<PAGE>

===============================================================================

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

                                    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, 2002

                                       OR

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

               FOR THE TRANSITION PERIOD ____________ TO__________

                         COMMISSION FILE NUMBER 0-21743

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

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

   2201 SECOND STREET, SUITE 402
        FORT MYERS, FLORIDA                                       33901
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                       (ZIP CODE)

          ISSUER'S TELEPHONE NUMBER (INCLUDING AREA CODE) 239-337-3434

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

                                      NAME OF EACH EXCHANGE
   TITLE OF EACH CLASS                  ON WHICH REGISTERED
COMMON STOCK, PAR VALUE $.01         OVER-THE-COUNTER BULLETIN BOARD

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

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

      Issuer's  consolidated  revenue  for  its  most  recent  fiscal  year  was
$9,399,000.

      The aggregate market value of the voting stock held by  non-affiliates  of
the  issuer  based on the price at which  shares of common  stock  closed on the
Over-the-Counter  Bulleting  Board on March 30,  2003  ($0.0195)  was  $619,000.
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 30,  2003,  there were  outstanding  36,899,341  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.
===============================================================================

<PAGE>


                                     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 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").


<PAGE>

     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

     On November  12,  2002,  the Company  entered into an Equity Line of Credit
Agreement  with  Cornell  under  which  Cornell  agreed to  purchase up to $10.0
million of NeoMedia's  common stock and over the next two years, with the timing
and amount of the purchase at the Company's  discretion.  The maximum  amount of
each  purchase is $150,000 with a minimum of seven days between  purchases.  The
shares will be valued at 98% of the lowest closing bid price during the five-day
period  following the delivery of a notice of purchase by NeoMedia.  The Company
will pay 5% of the gross  proceeds of each  purchase to Cornell as a commission.
According to the terms of the agreement,  the Company cannot draw on the line of
credit until the shares underlying the agreement are registered for trading with
the Securities and Exchange  Commission.  On February 14, 2003, the SEC declared
effective  the  S-1  registration   statement   containing  100  million  shares
underlying the Equity Line of Credit.

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



INDUSTRY OVERVIEW

   NEOMEDIA INTERNET SWITCHING SERVICES

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

     The Company believes the key to the adoption of physical  world-to-Internet
technologies  in the  marketplace  will  be in the  development  of  real  world
applications  that  provide the end user a valuable  experience.  The  Company's
service offering,  however,  differs from those of AirClic and other competitors
in that, unlike their products and services,  NeoMedia's products do not require
the use of a proprietary or specified device, and the Company offers its service
on a private label basis.  The Company is 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.



                                       2
<PAGE>

     Proprietary  products,  such  as  NeoMedia  encoders,  systems  integration
services and Integrated Document Factory solutions offer a competitive value-add
to the Company's NCIS business. The Company has unique offerings,  which, to the
extent  that they meet  market  needs,  offer the  potential  for growth in this
industry.  In  addition,  the  Company's  recent  high-end  storage Area Network
Solution allows it to participate in the higher-margin  area of the open systems
marketplace.

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


STRATEGY

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

     While  pursing  these goals  NeoMedia  remains  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,
governmental, and educational applications.

     Intellectual  Property  Licensing.  The  Company  currently  holds six U.S.
patents  relating to the  physical  world-to-Internet  marketplace.  The Company
intends to license this intellectual property portfolio to companies endeavoring
to tap the potential of this emerging  market.  To date, the Company has entered
into such agreements with  Digital:Convergence,  A.T. Cross Company,  and Symbol
Technologies.  During  January 2002,  the Company  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 our patent portfolio.

   NEOMEDIA CONSULTING AND INTEGRATION SERVICES

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

     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.

     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.



                                       3
<PAGE>

     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.


STRATEGIC RELATIONSHIPS

   NEOMEDIA INTERNET SWITCHING SERVICES

     In this segment, the Company has a number of customers who have used or are
using its products and services,  including  Amway,  Solar,  A.T. Cross Company,
NYCO and two  universities in Latin America.  During the year ended December 31,
2000, the Company  entered into a license  agreement  with  Digital:Convergence.
This customer  accounted for 28.2% of NeoMedia's  total revenue and 96.1% of its
Application  Services  revenue during such year.  During the year ended December
31,  2001,   the  Company  did  not  recognize   any  revenue   related  to  the
Digital:Convergence  contract,  and the  Company  wrote off  approximately  $7.4
million in net assets and  liabilities  related to the contract.  In March 2002,
Digital  Convergence  filed for  bankruptcy  under  Chapter  7. The  Company  is
aggressively  pursuing  numerous  additional  opportunities for our products and
services.

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

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

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

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

     During September 2001, AirClic, Inc. filed suit against the Company seeking
a declaration that certain core intellectual  property securing a note issued by
the Company to AirClic,  some of which is patented and others for which a patent
application is pending,  is invalid and in the public  domain.  On September 18,
2002, the court ruled in favor of the Company and dismissed AirClic's complaint.

   NEOMEDIA CONSULTING AND INTEGRATION SERVICES

         Through this segment,  the Company provides  services and products to a
spectrum of  customers,  ranging  from  closely  held  companies  to Fortune 500
companies.  For the years ended December 31, 2002, 2001, and 2000, one customer,
SBC/Ameritech Services, Inc., accounted for 36%, 37%, and 30%, respectively,  of
the Company's 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 us at any
time.  Accordingly,  the loss of this customer, or a significant reduction by it
in buying the products and services offered by us, absent diversification, would


                                       4
<PAGE>

materially and adversely affect of the Company's business, prospects,  financial
condition,  and results of operations.  In addition,  a single supplier supplies
the equipment and software, which is re-marketed to this customer.  Accordingly,
the loss of this  supplier  would  materially  adversely  affect  our  business,
prospects, financial condition, and results of operations. For these reasons, we
are  seeking,  and  continue to seek,  to  diversify  our sources of revenue and
vendors from whom we purchase.

SALES AND MARKETING

   NEOMEDIA INTERNET SWITCHING SERVICES

     PaperClickTM.  While the Company  eliminated  the majority of its sales and
marketing  staff during the third  quarter of 2001,  it 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.  The  Company has  refocused  its sales
efforts by  focusing on signing up channel  partners  who have  industry  market
presence.  The Company  intends to negotiate  with a number of  industry-focused
companies who will be its "go-to-market" partners. On March 3, 2003, the Company
announced  that it had reached a  partnering  agreement  with Tibbs  Information
Systems,  Inc.,  under  which  the two  Companies  will team up to  compete  for
government  and homeland  security  projects,  on which the two  companies  will
partner with major  high-tech  industry  leaders.  NeoMedia will  contribute its
Physical-world-to-Internet   platform,   intellectual   property,  and  industry
know-how.  No  assurances  can be given  that any  successful  association  will
result.

     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 the  Company  in seeking  out
potential  licensees  of its  intellectual  property  portfolio,  including  any
resulting  litigation.  On August 13, 2002,  NeoMedia's fifth patent surrounding
its  Physical-World-to-Internet  technology  was  issued by the U.S.  Patent and
Trademark Office.

   NEOMEDIA CONSULTING AND INTEGRATION SERVICES

     The Company,  through its systems integration services segment, markets its
products  and  services,  as well as those for  which it acts as a  re-marketer,
primarily  through a direct sales force,  which was composed of four individuals
as of December  31,  2002.  In  addition,  this  business  unit also relies upon
strategic  alliances with industry leaders to help market products and services,
provide lead referrals,  and establish informal co-marketing  arrangements.  Our
representatives   attend  seminars  and  trade  shows,   both  as  speakers  and
participants,  to help market products and services. In addition,  this business
segment  has three  agents in the  United  States  that  sell our  products  and
services.

CUSTOMERS

    NEOMEDIA INTERNET SWITCHING SERVICES

      PaperClickTM.  NeoMedia's  customers  for its  physical  world-to-Internet
offerings  have  included  Amway,  Solar  Communications,  INC.,  NYCO  Products
Company,  and several large  organizations in Latin America,  including  several
prestigious universities.

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

   NEOMEDIA CONSULTING AND INTEGRATION SERVICES

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

RESEARCH AND DEVELOPMENT



                                       5
<PAGE>

   NEOMEDIA INTERNET SWITCHING SERVICES

     NISS employed 2, 3, and 24 persons in the area of product development as of
December 31, 2002, 2001, and 2000, respectively. During the years ended December
31, 2002,  2001, and 2000,  NISS incurred total  software  development  costs of
$775,000, $2,064,000, and $2,888,000, respectively, of which $0, $1,515,000, and
$1,787,000,  respectively,  were capitalized as software  development  costs and
$781,000, $549,000, and $1,101,000,  respectively, were expensed as research and
development costs.



    NEOMEDIA CONSULTING AND INTEGRATION SERVICES

     All  significant   research  and  development  relating  to  the  Company's
consulting and integration  products was  discontinued at December 31, 1999 when
we  discontinued  our Y2K business.  All  employees  that were in this area were
reassigned  or  released  at or prior to such time.  If any future  research  or
development  of  products is needed,  it will be  performed  by the  application
services division or outside contractors.


INTELLECTUAL PROPERTY RIGHTS

     The Company's success in the physical world-to-Internet and the value-added
systems  integration  markets  is  dependent  upon its  proprietary  technology,
including  patents,  and other  intellectual  property,  and on its  ability  to
protect its proprietary  technology and other  intellectual  property rights. In
addition,  the Company must conduct its  operations  without  infringing  on the
proprietary  rights of third  parties.  The  Company  also  intends to rely upon
unpatented  trade  secrets and the know-how and expertise of its  employees.  To
protect its proprietary  technology and other intellectual property, the Company
relies  primarily on a  combination  of the  protections  provided by applicable
patent,   copyright,   trademark,   and  trade   secret   laws  as  well  as  on
confidentiality  procedures  and  licensing  arrangements.  The  Company has six
patents for its  physical  world-to-Internet  technology.  The Company  also has
several trademarks relating to its proprietary  software products.  Although the
Company believes that it has taken  appropriate  steps to protect its unpatented
proprietary rights, including requiring that its employees and third parties who
are granted  access to its  proprietary  technology  enter into  confidentiality
agreements  with the Company,  the Company can provide no  assurance  that these
measures will be sufficient to protect its rights against third parties.  Others
may   independently   develop  or  otherwise   acquire  patented  or  unpatented
technologies  or  products  similar or  superior  to those of the  Company.  The
Company is currently  engaged in a lawsuit  initiated against the Company by one
of its primary  competitors,  AirClic.  AirClic  seeks,  among other things,  to
succeed to our core assets, by suing for alleged default under a promissory note
in the principal amount of $500,000 issued to AirClic by the Company, secured by
the Company's core assets. AirClic also sued to invalidate the Company's patents
on our key physical world-to-Internet technologies, but this claim was dismissed
by the court during 2002.

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




                                       6
<PAGE>

COMPETITION

   NEOMEDIA INTERNET SWITCHING SERVICES

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


    NEOMEDIA CONSULTING AND INTEGRATION SERVICES.

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


PRODUCT LIABILITY 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 it against  such  claims.  Currently  the Company  does not
maintain  insurance against such claims,  which could result in material adverse
effects in the event of a successful claim


GOVERNMENT REGULATION

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

     Certain of the Company's  proprietary  technology allows for the storage of
demographic  data from our users. In 2000, 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 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.




                                       7
<PAGE>

ENVIRONMENTAL PROTECTION COMPLIANCE

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


EMPLOYEES

      As of  December  31,  2002,  the Company  employed  18 persons.  Of the 18
employees,  8 are located at the Company's  headquarters in Fort Myers, Florida,
and 10 at other domestic locations.  Of the 18 employees, 3 are dedicated to the
Application  Services business unit, 10 are dedicated to the Systems Integration
Services  business  unit,  and 5 provide  shared  services used by both business
units. None of the Company's employees are represented by a labor union or bound
by a collective  bargaining  agreement.  The Company  believes that its employee
relations are good.

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

SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES LITIGATION ACT OF 1995

      The Company  operates in a dynamic and rapidly  changing  environment that
involves numerous risks and  uncertainties.  The market for software products is
generally  characterized  by rapidly changing  technology,  frequent new product
introductions  and changes in customer  requirements  which can render  existing
products  obsolete or  unmarketable.  The statements  contained in this document
that are not historical facts may be forward-looking statements (as such term is
defined in the rules  promulgated  pursuant to the  Securities  Exchange  Act of
1934)  that are  subject  to a variety  of risks and  uncertainties  more  fully
described in the Company's filings with the Securities and Exchange  Commission.
The forward-looking statements are based on the beliefs of the management of the
Company, as well as assumptions made by, and information currently available to,
the  Company's  management.   Accordingly,   these  statements  are  subject  to
significant  risks,  uncertainties  and  contingencies  which  could  cause  the
Company's  actual  growth,  results,  performance  and  business  prospects  and
opportunities  in 2002 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.





                                       8
<PAGE>


                                  RISK FACTORS


RISKS SPECIFIC TO NEOMEDIA


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

     On September 6, 2001,  AirClic filed suit against  NeoMedia in the Court of
Common Pleas, Montgomery County, Pennsylvania,  seeking, among other things, the
accelerated repayment of a $500,000 loan it advanced to NeoMedia under the terms
of a letter of intent entered into between  AirClic and NeoMedia.  The letter of
intent was subsequently  abandoned on the basis of the Company's  alleged breach
of certain  representations  made by NeoMedia in the  promissory  note issued to
AirClic in respect of such  advance.  The note  issued by NeoMedia in respect of
AirClic's  $500,000  advance is secured by  substantially  all of the  Company's
property,  including  its  core  physical  world-to-Internet   technologies.  If
NeoMedia  is deemed to have  defaulted  under  such  note,  and does not pay the
judgment, AirClic, which is one of the Company's key competitors,  could acquire
NeoMedia's  core  intellectual  property  and other  assets,  which would have a
material adverse effect on NeoMedia's business, prospects,  financial condition,
and results of  operations.  The Company is vigorously  defending this claim and
has interposed  counterclaims  against  AirClic.  As of the date of this filing,
pleadings were closed and the parties have engaged in written discovery. Whether
or not AirClic is  successful  in asserting  its claims that  NeoMedia  breached
certain  representations made by it 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  NeoMedia,  payment of the note and related  interest  would have a
material adverse effect on NeoMedia's financial condition.  If NeoMedia fails to
pay such note, AirClic could proceed against the Company's intellectual property
and other assets securing the note which would have a material adverse effect on
NeoMedia's business, prospects, financial condition, and results of operations.


THE COMPANY'S  SHARES HAVE BEEN  DE-LISTED  FROM TRADING ON THE NASDAQ  SMALLCAP
MARKET,  WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON YOUR ABILITY TO RESELL YOUR
SHARES OR OBTAIN ACCURATE PRICE QUOTATIONS

     On March 11,  2002,  the  Company  received  a Nasdaq  Staff  Determination
stating  that,  as of  December  31,  2001,  the Company did not meet either the
minimum  net  tangible  assets  ($2,000,000)  or  minimum  stockholders'  equity
($2,500,000)  criteria for continued  listing on the Nasdaq  SmallCap Market and
advising that, accordingly, the Company's shares were subject to de-listing from
such market. On May 16, 2002, the Company received  notification from the Nasdaq
Listing  Qualifications  Panel that the Company's shares were delisted effective
May 17, 2002.  The Company's  shares are now trading on the OTC Bulletin  Board.
Your ability to resell shares of the Company's stock,  obtain accurate or timely
price  quotations  on the  Company's  shares,  and,  potentially,  the Company's
ability to sell  shares for its own account in order to raise  equity  financing
could possibly be materially adversely affected by this delisting.


THE COMPANY HAS HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE

     The  Company has  incurred  substantial  losses  since its  inception,  and
anticipate  continuing to incur substantial  losses for the foreseeable  future.
The Company  incurred a loss of $7,421,000 in the year ended  December 31, 2002,
$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,  and
$11,495,000  in the year ended  December 31,  1998.  The  Company's  accumulated
losses were  approximately  $70,765,000  as of December 31, 2002. As of December
31, 2002 and 2001, the Company had a working capital  (deficit) of approximately
$(8,985,000)  and  $(5,163,000),  respectively.  The Company  had  stockholders'
deficit  of  $(6,026,000)   and  $(263,000)  at  December  31,  2002  and  2001,
respectively.  The Company  generated  revenues of  $9,399,000,  $8,142,000  and
$27,565,000  for the years ended December 31, 2002,  2001 and 2000. In addition,
during the years ended December 31, 2002,  2001 and 2000,  the Company  recorded
negative cash flows from  operations  of $556,000,  $5,202,000  and  $6,775,000,


                                       9
<PAGE>

respectively.  To succeed,  the  Company  must  develop new client and  customer
relationships  and  substantially  increase its revenue  derived  from  improved
products and additional  value-added  services.  The Company has expended and to
the extent it has available financing, the Company intends to continue to expend
substantial  resources  to  develop  and  improve  its  products,  increase  its
value-added services and to market its products and services.  These development
and marketing  expenses must be incurred well in advance of the  recognition  of
revenue.  As a  result,  the  Company  may  not be able to  achieve  or  sustain
profitability.


THE COMPANY'S INDEPENDENT ACCOUNTANTS HAVE ADDED GOING CONCERN LANGUAGE TO THEIR
REPORT ON THE COMPANY'S FINANCIAL  STATEMENTS,  WHICH MEANS THAT THE COMPANY MAY
NOT BE ABLE TO CONTINUE OPERATIONS

     The report of Stonefield Josephson, Inc., the Company's current independent
auditors,  with respect to the Company's  financial  statements  and the related
notes for the years ended  December 31, 2002 and 2001,  indicates  that,  at the
date of their report,  the Company had suffered recurring losses from operations
and that the Company's current cash position raised  substantial doubt about its
ability to continue as a going concern.  The Company's  financial  statements do
not include any adjustments that might result from this uncertainty.  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,  indicates  that, at the date of their  report,  the
Company had  suffered  recurring  losses from  operations  and its current  cash
position  raised  substantial  doubt  about its  ability to  continue as a going
concern.  The Company's financial statements do not include any adjustments that
might result from this uncertainty.


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

     The physical  world-to-Internet  market in which the Company  operates is a
recently developed market. Further, the Company has conducted operations in this
market only since March 1996. Consequently, the Company has a relatively limited
operating history upon which you may base an evaluation of the Company's primary
business and  determine  the  Company's  prospects  for  achieving  its intended
business   objectives.   To  date,   the   Company   has   sold   its   physical
world-to-Internet products to only 12 companies.  Further,  Digital:Convergence,
the Company's primary customer for its physical world-to-Internet  products, has
filed Chapter 7 of the United States Bankruptcy Code and is presently being sued
by the Company for default on a promissory note issued to the Company in lieu of
payment.  The Company is prone to all of the risks inherent to the establishment
of any new business venture,  including unforeseen changes in its business plan.
You 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 its client base;

     o    implement  and   successfully   execute  its  business  and  marketing
          strategy;

     o    continue to develop and upgrade its products;

     o    continually update and improve its service offerings and features;

     o    respond  to  industry  and  competitive  developments;  and o attract,
          retain, and motivate qualified personnel.

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




                                       10
<PAGE>

THE  COMPANY IS SUBJECT TO PRICE  VOLATILITY  DUE TO ITS  OPERATIONS  MATERIALLY
FLUCTUATING

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

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

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

     o    the Company's ability to maintain client satisfaction;

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

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

     o    the timing and size of client and customer purchases;

     o    introductions of products and services by competitors;

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

     o    the  pricing of hardware  and  software  which the Company  resells or
          integrates into its 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  its  systems  and
          infrastructure in a timely and effective manner;

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

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

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

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

THE COMPANY'S COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE
DIFFICULT FOR INVESTORS TO SELL THEIR SHARES DUE TO SUITABILITY REQUIREMENTS

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

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

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



                                       11
<PAGE>

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

     o    In issuers  with net  tangible  assets less than $2.0  million (if the
          issuer has been in  continuous  operation for at least three years) or
          $10.0 million (if in continuous  operation for less than three years),
          or with average  revenues of less than $6.0 million for the last three
          years.

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


THE COMPANY IS  UNCERTAIN  OF THE  SUCCESS OF ITS  INTERNET  SWITCHING  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  Internet  Switching  Services  business  unit will ever  achieve
          profitability;

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

     o    the products the Company develops will obtain market acceptance.

     In the event that the  Internet  Switching  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'S SUCCESS IS DEPENDENT UPON THE RESALE OF SOFTWARE AND EQUIPMENT FOR
REVENUE;  A  REDUCTION  IN THESE  SALES WOULD  MATERIALLY  ADVERSELY  AFFECT THE
COMPANY'S OPERATIONS AND THE PRICE OF ITS STOCK

     During the years  ended  December  31,  2002,  2001 and 2000,  the  Company
derived 95%,  93%,  and 69%,  respectively,  of its revenues  from the resale of
computer  software  and  technology  equipment.  A loss or a  reduction  of this
revenue  would  have  a  material  adverse  effect  on the  Company's  business,
prospects,  financial condition, and results of operations, as well as its stock
price. The Company can provide no assurance that:

     o    the market for its products and services will continue;

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

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

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

     Further,  the  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.


                                       12
<PAGE>

A LARGE  PERCENTAGE OF THE COMPANY'S  ASSETS ARE INTANGIBLE  ASSETS,  WHICH WILL
HAVE LITTLE OR NO VALUE IF ITS OPERATIONS ARE UNSUCCESSFUL

     At December 31, 2002,  approximately 55% of the Company's total assets were
intangible  assets,  consisting  primarily of rights  related to its patents and
other intellectual property. If the Company's operations are unsuccessful, these
assets will have little or no value, which will materially  adversely affect the
value of the Company's stock and the ability of its stockholders to recoup their
investments in the Company's capital stock.


THE COMPANY'S ISS BUSINESS UNIT  MARKETING  STRATEGY HAS NOT BEEN TESTED AND MAY
NOT RESULT IN SUCCESS

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


THE  COMPANY'S  INTERNALLY  DEVELOPED  SYSTEMS ARE  INEFFICIENT  AND MAY PUT THE
COMPANY AT A COMPETITIVE DISADVANTAGE

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


THE COMPANY COULD FAIL TO ATTRACT OR RETAIN KEY PERSONNEL

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


THE COMPANY DEPENDS UPON ITS SENIOR  MANAGEMENT AND THEIR LOSS OR UNAVAILABILITY
COULD PUT THE COMPANY AT A COMPETITIVE DISADVANTAGE

     The  Company's  success  depends  largely  on the  skills  of  certain  key
management and technical personnel,  including Charles T. Jensen, its President,
Chief Executive Officer and Chief Operating Officer. The loss of the services of
Mr. Jensen could materially harm the Company's  business because of the cost and
time necessary to replace and train a replacement. Such a loss would also divert
management  attention  away  from  operational  issues.  The  Company  does  not
presently maintain a key-man life insurance policy on Mr. Jensen.




