsiveness  and  functionality  of the
          Company's products and services;

     o    license or develop  technologies useful in the Company's business on a
          timely basis;

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

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

The  Company  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 the  Company.  The  Company  believes  that  competition  will
intensify  and increase in the future.  The  Company's  target market is rapidly
evolving and is subject to continuous  technological  change.  As a result,  the
Company'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 the Company's business, prospects, financial condition, and results of
operations.

     In addition,  the  equipment  resales and systems  integration  markets are
increasingly competitive.  The Company competes in these industries on the basis
of a number of factors,  including the  attractiveness  of the services offered,
the  breadth  and  quality  of  these  services,  creative  design  and  systems
engineering  expertise,  pricing,  technological  innovation,  and understanding
clients'  needs.  A number of these  factors are beyond the  Company's  control.
Existing or future  competitors  may develop or offer  products or services that
provide  significant  technological,  creative,  performance,  price,  or  other
advantages over the products and services offered by the Company.



                                       21
<PAGE>

     Many of the Company'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,  the Company is significantly smaller
than its two largest competitors in the physical world-to-Internet industry, the
primary  focus  of  its  business.   Similarly,  the  Company  competes  against
significantly  larger and  better-financed  companies in its systems integration
and  resales  businesses,  including  the  manufacturers  of the  equipment  and
technologies  that the Company  integrates and resells.  If the Company competes
with its primary competitors for the same geographical or institutional markets,
their financial strength could prevent the Company from capturing those markets.
The  Company  may not  successfully  compete in any market in which the  Company
conducts  or may  conduct  operations.  In  addition,  based  on the  increasing
consolidation, price competition and participation of equipment manufacturers in
the systems integration and equipment resales markets, the Company believes that
it will no longer be able to compete effectively in these markets in the future.
It is for this reason,  that the Company has  increasingly  focused its business
plan  on  competing  in  the  emerging  market  for  physical  world-to-Internet
products.

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

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

         Certain of the Company's proprietary  technology allows for the storage
of  demographic  data from the  Company'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 its 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.



                                       22
<PAGE>

ITEM 2.  Description of Properties

     The Company's principal executive, development and administrative office is
located at 2201 Second Street, Suite 402, Fort Myers, Florida 33901. The Company
occupies  approximately 5,000 square feet under terms of a written lease from an
unaffiliated  party which  expires on July 31, 2005,  with monthly rent totaling
approximately $7,000.

     The Company maintains a sales facility at 2150 Western Court, Suite 230,
Lisle, Illinois 60532, occupying approximately 6,000 square feet under the terms
of a written lease from an unaffiliated party expiring on October 31, 2004, with
monthly rent totaling approximately $3,000. The Company also prepaid
approximately $63,000 of rent under the current lease through the issuance of
common stock during 2003. The Company recognizes approximately $5,000 per month
in additional rent expense relating to the stock issuance.

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

ITEM 3.  Legal Proceedings

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

     Virgin Entertainment Group

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

      AirClic, Inc. Litigation

     On September 6, 2001,  AirClic,  Inc. filed suit against the Company in the
Court of Common Pleas,  Montgomery County,  Pennsylvania,  seeking,  among other
things, the accelerated  repayment of a $500,000 loan it advanced to the Company
pursuant to the terms of a Secured  Promissory  Note made on July 11, 2003 and a
non-binding Letter of Intent dated July 3, 2001 between AirClic and the Company.
The  note  was  secured  by  substantially  all  of the  Company's  intellectual
property,  including the core physical  world-to-Internet  technologies.  In the
suit,  the  Company  acknowledged  its  obligations  under  the note but filed a
counterclaim   against   AirClic   seeking   damages   for   fraud,    negligent
misrepresentation and promissory estoppel.

     On October 3, 2003, the Company paid AirClic the principal plus interest in
the  approximate  amount of $610,000.  On December 5, 2003,  the Company paid an
additional  $115,000 in legal fees and entered into a settlement  agreement with
AirClic  under  which  the  suit  was  dismissed.  The  Company  has no  further
obligation relating to this matter.



                                       23
<PAGE>

       On January 23, 2004, NeoMedia filed a patent infringement lawsuit against
AirClic,  Scanbuy, Inc., and LScan Technologies,  Inc. The suit claims that each
of the parties has  manufactured,  or has  manufactured for it, and has used, or
actively  induced  others to use,  technology  which  allows  customers to use a
built-in UPC bar code scanner to scan individual  items and access  information.
The  Complaint  states  that  AirClic,  Scanbuy  and LScan  have had  actual and
constructive notice of the existence of the patents-in-suite,  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.  NeoMedia's  Complaint
seeks compensatory damages for infringement by AirClic,  Scanbuy and LScan, with
those  damages  to be  trebled  due to the  willful  and  wanton  nature  of the
infringement.  NeoMedia  also  seeks to  preliminarily  and  permanently  enjoin
AirClic, Scanbuy and LScan from their infringing activities.

      Other Litigation

      On August 20, 2001,  Ripfire,  Inc.  filed suit against the Company in the
San Francisco County Superior Court seeking payment of $138,000 under a software
license  agreement  entered  into  between  the  Company and Ripfire in May 2001
relating to implementation of the Qode Universal Commerce Solution. On September
6, 2002, the Company settled this suit for $133,000 of NeoMedia common stock, to
be valued at the time of  registration  of the shares.  The Company's  stock was
trading  at  approximately   $0.05  at  that  time.  The  Company  included  for
registration  2.7 million shares in the name of Ripfire in its Form S-1 that was
declared  effective  by the SEC on February 14, 2003.  The  Company's  stock was
trading at approximately $0.02 on February 14, 2003. The actual number of shares
to be  issued  to  Ripfire  per  the  pricing  outlined  in  the  agreement  was
approximately 9.8 million. On March 31, 2003, the Company issued the 2.7 million
shares of common  stock  that had been  registered  in the S-1 to  Ripfire.  The
Company is attempting to negotiate  settlement  of the  remaining  balance.  The
Company had a remaining accrued liability of $106,000 relating to this matter as
of December 31, 2003.

      On November 30, 2001,  Orsus Solutions USA, Inc.,  filed a summons seeking
payment in full of  approximately  $525,000  relating to a software and services
contract associated with implementation of the Qode Universal Commerce Solution.
In October 2003, the Company  settled this matter for $10,000 cash payments over
time, plus 3,000,000 shares of common stock. The Company had accrued a liability
of $7,000 as of December 31, 2003.

      On July 27, 2002, the Company's  former General Counsel filed suit in U.S.
District  Court,  Ft.  Myers  division,  seeking  payment of the 2000  executive
incentive,  severance and unpaid  vacation  days in the amount of  approximately
$154,000.  In June  2001,  the  Company's  compensation  committee  approved  an
adjustment  to the 2000  executive  incentive  plan that  reduced the  executive
incentive  payout  as a  result  of the  write-off  of  the  Digital:Convergence
intellectual  property  license  contract  in the second  quarter of 2001.  As a
result,  the Company  reduced the  accrual  for such payout by an  aggregate  of
approximately  $1.1 million in the second  quarter of 2002.  The  plaintiff  was
seeking payment of the entire original  incentive  payout. On November 12, 2002,
NeoMedia settled the lawsuit.  The settlement  calls for cash payments  totaling
approximately  $90,000 over a period of ten months,  plus 250,000 vested options
to purchase shares of NeoMedia common stock at an exercise price of $0.01 with a
term of five years. The Company had a liability of approximately $3,000 relating
to this matter as of December 31, 2003.

      On September 12, 2002,  R. R.  Donnelley & Sons Company filed a summons in
the  Circuit  Court of The  Twentieth  Judicial  Circuit in and for Lee  County,
Florida,  seeking  payment of  approximately  $92,000  in past due  professional
services bills,  plus interest and attorney fees.  During July 2003, the Company
settled the suit for cash payments over a period of approximately  one year. The
Company  had an accrued  liability  of  approximately  $82,000  relating to this
matter as of December 31, 2003.

      On October 28, 2002, Merrick & Klimek, P.C., filed a complaint against the
Company  seeking payment of  approximately  $170,000 in past due legal services.
The amount in question is subject to an unsecured  promissory  note that matured


                                       24
<PAGE>

unpaid on February 28, 2002.  On May 1, 2003,  the Company  settled the suit for
cash payments totaling  approximately  $196,000, to be paid at a rate of $30,000
per quarter  until the balance is  satisfied.  If the balance is paid within one
year of the settlement,  the Company will not pay interest charges.  The Company
had a remaining  liability of approximately  $116,000 relating to this matter as
of December 31, 2003, which was included in notes payable.

      On November  11, 2002,  Avnet/Hallmark  Computer  Marketing  Group filed a
complaint  against the Company seeking payment of approximately  $66,000 in past
due amounts  relating to hardware  and software  re-sold by the Company.  During
December   2002,   the  Company  made  payment  of   approximately   $30,000  to
Avnet/Hallmark,  reducing the balance owed to approximately $37,000. On April 1,
2003, the plaintiff received a judgment from the circuit court for the remaining
balance.  The Company has agreed to a payment plan for the balance over a period
of  approximately  nine  months.  The Company had a liability  of  approximately
$17,000 relating to this matter as of December 31, 2003.

      On February 6, 2003, Allen Norton & Blue, P.A., filed a complaint  against
the Company seeking payment of approximately $25,000 in past due legal services.
The Company has agreed to a payment plan relating to this matter under which the
balance will be paid over  approximately 12 months.  The Company had a liability
of approximately $13,000 relating to this matter as of December 31, 2003.

      On April 18, 2003, a former participant in the Company's 2001 self-insured
health plan sued the Company to recover  approximately  $46,000 in unpaid health
claims from 2001.  On December 1, 2003,  the Company  settled this suit for cash
payments  over a period of  approximately  one year.  The  Company  had  accrued
approximately $36,000 as of December 31, 2003.

         On January 26, 2004,  Day West &  Associates,  Inc.,  filed a complaint
against the Company  seeking payment of  approximately  $6,000 in past due legal
services.  The Company is  attempting to negotiate  settlement of the suit.  The
Company had not accrued any liability  relating to his matter as of December 31,
2003.

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

None.



                                       25
<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,  2003,  the  Company  had
243,991,257 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 and Nasdaq SmallCap Market, as applicable:

<TABLE>
<CAPTION>
                                                                         (U.S. $)
           ------------------------------------ ----------------------------------------------------------
           2001                                             HIGH                          LOW
           ------------------------------------ ------------------------------ ---------------------------
<S>                                                          <C>                          <C>
           First Quarter                                     $6.00                        $2.50
           Second Quarter                                     4.50                         1.76
           Third Quarter                                      1.85                         0.16
           Fourth Quarter                                     0.24                         0.11
           ------------------------------------ ------------------------------ ---------------------------
           2002                                             HIGH                          LOW
           ------------------------------------ ------------------------------ ---------------------------
           First Quarter                                     $0.41                        $0.14
           Second Quarter                                     0.17                         0.05
           Third Quarter                                      0.10                         0.02
           Fourth Quarter                                     0.05                         0.01
           ------------------------------------ ------------------------------ ---------------------------
           2003                                             HIGH                          LOW
           ------------------------------------ ------------------------------ ---------------------------
           First Quarter                                     $0.06                        $0.01
           Second Quarter                                     0.04                         0.01
           Third Quarter                                      0.29                         0.01
           Fourth Quarter                                     0.23                         0.10
</TABLE>

         (b) Holders.  As of December12,  2003, NeoMedia had approximately 3,500
recordholders of common stock.

         (c)  Dividends.  The Company has not declared or paid any  dividends on
its common stock during the years ended  December 31, 2003 or 2002.  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.

(d) Recent Issuances of Unregistered Securities.

     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.

     On October  31,  2003,  the  Company  entered  into an  agreement  to issue
8,000,000 shares of stock to International Digital Scientific,  Inc., as payment
of all past and future  amounts owed under a note payable from 1994.  The shares
were valued at $0.113. The market price at the time of the agreement was $0.113.



                                       26
<PAGE>

     On October  23,  2003,  the  Company  entered  into an  agreement  to issue
3,000,000 shares of stock to Orsus Solutions, USA, Inc., an unrelated vendor, as
payment of past due  liabilities of $331,000.  The shares were valued at $0.107.
The market price at the time of the agreement was $0.107.

     On October 28, 2003, the Company issued 95,238 shares of stock to Newbridge
Securities  Corporation,  an unrelated  advisor,  for  services  relating to the
Standby Equity  Distribution  Agreement.  The shares were valued at $0.105,  the
market price on the date of issuance.

     On October  27,  2003,  the  Company  issued  7,279  shares of stock to one
unrelated  vendor as payment of past due liabilities of $1,000.  The shares were
valued at $0.105, the market price on the date of issuance.

     On October 27, 2003, the Company issued to Cornell  Capital  Partners,  LP,
10,000,000  warrants to purchase shares of its common stock at an exercise price
of $0.05 per  share.  The  warrants  were  issued as a one-time  commitment  fee
relating  to the  Standby  Equity  Distribution  Agreement  between  Cornell and
NeoMedia.

     On October 3, 2003,  the Company  finalized  its purchase of Secure  Source
Technologies,  Inc.  for  3,500,000  shares of stock.  The shares were valued at
$0.14, the market price on the date of closing.

     On October 20,  2003,  the  Company  issued  66,841  shares of stock to one
unrelated vendor as payment of past due liabilities of $10,000.  The shares were
valued at $0.10. The market price on the date of the agreement was $0.10.

     On October 7,  2003,  the  Company  issued  103,907  shares of stock to one
unrelated vendor as payment of past due liabilities of $16,000.  The shares were
valued at $0.13. The market price on the date of the agreement was $0.13.

     On  October 6,  2003,  the  Company  issued  37,743  shares of stock to one
unrelated  vendor as payment of past due liabilities of $5,000.  The shares were
valued at $0.14. The market price on the date of issuance was $0.16.

     On September 25, 2003,  the Company  issued  875,855  shares of stock to an
unrelated vendor as payment of past due liabilities totaling $34,000. The shares
were  valued at $0.23 based on the market  price on the grant  date.  The market
price on the date of issuance was $0.20.

     On August 26,  2003,  the  Company  issued  1,600,000  shares of stock to a
former  employee as payment of past due incentive  compensation in the amount of
$29,000.  The  shares  were  valued at $0.02.  The  market  price on the date of
issuance was $0.02.

     On August 26, 2003, the Company  entered into an agreement to issue 450,000
shares of stock an unrelated vendor as payment of past due liabilities  totaling
$9,000.  The shares  were valued at $0.02.  The market  price on the date of the
agreement was $0.02.

     On July 9, 2003, the Company borrowed $25,000 from William E. Fritz, one of
its outside directors.  This amount was added to the principal of a $10,000 note
payable to Mr.  Fritz that  matures in April  2004,  with all other terms of the
note remaining the same. As consideration  for the loan, the Company granted Mr.
Fritz 2,500,000  warrants to purchase shares of the Company's common stock at an
exercise price of $0.01 per share.

     On April 21, 2003, the Company sold 25,000,000  shares of its common stock,
par value  $0.01,  in a private  placement  at a price of $0.01  per  share.  In
connection  with the sale,  the Company  also granted the  purchaser  25,000,000


                                       27
<PAGE>

warrants to purchase  shares of its common  stock at an exercise  price of $0.01
per share. The warrants had a fair value of $298,000 and have been recorded as a
cost of issuance.  The purchaser was William E. Fritz, a member of the Company's
Board of Directors.  Proceeds to us from sale of the shares were  $250,000.  The
Company recognized a discount expense in general and administrative  expenses of
approximately  $50,000 relating to this transaction with Mr. Fritz. On August 6,
2003,  Mr. Fritz  exercised  his warrants and  purchased  25,000,000  additional
shares of common stock at a price of $0.01 per share.

         On April 17,  2003,  the  Company's  Board of  Directors  approved  the
payment in full of  approximately  $154,000 of liabilities owed by us to Charles
W.  Fritz,  its  Founder and  Chairman  of the Board of  Directors,  through the
issuance of 15,445,967  shares of common stock. The shares were valued at $0.01.
The market price on the date of issuance was $0.011.  The Company  recognized an
expense in general and administrative expenses of approximately $15,000 relating
to this transaction with Mr. Fritz.

     During  November 2002, the Company issued  Convertible  Secured  Promissory
Notes with an aggregate face value of $60,000 to 3 separate  parties,  including
Charles W. Fritz,  Chairman of the Board of Directors  of  NeoMedia;  William E.
Fritz,  an  outside  director;  and  James J.  Keil,  an  outside  director.  In
connection  with the notes,  the Company  granted to the  holders an  additional
1,355,670  shares of its common stock and 60,000  warrants to purchase shares of
its common stock at $0.03 per share,  with a term of three  years.  The warrants
and shares were issued in January 2003.

     In August 2002,  the Company  issued 900,000 shares of common stock to 2150
Western  Court  L.L.C,  the landlord of its Lisle,  Illinois  sales  office,  as
settlement  of a lawsuit  relating to past-due and future  building  rents.  The
shares were valued at $0.03 per share, the market price at the date of issuance.

     In June  2002,  the  Company  issued  10,000  shares of common  stock to an
unrelated vendor as an interest payment on past-due accounts payable. The shares
were valued at $0.09. The market price on the date of issuance was $0.09.

     In February 2002, the Company issued  19,000,000 shares of its common stock
at a price  of  $0.17  per  share  to  five  individuals  and two  institutional
unrelated  parties.  The shares  were issued in  exchange  for limited  recourse
promissory  notes  maturing  at the  earlier  of i.) 90 days  from  the  date of
issuance, or ii.) 30 days from the date of registration of the shares. The gross
proceeds of such transaction  will be approximately  $3,040,000 upon maturity of
the notes, as a purchase price of $0.01 per share, or $190,000 in aggregate, was
paid in cash.  During August 2002, the notes matured  without  payment,  and the
Company  subsequently  cancelled the 19 million shares issued in connection with
such notes.  The Company  accrued a  liability  in the third  quarter of 2001 of
$190,000  relating to the par value paid in connection  with the issuance of the
shares, and such amount remained unpaid as of December 31, 2003.

     In February  2002,  the Company  issued  500,000  warrants to a provider of
commercial  financing services,  in exchange for interest due to the provider on
past due amounts under a credit agreement.

