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

                                 AMENDMENT NO. 1
                                       TO
                                    FORM 10-K


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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                                       OR

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

               FOR THE TRANSITION PERIOD ____________ TO__________

                         COMMISSION FILE NUMBER 0-21743

                           NEOMEDIA TECHNOLOGIES, INC.
                      (EXACT NAME OF ISSUER IN ITS CHARTER)

                 DELAWARE                                  36-3680347
     (STATE OR OTHER JURISDICTION OF                   (I.R.S. EMPLOYER
     INCORPORATION OR ORGANIZATION)                   IDENTIFICATION NO.)

      2201 SECOND STREET, SUITE 600
           FORT MYERS, FLORIDA                               33901
 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                  (ZIP CODE)

          ISSUER'S TELEPHONE NUMBER (INCLUDING AREA CODE) 941-337-3434

         SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:

                                                      NAME OF EACH EXCHANGE
           TITLE OF EACH CLASS                         ON WHICH REGISTERED
       COMMON STOCK, PAR VALUE $.01                  NASDAQ SMALL CAP MARKET

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

     Check  if  disclosure  of  delinquent  filers  in  response  to Item 405 of
Regulation  S-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 |X|

     Issuer's   consolidated  revenue  for  its  most  recent  fiscal  year  was
$8,142,000.

     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
Nasdaq  SmallCap  Stock  Market  on  March  13,  2002  ($0.29)  was  $9,694,000.
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 March 13,  2002,  there  were  outstanding  36,927,392_shares  of the
issuer's Common Stock.


                       DOCUMENTS INCORPORATED BY REFERENCE
Certain  portions of the  registrant's  definitive  Proxy Statement  pursuant to
Regulation  14A  of the  Securities  Exchange  Act  of  1934,  as  amended,  are
incorporated by reference into Part III of the Form 10-K.
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                                     PART I


              CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This Form 10-K contains forward-looking statements and information relating
to NeoMedia.  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. BUSINESS

GENERAL

     NeoMedia   Technologies,   Inc.  ("NeoMedia"  or  "the  Company")  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.

COMPANY STRUCTURE

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

      NeoMedia  Internet  Switching  Services  (NISS)  (formerly  named NeoMedia
Application Services), and

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

     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 our linking  "switch" and our  application
platforms.  NISS also  manages  the  Company's  valuable  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 targeted
at software  driven print  applications,  especially  at process  automation  of
production print facilities  through its integrated  document factory  solution.
Systems integration  services also identifies  prospects for custom applications
based on our  products  and  services.  This unit  recently  moved its  business
offerings to a much higher  Value-Add  called Storage Area Networks  (SAN).  The
operations are based in Lisle, Illinois.

COMPANY HISTORY

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

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      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.

RECENT DEVELOPMENTS

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

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

     In March 2001, the Company was granted its fourth patent in nineteen months
by the United  States Patent and Trademark  Office.  The new patent  extends the
Company's IP Portfolio with voice link to the web.

     In March 2001,  the Company  purchased  all of the net assets of  Qode.com,
Inc. (Qode), except for cash. In consideration for these assets, NeoMedia issued
274,699 shares of common stock,  valued at  $1,359,760.  On August 31, 2001, the
Company signed a non-binding letter of intent to sell the assets and liabilities
of the Qode  business unit to The Finx Group,  Inc., a holding  company based in
Elmsford,  NY. The final  contract  is  contingent  upon the  completion  of due
diligence and definitive  terms and  conditions  stated in the letter of intent.
The Company intends to sell the assets and liabilities of Qode, which consist of
all  inventory,  equipment and the ownership and operation of the  comprehensive
universal internet database along with the corresponding patents. The Finx Group
will 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.
(see Footnote 2 of the accompanying financial statements for further detail)

     In January 2002, the Company entered into an agreement with the law firm of
Baniak Pine and Gannon,  under which the firm will seek  potential  licensees of
the Company's patent portfolio.

INDUSTRY OVERVIEW

     NEOMEDIA INTERNET SWITCHING SERVICES

     The goal of our Internet  Switching Services business segment is to promote
mass  adoption of our switch and  background  computer  process to link physical
world objects to the Internet. Our switching platform is a state-of-the-art open
and extensible  cross-media  publishing  tool serving  customers in a variety of
industrial,  commercial, and educational applications.  This business segment is
also responsible for licensing our intellectual property to others as a means of
promoting this new market as well as providing a revenue and cash  resource.  We
have been  developing  our physical  world-to-Internet  technology and offerings
since 1996 and consider ourselves an innovator and pioneer in this industry.  In
the past year,  we have seen similar  technologies  and  concepts  emerge in the
marketplace,  and see these  events as a  positive  validation  of the  physical
world-to-internet concept.

     Press from competitors such as AirClic, Inc. and Digimarc, Inc. is expected
to continue to raise  consumer  awareness  of  physical-to-Web  convergence.  We
believe 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.  Our  service  offering,  however,
differs  from those of  AirClic  and other  competitors  in that,  unlike  their
products and services,  our products do not require the use of a proprietary  or
specified  device,  and we offer our service on a private  label  basis.  We are

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positioned  to provide  solutions  that preserve the  customer's  brand and also
provide tailored solutions to fit the customer needs.

     NEOMEDIA CONSULTING AND INTEGRATION SERVICES

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

     Proprietary  products,  such  as  NeoMedia  encoders,  systems  integration
services and Integrated Document Factory solutions offer a competitive value-add
to our NCIS business.  We have unique offerings,  which, to the extent that they
meet market needs, offer the potential for growth in this industry. In addition,
our recent  high-end  storage Area Network  Solution allows us 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 five years  inventing  and patenting the now
confirmed  "space"  of  linking  the  physical  and  Internet  environments  and
developing and  implementing  five  generations of  continuously  refined switch
technology that seamlessly bridges these environments.

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

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

PRODUCTS/SERVICES

     NEOMEDIA INTERNET SWITCHING SERVICES

            PAPERCLICKTM  SWITCHING SERVICE.  PaperClickTM is a state-of-the-art
     application-switching platform that links physical objects to digital media
     through the use of scanned UPC,  EAN, or custom  PaperClickTM  codes.  This
     dynamic open  solution  serves a wide  variety of customers in  industrial,
     commercial, and educational applications.

            INTELLECTUAL  PROPERTY  LICENSING.  The Company currently holds four
     U.S.  patents  relating  to  the  physical  world-to-Internet  marketplace.
     NeoMedia  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, and Symbol  Technologies.  During
     January 2002, NeoMedia announced that it had 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 the Company's patent portfolio.

     NEOMEDIA CONSULTING AND INTEGRATION SERVICES

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

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

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

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

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

STRATEGIC RELATIONSHIPS

     NEOMEDIA INTERNET SWITCHING SERVICES

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

     In  May  2001,   the  Company   entered  into  an  agreement   with  Symbol
Technologies,  Inc., granting Symbol a worldwide,  non-exclusive  license of the
Company's  patents  surrounding  the sale and use of  scanning  devices  used in
physical world-to-Internet technologies.

     NEOMEDIA CONSULTING AND INTEGRATION SERVICES

     Although  the NCIS  business of segment the Company  provides  services and
products to a spectrum of  customers,  ranging from  closely  held  companies to
Fortune 500  companies,  for the years  ended  December  31, 2001 and 2000,  one
customer, Ameritech Services, Inc. ("Ameritech"), accounted for 36.6% and 29.9%,
respectively,  of NeoMedia NCIS revenue.  The Company expects sales to Ameritech
as a  percentage  of total  sales to decline  in the  future.  Furthermore,  the
Company does not have a written agreement with Ameritech and,  therefore,  there
are  no  contractual  provisions  to  prevent  Ameritech  from  terminating  its
relationship  with  the  Company  at any  time.  Accordingly,  the  loss of this
customer,  or a significant  reduction by it in buying the products and services
offered by NeoMedia,  absent  diversification,  would  materially  and adversely
affect of NeoMedia  NCIS's  revenues and results of operations.  In addition,  a
single  supplier  provides the equipment and software,  which is  re-marketed to
this customer. Accordingly, the loss of this supplier would materially adversely
affect NeoMedia NCIS. For these reasons,  the Company is seeking,  and continues
to seek, to diversify its sources of revenue and vendors from whom it purchases.

SALES AND MARKETING

     NEOMEDIA INTERNET SWITCHING SERVICES

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<PAGE>

     PAPERCLICKTM.  While the Company  eliminated  the majority of its sales and
marketing  staff  during the third  quarter of 2001,  the Company  continues  to
promote its PaperClickTM line of products to potential customers in a wide array
of  industries.  Upon  receipt of  sufficient  financing,  the Company  plans to
re-focus its efforts on the sale of PaperClickTM  licenses through the hiring of
additional sales and marketing  staff.  NeoMedia has refocused its sales efforts
by focusing on signing up channel  partners who have industry  market  presence.
NeoMedia is currently  negotiating with a number of  industry-focused  companies
who will be our "go-to-market" partners.

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

     NEOMEDIA CONSULTING AND INTEGRATION SERVICES

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

RESEARCH AND DEVELOPMENT

     NEOMEDIA INTERNET SWITCHING SERVICES

     NeoMedia believes that its success in the Internet environment depends upon
its  ability to quickly  develop  new  products  and  services,  as well as make
enhancements to its existing products. NISS employed 3, 24 and 19 persons in the
area  of  product   development  as  of  December  31,  2001,  2000,  and  1999,
respectively.  During the years ended December 31, 2001, 2000 and 1999, NeoMedia
NAS incurred total  software  development  costs of  $2,064,000,  $2,888,000 and
$1,722,000,   respectively,  of  which  $1,515,000,   $1,787,639  and  $807,000,
respectively,  were  capitalized  as software  development  costs and  $549,000,
$1,101,000 and $915,000, respectively, were expensed as research and development
costs.

     NEOMEDIA CONSULTING AND INTEGRATION SERVICES

     All significant research and development relating to NeoMedia NCIS products
was  discontinued  at the end of 1999  when  the  Company  discontinued  its Y2K
business.  All  employees  that were in this area were  reassigned  or  released
during the fourth quarter of 1999.

INTELLECTUAL PROPERTY RIGHTS

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

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<PAGE>

     In addition to these  issued  patents,  the Company  continues  to develop,
acquire and  prosecute a  substantial  portfolio of domestic  and  international
patent  applications  that include  broad claims that apply to its core business
and markets.

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

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

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

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

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

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

COMPETITION

     NEOMEDIA INTERNET SWITCHING SERVICES

     The  markets in which the  Company  competes  are  relatively  new.  Recent
competitors in the print-to-web  market include  Digital:Convergence,  Digimarc,
and  AirClic.  The Company has a  significant  portfolio  of both  invented  and
acquired  patents to support its proprietary  technologies and provide a barrier
to entry for potential competitors.

     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

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this  area  is  intense.  In  some  instances,  the  Company,  in  acting  as  a
re-marketer, may compete with the original manufacturer.

PRODUCT LIABILITY INSURANCE

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

GOVERNMENT REGULATION

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

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

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,  2001,  the Company  employed  21  persons.  Of the 21
employees,  9 were located at the Company's  headquarters in Fort Myers, FL, and
12 at other domestic locations. Of the 21 employees, 3 are dedicated to the NISS
business  unit, 12 are dedicated to the NCIS business unit, and 6 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

                                       7

<PAGE>

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

                                  RISK FACTORS

RISKS SPECIFIC TO NEOMEDIA

     THE COMPANY HAD A RETAINED DEFICIT; THE COMPANY ANTICIPATES FUTURE LOSSES.

     The  Company has  incurred  substantial  losses  since our  inception,  and
anticipates  continuing to incur substantial losses for the foreseeable  future.
The Company  incurred a loss of $25,469,000 in the year ended December 31, 2001,
$5,409,000 in the year ended  December 31, 2000,  $10,472,000  in the year ended
December  31,  1999,  $11,495,000  in the year  ended  December  31,  1998,  and
$5,973,000 in the year ended December 31, 1997. The Company's accumulated losses
were approximately  $63,344,000 as of December 31, 2001. As of December 31, 2001
and 2000, we had a working capital  (deficit) of approximately  $(5,163,000) and
$8,426,000, respectively. The Company had stockholders' equity of $(263,000) and
$19,110,000 at December 31, 2001 and 2000,  respectively.  The Company generated
revenues of $8,142,000 and $27,565,000 for the years ended December 31, 2001 and
2000. In addition,  during years ended  December 31, 2001 and 2000,  the Company
recorded  negative  cash flows from  operations of  $5,202,000  and  $6,775,000,
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 will
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 AUDITORS HAVE QUALIFIED THEIR REPORT ON THE COMPANY FINANCIAL
     STATEMENTS  WITH  RESPECT TO THE  COMPANY'S  ABILITY TO CONTINUE AS A GOING
     CONCERN.

     The report of Stonefield Josephson, Inc., the Company's current independent
auditors,  with respect to the Company's  financial  statements  and the related
notes for the year ended December 31, 2001,  indicate that, at the date of their
report,  the Company had  suffered  recurring  losses  from  operations  and the
Company's  current cash position  raised  substantial  doubt about the Company's
ability to continue as a going concern.  The Company's  financial  statements do
not include any adjustments that might result from this uncertainty.  The report
of Arthur Andersen LLP, the Company's former independent auditors,  with respect
to the Company's financial  statements and the related notes for the years ended
December 31, 2000 and 1999,  indicate  that,  at the date of their  report,  the
Company had suffered  recurring losses from operations and the Company's current
cash position raised  substantial  doubt about the Company's ability to continue
as a going  concern.  The  Company's  financial  statements  do not  include any
adjustments that might result from this uncertainty.

                                       8

<PAGE>

     BECAUSE  THE  PHYSICAL  WORLD - TO - INTERNET  MARKET IN WHICH THE  COMPANY
     OPERATES  HAS  EXISTED  FOR A  SHORT  PERIOD  OF  TIME,  THERE  IS  LIMITED
     INFORMATION UPON WHICH INVESTORS CAN EVALUATE THE BUSINESS.

     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 may be deemed to have a
relatively limited operating history upon which investors may base an evaluation
of the  Company's  primary  business and  determine  its prospects for achieving
intended  business  objectives.  To date,  the  Company  has  sold our  physical
world-to-Internet  products to only 12 companies.  Further,  Digital:Convergence
Corporation,   the  Company's  primary  customer  for  the  Company's   physical
world-to-Internet  products,  is facing pressing  financial  difficulties 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.  Investors  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,

     o    Maintain and increase the Company's client base;

     o    Implement  and  successfully   execute  the  Company's   business  and
          marketing strategy;

     o    Continue to develop and upgrade the Company's products;

     o    Continually  update and improve the  Company's  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
were unable to do so, the Company's business,  prospects,  financial  condition,
and results of operations would be materially and adversely affected.

     FLUCTUATIONS  IN THE COMPANY'S  OPERATING  RESULTS MAY AFFECT THE COMPANY'S
     STOCK PRICE.

     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  its  operating
results  may  fluctuate  materially,  as a result  of  which  quarter-to-quarter
comparisons of the Company's results of operations may not be meaningful.  If in
some future quarter, whether as a result of such a fluctuation or otherwise, the
Company 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.  Investors  should not rely on the Company's
results  of  any  interim  period  as an  indication  of  the  Company's  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  which the Company  resells or
           integrates into it's products;

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

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

                                       9

<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 IS UNCERTAIN OF THE SUCCESS OF THE COMPANY'S  INTERNET SWITCHING
    SERVICES  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 seamless link from
physical objects,  including printed material, to the Internet.  The Company can
provide no assurance that:

     o     This   application   services   business   unit  will  ever   achieve
           profitability;
     o     The  Company's  current  product  offerings  will  not  be  adversely
           affected by the  focusing of the Company  resources  on the  physical
           world-to-Internet space; or
     o     The products the Company develops will obtain market acceptance.

In the event that the  application  Services  business unit should never achieve
profitability, that the Company's current product offerings should 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 DEPENDS ON THE RESALE OF SOFTWARE AND EQUIPMENT FOR REVENUE AND
     A REDUCTION IN THESE SALES WOULD MATERIALLY  ADVERSELY AFFECT THE COMPANY'S
     OPERATIONS AND THE VALUE OF THE COMPANY'S STOCK.

     During the years ended December 31, 2001,  2000,  1999,  1998, and 1997, we
derived 73%,  66%, 78%, 72%, and 78%,  respectively,  of the Company's  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
the Company's stock price. The Company can provide no assurance that:

     o     The market for the Company's 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
           the Company resells; or
     o     The Company's relationship with companies whose products and services
           it  sells  will  continue,   the  Company's   relationship  with  Sun
           Microsystems Computer Company.

    Further,  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 THE COMPANY'S OPERATIONS ARE UNSUCCESSFUL.

    At December 31, 2001,  approximately  56% of the Company's total assets were
intangible  assets,  consisting  primarily  of rights  related to the  Company's
patents  and  other  intellectual   property.  If  the  Company  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 the
Company's  stockholders  to recoup their  investments  in the Company's  capital
stock.

                                       10
<PAGE>

    THE COMPANY'S  MARKETING  STRATEGY HAS NOT BEEN TESTED AND MAY NOT RESULT IN
SUCCESS.

    To date, the Company has conducted  limited-marketing  efforts directly. All
of  the  Company's   marketing   efforts  have  been  largely  untested  in  the
marketplace, and may not result in sales of the Company's 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, the Company's
products and services. With respect to the Company's marketing efforts conducted
directly,  the Company  intends to expand the Company's sales staff upon receipt
of adequate  financing.  The Company's failure to further develop it's marketing
capabilities  and  successfully  market it's products and services  would have a
material  adverse  effect  on  the  Company's  business,  prospects,   financial
condition, and results of operations.

    THE COMPANY RELIES ON INTERNALLY  DEVELOPED SYSTEMS,  WHICH ARE INEFFICIENT,
    WHICH MAY PUT THE COMPANY AT A COMPETITIVE DISADVANTAGE.

    The Company uses  internally  developed  technologies  for a portion of it's
systems  integration   services,   as  well  as  the  technologies  required  to
interconnect it's clients' and customers' physical world-to-Internet systems and
hardware with the Company's  own. As the Company has 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.  The  Company  intends to upgrade and expand it's
systems  and  technologies  and  to  integrate   newly-developed  and  purchased
technologies  with it's own in order to improve the  efficiency of the company's
systems and  technologies,  although  the  Company is unable to predict  whether
these upgrades will improve the Company's  competitive position when compared to
it's competitors.

    THE COMPANY HAS LIMITED  HUMAN  RESOURCES;  THE COMPANY NEEDS TO ATTRACT AND
    RETAIN  HIGHLY  SKILLED  PERSONNEL;   AND  THE  COMPANY  MAY  BE  UNABLE  TO
    EFFECTIVELY MANAGE COMPANY GROWTH WITH THE COMPANY'S LIMITED RESOURCES.

     The  Company's  future  success will depend in large part on the  Company's
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 currently.
The  Company  may  not be  successful  in  attracting  and  retaining  qualified
personnel  on a  timely  basis,  on  competitive  terms,  or at all.  Due to the
Company's current working capital deficiency, the Company is currently unable to
afford a directors'  and  officers'  liability  insurance  policy with a term of
greater than six months. The Company's existing policy expires on July 25, 2002.
To the extent that  sufficient  resources are available,  the Company intends to
maintain a directors'  and officers'  liability  insurance  policy at all times.
However,  any inability to maintain such liability insurance in the future would
materially  adversely  affect  the  Company's  ability  to  attract  and  retain
qualified director and officer  candidates.  If the Company is not successful in
attracting  and  retaining  qualified  personnel,   it's  business,   prospects,
financial  condition,  and results of operations  would be materially  adversely
affected.

     THE COMPANY DEPENDS UPON THE COMPANY'S 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.  The loss or unavailability of any of these
individuals  for any  significant  period of time could have a material  adverse
effect on the Company's business, prospects, financial condition, and results of
operations.  None of the  Company's  key  management  or technical  personnel is
presently  subject to employment  agreements.  The Company has recently  awarded
stock options to key members of  management.  All key  management  personnel are
required to sign non-solicitation and confidentiality agreements. However, there
is no guarantee that these option  incentives or contractual  restrictions  will
discourage the Company's key management and technical personnel from leaving. If
the Company were not successful in retaining  it's key personnel,  the Company's
business,  prospects,  financial  condition,  and results of operations would be
materially adversely affected.

     THE COMPANY MAY BE UNABLE TO PROTECT THE  COMPANY'S  INTELLECTUAL  PROPERTY
     RIGHTS  AND THE  COMPANY  MAY BE LIABLE  FOR  INFRINGING  THE  INTELLECTUAL
     PROPERTY RIGHTS OF OTHERS.

                                       11
<PAGE>

     The Company's success in the physical world-to-Internet and the value-added
systems  integration  markets  is  dependent  upon  the  Company's   proprietary
technology, including the Company's patents and other intellectual property, and
on the Company's  ability to protect the Company's  proprietary  technology  and
other  intellectual  property rights. In addition,  the Company must conduct the
Company's  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 the  Company's  employees,  as well as the  Company's
patents. To protect the Company's 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 four patents for it's  physical  world-to-Internet  technology.  The Company
also has several  trademarks  relating to the  Company's  proprietary  products.
Although the Company  believes that the Company has taken  appropriate  steps to
protect the Company's  unpatented  proprietary rights,  including requiring that
the  Company's  employees  and  third  parties  who are  granted  access  to the
Company's proprietary technology enter into confidentiality  agreements with the
Company,  the Company  can  provide no  assurance  that these  measures  will be
sufficient to protect the Company's  rights  against third  parties.  Others may
independently  develop or otherwise acquire patented or unpatented  technologies
or products similar or superior to the Company.

     The Company  licenses from third  parties  certain  software  tools that it
includes in the Company's  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 the
Company's  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.  See  "Risks  Specific  To  NeoMedia -
Currently  Pending  Legal  Actions  Threaten  To Divest The  Company Of Critical
Intellectual Property."

     CURRENTLY  PENDING LEGAL ACTIONS THREATEN TO DIVEST THE COMPANY OF CRITICAL
     INTELLECTUAL PROPERTY.

     On  September 6, 2001,  AirClic,  Inc.  ("AirClic")  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 under the terms of a letter of intent  entered into between  AirClic
and the Company. The letter of intent was subsequently abandoned on the basis of
the Company's alleged breach of certain  representations  made by the Company in
the promissory note issued by the Company to AirClic in respect of such advance.
The note  issued by the  Company  in respect of  AirClic's  $500,000  advance is
secured by substantially all of the Company's intellectual  property,  including
its core physical  world-to-Internet  technologies.  If the Company is deemed to
have defaulted under the note, and does not pay the judgment,  AirClic, which is
one of NeoMedia's key competitors, could acquire the Company's core intellectual
property,  which would have a material adverse effect on the Company's business,
prospects,  financial  condition,  and  results of  operations.  The  Company is
vigorously  defending  this  lawsuit and has  interposed  counterclaims  against
AirClic.  The lawsuit is in its preliminary stages and, as such, at this time it
is  difficult  to assess the outcome.  Whether or not AirClic is  successful  in
asserting its claims that the Company breached certain  representations  made by
the Company in the note, the note became due and payable in accordance  with its
terms on January 11, 2002. Based on the cash currently available to the Company,
payment of the note and related interest would have a material adverse effect on
the  Company's  financial  condition.  If the  Company  fails to pay such  note,
AirClic could proceed against the Company's  intellectual  property securing the
note,  which would have a material  adverse  effect on the  Company's  business,
prospects,  financial  condition,  and  results of  operations.  The  Company is
aggressively  seeking  bridge  financing to enable it to pay the  principal  and
interest  remaining under the note following the resolution of the counterclaims

                                       12
<PAGE>


against AirClic.  The Company has not accrued any additional  liability over and
above the note payable and related accrued interest.