                                       13
<PAGE>

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

     The Company's success in the physical world-to-Internet and the value-added
systems  integration  markets  is  dependent  upon its  proprietary  technology,
including  its patents and other  intellectual  property,  and on the  Company's
ability to protect its proprietary  technology and other  intellectual  property
rights. In addition,  the Company must conduct its operations without infringing
on the  proprietary  rights of third  parties.  The Company also intends to rely
upon  unpatented  trade secrets and the know-how and expertise of its employees,
as  well as its  patents.  To  protect  its  proprietary  technology  and  other
intellectual  property,  the Company  relies  primarily on a combination  of the
protections  provided by  applicable  patent,  copyright,  trademark,  and trade
secret laws as well as on confidentiality procedures and licensing arrangements.
The Company has five patents for its physical world-to-Internet  technology. The
Company  also has  several  trademarks  relating  to its  proprietary  products.
Although the Company believes that it has taken appropriate steps to protect its
unpatented proprietary rights,  including requiring that its employees and third
parties  who  are  granted  access  to its  proprietary  technology  enter  into
confidentiality  agreements  with  the  Company,  the  Company  can  provide  no
assurance  that these  measures will be sufficient to protect its rights against
third parties. Others may independently develop or otherwise acquire patented or
unpatented technologies or products similar or superior to the Company's.

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


THE COMPANY IS EXPOSED TO PRODUCT LIABILITY CLAIMS FOR WHICH IT HAS COVERAGE AND
AN  UNINSURED  CLAIM  COULD  HAVE A  MATERIAL  ADVERSE  EFFECT ON THE  COMPANY'S
BUSINESS, PROSPECTS,  FINANCIAL CONDITION, AND RESULTS OF OPERATIONS, AS WELL AS
THE VALUE OF ITS STOCK

     Many of the  Company's  projects  are  critical  to the  operations  of its
clients'  businesses.  Any failure in a client's information system could result
in a claim for  substantial  damages  against  the  Company,  regardless  of the
Company's  responsibility  for such failure.  The Company could,  therefore,  be
subject to claims in connection  with the products and services that the Company
sells. The Company does not currently maintain product liability insurance.  The
Company does not currently maintain errors and omissions insurance. There can be
no assurance that:

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

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

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


                                       14
<PAGE>

THE COMPANY WILL NEED TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS

     During  May  2002,  the  Company  entered  into an  Equity  Line of  Credit
Agreement with Cornell  Capital  Partners LP. The agreement was terminated and a
new agreement was entered into in November 2002.  Under the terms of the revised
agreement, Cornell has agreed to purchase up to $10.0 million of NeoMedia common
stock over the next two years at the Company's discretion. The maximum amount of
each  purchase is $150,000,  with a minimum  seven days between  purchases.  The
purchase  price will be 98% of the lowest  closing bid price during the five-day
period  following the delivery of a notice of purchase by NeoMedia.  The Company
will pay 5% of the gross  proceeds of each  purchase to Cornell as a commission.
According to the terms of the agreement,  the Company cannot draw on the line of
credit  until the  shares  underlying  the  agreement  are  registered  for with
Securities  and Exchange  Commission.  On February  14,  2003,  the SEC declared
effective  the  S-1  registration   statement   containing  100  million  shares
underlying  the Equity  Line of Credit.  The  Company  has not secured any other
financing as of the date of this filing to fund operations.

     The  Company's  cash  balance as of December 31,  2002,  was  approximately
$70,000.  Based on current cash  balances  and  operating  budgets,  the Company
believes it only has enough operating capital to last through April 30, 2003. If
the Company's financial resources are insufficient, the Company may be forced to
seek protection  from its creditors  under the United States  Bankruptcy Code or
analogous  state  statutes  unless  it is able to  engage  in a merger  or other
corporate  finance  transaction with a better  capitalized  entity.  The Company
cannot predict whether additional financing will be available, its form, whether
equity or debt,  or be in another  form, or if the Company will be successful in
identifying  entities with which it may  consummate a merger or other  corporate
finance transactions.

     On December 2, 2002, the Company issued to a private  investor a promissory
note in the amount of  $165,000,  bearing  interest  at a rate of 12% per annum,
with a maturity of 150 days.  The Company  was to pay an  administrative  fee of
$16,500  and  legal  fees of  $10,000  relating  to the  issuance  of the  note,
resulting in net  proceeds to the Company of $138,500.  In the event the Company
had  defaulted on the note, it would have been required to issue to the investor
sufficient stock to comprise a non-dilutable 51% of the Company's  fully-diluted
common shares. In connection with the default provision of the note, the Company
entered into a Pledge Agreement under which the Company issued 53,620,023 shares
to an unrelated third party as collateral for the note. The investor only funded
to the Company  $84,000 of the principal  amount of the note. The Company repaid
this note during March 2003,  and the shares held in escrow were  returned.  The
Company has not incurred further obligation under this note agreement..

     During November 2002,  NeoMedia issued Convertible Secured Promissory Notes
with an aggregate face value of $60,000 to 3 separate parties, including Charles
W. Fritz,  Chairman of the Board of Directors of NeoMedia;  William E. Fritz, an
outside  director;  and James J.  Keil,  an  outside  director.  The notes  bear
interest  at a rate of 15% per  annum,  and  mature at the  earlier  of i.) four
months, or ii.) the date the shares underlying the Cornell Equity Line of Credit
are  registered  with the SEC. The notes are  convertible,  at the option of the
holder,  into  either  cash or shares of our common  stock at a 30%  discount to
either  market  price upon  closing,  or upon  conversion,  whichever  is lower.
NeoMedia  also  granted to the  holders an  additional  1,355,670  shares of its
common stock and 60,000 warrants to purchase shares of its common stock at $0.03
per share,  with a term of three  years.  The warrants and shares were issued in
January 2003.  In addition,  since this debt is  convertible  into equity at the
option of the note holder at beneficial conversion rates, an embedded beneficial
conversion  feature will be recorded as a debt discount and amortized  using the
effective interest rate over the life of the debt in accordance with EITF 00-27.
Total cost of beneficial conversion feature, fair value of the stock and cost of
warrants  issued  exceed the face value of the notes  payable,  therefore,  only
$60,000,  the face amount of the note, is recognizable as debt discount,  and is
being  amortized  over the  life of the  notes  payable.  Any  unamortized  debt
discount  related to  beneficial  conversion  feature will be charged to expense
upon  conversion,  as interest  expense.  In the event NeoMedia  defaults on the
note, NeoMedia will issue an additional  1,483,318 shares of its common stock to
the note holders. The notes are secured by our intellectual  property,  which is
subject to first lien by AirClic,  Inc. During March 2003, two of the affiliated
parties,  Mr. William Firtz and Mr. Keil, agreed to extend the maturity date due
to the Company's  capital  constraints.  The Company repaid Mr. Charles  Fritz's
note in full during  March 2003.  NeoMedia  will  continue to pursue  additional
capital through the issuance of Convertible  Secured  Promissory  Notes with the
same terms as above.




                                       15
<PAGE>

     Because the Company  cannot  reliably  predict when or if future  financing
will  occur,  the  Company is unable to  determine  whether and for how long the
Company will be able to meet its capital  requirements.  The Company anticipates
offering  additional  shares of its common stock through  private  placements of
unregistered  securities,  as well as debenture  notes and drawing on its Equity
Line of  Credit  to meet  its  short-term  capital  needs.  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 will be sufficient to satisfy its capital
requirements.  In the absence of  financing,  the Company  believes that it will
have  sufficient  capital to sustain  operations  through  April 30,  2003.  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 the Company may
require  additional  financing  in order to  execute on its  operating  plan and
continue as a going concern.  The Company cannot predict  whether any 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 form of a sale of equity  securities,  the holders of
the common stock may experience additional dilution.


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

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

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



                                       16
<PAGE>

     The  Company  is  authorized  to  issue a total  of  25,000,000  shares  of
Preferred Stock, par value $0.01 per share. The Company's  designated  Preferred
Stock is currently  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, following the conversion and cancellation of
452,489  shares of Series A  Convertible  Preferred  Stock,  par value $0.01 per
share, 47,511 shares of Series A Convertible Preferred Stock; and 100,000 shares
of Series B 12%  Convertible  Redeemable  Preferred  Stock,  par value $0.01 per
share.  No shares of the  Company's  preferred  stock  are  currently  issued or
outstanding.

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





                                       17
<PAGE>



RISKS RELATING TO THE COMPANY'S INDUSTRY


THE SECURITY OF THE INTERNET POSES RISKS TO THE SUCCESS OF THE COMPANY'S  ENTIRE
BUSINESS

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


THE COMPANY WILL ONLY BE ABLE TO EXECUTE ITS PHYSICAL WORLD-TO-INTERNET BUSINESS
PLAN IF INTERNET USAGE AND ELECTRONIC COMMERCE CONTINUE TO GROW

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

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


THE   COMPANY   MAY  NOT  BE   ABLE  TO   ADAPT   AS  THE   INTERNET,   PHYSICAL
WORLD-TO-INTERNET,  EQUIPMENT  RESALES AND  SYSTEMS  INTEGRATIONS  MARKETS,  AND
CUSTOMER DEMANDS CONTINUE TO EVOLVE

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

     o    rapid technological change;

                                       18
<PAGE>

     o    changes in user and customer requirements and preferences;

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

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

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

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

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

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

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

THE  COMPANY  MAY  NOT BE ABLE TO  COMPETE  EFFECTIVELY  IN  MARKETS  WHERE  ITS
COMPETITORS HAVE MORE RESOURCES

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

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

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

                                       19
<PAGE>


IN THE FUTURE  THERE COULD BE  GOVERNMENT  REGULATIONS  AND LEGAL  UNCERTAINTIES
WHICH COULD HARM THE COMPANY'S BUSINESS

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

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



ITEM 2.  DESCRIPTION OF PROPERTIES

     The Company's principal executive, development and administrative office is
located at 2201 Second Street, Suite 402, Fort Myers, Florida 33901. The Company
occupies  approximately 5,000 square feet under terms of a written lease from an
unaffiliated party which expires on January 31, 2004, with monthly rent totaling
approximately  $16,000.  During  September  2002,  the Company  entered  into an
agreement  with the landlord of this  facility  under which the Company  vacated
approximately  70% of its previously  rented space in exchange for reduced rent.
The Company maintains a sales facility at 2150 Western Court,  Suite 230, Lisle,
Illinois 60532, where it occupy  approximately 6,000 square feet under the terms
of a written  lease from an  unaffiliated  party  expiring on October 31,  2003.
Monthly rent on this facility was negotiated from approximately $9,000 per month
to  $3,000  per  month  for a  period  of nine  months  as part of a  settlement
agreement  between NeoMedia and the landlord  finalized in August 2002. 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. Upon
the discontinuation of the Qode business unit, the Company vacated the premises.
The Company was subsequently sued by Headway Associates,  the landlord, for past
and future rents on the facility. The Company settled the suit for cash payments
of $100,000, all of which have been made in 2002.

     During 2001, the Company closed its office in Monterrey,  Mexico, which was
primarily used for sales and consulting efforts.

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



                                       20
<PAGE>

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.

     NEOMEDIA SHAREHOLDERS

     During January 2002,  certain of NeoMedia'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  shares of NeoMedia  common  stock.  On March 11,
2002, NeoMedia filed its response claiming that NeoMedia 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.


     AIRCLIC, INC. LITIGATION

     On July 3, 2001,  the Company  entered into a non-binding  letter of intent
with  AirClic  which  contemplated  an  intellectual  property   cross-licensing
transaction  between the Company and  AirClic.  Under the terms of the letter of
intent,  AirClic was to provide the Company with bridge financing of $2,000,000,
which was to be paid to the Company in installments.  On July 11, 2001,  AirClic
advanced  $500,000 in bridge financing to the Company in return for a promissory
note from the  Company  secured by all of its  assets,  including  its  physical
world-to-Internet  patents. During the negotiation of definitive agreements, the
letter of intent was abandoned on the basis of the Company's  alleged  breach of
certain representations made by the Company in the promissory note.

     On September 6, 2001,  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 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   property,   including   the   Company's   core   physical
world-to-Internet   technologies.   If  the  Company  is  unsuccessful  in  this
litigation,  AirClic,  which  is one of the  Company's  key  competitors,  could
acquire the Company's core intellectual  property and other assets,  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
claim  and have  filed  counterclaims  against  AirClic.  As of the date of this
filing, pleadings were closed and the parties have engaged in written discovery.
Whether or not AirClic is  successful  in asserting  its claims that the Company
breached certain representations made by it 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  and other  assets  securing  the note which would have a
material  adverse  effect  on  the  Company's  business,  prospects,   financial
condition, and results of operations. The Company has not accrued any additional
liability over and above the note payable and related  accrued  interest.  As of
December 3, 2002,  pleadings were closed and the parties have engaged in written
discovery.

     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 in the public domain. Any
declaration  that the  Company's  core  patented  or  patentable  technology  is
non-protectable and in the public domain would have a material adverse effect on
the  Company's  business,   prospects,   financial  condition,  and  results  of
operations.  The Company is vigorously  defending this second action as well. On
November  21,2001,  the  Company  filed a motion to dismiss  the  complaint.  On
December 19, 2001, AirClic filed a response opposing that position. On September
18,  2002,  the court  ruled in favor of the  Company  and  dismissed  AirClic's
complaint.  The Company has not accrued any  liability in  connection  with this
matter.




                                       21
<PAGE>

      DIGITAL:  CONVERGENCE LITIGATION

      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.  On March 22,  2002,
Digital:Convergence filed under Chapter 7 of the United States Bankruptcy Code.

      OTHER LITIGATION

      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.  During May 2002, the Company
settled the suit.  The  Company is  obligated  to make cash  payments of $90,000
directly to the plaintiff  during the period May 2002 through December 2002, and
cash  payments  to the  plaintiff's  attorney  for legal  fees in the  amount of
$45,000 due in July and August 2002.  In  addition,  the  plaintiff  was granted
360,000 options to purchase shares of NeoMedia common stock at an exercise price
of $0.08.  As of March 31,  2002,  the Company had accrued a $347,000  liability
relating to the suit.  As a result,  the Company  recognized  an increase to net
income of  approximately  $176,000 during the three-month  period ended June 30,
2002 to adjust the liability to the  settlement  amount.  As of December 31, the
Company  had an accrued  liability  of  approximately  $33,000  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. On September
6, 2002,  the Company  settled  this suit for $133,000 of the  Company's  common
stock. On March 31, 2003, the Company issued 2,700,000 shares of common stock to
Ripfire  under this  arrangement.  The Company has accrued a $133,000  liability
relating to this matter as of December 31, 2002.

      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 is currently  attempting to negotiate settlement of this matter. The
Company has accrued a liability of $525,000 as of December 31, 2002.

      On July 22, 2002, 2150 Western Court, L.L.C., the property manager for the
Company's  Lisle,  IL, office,  filed a summons seeking payment of approximately
$72,000 for all past due rents on the facility. The summons asked for a judgment
for the above amount plus  possession  of the premises.  On August 9, 2002,  the
Company  settled  this  matter.  The  settlement  calls  for past  due  rents of
approximately  $72,000  to be paid over a  15-month  period,  as well as reduced
rents for the period August 2002 through March 2003. As additional consideration
in the settlement, the Company issued 900,000 shares of its common stock to 2150
Western  Court  L.L.C.  The  Company had a liability  of  approximately  $49,000
relating to this matter as of December 31, 2002.

      On July 27, 2002, the Company's  former General Counsel filed suit in U.S.
District  Court,  Ft.  Myers  division,  seeking  payment of the 2000  executive
incentive,  severance and unpaid  vacation  days in the amount of  approximately
$154,000.  In June  2001,  the  Company's  compensation  committee  approved  an
adjustment  to the 2000  executive  incentive  plan that  reduced the  executive
incentive  payout  as a  result  of the  write-off  of  the  Digital:Convergence
intellectual  property  license  contract  in the second  quarter of 2001.  As a
result,  the Company  reduced the  accrual  for such payout by an  aggregate  of
approximately  $1.1  million in the second  quarter of 2002.  The  plaintiff  is
seeking payment of the entire original  incentive  payout. On November 12, 2002,
the Company settled the lawsuit. The settlement calls for cash payments totaling
approximately  $90,000 over a period of ten months,  plus 250,000 vested options
to purchase  shares of the Company's  common stock at an exercise price of $0.01
with a term of five years. The Company had a liability of approximately  $70,000
relating to this matter as of December 31, 2002.

      On September 12, 2002,  R. R.  Donnelley & Sons Company filed a summons in
the  Circuit  Court of The  Twentieth  Judicial  Circuit in and for Lee  County,
Florida,  seeking  payment of  approximately  $92,000  in past due  professional
services bills. The Company is attempting to negotiate  settlement of this issue
out of court  prior to the court date.  The  Company  has accrued  approximately


                                       22
<PAGE>

$92,000 relating to this matter as of December 31, 2002.

      On September 13, 2002, Wachovia Bank, N.A., owner of the building in which
the Company's Ft. Myers, Florida  headquarters is located,  filed a complaint in
Circuit Court of The Twentieth Judicial Circuit in and for Lee County,  Florida,
seeking payment of approximately  $225,000 in past due rents. The complaint also
seeks payment of all future rent payments under the lease term, which expires in
January 2004, as well as  possession of the premises.  On October 28, 2002,  the
Company and Wachovia  reached a settlement on this matter.  The settlement calls
for cash payments of past due rents of  approximately  $250,000 over a period of
16 months. The Company will also vacate approximately 70% of the unused space in
its headquarters,  and the rent for the remainder of the lease, which expires in
January 2004, will be reduced  according to square footage used. The Company has
accrued a  liability  of  approximately  $269,000  relating to this matter as of
December 31, 2002.

      On October 21, 2002, International Digital Scientific, Inc. ("IDSI") filed
a demand for  arbitration  relating to past due payments on an  uncollateralized
note  payable  from us to IDSI dated  October  1,  1994.  The note was issued in
exchange for the purchase by us of computer  software from IDSI.  The note calls
for the Company to make  payments  of the  greater  of: (i) 5% of the  collected
gross revenues from sales of software or (ii) $16,000 per month.  As of December
31, 2002,  the Company had recorded a current  portion of long term debt to IDSI
of $425,093.  The net  carrying  value of future  obligation  under the note was
$651,285 as of December 31, 2002. The Company has filed a counterclaim  with the
arbitrator  relating to this matter. The arbitration  hearing has been scheduled
for June 25, 2003.

      On October 28, 2002, Merrick & Klimek, P.C., filed a complaint against the
Company  seeking payment of  approximately  $170,000 in past due legal services.
The amount in question is subject to an unsecured  promissory  note that matured
unpaid on February 28, 2002.  The Company is attempting to negotiate  settlement
of this issue out of court prior to the court date. The Company has recorded the
note  payable  amount  of   approximately   $170,000  and  accrued  interest  of
approximately $21,000 relating to this matter as of December 31, 2002.

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

      On December 30, 2002,  Brooks  Automation,  Inc. filed a complaint against
the  Company  seeking  payment  of  approximately  $37,000  in past due  amounts
relating to  software  re-sold by the  Company.  The  Company is  attempting  to
negotiate  settlement  of this issue out of court  prior to the court  date.  On
January 16, 2003, the Company and Brooks  Automation  reached a settlement under
which the Company will pay the amount owed to Brooks Automation over a period of
approximately 15 months,  with the payment amount increasing after three months.
The Company had a liability of approximately  $37,000 relating to this matter as
of December 31, 2002.

      On February 6, 2003,  Norton Allen & Blue, P.A., filed a complaint against
the Company seeking payment of approximately $25,000 in past due legal services.
The Company is  attempting  to negotiate  settlement  of this issue out of court
prior to the court date.

      On March 10, 2003, IBM Credit  Corporation  filed a complaint  against the
Company seeking payment of approximately  $9,000 in past due amounts relating to
equipment  leased  by the  Company.  The  Company  is  attempting  to  negotiate
settlement of this issue out of court prior to the court date.


                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS



                                       23
<PAGE>

     (a) Market Information. NeoMedia's common stock began trading on The Nasdaq
SmallCap  Market under the symbol  "NEOM" on November 25, 1996,  the date of the
Company's  initial public  offering.  On March 11, 2002, the Company  received a
Nasdaq Staff  Determination  stating  that,  as of December 31, 2001, it did not
meet  either  the  minimum  net   tangible   assets   ($2,000,000)   or  minimum
stockholders'  equity ($2,500,000)  criteria for continued listing on the Nasdaq
SmallCap  Market and  advising  that,  accordingly,  the  Company's  shares were
subject to de-listing  from such market  effective  May 17, 2002.  The Company's
shares are now trading on the OTC Bulletin  Board under the symbol "NEOM." As of
December 31, 2002, there were 30,746,968 common shares outstanding.

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

<TABLE>
<CAPTION>
                                                                         (U.S. $)
           ------------------------------------ ----------------------------------------------------------
           2000                                             HIGH                          LOW
           ------------------------------------ ------------------------------ ---------------------------
<S>                                                         <C>                           <C>
           First Quarter                                    $14.50                        $5.69
           Second Quarter                                    11.13                         5.00
           Third Quarter                                      6.75                         4.13
           Fourth Quarter                                     6.50                         1.94

           ------------------------------------ ------------------------------ ---------------------------
           2001                                             HIGH                          LOW
           ------------------------------------ ------------------------------ ---------------------------
           First Quarter                                     $6.00                        $2.50
           Second Quarter                                     4.50                         1.76
           Third Quarter                                      1.85                         0.16
           Fourth Quarter                                     0.24                         0.11

           ------------------------------------ ------------------------------ ---------------------------
           2002                                             HIGH                          LOW
           ------------------------------------ ------------------------------ ---------------------------
           First Quarter                                     $0.41                        $0.14
           Second Quarter                                     0.17                         0.05
           Third Quarter                                      0.10                         0.02
           Fourth Quarter                                     0.05                         0.01
</TABLE>


      (b) Holders. As of January 31, 2003, there were 99 registered 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.  The Company has not declared or paid any dividends on its
common stock during the years ended December 31, 2002, 2001 or 2000. The Company
will base any  issuance of dividends  upon its  earnings,  financial  condition,
capital  requirements  and other  factors  considered  important by its board of
directors.  Delaware  law and the  Company's  articles of  incorporation  do not
require the Company's  board of directors to declare  dividends on the Company's
common stock. The Company expects to retain all earnings,  if any,  generated by
operations for the  development and growth of the Company's  business,  and does
not  anticipate  paying any  dividends  to the  Company's  stockholders  for the
foreseeable future.

     (d) Recent Issuances of Unregistered Securities.

     In January 2003,  the Company  issued  1,355,670  shares of common stock to
three  separate  related  parties,  Charles W.  Fritz,  Chairman of the Board of
Directors;  William E.  Fritz,  outside  director;  and James J.  Keil,  outside
director,  in  connection  with  convertible  promissory  notes  issued on their
behalf.

      In December 2002,  NeoMedia issued  4,000,000 shares of common stock to an
unrelated  consultant  in exchange for  services to be provided  over a one-year
period. There were no proceeds to the Company from the issuance of the stock.

     On November 12, 2002,  NeoMedia and Cornell Capital Partners terminated the
May 2002 Equity Line of Credit  Agreement  and entered into a new Equity Line of
Credit Agreement with Cornell under which Cornell agreed to purchase up to $10.0
million of NeoMedia's  common stock and over the next two years, with the timing
and amount of the purchase at NeoMedia's discretion.  The maximum amount of each


                                       24
<PAGE>

purchase is $150,000 with a minimum of seven days between purchases.  The shares
will be valued at 98% of the lowest closing bid price during the five day period
following the delivery of a notice of advance by NeoMedia.  NeoMedia will pay 5%
of the gross proceeds of each purchase to Cornell as a commission.  According to
the terms of the agreement, NeoMedia cannot draw on the line of credit until the
shares  underlying  the agreement are registered for trading with the Securities
and Exchange  Commission.  On February 14, 2003, the SEC declared  effective the
S-1 registration  statement  containing 100 million shares underlying the Equity
Line  of  Credit.  Butler  Gonzalez  LLP was  paid a fee of  837,500  shares  of
NeoMedia's common stock for legal services relating to drafting and execution of
the Equity Line, and Westrock Advisors,  Inc. was paid a fee of 62,500 shares of
NeoMedia's common stock for acting as the placement agent.