     In January  2002,  the Company  issued  452,489  shares of common  stock to
About.com,  Inc.  The shares were issued upon  conversion  of 452,489  shares of
Series A Convertible  Preferred  Stock issued to About.com,  Inc. as payment for
advertising  expenses  incurred  during  2001.  The market  price on the date of
issuance was $0.15.  This issuance was made  pursuant to Section  3(a)(9) of the
Act.

     In January  2002,  the Company  issued  55,000  shares of common stock at a
price of $0.13 per share to an individual  unrelated  party. The market price on
the date of issuance was $0.14. Cash proceeds to NeoMedia were $7,150.



                                       28
<PAGE>

     In January 2002, the Company issued  1,614,501 shares of common stock to an
unrelated vendor as settlement of past-due  accounts payable and future payments
under equipment lease  agreements.  The shares were valued at $0.17.  The market
price on the date of issuance was $0.17.

     In January  2002,  the Company  issued  32,486 shares of common stock to an
unrelated  vendor as  settlement of past-due  accounts  payable in the amount of
$5,000.  The  shares  were  valued at  $0.15.  The  market  price on the date of
issuance was $0.17.

     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.



                                       29
<PAGE>

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

Overview

      Over the past several  years,  NeoMedia's  focus has been aimed toward the
intellectual property  commercialization  unit of its Internet Switching Systems
(NISS,  formerly  NAS)  business.  NISS  consists of the  patented  PaperClickTM
technology  that enables users to link directly from the physical to the digital
world, as well as the patents surrounding certain  physical-world-to-web linking
processes.   NeoMedia's  mission  is  to  invent,   develop,  and  commercialize
technologies  and products  that  effectively  leverage the  integration  of the
physical  and  electronic  to  provide  clear  functional  value for  NeoMedia's
end-users,    competitive    advantage   for   their   business   partners   and
return-on-investment  for their investors. To this end, NeoMedia has signed four
intellectual  property licenses since its inception,  and also recently acquired
additional   patents  as  part  of  NeoMedia's   acquisition  of  Secure  Source
Technologies,  Inc. On September 8, 2003,  NeoMedia announced its PaperClick for
Camera Cell PhonesTM product, which reads and decodes UPC/EAN or other bar codes
to link users to the Internet,  providing information and enabling e-commerce on
a  compatible  camera cell phone,  such as the Nokia 3650 model.  On October 30,
2003, NeoMedia unveiled its go-to-market strategy for the product.  During 2003,
NeoMedia  signed  contracts with several key partners  outlined in the strategy,
including agents Big Gig Strategies and SRP Consulting, and European advertising
agency  12Snap.  The Company has also entered into letters of intent with global
brand communication company Seven Worldwide,  and markting organizations iCoupon
and Digital Rum.

Loch Energy, Inc.

     During the first quarter of 2003, NeoMedia announced that it had reached an
agreement in principle to acquire and merge with Loch Energy,  Inc.,  an oil and
gas provider based in Humble,  Texas.  On October 1, 2003,  NeoMedia  discovered
that the royalty  interest from future sales of oil owned by Loch were oversold,
which would likely result in materially lower projected  available cashflow from
Loch's  operations.  This  projected  available  cashflow  was the basis for the
acquisition.  On  October  2,  2003,  NeoMedia's  Board  of  Directors  voted to
terminate the acquisition and merger proceedings.

SEC Inquiry

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

Acquisitions

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

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



                                       30
<PAGE>

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

Results of  Operations  for the Year Ended  December 31, 2003 as Compared to the
Year Ended December 31, 2002

     Net  sales.  Total net  sales for the year  ended  December  31,  2003 were
$2,400,000, which represented a $6,999,000, or 74%, decrease from $9,399,000 for
the year ended December 31, 2002. This decrease  primarily resulted from reduced
resales of Sun Microsystems  equipment due to increased  competition and general
economic  conditions.  NeoMedia intends to continue to pursue additional resales
of equipment,  software and services.  NeoMedia  expects resales to more closely
resemble the results for the year ended December 31, 2003,  rather than the year
ended December 31, 2002.  With the acquisition of CSI, the Company expects sales
in 2004 from this new  segment of business  to be  substantially  higher than in
2003.

     License fees.  License fees were  $414,000 for the year ended  December 31,
2003, compared with $446,000 for the year ended December 31, 2002, a decrease of
$32,000,  or 7%. The  decrease  was due to slightly  lower  sales of  internally
developed  software  licenses  in 2003.  NeoMedia  will  continue  to attempt to
increase sales of these high-margin products, and expects license fees to remain
materially constant over the next 12 months.

     Resales of software and technology  equipment and service fees.  Resales of
software and technology  equipment and service fees decreased by $6,967,000,  or
78%,  to  $1,986,000  for the year ended  December  31,  2003,  as  compared  to
$8,953,000  for the year  ended  December  31,  2002.  This  decrease  primarily
resulted  from reduced  resales of Sun  Microsystems  equipment due to increased
competition and general  economic  conditions.  NeoMedia  intends to continue to
pursue additional resales of equipment,  software and services. NeoMedia expects
resales to more  closely  resemble  the results for the year ended  December 31,
2003, rather than the year ended December 31, 2002.

     Cost of  Sales.  Cost of  license  fees was  $300,000  for the  year  ended
December 31, 2003, a decrease of $541,000,  or 64%,  compared  with $841,000 for
the  year  ended  December  31,  2002.   The  decrease   resulted  from  reduced
amortization  expense in 2003 of capitalized  development  costs relating to the
PaperClick,  MLM/Affinity,  and Qode products that were written off during 2002.
Cost of resales was  $1,829,000 for the year ended December 31, 2003, a decrease
of $5,594,000,  or 75%, compared with $7,423,000 for the year ended December 31,
2002. The decrease  resulted from decreased  resales in 2003 compared with 2002.
Cost of resales as a percentage of related resales was 92% in 2003,  compared to
83% in 2002.  This  increase is due to an  increased  sales mix of  lower-margin
equipment  products  sold in 2003  compared to 2002,  combined  with the general
erosion of margins in the resale  sector.  NeoMedia  expects costs of resales to
fluctuate with the sales of its equipment,  software, and services over the next
12 months.  With the  acquisition  of CSI, the Company  expects cost of sales in
2004 from this new segment of business to be substantially higher than in 2003.



                                       31
<PAGE>

       Gross Profit.  Gross profit was $271,000 for the year ended  December 31,
2003, a decrease of $864,000,  or 76%,  compared with gross profit of $1,135,000
for the year ended December 31, 2002.  This decrease was primarily the result of
lower  resales  of,  and lower  margin on,  computer  equipment,  software,  and
services in 2003 relative to 2002.

     Sales and  marketing.  Sales and  marketing  expenses were $523,000 for the
year ended December 31, 2003, compared to $1,009,000 for the year ended December
31, 2002, a decrease of $486,000 or 48%. This decrease  resulted  primarily from
reduced sales  commissions  earned on lower sales in 2003 as compared with 2002,
as well as a  smaller  sales  force  during  2003.  NeoMedia  expects  sales and
marketing  expense to increase over the next 12 months with the  acquisition  of
CSI International and the potential acquisition of BSD Software, as well as with
the  continued  development  and potential  rollout of the Company's  PaperClick
product suite.

     General and administrative.  General and administrative  expenses increased
by $202,000, or 5%, to $4,270,000 for the year ended December 31, 2003, compared
to  $4,068,000  for the year ended  December  31, 2002.  The  increase  resulted
primarily  from  non-cash  expenses  relating  to  NeoMedia's  option  repricing
program,  expense for stock  options  issued with  exercise  prices below market
price, and stock-based  professional  service expense.  NeoMedia expects general
and  administrative  expense  to  increase  over  the  next 12  months  with the
acquisition of CSI International and the potential acquisition of BSD Software.

     Research and development. During the year ended December 31, 2003, NeoMedia
charged to expense  $332,000 of research and  development  costs,  a decrease of
$443,000  or 57%  compared  to  $775,000  charged to expense  for the year ended
December 31, 2002.  The  decrease is primarily  due to a continued  reduction in
research and  development  overhead since first quarter 2002.  NeoMedia  expects
research and development costs to increase slightly over the next 12 months with
the  continued  development  and potential  rollout of the Company's  PaperClick
product suite.

     Loss on  Impairment  of Assets.  During the year ended  December  31, 2002,
NeoMedia  recognized  a loss on  impairment  of  assets  of  $1,003,000  for the
write-off   capitalized   development   costs   relating   to   its   PaperClick
physical-world-to-internet  software. NeoMedia did not take an impairment charge
during the year ended December 31, 2003.

     Loss on  extinguishment  of debt.  During the year ended December 31, 2003,
NeoMedia  recognized a loss on  extinguishment  of debt of  $152,000,  resulting
primarily  from the  payment of debt  through  the  issuance of shares of common
stock.

     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  $198,000,  or 111%,  to $376,000  for the year ended  December 31, 2003 from
$178,000 for the year ended December 31, 2002, due to interest  expense incurred
during 2003 associated with notes payable, lawsuits, and past due trade accounts
payable.

     Loss on disposal of discontinued operations. During the year ended December
31, 2002, NeoMedia  recognized a loss on disposal of discontinued  business unit
of $1,523,000 to write off the remaining  Qode-related  assets. No disposal loss
was recognized during the year ended December 31, 2003.

     Net Loss. The net loss for the year ended December 31, 2003 was $5,382,000,
which  represented a $2,039,000,  or 27% decrease from a $7,421,000 loss for the
year ended December 31, 2002. The decrease resulted primarily from an impairment
charge of  $1,003,000  relating to  NeoMedia's  PaperClick  assets and a loss on
disposal of NeoMedia's  Qode  business unit of $1,523,000 in 2002.  The decrease
was offset by higher  non-cash  expenses in 2003 relating to  NeoMedia's  option
repricing  program,  expense for stock options issued with exercise prices below
market price, and stock-based  professional  service  expense,  as well as lower
sales and gross profit in 2003 compared to 2002.



                                       32
<PAGE>

Liquidity and Capital Resources

     As of December 31, 2003,  NeoMedia's cash balance was $61,000,  compared to
$70,000 at December 31, 2002.

     Net cash used in operating activities was approximately  $3,191,000 for the
year ended December 31, 2003, compared with $535,000 for the year ended December
31, 2002.  NeoMedia's  net cash flow used in investing  activities for the years
ended  December 31, 2003 and 2002,  was $69,000 and $21,000,  respectively.  Net
cash provided by financing  activities for the years ended December 31, 2003 and
2002 was $3,251,000 and $492,000, respectively.

     During the years  ended  December  31, 2003 and 2002,  NeoMedia's  net loss
totaled  $5,382,000  and  $7,421,000,  respectively.  As of December  31,  2003,
NeoMedia had accumulated  losses from  operations of $76,147,000,  had a working
capital deficit of $6,526,000, and $61,000 in cash balances.

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming   NeoMedia  will  continue  as  a  going  concern.   Accordingly,   the
consolidated  financial  statements  do not include any  adjustments  that might
result from  NeoMedia's  inability to continue as a going concern.  NeoMedia may
obtain up to $20 million  over the next two years  through  its  Standby  Equity
Distribution Agreement with Cornell Capital Partners LP. As of January 30, 2004,
NeoMedia had obtained  approximately $3.6 million under its previous $10 million
Equity Line of Credit  Agreement  with Cornell,  and an additional  $4.0 million
promissory  note,  which is  scheduled to be repaid from the proceeds of sale of
common stock under the current $20 million Standby Equity Distribution Agreement
with Cornell. NeoMedia also issued 40 million warrants with an exercise price of
$0.05 per share to Cornell in connection with this  financing.  NeoMedia is also
entitled to receive an  additional  $1.0  million  from Cornell in the form of a
promissory  note within 15 days of filing a  registration  statement to register
the warrants.  Once the warrants are registered,  and if the average closing bid
price of NeoMedia's common stock for any five day period exceeds $0.10, NeoMedia
can force  Cornell to exercise the  warrants,  resulting in an  additional  $2.0
million cash to NeoMedia.  Management believes that it has sufficient funding to
sustain  operations  through  December  31,  2004,  however,  there  can  be  no
assurances  that the  market  for  NeoMedia's  stock  will  support  the sale of
sufficient  shares of  NeoMedia's  common stock to raise  sufficient  capital to
sustain  operations  for  such a  period,  or  that  actual  revenue  will  meet
management's  expectations.  If necessary  funds are not  available,  NeoMedia's
business  and  operations  would be  materially  adversely  affected and in such
event, NeoMedia would attempt to reduce costs and adjust its business plan.



                                       33
<PAGE>

Contractual Obligations

The  following  table  presents  the  Company's  contractual  obligations  as of
December 31, 2003 over the next five years and thereafter:

<TABLE>
<CAPTION>
                                          Payments by Period
                                            (in thousands)
--------------------------------------------------------------------------------------------------------
                                                              Less
                                                              Than       1-3        4-5       After 5
                                                  Amount     1 Year     Years      Years       Years
                                                 ---------- --------- ---------- ----------- -----------
<S>                                                   <C>       <C>        <C>         <C>         <C>
Legal Settlements                                     $249      $249       $---        $---        $---
Vendor Settlements & Agreements                        841       760         81         ---         ---
Operating Leases                                        30        30        ---         ---         ---
Short Term Debt                                        732       732        ---         ---         ---
                                                 ---------- --------- ---------- ----------- -----------
    Total Contractual Cash Obligations              $1,852    $1,771        $81        $---        $---
                                                 ========== ========= ========== =========== ===========
</TABLE>

         Intangible Assets

         At the end of each  quarter,  or upon  occurrence  of  material  events
relating to a specific  intangible item,  NeoMedia performs  impairment tests on
each of its intangible assets, which include goodwill, capitalized patent costs,
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 discounted cash
flow to be derived from the asset.  Intangible  asset balances are then adjusted
to their current net realizable  value based on these criteria if impaired.  The
Company received an independent valuation of its patent portfolio as of December
31, 2003. The independent  valuation  concluded that no impairment was necessary
as of December 31, 2003. No impairment  charges were taken during the year ended
December 31, 2003. During the year ended December 31, 2002,  NeoMedia recognized
an  impairment  charge  of $1.0  million  relating  to its  PaperClick  software
product.

Financing Agreements

         As of December  31, 2003 and 2002,  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.  NeoMedia and GE Access are
currently  operating  under an  additional  arrangement  under  which GE  Access
retains 50% of NeoMedia's proceeds from sales financed by GE Access, and applies
the portion of proceeds toward past due balances.  This  arrangement  reduces by
half NeoMedia's cash flow from resales of equipment and software  financed by GE
Access,  until the  balance  owed to GE Access is paid in full.  During  October
2003, NeoMedia and GE entered into an additional  agreement under which NeoMedia
also makes regular  payment  against its past due balances.  Termination of this
financing   relationship  with  GE  Access  could  materially  adversely  affect
NeoMedia's  financial  condition.  Management expects the agreement to remain in
place in the near future. As of December 31, 2003, the amount payable under this
financing arrangement was approximately $196,000.

Note Payable to Cornell Capital Partners

         On September 11, 2003,  the Company  received  funding in the form of a
promissory  note from Cornell  Capital  Partners in the gross amount of $500,000
before Cornell  discounts and fees. As of December 31, 2003, the Company had not
made any payment  against the principal of this note.  Accordingly,  the company
has  recorded  the  advance  balance  of  $500,000  in  "Notes  Payable"  on its
consolidated  balance sheet as of December 31, 2003. The original  maturity date
of this note is October 26, 2003.  During January 2004, the Company  reduced the
balance to approximately $337,000.



                                       34
<PAGE>

Going Concern

     The accompanying  consolidated financial statements have been prepared on a
going  concern  basis,  which  contemplates  the  realization  of assets and the
satisfaction of liabilities in the normal course of business.  Through  December
31, 2003,  NeoMedia has not been able to generate  sufficient  revenues from its
operations to cover its costs and operating expenses. Although NeoMedia has been
able to issue its common stock or other  financing for a significant  portion of
its  expenses,  it is not known  whether  NeoMedia will be able to continue this
practice,  or if revenue  will  increase  significantly  to be able to meet cash
operating  expenses.  This, in turn,  raises  substantial doubt about NeoMedia's
ability to continue as a going concern.  Management  believes that NeoMedia will
be able to  raise  additional  funds  through  its $20  million  Standby  Equity
Distribution  Agreement with Cornell.  However,  there can be no assurances that
the market for  NeoMedia's  stock will support the sale of sufficient  shares of
stock to raise enough capital to sustain operations.  The accompanying condensed
consolidated  financial  statements  do not include any  adjustments  that might
result from the outcome of these uncertainties.

     Based on current cash balances and operating budgets,  NeoMedia believes it
only has  sufficient  financing to last until  December 31, 2004.  If NeoMedia's
financial  resources are insufficient,  it may be forced to seek protection from
its  creditors  under the  United  States  Bankruptcy  Code or  analogous  state
statutes  unless it is able to engage  in a merger  or other  corporate  finance
transaction with a better  capitalized  entity.  NeoMedia cannot predict whether
additional financing will be available,  its form, whether equity or debt, or be
in another form, or if it will be successful in identifying  entities with which
it may consummate a merger or other corporate finance transactions.

Critical Accounting Policies

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



                                       35
<PAGE>

      Allowance  for Bad Debt.  NeoMedia  maintains  an  allowance  for doubtful
accounts  for  estimated  losses  resulting  from the  inability  of  NeoMedia's
customers to make required payments.  NeoMedia's 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  NeoMedia's
historical  experience,  NeoMedia's estimates could change and impact NeoMedia's
reported results.

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

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

      Revenue  Recognition.  The  Company  derives  revenues  from  two  primary
sources:  (1)  license  revenues  and (2)  resale  of  software  and  technology
equipment and service fee revenues.

          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.  License
revenue is recognized if persuasive  evidence of an agreement  exists,  delivery
has occurred, pricing is fixed and determinable, and collectibility is probable.

         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. 101,  "Revenue  Recognition  in Financial
Statements,"  as amended (SAB 101).  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.