     AirClic  has also  filed suit  against  the  Company  in the United  States
District Court for the Eastern District of Pennsylvania.  In this second action,
AirClic seeks a declaration that certain core intellectual property securing the
note issued by the Company to AirClic,  some of which is patented and others for
which a  patent  application  is  pending  is  invalid  and  unenforceable.  Any
declaration that the Company's core patented or patentable technology is invalid
and  unenforceable  would  have a  material  adverse  effect  on  the  Company's
business, prospects, financial condition, and results of operations. The Company
is  vigorously  defending  against  this  lawsuit as well.  The  Company has not
accrued any liability in  connection  with this matter.  See "Risks  Specific to
NeoMedia - The  Company  May Be Unable To  Protect  It's  Intellectual  Property
Rights And The Company May Be Liable For  Infringing The  Intellectual  Property
Rights Of Others".

     THE  COMPANY IS EXPOSED TO  PRODUCT  LIABILITY  CLAIMS FOR WHICH  INSURANCE
     COVERAGE IS LIMITED,  POTENTIALLY INADEQUATE AND IN SOME CASES UNAVAILABLE,
     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 THE COMPANY STOCK.

     Many of the  Company's  projects  are  critical  to the  operations  of the
Company's  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 it sells.
The Company  currently  maintains  product  liability  and errors and  omissions
insurance. There can be no assurance that:

     o     The Company has  contractually  limited our liability for such claims
           adequately or at all;
     o     The Company would have sufficient  resources to satisfy any liability
           resulting from any such claim;
     o     The  Company  coverage,  if  available,  will be adequate in term and
           scope to protect it against  material adverse effects in the event of
           a successful claim; or
     o     The  Company  insurer  will not  disclaim  coverage  as to any future
           claim.

    The  successful  assertion of one or more large  claims  against the Company
that exceed available  insurance coverage could materially  adversely affect the
Company's business, prospects, financial condition, and results of operations.

    THE COMPANY  CANNOT PREDICT ITS FUTURE CAPITAL NEEDS AND THE COMPANY MAY NOT
    BE ABLE TO SECURE ADDITIONAL FINANCING.

    The Company expects to receive up to $500,000 attributable to the payment of
the exercise prices of options for shares of common stock that the Company is in
the  process of  registering  for public  resale.  The Company  also  expects to
receive  up to  $3,230,000,  plus  interest  at a  rate  of 6% per  annum,  upon
repayment  of  promissory  notes  issued  to  the  Company,   in  each  case  as
consideration  for 19,000,000  shares of Company common stock, sold at $0.17 per
share. Despite the anticipated infusion of such capital, and because the Company
cannot  reliably  predict when or if such warrant  exercises,  cash payments and
note  repayments  will  occur,  if at all,  the  Company is unable to  determine
whether  and for how  long  the  Company  will  be  able  to  meet  its  capital
requirements.  The Company  anticipates  offerings up to  10,000,000  additional
shares of common stock within six months of the date of this filing and offering
of convertible debt and preferred stock securities in order to obtain short-term
financing. As is typical with short-term,  bridge financing, this capital may be
obtained  upon terms highly  unfavorable  to the Company.  Further,  the Company
cannot be certain that anticipated  revenues from operations would be sufficient
to satisfy its capital  requirements.  The  Company  believes  that it will have
sufficient capital to sustain operations through December 31,2002. The Company's
belief is based on its  operating  plan,  which in turn is based on  assumptions
that may prove to be incorrect. If capital raised from financing efforts and the
Company's  financial  resources  are  insufficient  it  may  require  additional
financing  in order to execute on the Company  operating  plan and continue as a
going concern. The Company cannot predict whether this additional financing will
be in the form of equity or debt, or be in 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.  In the event that any future  financing  should take the

                                       13
<PAGE>

form of a sale of  equity  securities,  the  holders  of the  common  stock  may
experience additional dilution.

    BECAUSE THE COMPANY WILL NOT PAY CASH DIVIDENDS,  INVESTORS MAY HAVE TO SELL
    THEIR SHARES IN ORDER TO REALIZE THEIR INVESTMENT.

    The Company has not paid any cash  dividends  on our common stock and do 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.  Any credit  agreements  into which the
Company may enter with institutional  lenders may restrict the Company's ability
to pay dividends.  Whether the Company pays cash dividends in the future will be
at the discretion of the Company's Board of Directors and will be dependent upon
the Company's financial condition, results of operations,  capital requirements,
and any other  factors  that the Board of Directors  decides is  relevant.  As a
result, investors may have to sell their shares of common stock to realize their
investment.

    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 us, 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 the Company,  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
the corporation 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,  which is similar to plans  adopted by many  leading
public  companies,  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 our directors, officers and principal stockholders, Charles
W.  Fritz,  William  E.  Fritz and The Fritz  Family  Limited  Partnership  were
exempted  from  triggering  the "poison  pill" as a result of their  significant
holdings  at the  time  of the  plan's  adoption,  which  otherwise  might  have
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 10,000,000 shares of Preferred
Stock,  par value $0.01 per share. The Company's  designated  Preferred Stock is
comprised  of 200,000  shares of Series A Preferred  Stock,  par value $0.01 per
share,  which shares are issuable in connection with the Company's  stockholders
rights plan, and 500,000  shares of Series B Convertible  Preferred  Stock,  par
value $0.01 per share,  of which  452,289  shares were issued as of December 31,
2001.  The  452,489  Series  B  shares  outstanding  as  of  December  31,  2001
automatically  converted  into the same  number of common  shares on  January 2,
2002.

    THE COMPANY'S  COMMON STOCK TRADES  SPORADICALLY,  THE OFFERING PRICE OF THE
    COMMON  STOCK  IS  ARBITRARY,  THE  MARKET  PRICE OF THE  SECURITIES  MAY BE
    VOLATILE,  AND THE COMPANY MUST SATISFY THE APPLICABLE  REQUIREMENTS FOR THE
    COMMON STOCK TO TRADE ON THE NASDAQ SMALL CAP MARKET.

     The Company's  common stock  currently  trades  sporadically  on the Nasdaq
Small Cap Market.  The market for the Company's  common stock may continue to be

                                       14
<PAGE>


an  inactive  market.  Accordingly,  unless  and until an active  public  market
develops,  investors  may have  difficulty  selling their shares of common stock
into which the preferred stock offered is  automatically  convertible at a price
that is attractive to the investor.

     The Company's  common stock has traded as low as $0.11 and as high as $6.75
between  June 30, 2000 and March 5, 2002.  From time to time after this  filing,
the market price of the common stock may experience significant volatility.  The
Company's   quarterly   results,   failure   to  meet   analysts   expectations,
announcements by the Company or the Company's competitors regarding acquisitions
or dispositions, loss of existing clients, new procedures or technology, changes
in general conditions in the economy,  and general market conditions could cause
the market price of the common stock to  fluctuate  substantially.  In addition,
the stock market has experienced  significant price and volume fluctuations that
have  particularly  affected  the trading  prices of equity  securities  of many
technology  companies.  These  price and  volume  fluctuations  often  have been
unrelated to the operating  performance of the affected companies.  In the past,
following  periods of volatility in the market price of a company's  securities,
securities  class action  litigation  has often been  instituted  against such a
company.  This type of  litigation,  regardless of the outcome,  could result in
substantial costs and a diversion of management's attention and resources, which
could materially adversely affect the Company's business,  prospects,  financial
condition,  and results of  operations.  The Nasdaq Stock Market has net capital
surplus and stock price  maintenance  criterion  for trading on the Nasdaq Small
Cap Market.  The Company is  currently  below the minimum  requirements  for Net
Tangible Assets and Stockholder  equity. The Company's ability to continue to be
listed on the Nasdaq  Stock Market will depend on whether the Company is able to
maintain net tangible assets of at least $2,000,000 and maintain a minimum stock
price of $1.00.

     If the Company  cannot  maintain the standards for continued  listing,  the
Company's  common stock could be subject to delisting  from the Nasdaq Small Cap
Market.  Trading,  if any, in the common  stock would then be  conducted  in the
over-the-counter  market on the OTC Bulletin  Board  established  for securities
that do not meet the Nasdaq Small Cap Market  listing  requirements,  or in what
are commonly referred to as the "pink sheets." As a result, an investor may find
it more  difficult  to dispose of, or to obtain  accurate  quotations  as to the
price of, the Company's shares.

     INVESTORS MAY SUFFER SIGNIFICANT ADDITIONAL DILUTION IF OUTSTANDING OPTIONS
     AND WARRANTS ARE EXERCISED.

     The Company also has  outstanding  stock options to purchase  approximately
5.0 million  shares of common stock and warrants to purchase  approximately  3.2
million  shares of common  stock,  some of which may in the  future,  but do not
currently, have exercise prices at or significantly below the price at which the
preferred stock converts into common stock or the price of the Company's  common
shares on the  public  market.  To the  extent  such  options  or  warrants  are
exercised,  there will be further dilution.  In addition,  in the event that any
future financing should be in the form of, be convertible  into, or exchangeable
for, equity securities, and upon the exercise of options and warrants, investors
may experience additional dilution.

     FUTURE SALES OF COMMON STOCK BY THE COMPANY'S  EXISTING  STOCKHOLDERS COULD
     ADVERSELY AFFECT THE COMPANY'S STOCK PRICE.

     The market price of the Company's common stock could decline as a result of
sales of a large number of shares of the Company's common stock in the market as
a result of offerings of common stock or securities convertible,  exercisable or
exchangeable  for common stock,  or the perception that these sales could occur.
These  sales also might make it more  difficult  for the  Company to sell equity
securities  in the  future  at a time  and at a price  that  the  Company  deems
appropriate.  The Company's  officers and directors are not currently subject to
lock-up  agreements  preventing  them  from  selling  their  shares.  Two of the
Company's  officers and directors,  Charles W. Fritz and William E. Fritz intend
to sell an aggregate of 3,945,551  shares of common stock in  connection  with a
registration  that  we  are  currently  in  the  process  of  making  effective.
Additionally, shares issued upon the exercise of stock options granted under the
Company's  stock option  plans will be eligible for resale in the public  market
from time to time subject to vesting.

     In  addition,  the Company may offer for sale up to  10,000,000  additional
shares of common  stock  within  six  months  from the date of this  filing,  as
necessary to raise capital to sustain Company  operations.  While applicable law
provides  that  unregistered  securities  may not generally be resold within one
year of their  purchase,  market  conditions may require the Company to register
such shares for public sale  earlier  than such shares  would  otherwise  become
freely  tradable,  thereby  creating  the  possibility  of further  dilution  to
purchasers of the Company shares.

                                       15
<PAGE>

RISKS RELATING TO THE COMPANY'S INDUSTRY

     INTERNET SECURITY POSES RISKS TO 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
the  Company's  business,   prospects,   financial  condition,  and  results  of
operations,  could be materially adversely affected. Rapid growth in the use of,
and  interest  in,  the  Internet,  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.

     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  the  Company's  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.

                                       16
<PAGE>

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 the  Company's  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 THE MARKETS IN WHICH
    IT COMPETES.

     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.  NeoMedia 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 NeoMedia.

     Many of the Company's  competitors have longer operating histories,  larger
customer bases, and longer relationships with clients, and significantly greater
financial, technical, marketing, and public relations resources than the Company
does.  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 the Company's business.  Similarly,  the Company
competes  against  significantly  larger and  better-financed  companies  in the
Company's   systems   integration   and  resales   businesses,   including   the
manufacturers of the equipment and technologies that the Company  integrates and
resells.  If  NeoMedia  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 it  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 not 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.

     REGULATORY AND LEGAL UNCERTAINTIES 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 the Company's cost of doing business,  or otherwise have a
material adverse effect on its business,  prospects,  financial  condition,  and
results of operations.  Moreover, the relevant governmental authorities have not

                                       17
<PAGE>

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  allow for the storage of
demographic data from its 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.



ITEM 2.  DESCRIPTION OF PROPERTIES

     The Company's principal executive, development and administrative office is
located at 2201 Second Street, Suite 600, Fort Myers, Florida 33901. The Company
occupies approximately 15,000 square feet under terms of a written lease from an
unaffiliated  party which  expired on January  31,  2001.  The Company  signed a
renewal for three years at this facility  during the first quarter of 2001.  The
Company has a sales facility at 2150 Western Court,  Suite 230, Lisle,  Illinois
60532,  where the Company  occupies  approximately  6,000  square feet under the
terms of a written  lease from an  unaffiliated  party  expiring  on October 31,
2003. In March 2001, with the  acquisition of the assets of Qode.com,  Inc., the
Company added an additional 8,388 square feet office lease at 4850 N. State Road
7, Suite 104, Ft. Lauderdale,  Florida, with monthly rent totaling approximately
$9,200. The lease expires March, 2005. This lease is being terminated subject to
a settlement agreement between the Company and Headway associates,  the landlord
(see "Legal Proceedings").

     During 2001, we closed our office in Monterrey, Mexico, which was primarily
used for sales and consulting efforts.

     The Company believes that its existing office space is adequate to meet its
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.

     On  September 6, 2001,  AirClic,  Inc.  ("AirClic")  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 under the terms of a letter of intent  entered into between  AirClic
and the Company. The letter of intent was subsequently abandoned on the basis of
the Company's alleged breach of certain  representations  made by the Company in
the promissory note issued by the Company to AirClic in respect of such advance.
The note  issued by the  Company  in respect of  AirClic's  $500,000  advance is
secured by substantially all of the Company's intellectual  property,  including
its core physical  world-to-Internet  technologies.  If the Company is deemed to
have defaulted under the note, and does not pay the judgment,  AirClic, which is
one  of the  NeoMedia's  key  competitors,  could  acquire  the  Company's  core
intellectual  property,  which  would  have a  material  adverse  effect  on the
Company's business,  prospects,  financial condition, and results of operations.
The  Company  is   vigorously   defending   this  lawsuit  and  has   interposed
counterclaims  against AirClic. The lawsuit is in its preliminary stages and, as
such, at this time it is difficult to assess the outcome. Whether or not AirClic
is  successful  in  asserting  its  claims  that the  Company  breached  certain
representations made by the Company in the note, the note became due and payable
in accordance  with its terms on January 11, 2002.  Based on the cash  currently
available to the Company,  payment of the note and related interest would have a
material  adverse effect on the Company's  financial  condition.  If the Company
faisl to pay such note, AirClic could proceed against the Company's intellectual
property  securing the note,  which would have a material  adverse effect on the
Company's business,  prospects,  financial condition, and results of operations.
The Company is  aggressively  seeking  bridge  financing to enable it to pay the
principal and interest  remaining under the note following the resolution of the

                                       18
<PAGE>

counterclaims  against  AirClic.  The Company  has not  accrued  any  additional
liability over and above the note payable and related accrued interest.

     AirClic  has also  filed suit  against  the  Company  in the United  States
District Court for the Eastern District of Pennsylvania.  In this second action,
AirClic seeks a declaration that certain core intellectual property securing the
note issued by the Company to AirClic,  some of which is patented and others for
which a  patent  application  is  pending  is  invalid  and  unenforceable.  Any
declaration that the Company's core patented or patentable technology is invalid
and  unenforceable  would  have a  material  adverse  effect  on  the  Company's
business, prospects, financial condition, and results of operations. The Company
is  vigorously  defending  against  this  lawsuit as well.  The  Company has not
accrued any liability in connection with this matter.

     On June 26,  2001,  the  Company  filed a $3  million  lawsuit  in the U.S.
District  Court,   Northern   District  of  Texas,   Dallas  Division,   against
Digital:Convergence  Corporation  for breach of contract  regarding a $3 million
promissory  note due on June 24, 2001 that was not paid.  The Company is seeking
payment of the $3 million note plus interest and attorneys fees. The Company has
not accrued any gain contingency related to this matter.

     In April 2001,  the former  President  and  director  of  NeoMedia  filed a
lawsuit against the Company and several of its directors.  The suit was filed in
the Circuit Court of the Twentieth Judicial Circuit for Sarasota,  Florida.  The
claim alleges the individual was fraudulently  induced into accepting employment
and that  the  Company  breached  the  employment  agreement.  The  individual's
employment  with the Company  ended in January  2001.  The Company  believes the
claim is without merit and is vigorously defending itself. Final outcome of this
matter is uncertain  and a range of loss cannot  reasonably  be  estimated.  The
Company has accrued  approximately  $347,000 in severance and incentive payments
relating to this matter.

     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.  The Company
has entered  into a letter of intent with the Finx Group,  Inc. to sell  certain
assets and  liabilities  relating to Qode. As part of the letter of intent,  the
Finx Group will assume all  liabilities  up to $138,000  relating to the Ripfire
contract.   Accordingly,  the  Company  has  not  accrued  a  liability  in  the
accompanying  financial statements.  The Company,  along with the Finx Group, is
currently negotiating settlement of this matter.

     On October 3, 2001, Headway Associates,  Ltd. filed a complaint for damages
in the Circuit Court of the  Seventeenth  Judicial  Circuit for Broward  County,
Florida.  Headway  Associates,  Ltd. is seeking payment of all amounts due under
the terms the lease  agreement of the Ft.  Lauderdale  office of NeoMedia's Qode
business unit. The lease  commenced on March 3, 2000 and terminates on March 31,
2005. On February 25, 2002,  Headway agreed to accept $100,000 cash payment over
a two-month  period for settlement of all past-due and future amounts owed under
the lease. This amount is accrued in the accompanying financial statements.

     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.
The  Company has  entered  into a letter of intent with the Finx Group,  Inc. to
sell certain assets and  liabilities  relating to Qode. As part of the letter of
intent,  the Finx Group will assume all  liabilities up to $530,000  relating to
the Orsus contract.  Accordingly, the Company has not accrued a liability in the
accompanying  financial statements.  The Company,  along with the Finx Group, is
currently negotiating settlement of this matter.

     On March 20, 2002, IOS Capital,  Inc. filed a summons  seeking full payment
of  approximately  $38,700  relating  to past due and future  payments  under an
office  equipment  lease.  The Company has returned the equipment and intends to
settle the past due amounts. As of December 31, 2001, the Company had recorded a
liability of approximately $10,000 relating to this matter.


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

     On October 24, 2001,  the Company filed a proxy  statement  with the SEC to
request a  shareholder  vote that would  increase  the  number of the  Company's
authorized  shares of common stock from  50,000,000  shares to  100,000,000  and

                                       19
<PAGE>

increase the number of the Company's  authorized  shares of preferred stock from
10,000,000  shares to  25,000,000.  The proxy also  requested  approval  to sell
19,000,000  shares of common  stock to  accredited  investors  in  exchange  for
limited  recourse   promissory  notes.  On  December  11,  2001,  the  Company's
shareholders  approved  the sale of  19,000,000  shares  at $0.08  per  share in
exchange  for  limited  recourse  promissory  notes.  The price  has since  been
increased  to $0.17  per  share.  The  proposition  to  increase  the  number of
authorized  common and preferred  shares did not pass as a result of the failure
to secure favorable votes from holders of a majority of the outstanding shares.


                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     (a) MARKET INFORMATION. NeoMedia's common stock began trading on The Nasdaq
Small Cap Stock Market under the symbol "NEOM" on November 25, 1996, the date of
its initial public offering.  Prior to such time there was no established public
trading market for NeoMedia's common stock.

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

     TYPE OF SECURITY        PERIOD ENDED                     HIGH      LOW
     ----------------        ------------                     ----      ---
                             Common Stock   March 31, 2000  $ 14.50     $5.69
                             June 30, 2000                  $ 11.13     $5.00
                             September 30, 2000             $  6.75     $4.13
                             December 31, 2000              $  6.50     $1.94
                             March 31, 2001                 $  6.00     $2.50
                             June 30, 2001                  $  4.50     $1.76
                             September 30, 2001             $  1.85     $0.16
                             December 31, 2001              $  0.24     $0.11

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

     (b) HOLDERS.  As of March 13, 2002, there were 158 registered  shareholders
and approximately  3,000 beneficial  shareholders of record of NeoMedia's common
stock.  NeoMedia believes that it has a greater number of shareholders because a
substantial  number of NeoMedia's  common stock is held of record in street name
by broker-dealers for their customers.

     (c) DIVIDENDS. As of March 15, 2002, NeoMedia has not paid any dividends on
its common stock and does not expect to pay a cash  dividend in the  foreseeable
future,  but intends to devote all funds to the operation of its businesses.  As
of March 15,  2002,  NeoMedia  has a letter of  credit  with Bank One,  Chicago,
Illinois,  the terms of which require Bank One's written permission prior to the
declaration of cash dividends.

     (d)  RECENT ISSUANCES OF UNREGISTERED SECURITIES.

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

                                       20
<PAGE>

        In January 1999,  NeoMedia  issued  82,372  shares of NeoMedia's  common
stock  to an  individual  related  party  at a price  of  $3.04  per  share.  In
connection  with the sale,  NeoMedia also issued 8,237 warrants with an exercise
price of $3.04.  The  gross  proceeds  of such  transaction  were  approximately
$250,000.

        In January 1999,  NeoMedia issued warrants to purchase 230,000 shares of
common stock at a price of $2.13 per share to an outside consultant for services
performed.

        In January and February  1999,  NeoMedia  issued an aggregate of 145,000
shares  of  NeoMedia's  common  stock  at a price  of  $3.50  per  share to five
individual and one institutional unrelated parties. In connection with the sale,
NeoMedia also issued an aggregate of 3,000  warrants  with an exercise  price of
$3.50. The gross proceeds of such transaction were  approximately  $507,500.  In
connection with the sale,  NeoMedia also issued as a commission 280,000 warrants
to purchase  shares of NeoMedia  common stock at an exercise  price of $2.13 per
share

        In January 1999,  NeoMedia  issued  42,857  shares of NeoMedia's  common
stock  at a price  of  $3.50  per  share  to an  individual  related  party.  In
connection  with the sale,  NeoMedia also issued 4,286 warrants with an exercise
price of $3.50.  The  gross  proceeds  of such  transaction  were  approximately
$150,000.

        In February 1999,  NeoMedia  issued 250,000 shares of NeoMedia's  common
stock at a price of $4.00 per share to AT Cross Company,  an unrelated party. In
connection with the sale, NeoMedia also issued 100,000 warrants with an exercise
price of $5.00. The gross proceeds of such transaction were $1,000,000.

        In April 1999,  NeoMedia  issued an  aggregate  of  1,000,000  shares of
NeoMedia's  common  stock at a price of $3.45  per share to two  individual  and
three  institutional  unrelated parties.  The gross proceeds of such transaction
were approximately $3,450,000. In connection with the sale, NeoMedia issued as a
commission  175,000  warrants to purchase  shares of NeoMedia common stock at an
exercise price of $3.45 per share.