     In November  2002,  NeoMedia  issued  250,000  shares of common  stock upon
exercise of  outstanding  options by an unrelated  party at a price of $0.01 per
share. The gross proceeds of such transaction were approximately $3,000.

     In August  2002,  NeoMedia  issued  900,000  shares of common stock to 2150
Western  Court  L.L.C,  the landlord of its Lisle,  Illinois  sales  office,  as
settlement  of a lawsuit  relating to past-due and future  building  rents.  The
shares were valued at $0.03 per share, the market price at the date of issuance.
There were no cash proceeds to NeoMedia in this transaction.

     In July,  August  and  September  2002,  NeoMedia  issued an  aggregate  of
3,000,000 shares of its common stock upon the exercise of outstanding options by
a  consultant  at a price  of  $0.01  per  share.  The  gross  proceeds  of such
transaction were $30,000.

     In June 2002,  the Company  repriced 3 million of its common stock warrants
from $0.12 to $.05 per share.  All of the warrants were  exercised  immediately.
The Company recognized an expense of $132,000 related to this repricing.

     In June  2002,  NeoMedia  issued  900,000  shares  of  common  stock to two
unrelated  consultants as payment for  consulting  services to be performed from
June 2002 through June 2003. There were no cash proceeds to the Company in these
transactions.

     In June 2002, NeoMedia issued 10,000 shares of common stock to an unrelated
vendor as an interest payment on past-due accounts  payable.  There were no cash
proceeds to the Company in these transactions.

     In May 2002, NeoMedia issued an aggregate of 200 shares of its common stock
upon the exercise of outstanding  options by an employee at a price of $0.12 per
share. The gross proceeds of such transaction were $24.

     During  April  2002,  NeoMedia  repriced  7.4  million of its common  stock
options held by employees,  consultants and advisors for a period of six months.
During the term of the  option  repricing  program,  participating  holders  are
entitled to exercise subject options at an exercise price per share equal to the
greater of (1) $0.12 or (2) 50% of the last sale price of shares of Common Stock
on the OTCBB,  on the trading date  immediately  preceding the date of exercise.
Shortly after the  announcement of the repricing  program,  the market price for
the  Company's  common  stock fell below  $0.12,  and has not closed above $0.12
since. As a result, no options were exercised under the terms of the program and
NeoMedia did not recognize any expense relating to the repricing  program during
the year ended  December  31,  2002due  to  immaterial  effect on the  financial
statements.

     In April 2002, NeoMedia issued an aggregate of 140,775 shares of its common
stock upon the  exercise  of  outstanding  warrants  by Charles  W.  Fritz,  its
Chairman and Chief Executive  Officer,  at a price of $0.12 per share. Mr. Fritz
subsequently  sold the  shares  into the  market.  The  gross  proceeds  of such
transaction were  approximately  $17,000.  In accordance with Section 16(b), all
proceeds from the sales were retained by the Company.

     In April 2002,  NeoMedia  issued an aggregate  of  1,962,255  shares of its
common stock upon the exercise of outstanding  options by two unrelated  parties
at a price of $0.12 per  share.  The gross  proceeds  of such  transaction  were
approximately $235,000.



                                       25
<PAGE>

     In April 2002,  NeoMedia issued an aggregate of 40,000 shares of its common
stock upon the  exercise  of  outstanding  options by James J. Keil,  an outside
director.  Mr. Keil  purchased  25,000 shares at an exercise price of $0.135 and
15,000  shares  at  $0.20.   The  gross  proceeds  of  such   transaction   were
approximately $6,000.

     During  March  2002,  NeoMedia  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  OTCBB,  on the  trading  date
immediately preceding the date of exercise.  Approximately 370,000 warrants were
exercised in connection with the program, and NeoMedia recognized  approximately
$63,000 in expense  relating to the repricing during the year ended December 31,
2002.

     In March 2002, NeoMedia issued an aggregate of 228,675 shares of its common
stock upon the exercise of outstanding warrants by an unrelated party at a price
of $0.12 per share. The gross proceeds of such  transaction  were  approximately
$27,000.

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

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

     In January  2002,  NeoMedia  issued  55,000 shares of its common stock at a
price of $0.13 per share to an  individual  unrelated  party.  Cash  proceeds to
NeoMedia were $7,150.

     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 the Company in
these transactions.

     In September 2001,  NeoMedia issued 150,000 options to buy shares of common
stock at a price of $0.20 per share for consulting services.

     In July 2001,  NeoMedia  issued an aggregate of 11,300 shares of its 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.  The  warrants  were
originally  issued to one unrelated party for professional  services provided to
the Company.

     In June 2001, NeoMedia issued warrants to purchase 404,900 shares of common
stock with an exercise price of $2.09 for consulting services.

     In June 2001,  NeoMedia  issued an  aggregate of 4,100 shares of its 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. The warrants were originally
issued to one unrelated party for professional services provided to the Company.

     In May 2001,  NeoMedia  issued an aggregate of 320,050 shares of its 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.  The  warrants  were
originally  issued to one related party in exchange for  forgiveness of debt and
one unrelated party for professional services provided to the Company.



                                       26
<PAGE>

     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 March and April 2001, NeoMedia issued 316,500 shares of its common stock
at a price of $3.40 per share to four foreign  institutional  unrelated 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 its common stock at an exercise price of $3.56 per share to a
foreign individual.

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

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

     In March 2001,  NeoMedia issued 170,000 shares of its common stock issuable
upon the  exercise  of  outstanding  warrants  held by a  foreign  institutional
unrelated party,  originally issued in connection with the transaction described
in paragraph 4, above. The gross proceeds of such transaction were approximately
$362,000.

     In October  2000,  NeoMedia  issued  warrants to purchase  80,000 shares of
common stock at a price of $4.13 per share for consulting services.

     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 2000,  NeoMedia  issued an aggregate  of  1,000,000  shares of its
common  stock at a price of $7.50 per share to 20  foreign  individuals  and one
foreign  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 its  common  stock at an
exercise price of $7.50 per share,  125,000  warrants to purchase  shares of its
common stock at an exercise price of $15.00 per share,  and 100,000  warrants to
purchase  shares of its common stock at an exercise  price of $7.20 per share to
the institutional investor and an independent consultant.

     In March 2000,  NeoMedia issued 187,500 shares of its 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.  The warrants were
originally issued as payment for professional services provided to the Company.

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

     In February  2000,  NeoMedia  issued 50,000 shares of its common stock at a
price of $6.00 per share to an institutional unrelated party. In connection with
the sale,  the Company  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 its common stock upon
the exercise of outstanding  warrants at a price of $2.00 per share,  originally
issued in connection  with the  transaction  described  above in March 2002. The
gross proceeds of such transaction were approximately $75,000.

     In January  2000,  NeoMedia  issued an aggregate  of 301,368  shares of its
common stock at a price of $3.75 per share to 14 unrelated  parties,  3 of which
were institutions and 11 of which were  individuals,  of which two were foreign.
In  connection  with the sale,  the Company  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,  the Company  issued as  commissions  9,502 shares of its common stock
valued at $7.09 per share.



                                       27
<PAGE>

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





                                       28
<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.

                             SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

                                                     RESULTS FOR THE YEAR ENDED DECEMBER 31,
                                      ----------------------------------------------------------------------
                                            2002       2001        2000          1999       1998      1997
                                          (ACTUAL)   (ACTUAL)    (ACTUAL)      (ACTUAL)   (ACTUAL)  (ACTUAL)
                                                     (in  thousands, except share data)

CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<S>                                        <C>        <C>        <C>           <C>       <C>        <C>
Revenues                                   $9,399     $8,142     $27,565       $25,256   $23,478    $24,434
Cost of sales                               8,264      8,866      18,533        22,470    19,149     20,070
Gross margin                                1,135      (724)       9,032         2,786     4,329      4,364
Operating expenses                          5,852      7,840      14,615        13,032    15,945     10,268
Digital Convergence write-off                  --      7,354          --            --        --         --
Loss on impairment of assets                1,003      2,871          --            --        --         --
Loss from operations                      (5,720)   (18,789)     (5,583)      (10,246)  (11,616)    (5,904)
Interest expense/(income)                     178       (21)       (174)           226     (121)        147
Income tax provision/(benefit)                 --         --          --            --        --       (78)
Loss from continuing operations           (5,898)   (18,768)     (5,409)      (10,472)  (11,495)    (5,973)
Loss from operations and disposal
    of discontinued business unit         (1,523)    (6,701)          --            --        --         --
Net loss                                  (7,421)   (25,469)     (5,409)      (10,472)  (11,495)    (5,973)

LOSS PER SHARE DATA:
Loss per share from
  continuing operations                   ($0.26)    ($1.14)     ($0.39)       ($1.01)   ($1.34)    ($0.90)
Net loss per share                        ($0.33)    ($1.55)     ($0.39)       ($1.01)   ($1.34)    ($0.90)
Weighted average common
  shares outstanding (basic
  and diluted)                         22,330,485 16,410,246  13,931,104    10,377,478 8,560,849  6,615,107


CONSOLIDATED BALANCE SHEET DATA:
Total assets                               $4,323     $9,039     $40,594(a)    $13,657   $12,630    $19,799
Long-term debt                                226        390      14,042(b)        676       801        915

(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

</TABLE>



                                       29
<PAGE>


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

OVERVIEW

      Beginning in the second quarter of 2002, the Company's continued focus was
aimed toward the intellectual  property  commercialization  unit of its Internet
Switching Systems (NISS,  formerly NAS) business.  NISS consists of the patented
PaperClickTM technology that enables users to link directly from the physical to
the   digital   world,   as   well   as   the   patents    surrounding   certain
physical-world-to-web  linking  processes.  NeoMedia's  mission  is  to  invent,
develop,  and commercialize  technologies and products that effectively leverage
the integration of the physical and electronic to provide clear functional value
for the Company's end-users,  competitive  advantage for their business partners
and return-on-investment for their investors. To this end, the Company signed an
intellectual  property  license with Brandkey  Systems  Corporation,  the fourth
intellectual  property  license into which the Company has entered.  The Company
also  continued its movement into the Storage Area Network (SAN) market  through
its NeoMedia Consulting and Integration Services (NCIS) business unit.

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


RESULTS OF  OPERATIONS  FOR THE YEAR ENDED  DECEMBER 31, 2002 AS COMPARED TO THE
YEAR ENDED DECEMBER 31, 2001

     Net sales.  Total net sales for the year ended  December 31, 2002 were $9.4
million,  which  represented a $1.3 million,  or 16%, increase from $8.1 million
for the year ended  December 31, 2001.  This  increase  primarily  resulted from
revenues  relating to the  Company's  newly  created SAN  practice in 2002.  The
Company will continue to pursue  additional  sales of SAN products and services,
and to the extent  that such sales can be made,  the Company  expects  total net
sales to more  closely  resemble  the results for the first nine months of 2002,
rather than the first nine months of 2001.

     License  fees.  License fees were $0.4 million for the year ended  December
31, 2002,  compared  with $0.6  million for the year ended  December 31, 2001, a
decrease  of $0.2  million,  or 33%.  The  decrease  was due to  lower  sales of
internally  developed  software  licenses in 2002.  Demand for such licenses has
historically  fluctuated  from year to year. The Company  intends to continue to
increase  sales efforts of its  internally  developed  software  licenses in the
future.

     Resales of software and technology  equipment and service fees.  Resales of
software and technology equipment and service fees increased by $1.4 million, or
18%, to $9.0 million for the year ended  December 31, 2002,  as compared to $7.6
million for the year ended December 31, 2001. This increase  primarily  resulted
from revenues  relating to the Company's newly created SAN practice in 2002. The
Company will continue to pursue  additional  sales of SAN products and services,
and to the extent that such sales can be made,  the Company  expects  resales to
more closely resemble the results for the first nine months of 2002, rather than
the first nine months of 2001.

     Cost of Sales.  Cost of license  fees was $0.8  million  for the year ended
December  31,  2002,  a decrease of $1.6  million,  or 67%,  compared  with $2.4
million for the year ended December 31, 2001. The decrease resulted from reduced
amortization  expense of capitalized  development  costs in 2002 relating to the
PaperClick,  MLM/Affinity,  and Qode products that were written off during 2002.
Cost of resales  was $7.4  million  for the year ended  December  31,  2002,  an
increase of $0.9 million,  or 14%, compared with $6.5 million for the year ended
December 31, 2001. The increase resulted form increased resales in 2002 compared
with 2001.  Cost of resales as a percentage of related  resales was 83% in 2002,
compared  to 86% in 2001.  This  decrease  is due to an  increased  sales mix of
higher-margin equipment products sold in 2002 compared to 2001.



                                       30
<PAGE>

       Gross Profit.  Gross profit was $1.1 million for the year ended  December
31, 2002, an increase of $1.8  million,  or 257%,  compared with negative  gross
profit of $(0.7)  million for the year ended  December 31, 2001.  This  increase
primarily  resulted from revenues  relating to the  Company's  higer-margin  SAN
practice in 2002.

     Sales and marketing. Sales and marketing expenses were $1.0 million for the
year ended  December  31,  2002,  compared  to $2.5  million  for the year ended
December 31, 2001, a decrease of $1.5  million or 60%.  This  decrease  resulted
from a  reduction  in sales and  marketing  personnel  following  the  Company's
cost-reduction  initiative  started in the second half of 2001. The Company does
not expect  sales and  marketing  expenses to fluctuate  dramatically  from 2002
levels over the next 12 months.

     General and administrative.  General and administrative  expenses decreased
by $0.7 million,  or 15%, to $4.1 million for the year ended  December 31, 2001,
compared to $4.8  million for the year ended  December  31,  2001.  The decrease
resulted primarily from a smaller  administrative staff after the cost reduction
initiative of late 2001. The Company expects general and administrative  expense
to decrease slightly during 2003 due to reduced  professional  service expenses,
lease restructuring, and other cost reduction efforts.

     Research and development. During the year ended December 31, 2002, NeoMedia
charged to expense $0.8 million of research and  development  costs, an increase
of $0.3 million or 60% compared to $0.5 million  charged to expense for the year
ended  December  31, 2000.  The  increase is primarily  due to the fact that the
Company was capitalizing the majority of its product  development  costs in 2001
as the Qode Commerce  Solution was being  implemented.  The  implementation  was
cancelled and the product  discontinued in the third quarter of 2001. During the
third quarter of 2002,  development  resources were devoted  primarily to system
maintenance.  The company expects  research and  development  costs will decline
during 2003.

     Loss on Impairment of Assets. During 2002, the Company wrote off all assets
associated with its PaperClickTM product line, resulting in an impairment charge
of $1.0 million.  During 2001, the Company wrote off all assets  associated with
its discontinued MLM/Affinity product line, resulting in an impairment charge of
$2.9 million. The Company does not expect to take any additional losses form the
impairment of capitalized software products during 2003.

     Loss on  Digital:Convergence  contract.  During 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.  There were no
charges  related  to this  contract  in 2002.  The  Company  does not expect any
charges relating to this contract in the future.

     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  expense/(income)  increased by
$199,000,  or 948%,  to  $178,000  for the year  ended  December  31,  2002 from
$(21,000) for the year ended December 31, 2001, due to reduced cash balances and
the resulting  increased borrowing costs associated with notes payable and other
borrowing instruments throughout 2002 as compared to 2001.

     Loss from continuing  operations.  During the year ended December 31, 2002,
the Company's loss from continuing  operations decreased by $12.9 million or 69%
from  $18.8  million  in 2001 to $5.9  million in 2002.  The  decrease  resulted
primarily  from the $7.4 million  write-off of the Digital  Convergence  license
contract  during the second quarter of 2001,  combined with a loss on impairment
of the  Company's  MLM/Affinity  product  line of  $2.9  million  in 2001  and a
decrease  of  sales  and  marketing  expense  by $1.4  million  in 2002 due to a
reduction of the sales and marketing force.

     Loss from operations 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 operations of this unit during 2002.

     Loss on disposal of discontinued  operations.  The Company sustained a loss
of $3.1 million in 2001 from the disposal of its Qode  business unit in 2001. As
of December 31, 2001, the Company  reported net assets held for sale of $210,000
relating to this business  unit,  the sale of which was subject to a non-binding
letter of intent with The Finx Group, Inc., a holding company based in Elmsford,
NY. The Finx Group was to assume  $620,000  in Qode  payables  and  $800,000  in
long-term leases in exchange for 500,000 shares of the Finx Group,  right to use
and sell Qode  services,  and up to $5  million  in  affiliate  revenues  over a
five-year period.  During June 2002, the Finx Group notified the Company that it


                                       31
<PAGE>

did not intend to carry out the letter of intent due to capital constraints.  As
a result,  during the year ended  December  31,  2002,  the Company  recorded an
additional  expense of $1.5 million for the  write-off of remaining  Qode assets
and liabilities.

     Net  Loss.  The net loss  for the year  ended  December  31,  2002 was $7.4
million, which represented a $18.1 million, or 71% decrease from a $25.5 million
loss for the year ended December 31, 2001. The decrease  primarily resulted from
the $7.4 million  write-off of the Digital  Convergence  license contract during
the second  quarter of 2001, a loss on impairment of the Company's  MLM/Affinity
product line of $2.9 million in 2001, loss from  discontinued Qode operations of
$6.9 million in 2001,  and a reduction  in overhead  expenses  resulting  from a
reduction in force initiated in the third quarter of 2001.

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 license  fees was $2.4  million  for the year ended
December 31,  2001,  an increase of $1.1  million,  or 85%,  compared  with $1.3
million  for the year ended  December  31,  2000.  The  increase  resulted  from
increased  amortization expense of capitalized  development  associated with the
Company's  purchase of its Qode business unit in 2001.  Cost of resales was $6.5
million for the year ended  December 31, 2001, a decrease of $10.7  million,  or
62%,  compared  with $17.2  million for the year ended  December 31,  2000.  The
decrease  resulted form  decreased  resales in 2001 compared with 2000.  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.

       Gross Profit.  Gross  profit/(loss) was $(0.7) million for the year ended
December 31,  2001, a decrease of $9.7  million,  or 108%,  compared  with gross
profit of $9.0  million for the year ended  December  31,  2000.  This  decrease
primarily  resulted  from $7.8  million  margin in 2000  relating to the Digital
Convergence  license  contract,  as well as overall increased sales in 2000 from
our re-sale business.
     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


                                       32
<PAGE>

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
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.


LIQUIDITY AND CAPITAL RESOURCES




                                       33
<PAGE>

     The Company may obtain up to $10.0  million over the next two years through
its Equity Line of Credit agreement with Cornell Capital Partners LP. Management
believes that this additional financing will be sufficient to sustain operations
through April 30, 2003, however,  there can be no assurances that the market for
the Company's stock will support the sale of sufficient  shares NeoMedia's stock
to  raise  sufficient  capital  to  sustain  operations  for such a  period.  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,
2002,  2001, and 2000, was $0.6, $5.2 million,  and $6.8 million,  respectively.
During 2002, trade accounts  receivable  decreased $2.3 million,  while accounts
payable,  accrued expenses and deferred revenue  decreased $0.5 million.  During
2001,  trade  accounts  receivable  inclusive  of costs in  excess  of  billings
increased $0.7 million,  while accounts  payable,  accrued expenses and deferred
revenue increased $2.8 million. During 2000, trade accounts receivable inclusive
of costs in excess  billings  increased $1.3 million,  while  accounts  payable,
accrued  expenses and deferred  revenue  decreased $2.6 million.  NeoMedia's net
cash  flow  provided  by (used in)  investing  activities  for the  years  ended
December 31,  2002,  2001,  and 2000,  was $42,000,  ($2.8  million),  and ($2.6
million),  respectively. This decrease resulted from reduced capital spending in
an effort to control costs.

     During the years ended December 31, 2002,  2001, and 2000 the Company's net
loss   totaled   approximately   $7,421,000,    $25,469,000,   and   $5,409,000,
respectively.  As of December 31, 2002 the Company had  accumulated  losses from
operations  of  approximately  $70,765,000,  had a working  capital  deficit  of
approximately $8,985,000, and approximately $70,000 in cash balances.

     Management  believes it will need to have access to the Cornell Equity Line
of Credit agreement,  or raise additional  capital from other sources to sustain
the Company's  operations in 2003. 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.


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 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 Company may be  required to take  additional  excess
inventory charges, which will decrease gross margin and net operating results in
the future. In addition, as a result of the downturn in demand for our products,
the Company has excess capacity in our manufacturing facilities.  Currently, the
Company is not  capitalizing any inventory costs related to this excess capacity
as the  recoverability  of such costs is not certain.  The  application  of this
policy adversely affects our gross margin.

      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


                                       34
<PAGE>

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
weighted-average  probability  method  outlined in FAS 144. This method requires
significant management judgment to forecast the future operating results used in
the  analysis.  In addition,  other  significant  estimates are required such as
residual growth rates and discount  factors.  The estimates 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.  Intangible asset balances are then adjusted to their
current net realizable value based on these criteria if impaired.

FINANCING AGREEMENTS

         As of  December  31,  2002,  the  Company  was  party  to a  commercial
financing  agreement  with GE Access  that  provides  short-term  financing  for
certain computer hardware and software  purchases.  This arrangement  allows the
Company  to  re-sell  high-dollar  technology  equipment  and  software  without
committing  cash resources to financing the purchase.  The Company and GE Access
are currently  operating under an additional  arrangement  under which GE Access
retains 50% of the  Company's  proceeds  from sales  financed by GE Access,  and
applies the  portion of proceeds  toward  past due  balances.  This  arrangement
temporarily  reduces by half the  Company's  cash flow from resales of equipment
and software financed by GE Access.  The Company expects to begin receiving 100%
of the proceeds  from such sales during the first half of 2003.  Termination  of
the Company's financing  relationship with GE Access could materially  adversely
affect the Company's  financial  condition.  Management expects the agreement to
remain in place in the near future.

OTHER DEBTS

     On December 2, 2002, the Company issued to Michael Kesselbrenner, a private
investor,  a  Promissory  Note in the  principal  amount  of  $165,000,  bearing
interest at a rate of 12% per annum,  with a maturity of 150 days. In connection
with the default  provision of the Promissory  Note, the Company  entered into a
Pledge  Agreement,  dated  December  2, 2002,  under  which the  Company  issued
53,620,020  shares of common stock to an unrelated third party as collateral for
the  Promissory  Note.  The investor  only funded to the Company  $84,000 of the
principal  amount of the note.  The Company  repaid this note during March 2003,
and the  shares  held in escrow  were  returned.  The  Company  has not  further
obligation under this note agreement..

     On  November  12,  2002,  the Company  settled the lawsuit  with its former
General  Counsel over payment of the 2000  executive  incentive,  severance  and
unpaid  vacation days in the amount of  approximately  $154,000.  The settlement
calls for cash  payments  totaling  approximately  $100,000  over a period of 10
months,  plus 250,000 vested options to purchase shares of the Company's  common
stock at an exercise price of $0.01 and a term of five years.