                                       36
<PAGE>

Disposal of Qode Business Unit

     On August 31, 2001,  the Company  signed a non-binding  letter of intent to
sell the assets and liabilities of its Ft.  Lauderdale-based Qode business unit,
which it acquired in March 2001,  to The Finx  Group,  Inc.,  a holding  company
based in Elmsford,  NY. The Finx Group was to assume  $620,000 in Qode  payables
and  $800,000 in  long-term  leases in exchange  for 500,000  shares of the Finx
Group,  right to use and sell Qode  services,  and up to $5 million in affiliate
revenues over the next five years.  During the third and fourth quarters of 2001
and the first quarter of 2002, NeoMedia recorded a $2.6 million expense from the
write-down of the Qode assets/liabilities to net realizable value.

     The loss for  discontinued  operations  during the  phase-out  period  from
August 31,  2001  (measurement  date) to  September  30, 2001 was  $439,000.  No
further loss is anticipated.

     During June 2002, the Finx Group  notified  NeoMedia that it did not intend
to carry out the  letter  of intent  due to  capital  constraints.  As a result,
during the year ended  December 31,  2002,  the Company  recorded an  additional
expense of $1.5  million for the  write-off  of  remaining  Qode  assets.  As of
December 31, 2003, NeoMedia had approximately  $657,000 of liabilities  relating
to the Qode system on its books.

Impairment of PaperClick Asset

     During the year ended December 31, 2002,  NeoMedia recognized an impairment
charge   of   approximately    $1.0   million   relating   to   its   PaperClick
physical-world-to-internet software solution.

Effect Of Recently Issued Accounting Pronouncements

      In January 2003, the FASB issued  Interpretation No. 46, "Consolidation of
Variable  Interest  Entities" (FIN 46). FIN 46 changes the criteria by which one
company  includes  another  entity  in its  consolidated  financial  statements.
Previously,  the criteria was based on control through voting  interest.  FIN 46
requires  a variable  interest  entity to be  consolidated  by a company if that
company is subject to a majority of the risk of loss from the variable  interest
entity's  activities or entitled to receive a majority of the entity's  residual
returns or both.  A company  that  consolidates  a variable  interest  entity is
called the primary beneficiary of that entity. The consolidation requirements of
FIN 46 apply immediately to variable interest entities created after January 31,
2003. The consolidation requirements apply to older entities in the first fiscal
year or interim period beginning after June 15, 2003.  Certain of the disclosure
requirements  apply in all financial  statements  issued after January 31, 2003,
regardless of when the variable interest entity was established.

      During October 2003, the FASB issued Staff Position No. FIN 46,  deferring
the  effective  date for applying the  provisions of FIN 46 until the end of the
first interim or annual  period  ending after  December 31, 2003 if the variable
interest  was created  prior to  February 1, 2003 and the public  entity has not
issued  financial   statements   reporting  that  variable  interest  entity  in
accordance with FIN 46.



                                       37
<PAGE>

      On December 24, 2003, the FASB issued FASB  Interpretation No. 46 (Revised
December  2003),   "Consolidation  of  Variable  Interest  Entities,"  (FIN-46R)
primarily to clarify the required  accounting for interests in variable interest
entities.  FIN-46R  replaces  FIN-46  that was issued in January  2003.  FIN-46R
exempts  certain  entities  from  its  requirements  and  provides  for  special
effective  dates for entities that have fully or partially  applied FIN-46 as of
December 24, 2003. In certain  situations,  entities have the option of applying
or  continuing  to apply  FIN-46  for a short  period  of time  before  applying
FIN-46R.  While FIN-46R modifies or clarifies  various  provisions of FIN-46, it
also incorporates  many FASB Staff Positions  previously issued by the FASB. The
Company has deferred  the adoption of FIN 46 with respect to VIEs created  prior
to February 1, 2003.  Management is currently  assessing the impact, if any, FIN
46 may have on the Company;  however,  management does not believe there will be
any material impact to the Company's financial  position,  results of operations
or liquidity resulting from the adoption of this interpretation.

      In April 2003,  the FASB issued SFAS No. 149,  "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies
financial accounting and reporting of derivative instruments,  including certain
derivative instruments embedded in other contracts  (collectively referred to as
derivatives)  and  for  hedging  activities  under  SFAS  133,  "Accounting  for
Derivative  Instruments and Hedging Activities." This Statement is effective for
contracts  entered  into or  modified  after June 30,  2003,  except for certain
hedging  relationships  designated  after June 30,  2003.  The  adoption of this
Statement is not expected to have a material  impact on the Company's  financial
position, results of operations, or cash flows.

      In May  2003,  the FASB  issued  SFAS No.  150,  "Accounting  for  Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
150  establishes  standards for how an issuer  classifies  and measures  certain
financial  instruments with  characteristics  of both liabilities and equity. It
requires that issuers  classify a financial  instrument that is within its scope
as a liability  (or an asset in some  circumstances).  With certain  exceptions,
this Statement is effective for financial  instruments  entered into or modified
after May 31, 2003,  and  otherwise  is effective at the  beginning of the first
interim period  beginning after June 15, 2003. The adoption of this Statement is
not  expected to have a material  impact on the  Company's  financial  position,
results of operations, or cash flows.

      In  December  2003,  the FASB issued  Statement  of  Financial  Accounting
Standards (FAS) No. 132 (Revised 2003)  "Employers'  Disclosures  about Pensions
and Other  Postretirement  Benefits." This standard replaces FAS-132 of the same
title which was  previously  issued in February  1998.  The revised  FAS-132 was
issued in response to concerns  expressed  by  financial  statement  users about
their need for more  transparency of pension  information.  The revised standard
increases the existing GAAP  disclosures  for defined  benefit pension plans and
other defined  benefit  postretirement  plans.  However,  it does not change the
measurement or recognition of those plans as required under: FAS-87, "Employers'
Accounting for Pensions";  FAS-88,  "Employers'  Accounting for  Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits"; and
FAS-106,   "Employers'   Accounting  for  Postretirement   Benefits  Other  Than
Pensions."  Specifically,  the revised  standard  requires  companies to provide
additional  disclosures  about pension plan assets,  benefit  obligations,  cash
flows,  and benefit  costs of defined  benefit  pension  plans and other defined
benefit  postretirement  plans. Also, for the first time, companies are required
to provide a breakdown of plan assets by category, such as debt, equity and real
estate,  and to provide certain  expected rates of return and target  allocation
percentages  for these asset  categories.  The revised  FAS-132 is effective for
financial  statements  with fiscal years ending after  December 15, 2003 and for
interim  periods  beginning  after  December  15,  2003.  The  adoption  of this
Statement is not expected to have a material  impact on the Company's  financial
position, results of operations, or cash flows.



                                       38
<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

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

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

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



                                       39
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and
Stockholders of Neomedia Technologies, Inc.

     We have audited the  accompanying  consolidated  balance  sheet of Neomedia
Technolgies,  Inc. (a Delaware  Corporation) and subsidiaries as of December 31,
2003,  and the related  consolidated  statements  of  operations,  stockholders'
deficit,  and cash flows for the years ended  December 31, 2003 and 2002.  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  auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and  perform  the  audits to  obtain  reasonable  assurance  about  whether  the
consolidated  financial statements are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the  consolidated  financial  statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall consolidated  financial statement
presentation.  We believe  that our 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 financial  position of Neomedia
Technologies,  Inc. as of December 31, 2003,  and the results of its  operations
and its cash flows for the years ended  December 31, 2003 and 2002 in conformity
with accounting principles generally accepted in the United States of America.

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements,  the Company's significant operating
losses,   working  capital  deficit,   and  current  cash  flow  position  raise
substantial doubt about its ability to continue as a going concern. Management's
plans  regarding  those 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.

CERTIFIED PUBLIC ACCOUNTANTS

Irvine, California
February 27, 2004



                                       40
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET

                        (In thousands, except share data)


<TABLE>
<CAPTION>
                                                                            December 31,
                                                                              2003
                                                                            --------
ASSETS
Current assets:
<S>                                                                         <C>
        Cash and cash equivalents                                           $     61
        Trade accounts receivable, net of allowance for doubtful accounts
        of $49                                                                   133
        Inventories, net of allowance for obsolete & slow-moving
        inventory of $143                                                          3
        Prepaid expenses and other current assets                                356
                                                                            --------
        Total current assets                                                     553
        Property and equipment, net                                               61
        Capitalized patents, net                                               2,415
        Capitalized and purchased software costs, net                            118
        Other long-term assets                                                   729
                                                                            --------
             Total assets                                                   $  3,876
                                                                            ========

LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities:

        Accounts payable                                                    $  2,327
        Amounts due under financing agreements                                   196
        Amounts payable under settlement agreements                              772
        Liabilities of discontinued business unit                                657
        Sales taxes payable                                                      137
        Accrued expenses                                                       1,743
        Deferred revenues and other                                              515
        Notes payable                                                            732
                                                                            --------
             Total current liabilities                                         7,079

Commitments and contingencies                                                     --

Shareholders' deficit:

        Preferred stock, $0.01 par value, 25,000,000 shares authorized,
          none issued and outstanding                                             --
        Common stock, $0.01 par value, 1,000,000,000 shares authorized,
          247,041,675 shares issued and 243,991,257 outstanding                2,440
        Additional paid-in capital                                            71,565
        Deferred stock-based compensation                                       (282)
        Accumulated deficit                                                  (76,147)
        Treasury stock, at cost, 201,230 shares of common stock                 (779)
                                                                            --------
           Total shareholders' deficit                                        (3,203)
                                                                            --------
             Total liabilities and shareholders' deficit                    $  3,876
                                                                            ========
</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
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                               Years Ended December 31,
                                                                            ------------------------------
                                                                                 2003             2002
                                                                            -------------    -------------
NET SALES:
<S>                                                                         <C>              <C>
       License fees                                                         $         414    $         446
       Resale of software and technology equipment and service fees                 1,986            8,953
                                                                            -------------    -------------
          Total net sales                                                           2,400            9,399
                                                                            -------------    -------------

COST OF SALES:
       License fees                                                                   300              841
       Resale of software and technology equipment and service fees                 1,829            7,423
                                                                            -------------    -------------
          Total cost of sales                                                       2,129            8,264
                                                                            -------------    -------------


GROSS PROFIT                                                                          271            1,135

       Sales and marketing expenses                                                   523            1,009
       General and administrative expenses                                          4,270            4,068
       Research and development costs                                                 332              775
       Loss on impairment of assets                                                    --            1,003
                                                                            -------------    -------------


       Loss from operations                                                        (4,854)          (5,720)
       Loss on extinguishment of debt, net                                           (152)              --
       Interest expense, net                                                         (376)            (178)
                                                                            -------------    -------------

Loss from continuing operations                                                    (5,382)          (5,898)

       Loss on disposal of discontinued business unit (Note 12)                        --           (1,523)
                                                                            -------------    -------------

NET LOSS                                                                    $      (5,382)   $      (7,421)
                                                                            =============    =============

       NET LOSS PER SHARE FROM CONTINUING OPERATIONS--BASIC AND DILUTED     $       (0.04)   $       (0.26)
                                                                            =============    =============

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

NET LOSS PER SHARE--BASIC AND DILUTED                                       $       (0.04)   $       (0.33)
                                                                            =============    =============

Weighted average number of common shares--basic and diluted                   125,029,723       22,330,485
                                                                            =============    =============
</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>
                                                                               Years Ended December 31,
                                                                                   2003       2002
                                                                                  -------    -------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                               <C>        <C>
      Net loss                                                                    ($5,382)   ($7,421)
      Adjustments to reconcile net loss to net cash used in operating
      activities:
      Depreciation and amortization                                                   470      1,061
      Inventory reserve                                                                13        130
      Provision for doubtful accounts and notes receivable                            191         --
      Loss on disposal of discontinued business unit                                   --      1,523
      Loss on impairment of assets                                                     --      1,003
      Expense associated with option and warrant repricing                            773        195
      Fair value of expense portion of stock-based
               compensation granted for professional services                       1,000        685
      Interest expense allocated to debt                                               56         23
      Discount related to common stock issuance                                        50         --
      (Gain) loss on payment of accounts payable in stock                             152         --
      (Increase)/decrease in value of life insurance policies                         (35)        63
      Changes in operating assets and liabilities
        Trade accounts receivable, net                                                212      2,299
        Inventory                                                                      (3)        --
        Other current assets                                                          273        346
        Accounts payable, amounts due under financing agreements, amounts due
        under Settlement agreements, liabilities in excess of assets of
          discontinued business unit, accrued expenses and stock liability           (383)      (584)

        Deferred revenue other current liabilities                                   (366)       142
                                                                                  -------    -------

          Net cash used in operating activities                                    (2,979)      (535)
                                                                                  -------    -------
CASH FLOWS FROM INVESTING ACTIVITIES:
      Amounts issued under notes receivable                                          (209)        --
      Capitalization of software development and purchased intangible assets          (28)       (21)
      Acquisition of property and equipment                                           (44)        --
                                                                                  -------    -------
        Net cash used in investing activities                                        (281)       (21)
                                                                                  -------    -------

CASH FLOWS FROM FINANCING ACTIVITIES:

      Net proceeds from issuance of common stock, net of issuance costs of $226       250          8
      Net proceeds from exercise of stock warrants                                    250         45
      Net proceeds from exercise of stock options                                     156        274
      Borrowings under notes payable and long-term debt                             3,350        165
      Repayments on notes payable and long-term debt                                 (755)        --
                                                                                  -------    -------
        Net cash provided by financing activities                                   3,251        492
                                                                                  -------    -------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                              (9)       (64)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                           70        134
                                                                                  -------    -------
CASH AND CASH EQUIVALENTS, END OF YEAR                                            $    61    $    70
                                                                                  =======    =======

SUPPLEMENTAL CASH FLOW INFORMATION:
      Interest paid/(received) during the year                                    $     6    $    15
      Income taxes paid                                                                --         --
      Non-cash investing and financing activities:
        Value of stock granted to acquire Secure Source Technologies, Inc.            500         --
        Fair value of warrants issued as a direct incremental cost of financing        93         --
        Reduction in accounts payable and accruals for debt paid in stock           1,509         --
        Reduction of long-term debt paid and accrued interest with stock              904         --
        Fair value of stock compensation deferred to future periods                   282         --
        Discount recognized on the issuance of stock with notes payable                56         --
        Cancellation of common stock issued in 2001 to offset stock
      subscription receivable                                                          --       (240)
        Shares issued in accordance with Equity Line of Credit to repay Notes
      Payable, net of  issuance costs of $6,772                                     2,793         --
        Net effect of issuance and subsequent
           cancellation of common stock underlying notes receivable                    --       (190)
</TABLE>


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



                                      F-4
<PAGE>
<TABLE>
<CAPTION>

                                   NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
                             CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

                                         (In thousands, except share data)

                                                           Common Stock
                                           -----------------------------------------------
                                                                            Additional          Stock              Deferred
                                                                             Paid-in         Subscription            Stock
                                               Shares          Amount         Capital         Receivable         Compensation
                                           --------------  --------------  ---------------  ---------------  ----------------------
<S>                                           <C>                   <C>           <C>                <C>                         <C>
BALANCE, DECEMBER 31, 2001                    18,804,917            $188          $63,029            (240)                       0
Exercise of employee options                  5,252,455              52              222                 -                       -
Issuance of Common Stock through private
Placement, Net of $0 of issuance costs       (2,945,000)            (29)            (203)                -                       -
Expense associated with warrant repricing              -               -              195                -                       -
Fair value stock issued for professional
services rendered                              4,900,000              49              915                -                       -
Exercise of Warrants                             369,450               4               41                -                       -
Stock issued to pay liabilities                2,556,987              24              319                -                       -
Conversion of preferred stock to common
stock                                            452,489               5              878                -                       -
Issuance of warrants and stock with
convertible debt                               1,355,670              14               46                -                       -
Stock Subscription Receivable                          -               -                -              240                       -
Change in Deferred Stock Compensation                  -               -                -                -                   (231)
Net Loss                                               -               -                -                -                       -
                                           --------------  --------------  ---------------  ---------------  ----------------------

BALANCE, DECEMBER 31, 2002                    30,746,968            $307          $65,442                0                   (231)
Shares issued to Cornell Capital Partners     98,933,244            $990           $8,575
under Equity Line of Credit (Gross)                                                                      -                       -
Fees & discounts associated with Shares
issued to Cornell Capital Partners under
Equity Line of Credit                                                  -          (6,772)                -                       -
Issuance of Common Stock through private
Placement,                                    25,000,000             250               50                -                       -
Exercise of employee options                  15,599,175             156                -                -                       -
Exercise of Warrants                          28,904,900             289             (39)                -                       -
Expense associated with option & warrant
repricing                                              -               -              773                -                       -
Fair value of stock, options, & warrants
issued for professional services rendered      4,030,424              40              385                -                       -
Stock issued to pay past due liabilities      37,276,546             373            2,040                -                       -
Issuance of shares to purchase Secure
Source Technologies, Inc.                      3,500,000              35              465                -                       -
Issuance of warrants and stock with debt               -               -               19                -                       -
Expense recognized for options issued
with exercise price below market price                 -               -              627                                        -
Change in Deferred Stock Compensation                  -               -                -                -                    (51)
Net Loss                                               -               -                -                -                       -
                                           --------------  --------------  ---------------  ---------------  ----------------------

BALANCE, DECEMBER 31, 2003                   243,991,257          $2,440          $71,565                -                   (282)
                                           --------------  --------------  ---------------  ---------------  ----------------------


                                                                Preferred Stock                   Treasury Stock
                                           -------------------------------------------------  -----------------------
                                                                   Additional                                            Total
                                                                    Paid-in    Accumulated                            Stockholders'
                                              Shares      Amount    Capital      Deficit         Shares     Amount       Equity
                                           ------------  --------  ---------  --------------  -----------  ----------  ------------
BALANCE, DECEMBER 31, 2001                     452,489        $5       $878       ($63,344)      201,230      ($779)        ($263)
Exercise of employee options                         -         -          -               -            -           -           274
Issuance of Common Stock through private
Placement, Net of $0 of issuance costs               -         -          -               -            -           -         (232)
Expense associated with warrant repricing            -         -          -               -            -           -           195
Fair value stock issued for professional
services rendered                                    -         -          -               -            -           -           964
Exercise of Warrants                                 -         -          -               -            -           -            45
Stock issued to pay liabilities                      -         -          -               -            -           -           343
Conversion of preferred stock to common
stock                                        (452,489)       (5)      (878)               -            -           -             -
Issuance of warrants and stock with
convertible debt                                     -         -          -               -            -           -            60
Stock Subscription Receivable                        -         -          -               -            -           -           240
Change in Deferred Stock Compensation                -         -          -               -            -           -         (231)
Net Loss                                             -         -          -         (7,421)            -           -       (7,421)
                                           ------------  --------  ---------  --------------  -----------  ----------  ------------
BALANCE, DECEMBER 31, 2002                           0        $0         $0       ($70,765)      201,230      ($779)      ($6,026)
Shares issued to Cornell Capital Partners                                                                                    9,565
under Equity Line of Credit (Gross)                  -         -          -               -            -           -
Fees & discounts associated with Shares
issued to Cornell Capital Partners under
Equity Line of Credit                                -         -          -               -            -           -       (6,772)
Issuance of Common Stock through private
Placement,                                           -         -          -               -            -           -           300
Exercise of employee options                         -         -          -               -            -           -           156
Exercise of Warrants                                 -         -          -               -            -           -           250
Expense associated with option & warrant
repricing                                            -         -          -               -            -           -           773
Fair value of stock, options, & warrants
issued for professional services rendered            -         -          -               -            -           -           425
Stock issued to pay past due liabilities             -         -          -               -            -           -         2,413
Issuance of shares to purchase Secure
Source Technologies, Inc.                            -         -          -               -            -           -           500
Issuance of warrants and stock with debt             -         -          -               -            -           -            19
Expense recognized for options issued
with exercise price below market price               -         -          -                            -           -           627
Change in Deferred Stock Compensation                -         -          -               -            -           -          (51)
Net Loss                                             -         -          -         (5,382)            -           -       (5,382)
                                           ------------  --------  ---------  --------------  -----------  ----------  ------------

BALANCE, DECEMBER 31, 2003                           -        $-         $-       ($76,147)      201,230      ($779)      ($3,203)
                                           ------------  --------  ---------  --------------  -----------  ----------  ------------
</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; NeoMedia Technologies of Canada, Inc. incorporated in
Canada;  NeoMedia  Tech,  Inc.  incorporated  in  Delaware;  NeoMedia  EDV  GmbH
incorporated in Austria; NeoMedia Technologies Holding Company B.V. incorporated
in the Netherlands; NeoMedia Technologies de Mexico S.A. de C.V. incorporated in
Mexico;  NeoMedia  Migration  de Mexico  S.A.  de C.V.  incorporated  in Mexico;
NeoMedia  Technologies  do  Brasil  Ltd.  incorporated  in Brazil  and  NeoMedia
Technologies UK Limited incorporated in the United Kingdom, and are collectively
referred  to  as  "NeoMedia"  or  the  "Company".   The  consolidated  financial
statements  of NeoMedia are  presented on a  consolidated  basis for all periods
presented.  All significant  intercompany  accounts and  transactions  have been
eliminated in preparation of the consolidated financial statements.