        In April 1999,  NeoMedia  issued  warrants to purchase  50,000 shares of
common  stock at a price of  $0.01  per  share  to an  outside  institution  for
services performed.

        In May 1999, NeoMedia issued an aggregate of 65,000 shares of NeoMedia's
common stock at a price of $4.75 per share to two individual  unrelated parties.
In connection with the sale, NeoMedia also issued an aggregate of 6,500 warrants
with an exercise  price of $5.00.  The gross proceeds of such  transaction  were
approximately  $309,000.  In connection with the sale, NeoMedia paid commissions
of $3,375 cash plus 3,250 warrants to purchase  shares of NeoMedia  common stock
at an exercise price of $5.00 per share.

        In June 1999,  NeoMedia issued 250,000 shares of NeoMedia's common stock
at a price of $4.00  per  share to AT Cross  Company,  an  unrelated  party.  In
connection with the sale, NeoMedia also issued 100,000 warrants with an exercise
price of $7.00.  The  gross  proceeds  of such  transaction  were  approximately
$1,000,000.

        In September  1999,  NeoMedia  issued an aggregate of 210,000  shares of
NeoMedia's  common stock at a price of $7.00 per share to one individual and two
institutional  unrelated  parties.  The gross proceeds of such  transaction were
approximately  $1,470,000.  In connection  with the sale,  NeoMedia  issued as a
commission  105,000  warrants to purchase  shares of NeoMedia common stock at an
exercise price of $6.00 per share.

        In September  1999,  NeoMedia  issued an aggregate of 275,231  shares of
NeoMedia's  common  stock at a price of $5.75  per share to two  individual  and
three  institutional  unrelated parties.  In connection with the sale,  NeoMedia
also issued an aggregate of 27,523 warrants with an exercise price of $6.75. The
gross proceeds of such transaction were approximately  $1,583,000. In connection
with the sale, NeoMedia paid commissions of $30,000 cash, and also issued 11,172
shares of its  common  stock  valued at $6.19 per share and 10,000  warrants  to
purchase  shares of  NeoMedia  common  stock at an  exercise  price of $6.19 per
share.

        In October 1999,  NeoMedia  issued  15,000  shares of NeoMedia's  common
stock  at a price of  $4.38  per  share to an  individual  unrelated  party.  In
connection  with the sale,  NeoMedia also issued 1,500 warrants with an exercise
price of $4.38.  The  gross  proceeds  of such  transaction  were  approximately
$66,000.

                                       21
<PAGE>

        In November  1999,  NeoMedia  issued an aggregate  of 143,334  shares of
NeoMedia's  common stock at a price of $3.75 per share to two individual and two
institutional  unrelated  parties.  In connection  with the sale,  NeoMedia also
issued an aggregate of 5,067  warrants  with an exercise  price of $5.50,  1,267
warrants with an exercise price of $4.75,  5,333 warrants with an exercise price
of $4.67, and 2,667 warrants with an exercise price of $5.84. The gross proceeds
of such transaction were  approximately  $538,000.  In connection with the sale,
NeoMedia paid commissions of approximately $35,000.

        In January  2000,  NeoMedia  issued an  aggregate  of 301,368  shares of
NeoMedia's common stock at a price of $3.75 per share to ten individual and four
institutional  unrelated  parties.  In connection  with the sale,  NeoMedia also
issued an aggregate of 12,570  warrants with an exercise  price of $7.19,  5,400
warrants with an exercise price of $6.44,  and 12,167  warrants with an exercise
price of $7.37.  The  gross  proceeds  of such  transaction  were  approximately
$1,130,000.  In connection with the sale,  NeoMedia issued as commissions  9,502
shares of its common stock valued at $7.09 per share.

        In February  2000,  NeoMedia  issued 39,535 shares of NeoMedia's  common
stock at a price of $6.88  per  share to one  individual  and one  institutional
unrelated  party.  In  connection  with the sale,  NeoMedia  also  issued  2,500
warrants  with an exercise  price of $12.74 and 1,454  warrants with an exercise
price of $9.56.  The  gross  proceeds  of such  transaction  were  approximately
$272,000.

        In February  2000,  NeoMedia  issued 50,000 shares of NeoMedia's  common
stock at a price of $6.00  per share to an  institutional  unrelated  party.  In
connection  with the sale,  NeoMedia also issued 2,982 warrants with an exercise
price of $10.06.  The gross  proceeds  of such  transaction  were  approximately
$300,000.

        In February 2000, NeoMedia issued 37,500 shares of NeoMedia common stock
upon the  exercise of  outstanding  warrants at a price of $2.00 per share.  The
gross proceeds of such transaction were approximately $75,000.

        In March 2000,  NeoMedia  issued an  aggregate  of  1,000,000  shares of
NeoMedia's  common stock at a price of $7.50 per share to 20 individual  and one
institutional  unrelated  party.  The gross  proceeds of such  transaction  were
approximately  $7,500,000.  In connection  with the sale,  NeoMedia  issued as a
commission  125,000  warrants to purchase  shares of NeoMedia common stock at an
exercise  price of $7.50 per  share,  125,000  warrants  to  purchase  shares of
NeoMedia  common  stock at an  exercise  price of $15.00 per share,  and 100,000
warrants to purchase  shares of NeoMedia  common  stock at an exercise  price of
$7.20 per share.

        In May 2000,  NeoMedia  issued 187,500  shares of NeoMedia  common stock
upon the  exercise of  outstanding  warrants at a price of $7.38 per share.  The
gross proceeds of such transaction were approximately $1,383,000.

        In October 2000,  NeoMedia issued warrants to purchase  1,400,000 shares
of common stock at a price of $6.00 per share to Digital:Convergence Corporation
as consideration for a 10-year intellectual property license agreement.

        In March and April 2001,  NeoMedia  issued  316,500 shares of NeoMedia's
common  stock at a price  of $3.40  per  share to four  unrelated  institutional
parties.  The gross proceeds of such transaction were approximately  $1,076,000.
In connection with the sale,  NeoMedia issued as a commission 50,000 warrants to
purchase  shares of  NeoMedia  common  stock at an  exercise  price of $3.56 per
share.

        In March 2001,  NeoMedia issued 18,000 shares of NeoMedia's common stock
at a price of $3.41 per share to an  institutional  unrelated  party.  The gross
proceeds of such transaction were $61,000.

        In March 2001, NeoMedia issued 156,250 shares of NeoMedia's common stock
at a price of $3.20 per share to an  institutional  unrelated  party.  The gross
proceeds of such transaction were $500,000.

        In March  2001,  NeoMedia  issued  an  aggregate  of  170,000  shares of
NeoMedia  common stock upon the exercise of  outstanding  warrants at a price of
$2.13 per share.  The gross  proceeds  of such  transaction  were  approximately
$362,000.

        In March 2001, NeoMedia placed 1,676,500 shares of NeoMedia common stock
in escrow in exchange for certain assets and liabilities of Qode.com,  Inc.. The

                                       22
<PAGE>


shares  are  subject  to  earn-out  under a sale  and  purchase  agreement  with
Qode.com,  Inc. In connection with the sale and purchase agreement,  the Company
also issued  274,699  shares of NeoMedia  common  stock to certain of  Qode.com,
Inc.'s debtholders.

        In April 2001,  NeoMedia  issued  warrants to purchase  50,000 shares of
common  stock at a price of  $0.01  per  share  to an  outside  institution  for
services performed

        In May 2001,  NeoMedia issued an aggregate of 320,050 shares of NeoMedia
common stock upon the exercise of  outstanding  warrants at a price of $2.00 per
share. The gross proceeds of such transaction were $641,000.

        In June 2001,  NeoMedia  issued an aggregate of 4,100 shares of NeoMedia
common stock upon the exercise of  outstanding  warrants at a price of $2.00 per
share. The gross proceeds of such transaction were $8,000.

        In July 2001,  NeoMedia issued an aggregate of 11,300 shares of NeoMedia
common stock upon the exercise of  outstanding  warrants at a price of $2.00 per
share. The gross proceeds of such transaction were $23,000.

        In September 2001, the Company released from escrow 35,074 shares of its
common stock under the terms of the Company's  sale and purchase  agreement with
Qode.com,  Inc.  The shares were payment for first and second  contract  quarter
performance under the earn-out plan included in the sale and purchase agreement.

        In November 2001,  NeoMedia  issued an aggregate of 3,000,000  shares of
our common stock to two unrelated  parties at a price of $0.08 per share.  These
shares were  subsequently  cancelled and re-issued as part of a 19 million share
offering during the first quarter of 2002.

        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 B Preferred  Stock issued to About.com,  Inc. as payment for  advertising
expense incurred during 2001.

        In January 2002, NeoMedia issued 1,646,987 shares of common stock to two
unrelated vendors as settlement of past-due accounts payable and future payments
under  equipment  lease  agreements.  There were no cash proceeds to NeoMedia in
these transactions.

        In February 2002, NeoMedia issued 19,000,000 shares of NeoMedia's 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  $3,230,000 upon maturity of
the notes.

     The above  issuances of securities  were made by the Company in reliance on
exemptions from registration  contained in Section 4(2) of the Securities Act of
1933, as amended,  and the rules and  regulations  thereunder,  as offerings not
involving a public offering.

                                       23
<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA

     The  following  data  should  be read  in  conjunction  with  "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
the consolidated financial statements and the related notes appearing in Item 8.

<TABLE>

                                                SELECTED FINANCIAL DATA
<CAPTION>

                                                      RESULTS FOR THE YEAR ENDED DECEMBER 31,
                                                1996         1997          1998         1999           2000             2001
                                              (ACTUAL)     (ACTUAL)      (ACTUAL)     (ACTUAL)       (ACTUAL)         (ACTUAL)
                                              --------     --------      --------     --------       --------         --------
                                                                      (in thousands, except share data)
<S>                                            <C>           <C>          <C>           <C>            <C>               <C>

CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues                                       $17,518       $24,434      $23,478       $25,256        $27,565           $8,142
Cost of sales                                   14,948        20,070       19,149        22,470         18,533            8,866
Gross margin                                     2,570         4,364        4,329         2,786          9,032            (724)
Operating expenses                               4,949        10,268       15,945        13,032         14,615            7,840
Digital Convergence write-off                       --            --           --            --             --            7,354
Loss on impairment of assets                        --            --           --            --             --            2,871
Loss from operations                           (2,379)       (5,904)     (11,616)      (10,246)        (5,583)         (18,789)
Interest expense/(income)                          540           147        (121)           226          (174)             (21)
Income tax provision/(benefit)                     156          (78)           --            --             --               --
Loss from continuing operations                (3,075)       (5,973)     (11,495)      (10,472)        (5,409)         (18,768)
Loss from operations and disposal of
     discontinued business unit                     --            --           --            --             --          (6,701)
Net loss                                      ($3,075)      ($5,973)     ($11,495(     $10,472)       ($5,409)        ($25,469)

LOSS PER SHARE DATA:
Loss per share from
  continuing operations                        ($0.72)       ($0.90)      ($1.34)       ($1.01)        ($0.39)          ($1.14)
Net loss per share                             ($0.72)       ($0.90)      ($1.34)       ($1.01)        ($0.39)          ($1.55)
Weighted average common
  shares outstanding (basic
  and diluted)                                4,266,753    6,615,107     8,560,841     0,377,4713     ,931,104        16,410,246


CONSOLIDATED BALANCE SHEET DATA:
Total assets                                   $11,266       $19,799      $12,630       $13,657        $40,594(a)        $9,039
Long-term debt                                   1,589           915          801           676         14,042(b)           390
</TABLE>

  (a) - Includes  $22,518,000 of assets related to Digital Convergence license
        contract that were written off during 2001
  (b) - Includes  $13,503,000 of long-term deferred revenue related to Digital
        Convergence license contract that was written off during 2001

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

     During 2001,  the company's  continued  focus was aimed toward 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.  NeoMedia's mission is to invent,  develop, and commercialize
technologies  and products  that  effectively  leverage the  integration  of the
physical and  electronic  to provide  clear  functional  value for the Company's
end-users,    competitive    advantage   for   their   business   partners   and

                                       24
<PAGE>


return-on-investment for their investors. Additionally, the Company has retained
the  services of the  intellectual  property law firm of Baniak Pine & Gannon to
pursue license agreements surrounding NeoMedia's valuable patent portfolio.

     In March  2001,  the  Company  purchased  substantially  all the  assets of
Qode.com,  Inc. In August 2001, the Company entered into a letter of intent with
a third  party to  purchase  the assets and  assume  certain of the  liabilities
related to the business  unit.  The  discontinuation  of the Qode  business unit
resulted in a loss from disposal of  discontinued  business unit of $3.1 million
in 2001.  Additionally,  the loss from  operations  of the business  unit during
2001was  $3.6  million.  (see  also  Footnote  2 in the  accompanying  financial
statements)


RESULTS OF  OPERATIONS  FOR THE YEAR ENDED  DECEMBER 31, 2001 AS COMPARED TO THE
YEAR ENDED DECEMBER 31, 2000

    NET SALES.  Total net sales for the year ended  December  31, 2001 were $8.1
million,  which  represented  a $19.5  million,  or 70.1%,  decrease  from $27.6
million for the year ended December 31, 2000. This decrease  primarily  resulted
from reduced resales of Sun Microsystems  equipment due to increased competition
and general  economic  conditions.  Additionally,  we recognized $7.8 million of
revenue in 2000 related to the DC license  contract.  No revenue was  recognized
related to this  contract in 2001.  The  Company  expects net sales in 2002 will
increase significantly from 2001, due to a resurgence in demand for software and
technology  equipment and services,  combined with  anticipated  revenue streams
from intellectual property licenses.

        Total net sales  during  the fourth  quarter of 2001 were $4.5  million,
compared  with $0.9  million in the third  quarter of 2001,  $1.2 million in the
second  quarter  of 2001,  and $1.5  million in the first  quarter of 2001.  The
fourth-quarter  increase is primarily  due to a large Storage Area Network (SAN)
sale of $1.1 million in that  quarter.  Additionally,  sales from the  Company's
Consulting and Integration  Services business unit have been historically higher
in the fourth quarter of the calendar year.

    LICENSE FEES. License fees were $0.6 million for the year ended December 31,
2001,  compared  with $8.4  million  for the year ended  December  31,  2000,  a
decrease of $7.8 million,  or 92.9%.  The decrease  resulted  primarily from the
recognition   of   $7.8   million   revenue   during   2000   related   to   the
Digital:Convergence  license contract. No revenue was recognized related to this
contract in 2001.  The Company is  anticipating  license  revenue growth in 2002
compared with 2001 as it aggressively  pursues license contracts relating to its
intellectual property.

    RESALES OF SOFTWARE AND  TECHNOLOGY  EQUIPMENT AND SERVICE FEES.  Resales of
software and  technology  equipment and service fees decreased by $11.5 million,
or 63.4%,  to $7.6 million for the year ended  December 31, 2001, as compared to
$19.1  million for the year ended  December 31, 2000.  This  decrease  primarily
resulted  from  fewer  sales  of Sun  Microsystems  hardware  due  to  increased
competition and general economic conditions. The Company believes that resurgent
demand for such  products,  combined  with the  Company's  movement  into higher
margin and Value-Add  products and services such as Storage Area Networks,  will
result in increased  revenue from resales of software and  technology  equipment
and service fees during 2002.

    COST OF SALES.  Cost of resales as a percentage of related resales was 86.0%
in 2001,  compared to 90% in 2000. This decrease is substantially due to a sales
mix of higher-margin products such as service fees and maintenance contracts.

    SALES  AND  MARKETING.  A  portion  of the  compensation  to the  sales  and
marketing staff  constitutes  salary and is fixed in nature and the remainder of
this compensation,  which is paid as a commission,  is directly related to sales
volume.  Sales and  marketing  expenses  were $2.5  million  for the year  ended
December  31,  2001,  compared to $6.5  million for the year ended  December 31,
2000, a decrease of $4.0 million or 61.5%. This decrease primarily resulted from
fewer marketing  personnel in 2001, coupled with a decrease in sales commissions
from reduced  sales.  Sales and  marketing  expense will continue to decrease in
2002 as the Company moves away from its applications service provider model.

    GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased by
$2.2 million,  or 30.1%,  to $4.8 million for the year ended  December 31, 2001,
compared to $7.2 million for the year ended  December 31, 2000.  The decrease is

                                       25
<PAGE>

primarily  related to a reduction in personnel as a result of the Company's cost
reduction  initiative.  General and  administrative  expenses  will  continue to
decline in 2002 as the Company realizes the full-year  benefit of cost-reduction
measures begun in the fourth quarter of 2001.

    RESEARCH AND DEVELOPMENT.  During the year ended December 31, 2001, NeoMedia
charged to expense $0.5 million of research and development costs, a decrease of
$0.6 million or 54.5%  compared to $1.1 million  charged to expense for the year
ended  December  31,  2000.  This  decrease  is  predominately  associated  with
decreased personnel devoted to NeoMedia's  development during the second half of
2001,  combined with  increased  capitalization  of software  development  costs
associated with NeoMedia's  "switching" platform and the Qode Universal Commerce
Solution during the first half of 2001.  Research and  development  expense will
continue to decrease  in 2002 as the  Company  moves away from its  applications
service provider model

    LOSS ON IMPAIRMENT OF ASSETS.  During the third quarter of 2001, the Company
wrote off all assets associated with its discontinued MLM/Affinity product line,
resulting in an impairment charge of $2.9 million.

    LOSS ON DIGITAL:CONVERGENCE.  During the second quarter of 2001, the Company
wrote off all assets  and  liabilities  relating  to its  intellectual  property
license with Digital:Convergence, resulting in a net charge of $7.4 million.

    INTEREST EXPENSE (INCOME), NET. Interest expense/(income) consists primarily
of interest paid to creditors as part of financed  purchases,  notes payable and
NeoMedia's  asset-based  collateralized line of credit net of interest earned on
cash equivalent investments.  Interest (income) decreased by $153,000, or 87.9%,
to $(21,000) for the year ended  December 31, 2001 from  $(174,000) for the year
ended  December  31,  2000,  due to reduced  cash  balances  throughout  2001 as
compared to 2000.

    LOSS FROM  CONTINUING  OPERATIONS.  During the year ended December 31, 2001,
the  Company's  loss from  continuing  operations  increased by $13.4 million or
248.1%  from $5.4  million in 2000 to $18.8  million in 2001.  This  increase is
primarily due to the loss on the Digital:Convergence license contract of $7.4 in
the second  quarter of 2001 and an impairment  loss of $2.8 million in the third
quarter of 2001 related to the  discontinuation  of the  Company's  MLM/Affinity
product line.

    LOSS FROM  OPERATIONS AND DISPOSAL OF DISCONTINUED  OPERATIONS.  The Company
discontinued  operations of its Qode business unit in 2001,  resulting in a loss
from  operations of  discontinued  business units of $3.6 million.  There was no
loss from this  business  unit during  2000.  The  business  unit's  assets were
purchased in March 2001 and the  implementation  was cancelled during the second
quarter of 2001.

    LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS. The Company sustained a loss of
$3.1 million in 2001 from the disposal of the Qode business unit in 2001.

    NET  LOSS.  The net loss for the year  ended  December  31,  2001 was  $25.5
million,  which  represented  a $20.1  million,  or 372.2%  increase from a $5.4
million loss for the year ended  December 31, 2000.  The increase in net loss is
due  primarily to the loss on the  Digital:Convergence  contract,  an impairment
loss of in the third  quarter  of 2001  related  to the  discontinuation  of the
Company's  MLM/Affinity  product line and the  discontinuation  of the Company's
Qode business unit, and reduced resales of software and technology equipment and
service  fees  resulting  from  increased   competition  and  general   economic
conditions, offset by lower expenses as a result of the Company's cost reduction
effort.

RESULTS OF  OPERATIONS  FOR THE YEAR ENDED  DECEMBER 31, 2000 AS COMPARED TO THE
YEAR ENDED DECEMBER 31, 1999

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

     LICENSE  FEES.  Total  license  fees  increased  from $2.4  million to $8.4
million, or 250.0%, for the years ended December 31, 1999 and December 31, 2000.
The increase was due to a license  agreement,  entered into during the fourth of
quarter of 2000, between NeoMedia and Digital  Convergence  Corporation  ("DC"),
granting DC a worldwide, non-exclusive license of the Company's patent portfolio
for  directly  linking  documents,  objects,  and  transactions  directly to the
Internet.  Revenue from this  agreement  totaled $7.8 million in 2000.  This was
offset by a decrease of $1.8 million due to the discontinuation of the Company's

                                       26
<PAGE>

Y2K  product  line.  Cost of sales as a  percentage  of related  sales was 15.4%
during 2000 compared to 73.7% during 1999. This decrease in the cost of sales as
a percentage  of related  sales was primarily due to DC license sale in 2000 and
the discontinuation of Y2K licenses on which the Company paid royalties.

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

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

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

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

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

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


LIQUIDITY AND CAPITAL RESOURCES


    NeoMedia  anticipates  that its existing cash  balances and funds  available
from  borrowings  under  its  existing  financing  agreement  will  have  to  be
supplemented with additional funds, through loans and/or capital  contributions,
to finance NeoMedia's  operations in 2002. During the first quarter of 2002, the
Company has  successfully  sold 19 million shares of its common stock at a price
of $0.17 per share in exchange for limited recourse promissory notes maturing no
later than May 2002,  resulting in proceeds of  $3,230,000  to the Company.  The
Company  expects to obtain an  additional  $1.0  million of debt  and/or  equity
financing  during the first  quarter  and second  quarters  of 2002.  Management
believes that this additional financing will be sufficient to sustain operations
through the first half of 2002,  however,  there can be no assurances that these
additional  financings  will be obtained.  If necessary funds are not available,
NeoMedia's business and operations would be materially adversely affected and in
such event, NeoMedia would attempt to reduce costs and adjust its business plan.

     Net cash used in operating activities for the year ended December 31, 2001,
2000,  and 1999 was $5.2 million,  $6.8 million and $7.0 million,  respectively.

                                       27
<PAGE>

During 2001, trade accounts receivable  inclusive of costs in excess of billings
increased $0.9 million,  while accounts  payable,  accrued expenses and deferred
revenue increased $3.0 million. During 2000, trade accounts receivable inclusive
of costs in excess  billings  increased $1.0 million,  while  accounts  payable,
accrued expenses and deferred revenue increased $1.1 million. During 1999, trade
accounts  receivable  inclusive  of costs in excess of billings  decreased  $2.5
million, while accounts payable, accrued expenses and deferred revenue decreased
$1.7  million.  NeoMedia's  net cash flow used in investing  activities  for the
years ended December 31, 2001,  2000 and 1999,  was $3.0,  $2.6 million and $2.1
million,  respectively.  This increase resulted from higher capitalized software
development  costs  coupled  with an increase in  acquisition  costs  related to
long-term and intangible assets.

    During the years ended  December 31, 2001,  2000 and 1999 the  Company's net
loss   totaled   approximately   $25,469,000,    $5,409,000   and   $10,472,000,
respectively.  As of December 31, 2001 the Company had  accumulated  losses from
operations  of  approximately  $63,344,000,  had a working  capital  deficit  of
approximately  $5,163,000,  and  approximately  $134,000  in  unrestricted  cash
balances.