     During November 2002,  NeoMedia issued Convertible Secured Promissory Notes
with an aggregate face value of $60,000 to 3 separate parties, including Charles
W. Fritz,  Chairman of the Board of Directors of NeoMedia;  William E. Fritz, an
outside  director;  and James J.  Keil,  an  outside  director.  The notes  bear
interest  at a rate of 15% per  annum,  and  mature at the  earlier  of i.) four


                                       35
<PAGE>

months, or ii.) the date the shares underlying the Cornell Equity Line of Credit
are  registered  with the SEC. The notes are  convertible,  at the option of the
holder,  into  either  cash or shares of our common  stock at a 30%  discount to
either  market  price upon  closing,  or upon  conversion,  whichever  is lower.
NeoMedia  also  granted to the  holders an  additional  1,355,670  shares of its
common stock and 60,000 warrants to purchase shares of its common stock at $0.03
per share,  with a term of three  years.  The warrants and shares were issued in
January 2003.  In addition,  since this debt is  convertible  into equity at the
option of the note holder at beneficial conversion rates, an embedded beneficial
conversion  feature will be recorded as a debt discount and amortized  using the
effective interest rate over the life of the debt in accordance with EITF 00-27.
Total cost of beneficial conversion feature, fair value of the stock and cost of
warrants  issued  exceed the face value of the notes  payable,  therefore,  only
$60,000,  the face amount of the note, is recognizable as debt discount,  and is
being  amortized  over the  life of the  notes  payable.  Any  unamortized  debt
discount  related to  beneficial  conversion  feature will be charged to expense
upon  conversion,  as interest  expense.  In the event NeoMedia  defaults on the
note, NeoMedia will issue an additional  1,483,318 shares of its common stock to
the note holders. The notes are secured by our intellectual  property,  which is
subject to first lien by AirClic,  Inc. During March 2003, two of the affiliated
parties,  Mr. William Fritz and Mr. Keil, agreed to extend the maturity date due
to the Company's  capital  constraints.  The Company repaid Mr. Charles  Fritz's
note in full during  March 2003.  NeoMedia  will  continue to pursue  additional
capital through the issuance of Convertible  Secured  Promissory  Notes with the
same terms as above.

GOING CONCERN

     The accompanying  consolidated financial statements have been prepared on a
going  concern  basis,  which  contemplates  the  realization  of assets and the
satisfaction of liabilities in the normal course of business.

     Through  December  31,  2002,  the  Company  has not been able to  generate
sufficient  revenues  from its  operations  to cover  its  costs  and  operating
expenses.  Although the Company has been able to issue its common stock or other
financing  for a significant  portion of its  expenses,  it is not known whether
NeoMedia will be able to continue this practice, or if its revenue will increase
significantly to be able to meet its cash operating expenses.

     This, in turn,  raises  substantial  doubt about the  Company's  ability to
continue as a going concern.  Management  believes that the Company will be able
to raise  additional  funds  through its $10 million  Equity Line of Credit with
Cornell.  However,  no assurances can be given as to the success of these plans.
The consolidated  financial statements do not include any adjustments that might
result from the outcome of these uncertainties.

RECENTLY ISSUED 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.  NeoMedia has  implemented  the provisions of SFAS No. 141 and No. 142 and
has concluded that the adoption does not have a material impact on the Company's
financial statements.

     In October  2001,  the FASB  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


                                       36
<PAGE>

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.  NeoMedia  does not expect the adoption to have a material
impact to NeoMedia'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.  Neomedia has implemented the provision
of SFAS No. 144 and has  concluded  that the  adoption  does not have a material
impact on the  Company's  financial  statements.In  April 2002,  the FASB issued
Statement No. 145,  "Rescission of FASB Statements No. 4, 44, and 64,  Amendment
of FASB Statement No. 13, and Technical  Corrections."  This Statement  rescinds
FASB Statement No. 4, "Reporting Gains and Losses from  Extinguishment of Debt,"
and an amendment of that Statement,  FASB Statement No. 64,  "Extinguishments of
Debt Made to  Satisfy  Sinking-Fund  Requirements"  and FASB  Statement  No. 44,
"Accounting for Intangible Assets of Motor Carriers." This Statement amends FASB
Statement No. 13, "Accounting for Leases," to eliminate an inconsistency between
the  required  accounting  for  sale-leaseback  transactions  and  the  required
accounting for certain lease  modifications  that have economic effects that are
similar to sale-leaseback transactions.  NeoMedia has implemented the provisions
of SFAS No. 144 and has  concluded  that the  adoption  does not have a material
impact on the Company's financial statements.

     During April 2002, the FASB issued  Statement No. 145,  "Rescission of FASB
Statements No. 4, 44, and 64,  Amendment of FASB Statement No. 13, and Technical
Corrections." This statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from  Extinguishments of Debt," and an amendment of that Statement,  FASB
Statement  No.  64,  "Extinguishments  of  Debt  Made  to  Satisfy  Sinking-Fund
Requirements,"  and FASB Statement No. 44,  "Accounting for Intangible Assets of
Motor  Carriers." This Statement  amends FASB Statement No. 13,  "Accounting for
Leases," to  eliminate an  inconsistency  between the  required  accounting  for
sale-leaseback  transactions  and the  required  accounting  for  certain  lease
modifications  that have  economic  effects  that are similar to  sale-leaseback
transactions. The Company does not expect the adoption of FASB No. 145 to have a
material impact on the Company's financial position or results of operations.

     In July 2002, the FASB issued SFAS No. 146 "Accounting for Exit or Disposal
Activities."  The  provisions  of this  statement  are  effective  for  disposal
activities initiated after December 31, 2002, with early application encouraged.
The  Company  does not  expect the  adoption  of FASB No. 146 to have a material
impact on the Company's financial position or results of operations.

     In October  2002,  the FASB  issued  Statement  No. 147,  "Acquisitions  of
Certain  Financial  Institutions-an  amendment of FASB Statements No. 72 and 144
and  FASB  Interpretation  No.  9",  which  removes  acquisitions  of  financial
institutions  from  the  scope of both  Statement  72 and  Interpretation  9 and
requires that those  transactions be accounted for in accordance with Statements
No. 141,  Business  Combinations,  and No. 142,  Goodwill  and Other  Intangible
Assets.  In addition,  this  Statement  amends SFAS No. 144,  Accounting for the
Impairment or Disposal of Long-Lived  Assets,  to include in its scope long-term
customer-relationship  intangible  assets  of  financial  institutions  such  as
depositor- and  borrower-relationship  intangible  assets and credit  cardholder
intangible  assets.  The  requirements  relating to  acquisitions  of  financial
institutions is effective for  acquisitions for which the date of acquisition is
on or after  October 1, 2002.  The  provisions  related  to  accounting  for the
impairment  or disposal of certain  long-term  customer-relationship  intangible
assets are effective on October 1, 2002.  The adoption of this Statement did not
have a  material  impact to the  Company's  financial  position  or  results  of
operations as the Company has not engaged in either of these activities.

     In December  2002,  the FASB issued  Statement  No.  148,  "Accounting  for
Stock-Based Compensation-Transition and Disclosure", which amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of  transition  for a  voluntary  change  to the  fair  value  based  method  of
accounting for stock-based employee  compensation.  In addition,  this Statement
amends  the  disclosure  requirements  of  Statement  123 to  require  prominent


                                       37
<PAGE>

disclosures in both annual and interim financial  statements about the method of
accounting for stock-based  employee  compensation  and the effect of the method
used  on  reported  results.  The  transition  guidance  and  annual  disclosure
provisions of Statement 148 are effective for fiscal years ending after December
15, 2002,  with earlier  application  permitted  in certain  circumstances.  The
interim  disclosure  provisions are effective for financial  reports  containing
financial  statements for interim periods beginning after December 15, 2002. The
adoption  of this  statement  did not have a  material  impact on the  Company's
financial  position or results of  operations  as the Company has not elected to
change to the fair value based method of  accounting  for  stock-based  employee
compensation.

     In January 2003, the FASB issued  Interpretation No. 46,  "Consolidation of
Variable Interest Entities." Interpretation 46 changes the criteria by which one
company  includes  another  entity  in its  consolidated  financial  statements.
Previously,  the  criteria  were  based  on  control  through  voting  interest.
Interpretation  46 requires a variable  interest  entity to be consolidated by a
company if that  company  is subject to a majority  of the risk of loss from the
variable interest  entity's  activities or entitled to receive a majority of the
entity's  residual  returns  or both.  A company  that  consolidates  a variable
interest  entity  is  called  the  primary   beneficiary  of  that  entity.  The
consolidation  requirements of  Interpretation  46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to older  entities in the first  fiscal year or interim  period  beginning
after  June  15,  2003.  Certain  of the  disclosure  requirements  apply in all
financial  statements  issued  after  January 31, 2003,  regardless  of when the
variable  interest  entity  was  established.  The  Company  does not expect the
adoption  to have a  material  impact to the  Company's  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.


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

     On June 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 NeoMedia'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.  In their  report ended March 18, 1998 for the year
ended December 31, 1997, KPMG LLP did not issued a qualified or adverse opinion.
Effective  July 14, 1999, the Company  engaged Arthur  Andersen LLP to audit its
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  NeoMedia's  financial  statements  for the fiscal years 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


                                       38
<PAGE>

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.  In
their  report dated March 30,  2001,  for the years ended  December 31, 2000 and
1999,  Arthur  Andersen  LLP did not issue an adverse  opinion,  but did issue a
qualified opinion with a "going concern" clause.  Effective October 25, 2001 the
Company engaged Stonefield Josephson, Inc. as our new independent accountants.




                                       39
<PAGE>


THIS IS A COPY OF THE AUDIT REPORT  PREVIOUSLY  ISSUED BY ARTHUR ANDERSEN LLP IN
CONNECTION WITH NEOMEDIA TECHNOLOGIES, INC.'S FILING FOR THE YEAR ENDED DECEMBER
31, 2000 AND 1999.  THIS AUDIT REPORT HAS NOT BEEN  REISSUED BY ARTHUR  ANDERSEN
LLP IN CONNECTION WITH THIS FORM 10-K. SEE EXHIBIT 23.2 FOR FURTHER DISCUSSION.



               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  sheets  of  Neomedia
Technolgies,  Inc. (a Delaware  Corporation) and subsidiaries as of December 31,
2002  and  2001,  and  the  related   consolidated   statements  of  operations,
stockholders'   deficit,  and  cash  flows  for  the  years  then  ended.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in  all  material   respects,   the  financial   position  of  Neomedia
Technologies,  Inc.  as of December  31,  2002 and 2001,  and the results of its
operations  and its cash  flows  for the years  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,
working capital deficit,  and current cash flow position raise substantial doubt
about its ability to continue as a going concern.  Management's  plans regarding
those  matters  also  are  described  in  Note  3.  The  consolidated  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.



/s/ STONEFIELD JOSEPHSON, INC.

CERTIFIED PUBLIC ACCOUNTANTS

Irvine, California
April 2, 2003


                                      F-2
<PAGE>


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

<TABLE>
<CAPTION>
                                                                                DECEMBER 31,
                                                                         ---------------------------
                                                                            2002           2001
                                                                            ----           ----
<S>                                                                          <C>            <C>
ASSETS
Current assets:
      Cash and cash equivalents                                              $   70         $  134
      Trade accounts receivable, net of allowance for doubtful accounts
         of $55 in 2002 and $65 in 2001                                         327          2,626
      Inventories                                                               112            197
      Current assets of discontinued business unit                               --            210
      Prepaid expenses and other current assets                                 629            582
                                                                         ------------   ------------
      Total current assets                                                    1,138          3,749

      Property and equipment, net                                                98            205
      Capitalized patents, net                                                2,244          2,500
      Capitalized and purchased software costs, net                             149          1,828
      Other long-term assets                                                    694            757
                                                                         ------------   ------------

           Total assets                                                      $ 4,323        $ 9,039
                                                                         ============   ============

LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
      Accounts payable                                                       $ 3,313        $ 2,886
      Amounts due under financing agreements                                     430          2,283
      Liabilities in excess of assets of discontinued business unit            1,495             --
      Accrued expenses                                                         2,325          1,922
      Current portion of long-term debt                                          425            149
      Notes payable                                                              893            750
      Sales taxes payable                                                        326            148
      Deferred revenues                                                          879            767
      Other                                                                       37              7
                                                                         ------------   ------------
           Total current liabilities                                          10,123          8,912


Long-term debt, net of current portion                                           226            390
                                                                         ------------   ------------


           Total liabilities                                                  10,349          9,302
                                                                         ------------   ------------

Shareholders' deficit:
      Preferred stock, $0.01 par value, 25,000,000 shares authorized,none issued
        and outstanding in 2002, 452,489 issued and outstanding in 2001           --              5
      Additional paid-in capital, preferred stock                                 --            878
      Common stock, $0.01 par value, 200,000,000 shares authorized,87,136,802
        shares issued and 30,746,968 outstanding in 2002, 20,446,343 shares
        shares issued and 18,804,917 outstanding in 2001                         307            188
      Additional paid-in capital                                              65,442         63,029
      Stock subscription receivable                                               --           (240)
      Deferred stock-based compensation                                         (231)           ---
      Accumulated deficit                                                    (70,765)       (63,344)
      Treasury stock, at cost, 201,230 shares of common stock                   (779)          (779)
                                                                         ------------   ------------
      Total shareholders' deficit                                             (6,026)          (263)
                                                                         ------------   ------------
           Total liabilities and shareholders' deficit                       $ 4,323        $ 9,039
                                                                         ============   ============


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


<PAGE>



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

<TABLE>
<CAPTION>

                                                                                    YEARS ENDED DECEMBER 31,
                                                                           --------------------------------------------
                                                                                    2002           2001           2000
<S>                                                                              <C>            <C>           <C>
NET SALES:
     License fees                                                                $   446        $   576       $  8,417
     Resale of software and technology equipment and service fees                  8,953          7,566         19,148
                                                                           -------------- ----------------  -----------
     Total net sales                                                               9,399          8,142         27,565
                                                                           -------------- ----------------  -----------

COST OF SALES:
     License fees                                                                    841          2,355          1,296
     Resale of software and technology equipment and service fees                  7,423          6,511         17,237
                                                                           -------------- ----------------  -----------
     Total cost of sales                                                           8,264          8,866         18,533
                                                                           -------------- ----------------  -----------

GROSS PROFIT (LOSS)                                                                1,135          (724)          9,032

     Sales and marketing expenses                                                  1,009          2,519          6,504
     General and administrative expenses                                           4,068          4,772          7,010
     Research and development costs                                                  775            549          1,101
     Loss on impairment of assets                                                  1,003          2,871             --
     Loss on Digital:  Convergence license contract                                   --          7,354             --
                                                                           -------------- ----------------  -----------

     Loss from operations                                                         (5,720)       (18,789)        (5,583)
     Interest expense (income), net                                                  178            (21)          (174)
                                                                           -------------- ----------------  -----------

     Loss from continuing operations                                              (5,898)       (18,768)        (5,409)
     Discontinued operations (Note 1):
        Loss from operations of discontinued business unit                            --        (3,613)             --
        Loss on disposal of discontinued  business unit,  including provision of
     $0 in 2002 and $439 in 2001 for operating losses during
     phase-out period                                                             (1,523)        (3,088)             --
                                                                           -------------- ----------------  -----------

NET LOSS                                                                       $  (7,421)     $ (25,469)      $ (5,409)
                                                                           ============== ================  ===========

NET LOSS PER SHARE FROM CONTINUING OPERATIONS-
     BASIC AND DILUTED                                                           ($0.26)        ($1.14)        ($0.39)
                                                                           ============== ================  ===========

NET LOSS PER SHARE FROM DISCONTINUED OPERATIONS-
     BASIC AND DILUTED                                                           ($0.07)        ($0.41)             --
                                                                           ============== ================  ===========

NET LOSS PER SHARE--BASIC AND DILUTED                                            ($0.33)        ($1.55)        ($0.39)
                                                                           ============== ================  ===========

Weighted average number of common shares--basic and diluted                   22,330,485     16,410,246     13,931,104


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

                                      F-4
<PAGE>


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

                                                                                YEARS ENDED DECEMBER 31,
                                                                               2002       2001        2000
                                                                               ----       ----        ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                           <C>       <C>          <C>
    Net loss                                                                  ($7,421)  ($25,469)    ($5,409)
    Adjustments to reconcile net loss to net cash used in operating activities:
    Depreciation and amortization                                               1,061      3,369       2,336
    Inventory reserve                                                             130         --          --
    Loss on disposal of discontinued business units                             1,523      2,649          --
    Loss on disposal of and impairment of assets                                1,003      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                                     195        947          --
    Fair value of expense portion of stock based
             compensation granted for professional services                       685         69         437
    Amortization of discount on convertible debt                                   23         --          --
    Changes in operating assets and liabilities
      Trade accounts receivable, net                                            2,299       (663)      1,459
      Digital Convergence receivable                                               --         --      (2,767)
      Prepaid - Digital Convergence                                                --        118          --
      Other current assets                                                        346       (109)       (121)
      Other long-term assets                                                       --         --        (194)
      Accounts payable, amounts due under financing agreements, liabilities
    in excess of assets of discontinued business unit, accrued expenses and
    stock liability                                                              (584)     2,466      (2,758)
      Deferred revenue                                                            112        318         184
      Other current liabilities                                                    30         (4)         --
                                                                            ----------- ---------- -----------
        Net cash used in operating activities                                    (598)    (5,202)     (6,775)
                                                                            ----------- ---------- -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Capitalization of software development and purchased intangible assets
                                                                                 (21)    (2,883)     (2,317)
    (Increase)/decrease in value of life insurance policies
                                                                                   63        158       (199)
    Acquisition of property and equipment
                                                                                   --       (81)       (123)
                                                                            ----------- ---------- -----------
      Net cash used in investing activities
                                                                                    42    (2,806)     (2,639)
                                                                            ----------- ---------- -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Net proceeds from issuance of common stock,  net of issuance  costs of $0 in
        2002, $149 in 2001, and $74 in 2000
                                                                                     8      1,638       9,203
    Net proceeds from exercise of stock warrants
                                                                                   45      1,045       2,877
    Net proceeds from exercise of stock options
                                                                                  274        138         537
    Common stock repurchased
                                                                                   --         --       (779)
    Borrowings under notes payable and long-term debt
                                                                                  165        504          --
    Change in restricted cash
                                                                                   --        750         194
    Pepayments on notes payable and long-term debt
                                                                                   --      (386)       (625)
                                                                            ----------- ---------- -----------
      Net cash provided by financing activities
                                                                                   492      3,689      11,407
                                                                            ----------- ---------- -----------

NET INCREASE IN CASH AND CASH EQUIVALENTS
                                                                                  (64)    (4,319)       1,993

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
                                                                                   134      4,453       2,460
                                                                            ----------- ---------- -----------

CASH AND CASH EQUIVALENTS, END OF YEAR                                             $70       $134      $4,453
                                                                            =========== ========== ===========

SUPPLEMENTAL CASH FLOW INFORMATION:
    Interest paid/(received) during the year                                       $15      ($61)        $170
    Income tax paid                                                                 --         --          --
    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
    Accounts payable converted to note payable                                      --        246          --
    Common stock issued in exchange for note receivable                             --        240          --
</TABLE>

                                      F-5
<PAGE>

<TABLE>
<CAPTION>

<S>                                                                                 <C>        <C>        <C>
    Net assets classified as "Liabilities held for sale"                            --        210          --
    Daystar assets purchased with shares of common stock                            --         --       3,520
    Warrants issued for license contract                                            --         --       4,704
    Deferred revenue relating to license contract                                   --         --      15,432
    Common stock and options issued to settle debt                                 343         --          --
    Cancellation of common stock issued in 2001 to offset stock
    subscription receivable                                                       (240)        --          --
    Net effect of issuance and subsequent
        cancellation of common stock underlying notes receivable                  (190)        --          --
    Beneficial conversion features                                                  23
    Stock and  warrants issued with convertible promissory notes                    37         --          --



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

                                      F-6
<PAGE>



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

                      COMMON STOCK                              PREFERRED STOCK               TREASURY STOCK
                --------------------------                  -------------------------        -----------------
                                 ADDITIONAL STOCK     DEFERRED                  ADDITIONAL                        TOTAL
                                 PAID-IN  SUBSCRIPTION STOCK                    PAID-IN  ACCUMULATED              STOCKHOLDERS'
                  SHARES  AMOUNT CAPITAL  RECEIVABLE COMPENSATION SHARES AMOUNT CAPITAL   DEFICIT  SHARES AMOUNT  EQUITY
<S>             <C>          <C>  <C>        <C>           <C>             <C>  <C>        <C>      <C>      <C>
BALANCE,
DECEMBER 31,
1999            12,023,389   $119 $36,367        -         -        -       -      - ($32,466)      -       -   $4,020

Exercise of
stock options      182,787      2     535        -         -        -       -      -        -       -       -      537

Issuance of
common stock
through Private
placement, net
of $170 of
Issuance costs   1,415,279     15   9,188        -         -        -       -      -        -       -       -    9,203

Fair value of
warrants issued
for
Professional
services
rendered                 -      -     253        -         -        -       -      -        -       -       -      253

Fair value of
stock issued
for
professional
Services
rendered            21,500      1     183        -         -        -       -      -        -       -       -      184

Fair value of
warrants issued
Related to
license
agreement With
Digital
Convergence              -      -   4,704        -         -        -       -      -        -       -       -    4,704

Exercise of
warrants           495,600      5   2,872        -         -        -       -      -        -       -       -    2,877

Stock issued to
purchase assets    321,829      3   3,517        -         -        -       -      -        -       -       -    3,520

Treasury stock
at cost                  -      -       -        -         -        -       -      -        - 201,230   (779)    (779)

Net Loss                 -      -       -        -         -        -       -      -  (5,409)       -       -  (5,409)
                -------------------------------------------------------------------------------------------------------
BALANCE,        14,460,384   $145 $57,619        -         -        -       -      -($37,875) 201,230  ($779)  $19,110
DECEMBER 31,
2000
                -------------------------------------------------------------------------------------------------------
Exercise of         38,560      -     138        -         -        -       -      -        -       -       -      138
employee options

Issuance of
Common Stock
through private
Placement, Net
of $149 of
issuance costs   3,490,750     35   1,843        -         -        -       -      -        -       -       -    1,878

Expense
associated with
warrant
repricing                -      -     947        -         -        -       -      -        -       -       -      947

Fair value of
options issued
for
Professional
services
rendered                 -      -      69        -         -        -       -      -        -       -       -       69

Exercise of
Warrants           505,450      5   1,040        -         -        -       -      -        -       -       -    1,045

Stock issued to
purchase assets    309,773      3   1,373        -         -        -       -      -        -       -       -    1,376

Issuance of
Preferred Stock
for services             -      -       -        -         -  452,489       5    878        -       -       -      883

Stock
Subscription
Receivable                                   (240)         -                                                     (240)

Net Loss                 -      -       -        -         -        -       -      - (25,469)       -       - (25,469)
                -------------------------------------------------------------------------------------------------------
BALANCE,        18,804,917   $188 $63,029    (240)         0  452,489      $5   $878($63,344) 201,230  ($779)   ($263)
DECEMBER 31,
2001
                -------------------------------------------------------------------------------------------------------
Exercise of
employee options 5,252,455     52     222        -         -        -       -      -        -       -       -      274

Issuance of
Common Stock
through private
Placement, Net
of $0 of
issuance costs      55,000      1       7        -         -        -       -      -        -       -       -        8

Cancellation of              (30)
Private

Placement Shares(3,000,000)         (210)        -         -        -       -      -        -       -       -    (240)

Expense
associated with
warrant
repricing                -      -     195        -         -        -       -      -        -       -       -      195

Fair value of
stock issued
for
professional
services
rendered         4,900,000     49     192        -         -        -       -      -        -       -       -      241

Fair value of
options and
warrants issued
for
professional
services
rendered                 -      -     723        -         -        -       -      -        -       -       -      723

Exercise of
Warrants           369,450      4      41        -         -        -       -      -        -       -       -       45

Stock issued to
pay liabilities  2,556,987     24     319        -         -        -       -      -        -       -       -      343

Conversion of
preferred stock
to common stock    452,489      5     878        -         -(452,489)     (5)  (878)        -       -       -        -

Issuance of
warrants and
stock with
convertible
notes payable    1,355,670     14      23        -         -        -       -      -        -       -       -       37

Benefical
conversion
feature
embedded in
convertible
notes payable            -      -      23        -         -        -       -      -        -       -       -       23

Stock
Subscription
Receivable               -      -       -      240         -        -       -      -        -       -       -      240

Deferred Stock
Compensation             -      -       -        -     (231)        -       -      -        -       -       -    (231)

Net Loss                 -      -       -        -         -        -       -      -  (7,421)       -       -  (7,421)
                -------------------------------------------------------------------------------------------------------
BALANCE,        30,746,968   $307 $65,442        0     (231)        0      $0     $0($70,765) 201,230  ($779) ($6,026)
DECEMBER 31,
2002
                -------------------------------------------------------------------------------------------------------


 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)  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.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS

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

ESTIMATES

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



                                       F-8
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

REVENUE RECOGNITION

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

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

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

      Revenue for resale of software and technology equipment and service fee is
recognized  based on guidance  provided in  Securities  and Exchange  Commission
(SEC) Staff  Accounting  Bulletin  No. 101,  "Revenue  Recognition  in Financial
Statements,"  as amended (SAB 101).  Software and  technology  equipment  resale
revenue is recognized  when all of the  components  necessary to run software or
hardware  have been  shipped.  Service  revenues  include  maintenance  fees for
providing system updates for software products, user documentation and technical
support  and are  recognized  over the life of the  contract.  Software  license
revenue  from  long-term  contracts  has  been  recognized  on a  percentage  of
completion  basis,  along with the  associated  services being  provided.  Other
service  revenues,  including  training and  consulting,  are  recognized as the
services are  performed.  The Company uses  stand-alone  pricing to determine an
element's  vendor  specific  objective  evidence  (VSOE) in order to allocate an
arrangement  fee amongst various pieces of a  multi-element  contract.  NeoMedia
records an allowance for uncollectible accounts on a customer-by-customer  basis
as appropriate.