       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 $5,382,000 and $7421,000 for the
years ended  December 31, 2003 and 2002,  respectively,  and has an  accumulated
deficit of  $76,147,000  as of December 31, 2003.  In addition,  the Company has
cash balance of $61,000 and working capital deficit of $6,526,000 as of December
31, 2003.

      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 revenue  generation
from the Company's  valuable  intellectual  property  portfolio and PaperClickTM
internet  "switching"  software.  On February  6, 2004,  NeoMedia  acquired  CSI
International,  Inc., ("CSI") of Calgary,  Alberta, Canada, a private technology
products  company in the micro paint repair  industry.  NeoMedia paid  7,000,000
shares  of its  common  stock,  plus  $2.5  million  cash  in  exchange  for all
outstanding shares of CSI. NeoMedia has centralized the administrative functions
in its Ft. Myers, Florida  headquarters,  and maintains the sales and operations
office in Calgary,  Alberta, Canada. Through the acquisition of CSI, the Company
expects the revenue for 2004 to be  substantially  higher than that for 2003 and
expects this division will generate positive cash in 2004.



                                      F-6
<PAGE>

Nature of Business Operations

      During the yearss  ended  December  31,  2003 and 2002,  the  Company  was
structured  and  evaluated  by its  Board of  Directors  and  Management  as two
distinct business units:

                  NeoMedia Internet Switching Software (NISS), and

                  NeoMedia Consulting and Integration Services (NCIS)

     On February 6, 2004, the Company acquired CSI International,  Inc. ("CSI"),
of Calgary,  Alberta, Canada, a private technology products company in the micro
paint repair industry.  NeoMedia has centralized the administrative functions in
its Ft. Myers,  Florida  headquarters,  and  maintains the sales and  operations
office in Calgary, Alberta, Canada.  CSI-related operations will be evaluated as
a separate business unit during the year ended December 31, 2004.

     NeoMedia    Internet    Switching    Software   (NISS).    NISS   (physical
world-to-Internet  offerings)  is the core  business  and is based in the United
States, with development and operating facilities in Fort Myers,  Florida.  NISS
develops and supports the Company's  physical world to Internet core technology,
including  NeoMedia's  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.

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

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Financial Instruments

      The  carrying   amount  of  the  Company's  cash   equivalents,   accounts
receivable, prepaid expenses, other current assets, accounts payable and accrued
expenses,  accrued salaries and benefits,  and payable 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, 2003, the allowance for doubtful accounts was $49,000.

Inventories

      Inventories are stated at the lower of cost or market, and at December 31,
2003 was comprised of purchased  computer  technology  resale products.  Cost is
determined  using the  first-in,  first-out  method.  At December 31, 2003,  the
reserve for obsolescence was $143,000.

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
periods ranging from five to seventeen years.

Capitalized and Purchased Software Costs

      Intangible  assets consist of capitalized  software  development costs and
patents.

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



                                      F-8
<PAGE>

      In  accordance  with SFAS No. 86, at the end of each  quarterly  reporting
period,  the Company  evaluates each of its software  products for impairment by
adjusting the unamortized capitalized costs of each computer software product to
its net realizable  value. Net realizable value is equal to the estimated future
gross  revenues  from each  product  reduced by the  estimated  future  costs of
completing  and  disposing of that  product,  including  the costs of performing
maintenance   and   customer   support   required  to  satisfy   the   Company's
responsibility set forth at the time of sale. It is reasonably possible that the
estimates  underlying the impairment analysis could change in the near term, and
the  effect  of the  change  could be  material  to the  consolidated  financial
statements.

Evaluation of Long-Lived Assets

      In  October  2001,  the FASB  issued  SFAS No.  144,  "Accounting  for the
Impairment or Disposal of Long-Lived Assets." This statement supersedes SFAS No.
121,  "Accounting  for the  Impairment of Long-Lived  Assets and for  Long-Lived
Assets  to  Be  Disposed  of."  Although   retaining  many  of  the  fundamental
recognition and measurement  provisions of SFAS 121, the new rules significantly
change  the  criteria  that  would  have  to be  met to  classify  an  asset  as
held-for-sale.  The statement also supersedes  certain  provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations--Reporting
the Effects of Disposal of a Segment of a Business,  and Extraordinary,  Unusual
and Infrequently  Occurring Events and  Transactions," and will require expected
future  operating  losses  from  discontinued  operations  to  be  displayed  in
discontinued  operations  in the  period  or  periods  in which the  losses  are
incurred rather than as of the measurement date, as presently required. NeoMedia
adopted this new statement on January 1, 2002,  and concluded that the effect of
adopting this statement had no material impact on NeoMedia's financial position,
results of operations, or cash flows.

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

      NeoMedia derives  revenues from two primary sources:  (1) license revenues
and (2) resale of software and technology equipment and service fee revenues.

      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.  License
revenue is recognized if persuasive  evidence of an agreement  exists,  delivery
has occurred, pricing is fixed and determinable, and collectibility is probable.

      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. 101,  "Revenue  Recognition  in Financial
Statements,"  as amended (SAB 101).  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


                                      F-9
<PAGE>

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.

Shipping and Handling Costs

         Shipping  and  handling  costs  are  passed  through  to the  Company's
customers, and are netted in 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.

       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.



                                      F-10
<PAGE>

                                                 Years Ended
                                                 December 31,
                                            ---------------------
                                              2003          2002
                                            -------       -------
Net Loss, as reported                       ($5,382)      ($7,421)
Compensation recognized under APB 25            623            --
Compensation recognized under SFAS 123         (962)       (1,277)
                                            -------       -------
  Pro-forma net loss                        ($5,721)      ($8,698)
                                            =======       =======

Net Loss per share:

Basic and diluted - as reported             ($ 0.04)      ($ 0.33)
                                            =======       =======
Basic and diluted - pro-forma               ($ 0.05)      ($ 0.39)
                                            =======       =======

      For grants in 2003 and 2002, the following  assumptions  were used: (i) no
expected  dividends;  (ii) a risk-free  interest  rate of 4.5%;  (iii)  expected
volatility  ranging  from 253% to 457% for 2003 and 135% to 211% for  2002,  and
(iv) an expected life of the shorter of 3 years or the stated life of the option
for  options  granted in 2003,  and 5 years or the stated life of the option for
options granted in 2002. 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, 2003.

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, 2003    December 31, 2002
                                       -----------------    -----------------
      Outstanding Stock Options           33,512,507           10,801,219
      Outstanding Warrants                26,195,000            7,433,758



                                      F-11
<PAGE>

Comprehensive Income

       For the years ended  December 31, 2003 and 2002, the Company did not have
other  comprehensive  income and  therefore  has not included  the  statement of
comprehensive income in the accompanying consolidated financial statements.

Reclassifications

      Certain   reclassifications  have  been  made  to  the  2002  consolidated
financial statements to conform to the 2003 presentation.

Recent Accounting Pronouncements

      In January 2003, the FASB issued  Interpretation No. 46, "Consolidation of
Variable  Interest  Entities" (FIN 46). FIN 46 changes the criteria by which one
company  includes  another  entity  in its  consolidated  financial  statements.
Previously,  the criteria were based on control through voting interest.  FIN 46
requires  a variable  interest  entity to be  consolidated  by a company if that
company is subject to a majority of the risk of loss from the variable  interest
entity's  activities or entitled to receive a majority of the entity's  residual
returns or both.  A company  that  consolidates  a variable  interest  entity is
called the primary beneficiary of that entity. The consolidation requirements of
FIN 46 apply immediately to variable interest entities created after January 31,
2003. The consolidation requirements apply to older entities in the first fiscal
year or interim period beginning after June 15, 2003.  Certain of the disclosure
requirements  apply in all financial  statements  issued after January 31, 2003,
regardless of when the variable interest entity was established.

      During October 2003, the FASB issued Staff Position No. FIN 46,  deferring
the  effective  date for applying the  provisions of FIN 46 until the end of the
first interim or annual  period  ending after  December 31, 2003 if the variable
interest  was created  prior to  February 1, 2003 and the public  entity has not
issued  financial   statements   reporting  that  variable  interest  entity  in
accordance with FIN 46.

      On December 24, 2003, the FASB issued FASB  Interpretation No. 46 (Revised
December  2003),   "Consolidation  of  Variable  Interest  Entities,"  (FIN-46R)
primarily to clarify the required  accounting for interests in variable interest
entities.  FIN-46R  replaces  FIN-46  that was issued in January  2003.  FIN-46R
exempts  certain  entities  from  its  requirements  and  provides  for  special
effective  dates for entities that have fully or partially  applied FIN-46 as of
December 24, 2003. In certain  situations,  entities have the option of applying
or  continuing  to apply  FIN-46  for a short  period  of time  before  applying
FIN-46R.  While FIN-46R modifies or clarifies  various  provisions of FIN-46, it
also incorporates  many FASB Staff Positions  previously issued by the FASB. The
Company has deferred  the adoption of FIN 46 with respect to VIEs created  prior
to February 1, 2003.  Management is currently  assessing the impact, if any, FIN
46 may have on the Company;  however,  management does not believe there will be
any material impact to the Company's financial  position,  results of operations
or liquidity resulting from the adoption of this interpretation.

      In April 2003,  the FASB issued SFAS No. 149,  "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies
financial accounting and reporting of derivative instruments,  including certain
derivative instruments embedded in other contracts  (collectively referred to as
derivatives)  and  for  hedging  activities  under  SFAS  133,  "Accounting  for
Derivative  Instruments and Hedging Activities." This Statement is effective for
contracts  entered  into or  modified  after June 30,  2003,  except for certain
hedging  relationships  designated  after June 30,  2003.  The  adoption of this
Statement is not expected to have a material  impact on the Company's  financial
position, results of operations, or cash flows.



                                      F-12
<PAGE>

      In May  2003,  the FASB  issued  SFAS No.  150,  "Accounting  for  Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
150  establishes  standards for how an issuer  classifies  and measures  certain
financial  instruments with  characteristics  of both liabilities and equity. It
requires that issuers  classify a financial  instrument that is within its scope
as a liability  (or an asset in some  circumstances).  With certain  exceptions,
this Statement is effective for financial  instruments  entered into or modified
after May 31, 2003,  and  otherwise  is effective at the  beginning of the first
interim period  beginning after June 15, 2003. The adoption of this Statement is
not  expected to have a material  impact on the  Company's  financial  position,
results of operations, or cash flows.

      In  December  2003,  the FASB issued  Statement  of  Financial  Accounting
Standards (FAS) No. 132 (Revised 2003)  "Employers'  Disclosures  about Pensions
and Other  Postretirement  Benefits." This standard replaces FAS-132 of the same
title which was  previously  issued in February  1998.  The revised  FAS-132 was
issued in response to concerns  expressed  by  financial  statement  users about
their need for more  transparency of pension  information.  The revised standard
increases the existing GAAP  disclosures  for defined  benefit pension plans and
other defined  benefit  postretirement  plans.  However,  it does not change the
measurement or recognition of those plans as required under: FAS-87, "Employers'
Accounting for Pensions";  FAS-88,  "Employers'  Accounting for  Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits"; and
FAS-106,   "Employers'   Accounting  for  Postretirement   Benefits  Other  Than
Pensions."  Specifically,  the revised  standard  requires  companies to provide
additional  disclosures  about pension plan assets,  benefit  obligations,  cash
flows,  and benefit  costs of defined  benefit  pension  plans and other defined
benefit  postretirement  plans. Also, for the first time, companies are required
to provide a breakdown of plan assets by category, such as debt, equity and real
estate,  and to provide certain  expected rates of return and target  allocation
percentages  for these asset  categories.  The revised  FAS-132 is effective for
financial  statements  with fiscal years ending after  December 15, 2003 and for
interim  periods  beginning  after  December  15,  2003.  The  adoption  of this
Statement is not expected to have a material  impact on the Company's  financial
position, results of operations, or cash flows.

3. EQUITY LINE OF CREDIT WITH CORNELL CAPITAL PARTNERS ("CORNELL")

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

     During the year ended December 31, 2003, the Company sold 98,933,244 shares
of its common stock to Cornell  under the Equity Line of Credit.  The  following
table  summarizes  funding  received from Cornell during the year ended December
31, 2003:

<TABLE>
<CAPTION>
                                                                                                                         Year
                                                                                                                         Ended
                                                     First            Second           Third           Fourth          December 31,
                                                    Quarter           Quarter         Quarter          Quarter            2003
                                                  ------------     ------------     ------------     ------------     ------------
<S>                                               <C>             <C>              <C>              <C>              <C>
Number of shares sold to Cornell                     3,990,342       27,873,902       56,069,000       11,000,000       98,933,244
Gross Proceeds from sale of shares to Cornell     $     84,000     $    633,000     $  7,088,000     $  1,760,000     $  9,565,000
Less: discounts and fees*                              (29,000)        (189,000)      (5,429,000)      (1,125,000)     ($6,772,000)
                                                  ------------     ------------     ------------     ------------     ------------
   Net Proceeds from sale of shares to Cornell    $     55,000     $    444,000     $  1,659,000     $    635,000     $  2,793,000
                                                  ------------     ------------     ------------     ------------     ------------
</TABLE>




                                      F-13
<PAGE>

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

     As of December  31,  2003,  the Company had a  promissory  note  payable to
Cornell in the amount of $500,000

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

4.    PROPERTY AND EQUIPMENT

      As  of  December  31,  2003,  property  and  equipment  consisted  of  the
following:

                                                    (dollars
                                                       in
                                                   thousands)
                                                  -------------
                                                      2003

Furniture and fixtures                                    $266
Equipment                                                   41
                                                  -------------
      Total                                                307
Less: accumulated depreciation
    Furniture and fixtures                               (237)
    Equipment                                              (9)
                                                  -------------
      Total property and equipment, net                    $61
                                                  =============

      Depreciation expense was $83,000 and $108,000 for the years ended December
31, 2003 and 2002, respectively.



                                      F-14
<PAGE>

5.    INTANGIBLE ASSETS

      As of December 31, 2003, intangible assets consisted of the following:

                                                                (dollars
                                                                   in
                                                                thousands)
                                                               ------------
                                                                   2003
                                                               -----------

Capitalized and purchased software costs                             $575
Patents and related costs                                           3,566
                                                               ------------
      Total                                                         4,141
Less: accumulated amortization
    Capitalized and purchased software costs                         (456)
    Patents and related costs                                      (1,152)
                                                               ------------
        Intangible assets, net                                     $2,533
                                                               ============


      Capitalized  patent  activity for the year ended  December 31, 2003 was as
follows:

                                                             (dollars in
                                                              thousands)
                                                             ------------
                                                                 2003
                                                             ------------
Beginning balance                                                 $2,244
Additions                                                             22
Acquisition of Secure Source Technologies, Inc. Patents              422
Amortization                                                        (273)
                                                             ------------
  Ending balance                                                  $2,415
                                                             ============

      Amortization  expense of capitalized patents was $273,000 and $276,000 for
the years ended December 31, 2003 and 2002,  respectively.  The weighted-average
amortization  period of  capitalized  patents as of  December  31, 2003 was 15.8
years.

      Capitalized  and purchased  software  activity for the year ended December
31, 2003 was as follows:

                                                                (dollars in
                                                                 thousands)
                                                                ------------
                                                                    2003
                                                                ------------

Beginning balance                                                     $149
Additions                                                                6
Acquisition of Secure Source Technologies, Inc. software                77
Amortization                                                          (114)
                                                                ------------
  Ending balance                                                      $118
                                                                ============

      Amortization  expense of  capitalized  and  purchased  software  costs was
$114,000  and  $677,000  for  the  years  ended  December  31,  2003  and  2002,
respectively.  The  weighted-average  amortization  period  of  capitalized  and
purchased software costs as of December 31, 2003 was 6.1 years.