    Management  believes it will need to raise additional capital to sustain the
Company's  operations in 2002.  The failure of  management  to accomplish  these
initiatives will adversely effect the Company's business,  financial conditions,
and results of operations and its ability to continue as a going concern.


     Subsequent to December 31, 2001,  the Company has  undertaken the following
initiatives:

     o     During  February  2002,  the  Company  sold 19 million  shares of its
           common  stock at $0.17 per share in  exchange  for  promissory  notes
           maturing at the earlier of i) 90 days from the date of  issuance,  or
           ii) 30 days  from  registration  of the  shares.  Proceeds  from this
           transaction will be $3,230,000.

     o     During  March 2002,  the Company  repriced  1.2 million of its common
           stock  warrants  for a period of six  months.  During the term of the
           warrant  repricing  program,  participating  holders are  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 NASDAQ  Small Cap Market on the trading  date
           immediately preceding the date of exercise.



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,  our most  critical
accounting  policies  include:  inventory  valuation,  which affects our cost of
sales and gross  margin;  the valuation of purchased  intangibles  and goodwill,
which affects our amortization and write-offs of goodwill and other intangibles;
the valuation of strategic  equity  investments,  which affects our other income
and expense;  and valuation of deferred  income taxes,  which affects our income
tax expense and  benefit.  The Company also has other key  accounting  policies,
such as our  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  the  Company  uses in  applying  these most
critical  accounting  policies  have a  significant  impact on the  results  the
Company reports in our financial statements.

     INVENTORY VALUATION

        Our policy is to value  inventories  at the lower of cost or market on a
part-by-part  basis.  This policy  requires us to make  estimates  regarding the
market value of our  inventories,  including an assessment of excess or obsolete
inventories.  The Company determines excess and obsolete inventories based on an
estimate of the future demand for our products  within a specified time horizon,
generally 12 months. The estimates the Company uses for demand are also used for
near-term  capacity  planning and inventory  purchasing and are consistent  with
revenue forecasts.  If our demand forecast is greater than its actual demand the

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<PAGE>

Company may be required to take additional excess inventory charges,  which will
decrease gross margin and net operating results in the future.

     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,  the Company  primarily uses the discounted cash
flow method.  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 the Company has used are  consistent  with the plans and
estimates  that the  Company  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 our net operating results.

     ALLOWANCE FOR BAD DEBT

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


INTANGIBLE ASSETS

     At the end of each quarter the Company performs impairment tests on each of
its  intangible  assets,  which include  capitalized  patent costs,  capitalized
software  development  costs, and purchased  software.  In doing so, the Company
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 our current business plan, and projected revenue to
be derived from the asset. Revenue is projected using the expected present value
of revenues over the lives of each intangible  asset group. If the book value of
any assets group  exceeds the expected  revenue,  then an  impairment  charge is
taken and the asset  balance is adjusted to match the  expected  revenue.  As of
December 31, 2001, the expected present value of revenues over the lives of each
intangible  asset  group  exceeded  their  respective  carrying  values,  and no
impairment charge was taken in the fourth quarter of 2001.

FINANCING AGREEMENTS

        As of December 31, 2001, 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.  There are no debt covenants  specified in the credit
agreement.  Termination of this agreement would materially  adversely affect the
Company's  financial  condition.  Management  expects the agreement to remain in
place in the near future.



RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In June of 1998,  the  Financial  Accounting  Standards  Board (the "FASB")
issued Statement of Financial  Accounting Standard ("SFAS") No. 133, "Accounting
for Derivative  Instruments  and Hedging  Activities."  The FASB later issued in
June 1999 SFAS No. 137,  which  deferred the effective  date for SFAS No. 133 to
all  fiscal  years  beginning  after June 15,  2000,  with  earlier  application
encouraged.  SFAS No. 133  establishes  accounting  and reporting  standards for
derivative  instruments,  including certain derivative  instruments  embedded in
other  contracts,  and for  hedging  activities.  It  requires  that  an  entity
recognize all  derivatives  as either assets or  liabilities in the statement of
financial  position and measure those instruments at fair value. The adoption of

                                       29
<PAGE>

SFAS No. 133 did not have a material impact on our financial position or results
of operations.

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

     On  July  21,  2001,  the  Financial   Accounting  Standards  Board  issued
Statements of Financial  Accounting  Standards No. 141 (SFAS No. 141), "Business
Combinations",  and No.  142  (SFAS No.  142),  "Goodwill  and Other  Intangible
Assets." SFAS No. 141 addresses financial  accounting and reporting for goodwill
and other intangible  assets acquired in a business  combination at acquisition.
SFAS No. 141  requires  the  purchase  method of  accounting  to be used for all
business  combinations  initiated after June 30, 2001 and  establishes  specific
criteria for the recognition of intangible assets separately from goodwill; SFAS
No. 142  addresses  financial  accounting  and  reporting for goodwill and other
intangible  assets subsequent to their  acquisition.  SFAS No. 142 provides that
goodwill and intangible  assets which have  indefinite  useful lives will not be
amortized,  but rather will be tested at least annually for impairment.  It also
provides that  intangible  assets that have finite useful lives will continue to
be amortized over their useful lives,  but those lives will no longer be limited
to forty years.  SFAS No. 141 is effective for all business  combinations  after
June 30, 2001. The provisions of SFAS No. 142 are effective beginning January 1,
2002. The Company is considering  the provisions of SFAS No. 141 and No. 142 and
at present has not  determined  the impact of adopting SFAS No. 141 and SFAS No.
142.

     In October 2001,  the FASB recently  issued SFAS No. 143,  "Accounting  for
Asset Retirement Obligations," which requires companies to record the fair value
of a liability for asset retirement  obligations in the period in which they are
incurred. The statement applies to a company's legal obligations associated with
the retirement of a tangible long-lived asset that results from the acquisition,
construction,  and  development or through the normal  operation of a long-lived
asset. When a liability is initially recorded,  the company would capitalize the
cost,  thereby  increasing  the  carrying  amount  of  the  related  asset.  The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value.  Upon  settlement of
the liability,  the obligation is settled at its recorded  amount or the company
incurs a gain or loss.  The  statement is effective  for fiscal years  beginning
after June 30, 2002. The Company does not expect the adoption to have a material
impact to the Company's financial position or results of operations.

     In  October  2001,  the FASB  issued  SFAS  No.  144,  "Accounting  for the
Impairment  or Disposal of  Long-Lived  Assets".  Statement  144  addresses  the
accounting  and reporting for the  impairment or disposal of long-lived  assets.
The statement  provides a single  accounting  model for long-lived  assets to be
disposed  of.  New  criteria  must be met to  classify  the  asset  as an  asset
held-for-sale.  This  statement  also  focuses  on  reporting  the  effects of a
disposal of a segment of a business.  This  statement  is  effective  for fiscal
years  beginning  after  December  15,  2001.  The  Company  does not expect the
adoption  to have a  material  impact to its  financial  position  or results of
operations.



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


     Market risk is the  potential  loss arising from adverse  changes in market
rates and  prices,  such as  foreign  currency  exchange,  interest  rates and a
decline in the stock  market.  The Company  does not enter into  derivatives  or
other financial instruments for trading or speculative purposes. The Company has
limited  exposure  to market  risks  related to changes  in  interest  rates and
foreign currency exchange rates. The Company does not currently invest in equity
instruments of public or private companies for business or strategic purposes.


     The  Company  generally  conducts  business,  including  sales  to  foreign
customers,  in U.S.  dollars,  and as a result,  has  limited  foreign  currency
exchange  rate risk.  The effect of an  immediate  10 percent  change in foreign
exchange  rates  would not have a  material  impact on the  Company's  financial
condition or results of operations.

ITEM 8.  FINANCIAL STATEMENTS

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

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<PAGE>


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
           ACCOUNTING AND FINANCIAL DISCLOSURES

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

     On October 29, 2001,  the Company filed a Report on Form 8-K reporting that
it had dismissed Arthur Andersen LLP as its independent  auditors. In connection
with the audit of the Company's  financial  statements for the fiscal year ended
December 31, 2000 and 1999 and in the subsequent interim periods,  there were no
disagreements  with Arthur Andersen LLP on any matters of accounting  principles
or practice,  financial statement  disclosure,  or auditing scope and procedures
which,  if not resolved to the  satisfaction  of Arthur  Andersen LLP would have
caused  Arthur  Andersen LLP to make  reference  to the matter in their  report.
Effective October 25, 2001 the Company engaged Stonefield Josephson, Inc. as its
new independent accountants.

                                       31
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To NeoMedia Technologies, Inc.:

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

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

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

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


                                                         /s/ ARTHUR ANDERSEN LLP

Tampa, Florida
March 30, 2001

                                      F-1
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

                          INDEPENDENT AUDITORS' REPORT


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

We  have  audited  the  accompanying  consolidated  balance  sheet  of  Neomedia
Technologies,  Inc. (a Delaware corporation) and subsidiaries as of December 31,
2001,  and the related  consolidated  statements  of  operations,  stockholders'
equity  and cash flows for the year then  ended.  These  consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain reasonable  assurance about whether the consolidated
financial  statements  are free of  material  misstatement.  An  audit  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 audit provides 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. and subsidiaries as of December 31, 2001, and the results of
its  operations  and its cash flows for the year then ended 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 3 to the
consolidated  financial  statements,  the Company's significant operating losses
and current  cash flow  position  raise  substantial  doubt about its ability to
continue  as a going  concern.  The  consolidated  financial  statements  do not
include any adjustments that might result from the outcome of this uncertainty.


/s/ STONEFIELD JOSEPHSON, INC.

Irvine, California
March  28, 2002

                                      F-2
<PAGE>

<TABLE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)
<CAPTION>

                                                                                DECEMBER 31,
                                                                           -----------------------
                                                                                2001        2000
                                                                                ----        ----
<S>                                                                         <C>           <C>

ASSETS
Current assets:
     Cash and cash equivalents...............................               $    134      $4,453
   Restricted cash...........................................                     --         750
   Short-term investments....................................                     --          --
   Trade accounts receivable, net of allowance for doubtful
     accounts of $65 and $484 in 2001 and 2000...............                  2,583       4,370
   Digital Convergence receivable............................                              5,144
   Costs and estimated earnings in excess of billings on
     uncompleted contracts...................................                     43          89
   Inventories...............................................                    197         116
   Assets held for sale......................................                    210          --
   Prepaid expenses and other current assets.................                    582         946
                                                                           ---------  ----------
        Total current assets.................................                  3,749      15,868

Property and equipment, net..................................                    205         365
Digital Convergence receivable, net of current portion.......                     --      10,288
Prepaid - Digital Convergence................................                     --       4,116
Capitalized patents, net.....................................                  2,500       2,661
Capitalized and purchased software costs and other intangible assets, net      1,828       6,382
Other long-term assets.............................                              757         914
                                                                           ---------  ----------
        Total assets........................................                $  9,039    $ 40,594
                                                                           =========  ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable..........................................                 $2,886      $1,187
   Amounts due under financing agreements....................                  2,283       1,114
   Accrued expenses..........................................                  1,922       2,691
   Stock liability...........................................                     --          --
   Current portion of long-term debt.........................                    149         137
   Note Payable..............................................                    750          --
   Sales taxes payable.......................................                    135         261
   Billings in excess of costs and estimated earnings on
     uncompleted contracts...................................                     13          49
   Deferred revenues - Digital Convergence...................                     --       1,543
   Deferred revenues.........................................                    767         449
   Other.....................................................                      7          11
                                                                           ---------  ----------
        Total current liabilities............................                  8,912       7,442

Long-term debt, net of current portion.......................                    390         539
Long-term deferred revenue - Digital Convergence.............                     --      13,503
                                                                           ---------  ----------
        Total liabilities....................................                  9,302      21,484
                                                                           ---------  ----------
Shareholders' equity:
   Preferred stock, $.01 par value, 10,000,000 shares authorized,
   452,289 issued and outstanding in 2001, none issued and outstanding
   in 2000...................................................                      5          --
   Additional paid-in capital, preferred  stock..............                    878          --
   Common stock, $.01 par value, 50,000,000 shares
     authorized, 20,446,343 shares issued and 18,804,917 outstanding
     in 2001, 14,460,384 shares issued and outstanding in 2000                   188         145
   Additional paid-in capital................................                 63,029      57,619
   Stock subscriptions receivable............................                  (240)          --
   Accumulated deficit.......................................               (63,344)    (37,875)
   Treasury stock, at cost, 201,230 shares of common stock...                  (779)       (779)
                                                                           ---------  ----------
        Total shareholders' equity...................... ....                  (263)      19,110
                                                                           ---------  ----------
          Total liabilities and shareholders' equity.........           $      9,039 $   40,594
                                                                        ============  ==========

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

                                      F-3
<PAGE>

<TABLE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>




                                                                                YEARS ENDED DECEMBER 31,

                                                                                  2001     2000     1999
                                                                                  ----     ----     ----
<S>                                                                              <C>  <C>          <C>

NET SALES:

   License fees..............................................                 $ 576        $8,417     $2,430
   Resales of software and technology equipment and service fees              7,566        19,148     22,826
                                                                        -----------    ----------  ----------

        Total net sales......................................                 8,142        27,565     25,256
                                                                         ------------  ----------  ----------

COST OF SALES:

   License fees...............................................                2,355        1,296       1,790
   Resales of software and technology equipment and service fees              6,511       17,237      20,680
                                                                         ------------  ----------  ----------

        Total cost of sales..................................                 8,866       18,533      22,470
                                                                         ------------  ----------  ----------

GROSS PROFIT.................................................                   (724)      9,032       2,786-


Sales and marketing expenses.................................                  2,519       6,504       6,765
General and administrative expenses..........................                  4,772       7,010       5,281
Research and development costs...............................                    549       1,101         986
Loss on impairment of assets.................................                  2,871          --          --
Loss on Digital:Convergence license contract.................                  7,354          --          --
                                                                         ------------  ----------  ----------
Loss from operations.........................................                (18,789)     (5,583)    (10,246)
Interest (income) expense, net..............................                     (21)       (174)        226
                                                                         ------------  ----------  ----------
Loss from continuing operations..............................                (18,768)     (5,409)    (10,472)
Discontinued operations (Note 1):

     Loss from operations of discontinued business unit......                 (3,613)        --          --
     Loss on disposal of discontinued business unit, including provision
         of $439 in 2001 for operating losses during phase-out period         (3,088)        --          --
                                                                         ------------  ----------  ----------

NET LOSS.....................................................               $(25,469)   $ (5,409)   (10,472)
                                                                         ------------  ----------  ----------

NET LOSS PER SHARE FROM CONTINUING OPERATIONS-
     BASIC AND DILUTED.......................................                 $(1.14)   $  (0.39)    $(1.01)
                                                                         -----------   ----------  ----------

NET LOSS PER SHARE FROM DISCONTINUED OPERATIONS-
     BASIC AND DILUTED.......................................                 $(0.41)   $     --     $    --
                                                                         ------------  ----------  ----------

NET LOSS PER SHARE--BASIC AND DILUTED........................                 $(1.55)     $(0.39)    $(1.01)
                                                                         ------------  ----------  ----------

Weighted average number of common shares--basic and diluted               16,410,246  13,931,104   10,377,478
                                                                         ===========  ===========  ==========


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

                                      F-4
<PAGE>

<TABLE>

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

                                                                                  YEARS ENDED DECEMBER 31,
                                                                                  2001      2000           1999
                                                                                  ----      ----           ----
<S>                                                                             <C>         <C>         <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.....................................................                   $(25,469)   $(5,409)    $(10,472)
Adjustments to reconcile net loss to net cash used in operating activities:
   Depreciation and amortization.............................                      3,369      2,336        2,029
   Loss on disposal of discontinued business units...........                      2,649         --           --
   Loss on disposal of and impairment of assets..............                      2,871         58           --
   Effect of loss on Digital:Convergence contract............                      7,354         --           --
   Preferred stock issued to pay advertising expense.........                        882         --           --
   Expense associated with warrant repricing.................                        947         --           --
   Fair value of stock based compensation granted for
     professional services...................................                         69        437           28
   Changes in operating assets and liabilities
     Trade accounts receivable, net..........................                       (709)     1,548        2,271
     Digital Convergence receivable..........................                                (2,767)          --
     Prepaid - Digital Convergence...........................                        118         --           --
     Costs and estimates earnings in excess of billings on
       uncompleted contracts.................................                         46        (89)         222
     Other current assets....................................                       (109)      (121)         382
      Other long-term assets.................................                         --       (194)          --
     Accounts payable, accrued expenses and stock liability..                      2,502     (2,676)      (1,286)
     Billings in excess of costs and estimates earnings on
       uncompleted contracts.................................                        (36)       (82)         131
     Deferred revenue........................................                        318        184         (391)
     Other current liabilities...............................                         (4)        --           76
                                                                                ---------    -------      -------
Net cash used in operating activities........................                     (5,202)    (6,775)      (7,010)
                                                                                ---------    -------      -------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of software development and purchased intangible assets            (2,883)    (2,317)      (1,470)
(Increase)/decrease in value of life insurance policies......                        158       (199)        (522)
Acquisition of property and equipment........................                        (81)      (123)        (127)
                                                                                ---------    -------      -------
Net cash used in investing activities........................                     (2,806)    (2,639)      (2,119)
                                                                                ---------    -------      -------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock, net of issuance
    costs of $149 in 2001, $74 in 2000, and $148 in 1999.....                      1,638      9,203        8,172
Net proceeds from exercise of stock warrants.................                      1,045      2,877           75
Net proceeds from exercise of stock options..................                        138        537        1,061
Common stock repurchased.....................................                         --       (779)          --
Borrowings under notes payable and long-term debt............                        504         --        2,000
Change in restricted cash....................................                        750        194         (194)
Repayments on notes payable and long-term debt...............                       (386)      (625)        (125)
                                                                                ---------    -------      -------
Net cash provided by financing activities....................                      3,689     11,407       10,989
                                                                                ---------    -------      -------
NET INCREASE IN CASH AND CASH EQUIVALENTS....................                     (4,319)     1,993        1,860
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.................                      4,453      2,460          600
                                                                                ---------    -------      -------
CASH AND CASH EQUIVALENTS, END OF YEAR.......................                      $ 134     $4,453       $2,460
                                                                                =========    =======      =======

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid/(received) during the year ....................                      $ (61)      $170         $146
Non-cash investing and financing activities:
   Net assets acquired as part of Qode purchase agreement in exchange
       for common stock and forgiveness of note..............                      1,800         --           --
   Shares earned by Qode.com under purchase agreement........                        13


                                                                F-5
<PAGE>

   Accounts payable converted to note payable................                       246          --           --
   Common stock issued in exchange for note receivable.......                       240          --           --
   Net assets classified as "Liabilities held for sale"......                       210          --           --
   Daystar assets purchased with shares of common stock......                        --       3,520           --
   Conversion of short-term debt to equity...................                        --          --        2,000
   Issuance costs for shares issued through private placement                       149          96          112
   Stock liability due upon issuance of patent...............                        --          --        1,863
   Warrants issued for license contract......................                        --       4,704           --
   Deferred revenue relating to license contract.............                        --      15,432           --

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

                                                                F-6
<PAGE>

<TABLE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                        (IN THOUSANDS, EXCEPT SHARE DATA)



<CAPTION>

                                     Common Stock                                     Preferred Stock            Treasury Stock
                                                                                                                   Stock
                                  --------------------                               ----------------------      -----------
                                                   Additional    Stock                        Additional
                                                   Paid-in     Subscription                   Paid-in    Accumulated
                                  Shares   Amount  Capital     Receivable     Shares Amount   Capital    Deficit    Shares   Amount
                                  --------------------------------------------------------------------------------------------------
<S>                              <C>            <C>   <C>           <C>          <C>   <C>      <C>      <C>           <C>     <C>


BALANCE, DECEMBER 31, 1998.....    8,699,08     $87   $25,168       -            -     -        -        ($21,994)     -       -

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

Exercise of employee options...     182,787       2       535       -            -     -        -           -          -       -
Issuance of common stock through
     Private placement, net of
     $170 of
     Issuance costs............   1,415,259      15     9,188       -            -     -        -           -          -       -
Fair value of warrants issued for
   Professional services rendered         -       -       253       -            -     -        -           -          -       -
Fair value of  stock issued for
professional Services rendered..     21,500       1       183       -            -     -        -           -          -       -
Fair value of warrants issued
     Related to license agreement
     With Digital Convergence...          -       -     4,704       -            -     -        -           -          -       -
Exercise of warrants...........     495,600       5     2,872       -            -     -        -           -          -       -
Stock issued to purchase assets     321,829       3     3,517       -            -     -        -           -          -       -
purchase assets.........
Treasury stock at cost.........           -       -     -           -            -     -        -           -       201,230    (779)
Net Loss........................          -       -     -           -            -     -        -           (5,409)    -       -
                                 ---------------------------------------------------------------------------------------------------

BALANCE, DECEMBER 31,            14,460,384     $145   $57,619      -            -     -        -         ($37,875) 201,230   ($779)
2000.........
                                 ---------------------------------------------------------------------------------------------------
Exercise of employee options...      38,560        -       138      -            -     -        -           -          -       -
Issuance of Common Stock through
private Placement, Net
of $149 of issuance costs......   3,490,750       35     1,843      -            -     -        -           -          -       -
Expense associated with warrant      -             -       947      -            -     -        -           -          -       -
repricing..
Fair value of options issued for     -             -        69      -            -     -        -           -          -       -
     Professional services
     rendered
Exercise of Warrants...........     505,450        5     1,040      -            -     -        -           -          -       -
Stock issued to purchase assets     309,773        3     1,373      -            -     -        -           -          -       -
purchase assets..........
Issuance of Preferred Stock for      -             -         -      -         452,489   5      878          -          -       -
services.......................
Stock Subscription Receivable..                                    (240)
Net Loss........................     -             -         -      -            -     -         -         (25,469)    -       -
                                 ---------------------------------------------------------------------------------------------------

BALANCE, DECEMBER 31, 2001       18,804,917     $188   $63,029     (240)     452,489   $5     $878        ($63,344) 201,230   ($779)


                                       Total
                                    Stockholders'
                                       Equity
                                    ----------------



BALANCE, DECEMBER 31, 1998.....     $3,261

Exercise of employee options...      1,061
Issuance of common stock through
     Private placement, net of       8,059
placement,  net of $260 of
     Issuance costs............
Fair value of warrants issued
   for professional services            28
rendered.......................
Exercise of warrants...........         75
warrants......................
Fair value of stock granted in
     Conjunction with financing      2,008
Net Loss.......................    (10,472)
                                 ----------------
BALANCE, DECEMBER 31, 1999.....     $4,020

Exercise of employee options...        537
Issuance of common stock through
     Private placement, net of
     $170 of
     Issuance costs............      9,203
Fair value of warrants issued for
   Professional services rendered      253
Fair value of  stock issued for
professional Services rendered..       184
Fair value of warrants issued
     Related to license agreement
     With Digital Convergence...     4,704
Exercise of warrants...........      2,877
Stock issued to purchase assets      3,520
purchase assets.........
Treasury stock at cost.........       (779)
Net Loss........................    (5,409)
                                 ----------------

BALANCE, DECEMBER 31,              $19,110
2000.........
                                 ----------------
Exercise of employee options...        138
Issuance of Common Stock through
private Placement, Net
of $149 of issuance costs......      1,878
Expense associated with warrant        947
repricing..
Fair value of options issued for        69
     Professional services
     rendered
Exercise of Warrants...........      1,045
Stock issued to purchase assets      1,376
purchase assets..........
Issuance of Preferred Stock for        883
services.......................
Stock Subscription Receivable..       (240)
Net Loss........................   (25,469)
                                   --------

BALANCE, DECEMBER 31, 2001           ($263)


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

                                       F-7
<PAGE>



                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.   BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS

BASIS OF PRESENTATION

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

NATURE OF BUSINESS OPERATIONS

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

               NeoMedia Internet Switching Services (NISS), and

               NeoMedia Consulting and Integration Services (NCIS)

NEOMEDIA INTERNET SWITCHING SERVICES (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  our  linking  "switch"  and  application
platforms.  NISS also  manages  the  Company's  valuable  intellectual  property
portfolio, including the identification and execution of licensing opportunities
surrounding the patents.