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  at the time of issuance.  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 are
being held in escrow pending the results of negotiations between the Company and
Qode with respect to the  performance  of the Qode  business unit for the period
March 1, 2001 through  February 28,  2002.  As a result,  all such shares may be
released to Qode.

      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, 2002.


                                      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 was July 1, 2001. At the end of the 12-month measurement period
(February 28, 2002),  the number of shares issued to Qode under the earn-out was
35,074, allocated as outlined in the table above. The remaining 1,641,426 shares

                                      F-10
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

are being held in escrow pending the results of negotiations between the Company
and Qode with respect to a disagreement  over the performance of, and investment
in, the Qode  business  unit for the period March 1, 2001  through  February 28,
2002. As a result, all such shares may be released to Qode.

      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.

Other

     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. On July
22, 2002, the case was converted to Chapter 7, U.S. Bankruptcy Code.

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

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

         During June 2002,  the Finx Group  notified the Company that it did not
intend  to carry  out the  letter of intent  due to  capital  constraints.  As a
result,  during the three-month period ended June 30, 2002, the Company recorded
an  additional  expense of $1.5  million for the  write-off  of  remaining  Qode
assets.  As of December  31, 2002,  the Company had $1.5 million of  liabilities
relating to the Qode system on its books.

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


                                      F-11
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 of 2001 (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:

<TABLE>
<CAPTION>

                                                           December 31,         March 31,          Write-off
                                                                              2001 Balances
                                                          2000 Balances        (Unaudited)       June 30, 2001
                                                         --------------------------------------------------------
                                                                         (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>


                                      F-12
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      The net effect of the write-off was a $7,354,000 non-cash charge to income
during   the   second   quarter  of  2001,   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. (see "Legal Proceedings" in Footnote 11)

      AirClic 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 in the public  domain.  Any
declaration  that the  Company's  core  patented  or  patentable  technology  is
non-protectable and in the public domain would have a material adverse effect on
the  Company's  business,   prospects,   financial  condition,  and  results  of
operations.  The Company is vigorously  defending this second action as well. On
November  21,2001,  the  Company  filed a motion to dismiss  the  complaint.  On
December 19, 2001, AirClic filed a response opposing that position. On September
18,  2002,  the court  ruled in favor of the  Company  and  dismissed  AirClic's
complaint.


ADVERTISING EXPENSE

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 the  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.  Total  advertising  expense for the years ended
December  31,  2002,  2001,  and  2000  was  $4,000,   $883,000,   and  $70,000,
respectively.


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

                                      F-13
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

OPTION AND WARRANT REPRICING PROGRAMS

      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.


     In June 2002,  the Company  repriced 3 million of its common stock warrants
from $0.12 to $.05 per share.  All of the warrants were  exercised  immediately.
The Company recognized an expense of $132,000 related to this repricing.


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

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


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 an
exercise price of $2.09.  The warrant grant was later rescinded  during 2001 and
the warrants were not issued.

      In June 2002,  the Board of  Directors  approved the issuance of 1,500,000
warrants  for Charles W. Fritz,  NeoMedia's  Chairman,  at an exercise  price of
$0.05, to replace warrants  exercised in the Company's warrant repricing program
for which Mr. Fritz  received no profit.  The Company  recognized  an expense of

                                      F-14
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

approximately  $66,000  relating  to  the  issuance  of  these  warrants  in the
accompanying consolidated statement of operations.

VALUATION AND RESERVES

Allowance for doubtful  accounts  activity for the years ended December 31, 2002
and 2001 was as follows:

                                                     (dollars in thousands)
                                                   -------------------------
                                                           2002       2001
                                                           ----       ----
Beginning balance                                           $65        $484

Bad debt expense                                             41           -

Write-off of uncollectible accounts                           -         (68)

Collection of accounts previously written off                 -        (182)

Adjustment to general allowance                             (51)       (169)
                                                   -------------------------
  Ending balance                                            $55         $65
                                                   =========================


INVENTORIES

      Inventories are stated at the lower of cost or market, and at December 31,
2002 and 2001 were comprised of purchased  computer  technology resale products.
Cost is determined using the first-in,  first-out  method. At December 31, 2002,
the reserve for  obsolescence  was  $130,000.  Reserves  for  obsolescence  were
increased by $130,000 for 2002.

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 $108,000,  $249,000,  and $263,000 for the years
ended December 31, 2002, 2001, and 2000, respectively.

CAPITALIZED AND PURCHASED SOFTWARE COSTS

      Intangible  assets consist of capitalized  software  development costs and
patents.

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

      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

                                      F-15
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2002 and 2001
were as follows:

                                                     (dollars in thousands)
                                                 ---------------------------
                                                       2002           2001
                                                       ----           ----
CAPITALIZED PATENTS
Beginning balance                                      $2,500        $2,661

Additions                                                  17           102

Amortization                                            (273)         (263)
                                                 ---------------------------
  Ending balance                                       $2,244        $2,500
                                                 ===========================

CAPITALIZED & PURCHASED SOFTWARE COSTS
Beginning balance                                      $1,828        $6,382

Additions                                                   4         2,391
Intangible assets moved

    (to)/from "Assets Held for Sale"                    1,027       (1,027)

Disposals/write-offs                                  (2,030)       (3,061)

Amortization                                            (680)       (2,857)
                                                 ---------------------------
  Ending balance                                         $149        $1,828
                                                 ===========================

      Amortization  expense of intangible assets was $953,000,  $3,120,000,  and
$2,073,000 for the years ended December 31, 2002, 2001, and 2000, 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 $0, $92,000,
and  $259,000  for  the  years  ended   December  31,  2002,   2001,  and  2000,
respectively.  Net loss allocated to the MLM/Affinity  program was $0, $832,000,
and  $1,075,000,  for the  years  ended  December  31,  2002,  2001,  and  2000,
respectively.

      During the year  ended  December  31,  2002,  the  Company  recognized  an
impairment    charge   of   $1.0    million    relating   to   its    PaperClick
physical-world-to-internet  software solution.  Due to capital constraints,  the
Company is not currently able to devote full-time  resources and  infrastructure
to commercializing the technology.


EVALUATION OF LONG-LIVED ASSETS

      In  October  2001,  the FASB  issued  SFAS No.  144,  "Accounting  for the
Impairment or Disposal of Long-Lived Assets." This statement supersedes SFAS No.
121,  "Accounting  for the  Impairment of Long-Lived  Assets and for  Long-Lived
Assets  to  Be  Disposed  of."  Although   retaining  many  of  the  fundamental
recognition and measurement  provisions of SFAS 121, the new rules significantly
change  the  criteria  that  would  have  to be  met to  classify  an  asset  as

                                      F-16
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

held-for-sale.  The statement also supersedes  certain  provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations--Reporting
the Effects of Disposal of a Segment of a Business,  and Extraordinary,  Unusual
and Infrequently  Occurring Events and  Transactions," and will require expected
future  operating  losses  from  discontinued  operations  to  be  displayed  in
discontinued  operations  in the  period  or  periods  in which the  losses  are
incurred  rather than as of the  measurement  date,  as presently  required.  We
adopted this new statement on January 1, 2002,  and concluded that the effect of
adopting  this  statement  had no  material  impact on our  financial  position,
results of operations, or cash flows.


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, 2002,  2001,
and 2000.

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, 2002    DECEMBER 31, 2001    DECEMBER 31,
                                            -----------------    -----------------    -------------
                                                                                           2000
<S>                                            <C>                   <C>                <C>
      Outstanding Stock Options                10,801,219            4,214,000          4,294,000
      Outstanding Warrants                      7,433,758            3,240,000          3,968,000
</TABLE>

FINANCIAL INSTRUMENTS

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

CONCENTRATIONS OF CREDIT RISK

      Financial  instruments that potentially subject NeoMedia to concentrations
of credit risk consist  primarily of trade accounts  receivable  with customers.
NeoMedia  extends  credit to its customers as determined on an individual  basis
and has included an allowance  for doubtful  accounts of $55,000,  $65,000,  and
$484,000 in its December 31, 2002, 2001, and 2000  consolidated  balance sheets,
respectively.   NeoMedia   had  net   sales  to  one  major   customer   in  the
telecommunications   industry   (Ameritech)  of  $3,362,000,   $2,983,000,   and
$5,824,000   during  the  years  ended  December  31,  2002,   2001,  and  2000,
respectively, resulting in trade accounts receivable of $47,000, $1,499,000, and
$229,000 as of December 31, 2002, 2001, and 2000,  respectively.  In addition, a
single  company  supplies the majority of the  Company's  resold  equipment  and
software, which is re-marketed to this customer.  Accordingly,  the loss of this
customer or supplier would materially adversely affect the Company's operations.
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  87%, 73%, and 66% of NeoMedia's  revenue for
the years ended December 31, 2002,  2001, and 2000,  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 years ended December 31,
2002 or 2001.

RECLASSIFICATIONS


                                      F-17
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      Certain  reclassifications  have been made to the 2000 and 2001  financial
statements to conform to the 2002 presentation.

COMPREHENSIVE INCOME

       For the years ended  December 31, 2002,  2001,  and 2000, 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.  NeoMedia has  implemented  the provisions of SFAS No. 141 and No. 142 and
has concluded that the adoption does not have a material impact on the Company's
financial statements.

     In October  2001,  the FASB  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.  NeoMedia  does not expect the adoption to have a material
impact to NeoMedia'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.  Neomedia  has  implemented  the  provision  of SFAS No. 144 and has
concluded  that the adoption  does not have a material  impact on the  Company's
financial statements.

     In April 2002,  the FASB issued  Statement  No.  145,  "Rescission  of FASB
Statements No. 4, 44, and 64,  Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from  Extinguishment  of Debt," and an amendment of that Statement,  FASB
Statement  No.  64,  "Extinguishments  of  Debt  Made  to  Satisfy  Sinking-Fund
Requirements"  and FASB Statement No. 44,  "Accounting for Intangible  Assets of
Motor  Carriers." This Statement  amends FASB Statement No. 13,  "Accounting for
Leases," to  eliminate an  inconsistency  between the  required  accounting  for
sale-leaseback  transactions  and the  required  accounting  for  certain  lease
modifications  that have  economic  effects  that are similar to  sale-leaseback


                                      F-18
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

transactions. NeoMedia does not expect the adoption to have a material impact to
NeoMedia's financial position or results of operations.

     In July 2002, the FASB issued SFAS No. 146 "Accounting for Exit or Disposal
Activities."  The  provisions  of this  statement  are  effective  for  disposal
activities initiated after December 31, 2002, with early application encouraged.
The  Company  does not  expect the  adoption  of FASB No. 146 to have a material
impact on the Company's financial position or results of operations.

     In October  2002,  the FASB  issued  Statement  No. 147,  "Acquisitions  of
Certain  Financial  Institutions-an  amendment of FASB Statements No. 72 and 144
and  FASB  Interpretation  No.  9",  which  removes  acquisitions  of  financial
institutions  from  the  scope of both  Statement  72 and  Interpretation  9 and
requires that those  transactions be accounted for in accordance with Statements
No. 141,  Business  Combinations,  and No. 142,  Goodwill  and Other  Intangible
Assets.  In addition,  this  Statement  amends SFAS No. 144,  Accounting for the
Impairment or Disposal of Long-Lived  Assets,  to include in its scope long-term
customer-relationship  intangible  assets  of  financial  institutions  such  as
depositor- and  borrower-relationship  intangible  assets and credit  cardholder
intangible  assets.  The  requirements  relating to  acquisitions  of  financial
institutions is effective for  acquisitions for which the date of acquisition is
on or after  October 1, 2002.  The  provisions  related  to  accounting  for the
impairment  or disposal of certain  long-term  customer-relationship  intangible
assets are effective on October 1, 2002.  The adoption of this Statement did not
have a  material  impact to the  Company's  financial  position  or  results  of
operations as the Company has not engaged in either of these activities.

     In December  2002,  the FASB issued  Statement  No.  148,  "Accounting  for
Stock-Based Compensation-Transition and Disclosure", which amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of  transition  for a  voluntary  change  to the  fair  value  based  method  of
accounting for stock-based employee  compensation.  In addition,  this Statement
amends  the  disclosure  requirements  of  Statement  123 to  require  prominent
disclosures in both annual and interim financial  statements about the method of
accounting for stock-based  employee  compensation  and the effect of the method
used  on  reported  results.  The  transition  guidance  and  annual  disclosure
provisions of Statement 148 are effective for fiscal years ending after December
15, 2002,  with earlier  application  permitted  in certain  circumstances.  The
interim  disclosure  provisions are effective for financial  reports  containing
financial  statements for interim periods beginning after December 15, 2002. The
adoption  of this  statement  did not have a  material  impact on the  Company's
financial  position or results of  operations  as the Company has not elected to
change to the fair value based method of  accounting  for  stock-based  employee
compensation.

     In January 2003, the FASB issued  Interpretation No. 46,  "Consolidation of
Variable Interest Entities." Interpretation 46 changes the criteria by which one
company  includes  another  entity  in its  consolidated  financial  statements.
Previously,   the  criteria  was  based  on  control  through  voting  interest.
Interpretation  46 requires a variable  interest  entity to be consolidated by a
company if that  company  is subject to a majority  of the risk of loss from the
variable interest  entity's  activities or entitled to receive a majority of the
entity's  residual  returns  or both.  A company  that  consolidates  a variable
interest  entity  is  called  the  primary   beneficiary  of  that  entity.  The
consolidation  requirements of  Interpretation  46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to older  entities in the first  fiscal year or interim  period  beginning
after  June  15,  2003.  Certain  of the  disclosure  requirements  apply in all
financial  statements  issued  after  January 31, 2003,  regardless  of when the
variable  interest  entity  was  established.  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, 2002, 2001, and 2000 the Company's net
loss   totaled   approximately   $7,421,000,    $25,469,000,   and   $5,409,000,
respectively.  As of December 31, 2002 the Company had an accumulated deficit of
approximately   $70,765,000  and  approximately  $70,000  in  unrestricted  cash
balances.  As of December 31, 2002, the Company had negative  working capital of
$8,985,000  and negative  cashflow from  operations  of $598,000.  The Company's
unrestricted  cash  balance as of  February  5, 2003 was  approximately  $44,000
(unaudited).


                                      F-19
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      On November  12, 2002,  the Company  entered into an Equity Line of Credit
Agreement  with  Cornell  under  which  Cornell  agreed to  purchase up to $10.0
million of NeoMedia's  common stock and over the next two years, with the timing
and amount of the purchase at the Company's  discretion.  The maximum  amount of
each  purchase is $150,000 with a minimum of seven days between  purchases.  The
shares will be valued at 98% of the lowest closing bid price during the five-day
period  following the delivery of a notice of purchase by NeoMedia.  The Company
will pay 5% of the gross  proceeds of each  purchase to Cornell as a commission.
According to the terms of the agreement,  the Company cannot draw on the line of
credit until the shares underlying the agreement are registered for trading with
the Securities and Exchange  Commission.  On February 14, 2003, the SEC declared
effective  the  S-1  registration   statement   containing  100  million  shares
underlying the Equity Line of Credit.

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

      Should these financing sources fail to materialize,  management would seek
alternate  funding  sources  through  sale of  common  and/or  preferred  stock.
Management's plan is to secure adequate funding to bridge to revenue  generation
from the Company's  valuable  intellectual  property  portfolio and PaperClickTM
internet  "switching"  software.  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.
Additionally,  on March 13, 2003,  the Company  announced that it has reached an
agreement in principal to acquire and merge with Loch Energy, Inc. ("Loch"),  an
oil and gas provider  based in Humble,  Texas.  Loch  currently owns mineral and
lease rights to five properties, totaling approximately 130 acres, near Houston,
Texas. Loch's portion of the proven reserves on the five properties is estimated
at  7,707,247  barrels.  Loch's  portion of the  probable  reserves  on the five
properties is estimated at an  additional  5,963,748  barrels.  The merger would
provide for one share of common stock of the Company to be  exchanged  for every
four shares of Loch common stock on an adjusted basis, and additional "earn out"
shares to be issued to Loch  shareholders  based on actual oil production in the
first year after closing.  Total shares to be issued to Loch  shareholders  will
not  exceed  50% of  NeoMedia  outstanding  shares.  The  merger is  subject  to
negotiations of definitive contracts, corporate filing requirements,  completion
of due  diligence  and any  required  approval  by the Boards of  Directors  and
shareholders  of each  company.  It is  anticipated  that  closing  would  occur
approximately 30 days after such conditions are satisfied.

4.    CONTRACT ACCOUNTING

      NeoMedia  periodically  enters into  long-term  software  development  and
consultation  agreements  with  certain  customers.  As of December 31, 2002 and
2001,  certain  contracts  were not completed and  information  regarding  these
uncompleted contracts was as follows:

                                                         (dollars in thousands)
                                                       ------------------------
                                                            2002          2001
                                                            ----          ----
Costs incurred on contracts                                   $7           $50

Profit to date                                                 3            15
                                                       ------------------------
    Total costs and estimated earnings
                                                              10            65

Less - billings to date                                      (8)          (35)
                                                       ------------------------
  Costs and estimated earnings in excess of billings          $2           $30
                                                       ========================

                                      F-20
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

                                                         (dollars in thousands)
                                                         ----------------------
                                                               2002       2001
Accounts receivable                                              $3        $43

Deferred revenue                                                (1)       (13)
                                                         ----------------------
  Costs and estimated earnings in excess of billings, net        $2        $30
                                                         ======================


5.    PROPERTY AND EQUIPMENT

      As of December 31, 2002 and 2001,  property and equipment consisted of the
following:

                                                     (dollars in thousands)
                                                    -------------------------
                                                          2002          2001
                                                          ----          ----
Furniture and fixtures                                    $274          $643

Leasehold improvements                                       -           109

Equipment                                                  166           326
                                                    -------------------------
     Total                                                 440         1,078
Less: accumulated depreciation

   Furniture and fixtures                                (208)         (273)

   Leasehold improvements                                    -         (109)

   Equipment                                             (134)         (226)

Less property and equipment held for sale                    -         (265)
                                                    -------------------------
      Total property and equipment, net                    $98          $205
                                                    =========================

      During the years ended  December  31, 2002 and 2001,  the Company  took an
impairment  charge  against  property  and  equipment  of $0.3  million and $0.6
million,  respectively,  relating to the  discontinuation  of its Qode  business
unit.


6.    INTANGIBLE ASSETS

      As of  December  31, 2002 and 2001,  intangible  assets  consisted  of the
following:

                                                      (dollars in thousands)
                                                     -------------------------
                                                           2002          2001
                                                           ----          ----
Cost:
Capitalized and purchased software costs                   $672        $8,520

Patents and related costs                                 3,142         3,125
                                                     -------------------------
        Total                                             3,814        11,645

                                                     -------------------------
Less: accumulated amortization:
     Capitalized and purchased software costs             (523)       (5,665)

     Patents and related costs                            (898)         (625)
                                                     -------------------------
       Total                                            (1,421)       (6,290)

                                                     -------------------------
Carrying value:
Capitalized and purchased software costs                    149         2,855
Patents and related costs                                 2,244         2,500
                                                     -------------------------
                                                          2,393         5,355

Less intangible assets of discontinued business unit          -       (1,027)
                                                     -------------------------
   Intangible assets, net                                $2,393        $4,328
                                                     =========================


                                      F-21
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      During the year  ended  December  31,  2002,  the  Company  recognized  an
impairment    charge   of   $1.0    million    relating   to   its    PaperClick
physical-world-to-internet  software solution.  Due to capital constraints,  the
Company is not currently able to devote full-time  resources and  infrastructure
to  commercializing  the  technology.  The Company intends to re-focus sales and
marketing  efforts  surrounding  the  product  upon the  receipt  of  sufficient
capital.

      As of December 31, 2002, the Company estimated future amortization expense
be $389,000 for 2003,  $294,000 for 2004,  $205,000 for 2005,  $157,000 for 2006
and $148,000 for 2007.

      During the years ended  December  31, 2002 and 2001,  the Company  took an
impairment   charge   against   intangible   assets  of  $0  and  $2.1  million,
respectively, relating to the discontinuation of its Qode business unit.


7.    FINANCING AGREEMENTS

      RESALE FINANCING ARRANGEMENT

      The  Company has an  agreement  with a  commercial  finance  company  that
provides  short-term  financing  for  certain  computer  hardware  and  software
purchases.  Under the  agreement,  there are generally no financing  charges for
amounts  paid within 30 or 45 days,  depending  on the vendor used to source the
product.  Under this agreement there are two separate lines of credit. The first
line  has  credit   availability  of  $750,000.   The  second  line  has  credit
availability  of up to  $2,000,000,  based upon the  Company's  customer  credit
rating.  The commercial  finance company  currently applies 50% of the Company's
proceeds from  re-sales of equipment and software  toward past due balances owed
by the Company to the commercial  finance company.  The Company expects to begin
receiving 100% of its proceeds during 2003.

      Borrowings are  collateralized  by all inventory,  property and equipment,
and accounts  receivable.  As of December  31, 2002 and 2001,  amounts due under
this  financing  agreement  included  in  accounts  payable  were  $430,000  and
$2,283,000, respectively.