      During the year  ended  December  31,  2002,  the  Company  recognized  an
impairment    charge   of   $1.0    million    relating   to   its    PaperClick


                                      F-15
<PAGE>

physical-world-to-internet  software  solution in its NISS  business  unit.  The
impairment  charge was the result of a funding  shortage during 2002 that forced
the Company to terminate the majority of its  workforce,  including the selling,
marketing,  and development  functions supporting  PaperClick.  During 2003, the
Company reinstituted its PaperClick selling, marketing and development efforts.

      As of December 31, 2003, the Company estimated future amortization expense
of capitalized patents and software for the next five years to be:

                                       (In Thousands)
                                       --------------
                     2004                   $353
                     2005                    275
                     2006                    228
                     2007                    211
                     2008                    187


6.  ALLOWANCE FOR DOUBTFUL ACCOUNTS AND INVENTORY RESERVE

      Allowance for doubtful  accounts  activity for the year ended December 31,
2003 was as follows:

                                                         (dollars
                                                      in thousands)
                                                    -------------------
                                                           2003
                                                    -------------------

Beginning balance                                              $55

Bad debt expense                                                 -

Write-off of uncollectible accounts                              -

Collection of accounts previously written off                  (18)

Adjustment to general allowance                                 12
                                                    -------------------
  Ending balance                                               $49
                                                    ===================

      Inventory  reserve  activity  for the year ended  December 31, 2003 was as
follows:

                                                         (dollars
                                                      in thousands)
                                                    -------------------
                                                           2003
                                                    -------------------

Beginning balance                                             $130
Allowance for slow-moving parts inventory                       13
                                                    -------------------
  Ending balance                                              $143
                                                    ===================


7. FINANCING AGREEMENTS

      Resale Financing Arrangement

         As of  December  31,  2003,  the  Company  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 the
Company  to  re-sell  high-dollar  technology  equipment  and  software  without
committing  cash resources to financing the purchase.  The Company and GE Access
are currently  operating under an additional  arrangement  under which GE Access
retains 50% of the  Company's  proceeds  from sales  financed by GE Access,  and
applies the  portion of proceeds  toward  past due  balances.  This  arrangement
reduces by half the  Company's  cash flow from resales of equipment and software
financed  by GE  Access,  until the  balance  owed to GE Access is paid in full.
During  October 2003,  the Company and GE entered into an  additional  agreement
under  which  the  Company  also  makes  regular  payment  against  its past due
balances.  Termination of the Company's  financing  relationship  with GE Access
could  have  a  material  adverse  effect  the  Company's  financial  condition.
Management  expects the  agreement to remain in place in the near future.  As of
December 31, 2003 and 2002, the amount payable under this financing  arrangement
was approximately $196,000 and $430,000, respectively.



                                      F-16
<PAGE>

8.  NOTES PAYABLE

      On February 26, 2002, the Company  borrowed  $10,000 from William E. Fritz
under a note payable  bearing  interest at 8% per annum.  The note was repaid in
April 2003.

     During  March 2002,  the Company  borrowed  $190,000  from William E. Fritz
under a note  payable  bearing  interest at 8% per annum with a term of 16 days.
The note was repaid during March 2002.

      On April 5, 2002, the Company borrowed $11,000 from William E. Fritz under
a note payable  bearing  interest at 8% per annum.  The note was repaid in April
2003.

     During November 2002,  NeoMedia issued Convertible Secured Promissory Notes
with an aggregate face value of $60,000 to 3 separate parties, including Charles
W. Fritz,  Chairman of the Board of Directors of NeoMedia;  William E. Fritz, an
outside  director;  and James J.  Keil,  an  outside  director.  The notes  bear
interest  at a rate of 15% per annum,  and  matured  at the  earlier of i.) four
months, or ii.) the date the shares underlying the Cornell Equity Line of Credit
were registered with the SEC. The notes were  convertible,  at the option of the
holder, into either cash or shares of NeoMedia common stock at a 30% discount to
either  market  price upon  closing,  or upon  conversion,  whichever  is lower.
NeoMedia  also  granted to the  holders an  additional  1,355,670  shares of its
common stock and 60,000 warrants to purchase shares of its common stock at $0.03
per share,  with a term of three  years.  The warrants and shares were issued in
January 2003.  In addition,  since this debt is  convertible  into equity at the
option of the note holder at beneficial conversion rates, an embedded beneficial
conversion  feature was  recorded as a debt  discount  and  amortized  using the
effective interest rate over the life of the debt in accordance with EITF 00-27.
Total cost of beneficial conversion feature, fair value of the stock and cost of
warrants  issued  exceed the face value of the notes  payable,  therefore,  only
$60,000,  the face amount of the note, was  recognizable  as debt discount,  and
amortized  over the life of the notes  payable.  During  March 2003,  two of the
affiliated  parties,  Mr.  William  Fritz and Mr.  Keil,  agreed  to extend  the
maturity  date due to the  Company's  capital  constraints.  The Company  repaid
Charles  Fritz's note in full during March 2003, and repaid James J. Keil's note
in full during April 2003.  The Company paid $30,000 of the principal on William
Fritz's note during  April 2003,  and entered into a new note with Mr. Fritz for
the remaining  $10,000.  The new note bears  interest at a rate of 10% per annum
and matures in April 2004.  The new note also includes a provision  under which,
as consideration for the loan, Mr. Fritz will receive a 3% royalty on all future
revenue generated from the Company's intellectual property.

     On December 2, 2002, the Company issued to Michael Kesselbrenner, a private
investor,  a  Promissory  Note in the  principal  amount  of  $165,000,  bearing
interest at a rate of 12% per annum,  with a maturity of 150 days.  The investor
only  funded to the Company  $84,000 of the  principal  amount of the note.  The
Company  repaid this note during March 2003,  and the shares which had been held
in escrow as collateral for the loan were returned. The Company has not incurred
further obligation under this note agreement.

     On March 13, 2003,  the Company  borrowed  from Cornell the gross amount of
$262,000 before Cornell discounts and fees. As of December 31, 2003, the Company
had sold  18,535,039  shares to Cornell  under the Equity Line of Credit and the
proceeds were used to repay this obligation in full.



                                      F-17
<PAGE>

     On May 27,  2003,  the Company  borrowed  from  Cornell the gross amount of
$245,000 before Cornell discounts and fees. As of December 31, 2003, the Company
had sold  8,922,467  shares to Cornell  under the Equity  Line of Credit and the
proceeds were used to repay this obligation in full.

     On June 24,  2003,  the Company  borrowed  from Cornell the gross amount of
$400,000 before Cornell discounts and fees. As of December 31, 2003, the Company
had sold  18,426,808  shares to Cornell  under the Equity Line of Credit and the
proceeds were used to repay this obligation in full.

     On July 9, 2003, the Company borrowed $25,000 from William E. Fritz, one of
its outside  directors.  This amount was added to the  principal  of the $10,000
note payable to Mr. Fritz  entered into during April 2003,  with all other terms
of the note  remaining  the same.  As  consideration  for the loan,  the Company
granted Mr. Fritz 2,500,000  warrants to purchase shares of the Company's common
stock at an exercise price of $0.01 per share.  The warrants had a fair value of
approximately  $74,000.  In accordance with EITF 00-27, the Company recorded the
relative  fair value of the  warrants  as a discount  against  the note,  and is
amortizing  the  discount  over the life of the note.  The note matures in April
2004.

     On July 21,  2003,  the Company  borrowed  from Cornell the gross amount of
$200,000 before Cornell discounts and fees. As of December 31, 2003, the Company
had sold  10,806,998  shares to Cornell  under the Equity Line of Credit and the
proceeds were used to repay this obligation in full.

     On August 1, 2003,  the Company  borrowed  from Cornell the gross amount of
$200,000 before Cornell discounts and fees. As of December 31, 2003, the Company
had sold  5,915,410  shares to Cornell  under the Equity  Line of Credit and the
proceeds were used to repay this obligation in full.

      On August 29, 2003,  the Company  borrowed  $50,000 from William E. Fritz,
one of its outside directors, under an unsecured note payable. The note was paid
in full during September 2003.

     On September 2, 2003, the Company borrowed from Cornell the gross amount of
$200,000 before Cornell discounts and fees. As of December 31, 2003, the Company
had sold  5,919,784  shares to Cornell  under the Equity  Line of Credit and the
proceeds were used to repay this obligation in full.

     On  September  11,  2003,  the  Company  received  funding in the form of a
promissory  note from  Cornell in the gross  amount of $500,000  before  Cornell
discounts  and fees.  As of  December  31,  2003,  the  Company had not made any
payment  against  the  principal  of this note.  Accordingly,  the  company  has
recorded  the advance  balance of $500,000 in "Notes  Payable" on its  condensed
consolidated  balance sheet as of December 31, 2003.  During  January 2004,  the
Company sold 1,408,992 shares to Cornell,  reducing the balance to approximately
$337,000. The Company has the option to repay any remaining principal in cash.

     On September 29, 2003,  the Company  borrowed from Cornell the gross amount
of $1,500,000  before  Cornell  discounts and fees. As of December 31, 2003, the
Company had sold  26,000,000  shares to Cornell  under the Equity Line of Credit
and the proceeds were used to repay this obligation in full.

9.    LONG-TERM DEBT

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



                                      F-18
<PAGE>

      On October 21, 2002, IDSI filed a demand for arbitration  relating to past
due payments on the note payable.  On October 31, 2003, the Company paid off all
past due and future  obligations  under the note to IDSI through the issuance of
8,000,000 shares of NeoMedia common stock. The Company has no future  obligation
under the note. The Company incurred a loss of $187,000 which is included in the
Loss on Extinguishment of Debt.

10.  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 $49,000 in its December
31, 2003 consolidated  balance sheet. In addition, a single company supplies the
majority of the Company's resold equipment and software, which is re-marketed to
this  customer.  Accordingly,  the  loss  of this  customer  or  supplier  would
materially adversely affect the Company's  operations.  During 2004, the Company
will attempt to diversify  its customer  base to offset the decrease in sales to
SBC/Ameritech.  Revenue  generated from the remarketing of computer software and
technology  equipment has  accounted for a significant  percentage of NeoMedia's
revenue.  Such  sales  accounted  for  approximately  83% and 87% of  NeoMedia's
revenue for the years ended December 31, 2003 and 2002, respectively.

11.  ACQUISITIONS

      Secure Source Technologies, Inc. ("SST")

      On October 8, 2003, the Company acquired 100% ownership of SST, a provider
of security  solutions and covert security  technology for the manufacturing and
financial  services  industries,  in  exchange  for 3.5  million  shares  of the
Company's  common  stock.  With  the  purchase  of  SST,  the  Company  acquired
additional patents that compliment its existing intellectual property portfolio,
as well as a security software platform,  and computer  equipment.  Prior to the
acquisition,  SST  was  inactive  and  had  minimal  operating  activities.  The
acquisition  was accounted for under the purchase  method.  The actual  purchase
price was  based on the fair  value of the  Company's  stock on the dates of the
grant. The purchase price was allocated as follows:

                                                            (Dollars in
                                                             Thousands)
                                                          ---------------
Value of 3.5 Million Shares Issued (Purchase Price)                 $500

Assets Purchased:

   Computer Equipment                                                  1
   Software Platform                                                  77
   Patents                                                           422
                                                          ---------------
      Total Purchase Price Allocation                               $500
                                                          ---------------

      The  allocation  of the purchase  price is  preliminary  and is subject to
revision,  which is not expected to be material, based on the final valuation of
the net assets acquired. Merger related cost was expensed as incurred.



                                      F-19
<PAGE>

      The proforma  financial  information is not presented as this  acquisition
was not considered  significant or material to the combined financial statements
on the date of the acquisition.

      The values assigned to intangible assets are subject to amortization.  The
acquired  software  platform  has  no  residual  value  and  a  weighted-average
amortization  period of 3 years. The acquired patents have no residual value and
a  weighted-average  amortization  period of 11.1 years.  The results of SST are
included in the consolidated financial statements for the period October 8, 2003
through December 31, 2003.

      Loch Energy, Inc.

         On March 7,  2003,  NeoMedia  announced  that  that it had  reached  an
agreement in  principle to acquire and merge with Loch,  an oil and gas provider
based in Humble, Texas. On October 1, 2003, NeoMedia discovered that the royalty
interest  from  future  sales of oil owned by Loch were  oversold,  which  would
likely  result in  materially  lower  projected  available  cashflow from Loch's
operations.  This  projected  available  cashflow was the basis for the proposed
acquisition by NeoMedia. On October 2, 2003, NeoMedia's Board of Directors voted
to cancel the  Memorandum  of Terms signed on March 13, 2003,  and terminate the
acquisition and merger.

12.  DISPOSAL OF QODE BUSINESS UNIT

      On August 31, 2001, the Company  signed a non-binding  letter of intent to
sell the assets and liabilities of its former Ft. Lauderdale-based Qode business
unit,  which it  acquired  in March 2001,  to The Finx  Group,  Inc.,  a holding
company  based in  Elmsford,  NY. The Finx Group was to assume  $620,000 in Qode
payables  and  $800,000  in  long-term  leases in exchange  for the  issuance of
500,000 shares of the Finx Group, right to use and sell Qode services, and up to
$5 million in affiliate revenues over the next five years.  During the third and
fourth  quarters of 2001 and the first quarter of 2002,  the company  recorded a
$2.6 million expense from the write-down of the Qode  assets/liabilities  to net
realizable value.

         During June 2002,  the Finx Group  notified the Company that it did not
intend  to carry  out the  letter of intent  due to  capital  constraints.  As a
result,  during the year ended  December  31,  2002,  the  Company  recorded  an
additional  expense of $1.5 million for the write-off of remaining  Qode assets.
As of December 31, 2003, the Company had  approximately  $769,000 of liabilities
relating to the Qode system remaining on its books.

13.  2000 EXECUTIVE INCENTIVE

         During the year ended  December  31,  2003,  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  approximately  $592,000 of the liability through the
issuance of approximately  5.4 million shares during the year ended December 31,
2003.  The  excess  of the  fair  value  of the  common  stock  issued  over the
outstanding accrued bonuses was included in the loss on extinguishment of debt.



                                      F-20
<PAGE>

14.   INCOME TAXES

      For the years ended  December 31, 2003 and 2002,  the components of income
tax expense were as follows:

                                               2003         2002
                                              ------       ------
                                                 (In thousands)
        Current                               $   --       $   --
        Deferred                                  --           --
                                              ------       ------
          Income tax expense/(benefit)        $   --       $   --
                                              ======       ======

      As of December 31, 2003,  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:

                                                            2003         2002
                                                          --------     --------

Accrued employee benefits                                 $      8     $     26
Provisions for doubtful accounts                                20           22
Capitalized software development costs and fixed assets        740          821
Net operating loss carryforwards (NOL)                      27,014       25,134
Accruals                                                       578          468
Write-off of long-lived assets                               2,070        2,070
State taxes                                                    107           95
Alternative minimum tax credit carryforward                     45           45
                                                          --------     --------
Total deferred tax assets                                   30,582       28,681
Valuation Allowance                                        (30,582)     (28,681)
                                                          --------     --------
   Net deferred income tax asset                          $     --     $     --
                                                          ========     ========

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

      For the years ended  December  31,  2003 and 2002,  the income tax benefit
differed from the amount computed by applying the statutory  federal rate of 34%
as follows:

                                        2003        2002
                                      -------     -------

Benefit at federal statutory rate     $(1,830)    $(2,523)
State income taxes, net of federal       (213)       (294)
Permanent and other, net                  142        (609)
Change in valuation allowance           1,901       3,426
                                      -------     -------
   Income tax expense/(benefit)       $    --     $    --
                                      =======     =======

      As of December 31, 2003, NeoMedia had net operating loss carryforwards for
federal tax purposes  totaling  approximately  $68 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.

                                      F-21
<PAGE>

15.  TRANSACTIONS WITH RELATED PARTIES

     During August 2003, the Company borrowed $50,000 from William E. Fritz, one
of its outside  directors,  under an  unsecured  note  payable with a term of 30
days. The note was repaid in full during September 2003.

     During July 2003, the Company  borrowed  $25,000 from William E. Fritz, one
of its outside  directors.  This amount was added to the  principal of a $10,000
note payable to Mr.  Fritz that  matures in April 2004,  with all other terms of
the note remaining the same. As consideration  for the loan, the Company granted
Mr.  Fritz  2,500,000  warrants  to  purchase  shares of its common  stock at an
exercise price of $0.01 per share.

     During April 2003,  the Company  entered into a consulting  agreement  with
William Fritz,  an outside  director,  for  consulting  and advisement  services
relating  to  the  merger  with  Loch  Energy,   Inc.,  and  to  the  subsequent
implementation  of various  management  programs  surrounding the business.  The
agreement  called  for total  payments  of  $250,000  over a period of one year.
During August 2003,  the Company paid the  consulting  contract in full.  During
September 2003, the consulting  contract was rescinded and the full $250,000 was
returned to us.

       During April 2003, the Company's Board of Directors  approved the payment
in full of approximately  $154,000 of liabilities owed by NeoMedia to Charles W.
Fritz, the Company's Founder and Chairman of the Board of Directors, through the
issuance of 15,445,967 shares of common stock. The Company recognized a discount
expense in general and administrative expenses of approximately $15,000 relating
to this transaction with Mr. Fritz.

     During April 2003, the Company sold 25,000,000  shares of its common stock,
par value $0.01, in a private placement at a price of $0.01 per share to William
Fritz. In connection with the sale, the Company also granted 25,000,000 warrants
to purchase  shares of NeoMedia  common stock at an exercise  price of $0.01 per
share.  The warrants  had a fair value of $298,000  and have been  recorded as a
cost of  issuance.  The  Company  recognized  a discount  expense in general and
administrative  expenses of  approximately  $50,000 relating to this transaction
with Mr.  Fritz.  On August 6,  2003,  Mr.  Fritz  exercised  his  warrants  and
purchased  25,000,000  additional shares of common stock at a price of $0.01 per
share.