NEOMEDIA CONSULTING AND INTEGRATION SERVICES (NCIS)

     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.  The unit also provides general and specialized consulting
services  targeted at software  driven print  applications,  and  especially  at
process  automation  of  production  print  facilities  through  its  integrated
document  factory  solution.   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

CASH AND CASH EQUIVALENTS

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

ESTIMATES

     The  preparation  of financial  statements  in conformity  with  accounting
principles  generally accepted in the United States requires  management to make

                                      F-8
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities at the date of the financial  statements and the reported amounts of
revenues and expenses  during the reported  period.  Actual results could differ
from those estimates.

REVENUE RECOGNITION

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

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

     Software and technology  equipment resale revenue is recognized when all of
the components necessary to run software or hardware have been shipped.  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.

PURCHASE AND DISPOSAL OF QODE.COM, INC.

     On March 1, 2001,  NeoMedia  purchased  all of the net assets of  Qode.com,
Inc. (Qode), except for cash. Qode is a development stage company, as defined in
Statement  of  Financial  Accounting  Standards  (SFAS) No. 7,  "Accounting  and
Reporting By Development Stage Enterprises".  In consideration for these assets,
NeoMedia   issued  274,699  shares  of  common  stock,   valued  at  $1,359,760.
Additionally,  the Company placed in escrow 1,676,500 shares of its common stock
valued at $8,298,675.  Stock issued was valued at $4.95 per share,  which is the
average closing price for the few days before and after the measurement  date of
March 1, 2001. As of December 31, 2001 the Company had released 35,074 shares of
common stock from escrow for  performance for the period March 1, 2001 to August
31,  2001.  The  remaining   1,641,426  shares  held  in  escrow  as  contingent
compensation  will not be issued due to the business unit not attaining  certain
performance targets.

          The Company  accounted for this purchase using the purchase  method of
accounting  in  accordance  with  Accounting  Principles  Board  Opinion No. 16,
"Business Combinations". The excess fair market value of the net assets acquired
over the  purchase  price was  allocated  to reduce  proportionately  the values
assigned to  noncurrent  assets.  The  accompanying  consolidated  statements of
operations  include the operations of Qode from March 1, 2001, through September
30, 2001.

                                      F-9
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The purchase price at the original purchase date was calculated and allocated as
follows:


Original Shares: 274,699 issued at $4.95                     1,360,000
Contingent shares: 35,074 issued at $0.39                  $    13,000
                                                       ----------------
  Total purchase price                                     $ 1,373,000
                                                       ----------------
PURCHASE PRICE ALLOCATED AS FOLLOWS:
ASSETS PURCHASED
  Trade receivables                                          $   5,000

  Inventory                                                    144,000

  Prepaid expenses                                              49,000

  Furniture & fixtures                                         913,000

  Capitalized development costs                              2,132,000

  Capitalized software                                          83,000

  Refundable deposits - non-current                             38,000

LIABILITIES ASSUMED

  Accounts payable                                           (981,000)

  Forgiveness of note receivable                             (440,000)

  Interest receivable                                         (10,000)

  Current portion of long-term debt                          (117,000)

  Note payable                                                (24,000)

  Capitalized lease obligation                               (419,000)
                                                       ----------------

    Total purchase price allocated                         $ 1,373,000
                                                       ================

During the third quarter of 2001, the Company issued an additional 35,074 shares
under the terms of the earn-out with Qode.com, Inc. (see explanation below). The
value of  these  shares  in the  amount  of  $13,000  was  allocated  $9,000  to
capitalized development costs and $4,000 to furniture and fixtures.

CONTINGENT CONSIDERATION

In accordance  with the purchase of the assets of Qode.com,  Inc.,  NeoMedia has
placed  1,676,500 shares of its common stock in escrow for a period of one year,
subject  to  downward   adjustment,   based  upon  the  achievement  of  certain
performance targets over the period of March 1, 2001 to February 28, 2002. As of
March  1,  2002,  these  performance  targets  were not met and  therefore,  the
remaining  1,641,426 shares held in escrow were not issued. The criteria used to
determine the number of shares released from escrow is a weighted combination of
revenue,  page views, and fully allocated  earnings before taxes relating to the
Qode Universal Commerce Solution.

At the end of each of  certain  interim  periods  as  outlined  in the  purchase
agreement,  the number of  cumulative  shares  earned by Qode.com is  calculated
based on  revenue  and page views and the shares  are  released.  The  resulting
financial impact on NeoMedia is a proportionate increase in the long-term assets
acquired from Qode, with a corresponding  increase in depreciation  expense from
that point forward.  The amount of the increase in long-term assets is dependent
upon the number of shares released from escrow, as well as the value of NeoMedia
stock at the time of  measurement.  The first such  measurement  date is July 1,
2001. At the end of the 12-month  measurement  period  (February 28, 2002),  the
final number of shares issued to Qode under the earn-out was 309,773,  allocated
as outlined in the table above.

                                      F-10
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


INTANGIBLE ASSETS

Intangible assets acquired from Qode.com include:

    i).  Purchased  software  licenses  relating to the  development of the Qode
    Universal Commerce Solution,  amortized on a straight-line  basis over three
    years.

    ii).  Capitalized  software development costs relating to the development of
the Qode Universal Commerce Solution.

PROFORMA INFORMATION

     Proforma  results of operations as though the companies had combined at the
beginning of the period is as follows:
                                                     YEAR ENDED
                                                     ----------
                                    December 31, 2001        December 31, 2000
                                    -----------------        -----------------
    Revenue                            $  8,228                  $   27,776

    Net Loss                          $ (20,959)                 $  (14,297)

    EPS - basic and diluted           $   (1.28)                 $    (1.01)


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 final  contract  is  contingent  upon the  completion  of due
diligence and definitive  terms and  conditions  stated in the letter of intent.
The Company intends to sell the assets and liabilities of Qode, which consist of
all  inventory,  equipment and the ownership and operation of the  comprehensive
universal internet database along with the corresponding patents. The Finx Group
will 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.
As of December 31, 2001, the  transaction  had not been  consummated  due to the
encumbrance  of certain of  NeoMedia's  Qode-related  assets under the Company's
note  payable to Airclic,  Inc. The Finx group has taken  possession  of certain
Qode system assets and has taken over ongoing  expenses  related to the business
unit.  Management  believes  that the sale will be  completed  immediately  upon
resolution of Airclic litigation.  During the third and fourth quarters of 2001,
the company  recorded a $2.6  million  expense from the  write-down  of the Qode
assets/liabilities to the following net realizable value:

                                           December 31, 2001
                                     (Balances in Thousands)

               Inventory                         $  144
               Equipment                            265
               Intangible Assets                  1,027
                                                  -----
                   Assets                         1,436
                                                  -----

               Accounts Payable                  $1,108
               Note Payable                          15
               Capital Lease                        103
                                                  -----
               Liabilities                        1,226
                                                  -----
                   Net Realizable Value          $  210
                                                 ------

                                      F-11
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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.

On May 31, 2001, three creditors of Qode.com,  Inc. filed in the U.S. Bankruptcy
Court an involuntary bankruptcy petition for Qode.com,  Inc. Qode.com,  Inc. has
converted the proceedings to Chapter 11, U.S. Code to re-organize its debts.

DIGITAL:.CONVERGENCE CORPORATION INTELLECTUAL PROPERTY LICENSE AGREEMENT

     The   Company    entered   into   an   agreement    with   a    competitor,
Digital:Convergence  Corporation ("DC"), a private company located in the US, in
October 2000, granting them a worldwide,  non-exclusive license of the Company's
extensive patent portfolio for directly linking documents,  objects, transaction
and voice  commands to the internet.  The agreement  provided for annual license
fees over a period of ten years in excess of $100 million  through a combination
of cash and  equity.  The  Company  recognized  $7.8  million of revenue in 2000
related to this  contract,  including a $5.0 million  cash  payment  received in
October  2000 for  royalties  earned  before  contract  execution,  $2.5 million
related to the $10 million of payments in DC common  stock and cash  expected to
be received in the first year of the  contract,  and $0.3 million  related to DC
stock received by NeoMedia to be recognized over the life of the contract.

     As part of the contract, the Company issued to DC a warrant to purchase 1.4
million shares of NeoMedia common stock.

     In the first quarter of 2001, DC issued the Company an interest  bearing $3
million note  payable in lieu of a $3 million cash payment due in January  2001.
The Company also received shares of DC stock in January with a contractual value
of $2 million as part of the first  contract-year  royalties  due.  The note was
originally  due on April 24, 2001,  however,  on that date the Company agreed to
extend it until June 24, 2001.  The Company also  partially  wrote down,  in the
first quarter of 2001,  the value of the remaining DC stock  receivable,  and DC
stock that had been received in January, to a value that management believed was
reasonable at the time (50% of the valuation  stipulated in the  contract).  The
write-down   consisted   of  a  reduction  in  assets  of  $7.7  million  and  a
corresponding reduction in liabilities of $7.7 million. The DC stock received in
January 2001 was valued at $1 million and the DC  receivable  was valued at $9.2
million.  In April 2001, the Company received additional shares of DC stock with
a $5 million value based on the valuation method stipulated in the contract.  No
revenue was recognized  related to these shares and the shares were not recorded
as  an  asset  due  to  DC's  worsening  financial  condition.  All  assets  and
liabilities relating to the contract were subsequently written off in the second
quarter (see below).

     Also in April,  an agreement  was entered into with DC whereby for a period
from the date of registration  of the shares  underlying the warrant to purchase
1.4 million shares of the Company's  common stock until October 24, 2001, if the
Company would identify a purchaser for the Company's  shares,  DC would exercise
the warrant and purchase 1.4 million  shares of common stock and sell the shares
to the identified purchaser. One third of the net proceeds received by DC on the
sale of the Company's common stock shall be paid to the Company toward repayment
of DC's  obligations  under the note to the Company in the amount of $3 million.
In  consideration  for this, the warrant  exercise price was reduced during this
period to 38 percent of the closing sale price of the Company's  common stock on
the day prior to the date of exercise,  subject to a minimum price.  Because the
exercise of the warrants at this reduced  price is  contingent  upon the Company
finding a purchaser  of the  underlying  1.4 million  shares,  the value of this
re-pricing  will be measured and recorded at the time the shares are sold. As of
October 24, the Company was not able to locate a purchaser  and  therefore,  the
warrant was not exercised.

     On June 24,  2001,  DC did not pay the note  that was due,  and on June 26,
2001, the Company filed a $3 million  lawsuit  against DC for breach of contract
regarding  the $3 million  promissory  note.  It was also  learned in the second
quarter of 2001 that DC's capital raising  efforts and business  operations were
having  difficulty,  and the Company decided to write off all remaining  amounts
related  to the DC  contract.  The  following  table  represents  balance  sheet
balances at December 31, 2000 and March 31, 2001, as well as all amounts written
off during the second quarter of 2001:

                                      F-12
<PAGE>

<TABLE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<CAPTION>

                                               December 31,      March 31,       Write-off
                                               2000 Balances    2000 Balances   June 30, 2001
                                                                 (Unaudited)
                                               ----------------------------------------------
                                                          (Dollars in thousands)
                                               ----------------------------------------------
<S>                                                    <C>          <C>          <C>

ASSETS
Available for sale securities - Digital Convergence   $     -     $ 1,000        $  1,000

Trade Accounts Receivable                               2,500       1,500           1,500
Digital Convergence receivable
                                                        5,144       5,144           5,144
Prepaid expenses (current portion)
                                                          470         470             470
Digital Convergence receivable, net of current portion 10,288       2,572           2,572
Prepaid DC (long-term portion)                          4,116       3,998           3,998
                                               --------------  --------------  --------------
  Total assets                                        $22,518     $14,684        $ 14,684
                                               ==============  ==============  ==============

LIABILITIES
Deferred revenues DC                                  $ 1,543         772             772

Long-term deferred revenues - DC                       13,503       6,558           6,558
                                               --------------  --------------  --------------
  Total liabilities                                   $15,046       7,330           7,330
                                               ==============  ==============  ==============
</TABLE>

     The net effect of the write-off is a $7,354,000  non-cash  charge to income
during the second  quarter,  which is  included  in Loss on  Digital:Convergence
License  Contract in the  consolidated  statements  of  operations  for the year
ending December 31, 2001. Any future  revenues  related to this contract will be
recorded as payments are received.

AIRCLIC, INC. RELATIONSHIP

     On July 3,  2001,  NeoMedia  signed a  non-binding  letter of  intent  with
AirClic, Inc. to cross-license the companies'  intellectual  property. The terms
of the proposed agreement called for NeoMedia to: (i) acquire an equity interest
in AirClic, and (ii) issue a significant equity interest in NeoMedia to AirClic,
which interest would likely have exceeded 50% of NeoMedia's  outstanding  equity
securities.  Further  terms of the  agreement  called  for  NeoMedia  to acquire
AirClic's Connect2  comparison  shopping business unit, which was to be combined
with NeoMedia's Qode business unit. AirClic has loaned NeoMedia $500,000 under a
secured  note due on the  earlier  of (i) the date on which  NeoMedia  raises $5
million in equity  financing from a source other than AirClic,  (ii) a change in
control of NeoMedia, or (iii) January 11, 2002.

     During the  negotiation  of a  definitive  set of  agreements  between  the
companies,  it was  determined  that  the  consummation  of the  transaction  as
provided  in the  non-binding  letter of intent  would  not be  completed.  As a
result, additional notes aggregating $1,500,000 will not be executed between the
companies.

     On September 6, 2001,  AirClic  filed suit against the Company in the Court
of Common Pleas,  Montgomery  County, PA, for breach of contract relating to the
July 3, 2001  non-binding  letter of intent  signed by the Company and  AirClic.
AirClic claims that the Company violated express  representations and warranties
relating to the Company's assets and state of business affairs.  AirClic seeks a
judgment to accelerate  repayment of the $500,000 note due January 11, 2002, and
to relieve  AirClic from any  obligation to make further loans to the Company as
outlined  in the letter of intent.  AirClic  has also  filed  suit  against  the
Company  in the  United  States  District  Court  for the  Eastern  District  of
Pennsylvania.  In this second action,  AirClic seeks a declaration  that certain
core intellectual  property  securing the note issued by us to AirClic,  some of
which is  patented  and others for which a patent  application  is  pending,  is
invalid and in the public domain. (see "Legal Proceedings" in Footnote 11)


ADVERTISING EXPENSE

                                      F-13
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


During the year ended  December  31, 2001,  the Company  entered into a one-year
license  agreement with About.com,  Inc. to provide the Qode Universal  Commerce
SolutionTM to About.com's  users. In June 2001,  About.com ran banner ads on its
site  promoting  the  Qode  Universal  Commerce  SolutionTM.  As  part  of  this
transaction,  About.com  received  452,489  shares of our  Series B  Convertible
Preferred  Stock,  par value  $0.01 per share,  of the  500,000  total  Series B
Convertible   Preferred   shares  the  Company  is  authorized   to  issue,   in
consideration for these promotions.  The Company recorded an advertising expense
of $882,000  associated with this transaction in sales and marketing  expense in
the  accompanying  consolidated  statements of  operations.  The agreement  with
About.com was terminated on August 31, 2001, in  anticipation of the sale of the
Qode assets to the Finx Group.

SEVERANCE EXPENSE

     During  the third  quarter  of 2001,  the  Company  laid off 55  employees,
including  the  chief  technology  officer  and  the  chief  operating  officer,
representing  a 60%  decrease in its total  workforce.  In  connection  with the
layoffs,  the Company  recognized a severance expense of approximately  $494,000
during the third quarter of 2001. The layoffs were part of a  company-wide  cost
reduction initiative.


EXECUTIVE INCENTIVE EXPENSE

     In June 2001, the Company's  compensation committee approved an adjustment,
relating to the  Digital:Convergence  patent license fees, to the 2000 executive
incentive plan that reduced the bonus payout by approximately $1.1 million. This
was recorded as a negative expense in the accompanying consolidated statement of
operations.

WARRANT REPRICING PROGRAM

          In  May  2001,  the  Company   re-priced   approximately  1.5  million
additional  warrants subject to a limited exercise period and other  conditions,
including  certain warrants issued in connection with NeoMedia's  initial public
offering in 1996,  which will expire at the end of 2001.  The repricing  program
allowed  the warrant  exercise  price to be reduced to 33 percent of the closing
sale price of the Company's common stock (subject to a minimum) on the day prior
to the date of exercise  for a period of six months from the date the  repricing
program began.  The exercise of the warrants and sale of the  underlying  common
stock was at the  discretion  of a broker  selected by the  Company,  within the
parameters of the repricing arrangement. In accordance with FASB Interpretation,
FIN 44, Accounting for Certain  Transactions  Involving Stock Transactions,  the
award was  accounted for as variable  from the date of  modifications  on May 1,
2001.  Accordingly,  $181,000 was recorded as compensation  in the  accompanying
consolidated statement of operations.

WARRANT ISSUANCE

     In June 2001,  the Board of  Directors'  approved  the  issuance of 414,000
warrants for Charles W. Fritz,  NeoMedia's  Chairman,  CEO,  and  president at a
exercise price of $2.09.  However, the warrants were not issued during 2001. The
Company does not intend to issue these warrants in 2002.

VALUATION AND RESERVES

     Allowance for doubtful  accounts  activity for the years ended December 31,
2001 and 2000 was as follows:

                                                 (dollars in thousands)
                                                 -----------------------
                                                    2001       2000
                                                    ----       ----
Beginning balance.................................     $484       $888

Bad debt expense..................................     (169)       303

Write-off of uncollectible accounts...............      (68)       (17)
Collection of accounts previously written off.....
                                                       (182)       (75)

                                      F-14
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Adjustment to general allowance...................        -       (615)
                                                 -----------------------
  Ending balance..................................      $65       $484
                                                 =========== ===========


INVENTORIES

     Inventory  is stated at the lower of cost or market,  and at  December  31,
2001,  2000 and 1999 was  comprised  of  purchased  computer  technology  resale
products. Cost is determined using the first-in, first-out method.

PROPERTY AND EQUIPMENT

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

     Depreciation  expense was  $249,000,  $263,000  and  $367,000 for the years
ended December 31, 2001, 2000 and 1999 respectively.

CAPITALIZED AND PURCHASED SOFTWARE COSTS AND OTHER INTANGIBLE ASSETS

     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.

     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 financial statements.

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

     Intangible  assets  activity for the years ended December 31, 2001 and 2000
was as follows:

                                                  DECEMBER 31,
                                                  ------------
                                                  2001            2000
                                                  ----            ----
         Beginning Balance                      $9,043         $ 5,296

                                      F-15
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Additions                               2,493           5,837
         Intangible Assets Moved
             To "Assets Held for Sale"         (1,027)             ---
         Amortization/Write-offs               (6,181)          (2,090)
                                               -------         --------
         Ending Balance                        $4,328          $ 9,043
                                               =======         ========

     Amortization  expense of intangible  assets was  $3,120,000  $2,073,000 and
$1,662,000 for the years ended December 31, 2001, 2000 and 1999, respectively.

LOSS ON IMPAIRMENT OF ASSETS

     In connection  with the Company's  reduction in work force during the third
quarter  2001,  the  Company  sold the  rights to its Pacer  Advantage  end-user
software  product for $40,000 cash.  Accordingly,  the Company wrote off all its
assets  aggregating $2.9 million related to the MLM/Affinity  program  including
assets pertaining to the purchase of Daystar  services,  LLC and a customer list
purchased  in 1998.  Revenue  related to the  MLM/Affinity  program was $92,000,
$259,000,  and $0 for the  years  ended  December  31,  2001,  2000,  and  1999,
respectively.  Net loss  allocated  to the  MLM/Affinity  program was  $832,000,
$1,075,000,  and $0 for the years  ended  December  31,  2001,  2000,  and 1999,
respectively.

EVALUATION OF LONG-LIVED ASSETS

     The Company  periodically  performs an evaluation of the carrying  value of
its long-lived assets,  including intangible assets, in accordance with SFAS No.
121  "Accounting  for the  Impairment  of Long-Lived  Assets and for  Long-Lived
Assets to Be Disposed Of". This evaluation consists primarily of a comparison to
the future  undiscounted net cash flows from the associated assets in comparison
to the carrying value of the assets.  As of December 31, 2001, the Company is of
the opinion that no impairment of its long-lived assets has occurred.

INCOME TAXES

     In accordance  with SFAS No. 109,  "Accounting  for Income  Taxes",  income
taxes are accounted for using the assets and liabilities approach.  Deferred tax
assets  and  liabilities   are  recognized  for  the  future  tax   consequences
attributable to differences  between the financial statement carrying amounts of
existing assets and liabilities,  and their  respective tax bases.  Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be  recovered  or  settled.  Deferred  tax  assets are  reduced  by a  valuation
allowance  when, in the opinion of  management,  it is more likely than not that
some  portion or all of the  deferred  tax assets  will not be  recognized.  The
Company has recorded a 100%  valuation  allowance as of December 31, 2001,  2000
and 1999.

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:
<TABLE>
<CAPTION>

                                           DECEMBER 31, 2001    DECEMBER 31, 2000     DECEMBER 31, 2000
                                           -----------------    -----------------     -----------------
<S>                                                <C>                  <C>                   <C>

     Outstanding Stock Options..............       4,214,000            4,294,000             3,418,000
     Outstanding Warrants...................       3,240,000            3,968,000             2,676,000
</TABLE>

     ..............................................
FINANCIAL INSTRUMENTS

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

CONCENTRATIONS OF CREDIT RISK

                                      F-16
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     Financial  instruments that potentially  subject NeoMedia to concentrations
of credit risk consist  primarily of trade accounts  receivable  with customers.
Credit risk is  generally  minimized as a result of the large number and diverse
nature of NeoMedia's customers,  which are located throughout the United States.
NeoMedia  extends  credit to its customers as determined on an individual  basis
and has included an allowance  for  doubtful  accounts of $65,000,  $484,000 and
$888,000 in its December 31, 2001,  2000 and 1999  consolidated  balance sheets,
respectively.   NeoMedia   had  net   sales  to  one  major   customer   in  the
telecommunications industry (Ameritech) of $2,983,000, $5,824,000 and $5,843,000
during the years ended December 31, 2001, 2000 and 1999, respectively, resulting
in trade accounts receivable of $1,499,000, $229,000 and $225,000 as of December
31, 2001, 2000 and 1999,  respectively.  In addition,  a single company supplies
the equipment and software, which is re-marketed to this customer.  Accordingly,
the loss of this supplier or customer would materially adversely affect NeoMedia
SI. Revenue  generated from the remarketing of computer  software and technology
equipment has accounted for a significant percentage of NeoMedia's revenue. Such
sales accounted for approximately 73%, 66% and 78% of NeoMedia's revenue for the
years ended December 31, 2001, 2000 and 1999, respectively. NeoMedia had license
fees to one major customer (DC) of $7,768,000 during the year ended December 31,
2000, resulting in an accounts receivable of $2,500,000 as of December 31, 2000.
Revenue generated from this licensing  agreement accounted for approximately 28%
of  NeoMedia  revenue  for the year ended  December  31,  2000.  No revenue  was
recognized under this agreement during the year ended December 31, 2001.