      NOTES PAYABLE

      On March 1,  2001,  the  Company  assumed  a bank  note  agreement  in its
purchase of Qode for approximately  $15,000,  bearing interest at 11% per annum.
The note  matured on March 15,  2002.  As of  December  31,  2002 and 2001,  the
outstanding  balance of this note was  $15,000.  Accrued  interest  amounted  to
$3,000 and $1,400, respectively, as of December 31, 2002 and 2001.

      On July 11, 2001, the Company  entered into a note payable  agreement with
AirClic, Inc., in the amount of $500,000,  bearing interest at 8% per annum. The
note  maturedon  January  5,  2002.  As of  December  31,  2002  and  2001,  the
outstanding  balance of this note was  $500,000,  and accrued  interest  payable
amounted  to  $59,000  and  $19,000,  respectively.  This  note  is  subject  to
litigation between the Company and AirClic (see "Legal Proceedings, Note 11).

      On September 21, 2001, the Company  entered into a note payable  agreement
with a law firm for  approximately  $76,000,  bearing interest at 10% per annum.
The note  matured on February 28,  2002.  As of December 31, 2002 and 2001,  the
outstanding  balance of this note was  $76,000,  and  accrued  interest  payable
amounted to $8,900 and $1,300, respectively.

      On September 28, 2001, the Company  entered into a note payable  agreement
with a law firm for approximately  $170,000,  bearing interest at 10% per annum.
The note  matured on February 28,  2002.  As of December 31, 2002 and 2001,  the
outstanding  balance of this note was  $170,000,  and accrued  interest  payable
amounted  to $21,000 and  $4,300,  respectively.  The note is subject to a legal
action by the holder against the Company (see "Legal Proceedings").


                                      F-22
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      On October 16, 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.  The note matured,  on April 16, 2002. As of December 31, 2002
and 2001, the outstanding  balance of this note was $4,000, and accrued interest
payable amounted to $300 and $100, respectively.

      On February 26, 2002, the Company  borrowed  $10,000 from William E. Fritz
under a note payable bearing interest at 8% per annum. The note matured on March
28,  2002.  As of December 31, 2002,  the  outstanding  balance of this note was
$10,000 and accrued interest payable amounted to $1,700.

      On April 5, 2002, the Company borrowed $11,000 from William E. Fritz under
a note  payable  bearing  interest at 8% per annum.  The note matured on June 4,
2002. As of December 31, 2002,  outstanding balance of this note was $11,000 and
accrued interest payable amounted to $1,800.

      On March 1, 2001,  the  Company  assumed a note of $104,000 in relation to
purchase of Qode assets.  The note payable bears interest at 5.5% per annum. The
note  matured on  December  31,  2001.  As of December  31,  2002 and 2001,  the
outstanding  balance was $0 and  $104,000,  respectively,  and accrued  interest
payable amounted to $0 and $4,700, respectively.

      During November 2002, NeoMedia issued Convertible Secured Promissory Notes
with an aggregate face value of $60,000 to 3 separate parties, including Charles
W. Fritz,  Chairman of the Board of Directors of NeoMedia;  William E. Fritz, an
outside  director;  and James J.  Keil,  an  outside  director.  The notes  bear
interest  at a rate of 15% per  annum,  and  mature at the  earlier  of i.) four
months, or ii.) the date the shares underlying the Cornell Equity Line of Credit
are  registered  with the SEC. The notes are  convertible,  at the option of the
holder,  into  either  cash or shares of our common  stock at a 30%  discount to
either  market  price upon  closing,  or upon  conversion,  whichever  is lower.
NeoMedia  also  granted to the  holders an  additional  1,355,670  shares of its
common stock and 60,000 warrants to purchase shares of its common stock at $0.03
per share,  with a term of three  years.  The warrants and shares were issued in
January 2003.  In addition,  since this debt is  convertible  into equity at the
option of the note holder at beneficial conversion rates, an embedded beneficial
conversion  feature will be recorded as a debt discount and amortized  using the
effective interest rate over the life of the debt in accordance with EITF 00-27.
Total cost of beneficial conversion feature, fair value of the stock and cost of
warrants  issued  exceed the face value of the notes  payable,  therefore,  only
$60,000,  the face amount of the note, is recognizable as debt discount,  and is
being  amortized  over the  life of the  notes  payable.  Any  unamortized  debt
discount  related to  beneficial  conversion  feature will be charged to expense
upon  conversion,  as interest  expense.  In the event NeoMedia  defaults on the
note, NeoMedia will issue an additional  1,483,318 shares of its common stock to
the note holders. The notes are secured by the Company's  intellectual property,
which is subject to first lien by AirClic,  Inc.  During the year ended December
31, 2002, the Company amortized discount of $23,000 related to these convertible
notes. During March 2003, two of the affiliated  parties,  Mr. William Firtz and
Mr.  Keil,  agreed to extend  the  maturity  date due to the  Company's  capital
constraints.  The Company repaid Mr.  Charles  Fritz's note in full during March
2003.  NeoMedia will continue to pursue additional  capital through the issuance
of Convertible Secured Promissory Notes with the same terms as above.

     On December 2, 2002, the Company issued to Michael Kesselbrenner, a private
investor,  a  Promissory  Note in the  principal  amount  of  $165,000,  bearing
interest at a rate of 12% per annum,  with a maturity of 150 days. In connection
with the default  provision of the Promissory  Note, the Company  entered into a
Pledge  Agreement,  dated  December  2, 2002,  under  which the  Company  issued
53,620,020  shares of common stock to an unrelated third party as collateral for
the  Promissory  Note.  The investor  only funded to the Company  $84,000 of the
principal  amount of the note.  The Company  repaid this note during March 2003,
and the shares  held in escrow  were  returned.  The  Company  has not  incurred
further obligation under this note agreement.



8.    LONG-TERM DEBT

      In October 1994,  the Company  purchased,  via seller  financing,  certain
computer software from International  Digital  Scientific,  Inc.  ("IDSI").  The
aggregate  purchase  price was  $2,000,000  and was funded by the seller with an

                                      F-23
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2002 and 2001,
the balance of the note payable, net of unamortized  discount,  was $651,000 and
$540,000, respectively.

      As of December 31, 2002, the Company included $425,000 in "Current portion
of  long-term  debt" on the  accompanying  balance  sheet  relating  to past due
payments  under the  arrangement  with IDSI.  On October 21, 2002,  IDSI filed a
demand for  arbitration  relating to past due payments on the note.  The Company
has filed a  counterclaim  with the  arbitrator  relating  to this  matter.  The
arbitration hearing has been scheduled for June 25, 2003.


      As of  December  31,  2002  and  2001,  long-term  debt  consisted  of the
following:

<TABLE>
<CAPTION>
                                                                       2002         2001
<S>                                                                 <C>           <C>
Note payable to International Digital Scientific, Inc. (IDSI),
  non-interest bearing with interest imputed at 9%, due with
  minimum monthly installments of $16,000 through March 2005        $     665     $   624

Less: unamortized discount                                                (14)        (85)
                                                                   --------------------------
  Total long-term debt                                                    651         539
Less:  current portion                                                   (425)       (149)
                                                                   --------------------------

Long-term debt, net of current portion                              $     226     $   390
                                                                   ==========================
</TABLE>

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

                                                             (IN THOUSANDS)
                                                             --------------


      2003...................................................  $     425

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

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

      2006...................................................       ----
      2007...................................................       ----
                                                               ---------


             Total...........................................  $     665
                                                               =========


9.    INCOME TAXES

      For the years ended  December 31, 2002,  2001, and 2000, the components of
income tax expense were as follows:

                                               2002        2001         2000
                                               ----        ----         ----
                                                       (IN THOUSANDS)
      Current...........................    $    --     $      --    $     --

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

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      As  of  December  31,  2002,  2001,  and  2000,  the  types  of  temporary
differences  between the tax basis of assets and liabilities and their financial
reporting  amounts which gave rise to deferred taxes, and their tax effects were
as follows:
<TABLE>
<CAPTION>

                                                                   2002         2001       2000
                                                                   ----         ----       ----

<S>                                                            <C>          <C>       <C>
Accrued employee benefits                                      $     26     $     62  $      30
Provisions for doubtful accounts                                     22           26        182
Deferred revenue                                                      -            -         13
Capitalized software development costs and fixed assets             821          676        284
Net operating loss carryforwards (NOL)                           25,134       22,916     15,021
Accruals                                                            468          470        864
Write-off of long-lived assets                                    2,070        1,060          -
Other                                                                95            -         17
Alternative minimum tax credit carryforward                          45           45         45
                                                               -------------------------------------
Total deferred tax assets                                        28,681       25,255     16,456
Valuation Allowance                                             (28,681)     (25,255)   (16,456)
                                                               -------------------------------------
   Net deferred income tax asset                               $      -     $      -  $       -
                                                               =====================================
</TABLE>

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

      For the years ended  December 31,  2002,  2001,  and 2000,  the income tax
benefit differed from the amount computed by applying the statutory federal rate
of 34% as follows:
<TABLE>
<CAPTION>

                                                                   2002        2001       2000
                                                                   ----        ----       ----
<S>                                                            <C>         <C>        <C>
Benefit at federal statutory rate                              $ (2,523)   $ (8,659)  $ (1,839)
State income taxes, net of federal                                 (294)     (1,009)      (196)
Exercise of non-qualified stock options                               -         (17)      (176)
Permanent difference - write-off of Digtal Convergence stock          -       1,190          -
Permanent and other, net                                           (609)       (304)      (860)
Change in valuation allowance                                     3,426       8,799      3,071
                                                               ---------------------------------
   Income tax expense/(benefit)
                                                               $      -    $      -   $      -
                                                               =================================
</TABLE>

      As of December 31, 2002, NeoMedia had net operating loss carryforwards for
federal tax purposes totaling  approximately  $62.8 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 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

                                      F-25
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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

      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.

      During February 2002, the Company  borrowed  $10,000 from William E. Fritz
under a note  payable  bearing  interest at 8% per annum with a term of 30 days.
The note has not been  repaid as of the date of this  filing  and  continues  to
accrue interest.

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

      During  April 2002,  the Company  borrowed  $11,000  from William E. Fritz
under a note  payable  bearing  interest at 8% per annum with a term of 60 days.
The note had not been  repaid as of the date of this  filing  and  continues  to
accrue interest.

      During November 2002, NeoMedia issued Convertible Secured Promissory Notes
with an aggregate face value of $60,000 to 3 separate parties, including Charles
W. Fritz,  Chairman of the Board of Directors of NeoMedia;  William E. Fritz, an
outside  director;  and James J.  Keil,  an  outside  director.  The notes  bear
interest  at a rate of 15% per  annum,  and  mature at the  earlier  of i.) four
months, or ii.) the date the shares underlying the Cornell Equity Line of Credit
are  registered  with the SEC. The notes are  convertible,  at the option of the
holder,  into  either  cash or shares of our common  stock at a 30%  discount to
either  market  price upon  closing,  or upon  conversion,  whichever  is lower.
NeoMedia  also  granted to the  holders an  additional  1,355,670  shares of its
common stock and 60,000 warrants to purchase shares of its common stock at $0.03
per share,  with a term of three  years.  The warrants and shares were issued in
January 2003.  In addition,  since this debt is  convertible  into equity at the
option of the note holder at beneficial conversion rates, an embedded beneficial
conversion  feature will be recorded as a debt discount and amortized  using the
effective interest rate over the life of the debt in accordance with EITF 00-27.
Total cost of beneficial conversion feature, fair value of the stock and cost of
warrants  issued  exceed the face value of the notes  payable,  therefore,  only
$60,000,  the face amount of the note, is recognizable as debt discount,  and is
being  amortized  over the  life of the  notes  payable.  Any  unamortized  debt
discount  related to  beneficial  conversion  feature will be charged to expense
upon  conversion,  as interest  expense.  In the event NeoMedia  defaults on the
note, NeoMedia will issue an additional  1,483,318 shares of its common stock to
the note holders. The notes are secured by the Company's  intellectual property,
which is subject to first lien by AirClic,  Inc.  During March 2003,  two of the
affiliated  parties,  Mr.  William  Firtz and Mr.  Keil,  agreed  to extend  the
maturity date due to the Company's capital  constraints.  The Company repaid Mr.
Charles Fritz's note in full during March 2003. NeoMedia will continue to pursue
additional capital through the issuance of Convertible  Secured Promissory Notes
with the same terms as above.
      The Company believes that all of the above  transactions were conducted at
"arm's length",  representing what it believes to be fair market value for those
services.

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, 2002,  2001, and 2000,  NeoMedia's rent expense was $853,000,
$1,246,000, and $1,067,000, respectively.


                                      F-26
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      The  following is a schedule of the future  minimum lease  payments  under
non-cancelable operating leases as of December 31, 2002:



                                                             PAYMENTS
                                                             --------
                                                          (IN THOUSANDS)
      2003...........................................        $     170
      2004...........................................                7
      2005...........................................               --
      2006...........................................               --
      2007...........................................               --
                                                             ---------
      Total..........................................        $     177
                                                             =========

      As of  December  31,  2002,  none of the  Company's  employees  were under
contract.  Additionally, as of December 31, 2002, the Company was not a party to
any long-term consulting agreements that are to be paid in cash.

LEGAL PROCEEDINGS

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


     NEOMEDIA SHAREHOLDERS

     During January 2002,  certain of NeoMedia'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  shares of NeoMedia  common  stock.  On March 11,
2002, NeoMedia filed its response claiming that NeoMedia 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.


     AIRCLIC, INC. LITIGATION

     On July 3, 2001,  the Company  entered into a non-binding  letter of intent
with  AirClic  which  contemplated  an  intellectual  property   cross-licensing
transaction  between the Company and  AirClic.  Under the terms of the letter of
intent,  AirClic was to provide the Company with bridge financing of $2,000,000,
which was to be paid to the Company in installments.  On July 11, 2001,  AirClic
advanced  $500,000 in bridge financing to the Company in return for a promissory
note from the  Company  secured by all of its  assets,  including  its  physical
world-to-Internet  patents. During the negotiation of definitive agreements, the
letter of intent was abandoned on the basis of the Company's  alleged  breach of
certain representations made by the Company in the promissory note.

     On September 6, 2001,  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 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   property,   including   the   Company's   core   physical
world-to-Internet   technologies.   If  the  Company  is  unsuccessful  in  this
litigation,  AirClic,  which  is one of the  Company's  key  competitors,  could
acquire the Company's core intellectual  property and other assets,  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
claim  and have  filed  counterclaims  against  AirClic.  As of the date of this
prospectus,  pleadings  were  closed  and the  parties  have  engaged in written
discovery. Whether or not AirClic is successful in asserting its claims that the
Company breached certain representations made by it 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 and other assets  securing the note which

                                      F-27
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

would have a  material  adverse  effect on the  Company's  business,  prospects,
financial condition, and results of operations.  The Company has not accrued any
additional  liability  over and  above  the note  payable  and  related  accrued
interest.  As of December 3, 2002,  pleadings  were closed and the parties  have
engaged in written discovery.

     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 in the public domain. Any
declaration  that the  Company's  core  patented  or  patentable  technology  is
non-protectable and in the public domain would have a material adverse effect on
the  Company's  business,   prospects,   financial  condition,  and  results  of
operations.  The Company is vigorously  defending this second action as well. On
November  21,2001,  the  Company  filed a motion to dismiss  the  complaint.  On
December 19, 2001, AirClic filed a response opposing that position. On September
18,  2002,  the court  ruled in favor of the  Company  and  dismissed  AirClic's
complaint.  The Company has not accrued any  liability in  connection  with this
matter.


      DIGITAL:  CONVERGENCE LITIGATION

      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.  On March 22,  2002,
Digital:Convergence filed under Chapter 7 of the United States Bankruptcy Code.

      OTHER LITIGATION

      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.  During May 2002, the Company
settled the suit.  The  Company is  obligated  to make cash  payments of $90,000
directly to the plaintiff  during the period May 2002 through December 2002, and
cash  payments  to the  plaintiff's  attorney  for legal  fees in the  amount of
$45,000 due in July and August 2002.  In  addition,  the  plaintiff  was granted
360,000 options to purchase shares of NeoMedia common stock at an exercise price
of $0.08.  As of March 31,  2002,  the Company had accrued a $347,000  liability
relating to the suit.  As a result,  the Company  recognized  an increase to net
income of  approximately  $176,000 during the three-month  period ended June 30,
2002 to adjust the liability to the  settlement  amount.  As of December 31, the
Company  had an accrued  liability  of  approximately  $33,000  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. On September
6, 2002,  the Company  settled  this suit for $133,000 of the  Company's  common
stock. On March 31, 2003, the Company issued 2,700,000 shares of common stock to
Ripfire  under this  arrangement.  The Company has accrued a $133,000  liability
relating to this matter as of December 31, 2002.

      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 is currently  attempting to negotiate settlement of this matter. The
Company has accrued a liability of $525,000 as of December 31, 2002.

      On July 22, 2002, 2150 Western Court, L.L.C., the property manager for the
Company's  Lisle,  IL, office,  filed a summons seeking payment of approximately
$72,000 for all past due rents on the facility. The summons asked for a judgment
for the above amount plus  possession  of the premises.  On August 9, 2002,  the
Company  settled  this  matter.  The  settlement  calls  for past  due  rents of
approximately  $72,000  to be paid over a  15-month  period,  as well as reduced

                                      F-28
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

rents for the period August 2002 through March 2003. As additional consideration
in the settlement, the Company issued 900,000 shares of its common stock to 2150
Western  Court  L.L.C.  The  Company had a liability  of  approximately  $49,000
relating to this matter as of December 31, 2002.

      On July 27, 2002, the Company's  former General Counsel filed suit in U.S.
District  Court,  Ft.  Myers  division,  seeking  payment of the 2000  executive
incentive,  severance and unpaid  vacation  days in the amount of  approximately
$154,000.  In June  2001,  the  Company's  compensation  committee  approved  an
adjustment  to the 2000  executive  incentive  plan that  reduced the  executive
incentive  payout  as a  result  of the  write-off  of  the  Digital:Convergence
intellectual  property  license  contract  in the second  quarter of 2001.  As a
result,  the Company  reduced the  accrual  for such payout by an  aggregate  of
approximately  $1.1  million in the second  quarter of 2002.  The  plaintiff  is
seeking payment of the entire original  incentive  payout. On November 12, 2002,
the Company settled the lawsuit. The settlement calls for cash payments totaling
approximately  $90,000 over a period of ten months,  plus 250,000 vested options
to purchase  shares of the Company's  common stock at an exercise price of $0.01
with a term of five years. The Company had a liability of approximately  $70,000
relating to this matter as of December 31, 2002.

      On September 12, 2002,  R. R.  Donnelley & Sons Company filed a summons in
the  Circuit  Court of The  Twentieth  Judicial  Circuit in and for Lee  County,
Florida,  seeking  payment of  approximately  $92,000  in past due  professional
services bills. The Company is attempting to negotiate  settlement of this issue
out of court  prior to the court date.  The  Company  has accrued  approximately
$92,000 relating to this matter as of December 31, 2002.

      On September 13, 2002, Wachovia Bank, N.A., owner of the building in which
the Company's Ft. Myers, Florida  headquarters is located,  filed a complaint in
Circuit Court of The Twentieth Judicial Circuit in and for Lee County,  Florida,
seeking payment of approximately  $225,000 in past due rents. The complaint also
seeks payment of all future rent payments under the lease term, which expires in
January 2004, as well as  possession of the premises.  On October 28, 2002,  the
Company and Wachovia  reached a settlement on this matter.  The settlement calls
for cash payments of past due rents of  approximately  $250,000 over a period of
16 months. The Company will also vacate approximately 70% of the unused space in
its headquarters,  and the rent for the remainder of the lease, which expires in
January 2004, will be reduced  according to square footage used. The Company has
accrued a  liability  of  approximately  $270,000  relating to this matter as of
December 31, 2002.

      On October 21, 2002, International Digital Scientific, Inc. ("IDSI") filed
a demand for  arbitration  relating to past due payments on an  uncollateralized
note  payable  from us to IDSI dated  October  1,  1994.  The note was issued in
exchange for the purchase by us of computer  software from IDSI.  The note calls
for the Company to make  payments  of the  greater  of: (i) 5% of the  collected
gross revenues from sales of software or (ii) $16,000 per month.  As of December
31,  2002,  the  Company  had  a  past  due  balance  under  the  IDSI  note  of
approximately  $304,000.  The net carrying value of future  obligation under the
note was $390,000 as of December 31, 2002.  The Company has filed a counterclaim
with the arbitrator  relating to this matter.  The arbitration  hearing has been
scheduled for June 25, 2003.

      On October 28, 2002, Merrick & Klimek, P.C., filed a complaint against the
Company  seeking payment of  approximately  $170,000 in past due legal services.
The amount in question is subject to an unsecured  promissory  note that matured
unpaid on February 28, 2002.  The Company is attempting to negotiate  settlement
of this issue out of court prior to the court date. The Company has recorded the
note  payable  amount  of   approximately   $170,000  and  accrued  interest  of
approximately $21,000 relating to this matter as of December 31, 2002.

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


                                      F-29
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      On December 30, 2002,  Brooks  Automation,  Inc. filed a complaint against
the  Company  seeking  payment  of  approximately  $37,000  in past due  amounts
relating to software  re-sold by the Company.  On January 16, 2003,  the Company
and Brooks Automation  reached a settlement under which the Company will pay the
amount owed to Brooks Automation over a period of approximately 15 months,  with
the payment  amount  increasing  after three  months.  The Company had a $37,000
liability relating to this matter as of December 31, 2002.

      On February 6, 2003,  Norton Allen & Blue, P.A., filed a complaint against
the Company seeking payment of approximately $25,000 in past due legal services.
The Company is  attempting  to negotiate  settlement  of this issue out of court
prior to the court date.

      On March 10, 2003, IBM Credit  Corporation  filed a complaint  against the
Company seeking payment of approximately  $9,000 in past due amounts relating to
computer equipment leased by the Company. The Company is attempting to negotiate
settlement of this issue out of court prior to the court date.


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 generally vest 20% upon grant and 20%
per year thereafter. The options expire ten years from the date of grant.

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

      Effective 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, 2002,  2001, and 2000
for stock-based employee compensation.


                                      F-30
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      For grants in 2002,  2001, and 2000, the following  assumptions were used:
(i) no expected dividends; (ii) a risk-free interest rate of 4.5% for 2002, 4.5%
for 2001, and 6% for 2000; (iii) expected  volatility  ranging from 135% to 211%
for 2002,  135% for 2001,  and 80% for 2000,  and (iv) an  expected  life of the
shorter of 5 years or the stated life of the option for options granted in 2002,
the shorter of 5 years or the stated  life of the option for options  granted in
2002,  and the  shorter of 4 years or the stated  life of the option for options
granted  in  2000.  The  fair-value  was  determined  using  the   Black-Scholes
option-pricing model.

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

      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).