     During  November 2002, the Company issued  Convertible  Secured  Promissory
Notes with an aggregate face value of $60,000 to 3 separate  parties,  including
Charles W. Fritz,  Chairman of the Board of Directors  of  NeoMedia;  William E.
Fritz, an outside director;  and James J. Keil, an outside  director.  The notes
had an  interest  rate of 15% per annum,  and matured at the earlier of i.) four
months, or ii.) the date the shares underlying the Cornell Equity Line of Credit
were registered with the SEC. The notes were  convertible,  at the option of the
holder,  into  either  cash or shares  of the  Company's  common  stock at a 30%
discount to either market price upon closing,  or upon conversion,  whichever is
lower. The Company also granted to the holders an additional 1,355,670 shares of
its common stock and 60,000  warrants to purchase  shares of its common stock at
$0.03 per share, with a term of three years. The warrants and shares were issued
in January 2003. In addition,  since this debt is convertible into equity at the
option of the note holder at beneficial conversion rates, an embedded beneficial
conversion  feature was  recorded as a debt  discount  and  amortized  using the
effective interest rate over the life of the debt in accordance with EITF 00-27.
Total cost of beneficial conversion feature, fair value of the stock and cost of
warrants  issued  exceed the face value of the notes  payable,  therefore,  only
$60,000,  the face amount of the note, was  recognizable  as debt discount,  and
amortized  over the life of the notes  payable.  During  March 2003,  two of the
affiliated  parties,  Mr.  William  Fritz and Mr.  Keil,  agreed  to extend  the
maturity date due to NeoMedia's capital constraints.  The Company repaid Charles
Fritz's note in full during March 2003,  and repaid James J. Keil's note in full
during April 2003. The Company paid $30,000 of the principal on William  Fritz's
note during  April  2003,  and  entered  into a new note with Mr.  Fritz for the
remaining  $10,000.  The new note bears  interest at a rate of 10% per annum and
matures in April 2004.  The new note also includes a provision  under which,  as
consideration  for the loan,  Mr.  Fritz will receive a 3% royalty on all future
revenue generated from the Company's intellectual property.



                                      F-22
<PAGE>

     During April 2002, the Company borrowed $11,000 from William E. Fritz under
a note payable bearing interest at 8% per annum with a term of 60 days. The note
was repaid in April 2003.

     During  March 2002,  the Company  borrowed  $190,000  from William E. Fritz
under a note  payable  bearing  interest at 8% per annum with a term of 16 days.
The note was repaid during March 2002.

     During  February 2002, the Company  borrowed  $10,000 from William E. Fritz
under a note  payable  bearing  interest at 8% per annum with a term of 30 days.
The note was repaid in April 2003.

     During  October 2001,  the Company  borrowed  $4,000 from Charles W. Fritz,
NeoMedia's Chairman, its former Chief Executive Officer and a director,  under a
note payable  bearing  interest at 10% per annum with a term of six months.  The
note was repaid in April 2003.

     The Company believes that all of the above  transactions  were conducted at
"arm's length",  representing what NeoMedia believes to be fair market value for
those services.

16.   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, 2003 and 2002,  NeoMedia's  rent  expense was  $265,000 and
$853,000, 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, 2003:

                                        Payments
                                     (In Thousands)
                        2004           $      30
                  Thereafter                  --
                                       ----------
                  Total                $      30
                                       ==========

      As of  December  31,  2003,  none of the  Company's  employees  were under
contract.  Additionally, as of December 31, 2003, the Company was not a party to
any long-term consulting agreements that are to be paid in cash.

      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.



                                      F-23
<PAGE>

      AirClic, Inc. Litigation

     On September 6, 2001,  AirClic,  Inc. filed suit against the Company in the
Court of Common Pleas,  Montgomery County,  Pennsylvania,  seeking,  among other
things, the accelerated  repayment of a $500,000 loan it advanced to the Company
pursuant to the terms of a Secured  Promissory  Note made on July 11, 2003 and a
non-binding Letter of Intent dated July 3, 2001 between AirClic and the Company.
The  note  was  secured  by  substantially  all  of the  Company's  intellectual
property,  including the core physical  world-to-Internet  technologies.  In the
suit,  the  Company  acknowledged  its  obligations  under  the note but filed a
counterclaim   against   AirClic   seeking   damages   for   fraud,    negligent
misrepresentation and promissory estoppel.

     On October 3, 2003, the Company paid AirClic the principal plus interest in
the  approximate  amount of $610,000.  On December 5, 2003,  the Company paid an
additional  $115,000 in legal fees and entered into a settlement  agreement with
AirClic  under  which  the  suit  was  dismissed.  The  Company  has no  further
obligation relating to this matter.

       On January 23, 2004, NeoMedia filed a patent infringement lawsuit against
AirClic,  Scanbuy, Inc., and LScan Technologies,  Inc. The suit claims that each
of the parties has  manufactured,  or has  manufactured for it, and has used, or
actively  induced  others to use,  technology  which  allows  customers to use a
built-in UPC bar code scanner to scan individual  items and access  information.
The  Complaint  states  that  AirClic,  Scanbuy  and LScan  have had  actual and
constructive notice of the existence of the patents-in-suite,  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.  NeoMedia's  Complaint
seeks compensatory damages for infringement by AirClic,  Scanbuy and LScan, with
those  damages  to be  trebled  due to the  willful  and  wanton  nature  of the
infringement.  NeoMedia  also  seeks to  preliminarily  and  permanently  enjoin
AirClic, Scanbuy and LScan from their infringing activities.

      Other Litigation

      On August 20, 2001,  Ripfire,  Inc.  filed suit against the Company in the
San Francisco County Superior Court seeking payment of $138,000 under a software
license  agreement  entered  into  between  the  Company and Ripfire in May 2001
relating to implementation of the Qode Universal Commerce Solution. On September
6, 2002, the Company settled this suit for $133,000 of NeoMedia common stock, to
be valued at the time of  registration  of the shares.  The Company's  stock was
trading  at  approximately   $0.05  at  that  time.  The  Company  included  for
registration  2.7 million shares in the name of Ripfire in its form S-1 that was
declared  effective  by the SEC on February 14, 2003.  The  Company's  stock was
trading at approximately $0.02 on February 14, 2003. The actual number of shares
to be  issued  to  Ripfire  per  the  pricing  outlined  in  the  agreement  was
approximately 9.8 million. On March 31, 2003, the Company issued the 2.7 million
shares of common  stock  that had been  registered  in the S-1 to  Ripfire.  The
Company is attempting to negotiate  settlement  of the  remaining  balance.  The
Company had a remaining accrued liability of $106,000 relating to this matter as
of December 31, 2003.

      On November 30, 2001,  Orsus Solutions USA, Inc.,  filed a summons seeking
payment in full of  approximately  $525,000  relating to a software and services
contract associated with implementation of the Qode Universal Commerce Solution.
In October 2003, the Company  settled this matter for $10,000 cash payments over
time, plus 3,000,000 shares of common stock. The Company had accrued a liability
of $7,000 as of December 31, 2003.



                                      F-24
<PAGE>

      On July 27, 2002, the Company's  former General Counsel filed suit in U.S.
District  Court,  Ft.  Myers  division,  seeking  payment of the 2000  executive
incentive,  severance and unpaid  vacation  days in the amount of  approximately
$154,000.  In June  2001,  the  Company's  compensation  committee  approved  an
adjustment  to the 2000  executive  incentive  plan that  reduced the  executive
incentive  payout  as a  result  of the  write-off  of  the  Digital:Convergence
intellectual  property  license  contract  in the second  quarter of 2001.  As a
result,  the Company  reduced the  accrual  for such payout by an  aggregate  of
approximately  $1.1 million in the second  quarter of 2002.  The  plaintiff  was
seeking payment of the entire original  incentive  payout. On November 12, 2002,
NeoMedia settled the lawsuit.  The settlement  calls for cash payments  totaling
approximately  $90,000 over a period of ten months,  plus 250,000 vested options
to purchase shares of NeoMedia common stock at an exercise price of $0.01 with a
term of five years. The Company had a liability of approximately $3,000 relating
to this matter as of December 31, 2003.

      On September 12, 2002,  R. R.  Donnelley & Sons Company filed a summons in
the  Circuit  Court of The  Twentieth  Judicial  Circuit in and for Lee  County,
Florida,  seeking  payment of  approximately  $92,000  in past due  professional
services bills,  plus interest and attorney fees.  During July 2003, the Company
settled the suit for cash payments over a period of approximately  one year. The
Company  had an accrued  liability  of  approximately  $82,000  relating to this
matter as of December 31, 2003.

      On October 28, 2002, Merrick & Klimek, P.C., filed a complaint against the
Company  seeking payment of  approximately  $170,000 in past due legal services.
The amount in question is subject to an unsecured  promissory  note that matured
unpaid on February 28, 2002.  On May 1, 2003,  the Company  settled the suit for
cash payments totaling  approximately  $196,000, to be paid at a rate of $30,000
per quarter  until the balance is  satisfied.  If the balance is paid within one
year of the settlement,  the Company will not pay interest charges.  The Company
had a remaining  liability of approximately  $116,000 relating to this matter as
of December 31, 2003.

      On November  11, 2002,  Avnet/Hallmark  Computer  Marketing  Group filed a
complaint  against the Company seeking payment of approximately  $66,000 in past
due amounts  relating to hardware  and software  re-sold by the Company.  During
December   2002,   the  Company  made  payment  of   approximately   $30,000  to
Avnet/Hallmark,  reducing the balance owed to approximately $37,000. On April 1,
2003, the plaintiff received a judgment from the circuit court for the remaining
balance.  The Company has agreed to a payment plan for the balance over a period
of  approximately  nine  months.  The Company had a liability  of  approximately
$17,000 relating to this matter as of December 31, 2003.

      On February 6, 2003, Allen Norton & Blue, P.A., filed a complaint  against
the Company seeking payment of approximately $25,000 in past due legal services.
The Company has agreed to a payment plan relating to this matter under which the
balance will be paid over  approximately 12 months.  The Company had a liability
of approximately $13,000 relating to this matter as of December 31, 2003.

      On April 18, 2003, a former participant in the Company's 2001 self-insured
health plan sued the Company to recover  approximately  $46,000 in unpaid health
claims from 2001.  On December 1, 2003,  the Company  settled this suit for cash
payments  over a period of  approximately  one year.  The  Company  had  accrued
approximately $36,000 as of December 31, 2003.

         On January 26, 2004,  Day West &  Associates,  Inc.,  filed a complaint
against the Company  seeking payment of  approximately  $6,000 in past due legal
services.  The Company is  attempting to negotiate  settlement of the suit.  The
Company had not accrued any liability  relating to his matter as of December 31,
2003.



                                      F-25
<PAGE>

17.   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.

18.   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.

      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.  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.


<PAGE>


      The following table  summarizes the status of NeoMedia's  2003, 2002, 1998
and 1996 stock option plans as of and for the years ended  December 31, 2003 and
2002:

<TABLE>
<CAPTION>
                                               2003                      2002
                                      ------------------------  ------------------------
                                                   Weighted                  Weighted
                                                    Average                   Average
                                                   Exercise                  Exercise
                                         Shares      Price         Shares      Price
                                      ------------------------  ------------------------
                                           (In        (In
                                       thousands)  thousands)
<S>                                     <C>            <C>         <C>          <C>
Outstanding at beginning of year        10,801         $1.11       4,214        $2.96
Granted                                 39,018         $0.01      12,306        $0.06
Exercised                              (15,605)        $0.01      (5,252)       $0.07
Forfeited                                 (702)        $1.26        (467)       $2.75
                                      ------------------------  ------------------------
  Outstanding at end of year            33,512         $0.23*     10,801        $1.11
                                      ========================  ========================

Options exercisable at year-end         33,512                    10,272

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

Available for grant at the end
  of the year                          114,025                     2,319
</TABLE>


      *  - Includes  3,644,382  options that have a restated  exercise  price of
         $0.01 under option  repricing  program  that  extends  through June 30,
         2004. For purposes of this table,options  subject to repricing are show
         at their original exercise price.

      The following table summarizes  information about NeoMedia's stock options
outstanding as of December 31, 2003:

<TABLE>
<CAPTION>
                          Options Outstanding                                   Options Exercisable
------------------------------------------------------------------------    ----------------------------
                                           Weighted-       Weighted-                         Weighted-
                                             Average         Average                          Average
                                            Remaining       Exercise                         Exercise
      Range of              Number        Contractual                            Number
   Exercise Prices       Outstanding         Life            Price            Exercisable      Price
   ---------------       -----------         ----            -----            -----------      -----
                        (In thousands)                                       (In thousands)
<S>                          <C>           <C>               <C>                  <C>          <C>
    $-- to $0.10             31,068        9.7  years        $0.01                31,068       $0.01

    0.11 to 0.84                742        6.2  years        $0.24                   742       $0.24

    0.85 to 3.63                955        5.6  years        $2.99                   955       $2.99

    3.64 to 5.13                437        6.1  years        $4.83                   437       $4.83

    5.14 to 7.31                310        4.3  years        $7.29                   310       $7.29
------------------------------------------------------------------------    ----------------------------
   $ -- to $7.31             33,512        9.4  years        $0.23                33,512       $0.23
========================================================================    ============================
</TABLE>


      In March 2002, the Company issued  2,946,310  options to buy shares of its
common  stock to two  outside  consultants  at a price of $0.17  per  share  for
consulting   services   rendered  over  a  six-month   period,   and  recognized
approximately $407,000 in expense in the 2002 consolidated financial statements.
The options vested 100% upon grant.  The options were all exercised  during 2002
and 2003.



                                      F-26
<PAGE>

      In June 2002,  the Company issued  3,000,000  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  over  a  one-year  period,  and  recognized
approximately  $125,000  in  general  and  administrative  expense  in the  2002
consolidated  financial  statements.  The options  vested  100% upon grant.  All
3,000,000  options  were  exercised  during  2002,  resulting in proceeds to the
Company of $30,000.

      In December 2002, the Company  issued  2,000,000  options to buy shares of
the  Company's  common stock to two outside  consultant  at a price of $0.01 per
share for consulting  services rendered over a twelve-month  period. The Company
recognized  approximately  $57,000  and  $5,000 in  general  and  administrative
expense in the  accompanying  consolidated  financial  statements  for the years
ended  December 31, 2003 and 2002,  respectively.  The options  vested 100% upon
grant. All 2,000,000 options were exercised during 2003.

      In June 2003,  the  Company  issued  375,000  options to buy shares of the
Company's common stock to two outside  consultants at a price of $0.01 per share
for consulting services rendered.  The Company recognized  approximately $13,000
in general and administrative expense in the accompanying consolidated financial
statements for the year ended December 31, 2003.

      In October 2003, the Company  issued 125,000  options to buy shares of the
Company's common stock to two outside  consultants at a price of $0.01 per share
for consulting services rendered.  The Company recognized  approximately $13,000
in general and administrative expense in the accompanying consolidated financial
statements for the year ended December 31, 2003.

      In October 2003, the Company issued 1,000,000 options to buy shares of the
Company's  common stock to an outside  consultant  at a price of $0.01 per share
for consulting to be provided over a period of one year. The options were valued
at approximately $102,000, of which the Company recognized approximately $20,000
in general and administrative expense in the accompanying consolidated financial
statements for the year ended December 31, 2003.

      In October 2003, the Company  issued 500,000  options to buy shares of the
Company's  common stock to an outside  consultant  at a price of $0.01 per share
for consulting to be provided over a period of one year. The options were valued
at approximately $51,000, of which the Company recognized  approximately $10,000
in general and administrative expense in the accompanying consolidated financial
statements for the year ended December 31, 2003.

      In November  2003,  the Company issued 50,000 options to buy shares of the
Company's  common stock to an outside  consultant  at a price of $0.06 per share
for consulting services rendered. The Company recognized approximately $7,000 in
general and administrative  expense in the accompanying  consolidated  financial
statements for the year ended December 31, 2003.

      In November 2003, the Company issued 150,000  options to buy shares of the
Company's  common stock to an outside  consultant  at a price of $0.16 per share
for consulting services rendered. The Company recognized approximately $3,000 in
general and administrative  expense in the accompanying  consolidated  financial
statements for the year ended December 31, 2003.

      In December  2003,  the Company issued 50,000 options to buy shares of the
Company's  common stock to an outside  consultant at a price of $0.052 per share
for consulting services rendered. The Company recognized approximately $7,000 in
general and administrative  expense in the accompanying  consolidated  financial
statements for the year ended December 31, 2003.

      In December  2003,  the Company issued 43,125 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. The Company recognized approximately $6,000 in
general and administrative  expense in the accompanying  consolidated  financial
statements for the year ended December 31, 2003.



                                      F-27
<PAGE>

      Warrants

      Warrant activity as of December 31, 2003 and 2002 was as follows:

Warrants Outstanding as of December 31, 2001

Warrants Outstanding as of December 31, 2001                3,239,897
  Warrants issued                                           5,000,000
  Warrants exercised                                         (369,450)
  Warrants expired                                           (436,689)
                                                          -----------

Warrants Outstanding as of December 31, 2002                7,433,758
  Warrants issued                                          48,060,000
  Warrants exercised                                      (28,904,900)
  Warrants expired                                           (393,858)
                                                          -----------

Warrants Outstanding as of December 31, 2003               26,195,000
                                                          ===========

      The following table summarizes  information about warrants  outstanding at
December 31, 2003, all of which are exercisable:

                                         Weighted-         Weighted-
                                          Average            Average
                                         Remaining          Exercise
    Range of          Warrants          Contractual
 Exercise Prices     Outstanding           Life              Price
------------------  --------------   ------------------   -------------
                    (In thousands)

  $--- to $0.05            24,560       4.6   years          $0.03
  0.06 to 3.56                225       4.6   years          $3.47
  3.57 to 6.54              1,410       1.8   years          $6.00
------------------  --------------   ------------------   -------------
  $--- to $6.54            26,195       4.5   years          $0.38
==================  ==============   ==================   =============

      In  June  2002,  the  Company  issued  2,000,000  warrants  to an  outside
consultant at an exercise price of $0.00. During 2002, the Company recognized an
expense of approximately $100,000 related to this transaction, which is included
in  general  and  administrative   expense  in  the  accompanying   consolidated
statements  of  operations.  The Company used the  Black-Scholes  option-pricing
model to value the  shares,  with the  following  assumptions:  (i) no  expected
dividends (ii) a risk-free  interest rate of 4.5% (iii)  expected  volatility of
135% and (iv) an expected life of 1 year. All 2,000,000  warrants were exercised
during the year ended December 31, 2003.