RECLASSIFICATIONS

     Certain  reclassifications  have been  made to the 1999 and 2000  financial
statements to conform to the 2001 presentation.

COMPREHENSIVE INCOME

      For the years ended December 31, 2001,  2000 and 1999, the Company did not
have other comprehensive  income and therefore has not included the statement of
comprehensive income in the accompanying financial statements.

RECENT ACCOUNTING PRONOUNCEMENTS

     On  July  21,  2001,  the  Financial   Accounting  Standards  Board  issued
Statements of Financial  Accounting  Standards No. 141 (SFAS No. 141), "Business
Combinations",  and No.  142  (SFAS No.  142),  "Goodwill  and Other  Intangible
Assets." SFAS No. 141 addresses financial  accounting and reporting for goodwill
and other intangible  assets acquired in a business  combination at acquisition.
SFAS No. 141  requires  the  purchase  method of  accounting  to be used for all
business  combinations  initiated after June 30, 2001 and  establishes  specific
criteria for the recognition of intangible assets separately from goodwill; SFAS
No. 142  addresses  financial  accounting  and  reporting for goodwill and other
intangible  assets subsequent to their  acquisition.  SFAS No. 142 provides that
goodwill and intangible  assets which have  indefinite  useful lives will not be
amortized but rather will be tested at least  annually for  impairment.  It also
provides that  intangible  assets that have finite useful lives will continue to
be amortized over their useful lives,  but those lives will no longer be limited
to forty years.  SFAS No. 141 is effective for all business  combinations  after
June 30, 2001. The provisions of SFAS No. 142 are effective beginning January 1,
2002. The Company is considering  the provisions of SFAS No. 141 and No. 142 and
at present has not  determined  the impact of adopting SFAS No. 141 and SFAS No.
142. The Company  does not expect the adoption to have a material  impact to the
Company's financial position or results of operations.

    In October 2001,  the FASB  recently  issued SFAS No. 143,  "Accounting  for
Asset Retirement Obligations," which requires companies to record the fair value
of a liability for asset retirement  obligations in the period in which they are
incurred. The statement applies to a company's legal obligations associated with
the retirement of a tangible long-lived asset that results from the acquisition,
construction,  and  development or through the normal  operation of a long-lived
asset. When a liability is initially recorded,  the company would capitalize the
cost,  thereby  increasing  the  carrying  amount  of  the  related  asset.  The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value.  Upon  settlement of
the liability,  the obligation is settled at its recorded  amount or the company

                                      F-17
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


incurs a gain or loss.  The  statement is effective  for fiscal years  beginning
after June 30, 2002. The Company does not expect the adoption to have a material
impact to the Company's financial position or results of operations.

    In  October  2001,  the  FASB  issued  SFAS  No.  144,  "Accounting  for the
Impairment  or Disposal of  Long-Lived  Assets".  Statement  144  addresses  the
accounting  and reporting for the  impairment or disposal of long-lived  assets.
The statement  provides a single  accounting  model for long-lived  assets to be
disposed  of.  New  criteria  must be met to  classify  the  asset  as an  asset
held-for-sale.  This  statement  also  focuses  on  reporting  the  effects of a
disposal of a segment of a business.  This  statement  is  effective  for fiscal
years  beginning  after  December  15,  2001.  The  Company  does not expect the
adoption  to have a  material  impact to the  Company's  financial  position  or
results of operations.

3.   LIQUIDITY

     During the years ended  December 31, 2001,  2000 and 1999 the Company's net
loss totaled approximately $25,469,000, $5,409,000 and $10,472,000 respectively.
As of December 31, 2001 the Company had an accumulated  deficit of approximately
$63,344,000  and  approximately  $134,000 in unrestricted  cash balances.  As of
December 31, 2001,  the working  capital was negative  $5,163,000  and cash flow
from operations was negative $5,202,000. The Company's unrestricted cash balance
as of March 12, 2002 was approximately $134,000 (unaudited).

     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 or debt,
or be in 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.

     Subsequent to December 31, 2001,  the Company has  undertaken the following
initiatives:

     o     During  February  2002,  the  Company  sold 19 million  shares of its
           common  stock at $0.17 per share in  exchange  for  promissory  notes
           maturing at the earlier of i) 90 days from the date of  issuance,  or
           ii) 30 days  from  registration  of the  shares.  Proceeds  from this
           transaction will be $3,230,000.

     o     During  March 2002,  the Company  repriced  1.2 million of its common
           stock  warrants  for a period of six  months.  During the term of the
           warrant  repricing  program,  participating  holders are  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 NASDAQ  Small Cap Market on the trading  date
           immediately preceding the date of exercise.

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.  To this end,  the Company has retained the law
firm of Baniak Pine & Gannon to pursue potential license  agreements,  and plans
to implement a sales strategy for PaperClickTM upon receipt of adequate funding.

4.   CONTRACT ACCOUNTING

     NeoMedia  periodically  enters  into  long-term  software  development  and
consultation  agreements with certain  customers.  As of December 31, 2001, 2000
and 1999,  certain contracts were not completed and information  regarding these
uncompleted contracts was as follows:

                                      F-18
<PAGE>

<TABLE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>


                                                                        2001            2000
                                                                        ----            ----
<S>                                                                  <C>            <C>

Costs Incurred on Contracts........................                  $    50        $    321

Profit to Date.....................................                       15           1,087
                                                                     --------       ---------

    Total Costs and Estimated Earnings.............                       65           1,408

Less - Billings to Date............................                      (35)         (1,368)
                                                                     --------       ---------

    Costs and Estimated Earnings in Excess of                        $    30        $     40

Billings...........................................                       30              40
                                                                     ========       =========

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

                                                                        2001            2000
                                                                        ----            -----
Costs and Estimated Earnings in Excess of                            $    43         $    89
Billings.......

Billing in Excess of Costs and Estimated
Earnings.........                                                        (13)            (49)
                                                                     --------       ---------

Costs and Estimated Earnings in Excess of                            $    30          $   40
Billings, Net                                                        ========         =======


5.   PROPERTY AND EQUIPMENT

     As of December 31, 2001, 2000 and 1999, property and equipment consisted of
the following:

                                                                            2001          2000
                                                                      ------------    --------
                                                                         (IN THOUSANDS)
     Furniture and fixtures......................................     $     643       $    314
     Leasehold improvements......................................           109            124
     Equipment...................................................           326            504
                                                                      ---------       --------
          Total..................................................         1,078            942
     Less accumulated depreciation...............................          (608)          (577)
     Less property and equipment held for sale...................          (265)           ---
                                                                      ---------       --------
          Total property and equipment, net......................      $    205       $    365
                                                                      =========       ========

6.   CAPITALIZED  PATENTS,  CAPITALIZED AND PURCHASED  SOFTWARE COSTS, AND OTHER
     INTANGIBLE ASSETS

     As of  December  31, 2001 and 2000 ,  intangible  assets  consisted  of the
     following:

                                                                       2001        2000
                                                                       ----        ----
                                                                         (IN THOUSANDS)
      Capitalized and purchased software costs...............       $ 8,520         $ 6,418
      Customer list..........................................           ---           1,143
      Repurchased license rights and other...................           ---           3,520
      Patents and related costs..............................         3,125           3,026
                                                                    -------         --------
      Total..................................................        11,645          14,107
      Less accumulated amortization:
      Capitalized and purchased software costs                       (5,665)         (3,590)
      Customer list                                                       -            (609)
      Repurchased license rights and other                                -            (500)
      Patents and related costs                                        (625)           (365)
      Less capitalized software held for                             (1,027)             --
      sale...................................................        -------        --------

                                      F-19
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      Total intangible assets, net...........................       $ 4,328         $ 9,043
                                                                    ========        ========
</TABLE>

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

7.   FINANCING AGREEMENTS

     The Company has entered into two separate  financing  agreements during the
years ended December 31, 2001 and 2000.

     IBM COMMERCIAL  CREDIT.  During the years ended December 31, 2001 and 2000,
the Company had an agreement with IBM Commercial Credit that provided short-term
financing  for certain  computer  hardware  and  software  purchases.  Under the
agreement,  there were generally no financing charges for amounts paid within 30
or 45 days,  depending  on the  vendor  used to source the  product.  Under this
agreement  there were two  separate  lines of credit.  The first line had credit
availability  of  $750,000.  The second  line had credit  availability  of up to
$2,000,000,  based upon the Company's  customer  credit rating.  Borrowings were
collateralized   by  all  inventory,   property  and  equipment,   and  accounts
receivable.  In addition,  as of December 31, 2000, a $750,000  letter of credit
was issued to the benefit of the  commercial  finance  company.  At December 31,
2000,  NeoMedia  collateralized  this letter with a  restricted  cash balance of
$750,000.  This line of credit  during  2001.  As of December 31, 2001 and 2000,
amounts  due under this  financing  agreement  included  in  "Amounts  due under
financing agreements" were $0 and $1,101,000, respectively.

     GE ACCESS.  The  Company  has an  agreement  with GE Access  that  provides
short-term financing for certain computer hardware and software purchases. Under
the agreement,  there are generally no financing charges for amounts paid within
30 days. Under this agreement there are two separate lines of credit.  The first
line has credit  availability  of up to $1,500,000 as of December 31, 2001.  The
second line has unlimited credit availability, based upon the Company's customer
credit rating.  Under this second agreement,  the financing company finances the
purchase  pending  credit  approval of  NeoMedia's  customer.  Payments are then
remitted  directly to the  finance  company,  at which time the finance  company
forwards  to  NeoMedia  the  Company's  margin  on  the  sale.   Borrowings  are
collateralized   by  all  inventory,   property  and  equipment,   and  accounts
receivable.  As of December 31, 2001 and 2000,  amounts due under this financing
agreement  included in "Amounts due under financing  agreements" were $2,283,000
and $13,000, respectively.


8.   LONG-TERM DEBT

     As of  December  31,  2001  and  2000,  long-term  debt  consisted  of  the
following:


                                                                   2001    2000
                                                                   ----    ----
                                                                  (IN THOUSANDS)
Note payable to International Digital Scientific, Inc. (IDSI),
     non-interest bearing with interest imputed at 9%,
     due with minimum monthly installments of $16,000 through
     March 2005...................................................  $624  $ 816
Less:  unamortized discount.......................................   (84)  (140)
                                                                     ---   ----

     Total long-term debt.........................................   540    676
Less:  current portion............................................  (150)  (137)
                                                                    ----   ----

Long-term debt, net of current portion............................  $390  $ 539
                                                                     ----  =====

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

                                                                  (IN THOUSANDS)

     2002...........................................................   $   192

                                      F-20
<PAGE>

     2003...........................................................       192

     2004...........................................................       192

     2005...........................................................        48

     2006...........................................................      ----


     Total..........................................................   $   624


     In October  1994,  the Company  purchased,  via seller  financing,  certain
computer software from IDSI. The aggregate purchase price was $2,000,000 and was
funded by the seller with an uncollateralized note payable, without interest, in
an amount  equal to the greater of: (i) 5% of the  collected  gross  revenues of
NeoMedia  Migration for the  preceding  month;  or (ii) the minimum  installment
payment as defined,  until paid in full. The minimum  installment payment is the
amount  necessary  to provide an average  monthly  payment  for the most  recent
twelve  month  period of $16,000  per month.  The  present  value of  $2,000,000
discounted at 9% (the Company's then incremental  borrowing rate) for 125 months
was approximately  $1,295,000,  the capitalized cost of the assets acquired. The
discount is being  accreted to interest  expense over the term of the note.  The
software  acquired was amortized over its estimated  useful life of three years.
As of  December  31,  2001 and 2000,  the  balance of the note  payable,  net of
unamortized discount, was $540,000 and $676,000, respectively.


9.   INCOME TAXES

     For the years ended  December 31, 2001,  2000 and 1999,  the  components of
income tax expense were as follows:

                                  2001       2000       1999
                                  ----       ----       ----
                                        (IN THOUSANDS)
Current                          $   -      $   -      $   -

Deferred                         $   -      $   -      $   -
                                  ----       ----       ----
Income tax expense/(benefit)     $   -      $   -      $   -
                                  ====       ====       ====

     As of December 31, 2001, 2000 and 1999, the types of temporary  differences
between the tax basis of assets and liabilities  and their  financial  reporting
amounts  which  gave rise to  deferred  taxes,  and their  tax  effects  were as
follows:

<TABLE>

                                                                2001      2000       1999
                                                                ----      ----       ----
                                                                     (IN THOUSANDS)
<S>                                                          <C>         <C>         <C>

Accrued employee benefits ................................   $    62     $   30      $   31
Provisions for doubtful accounts .........................        26         182         337
Deferred revenue .........................................        --          13          -
Capitalized software development costs and fixed assets...       676         284          98
Net operating loss carryforwards (NOL) ...................    22,916      15,021      12,724
Research and Development Credit                                   --          --          91
Accruals .................................................       470         864          51
Loss on disposal of Qode business unit ...................     1,060          --          --
Other ....................................................         8          --          17
Alternative minimum tax credit carryforward ..............        45          45          45
                                                             -------     -------     --------
Total deferred tax assets ................................    25,255      16,456      13,385
Valuation Allowance                                          $25,255)    (16,456)    (13,385)
                                                             -------     -------     --------
Net deferred income tax asset ............................       $--     $    --     $    --
                                                             =======     =======     ========
</TABLE>

                                      F-21
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     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,  2001,  2000 and 1999,  the  income tax
benefit differed from the amount computed by applying the statutory federal rate
of 34% as follows:

<TABLE>
                                                               2001       2000       1999
                                                               ----       ----       ----
                                                                     (IN THOUSANDS)
<S>                                                           <C>      <C>       <C>

Benefit at federal statutory rate ........................... $8,659)  $(1,839)  $(3,561)
State income taxes, net of federal .......................... (1,009)     (196)     (380)
Foreign income taxes, net of federal ........................     --        --        61
Exercise of non-qualified stock options .....................    (17)     (176)   (1,874)
Permanent difference - write-off of Digtal Convergence stock.  1,190        --        --
Permanent and other, net ....................................   (304)     (860)      (12)
Change in valuation allowance ...............................  8,799     3,071     5,766
                                                              -------  --------  --------
Income tax expense/(benefit) ................................ $   --   $    --   $    --
                                                              =======  ========  ========
</TABLE>

     As of December 31, 2001,  NeoMedia had net operating loss carryforwards for
federal tax purposes totaling  approximately  $57.3 million which may be used to
offset future taxable  income,  or, if unused expire between 2011 and 2020. As a
result of certain of  NeoMedia's  equity  activities  occurring  during the year
ended  December  31,  1997,  NeoMedia  anticipates  that the annual usage of its
pre-1998 net operating loss carryforwards may be further restricted  pursuant to
the provisions of Section 382 of the Internal Revenue Code.

10.  TRANSACTIONS WITH RELATED PARTIES

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

     In June 1999,  the  Company  sold a license  for the right to  utilize  its
Neolink  Information  Server to Daystar Services L.L.C.  ("Daystar") a Tennessee
limited liability company,  owned in part by an officer and one of the Company's
board members,  for $500,000.  The original  business purpose of the sale was to
generate revenue through the sale of an exclusive  license to Daystar.  In April
2000,  in  anticipation  of either a  potential  acquisition  of the  Company by
Digital:Convergence  ("DC") (which  subsequently did not occur),  or a long-term
intellectual  property license with DC, the Company purchased  substantially all
the assets of Daystar, including the rights to the license it sold to Daystar in
1999, for approximately $3.5 million of our common stock. In order to enter into
a 10-year  intellectual  property  license  agreement  with DC, the  Company was
required to re-purchase  the exclusive  license  agreement.  Additional  Daystar
assets purchased were to be employed in our MLM/Affinity  licensing program. The
assets  purchased  were  recorded as  intangible  assets at  approximately  $3.5
million on the accompanying  consolidated  balance sheets.  The Company believes
this transaction was conducted on terms as good as favorable as those would have
been derived from an arm's length negotiation.

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

     During the years ended  December 31, 1999 and 1998, the Company leased from
William E. Fritz a trade show booth for rental  payments  totaling  $31,000  and
$34,000, respectively. The lease expired during 1999.

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

                                      F-22
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     During October 2001, the Company borrowed $4,000 from Charles W. Fritz, its
Chairman and Chief Executive  Officer,  under a note payable bearing interest at
10% per annum with a term of six months.

     The Company  believes  this  transaction  was conducted on terms as good as
favorable as those would have been derived from an arm's length negotiation.

11.  COMMITMENTS AND CONTINGENCIES

     NeoMedia  leases its office  facilities  and  certain  office and  computer
equipment under various operating leases. These leases provide for minimum rents
and generally  include  options to renew for additional  periods.  For the years
ended December 31, 2001, 2000 and 1999,  NeoMedia's rent expense was $1,246,000,
$1,067,000 and $1,268,000, respectively.

     The  following is a schedule of the future  minimum  lease  payments  under
non-cancelable operating leases as of December 31, 2001:



                                                             PAYMENTS
                                                             --------
                                                          (IN THOUSANDS)
     2002............................................      $     844
     2003............................................            473
     2004............................................             56
     2005............................................              2
     2006............................................             --
                                                               -----
     Total...........................................       $  1,375
                                                             =======
     Of the $844,000 minimum lease payment due in 2002,  approximately  $205,000
relates to leases for Qode Universal  Commerce  Solution  equipment that will be
assumed by the Finx Group,  Inc. upon consummation of The Finx Group's letter of
intent with the Company.

     As of  December  31,  2001,  none of the  Company's  employees  were  under
contract.  Additionally,  the Company was not party to any long-term  consulting
agreements as of December 31, 2001.

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.

     On  September 6, 2001,  AirClic,  Inc.  ("AirClic")  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 under the terms of a letter of intent  entered into between  AirClic
and the Company. The letter of intent was subsequently abandoned on the basis of
the Company's alleged breach of certain  representations  made by the Company in
the promissory note issued by the Company to AirClic in respect of such advance.
The note  issued by the  Company  in respect of  AirClic's  $500,000  advance is
secured by substantially all of the Company's intellectual  property,  including
its core physical  world-to-Internet  technologies.  If the Company is deemed to
have defaulted under the note, and does not pay the judgment,  AirClic, which is
one  of the  NeoMedia's  key  competitors,  could  acquire  the  Company's  core
intellectual  property,  which  would  have a  material  adverse  effect  on the
Company's business,  prospects,  financial condition, and results of operations.
The  Company  is   vigorously   defending   this  lawsuit  and  has   interposed
counterclaims  against AirClic. The lawsuit is in its preliminary stages and, as
such, at this time it is difficult to assess the outcome. Whether or not AirClic
is  successful  in  asserting  its  claims  that the  Company  breached  certain
representations made by the Company in the note, the note became due and payable
in accordance  with its terms on January 11, 2002.  Based on the cash  currently
available to the Company,  payment of the note and related interest would have a
material  adverse effect on the Company's  financial  condition.  If the Company
faisl to pay such note, AirClic could proceed against the Company's intellectual


                                      F-23
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

property  securing the note,  which would have a material  adverse effect on the
Company's business,  prospects,  financial condition, and results of operations.
The Company is  aggressively  seeking  bridge  financing to enable it to pay the
principal and interest  remaining under the note following the resolution of the
counterclaims  against  AirClic.  The Company  has not  accrued  any  additional
liability over and above the note payable and related accrued interest.

     AirClic  has also  filed suit  against  the  Company  in the United  States
District Court for the Eastern District of Pennsylvania.  In this second action,
AirClic seeks a declaration that certain core intellectual property securing the
note issued by the Company to AirClic,  some of which is patented and others for
which a  patent  application  is  pending  is  invalid  and  unenforceable.  Any
declaration that the Company's core patented or patentable technology is invalid
and  unenforceable  would  have a  material  adverse  effect  on  the  Company's
business, prospects, financial condition, and results of operations. The Company
is  vigorously  defending  against  this  lawsuit as well.  The  Company has not
accrued any liability in connection with this matter.

     On June 26,  2001,  the  Company  filed a $3  million  lawsuit  in the U.S.
District  Court,   Northern   District  of  Texas,   Dallas  Division,   against
Digital:Convergence  Corporation  for breach of contract  regarding a $3 million
promissory  note due on June 24, 2001 that was not paid.  The Company is seeking
payment of the $3 million note plus interest and attorneys fees. The Company has
not accrued any gain contingency related to this matter.

     In April 2001,  the former  President  and  director  of  NeoMedia  filed a
lawsuit against the Company and several of its directors.  The suit was filed in
the Circuit Court of the Twentieth Judicial Circuit for Sarasota,  Florida.  The
claim alleges the individual was fraudulently  induced into accepting employment
and that  the  Company  breached  the  employment  agreement.  The  individual's
employment  with the Company  ended in January  2001.  The Company  believes the
claim is without merit and is vigorously defending itself. Final outcome of this
matter is uncertain  and a range of loss cannot  reasonably  be  estimated.  The
Company has accrued  approximately  $347,000 in severance and incentive payments
payable to Mr.  Goins.  The Company has not  accrued  any  additional  liability
related to the suit.

     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.  The Company
has entered  into a letter of intent with the Finx Group,  Inc. to sell  certain
assets and  liabilities  relating to Qode. As part of the letter of intent,  the
Finx Group will assume all  liabilities  up to $138,000  relating to the Ripfire
contract.   Accordingly,  the  Company  has  not  accrued  a  liability  in  the
accompanying  financial statements.  The Company,  along with the Finx Group, is
currently negotiating settlement of this matter.

     On October 3, 2001, Headway Associates,  Ltd. filed a complaint for damages
in the Circuit Court of the  Seventeenth  Judicial  Circuit for Broward  County,
Florida.  Headway  Associates,  Ltd. is seeking payment of all amounts due under
the terms the lease  agreement of the Ft.  Lauderdale  office of NeoMedia's Qode
business unit. The lease  commenced on March 3, 2000 and terminates on March 31,
2005. On February 25, 2002,  Headway agreed to accept $100,000 cash payment over
a two-month  period for settlement of all past-due and future amounts owed under
the lease. This amount is accrued in the accompanying financial statements.

     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.
The  Company has  entered  into a letter of intent with the Finx Group,  Inc. to
sell certain assets and  liabilities  relating to Qode. As part of the letter of
intent,  the Finx Group will assume all  liabilities up to $530,000  relating to
the Orsus contract.  Accordingly, the Company has not accrued a liability in the
accompanying  financial statements.  The Company,  along with the Finx Group, is
currently negotiating settlement of this matter.