                            2002        2001       2000
                            ----        ----       ----
NET LOSS
  As reported             ($7,421)   ($25,469)   ($5,409)
  Pro forma               ($8,420)   ($27,888)   ($7,498)

NET LOSS PER SHARE
  As reported             ($0.33)     ($1.55)     ($0.39)
  Pro forma               ($0.38)     ($1.70)     ($0.54)

      A summary of the status of  NeoMedia's  2002,  1998 and 1996 stock  option
plans as of and for the years ended  December  31,  2002,  2001,  and 2000 is as
follows:

<TABLE>
<CAPTION>
                                              2002                   2001                  2000
                                      ---------------------  --------------------- ----------------------
                                                 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           4,214   $2.96     4,294          $4.71      3,418     $4.43

Granted                                   12,306   $0.06     3,499          $2.00      1,192     $4.87

Exercised                                 (5,252)  $0.07       (38)         $3.60       (170)    $2.83
Forfeited                                   (467)  $2.75    (3,541)         $4.13       (146)    $5.78
                                      ----------- ---------  --------- ----------- ----------- ----------

  Outstanding at end of year              10,801   $1.11     4,214          $2.96      4,294     $4.71
                                      =========== =========  ========= =========== =========== ==========


Options exercisable at year-end           10,272             2,452                     2,140

Weighted-average fair value of options
  granted during the year                  $0.10             $1.40                     $3.05

Available for grant at the end of the
year                                       2,319             4,158                     4,116
</TABLE>


                                      F-31
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      The following table summarizes  information about NeoMedia's stock options
outstanding as of December 31, 2002:
<TABLE>
<CAPTION>

                          OPTIONS OUTSTANDING                                   OPTIONS EXERCISABLE
------------------------------------------------------------------------    ----------------------------
                                            WEIGHTED-       WEIGHTED-                        WEIGHTED-
                                             AVERAGE         AVERAGE                          AVERAGE
      RANGE OF              NUMBER          REMAINING       EXERCISE             NUMBER      EXERCISE
   EXERCISE PRICES       OUTSTANDING      CONTRACTUAL LIFE    PRICE            EXERCISABLE    PRICE
   ---------------       -----------      ----------------  --------          ------------   ---------
                        (In thousands)                                       (In thousands)

<S> <C>    <C>                 <C>         <C>               <C>                  <C>          <C>
    $-- to $0.10               5,705       6.6  years        $0.04                5,705        $0.04

    0.11 to 0.22               2,449       5.0  years        $0.18                2,449        $0.18

    0.23 to 4.88               1,753       6.8  years        $3.18                1,300        $3.15

    4.89 to 7.88                 801       6.2  years        $6.18                  729        $6.27

    7.89 to 10.88                 93       6.7  years        $8.86                   89        $8.88
--------------------- ----------------- ---------------- ---------------    --------------- ------------

   $0.84 to $10.88            10,801       6.2  years        $1.11               10,272        $0.98
===================== ================= ================ ===============    =============== ============
</TABLE>

      In October 2000,  the Company  issued 80,000  options to buy shares of the
Company's  common stock to an outside  consultant  at a price of $4.13 per share
for  consulting  services  rendered,  and recognized  approximately  $253,000 in
expense in 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 and 48,000 were vested at December 31,
2002.

      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 vested 40% upon grant and the
remaining 60% in September  2002. As of December 31, 2002,  all 150,000  options
were outstanding and vested.

      In March 2002, the Company issued  2,946,310  options to buy shares of the
Company's common stock to two outside  consultants at a price of $0.17 per share
for  consulting  services  rendered  over a  six-month  period,  and  recognized
approximately $407,000 in expense in the 2002 consolidated financial statements.
The options  vested 100% upon grant.  As of December  31,  2002,  984,055 of the
options were still outstanding and vested.

      In June 2002,  the Company issued  3,000,000  options to buy shares of the
Company's  common stock to an outside  consultant  at a price of $0.01 per share
for  consulting  services  rendered  over  a  one-year  period,  and  recognized
approximately $125,000 in expense in the 2002 consolidated financial statements.
The options vested 100% upon grant. All 3,000,000  options were exercised during
2002, resulting in proceeds to the Company of $30,000.

      In December 2002, the Company  issued  2,000,000  options to buy shares of
the  Company's  common  stock to an outside  consultant  at a price of $0.01 per
share  for  consulting  services  rendered  over  a  twelve-month   period,  and
recognized  approximately $78,000 in expense in the 2002 consolidated  financial
statements. The options vested 100% upon grant. All 2,000,000 options were still
outstanding and vested as of December 31, 2002.

  WARRANTS

      Warrant activity as of December 31, 2002, 2001, and 2000, is as follows:

            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
             Warrants issued             5,000,000
             Warrants exercised           (369,450)
             Warrants expired             (436,689)
                                       ------------

           Balance December 31, 2002     7,433,758
                                       ============

                                      F-32
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      During October 2000, the Company  issued  1,400,000  warrants as part of a
ten-year  license of the Company's  intellectual  property to DC. These warrants
were immediately  vested and exercisable.  The associated  expense was initially
being  recognized over the life of the contract,  and was written off as part of
the "Loss on  Digital:Convergence  license  contract"  recognized  in 2000.  All
1,400,000  warrants  were  outstanding  as of December 31, 2002. DC is currently
proceeding under Chapter 7 of the U.S. Bankruptcy Code.

      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 Company issued 404,900 warrants to an outside consultant
at an exercise price of $2.09. During 2001, the Company recognized an expense of
approximately $742,000 related to this transaction, which is included in general
and  administrative  expense  in the  accompanying  consolidated  statements  of
operations. The Company used the Black-Scholes option-pricing model to value the
shares,  with  the  following  assumptions:  (i) no  expected  dividends  (ii) a
risk-free  interest rate of 4.5% (iii)  expected  volatility of 135% and (iv) an
expected life of 3 years.  All of these  warrants were still  outstanding  as of
December 31, 2002.

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

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

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

                                      F-33
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      The following table summarizes  information about warrants  outstanding at
December 31, 2002, all of which are exercisable:


                                         WEIGHTED-          WEIGHTED-
                                          AVERAGE            AVERAGE
    RANGE OF          WARRANTS           REMAINING          EXERCISE
 EXERCISE PRICES     OUTSTANDING       CONTRACTUAL LIFE       PRICE
                    (In thousands)

  $--- to $0.05          5,009          2.8   years           $0.03
  0.06 to 2.13             485          0.4   years           $2.10
  2.14 to 3.56             241          5.3   years           $3.46
  3.57 to 7.37           1,443          2.7   years           $6.03
  7.38 to 15.00            256          0.2   years          $11.24
------------------  --------------   ------------------   -------------
 $--- to $15.00          7,434          2.6   years           $1.83
==================  ==============   ==================   =============

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


                                      F-34
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      Operational  results for the two segments for the years ended December 31,
2002, 2001, and 2000 and 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, 2002
     Net Sales
          License fees                                 $29                $417                $446
          Software and equipment resales

            and related services                         -               8,953               8,953

                Total net sales                         29               9,370               9,399

     Loss from Continuing Operations                (4,623)             (1,275)             (5,898)
     Loss from disposal of
          discontinued business unit                (1,523)                  -              (1,523)
     Net Loss                                       (6,146)             (1,275)             (7,421)

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 Sales               (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)

YEAR ENDED DECEMBER 31, 2000
     Net Sales
          Patent license fees                       $7,768                $---              $7,768
          Other license fees                           315                 334                 649
          Software and equipment resales
            and related services                         -              19,148              19,148

                Total net sales                      8,083              19,482              27,565

     Net Loss                                       (4,225)             (1,184)             (5,409)
</TABLE>



                                      F-35
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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>
2002
----
Total net sales                           $9,399       $947     $3,404       $3,652     $1,396
Gross profit                              $1,135        $54       $582         $417        $82
(Loss) before income taxes
     and discontinued operations        ($5,720)     ($741)     ($773)     ($2,824)   ($1,382)
Net (loss)                              ($7,421)     ($919)     ($773)     ($4,347)   ($1,382)
Net (loss) per share:
     basic and diluted                   ($0.33)    ($0.03)    ($0.03)      ($0.11)    ($0.05)
Segment operating income (loss):
NeoMedia ISS                            ($6,147)     ($145)     ($464)     ($4,301)   ($1,237)
NeoMedia CIS                            ($1,274)     ($774)     ($309)        ($46)     ($145)

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)
Segment operating income (loss):
NeoMedia ISS                           ($24,340)   ($1,660)   ($8,956)    ($10,931)   ($2,793)
NeoMedia CIS                            ($1,129)      ($32)     ($354)       ($111)     ($632)

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 income (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)
Segment operating income (loss):
NeoMedia ISS                            ($4,225)     $4,061   ($3,051)     ($2,818)   ($2,417)
NeoMedia CIS                            ($1,184)   ($1,394)     ($504)         $733      ($19)
</TABLE>


16.   COMMON STOCK

      Holders of common  stock are  entitled  to one vote for each share held of
record on each matter submitted to a vote of stockholders. Holders of the common
stock do not have cumulative voting rights, which means that the holders of more
than one half of our outstanding  shares of common stock,  subject to the rights
of the  holders of  preferred  stock,  can elect all of our  directors,  if they
choose to do so. In this event,  the holders of the  remaining  shares of common
stock would not be able to elect any  directors.  Subject to the prior rights of
any  class  or  series  of  preferred  stock  which  may  from  time  to time be

                                      F-36
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

outstanding,  if any,  holders of common stock are entitled to receive  ratably,
dividends  when,  as, and if  declared  by the Board of  Directors  out of funds
legally  available for that purpose and, upon our liquidation,  dissolution,  or
winding up, are entitled to share ratably in all assets  remaining after payment
of liabilities and payment of accrued  dividends and liquidation  preferences on
the preferred stock, if any.  Holders of common stock have no preemptive  rights
and have no rights to convert their common stock into any other securities.  The
outstanding common stock is duly authorized and validly issued,  fully-paid, and
nonassessable. In the event we were to elect to sell additional shares of common
stock following this offering, investors in this offering would have no right to
purchase additional shares. As a result,  their percentage equity interest in us
would be diluted.

      On June 6, 2002, the Company's  shareholders  voted to increase the number
of shares of common  stock,  par value  $0.01 per  share,  that the  Company  is
authorized to issue from  50,000,000 to  200,000,000  and the number of share of
preferred  stock,  par value $0.01 per share,  that the Company is authorized to
issue from 10,000,000 to 25,000,000.

      On November  12, 2002,  the Company  entered into an Equity Line of Credit
Agreement  with  Cornell  under  which  Cornell  agreed to  purchase up to $10.0
million of NeoMedia's  common stock and over the next two years, with the timing
and amount of the purchase at the Company's  discretion.  The maximum  amount of
each  purchase is $150,000 with a minimum of seven days between  purchases.  The
shares will be valued at 98% of the lowest closing bid price during the five-day
period  following the delivery of a notice of purchase by NeoMedia.  The Company
will pay 5% of the gross  proceeds of each  purchase to Cornell as a commission.
According to the terms of the agreement,  the Company cannot draw on the line of
credit until the shares underlying the agreement are registered for trading with
the Securities and Exchange  Commission.  On February 14, 2003, the SEC declared
effective  the  S-1  registration   statement   containing  100  million  shares
underlying the Equity Line of Credit.

17.   PREFERRED STOCK

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

18.   SUBSEQUENT EVENTS

      On February 6, 2003,  Norton Allen & Blue, P.A., filed a complaint against
the Company seeking payment of approximately $25,000 in past due legal services.
The Company is  attempting  to negotiate  settlement  of this issue out of court
prior to the court date.

      On February 14,  2003,  the SEC declared  effective  the S-1  registration
statement  containing 100 million shares underlying the Company's Equity Line of
Credit.  As of March 17, 2003 the Company had issued  1,342,642 shares of common
stock  under  the  Equity  Line of Credit  and  received  cash of  approximately
$150,000.

     On March 13,  2003,  the  Company  announced  that that it has  reached  an
agreement in principal to acquire and merge with Loch Energy, Inc. ("Loch"),  an
oil and gas provider  based in Humble,  Texas.  Loch  currently owns mineral and
lease rights to five properties, totaling approximately 130 acres, near Houston,
Texas. Loch's portion of the proven reserves on the five properties is estimated
at  7,707,247  barrels.  Loch's  portion of the  probable  reserves  on the five
properties is estimated at an  additional  5,963,748  barrels.  The merger would
provide for one share of common stock of the Company to be  exchanged  for every
four shares of Loch common stock on an adjusted basis, and additional "earn out"
shares to be issued to Loch  shareholders  based on actual oil production in the
first year after closing.  Total shares to be issued to Loch  shareholders  will
not  exceed  50% of  NeoMedia  outstanding  shares.  The  merger is  subject  to
negotiations of definitive contracts, corporate filing requirements,  completion

                                      F-37
<PAGE>
                  NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

of due  diligence  and any  required  approval  by the Boards of  Directors  and
shareholders  of each  company.  It is  anticipated  that  closing  would  occur
approximately 30 days after such conditions are satisfied.

      On April 2,  2003,  the  Company  was  issued  its  sixth US  Patent.  The
technology  covered  by  the  patent  allows  for  a  connection  from  human-or
machine-readable  input to  generate  a  tailored  response  that can  utilize a
profile of the person making the link between the code-carrying  physical object
and the desired electronic information. The patent allowed 58 claims.



                                      F-38
<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 January 20, 2003,  NeoMedia's  directors and  executive  officers
were:
<TABLE>
<CAPTION>

NAME                       AGE     POSITION
----                       ---     --------
<S>                         <C>    <C>
Charles W. Fritz            46     Chairman of the Board of Directors
Charles T. Jensen           59     President, Chief Operating Officer, Acting Chief
                                   Executive Officer and Director
David A. Dodge              27     Vice-President, Chief Financial Officer and Controller
William E. Fritz            72     Secretary and Director
James J. Keil               75     Director
A. Hayes Barclay            72     Director
</TABLE>

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


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

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

     DAVID A. DODGE joined NeoMedia in 1999 as the Financial  Reporting Manager.
Since then, Mr. Dodge has acted as NeoMedia's Director of Financial Planning and
Controller,  and currently  holds the title of Vice  President,  Chief Financial
Officer and  Controller.  Prior to joining  NeoMedia in 1999,  Mr.  Dodge was an

                                     III-1
<PAGE>

auditor with Ernst & Young LLP for 2 years.  Mr. Dodge holds a B.A. in economics
from Yale  University and an M.S. in accounting from the University of Hartford,
and is also a Certified Public Accountant.

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

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

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

      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.


ELECTION OF DIRECTORS AND OFFICERS

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


MEETINGS OF THE BOARD OF DIRECTORS

     During the fiscal year ended  December 31,  2002,  the  Company's  Board of
Directors  held 7 meetings.  All members of the Board of  Directors  attended at
least 75% of such meetings.

                                     III-2
<PAGE>

COMMITTEES OF THE BOARD OF DIRECTORS

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

     AUDIT  COMMITTEE.   The  Audit  Committee  is  responsible  for  nominating
NeoMedia's  independent  accountants  for  approval  by the Board of  Directors,
reviewing the scope, results and costs of the audit with NeoMedia's  independent
accountants,  and  reviewing  the  financial  statements,  audit  practices  and
internal controls of NeoMedia.  During 2002, members of the Audit Committee were
non-employee  directors  James J. Keil and A. Hayes  Barclay.  During 2002,  the
Audit Committee held five meetings.

     COMPENSATION  COMMITTEE.  The  Compensation  Committee is  responsible  for
recommending compensation and benefits for the executive officers of NeoMedia to
the Board of  Directors  and for  administering  NeoMedia's  Incentive  Plan for
Management.  Charles W. Fritz,  Charles T. Jensen, James J. Keil, and Paul Reece
were members of NeoMedia's  Compensation  Committee during 2002.  During January
2002, Mr. Reece resigned from the Board of Directors and Compensation Committee.
This Committee held one meeting throughout 2002.

     STOCK OPTION COMMITTEE.  The Stock Option Committee,  which is comprised of
non-employee directors, is responsible for administering NeoMedia's Stock Option
Plans.  A. Hayes Barclay and James J. Keil are the current members of NeoMedia's
Stock Option Committee. During 2002, this Committee held five meetings.

      DIRECTOR COMPENSATION

      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 onsite  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.  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  2002  all  Section  16(a)  filing
requirements  applicable  to  NeoMedia's  officers,  directors  and ten  percent
beneficial owners were complied with.


                                     III-3
<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, 2002, 2001 and 2000:

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>

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


<S>                                   <C>  <C>         <C>       <C>       <C>       <C>          <C>      <C>         <C>
       Charles W. Fritz               2002 $ 144,583   $   -     $     -   $    -    1,800,000    $   -    $  4,470    (3)
         Chairman of the Board        2001   221,758       -           -        -      400,000        -      21,532    (3),(4)
                                      2000   250,000   148,800(2)      -        -       49,000        -      22,502    (3),(4)


       Charles T. Jensen              2002    163,542      -           -        -      800,000        -       5,079    (3)
         Chief Operating Officer,     2001    144,239      -           -        -      240,000        -      17,794    (3),(4)
         President, Acting Chief      2000    150,000   87,860(2)      -        -       37,000        -      29,767    (3),(4)
         Executive Officer
</TABLE>

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

(2)  In June 2001,  NeoMedia's  Compensation  Committee  approved an adjustment,
     relating to the  Digital:Convergence  patent  license  fees,  to the Annual
     Incentive  Plan for  Management  that  reduced  the 2000  bonus  payout  by
     approximately  $1.1  million.  The  original  amount  recorded  in 2000 and
     reported on  NeoMedia's  Form 10-KSB for 2000 was  $430,800  for Charles W.
     Fritz and  $193,860  for  Charles  T.  Jensen.  The  adjusted  amounts  are
     presented in the table above.

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

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

EMPLOYMENT AGREEMENTS

      The five year employment  agreements  between NeoMedia and each of Charles
W.  Fritz,  as Chief Executive Officer and Chairman of the Board, and Charles T.
Jensen, as Vice-President and Chief Financial Officer expired on April 30, 2001.
Their  annual  compensation,  which  at  the time of expiration was $250,000 and
$150,000,  respectively,  was  continued  through  June  2002,  except that each
agreed,  along with other officers of NeoMedia, to a 20% reduction in the annual
rate for the two month period from May 15, 2001 to July 15, 2001 in an effort to
reduce  expenses.

      On June 26, 2002,  the Company's  Board granted  Charles W. Fritz a 90-day
leave of absence from his  responsibilities  as Chief  Executive  Officer,  and,
concurrently,  Charles  T.  Jensen was  elected  president  and Chief  Operating
Officer,  and also named  acting CEO.  The Company  also  announced  that it had
promoted David Dodge,  its  Controller,  to Vice  President and Chief  Financial
Officer.  On September  23, 2002,  Mr. Fritz  officially  resigned his duties as
Chief Executive Officer. He will remain Chairman of the Board of Directors and a
part-time  executive of the Company.  No employment  agreements are currently in
place for any employees of the Company.

                                     III-4
<PAGE>

INCENTIVE PLAN FOR MANAGEMENT

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

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

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

         The Company did not have an incentive  plan for management in place for
the year ended December 31, 2002.

STOCK OPTION PLANS

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

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

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

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)

                                     III-5
<PAGE>

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, 2002:

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

<S>                    <C>             <C>            <C>                <C>          <C>        <C>
Charles W. Fritz       50,000          0.3%           $0.14      January 9, 2012      $4,245     $10,758
                      250,000          1.4%           $0.05       June 6, 2012        $7,861     $19,922
                    1,500,000          8.7%           $0.05       June 6, 2007       $20,721     $45,788



Charles T. Jensen      50,000          0.3%           $0.14      January 9, 2012      $4,245     $10,758
                      250,000          1.4%           $0.05       June 6, 2012        $7,861     $19,922
                      500,000          2.9%           $0.05       June 6, 2012       $15,722     $39,844
</TABLE>


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  2002,  and  the  number  and  value  of all
unexercised options at fiscal year end.
<TABLE>
<CAPTION>

                                                  NUMBER OF UNEXERCISED
                      SHARES                      SECURITIES UNDERLYING        VALUE OF UNEXERCISED IN-
                     ACQUIRED       VALUE            OPTIONS/SARS AT           THE-MONEY OPTIONS/SARS AT
                    ON EXERCISE    REALIZED         DECEMBER 31, 2002            DECEMBER 31, 2002 (1)
                                              ------------------------------ ------------------------------
NAME                    (#)          ($)       EXERCISABLE   UNEXERCISABLE    EXERCISABLE   UNEXERCISABLE
------------------ -------------- ----------- ------------------------------ -------------- ---------------


<S>                <C>                <C>         <C>           <C>              <C>             <C>
Charles W. Fritz   140,775            $1,408      2,829,400     219,600            -              -


Charles T. Jensen       -                 -       1,400,586     104,800            -              -
</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, 2002 ($0.01) and the
     exercise  price of the  options.  No  options  held by the Named  Executive
     Officers were "In-the-money" as of December 31, 2002.


                                     III-6

<PAGE>


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 February 25, 2003, (i) by each person
or entity  known by  NeoMedia  to own  beneficially  more than five  percent  of
NeoMedia's  Common  Stock,  (ii) by each of  NeoMedia's  directors and nominees,
(iii) by each executive  officer of NeoMedia  named in the Summary  Compensation
Table, and (iv) by all executive officers and directors of NeoMedia as a group.

<TABLE>
<CAPTION>
                                           AMOUNT AND NATURE OF          PERCENT OF
                                         BENEFICIAL OWNERSHIP (1)        CLASS (1)
                                       ----------------------------     ------------

<S>                                                      <C>               <C>
Charles W. Fritz (2)                                     4,730,900        14.1%
Fritz Family Limited Partnership(3)                      1,511,742         4.9%
Chandler T. Fritz 1994 Trust(3)(4)(5)                       58,489           *
Charles W. Fritz 1994 Trust(3)(4)(6)                        58,489           *
Debra F. Schiafone 1994 Trust(3)(4)(7)                      48,489           *
William Fritz(3)                                         3,163,299        10.2%
Edna Fritz(3)                                               90,609           *
Charles T. Jensen(8)                                     1,438,086         4.5%
David A. Dodge(9)                                          190,420           *
A. Hayes Barclay(10)                                       269,000           *
James J. Keil(11)                                          793,000         2.6%
                                        ---------------------------     ------------

Officers and Directors As a Group
   (9 Persons)(12)                                      12,352,523        34.2%
                                        ---------------------------     ------------

Thornhill Capital LLC (13)                               3,336,955        9.8%
</TABLE>

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

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


      (1)  Applicable  percentage of ownership is based on 30,746,968  shares of
           common  stock  outstanding  as of February 25,  2003,  together  with
           securities  exercisable  or  convertible  into shares of common stock
           within 60 days of January 20, 2003 for each  stockholder.  Beneficial
           ownership  is  determined  in  accordance   with  the  rules  of  the
           Commission  and generally  includes  voting or investment  power with
           respect to  securities.  Shares of common stock subject to securities
           exercisable  or  convertible  into  shares of common  stock  that are
           currently  exercisable or exercisable  within 60 days of February 25,
           2003 are deemed to be  beneficially  owned by the person holding such
           options for the purpose of computing  the  percentage of ownership of
           such person,  but are not treated as  outstanding  for the purpose of
           computing the percentage ownership of any other person. .

     (2)   Shares  beneficially  owned  include 100 shares  owned by each of Mr.
           Fritz's four minor children for an aggregate of 400 shares, 1,409,400
           shares of common  stock  issuable  upon  exercise of options  granted
           under our 2002 and 1998 stock option plans, 1,510,000 shares issuable
           upon exercise of stock warrants, 268,131 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.

     (3)   William E. Fritz, the Company's  corporate  secretary and a director,
           and his wife,  Edna  Fritz,  are the  general  partners  of the Fritz
           Family  Limited  Partnership  and therefore each are deemed to be the
           beneficial  owners of the  1,511,742  shares held in the Fritz Family
           Partnership.  As trustee of each of the Chandler R. Fritz 1994 Trust,
           Charles  W.  Fritz  1994  Trust and Debra F.  Schiafone  1994  Trust,
           William E. Fritz is deemed to be the  beneficial  owner of the shares
           of NeoMedia held in each trust. Accordingly,  Mr. William E. Fritz is
           deemed  to be the  beneficial  owner  of an  aggregate  of  3,163,299
           shares,  165,467  shares 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,  1,172,567 shares
           owned by Mr. Fritz or his spouse, 52,523 shares to be issued upon the
           exercise  of  warrants  held by Mr.  Fritz or his spouse and  261,000
           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.