      In June 2002, the Company issued  1,500,000  warrants to buy shares of the
Company's  common  stock at a price of $0.05 per share to Charles W. Fritz,  the
Company's  Chairman  of the Board and former CEO, as  replacement  for  warrants
exercised  in the  Company's  warrant  repricing  program  for which  Mr.  Fritz
received no profit. The Company recognized  approximately  $66,000 in expense in
the 2002 consolidated financial statements relating to the warrant issuance. All
1,500,000 warrants were outstanding as of December 31, 2003.



                                      F-28
<PAGE>

      In June 2002, the Company issued  1,500,000  warrants to buy shares of the
Company's  common stock at a price of $0.05 per share to an outside  consultant,
as replacement for warrants exercised in the Company's warrant repricing program
for which the  outside  consultant  received no profit.  The Company  recognized
approximately  $66,000 in expense in the 2002 consolidated  financial statements
relating to the warrant issuance.  All 1,500,000 warrants were outstanding as of
December 31, 2003.

      During  January  2003,  the Company  granted  40,000,  10,000,  and 10,000
warrants with an exercise  price of $0.03 per share to William E Fritz,  Charles
W. Fritz, and James J. Keil,  respectively,  in connection with funding provided
to the Company by these individuals during November 2002.

      During February 2003, the Company  granted 500,000  warrants to GE Access,
its primary equipment supplier,  as payment of interest relating to a commercial
credit  agreement  between  GE  Access  and  NeoMedia.  The  Company  recognized
approximately  $7,000 in  interest  expense in the 2003  consolidated  financial
statements relating to the warrant issuance.  The warrants were not exercised as
of December 31, 2003.

      During April 2003,  the Company  granted  25,000,000  warrants to purchase
shares  of  NeoMedia  common  stock at an  exercise  price of $0.01 per share to
William E. Fritz, an outside director,  in connection with financing provided to
the Company by Mr.  Fritz.  The warrants  were not  exercised as of December 31,
2003.

      During  July 2003,  the  Company  granted  2,500,000  warrants to purchase
shares  of  NeoMedia  common  stock at an  exercise  price of $0.01 per share to
William E. Fritz, an outside director,  in connection with financing provided to
the Company by Mr.  Fritz.  The warrants  were not  exercised as of December 31,
2003.

      During September 2003, the Company granted 10,000,000 warrants to purchase
shares of NeoMedia  common  stock at an exercise  price of $0.01 per share to an
outside  consultant for consulting,  advisory,  and financing services performed
during  the  third  and  fourth   quarters  of  2003.  The  Company   recognized
approximately  $93,000 in expense in the 2003 consolidated  financial statements
relating to the warrant issuance. The warrants were not exercised as of December
31, 2003.

      During October 2003, the Company granted to Cornell 10,000,000 warrants to
purchase shares of the Company's  common stock at an exercise price of $0.05 per
share, in connection with the $20 million Standby Equity Distribution  Agreement
entered into between the Company and Cornell. The warrants were not exercised as
of December 31, 2003. Cornell exercised the warrants during January 2004.

      Option and Warrant Repricing Programs

      In June 2002, the Company  repriced 3 million of its common stock warrants
from $0.12 to $0.05 per share.  All of the warrants were exercised  immediately.
The Company  recognized an expense of $132,000  related to this repricing during
the year ended December 31, 2002.

      In April 2002, in order to encourage  the exercise of options,  NeoMedia's
Board of Directors adopted an option repricing program. Under the program, those
persons  holding  options  granted  under the 1996,  1998 and 2002 Stock  Option
Plans,  to the extent their  options were  exercisable  during the period ending
October 9, 2002,  were  allowed to  exercise  the option at a price which is the
greater of $0.12 per share or 50% of the last sale price of a share of  NeoMedia
common stock on the OTC Bulletin Board on the trading date immediately preceding
the date of exercise. No options were exercised under the program and no expense
was recognized relating to the program.

      During March 2002, the Company  repriced  approximately1.2  million of its
common stock warrants for a period of six months. During the term of the warrant
repricing  program,  participating  holders were entitled to exercise  qualified
warrants at an exercise price per share equal to the greater of (1) $0.12 or (2)
50% of the last  sale  price of  shares of  Common  Stock on the  OTCBB,  on the
trading date immediately  preceding the date of exercise.  Approximately 370,000
warrants were exercised in connection with the program,  and NeoMedia recognized
approximately $63,000 in expense relating to the repricing during the year ended
December 31, 2002.



                                      F-29
<PAGE>

      During April 2003, the Company repriced approximately 1.9 million warrants
held by Thornhill Capital LLC, an outside consultant to the Company.  Of the 1.9
million  warrants,  1.5 million had an  exercise  price of $0.05 per share,  and
approximately  0.4  million had an  exercise  price of $2.09 per share.  All 1.9
million  warrants  were repriced to $0.00 per share.  The Company  recognized an
expense of approximately  $27,000 related to this transaction  during the second
quarter of 2003. These warrants were exercised immediately after the repricing.

      During May 2003,  the Company  re-priced  approximately  8.0 million stock
options under a 6-month repricing program.  Under the terms of the program,  the
exercise price for outstanding  options under the Company's 2002, 1998, and 1996
Stock Option Plans was restated to $0.01 per share for a period of 6 months.  In
accordance with FASB Interpretation, FIN 44, Accounting for Certain Transactions
Involving Stock Transactions,  the award has been accounted for as variable from
May 19, 2003  through the period  ended  December  31,  2003.  Accordingly,  the
Company  recognized  approximately  $746,000  as  compensation  in  general  and
administrative  expense during the year ended  December 31, 2003.  Approximately
4.4 million options were exercised  under the repricing  program during the year
ended  December  31, 2003.  During  December  2003,  the deadline for the option
repricing  was  extended  to June 30,  2004 by the  Stock  Option  Committee  of
NeoMedia's Board of Directors.

19.   SEGMENT INFORMATION

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

      The Company is organized into two business segments: (a) NeoMedia ISS, and
(b) NeoMedia CIS.  Performance  is evaluated and  resources  allocated  based on
specific  segment  requirements  and  measurable  factors.  Management  uses the
Company's   internal   income   statements  to  evaluate  each  business  unit's
performance.  Assets of the business  units are not available for  management of
the business segments or for disclosure.



                                      F-30
<PAGE>

      Operational  results for the two segments for the years ended December 31,
2003 and 2002 are presented below (in thousands):

                                                           (in thousands)
                                                      --------------------------
                                                             Years Ended
                                                            December 31,
                                                      --------------------------
                                                          2003         2002
                                                      ------------- ------------

Net Sales:

      NeoMedia Consulting & Integration Services            $2,354       $9,370
      NeoMedia Internet Switching Service                       46           29
                                                      ------------- ------------
                                                            $2,400       $9,399
                                                      ------------- ------------

Net Loss:

      NeoMedia Consulting & Integration Services          ($4,331)     ($1,275)
      NeoMedia Internet Switching Service                  (1,051)      (6,146)
                                                      ------------- ------------
                                                          ($5,382)     ($7,421)
                                                      ------------- ------------

Identifiable Assets

      NeoMedia Consulting & Integration Services              $426
      NeoMedia Internet Switching Service                    2,537
      Corporate                                                913
                                                      -------------
                                                            $3,876
                                                      -------------

20.   COMMON STOCK

      Holders of common  stock are  entitled  to one vote for each share held of
record on each matter submitted to a vote of stockholders. Holders of the common
stock do not have cumulative voting rights, which means that the holders of more
than one half of 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 June 6, 2002, 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  50,000,000 to  200,000,000  and the number of share of
preferred  stock,  par value $0.01 per share,  that the Company is authorized to
issue from 10,000,000 to 25,000,000.

     On September 24, 2003, the Company's shareholders voted to (i) 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;  and (ii) implement the
2003  Stock  Option  Plan,  under  which  NeoMedia  is  authorized  to  grant to
employeees,  directors,  and  consultants up to 150,000,000  options to purchase
shares of its common  stock.  On  October,  30,  2003,  the  Company's  Board of
Directors  approved the 2003 Stock Incentive  Plan,  under which the Company can
issue up to 30 million  shares of stock to  employees,  non-employee  directors,
consultants for incentive purposes.



                                      F-31
<PAGE>

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

     On October 27,  2003,  the Company and Cornell  entered  into a $20 million
Standby Equity Distribution Agreement.  The terms of the agreement are identical
to the terms of the  previous  Equity  Line of Credit,  except  that the maximum
"draw" under the new agreement is $280,000 per week,  not to exceed  $840,000 in
any 30-day period,  and Cornell will purchase up to $20 million of the Company's
common stock over a two-year period. As a consideration fee for Cornell to enter
into the agreement,  the Company  issued 10 million  warrants to Cornell with an
exercise price of $0.05 per share, and a term of five years.  Cornell  exercised
the  warrants  in January  2004,  resulting  in  $500,000  cash  receipts to the
Company.

21.   PREFERRED STOCK

       The  Company's  Preferred  Stock is  currently  comprised  of  25,000,000
shares,  par value $0.01 per share,  of which 200,000  shares are  designated as
Series A  Preferred  Stock,  none of  which  are  issued  or  outstanding,  and,
following  the  conversion  into  common  stock of  452,489  shares  of Series A
Convertible Preferred Stock issued to About.com, 47,511 shares are designated as
Series A Convertible  Preferred Stock, none of which are issued and outstanding,
and 100,000 shares of Series B 12% Convertible  Redeemable Preferred Stock, none
of which are issued  and  outstanding.  The  Company  has no present  agreements
relating to or requiring the  designation  or issuance of  additional  shares of
preferred stock.

22.   SUBSEQUENT EVENTS

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

     On January 20, 2004, the Company  borrowed from Cornell the gross amount of
$4,000,000 before Cornell discounts and fees. Cornell has also committed to fund
an additional  $1,000,000 in the form of a promissory note. As consideration for
the  advance,  the Company  granted to Cornell  40,000,000  warrants to purchase
shares  of  NeoMedia  stock  with an  exercise  price of $0.05  per  share.  The
additional  $1,000,000  promissory  note  will be  funded  within 15 days of the
filing of a registration statement by the Company to register the warrants. Upon
registration  of the  warrants,  if the average  closing bid price of NeoMedia's
common stock for any five day period exceeds  $0.10,  the Company has the option
to force Cornell to exercise the warrants,  resulting in additional funds to the
Company of $2,000,000.  Of the $4,000,000  funding,  $2,500,000 was used to fund
the acquisition of CSI International,  Inc. during February 2004. As of February
2, 2004,  the Company  had sold to Cornell  2,868,313  shares  under the Standby
Equity Distribution Agreement,  reducing the balance payable to $3,680,000.  All
assets of the Company are pledged as collateral  for the note,  which matures on
June 18, 2004. The note has a 60-day cure period after maturity during which the
Company can cure any defaults  without  penalty.  The note accrues interest at a
rate of 24% upon default only. The Company has the option to repay any remaining
principal in cash.



                                      F-32
<PAGE>

       On January 23, 2004, NeoMedia filed a patent infringement lawsuit against
AirClic,  Scanbuy, Inc., and LScan Technologies,  Inc. The suit claims that each
of the parties has  manufactured,  or has  manufactured for it, and has used, or
actively  induced  others to use,  technology  which  allows  customers to use a
built-in UPC bar code scanner to scan individual  items and access  information.
The  Complaint  states  that  AirClic,  Scanbuy  and LScan  have had  actual and
constructive notice of the existence of the patents-in-suite,  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.  NeoMedia's  Complaint
seeks compensatory damages for infringement by AirClic,  Scanbuy and LScan, with
those  damages  to be  trebled  due to the  willful  and  wanton  nature  of the
infringement.  NeoMedia  also  seeks to  preliminarily  and  permanently  enjoin
AirClic, Scanbuy and LScan from their infringing activities.

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

     On  December 9, 2003,  NeoMedia  signed a  non-binding  letter of intent to
acquire  Triton  Global  Business  Services  Inc.  and its parent  company,  BSD
Software Inc. (Pink Sheets:  BSDS), both of Calgary,  Alberta,  Canada.  Triton,
formed in 1998 and  acquired  by BSD in 2002,  is an  Internet  Protocol-enabled
provider of live and automated  operator calling services,  e-business  support,
billing and  clearinghouse  functions  and  information  management  services to
telecommunications,  Internet and e-business service providers. The LOI outlined
terms,  including  an exchange of one share of  NeoMedia  common  stock for each
share of BSD  Software,  not to exceed 40 million  shares.  The  transaction  is
contingent upon, among other things, satisfactory due diligence investigation by
both  companies,  approval by  NeoMedia's  Board of  Directors,  approval by BSD
Software's  Board of Directors  and  shareholders,  and any required  regulatory
approvals.  As of February  27,  2004,  the Company has not yet entered into any
definitive purchase agreement with BSD.



                                      F-33
<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 January 30, 2004,  NeoMedia's  directors and  executive  officers
were:

Name                Age   Position
----                ---   --------

Charles W. Fritz     47   Chairman of the Board of Directors
                          President, Chief Operating Officer, Acting Chief
Charles T. Jensen    60     Executive Officer and Director
David A. Dodge       28   Vice-President, Chief Financial Officer and Controller
William E. Fritz     73   Secretary and Director
James J. Keil        76   Director
A. Hayes Barclay     73   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  NeoMedia's  inception.  On August 6, 1996, Mr.
Fritz  was  appointed  Chief  Executive  Officer  and  Chairman  of the Board of
Directors.  On April 2, 2001,  Mr. Fritz was  appointed  as  President  where he
served  until June 2002.  Mr.  Fritz is  currently a member of the  Compensation
Committee.  Prior to founding NeoMedia,  Mr. Fritz was an account executive with
IBM Corporation from January 1986 to January 1988, and Director of Marketing and
Strategic  Alliances for the information  consulting group from February 1988 to
January  1989.  Mr.  Fritz holds an M.B.A.  from  Rollins  College and a B.A. in
finance  from the  University  of  Florida.  Mr.  Fritz is the son of William E.
Fritz, a Director of NeoMedia.

     Charles T. Jensen was Chief Financial Officer, Treasurer and Vice-President
of NeoMedia  since May 1, 1996.  Mr. Jensen has been a Director  since August 6,
1996, and currently is a member of the Compensation Committee. During June 2002,
Mr. Jensen was promoted to President,  Chief Operating Officer, and Acting Chief
Executive  Officer.  Prior to joining  NeoMedia in November 1995, Mr. Jensen was
Chief  Financial  Officer of Jack M. Berry,  Inc., a Florida  corporation  which
grows and processes citrus products,  from December 1994 to October 1995, and at
Viking Range  Corporation,  a Mississippi  corporation  which  manufactures  gas
ranges,  from  November  1993 to December  1994.  From December 1992 to February
1994,  Mr.  Jensen was  Treasurer of Lin Jensen,  Inc.,  a Virginia  corporation
specializing  in ladies  clothing and  accessories.  Prior to that, from January
1982 to March 1993, Mr. Jensen was Controller and  Vice-President  of Finance of
The Pinkerton Tobacco Co., a tobacco manufacturer.  Mr. Jensen holds a B.B.A. in
accounting  from  Western   Michigan   University  and  is  a  Certified  Public
Accountant.


                                     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, Chief
Financial  Officer and Controller.  Prior to joining NeoMedia in 1999, Mr. Dodge
was an auditor  with Ernst & Young LLP for 2 years.  Mr.  Dodge  holds a B.A. in
economics from Yale  University and an M.S. in accounting from the University of
Hartford, and is also a Certified Public Accountant.

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

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

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

Election Of Directors And Officers

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

Meetings Of The Board Of Directors

       During the fiscal year ended  December 31, 2003,  the Company's  Board of
Directors  held 5 meetings.  All members of the Board of  Directors  attended at
least 75% of such meetings.



                                     III-2
<PAGE>

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  consolidated  financial  statements,   audit
practices and internal controls of NeoMedia.  During 2003,  members of the Audit
Committee were non-employee directors James J. Keil and A. Hayes Barclay. During
2003, the Audit  Committee held 2 meetings.  Due to financial  constraints,  the
Company does not 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 2003.  This  Committee  held one
meeting throughout 2003.

     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 2003, this Committee held one meeting.

Director Compensation

     During October 2003, each outside director was granted 1,000,000 options at
an exercise  price of $0.01 per share from the 2003 Stock Option Plan.  The last
grant to outside  directors was at NeoMedia's  previous  annual  meeting held on
June 6, 2002, at which each outside  director  received  100,000 options with an
exercise price of $0.05 per share. NeoMedia does not have a written compensation
policy for its outside directors at this time.

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  2003  all  Section  16(a)  filing
requirements  applicable  to  NeoMedia's  officers,  directors  and ten  percent
beneficial owners were complied with.



                                     III-3
<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, 2003, 2002 and 2001:

                           Summary Compensation Table

<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>
Charles W. Fritz              2003        $145,255       $110,322(2)   $60,568 (3)      -       10,000,000        -         --
    Chairman of the Board     2002         144,583              -        4,470 (4)      -        1,800,000        -
                              2001         221,758              -       21,532 (4)      -          400,000        -         --

Charles T. Jensen             2003         162,318         91,618(2)     1,072 (4)      -       10,000,000        -
    Chief Operating Officer,  2002         163,542              -        5,079 (4)      -          800,000        -
    President, Acting Chief   2001         144,239              -       17,794 (4)      -          240,000        -         --
    Executive Officer
</TABLE>


---------------
(1)    Represents  options  granted under  NeoMedia's  2003, 2002 and 1998 Stock
       Option Plans and warrants  granted at the  discretion of the Stock Option
       Committee of NeoMedia's Board of Directors.

(2)    During  2003,  the Company  paid past due Year 2000  Executive  Incentive
       liability through the issuance of shares of its common stock. The amounts
       reported in this table  represent  the market  value of the shares on the
       date of issuance.

(3)    During 2003,  the Company  paid Charles W. Fritz unpaid  salary from 2002
       through the issuance of shares of its common stock.  The amounts reported
       in this table  represent  the  market  value of the shares on the date of
       issuance.

(4)    Includes  automobile  expenses  attributable  to  personal  use  and  the
       corresponding  income tax  effects,  and life  insurance  premiums  where
       policy  benefits  are  payable  to  beneficiary  of the  Named  Executive
       Officer.