     On March 20, 2002, IOS Capital,  Inc. filed a summons  seeking full payment
of  approximately  $38,700  relating  to past due and future  payments  under an
office  equipment  lease.  The Company has returned the equipment and intends to
settle the past due amounts. As of December 31, 2001, the Company had recorded a
liability of approximately $10,000 relating to this matter.

                                      F-24
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


12.  DEFINED CONTRIBUTION SAVINGS PLAN

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

13.  EMPLOYEE STOCK OPTION PLAN

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

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

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

     For grants in 2001, 2000 and 1999, the following assumptions were used: (i)
no expected  dividends;  (ii) a risk-free interest rate of 4.5% for 2001, 6% for
2000 and 5% for 1999;  (iii) expected  volatility of 135% for 2001, 80% for 2000
and 70% for 1999 and (iv) an  expected  life of 5 years for  options  granted in
2001 and 4 years for  options  granted  in 2000 and  1999.  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 the 1998 Stock Option Plan.

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

                                                     2001        2000       1999
                                                     ----        ----       ----
NET LOSS
     As reported..............................    $25,469      $5,409    $10,472
     Pro forma................................    $27,888      $7,498    $11,731
NET LOSS PER SHARE
     As reported..............................      $1.55       $0.39     $ 1.01
     Pro forma................................      $1.70       $0.54     $ 1.13

                                      F-25
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



     A summary of the status of  NeoMedia's  1996 and 1998 stock option plans as
of and for the years ended December 31, 2001, 2000 and 1999 is as follows:

<TABLE>
<CAPTION>


                                                2001                     2000                    1999
                                         -----------             ------------            ------------
                                                   WEIGHTED                 WEIGHTED                WEIGHTED
                                                   AVERAGE                  AVERAGE                 AVERAGE
                                                   EXERCISE                 EXERCISE                EXERCISE
                                       SHARES        PRICE       SHARES      PRICE       SHARES       PRICE
                                        (IN                       (IN                     (IN
                                      THOUSANDS)               THOUSANDS)               THOUSANDS)
<S>                                        <C>      <C>          <C>         <C>         <C>         <C>


Outstanding at beginning of year           4,294    $ 4.71       3,418       $ 4.43      3,164       $ 4.40
Granted .........................          3,499      2.00       1,192         4.87      1,721         4.71
Exercised .......................            (38)     3.60        (170)        2.83       (599)        1.77
Forfeited .......................         (3,541)     4.13        (146)        5.78       (868)        5.79
                                          ------    ------       -----       ------      -----       ------
Outstanding at end of year ......          4,214    $ 2.96       4,294       $ 4.71      3,418       $ 4.43
                                          ======    ======       =====       ======      =====       ======



 Options exercisable at                    2,452                 2,140                   1,398
 year-end.......................
 Weighted-average fair value of
 options granted
 during the year................          $ 1.81                $ 3.05                  $ 2.68
 granted during the year
 Available for grant at the end
 of the year....................           4,158                 4,116                   5,162
</TABLE>

     The following table summarizes  information  about NeoMedia's stock options
outstanding as of December 31, 2001:

<TABLE>
<CAPTION>

                          OPTIONS OUTSTANDING                       OPTIONS EXERCISABLE
----------------------------------------------                    -------------------------
                                       WEIGHTED-        WEIGHTED-                   WEIGHTED-
                                        AVERAGE          AVERAGE                     AVERAGE
      RANGE OF            NUMBER       REMAINING        EXERCISE        NUMBER      EXERCISE
   EXERCISE PRICES      OUTSTANDING  CONTRACTUAL LIFE    PRICE      EXERCISABLE       PRICE
 -------------------  -------------- ----------------  ---------- ---------------   --------
                       (IN THOUSANDS)                             (IN THOUSANDS)
<S>                        <C>         <C>           <C>              <C>         <C>

$    -- to $  0.84         1,441       9.4 years     $  0.24            667       $  0.28
   1.88 to    2.91           767       8.0 years        2.52            429          2.52
   3.25 to    4.98         1,055       7.9 years        3.81            619          3.76
   5.06 to    7.88           836       7.2 years        6.15            632          6.25
   8.44 to   10.88           115       7.7 years        8.89            105          8.92
  ----------------         -----       ---------     -------          -----       -------
   $0.84 to $10.88         4,214       8.3 years     $  2.96          2,452       $  3.46
  ================         =====       =========     =======          =====       =======
</TABLE>

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

                                      F-26
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     In October 2000,  the Company  issued 80,000  warrants to buy shares of the
Company's  common stock to an outside  consultant  at a price of $4.13 per share
for  consulting  services  rendered,  and recognized  approximately  $253,000 in
expense in its 2000 consolidated  financial  statements.  These warrants vest in
the same manner as the  employee  options  granted  under the 1998 Stock  Option
Plan.  All these  warrants  were  outstanding  at December  31,  2001.  Of these
warrants, 16,000 were vested at December 31, 2001.

     In September  2001, the Company issued 150,000 options to buy shares of the
Company's  common stock to an outside  consultant  at a price of $0.20 per share
for consulting services rendered,  and recognized $18,800 in expense in the 2001
consolidated  financial  statements.  The  warrants  vest 40% upon grant and the
remaining 60% one year from the grant date. As of December 31, 2001, all 150,000
warrants were outstanding and 60,000 were vested.

WARRANTS

Warrant activity as of December 31, 2001, 2000 and 1999, is as follows:



Balance December 31, 1998         1,639,832

    Warrants issued               1,118,630

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

Balance December 31, 1999         2,676,362

    Warrants issued               1,787,073

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

Balance December 31, 2000         3,967,835

    Warrants issued                 887,512

    Warrants exercised              505,450

    Warrants expired              1,110,000
                                  ---------

Balance December 31, 2001         3,239,897
                                  ---------


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

     During 2001, the Company  re-priced  approximately  1.5 million  additional
warrants  subject to a limited exercise period and other  conditions,  including
certain warrants issued in connection with NeoMedia's initial public offering in
1996,  which  expired at the end of 2001.  The  repricing  program  allowed  the
warrant  exercise price to be reduced to 33 percent of the closing sale price of
the Company's  common stock  (subject to a minimum) on the day prior to the date
of  exercise  for a period of six  months  from the date the  repricing  program
began. The exercise of the warrants and sale of the underlying  common stock was
at the discretion of a broker selected by the Company,  within the parameters of
the repricing  arrangement.  In  accordance  with FASB  Interpretation,  FIN 44,
Accounting for Certain Transactions Involving Stock Transactions,  the award was
accounted  for as  variable  from  the  date of  modifications  on May 1,  2001.
Accordingly, $181,000 was recorded in during 2001 as compensation expense.

     In June 2001,  the Board of  Directors  approved  the  issuance  of 404,900
warrants to an outside  consultant  at an exercise  price of $2.09.  The Company
recognized an expense of  approximately  $742,000  related to this  transaction,
which is  included  in general and  administrative  expense in the  accompanying

                                      F-27
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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 3 years.

     The following table summarizes  information  about warrants  outstanding at
December 31, 2001, all of which are exercisable:

                                                     Weighted
                                                      Average
                                                     Remaining       Average
                 Range of            Warrants        Contractual    Exercise
              Exercise Prices       Outstanding      Life (Years)     Price
              ---------------       -----------      ------------   --------
              $0.10 to $5.50            927              2.6        $2.51
              $5.51 to $6.99          1,558              3.5        $6.02
              $7.00 to $9.99            524              1.0        $8.04
            $10.00 to $15.00            231              1.1       $12.74
                                        ---              ---       ------
             $0.10 to $15.00          3,240              2.7        $5.82
                                      -----              ---        -----

14.  SEGMENT INFORMATION

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

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

     Operational  results for the two segments for the years ended  December 31,
2001, 2000 and 1999 are presented below (in thousands):

<TABLE>
<CAPTION>

                                               NEOMEDIA ISS      NEOMEDIA CIS
                                                (FORMERLY         (FORMERLY
                                               NEOMEDIA ASP)     NEOMEDIA SI)    CONSOLIDATED
                                               -------------     ------------    ------------
<S>                                                 <C>             <C>              <C>

YEAR ENDED DECEMBER 31, 2001
    Net Sales
        Qode Business Unit...................            $13             $-               $13
        Paperclick/Amway/MLM.................            140                              140
        Software and equipment resales
          and related services...............              -          8,002             8,002
                                                       -----       --------           -------
        Total gross sales....................            153          8,002             8,155
        Less: Qode Business Unit.............           (13)              -              (13)
                                                       -----       --------           -------
         Total net sales.....................            140          8,002             8,142
                                                       -----       --------           -------

    Loss from Continuing Operations..........       (17,639)        (1,129)          (18,768)
    Loss from operations of and disposal of
        discontinued business unit...........        (6,701)              -           (6,701)
    Net Loss.................................       (24,340)        (1,129)          (25,469)
</TABLE>

                                      F-28
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

YEAR ENDED DECEMBER 31, 2000
    Net Sales................................        $8,083         $19,482           $27,565
    Net Loss.................................       (4,225)         (1,184)           (5,409)

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


15.  QUARTERLY INFORMATION (UNAUDITED)

     The  summarized  quarterly  financial  data  presented  below  reflects all
adjustments  which, in the opinion of management,  are of a normal and recurring
nature  necessary to present  fairly the results of  operations  for the periods
presented.

<TABLE>
<CAPTION>

                                                           (dollars in thousands except per share data)
                                                ---------------------------------------------------------------
                                                    TOTAL       FOURTH     THIRD      SECOND      FIRST
                                                    -----       ------     -----      ------      -----
<S>                                              <C>          <C>       <C>        <C>         <C>

2001
----
Total net sales..............................       $8,142      $4,459      $908      $1,237     $1,538
Gross profit.................................       ($724)        $597    ($503)      ($404)     ($414)
(Loss) before income taxes
     and discontinued
operations.........                              ($18,768)        $771  ($5,072)   ($11,042)   ($3,425)
Net (loss)...................................    ($25,469)    ($1,692)  ($9,310)   ($11,042)   ($3,425)
Net (loss) per share:
     basic and diluted.......................      ($1.55)     ($0.11)   ($0.60)     ($0.72)    ($0.24)

2000
----
Total net sales..............................      $27,565      $9,875    $4,049      $9,547     $4,094
Gross profit.................................       $9,032      $7,571       $42        $879       $540
(Loss) before income taxes
     and discontinued operations.............     ($5,409)      $2,667  ($3,555)    ($2,085)   ($2,436)
Net (loss)...................................     ($5,409)      $2,667  ($3,555)    ($2,085)   ($2,436)
Net (loss) per share:
     basic and diluted.......................      ($0.39)       $0.21   ($0.25)     ($0.15)    ($0.19)

1999
----
Total net sales..............................      $25,256      $5,091    $5,019      $7,342     $7,804
Gross profit.................................       $2,786      ($156)     ($11)      $1,269     $1,684
(Loss) before income taxes
     and discontinued operations.............    ($10,472)    ($3,881)  ($2,937)    ($1,888)   ($1,766)
Net (loss)...................................    ($10,472)    ($3,881)  ($2,937)    ($1,888)   ($1,766)
Net (loss) per share:
     basic and diluted.......................      ($1.01)     ($0.34)   ($0.27)     ($0.19)    ($0.20)
</TABLE>



16.  COMMON STOCK

     On October 24, 2001,  the Company filed a proxy  statement  with the SEC to
request a shareholder  vote to increase the number of the  Company's  authorized

                                      F-29
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


shares of common stock from  50,000,000  shares to 100,000,000  and increase the
number of the Company's  authorized  shares of preferred  stock from  10,000,000
shares to  25,000,000.  The  shareholder  meeting was held on December 11, 2001.
This  resolution  did not pass as a result of the  failure  to secure  favorable
votes from holders of a majority of the outstanding shares.

     The proxy also requested approval to sell 19,000,000 shares of common stock
to  accredited  investors  in exchange  for limited  recourse  promissory  notes
accruing  interest  at a rate  of 6% per  annum,  with a term of  three  months,
providing for mandatory  repayment of principal in the amount of the proceeds of
any sale of the shares of common stock (or other  securities or assets issued in
respect of such shares of common  stock)  purchased by means of such  promissory
notes,  with sole recourse under the event of default under the promissory  note
limited to recovery of the shares of common stock  purchased (or other assets or
securities  issued in respect  thereof) by means of such  promissory  note. This
resolution  passed.  During  the  fourth  quarter of 2001,  the  Company  issued
3,000,000  of the  19,000,000  shares at $0.08 per share in exchange for limited
recourse  promissory  notes as described above. The Company has recorded a stock
subscription  receivable  of $240,000 as of  December  31, 2001 with  respect to
these  shares.  Subsequent  to December 31, 2001,  the Company has cancelled the
3,000,000  shares  issued in 2001 and  re-issued  them,  along  with  16,000,000
additional  shares,  at a price of $0.17 per  share,  subject  to the same terms
described above.

     During the year ended December 31, 2001, the Company issued through private
placements  3,490,750  shares of the  Company's  Common  Stock for  proceeds  of
$1,637,000.

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

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


17.   PREFERRED STOCK

     In June 2001, the Company  entered into a one-year  license  agreement with
About.com, Inc. to provide the Qode Universal Commerce SolutionTM to About.com's
estimated 36 million  worldwide  users.  The Company and  About.com  intended to
promote the co-branded  shopping service  throughout the About.com  network.  In
June 2001,  About.com ran banner ads on its site  promoting  the Qode  Universal
Commerce   SolutionTM.   As  part  of  the  emerging   About.com   and  NeoMedia
relationship,  About.com  received  452,489  shares of our Series B  Convertible
Preferred  Stock,  par value  $0.01 per share,  of the  500,000  total  Series B
Convertible  Preferred shares which we are authorized to issue, in consideration
for these  promotions.  Each share was  convertible  into one share of  NeoMedia
common  stock.  We  recorded  an  expense  of  $882,000   associated  with  this
transaction  in the  second  quarter  in  sales  and  marketing  expense  in the
accompanying consolidated statements of operations. The agreement with About.com
was  terminated  on August 31,  2001,  in  anticipation  of the sale of the Qode
assets to the Finx Group,  Inc.  Subsequent  to December 31, 2001,  the Series B
Convertible  Preferred  Stock  issued to  About.com  automatically  converted to
452,289 shares of NeoMedia common stock on January 2, 2002.


18.  SUBSEQUENT EVENTS

     Subsequent to December 31, 2001, the following events have occurred:

       o   During January 2002,  certain of the Company's  shareholders  filed a
           complaint with the Securities and Exchange Commission,  alleging that
           the  shareholders  were  not  included  in the  special  shareholders
           meeting of November 25,  2001,  to vote on the issuance of 19 million

                                      F-30
<PAGE>

                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


           shares of NeoMedia  common stock.  On March 11, the Company filed its
           response claiming that the Company had fully complied with all of its
           obligations  under  the  laws  and  regulations  administered  by the
           Securities  and Exchange  Commission,  as well as with its obligation
           under Delaware General Corporation Law.

       o   During  February  2002,  the  Company  sold 19 million  shares of its
           common  stock at $0.17 per share in  exchange  for  promissory  notes
           maturing at the earlier of i) 90 days from the date of  issuance,  or
           ii) 30 days from registration of the shares. During 2001, the Company
           had issued 3 million shares to unrelated investors at $0.08 per share
           payable in the same manner. Those shares were cancelled and re-issued
           as part of the 19 million share offering in 2002.

       o   During  February  2002, the Company  issued  1,646,987  shares of its
           common  stock  to two  separate  vendors  as  settlement  of past due
           liabilities and future payments relating to equipment leases.

       o   During March 2002,  the Company  requested a hearing  before a Nasdaq
           listing  qualifications  panel to review a staff determination issued
           by Nasdaq.  The determination  indicated that as of December 31, 2001
           the  Company  did not comply  with  either the minimum $2 million net
           tangible  assets or the minimum  $2.5  million  stockholders'  equity
           requirement for continued listing, and that the company's shares were
           therefore  subject to delisting.  NeoMedia  responded by requesting a
           hearing   before  a  Nasdaq   listing   panel  to  review  the  staff
           determination. The hearing is scheduled for April 18, 2002.

       o   During  March 2002,  the Company  repriced  1.2 million of its common
           stock  warrants  for a period of six  months.  During the term of the
           warrant  repricing  program,  participating  holders are  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 NASDAQ  Small Cap Market on the trading  date
           immediately preceding the date of exercise. The Company is accounting
           for the repricing  using variable  accounting at each reporting date,
           in  accordance  with  FIN  44.  Under  this  treatment,   expense  is
           recognized for unexercised stock warrants repriced below market based
           on the  closing  price  of  NeoMedia  stock  on the  last day of each
           reporting  period.  Additionally,   if  any  warrants  are  exercised
           pursuant to the  repricing  program,  expense is  recognized  for the
           difference  between the market price of NeoMedia stock at the time of
           exercise and the restated exercise price.

                                      F-31
<PAGE>


                                    PART III

     ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
               COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT


DIRECTORS AND EXECUTIVE OFFICERS

     As of March 14, 2002, NeoMedia's directors and executive officers were:

NAME                            AGE           POSITION HELD
Charles W. Fritz..............   45   President, Chief Executive Officer,
                                      Director and Chairman of the Board

William E. Fritz..............   71   Secretary and Director

Charles T. Jensen.............   58   Chief Financial Officer, Vice-President,
                                      Treasurer, and Director

A. Hayes Barclay............     71   Director

James J. Keil..................  72   Director


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


     CHARLES W.  FRITZ,  age 45, is a founder of  NeoMedia  and has served as an
officer and as a Director since its 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.  Mr. Fritz is currently a
member of the Compensation Committee.  Prior to founding NeoMedia, Mr. Fritz was
an  Account  Executive  with IBM  Corporation  from  1986 to 1988,  Director  of
Marketing and  Strategic  Alliances for the  Information  Consulting  Group from
1988-1989,  and a Consultant  for McKinsey & Company.  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, and its Secretary.

     WILLIAM  E.  FRITZ,  age 71, is a founder  of  NeoMedia  and has  served as
Secretary and Director since its  inception.  Mr. Fritz also served as Treasurer
of  NeoMedia  from its  inception  until May 1, 1996.  Mr.  Fritz,  who has over
thirty-two  years in  establishing  and  operating  privately  owned  companies,
currently  is, and for at least the past eleven  years 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  Chief
Executive Officer and Chairman of the Board.

     CHARLES T. JENSEN, age 58, has been 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.
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>

     A. HAYES  BARCLAY,  age 71, 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.

     JAMES J. KEIL,  age 74, 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.

     During July,  2001,  the Company laid off 55 employees,  including  Rudolph
Mosny, Chief Operating Officer and Executive Vice President - International, and
Robert Durst, Chief Technical Officer and Executive Vice President, each of whom
were also directors.

     During September 2001,  Michael Tanner, an outside director,  resigned from
the Board of Directors.

     During January 2002,  Paul Reece,  an outside  director,  resigned from the
Board of Directors.

     MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS

     All  directors  shall be elected on an annual  basis,  each to hold  office
until the next annual meeting of shareholders or until that director's successor
has been elected and qualified or until the earlier of death or resignation.  At
present, NeoMedia's by-laws provide for not less than one director nor more than
nine. Currently,  there are five 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 or until his successor is elected and qualified.
From January 1, 2001,  through  December 31, 2001,  NeoMedia  held 13 directors'
meetings.  During the  fiscal  year  ended  December  31,  2001,  all  incumbent
directors attended more than 75 percent of the combined total of meetings of the
Board and the Committees on which they served during 2001.

     Our board of directors  currently has audit, stock option, and compensation
committees. At least a majority of the members of each committee are independent
directors. The audit committee reviews the scope of our audit, recommends to our
board of directors  the  engagement  of our  independent  auditors,  reviews the
financial  statements,  and reviews any  transactions  between us and any of our
officers,  directors  or other  related  parties.  Our  stock  option  committee
administers  the  1996 and  1998  stock  option  plans  and the 1996  management
incentive plan. Our compensation  committee evaluates our compensation  policies
and approves executive compensation and executive employment contracts.  Messrs.
Keil  (chairman) and Barclay are members of the audit  committee.  Messrs.  Keil
(chairman) and Barclay are members of the stock option committee.  Messrs.  Keil
(chairman),  Charles W.  Fritz,  Jensen,  Reece,  and Tanner are  members of the
compensation committee.

     DIRECTOR COMPENSATION

                                     III-2
<PAGE>

     Directors are reimbursed for expenses  actually incurred in connection with
attending  meetings of the Board of Directors.  Non-employee  directors  receive
fees of $2,000 per meeting attended. Upon election or re-election as a director,
non-employee  directors  receive options to purchase 15,000 shares of NeoMedia's
common stock under the 1998 Stock Option Plan.  Non-employee directors may elect
to receive options to purchase an additional  3,000 shares of NeoMedia's  common
stock under the 1998 Stock  Option Plan in lieu of the  director  fee of $2,000.
These options are immediately  vested.  NeoMedia  anticipates  that the Board of
Directors will meet at least five times a year.

     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 and with
the NASDAQ SmallCap  Market.  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  2001 all  Section  16(a)  filing  requirements
applicable to NeoMedia's  officers,  directors and ten percent beneficial owners
were complied with.

                                     III-3
<PAGE>



<PAGE>



     ITEM 11. 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, 2001, 2000 and 1999:

<TABLE>
<CAPTION>

                                   SUMMARY COMPENSATION TABLE

                                 ANNUAL COMPENSATION (1)                LONG-TERM COMPENSATION
                           -------------------------------------     ---------------------------
                                                                       SECURITIES
                                                                       UNDERLYING
    NAME AND PRINCIPAL                       OTHER ANNUAL               WARRANTS      ALL OTHER
         POSITION            YEAR    SALARY  COMPENSATION    BONUS    AND OPTIONS   COMPENSATION
-------------------------------------------- ------------ ---------- -------------- ------------
<S>                          <C>    <C>         <C>       <C>          <C>          <C>

Charles W. Fritz............ 2001   $221,758    $   -     $      -     400,000 (2)  $21,532 (5),(6)
Chief Executive Officer      2000    250,000        -      148,800(8)   49,000 (2)   22,502 (5),(6)
                             1999    250,000        -            -     400,000 (2)   84,914 (5),(6)

Charles T. Jensen........... 2001    144,239        -            -     240,000 (2)   17,794 (5),(6)
  Chief Financial Officer,   2000    150,000        -       87,860(8)   37,000 (2)   29,767 (5),(6)
  Vice President & Treasurer 1999    150,000        -            -     180,000 (2)   42,712 (5),(6)

Robert T. Durst, Jr......... 2001     95,755        -            -     120,000 (2)    9,455 (5),(6)
  Executive Vice President,  2000    170,000        -       99,708(8)   37,000 (2)   13,127 (5),(6)
  Chief Technical Officer    1999    170,000        -            -     210,000 (2)   13,876 (5),(6)

William F. Goins (3)........ 2001     13,963        -            -     120,000 (2)        -
  President & Chief          2000    180,000        -      131,790(8)   40,000 (2)   11,699 (6)
  Operating Officer          1999     75,000    25,000(7)        -     200,000 (2)      625 (6)

Rudolf Y. Mosny (4)......... 2001     91,383        -            -     500,000 (2)        -
  President & Chief          2000          -        -            -     100,000 (2)        -
  Operating Officer          1999          -        -            -           -            -

</TABLE>

1.   In accordance  with the rules of the  Securities  and Exchange  Commission,
     other  compensation in the form of perquisites and other personal  benefits
     has been  omitted in those  instances  where the  aggregate  amount of such
     perquisites and other personal benefits constituted less than the lesser of
     $50,000  or 10% of the total of annual  salary  and  bonuses  for the Named
     Executive Officer for such year.