                                     III-7
<PAGE>

     (4)  William E. Fritz is the trustee of this Trust and  therefore is deemed
          to be the beneficial owner of such shares.

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

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

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

     (8)  Includes  1,436,586  shares of common stock  issuable upon exercise of
          options granted under our 2002, 1998, and 1996 stock option plans, and
          1,500 shares owned by Mr. Jensen's son.

     (9)  Includes  190,420  shares of common stock  issuable  upon  exercise of
          options granted under our 2002 and 1998 stock option plans.

     (10) Includes  264,000  shares of common stock  issuable  upon  exercise of
          options granted under our 1996 and 1998 stock option plans,  and 1,500
          shares owned by Mr.  Barclay  directly.  The address of the referenced
          individual  is c/o  Barclay  & Damisch  Ltd.  115 West  Wesley  Street
          Wheaton, IL 60187.

     (11) Includes  283,000  shares of common stock  issuable  upon  exercise of
          options  granted under  NeoMedia's  2002,  1998, and 1996 stock option
          plans,  10,000 shares issuable upon exercise of warrants,  and 500,000
          shares  owned by Mr.  Keil  directly.  The  address of the  referenced
          individual  is c/o  Keil & Keil  Associates  5505  CT Ave.  NW,  #339,
          Washington, D.C., 20015-2601.

     (12) Includes an aggregate of 3,844,406  currently  exercisable  options to
          purchase shares of common stock granted under  NeoMedia's  2002, 1998,
          and 1996  stock  option  plans  and  1,572,523  currently  exercisable
          warrants to purchase shares of common stock.

     (13) Beneficial  ownership is comprised of 1,432,055  shares  issuable upon
          exercise of stock options granted under our 2002 and 1998 stock option
          plans, and 1,904,900 shares issuable upon exercise of stock warrants.

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

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

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

     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.

     During  February 2002, the Company  borrowed  $10,000 from William E. Fritz
under a note  payable  bearing  interest at 8% per annum with a term of 30 days.
The note has not been  repaid as of the date of this  filing  and  continues  to
accrue interest.

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


                                     III-8
<PAGE>

     During April 2002, the Company borrowed $11,000 from William E. Fritz under
a note payable bearing interest at 8% per annum with a term of 60 days. The note
had not been  repaid  as of the date of this  filing  and  continues  to  accrue
interest.

      During November 2002, NeoMedia issued Convertible Secured Promissory Notes
with an aggregate face value of $60,000 to 3 separate parties, including Charles
W. Fritz,  Chairman of the Board of Directors of NeoMedia;  William E. Fritz, an
outside  director;  and James J.  Keil,  an  outside  director.  The notes  bear
interest  at a rate of 15% per  annum,  and  mature at the  earlier  of i.) four
months, or ii.) the date the shares underlying the Cornell Equity Line of Credit
are  registered  with the SEC. The notes are  convertible,  at the option of the
holder,  into  either  cash or shares of our common  stock at a 30%  discount to
either  market  price upon  closing,  or upon  conversion,  whichever  is lower.
NeoMedia  also  granted to the  holders an  additional  1,355,670  shares of its
common stock and 60,000 warrants to purchase shares of its common stock at $0.03
per share,  with a term of three  years.  The warrants and shares were issued in
January 2003.  In addition,  since this debt is  convertible  into equity at the
option of the note holder at beneficial conversion rates, an embedded beneficial
conversion  feature will be recorded as a debt discount and amortized  using the
effective interest rate over the life of the debt in accordance with EITF 00-27.
Total cost of beneficial conversion feature, fair value of the stock and cost of
warrants  issued  exceed the face value of the notes  payable,  therefore,  only
$60,000,  the face amount of the note, is recognizable as debt discount,  and is
being  amortized  over the  life of the  notes  payable.  Any  unamortized  debt
discount  related to  beneficial  conversion  feature will be charged to expense
upon  conversion,  as interest  expense.  In the event NeoMedia  defaults on the
note, NeoMedia will issue an additional  1,483,318 shares of its common stock to
the note holders. The notes are secured by the Company's  intellectual property,
which is subject to first lien by AirClic,  Inc.  During March 2003,  two of the
affiliated  parties,  Mr.  William  Firtz and Mr.  Keil,  agreed  to extend  the
maturity date due to the Company's capital  constraints.  The Company repaid Mr.
Charles Fritz's note in full during March 2003. NeoMedia will continue to pursue
additional capital through the issuance of Convertible  Secured Promissory Notes
with the same terms as above.


ITEM 14. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE  CONTROLS AND PROCEDURES . Neomedia's  chief  executive
officer and chief financial  officer,  after evaluating the effectiveness of the
Company's "disclosure controls and procedures" (as defined in Sections 13a-14(c)
of the Securities Exchange Act of 1934) as of a date (the "Evaluation Date") not
more than 90 days before the filing date of this annual  report,  have concluded
that as of the Evaluation Date, the Company's disclosure controls and procedures
were effective and designed to ensure that material  information relating to the
Company and its consolidated subsidiaries is accumulated and would be made known
to them by others within those entities as appropriate to allow timely decisions
regarding required disclosures.

CHANGES  IN  INTERNAL  CONTROLS  .  Neomedia  does not  believe  that  there are
significant  deficiencies  in the design or operation  of its internal  controls
that could adversely effect its ability to record, process, summarize and report
financial  data.  Although  there were no  significant  changes in the Company's
internal  controls or in other  factors  that could  significantly  affect those
controls  subsequent to the Evaluation Date,  Neomedia's senior  management,  in
conjunction  with its Board of Directors,  continuously  reviews overall company
policies  and  improves  documentation  of  important  financial  reporting  and
internal control matters.  Accordingly,  certain changes to Neomedia's  internal
controls  were made  during  the  fourth  quarter  of 2002,  none of which  were
significant.  Neomedia is committed to  continuously  improving the state of its
internal controls, corporate governance and financial reporting.

LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS . Neomedia's management,  including
the chief executive  officer and chief financial  officer,  does not expect that
our disclosure or internal  controls will prevent all errors or fraud. A control
system, no matter how well conceived and operated,  can provide only reasonable,
not  absolute,  assurance  that the  objectives  of the control  system are met.
Further,  the design of a control  system  must  reflect the fact that there are
resource  constraints,  and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in a cost-effective  control
system, misstatements due to error or fraud may occur and not be detected.

                                     III-9
<PAGE>


ITEM 15.      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:

<TABLE>
<CAPTION>

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

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

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

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

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

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

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

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

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

                                     III-10
<PAGE>


<TABLE>
<CAPTION>

EXHIBIT
NO.             DESCRIPTION                                                  LOCATION
<S>             <C>                                                          <C>
3.10            Form of By-laws of DevSys Migration, Inc.                    Incorporated by reference to Exhibit 3.10 to
                                                                             Company's Registration Statement No. 333-5534
                                                                             as filed with the SEC on November 25, 1996

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

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

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

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

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

4.1             Form of Certificate for Common Stock of DevSys, Inc.         Incorporated by reference to Exhibit 4.1 to
                                                                             the Company's Registration Statement No.
                                                                             333-5534 as filed with the SEC on November
                                                                             25, 1996

4.2             Form of Joseph Charles' Warrant Agreement                    Incorporated by reference to Exhibit 4.2 to
                                                                             the Company's Registration Statement No.
                                                                             333-5534 as filed with the SEC on November
                                                                             25, 1996

4.3             Form of Private Placement Financing Converted Securities     Incorporated by reference to Exhibit 4.4 to
                Registration Rights Agreement                                the Company's Registration Statement No.
                                                                             333-5534 as filed with the SEC on November
                                                                             25, 1996

4.4             Form of 10% Unsecured Subordinate Convertible Promissory     Incorporated by reference to Exhibit 4.5 to
                Note                                                         the Company's Registration Statement No.
                                                                             333-5534 as filed with the SEC on November
                                                                             25, 1996

4.5             Form of Principal Stockholder's Warrant                      Incorporated by reference to Exhibit 4.6 to
                                                                             the Company's Registration Statement No.
                                                                             333-5534 as filed with the SEC on November
                                                                             25, 1996
</TABLE>

                                     III-11
<PAGE>

<TABLE>
<CAPTION>

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

4.6             Form of Placement Agent's Registration Rights Agreement      Incorporated by reference to Exhibit 4.7 to
                                                                             the Company's Registration Statement No.
                                                                             333-5534 as filed with the SEC on November
                                                                             25, 1996

4.7             Form of Placement Agent's Warrant for the Purchase of        Incorporated by reference to Exhibit 4.8 to
                Shares of Common Stock and Warrants                          the Company's Registration Statement No.
                                                                             333-5534 as filed with the SEC on November
                                                                             25, 1996

4.8             Form of Warrant Agreement and Warrant                        Incorporated by reference to Exhibit 4.9 to
                                                                             the Company's Registration Statement No.
                                                                             333-5534 as filed with the SEC on November
                                                                             25, 1996

4.9             NeoMedia Technologies, Inc. 1998 Stock Option Plan           Incorporated by reference to Appendix A to
                                                                             the Company's Form 14A as filed with the SEC
                                                                             on February 18, 1998

4.10            Form of Warrant to Charles W. Fritz                          Incorporated by reference to Exhibit 4.10 to
                                                                             the Company's Registration Statement on Form
                                                                             10-KSB as filed with the SEC on March 31, 1998

4.11            Form of Warrant to Dominick & Dominick, Incorporated         Incorporated by reference to Exhibit 4.11 to
                                                                             the Company's Annual Report on Form 10-KSB as
                                                                             filed with the SEC on March 31, 1998

4.12            Form of Warrant to Compass Capital LLC                       Incorporated by reference to Exhibit 4.12 to
                                                                             the Company's Annual Report on Form 10-KSB as
                                                                             filed with the SEC on March 31, 1998

4.13            Form of Warrant to Thornhill Capital, LLC                    Incorporated by reference to Exhibit 4.13 to
                                                                             the Company's Annual Report on Form 10-KSB as
                                                                             filed with the SEC on March 31, 1998

4.14            Form of Warrant to Southeast Research Partners, Inc.         Incorporated by reference to Exhibit 4.14 to
                                                                             the Company's Annual Report on Form 10-KSB as
                                                                             filed with the SEC on March 31, 1998

4.15            Form of Warrant to Joseph Charles & Associates, Inc.         Incorporated by reference to Exhibit 4.15 to
                                                                             the Company's Annual Report on Form 10-KSB as
                                                                             filed with the SEC on March 31, 1998

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

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

</TABLE>

                                     III-12
<PAGE>

<TABLE>
<CAPTION>

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

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

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

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

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

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

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

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

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

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

10.12           License Agreement, dated October 18, 2000, between Digital   Incorporated by reference to Exhibit 10.1 to
                Convergence Corporation and NeoMedia                         the Registrants Form 10-QSB as filed on
                                                                             October 30, 2000

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

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


                                     III-13
</TABLE>

<PAGE>


<TABLE>
<CAPTION>

EXHIBIT
NO.             DESCRIPTION                                                  LOCATION
<S>             <C>                                                          <C>
10.15           Mutual settlement agreement by and between NeoMedia          Incorporated by reference to Exhibit 10.20 to
                Technologies and 2150 Western Court Company, LLC             the Registrants Form 10-Q as filed on
                                                                             November 14, 2002

10.16           Mutual settlement agreement by and between NeoMedia          Incorporated by reference to Exhibit 10.21 to
                Technologies and Ripfire, Inc.                               the Registrants Form 10-Q as filed on
                                                                             November 14, 2002

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

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

10.19           Revised Equity Line of Credit Agreement, dated November      Incorporated by reference to Exhibit 10.24 to
                11, 2002, between NeoMedia Technologies and Cornell          the Registrants Form 10-Q as filed on
                Capital Partners LP                                          November 14, 2002

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

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

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

10.23           Placement Agent Agreement, dated September 17, 2002,         Incorporated by reference to Exhibit 10.84 of
                between NeoMedia Technologies and Westrock Advisors, Inc.    the Company's Form S-1 as filed with the SEC
                                                                             on December 20, 2002

10.24           Escrow Agreement, dated September 17, 2002, between          Incorporated by reference to Exhibit 10.85 of
                NeoMedia Technologies and Cornell Capital Partners           the Company's Form S-1 as filed with the SEC
                                                                             on December 20, 2002

10.25           Equity  Line of Credit  Agreement,  dated  September  17,    Incorporated  by reference to Exhibit 10.86 of
                2002, between  NeoMedia Technologies and Cornell Capital     the Company's Form S-1 as filed with the
                Partners                                                     SEC on December 20, 2002

10.26           Registration   Rights  Agreement,   dated  September  17,    Incorporated  by reference to Exhibit 10.87 of
                2002, between  NeoMedia Technologies and Cornell Capital     the Company's Form S-1 as filed with the SEC
                Partners                                                     on December 20, 2002

10.27           Promissory Note, dated February 23, 2001, between Digital    Incorporated by reference to Exhibit 10.88 of
                Convergence Corporation and NeoMedia                         the Company's Form S-1 as filed with the SEC
                                                                             on December 20, 2002

                                     III-14
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

EXHIBIT
NO.             DESCRIPTION                                                  LOCATION
<S>             <C>                                                          <C>
10.28           Termination Agreement, dated August 21, 2001, between        Incorporated by reference to Exhibit 10.89 of
                About.com and NeoMedia                                       the Company's Form S-1 as filed with the SEC
                                                                             on December 20, 2002

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

10.30           Memorandum of Terms, dated March 7, 2003, for merger         Incorporated by reference to Exhibit 03.1 of
                between NeoMedia Technologies and Loch Energy, Inc.          the Company's Form 8-K as filed with the SEC
                                                                             on March 19, 2003

21.0            Subsidiaries                                                 Incorporated by reference to description of
                                                                             the Company's subsidiaries contained in Part
                                                                             I, Item I of this Form 10-K.

23.1            Consent of Stonefield Josephson, Inc.                        Provided herewith

23.2            Notice Regarding Consent of Arthur Andersen LLP              Provided herewith

</TABLE>

(b) Reports on Form 8-K

      The Company filed a Form 8-K on December 12, 2002,  disclosing that it had
      issued to a private  investor a promissory note in the amount of $165,000,
      bearing interest at a rate of 12% per annum,  with a maturity of 150 days.
      The  Company  paid an  administrative  fee of  $16,500  and legal  fees of
      $10,000 relating to the issuance of the note, resulting in net proceeds to
      the Company of $138,500.  In connection with the default  provision of the
      note,  the  Company  entered  into a Pledge  Agreement  under which it has
      issued 53,362,005 shares to an unrelated third party as collateral for the
      note.  In the event of default,  the third party would issue the shares to
      the Investor, and the Company would issue additional shares as required to
      increase the  Investor's  ownership to 51% of the Company's  fully-diluted
      outstanding shares at the time of default

      The  Company  filed a Form 8-K on March 9,  2003,  disclosing  that it had
      reached an  agreement  in principal to acquire and merge with Loch Energy,
      Inc.,  an oil and gas  provider  based in  Humble,  Texas.  The  merger is
      subject  to  negotiations  of  definitive   contracts,   corporate  filing
      requirements, completion of due diligence and any required approval by the
      Boards of Directors and  shareholders  of each company.  It is anticipated
      that closing would occur  approximately  30 days after such conditions are
      satisfied



                                     III-15
<PAGE>



                                  EXHIBIT 23.1



               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  April 2,  2003 on the  consolidated  statement  of  balance  sheets as of
December  31,  2002  and  2001,  and  the  related  consolidated  statements  of
operations,  stockholders'  deficit  and cash  flows for the years  then  ended,
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,
333-33738, 333-85422, 333-91284, 333-99183, 333-101588, and 333-102103).


/s/ STONEFIELD JOSEPHSON, INC.

CERTIFIED PUBLIC ACCOUNTANTS

Irvine, California
April 7, 2003

<PAGE>


          EXHIBIT 23.2 NOTICE REGARDING CONSENT OF ARTHUR ANDERSEN LLP

     Section 11(a) of the  Securities  Act of 1933, as amended (the  "Securities
Act"),  provides that if any part of a  registration  statement at the time such
part becomes  effective  contains an untrue  statement of a material  fact or an
omission to state a material fact required to be stated  therein or necessary to
make the  statements  therein not  misleading,  any person  acquiring a security
pursuant to such registration statement (unless it is proved that at the time of
such  acquisition  such person knew of such untruth or omission) may sue,  among
others,  every  accountant  who has consented to be named as having  prepared or
certified  any part of the  registration  statement,  or as having  prepared  or
certified  any  report  or  valuation  which  is used  in  connection  with  the
registration  statement,  with  respect to the  statement  in such  registration
statement, report or valuation which purports to have been prepared or certified
by the accountant.


This Form 10-K is incorporated by reference into NeoMedia's  filings on Form S-8
Nos.  333-80591,   333-42477,   333-36098,   333-51811,   333-77659,  333-33738,
333-85422, 333-91284, 333-99183,  333-101588, and 333-102103 (collectively,  the
"Registration  Statements") and, for purposes of determining any liability under
the  Securities  Act,  is deemed  to be a new  registration  statement  for each
Registration Statement into which it is incorporated by reference.

Effective  October 24,  2001,  NeoMedia  dismissed  Arthur  Andersen  LLP as its
independent auditor and appointed Stonefield  Josephson,  Inc. to replace Arthur
Andersen.  NeoMedia's  understanding  is that the  staff of the  Securities  and
Exchange Commission has taken the position that it will not accept consents from
Arthur Andersen if the engagement partner and the manager for the NeoMedia audit
are no longer with Arthur Andersen.  Both the engagement partner and the manager
for the NeoMedia audit are no longer with Arthur Andersen. As a result, NeoMedia
has been unable to obtain Arthur Andersen's written consent to the incorporation
by reference into the  Registration  Statements of its audit report with respect
to NeoMedia's  financial statements as of December 31, 2000 and 1999 and for the
years then ended. Under these circumstances,  Rule 437a under the Securities Act
permits  NeoMedia to file this Form 10-K  without a written  consent from Arthur
Andersen.  As a result,  however,  Arthur  Andersen  will not have any liability
under  Section  11(a)  of the  Securities  Act for any  untrue  statements  of a
material fact contained in the financial  statements  audited by Arthur Andersen
or any omissions of a material fact required to be stated therein.  Accordingly,
you would be unable to assert a claim  against  Arthur  Andersen  under  Section
11(a)  of  the  Securities  Act  for  any  purchases  of  securities  under  the
Registration  Statements  made on or after  the date of this Form  10-K.  To the
extent  provided in Section  11(b)(3)(C) of the Securities Act,  however,  other
persons who are liable under Section 11(a) of the Securities Act,  including the
Company's officers and directors,  may still rely on Arthur Andersen's  original
audit  reports as being made by an expert for  purposes  of  establishing  a due
diligence defense under Section 11(b) of the Securities Act.


<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 7th day of April, 2003.

                     NEOMEDIA TECHNOLOGIES, INC.
                     REGISTRANT


                     By:
                         ----------------------------------------------------
                          /s/ 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 April 1, 2002.
<TABLE>
<CAPTION>

SIGNATURES                        TITLE                                         DATE
----------                        -----                                         ----

<S>                               <C>                                           <C>
                                  President, Acting Chief Executive Officer,
------------------------
/s/ Charles T. Jensen             Chief Operating Officer and Director          April 7, 2003

                                  Director and Secretary                        April 7, 2003
------------------------
/s/ William E. Fritz

                                  Chairman of the Board
/s/ Charles W. Fritz                                                            April 7, 2003

                                  Vice-President, Chief Financial
/s/ David A. Dodge                Officer and Controller                        April 7, 2003

                                  Director                                      April 7, 2003
------------------------
/s/ Hayes Barclay

                                  Director                                      April 7, 2003
------------------------
/s/ James J. Keil

</TABLE>



<PAGE>



                                 CERTIFICATIONS
                                 --------------

I, Charles T. Jensen, certify that:

1. I have  reviewed  this annual  report on Form 10-K of NeoMedia  Technologies,
Inc.;

2.  Based on my  knowledge,  this  annual  report  does not  contain  any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

         a) designed  such  disclosure  controls and  procedures  to ensure that
         material  information   relating  to  the  registrant,   including  its
         consolidated  subsidiaries,  is made known to us by others within those
         entities, particularly during the period in which this annual report is
         being prepared;


         b) evaluated the effectiveness of the registrant's  disclosure controls
         and  procedures as of a date within 90 days prior to the filing date of
         this annual report (the "Evaluation Date"); and


         c)  presented  in  this  annual  report  our   conclusions   about  the
         effectiveness  of the disclosure  controls and procedures  based on our
         evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's   board  of  directors  (or  persons   performing   the  equivalent
functions):

         a) all significant  deficiencies in the design or operation of internal
         controls  which  could  adversely  affect the  registrant's  ability to
         record,   process,   summarize  and  report  financial  data  and  have
         identified  for the  registrant's  auditors any material  weaknesses in
         internal controls; and


         b) any fraud,  whether or not  material,  that  involves  management or
         other  employees  who  have a  significant  role  in  the  registrant's
         internal controls; and

6. The  registrant's  other  certifying  officers  and I have  indicated in this
annual report whether there were significant  changes in internal controls or in
other factors that could  significantly  affect internal controls  subsequent to
the date of our most recent  evaluation,  including any corrective  actions with
regard to significant deficiencies and material weaknesses.


Date: April 7, 2003                   /s/ Charles T. Jensen
                                      -----------------------------
                                             President, Chief Operating Officer,
                                             Acting Chief Executive Officer, and
                                             Director


<PAGE>



                                  CERTIFICATION
                                  -------------

I, David A. Dodge, certify that:

1. I have  reviewed  this annual  report on Form 10-K of NeoMedia  Technologies,
Inc.;

2.  Based on my  knowledge,  this  annual  report  does not  contain  any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

         a) designed  such  disclosure  controls and  procedures  to ensure that
         material  information   relating  to  the  registrant,   including  its
         consolidated  subsidiaries,  is made known to us by others within those
         entities, particularly during the period in which this annual report is
         being prepared;


         b) evaluated the effectiveness of the registrant's  disclosure controls
         and  procedures as of a date within 90 days prior to the filing date of
         this annual report (the "Evaluation Date"); and


         c)  presented  in  this  annual  report  our   conclusions   about  the
         effectiveness  of the disclosure  controls and procedures  based on our
         evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's   board  of  directors  (or  persons   performing   the  equivalent
functions):

         a) all significant  deficiencies in the design or operation of internal
         controls  which  could  adversely  affect the  registrant's  ability to
         record,   process,   summarize  and  report  financial  data  and  have
         identified  for the  registrant's  auditors any material  weaknesses in
         internal controls; and


         b) any fraud,  whether or not  material,  that  involves  management or
         other  employees  who  have a  significant  role  in  the  registrant's
         internal controls; and

6. The  registrant's  other  certifying  officers  and I have  indicated in this
annual report whether there were significant  changes in internal controls or in
other factors that could  significantly  affect internal controls  subsequent to
the date of our most recent  evaluation,  including any corrective  actions with
regard to significant deficiencies and material weaknesses.


Date: April 7, 2003                       /s/ David A. Dodge
                                          -----------------------------
                                                Vice-President, Chief Financial
                                                Officer, and Controller


<PAGE>