Employment Agreements

      On June 26,  2002,  Charles T.  Jensen  was  elected  president  and Chief
Operating  Officer,  and also named acting CEO. The Company also promoted  David
Dodge,  its  Controller,  to Vice  President  and Chief  Financial  Officer.  No
employment agreements are currently in place for any employees of the Company.



                                     III-4
<PAGE>

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.

         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 an incentive  plan for management in place for
the year ended December 31, 2003.

         During 2003,  the Company  settled  approximately  $300,000 in past due
incentive  awards  relating to its  executive  incentive  plan for fiscal  2000,
through the issuance of common stock.  The Company has a remaining  liability of
approximately  $80,000  as of  December  31,  2003  relating  to this  executive
incentive.  During January 2004,  the Company paid an additional  $74,000 toward
the balance 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.



                                     III-5
<PAGE>

       Effective June 6, 2002,  NeoMedia adopted its 2002 Stock Option Plan. The
2002 Stock Option Plan  provides for authority for the Board of Directors to the
grant non-qualified stock options with respect to a maximum of 10,000,000 shares
of common stock. 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.  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.

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,
2003,  the Company had issued  approximately  5.8 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 $12,000  for 2003) 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.

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, 2003:

<TABLE>
<CAPTION>
                                             Percent of
                             Number of          Total                                                Potential Realizable Value
                             Securites        Options/                                                at Assumed Annual Rates
                             Underlying         SARs                                                of Stock Price Appreciation
                              Options        Granted to       Exercise or                                 for option Term
                              Granted       Employees in      Base Price         Expiration       -------------------------------
Name                            (#)          Fiscal Year       ($/share)            Date              5%($)           10%($)
-------------------       --------------    --------------   ---------------   ------------------ -------------------------------
<S>                       <C>               <C>              <C>               <C>                <C>               <C>
Charles W. Fritz             10,000,000          16.6%             $0.01       October 20, 2013      $641,473       $1,625,617

Charles T. Jensen            10,000,000          16.6%             $0.01       October 20, 2013       641,473        1,625,617
</TABLE>


                                     III-6
<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, 2003, 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       Value            Options/SARs at              the-Money Options/SARs at
                    on Exercise    Realized         December 31, 2003               December 31, 2003 (1)
                                              -------------------------------  --------------------------------
Name                    (#)          ($)       Exercisable    Unexercisable      Exercisable    Unexercisable
------------------ -------------- ----------- -------------------------------  --------------------------------
<S>                                 <C>           <C>                              <C>
Charles W. Fritz        --          $    -        13,059,000          -            $1,658,493         -

Charles T. Jensen       --          $    -        11,505,386          -            $1,461,184         -
</TABLE>




(1)  Based on the closing price of $0.137 of  NeoMedia's  common stock as quoted
     on OTC Bulletin  Board on December  31, 2003 and the exercise  price of the
     option/SAR. During May 2003, the Option Committee of the Company's Board of
     Directors  repriced all  outstanding  stock options to an exercise price of
     $0.01  per  share  for  a  period  of  six  months.  The  Option  Committee
     subsequently  extended the option  repricing  through  June 30, 2004.  As a
     result,  as of December 31, 2003,  Mr. Fritz and Mr. Jensen held  3,059,000
     and 1,527,386,  respectively, with restated exercises prices, for which the
     exercise  prices will revert to the  original  amounts if not  exercised by
     June 30, 2004. All of the restated options were  out-of-the-money  at their
     original exercise prices.


                                     III-7
<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 January 30, 2004, (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          Percent of
                                                      Beneficial Ownership (1)        Class (1)
                                                   ------------------------------    -------------
<S>                                                <C>                                  <C>
Charles W. Fritz (2)(3)                                              30,316,467         11.1%
William Fritz(2)(4)                                                  56,674,776         21.5%
Charles T. Jensen(2)(5)                                              11,506,886          4.2%
David A. Dodge(2)(6)                                                  2,300,000           *
A. Hayes Barclay(2)(7)                                                1,139,000           *
James J. Keil(2)(8)                                                   1,412,000           *
                                                    ----------------------------     -------------

Officers and Directors as a Group (6 Persons)(9)                    103,349,129         35.5%
                                                    ----------------------------     -------------
</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 259,477,268  shares of
          common  stock  outstanding  as of  January  30,  2004,  together  with
          securities  exercisable  or  convertible  into shares of common  stock
          within 60 days of January 30, 2004, for each  stockholder.  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 January 30,
          2004, 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 402, 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 minor  children  for an aggregate of 400
          shares,  11,549,000  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,
          15,714,098  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:
          51,172,567 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  1,285,000  shares to be issued upon the  exercise of
          options held by Mr. Fritz or his spouse.  Mr.  William E. Fritz may be
          deemed to be a parent and  promoter  of  NeoMedia,  as those terms are
          defined in the Securities Act.

     (5)  Charles T. Jensen is President,  Chief Operating Officer, Acting Chief
          Executive Officer, and a member of the Board of Directors.  Beneficial
          ownership  includes  11,505,386  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 2,300,000 shares of common
          stock issuable upon exercise of options granted under NeoMedia's stock
          option plans.

     (7)  A.  Hayes  Barclay  is a member of the Board of  Directors.  Ownership
          includes  1,134,000  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
          benficially  owned  includes  10,000 shares  issuable upon exercise of
          warrants, and 1,402,000 shares owned by Mr. Keil directly.



                                     III-8
<PAGE>

     (9)  Includes an aggregate of 27,773,386  currently  exercisable options to
          purchase shares of common stock granted under  NeoMedia's stock option
          plans,  4,060,000 currently exercisable warrants to purchase shares of
          common  stock,  and  71,515,743  shares owned  directly by  NeoMedia's
          officers and directors.



                                     III-9
<PAGE>



ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     During  February 2002, the Company  borrowed  $10,000 from William E. Fritz
under a note  payable  bearing  interest at 8% per annum with a term of 30 days.
The note was repaid during April 2003.

     During  March 2002,  the Company  borrowed  $190,000  from William E. Fritz
under a note  payable  bearing  interest at 8% per annum with a term of 16 days.
The note was repaid during March 2002.

     During April 2002, the Company borrowed $11,000 from William E. Fritz under
a note payable bearing interest at 8% per annum with a term of 60 days. The note
was repaid during April 2003..

     During November 2002,  NeoMedia issued Convertible Secured Promissory Notes
with an aggregate face value of $60,000 to 3 separate parties, including Charles
W. Fritz,  Chairman of the Board of Directors of NeoMedia;  William E. Fritz, an
outside  director;  and James J.  Keil,  an  outside  director.  The notes  bear
interest  at a rate of 15% per annum,  and  matured  at the  earlier of i.) four
months, or ii.) the date the shares underlying the Cornell Equity Line of Credit
were registered with the SEC. The notes were  convertible,  at the option of the
holder, into either cash or shares of NeoMedia common stock at a 30% discount to
either  market  price upon  closing,  or upon  conversion,  whichever  is lower.
NeoMedia  also  granted to the  holders an  additional  1,355,670  shares of its
common stock and 60,000 warrants to purchase shares of its common stock at $0.03
per share,  with a term of three  years.  The warrants and shares were issued in
January 2003.  In addition,  since this debt is  convertible  into equity at the
option of the note holder at beneficial conversion rates, an embedded beneficial
conversion  feature was  recorded as a debt  discount  and  amortized  using the
effective interest rate over the life of the debt in accordance with EITF 00-27.
Total cost of beneficial conversion feature, fair value of the stock and cost of
warrants  issued  exceed the face value of the notes  payable,  therefore,  only
$60,000,  the face amount of the note, was  recognizable  as debt discount,  and
amortized  over the life of the notes  payable.  During  March 2003,  two of the
affiliated  parties,  Mr.  William  Fritz and Mr.  Keil,  agreed  to extend  the
maturity  date due to the  Company's  capital  constraints.  The Company  repaid
Charles  Fritz's note in full during March 2003, and repaid James J. Keil's note
in full during April 2003.  The Company paid $30,000 of the principal on William
Fritz's note during  April 2003,  and entered into a new note with Mr. Fritz for
the remaining  $10,000.  The new note bears  interest at a rate of 10% per annum
and matures in April 2004.  The new note also includes a provision  under which,
as consideration for the loan, Mr. Fritz will receive a 3% royalty on all future
revenue generated from the Company's intellectual property.

      During  April 2003,  the Board of  Directors  of the Company  approved the
payment in full of approximately  $154,000 of liabilities owed by the Company to
Charles W. Fritz, the Company's  Founder and Chairman of the Board of Directors,
through  the  issuance  of  15,445,967  shares  of  common  stock.  The  Company
recognized  a  discount  expense  in  general  and  administrative  expenses  of
approximately $15,000 relating to this transaction with Mr. Fritz.

      During April 2003, the Company sold 25,000,000 shares of its common stock,
par value  $0.01,  in a private  placement  at a price of $0.01  per  share.  In
connection  with the sale,  the Company  also granted the  purchaser  25,000,000
warrants to purchase  shares of the Company's  common stock at an exercise price
of $0.01 per share.  The  warrants  had a fair value of  $298,000  and have been
recorded as a cost of issuance.  The purchaser was William E. Fritz, a member of
the  Company's  Board of  Directors.  Proceeds to the  Company  from sale of the
shares were $250,000.  The Company  recognized a discount expense in general and
administrative  expenses of  approximately  $50,000 relating to this transaction
with Mr.  Fritz.  On August 6,  2003,  Mr.  Fritz  exercised  his  warrants  and
purchased  25,000,000  additional shares of common stock at a price of $0.01 per
share.


                                     III-10
<PAGE>

     During April 2003,  the Company  entered into a consulting  agreement  with
William Fritz,  an outside  director,  for  consulting  and advisement  services
relating  to  the  merger  with  Loch  Energy,   Inc.,  and  to  the  subsequent
implementation  of various  management  programs  surrounding the business.  The
agreement  called  for total  payments  of  $250,000  over a period of one year.
During August 2003,  the Company paid the  consulting  contract in full.  During
September 2003, the consulting  contract was rescinded and the full $250,000 was
returned to NeoMedia.

      During July 2003, the Company  borrowed $25,000 from William E. Fritz, one
of its outside  directors.  This amount was added to the  principal of a $10,000
note payable to Mr.  Fritz that  matures in April 2004,  with all other terms of
the note remaining the same. As consideration  for the loan, the Company granted
Mr. Fritz 2,500,000 warrants to purchase shares of the Company's common stock at
an  exercise  price  of  $0.01  per  share.  The  warrants  had a fair  value of
approximately  $74,000.  In accordance with EITF 00-27, the Company recorded the
relative  fair  value of the  warrants  as a  discount  against  the  note,  and
amortized the discount over the life of the note.

      On August 29, 2003,  the Company  borrowed  $50,000 from William E. Fritz,
one of its outside directors, under an unsecured note payable. The note was paid
in full during September 2003.



                                     III-11
<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>
3.1           Articles of Incorporation of Dev-Tech Associates,    Incorporated by reference to Exhibit 3.1
              Inc. and amendment thereto                           to Registrant's Registration Statement
                                                                   No. 333-5534 as filed with the SEC on
                                                                   November 25, 1996

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

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

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


3.5           Articles of Merger and Agreement and Plan of         Incorporated by reference to Exhibit 3.5
              Merger of DevSys, Inc and Dev-Tech Associates, Inc.  to 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.   Incorporated by reference to Exhibit 3.6
              into DevSys, Inc.                                    to Registrant's Registration Statement
                                                                   No. 333-5534 as filed with the SEC on
                                                                   November 25, 1996




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


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

                                     III-12
<PAGE>


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

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

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

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

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

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

3.15            Form of  Certificate  of  Amendment  to Restated  Incorporated  by  reference to Exhibit 3.5
                Certificate   of   Incorporation   of   NeoMedia  to  Registrant's  Annual  Report  as filed
                Technologies,    Inc.   increasing    authorized  with the SEC on November 2, 2001
                capital and creating preferred 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  Incorporated   by   reference  to  Exhibit
                Associates, Inc. 1996 Stock Option Plan           10.45  to  the  Registrant's  Registration
                                                                  Statement  No.  333-5534 as filed with the
                                                                  SEC on November 25, 1996

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


                                     III-12
<PAGE>


<TABLE>
<CAPTION>
Exhibit
No.       Description                                          Location
------    -----------                                          --------
<S>       <C>                                                  <C>
10.4      Dev-Tech Migration, Inc. 1996 Stock Option           Incorporated by reference to Exhibit 10.47 to
          Plan                                                 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          Incorporated by reference to Exhibit 10.48 to
          Migration, Inc.                                      the 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            Incorporated by reference to Exhibit 10.49 to
          Migration, Inc.                                      the 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            Incorporated by reference to Exhibit 10.50 to
          amendments                                           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
          Technologies, Inc. 1996 Stock Option Plan            the Registrant's Registration Statement No. 333-
                                                               5534 as filed with the SEC on November 25, 1996

10.9      NeoMedia Technologies, Inc. 1998 Stock               Provided Herewith
          Option Plan

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

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

10.14     Intellectual Property licensing agreement            Incorporated by reference to Exhibit 10.18 to
          between NeoMedia and A.T. Cross Company              the Registrant's Form S-1/A as filed with the
                                                               SEC on April 24, 2002
</TABLE>

                                     III-14
<PAGE>

<TABLE>
<CAPTION>
Exhibit
No.       Description                                       Location
--------  -----------                                       --------
<S>       <C>
10.15     Intellectual Property licensing agreement         Registrant's Form S-1/A as filed with the SEC on April
          between NeoMedia and Symbol                       24, 2002
          Technologies, Inc.

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

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

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

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

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

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

10.23     Nasdaq Staff delisting notification letter        Incorporated by reference to Exhibit 10.18 to the
          dated May 16, 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         Incorporated by reference to Exhibit 10.19 to the
          termination lawsuit brought by former             Registrant's Form 10-Q as filed with the SEC on
          president and Chief Operating Officer             August 14, 2002

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

                                     III-15
<PAGE>

<TABLE>
<CAPTION>
Exhibit
No.           Description                                         Location
--------      -----------                                         --------
<S>           <C>                                                 <C>
10.26         Mutual settlement agreement by and between          Incorporated by reference to Exhibit 10.21 to
              NeoMedia Technologies and Ripfire, Inc.             the Registrants Form 10-Q as filed on
                                                                  November 14, 2002

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

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

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

10.30         Sponsorship and Advertising Agreement, dated        Incorporated by reference to Exhibit 23.7 to
              May 23, 2001, between About.com and                 the Registrants Form S-1/A as filed on
              NeoMedia                                            November 16, 2001

10.31         Promissory Note dated December 2, 2002              Incorporated by reference to Exhibit 99.1 of
              between Michael Kesselbrenner and NeoMedia          the Registrant's Form 8-K as filed with the
                                                                  SEC on December 12, 2002.

10.32         Pledge Agreement dated December 2, 2002,            Incorporated by reference to Exhibit 99.2 of
              between Michael Kesselbrenner and NeoMedia          the Registrant's Form 8-K as filed with the
                                                                  SEC on December 12, 2002.

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

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

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

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

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

                                     III-16

<PAGE>

<TABLE>
<CAPTION>
Exhibit
No.       Description                                           Location
--------  -----------                                           --------
<S>       <C>                                                   <C>
10.38     Memorandum of Terms to merge, dated March 7,          Incorporated by reference to Exhibit 3.1 to the
          2003, between NeoMedia and Loch Energy, Inc.          Registrant's Form 8-K as filed on March 19, 2003

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


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

10.41     Standby Equity Distribution Agreement, dated          Incorporated by reference to Exhibit 10.91 to
          October 27, 2003, between NeoMedia and Cornell        the Registrant's Form SB-2/A as filed on
          Capital Partners                                      December 19, 2003


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

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

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

10.45     2003 Stock Compensation Plan                          Incorporated by reference to Exhibit 4.1 to the
                                                                Registrant's Form S-8 as filed on October 31, 2003

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

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

10.48     Definitive Merger Agreement, dated February 6,        Incorporated by reference to Exhibit 3.1 to the
          2004, between NeoMedia and CSI International, Inc.    Registrant's Form 8-K as filed on February 10, 2004
          $4 million Promissory note payable to Cornell

10.49     Capital Partners, dated January 15, 2004              Provided Herewith

23.1      Consent of Stonefield Josephson, Inc.                 Provided Herewith
</TABLE>


                                     III-17
<PAGE>


(b) Reports on Form 8-K

      NeoMedia filed a report on Form 8-K on October 3, 2003,  reporting that it
had terminated its letter of intent to merge with Loch Energy, Inc.

      NeoMedia filed a report on Form 8-K on October 9, 2003,  reporting that it
had completed its pending merger with Secure Source Technologies, Inc.

      NeoMedia  filed a report on Form 8-K on November 13, 2003,  reporting that
it had signed a letter of intent to acquire CSI International, Inc.

      NeoMedia  filed a report on Form 8-K on December 11, 2003,  reporting that
it had signed a letter of intent to acquire BSD Software, Inc.

      NeoMedia  filed a report on Form 8-K on February 10, 2004,  reporting that
it had completed its pending merger with CSI International, Inc.


<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, 2003 and 2002 were $119,000 and $145,000, 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, 2003 and 2002 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,  for
the years ended December 31, 2003 and 2002 were $9,000 and $9,000, respectively.

All Other Fees

     The aggregate fees billed by Stonefield Josephson, Inc., for other products
and services  during the years ended  December 31, 2003 and 2002 were $0 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-19
<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 27th day of February, 2004.

                       NEOMEDIA TECHNOLOGIES, INC.

                       Registrant

                       By: /s/ Charles T. Jensen, President, Chief Operating
                           Officer, Acting 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 February 27, 2004.

<TABLE>
<CAPTION>
Signatures                        Title                                         Date
----------                        -----                                         ----
<S>                               <C>                                           <C>
----------------------------      President, Acting Chief Executive Officer,
/s/ Charles T. Jensen             Chief Operating Officer and Director          February 27, 2004


----------------------------      Director and Secretary                        February 27, 2004
/s/ William E. Fritz

----------------------------      Chairman of the Board
/s/ Charles W. Fritz                                                            February 27, 2004

----------------------------      Vice-President, Chief Financial
/s/ David A. Dodge                Officer and Controller                        February 27, 2004

----------------------------      Director                                      February 27, 2004
/s/ Hayes Barclay

----------------------------      Director                                      February 27, 2004
/s/ James J. Keil
</TABLE>