2.   Represents  options  granted  under  NeoMedia's  1998 Stock Option Plan and
     warrants granted at the discretion of NeoMedia's Board of Directors.

3.   Mr. Goins' employment with NeoMedia ended during January 2001.

4.   Mr. Mosny's employment with NeoMedia ended during July 2001.

                                     III-4
<PAGE>

5.   Includes  life  insurance  premiums  where  policy  benefits are payable to
     beneficiary of the Named Executive Officer.

6.   Automobile  expenses  attributable  to personal  use and the  corresponding
     income tax effects.

7.   Represents sign-on bonus.

8.   In June 2001, the Company's  compensation committee approved an adjustment,
     relating  to the  Digital:Convergence  patent  license  fees,  to the  2000
     executive  incentive  plan that reduced the bonus  payout by  approximately
     $1.1 million. The original amount recorded in 2000 and reported in the 2000
     form 10-KSB was  $430,800  for Charles W.  Fritz,  $193,860  for Charles T.
     Jensen,  $219,708  for Robert T. Durst,  and $290,790 for William F. Goins.
     The adjusted amounts are presented in the table above.

EMPLOYMENT AGREEMENTS

     The Company entered into five year employment  agreements  ending April 30,
2001 with each of Charles W. Fritz, its chief executive  officer and chairman of
the board of  directors,  and  Charles  T.  Jensen,  its vice  president,  chief
financial  officer and treasurer,  and with Robert T. Durst,  Jr., its executive
vice-president  and  chief  technical  officer,   ending  March  31,  2001.  The
employment  agreements  provided for an annual salary of $170,000 for Mr. Fritz,
$140,000 for Mr. Durst and $110,000 for Mr. Jensen,  subject to annual review by
the board of directors  which may increase  but not  decrease  such salary,  and
participation  in all  benefits and plans  available  to executive  employees of
NeoMedia.  Effective as of January 1, 1998, the board of directors increased the
annual salary of Mr. Fritz to $250,000, Mr. Durst to $170,000, and Mr. Jensen to
$150,000.  During  the  period  May  15,  2001  through  July  15,  2001,  these
individuals,  along with  other  officers  of  NeoMedia,  temporarily  had their
salaries  reduced by 20% in the effort to reduce expenses.  In addition,  during
the year ended December 31, 2001,  the board granted  Messrs.  Fritz,  Durst and
Jensen options to purchase 400,000,  120,000 and 240,000 shares of common stock,
respectively,  under the 1998 stock option plan.  During the year ended December
31, 2000, the board granted Messrs.  Fritz, Durst and Jensen options to purchase
49,000, 37,000, and 37,000 shares of common stock, respectively,  under the 1998
stock  option  plan.  During  the year ended  December  31,  1999,  the board of
directors  granted  to Messrs.  Fritz,  Durst and  Jensen  options  to  purchase
400,000,  210,000 and 180,000  shares of common stock,  respectively,  under the
1998  stock  option  plan.  The  Company  plans to  renegotiate  new  employment
agreements with Messrs.  Fritz and Jensen.  In the interim,  the Company has put
into place  agreements  that  provide for six months  severance  in the event of
termination  related to a change of control.  Mr. Durst was laid off during July
2001 as part of a company-wide cost reduction effort.

     During the year  ended  December  31,  1999,  the  Company  entered  into a
one-year  employment  agreement ending July 31, 2000, with William F. Goins, its
president and chief  operating  officer.  The agreement was renewed through July
31, 2001.  The agreement  provides for an annual salary of $180,000,  subject to
periodic  review by the board of  directors  which may increase but not decrease
such  salary,  and  participation  in all  benefits  and plans  available to our
executive employees. In addition, during the year ended December 31, 2001, 2000,
and 1999, the board of directors  granted to Mr. Goins options to purchase up to
120,000, 40,000, and 200,000 shares of our common stock, respectively, under the
1998 stock option plan. As of January 31, 2001, Mr. Goins was no longer employed
by the Company.  The Company is involved in litigation  with Mr. Goins regarding
his departure with company.

     During July,  2001,  the Company laid off 55 employees,  including  Rudolph
Mosny,  Chief Operating Officer,  Executive Vice President - International,  and
director.

INCENTIVE PLAN FOR MANAGEMENT

                                     III-5
<PAGE>

     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.

STOCK OPTION PLANS

     Effective as of 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.

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 $10,500  for 2000) 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, 2001:



                                     III-6
<PAGE>

<TABLE>
<CAPTION>


                                    NUMBER OF
                                   SECURITIES     % OF TOTAL
                                   UNDERLYING       OPTIONS
                                     OPTIONS      GRANTED TO     EXERCISE     EXPIRATION
NAME                               GRANTED (1)     EMPLOYEES       PRICE         DATE
--------------------------------  --------------  ------------   ----------   -----------
<S>                                   <C>            <C>           <C>         <C>

Charles W. Fritz................      200,000        5.7%          $2.50        1/2/11
                                      200,000        5.7%          $0.20       9/13/11

Robert T. Durst.................      120,000        3.4%          $2.50        1/2/11

Charles T. Jensen...............       90,000        2.6%          $2.50        1/2/11
                                      150,000        4.3%          $0.20       9/13/11

William F. Goins(2).............      120,000        3.4%          $2.50        1/2/11

Rudolf Y. Mosny (3).............      500,000        14.3%         $3.25        4/5/11
</TABLE>


(1)  Options granted under the 1998 Stock Option Plan.

(2)  Mr. Goins' employment with NeoMedia ended in January 2001

(3)  Options have special  vesting  depending on price of NeoMedia common stock.
     Options were forfeited upon Mr. Mosny's termination in July 2001.



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  fiscal  2001,  and  the  number  and  value  of all
unexercised options at fiscal year end.

<TABLE>
<CAPTION>

                                                  NUMBER OF UNEXERCISED
                                                  SECURITIES UNDERLYING     VALUE OF UNEXERCISED IN-
                                                      OPTIONS/SARS AT      THE-MONEY OPTIONS/SARS AT
                         SHARES                       DECEMBER 31, 2001       DECEMBER 31, 2001 (1)
                        ACQUIRED       VALUE    --------------------------  --------------------------
NAME                   ON EXERCISE   REALIZED   EXERCISABLE  UNEXERCISABLE  EXERCISABLE UNEXERCISABLE
---------------------  -----------  ----------  --------------------------  --------------------------
<S>                         <C>         <C>         <C>         <C>              <C>          <C>

Charles W. Fritz (2)        -           -           699,600     549,400          -            -

Robert T. Durst             -           -              -           -             -            -

Charles T. Jensen           -           -           413,186     292,200          -            -

William F. Goins(3)         -           -              -           -             -            -

Rudolf Y. Mosny(4)          -           -              -           -             -            -
</TABLE>

   (1) The value of the in the money  options is  calculated  by the  difference
       between the market  price of the stock at December  31, 2001  ($0.14) and
       the exercise price of the options.

   (2) Includes  stock  options  and  warrants.


                                     III-7
<PAGE>

   (3) Mr Goins' employment with NeoMedia ended in January 2001.

   (4) Mr. Mosny's employment with NeoMedia ended in July 2001.


ITEM 12.  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 March 15, 2002, (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.

                                             AMOUNT AND NATURE OF    PERCENT OF
                                          BENEFICIAL OWNERSHIP (1)    CLASS (1)
                                          ------------------------   ----------

Charles W. Fritz (2)(3)....................      2,555,930               7.0%
Fritz Family Limited Partnership (2)(4)....      1,511,742               4.1%
Chandler T. Fritz 1994 Trust (2)(5)(6).....         58,489                *
Charles W. Fritz 1994 Trust (2)(5)(7)......         58,489                *
Debra F. Schiafone 1994 Trust (2)(5)(8)....         48,489                *
William & Edna Fritz (2)(4)(5).............        430,310               1.2%
Charles Jensen (2)(9)......................        500,686               1.4%
A. Hayes Barclay (10)(11)..................        169,000                 *
James J. Keil  (12)(13)....................        123,000                 *
                                                   -------
ALL EXECUTIVE OFFICERS AND DIRECTORS
  AS A GROUP (6 PERSONS) (14)..............      5,456,135              15.0%

____________________________________________________

      /*/ denotes  ownership of less than one percent of issued and  outstanding
shares of our common stock.


(1)  Beneficial  ownership is  determined  in  accordance  with the rules of the
     Securities and Exchange  Commission,  and includes  generally  voting power
     and/or  investment  power with respect to  securities.  Options to purchase
     shares of common stock  currently  exercisable or exercisable  within sixty
     days of March 15, 2002 are deemed  outstanding for computing the beneficial
     ownership  percentage of the person holding such options but are not deemed
     outstanding for computing the beneficial  ownership percentage of any other
     person.  Except as  indicated by footnote,  to our  knowledge,  the persons
     named in the table  above have the sole  voting and  investment  power with
     respect to all shares of common stock shown as beneficially owned by them.

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

(3)  Shares  beneficially  owned include 400 shares of common stock,  100 shares
     owned by each of Mr.  Fritz's  four minor  children for an aggregate of 400
     shares,  140,775  shares of common stock issuable upon exercise of warrants
     to purchase common stock which are currently exercisable, 829,600 shares of
     common  stock  issuable  upon  exercise of options  granted  under our 1998
     employee  stock  option  plan,  42,186  shares of common stock owned by Mr.
     Charles W. Fritz directly, and 1,542,969 shares of common stock held by the
     CW/LA II Family Limited  Partnership,  a family limited partnership for the
     benefit of Mr. Fritz's family.

                                     III-8
<PAGE>

(4)  William E. Fritz,  our corporate  secretary,  and his wife, Edna Fritz, are
     the general partners of the Fritz Family Limited  Partnership and therefore
     each are deemed to be the beneficial  owner 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  shares of
     NeoMedia held in each trust. Accordingly, Mr. William E. Fritz is deemed to
     be the  beneficial  owner of an aggregate of 2,070,519  shares,  165,467 of
     which as a result of being  trustee of the  Chandler  T. Fritz 1994  Trust,
     Charles W. Fritz 1994 Trust and Debra F.  Schiafone  1994 Trust,  1,511,742
     shares  as a  result  of  being  co-general  partner  of the  Fritz  Family
     Partnership, 268,787 shares owned by Mr. Fritz or his spouse, 12,523 shares
     to be issued upon the exercise of warrants  held by Mr. Fritz or his spouse
     and 149,000  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)  William E. Fritz is the trustee of this Trust and therefore is deemed to be
     the beneficial owner of such shares.

(6)  Chandler T. Fritz,  son of William E. Fritz, is the primary  beneficiary of
     this trust.

(7)  Charles W.  Fritz,  son of William  E.  Fritz and our  president  and chief
     executive officer, is the primary beneficiary of this trust.

(8)  Debra  F.  Schiafone,   daughter  of  William  E.  Fritz,  is  the  primary
     beneficiary of this trust.

(9)  Includes  499,186  shares of common stock issuable upon exercise of options
     granted under our 1996 and 1998 stock option plans.

(10) Includes  164,000  shares of common stock issuable upon exercise of options
     granted under our 1996 and 1998 stock option plans.

(11) c/o Barclay & Damisch Ltd. 115 West Wesley Street Wheaton, IL 60187

(12) Includes  123,000  shares of common stock issuable upon exercise of options
     granted under NeoMedia's 1996 and 1998 stock option plans.

(13) The address of the referenced  individual is c/o Keil & Keil Associates 733
     15th Street, N.W. Washington 20005

(14) Includes  an  aggregate  of  1,764,786  currently  exercisable  options  to
     purchase  shares of common stock  granted  under our 1996 stock option plan
     and 1998 stock option plan and 153,298  currently  exercisable  warrants to
     purchase shares of common stock.


ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     In April,  2000, the Company  purchased  substantially all of the assets of
DayStar Services, L.L.C., a Tennessee limited liability company ("DayStar"). The
assets consisted of DayStar's rights under a license  agreement  between DayStar
and the Company  dated June 30,  1999,  for the  Company's  NeoLink  Information
Server ("NeoLink") and DayStar's rights under an Agent Agreement between DayStar
and the Company  dated June 30, 1999,  for NeoLink.  The assets  purchased  also
included  all of  DayStar's  software  and hardware and source codes used in the
operation of the DayStar website and existing customer/vendor relationships. The
purchase  price for the assets  was  $4,000,000;  $3,520,000  paid  through  the
transfer of shares of  NeoMedia's  Common  Stock and  $480,000  paid through the
forgiveness of a receivable  due from DayStar.  William Fritz and Charles Fritz,


                                     III-9
<PAGE>

officers, directors and principal shareholders of the Company are also principal
equity holders of DayStar.

     During 2000, NeoMedia leased office and residential facilities from related
parties for rental payments totaling $5,000. This lease expired in 2000.

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

     During October 2001, the Company borrowed $4,000 from Charles W. Fritz, its
Chairman and Chief Executive  Officer,  under a note payable bearing interest at
10% per annum with a term of six months.


ITEM 14.   EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

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

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

   3.1    Restated Certificate of Incorporation of DevSys, Inc. (Incorporated by
          reference to Exhibit 3.3 to  NeoMedia's  Registration  Statement,  No.
          333-5534 (the "Registration Statement")).
   3.2    By-laws of DevSys,  Inc.  (Incorporated by reference to Exhibit 3.4 to
          NeoMedia's Registration Statement).
   3.3    Certificate of Amendment to Certificate  of  Incorporation  of DevSys,
          Inc. changing its name to NeoMedia Technologies, Inc. (Incorporated by
          reference to Exhibit 3.13 to NeoMedia's Registration Statement).
   3.4    Form of Certificate of Amendment to  Certificate of  Incorporation  of
          NeoMedia   Technologies,   Inc.  authorizing  a  reverse  stock  split
          (Incorporated by reference to Exhibit 3.14 to NeoMedia's  Registration
          Statement).
   4.1    Form of Certificate for Common Stock of DevSys, Inc.  (Incorporated by
          reference to Exhibit 4.1 to NeoMedia's Registration Statement).
   4.2    Form of Joseph Charles' Warrant  Agreement  (Incorporated by reference
          to Exhibit 4.2 to NeoMedia's Registration Statement).
   4.3    Form of Principal  Stockholder's Warrant (Incorporated by reference to
          Exhibit 4.6 to NeoMedia's Registration Statement).
   4.4    Form of Placement Agent's Warrant for the Purchase of Shares of Common
          Stock and  Warrants  (Incorporated  by  reference  to  Exhibit  4.8 to
          NeoMedia's Registration Statement).
   4.5    Form of Warrant to Charles W.  Fritz  (Incorporated  by  reference  to
          Exhibit 4.10 to NeoMedia's Form 10-KSB for the year ended December 31,
          1997)
   4.6    Form of Warrant to Dominick & Dominick,  Incorporated (Incorporated by
          reference to Exhibit 4.11 to NeoMedia's Form 10-KSB for the year ended
          December 31, 1997)
   4.7    Form of Warrant to Compass Capital, Inc. (Incorporated by reference to
          Exhibit 4.12 to NeoMedia's Form 10-KSB for the year ended December 31,
          1997)
   4.8    Form  of  Warrant  to  Thornhill  Capital,  L.L.C.   (Incorporated  by
          reference to Exhibit 4.10 to NeoMedia's Form 10-KSB for the year ended
          December 31, 1997)
   4.9    Form of Warrant to Southeast Research Partners,  Inc. (Incorporated by
          reference to Exhibit 4.14 to NeoMedia's Form 10-KSB for the year ended
          December 31, 1997)
   4.10   Form of Warrant to Joseph Charles & Associates,  Inc. (Incorporated by
          reference to Exhibit 4.15 to NeoMedia's Form 10-KSB for the year ended
          December 31, 1997)
   10.1   Form of Nonsolicitation and Confidentiality Agreement (Incorporated by
          reference to Exhibit 10.2 to NeoMedia's Registration Statement).

                                     III-10
<PAGE>

   10.2   Employment  Agreement dated May 1, 1996 between  Dev-Tech  Associates,
          Inc. and Charles W. Fritz  (Incorporated  by reference to Exhibit 10.3
          to NeoMedia's Registration Statement).
   10.3   Employment  Agreement dated April 1, 1996 between Dev-Tech Associates,
          Inc. and Robert T. Durst,  Jr.  (Incorporated  by reference to Exhibit
          10.4 to NeoMedia's Registration Statement).
   10.4   Employment  Agreement dated May 1, 1996 between  Dev-Tech  Associates,
          Inc. and Charles T. Jensen  (Incorporated by reference to Exhibit 10.5
          to NeoMedia's Registration Statement).
   10.5   Dev-Tech  Associates,   Inc.  Annual  Incentive  Plan  for  Management
          (Incorporated by reference to Exhibit 10.43 to NeoMedia's Registration
          Statement).
   10.6   Dev-Tech   Associates,   Inc.  401(k)  Plan  and  amendments   thereto
          (Incorporated by reference to Exhibit 10.50 to NeoMedia's Registration
          Statement).
   10.7   First  Amendment and Restatement of NeoMedia  Technologies,  Inc. 1996
          Stock Option Plan (As Established  Effective  February 1, 1996, and as
          amended  through  November  18,  1996)  (Incorporated  by reference to
          Exhibit 10.60 to NeoMedia's Registration Statement).
   10.8   Agreement of Lease  Between  First Union  National Bank of Florida and
          NeoMedia  Technologies,  Inc. Dated November 27, 1996 (Incorporated by
          reference  to Exhibit  10.43 to  NeoMedia's  Form  10-KSB for the year
          ended December 31, 1996).
   10.9   Agreement for Wholesale  Financing  (Security  Agreement)  Between IBM
          Credit Corporation and NeoMedia Technologies,  Inc. Dated February 20,
          1997  (Incorporated  by reference to Exhibit 10.47 to NeoMedia's  Form
          10-KSB for the year ended December 31, 1996).
   10.10  Collateralized  Guaranty  Between IBM Credit  Corporation and NeoMedia
          Migration,  Inc. Dated February 20, 1997 (Incorporated by reference to
          Exhibit  10.48 to NeoMedia's  Form 10-KSB for the year ended  December
          31, 1996).
   10.11  NeoMedia  Technologies,  Inc. 1998 Stock Option Plan  (Incorporated by
          reference to Appendix A to  NeoMedia's  Form 14A Filed on February 18,
          1998).
   10.12  Amendment   to   NeoMedia   Technologies   1998  Stock   Option   Plan
          (Incorporated  by reference to text of NeoMedia form 14A filed on July
          2, 1999)
   10.13  Employment   Agreement   dated   August  2,  1999   between   NeoMedia
          Technologies,  Inc. and William  Goins  (incorporated  by reference to
          exhibit  10.32 of NeoMedia's  Form 10-KSB for the year ended  December
          31, 1999.)
   10.14  Licensing  Agreement  between   Digital:Convergence   Corporation  and
          NeoMedia Technologies, Inc. (Incorporated by reference to Exhibit 10.1
          of NeoMedia Form 10-QSB filed on October 30, 2000)
   10.15  Sale and  Purchase  Agreement  between  Qode.com,  Inc.  and  NeoMedia
          Technologies,  Inc.  (Incorporated  by  reference  to Exhibit  10.1 of
          NeoMedia Form 8K filed on March 15, 2001)
   10.16  Patent  License  Agreement - Devices  between A.T.  Cross  Company and
          NeoMedia Technologies, Inc. (Incorporated by reference to Exhibit 23.5
          of NeoMedia Form S1/A filed November 16, 2001).
   10.17  License  Agreement  between  Symbol  Technologies,  Inc.  and NeoMedia
          Technologies,  Inc.  (Incorporated  by  reference  to Exhibit  23.6 of
          NeoMedia Form S1/A filed November 16, 2001).
   10.18  Sponsorship  and Advertising  Agreement  between  About.com,  Inc. and
          NeoMedia Technologies, Inc. (Incorporated by reference to Exhibit 23.7
          of NeoMedia Form S1/A filed November 16, 2001).
   10.19  Proposed  Transaction  Agreement  between  AirClic,  Inc. and NeoMedia
          Technologies,  Inc.  (Incorporated  by  reference  to Exhibit  23.8 of
          NeoMedia Form S1/A filed November 16, 2001).
      21  Subsidiaries  (Incorporated  by reference to  description of Company's
          subsidiaries contained in Part I, Item I of this form 10-K.


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

                                     III-11
<PAGE>





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

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

(b)   Reports on Form 8-K

      Form 8-K filed October 29, 2001 to disclose that the Company had dismissed
      Arthur Andersen LLP as its independent  accountants and engaged Stonefield
      Josephson, Inc. as its new independent accountants.

                                     III-12
<PAGE>

                                  EXHIBIT 23.1




CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

As  independent   certified  public  accountants,   we  hereby  consent  to  the
incorporation  of our  report,  included in this Form 10-K,  into the  Company's
previously  filed  Registration  Statements  File  nos.  333-80591,   333-42477,
333-36098, 333-51811, 333-77659, and 333-33738.



                                                         /S/ ARTHUR ANDERSEN LLP

Tampa, Florida,
    March 26, 2002


                                     III-13
<PAGE>


                                  EXHIBIT 23.2




               Consent of Independent Certified Public Accountants
               ---------------------------------------------------



Board of Directors
Neomedia Technologies, Inc.



We consent to the incorporation by reference of our independent auditors' report
dated  March 28,  2002 on the  consolidated  statement  of  balance  sheet as of
December  31,  2001  and the  related  consolidated  statements  of  operations,
stockholders'  equity and cash flows for the year then  ended,  included in this
Form  10-K/Amendment  No. 1, into the Company's  previously  filed  Registration
Statements (File Nos. 333-80591, 333-42477, 333-36098, 333-51811, 333-77659, and
333-33738, 333-101588, 333-99183, 333-91284, and 333-85422).


/s/ Stonefield Josephson, Inc.
Irvine, California
February 3, 2003


                                     III-14
<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 3rd day of February, 2003.

                                     NEOMEDIA TECHNOLOGIES, INC.
                                     REGISTRANT


                                     By:  /s/ CHARLES T. JENSEN
                                        --------------------------------------
                                         Charles T. Jensen
                                           President, Acting Chief Executive
                                           Officer, Chief Operating 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 3, 2003.

      SIGNATURES                                   TITLE


 /s/ CHARLES T. JENSEN          President, Acting Chief Executive Officer,
-----------------------------   Chief Operating Officer and Director
   Charles T. Jensen


 /s/ CHARLES W. FRITZ           Chairman of the Board
-----------------------------
    Charles W. Fritz


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


/s/ DAVID A. DODGE              Vice President, Chief Financial Officer
-----------------------------   and Controller
   David A. Dodge


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


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


                                     III-15