Edgar Filing: NEOMEDIA TECHNOLOGIES INC

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

AMENDMENT NO. 1 TO
FORM 10-KSB

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

For the Fiscal Year Ended December 31, 2004

|_| 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
$1,700,000.

The aggregate market value of the voting stock held by non-affiliates of
the issuer based on the price at which shares of common stock closed on the
Over-the-Counter Bulleting Board on January 31, 2005 ($0.24) was $89,000,000.
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 January 31, 2005, there were outstanding 437,356,497 shares of the
issuer's Common Stock.

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PART I

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

ITEM 1. DESCRIPTION OF BUSINESS

General

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

During 2004, NeoMedia acquired CSI International, Inc. and incorporated
its Micro Paint Repair business unit, specializing in chemical technologies and
processes for auto paint repair systems.

NeoMedia also acts as a value-added reseller of computer equipment and
software, and provided specialized consulting services around these products.

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

Company Structure

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

- NeoMedia Internet Switching Software (NISS),

- NeoMedia Consulting and Integration Services (NCIS), and

- NeoMedia Micro Paint Repair (NMPR)

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

NCIS is the original business line upon which the Company was founded.
This unit resells client-server equipment and related software, and general and
specialized consulting services. Systems integration services also identifies
prospects for custom applications based on NeoMedia's products and services.
These operations are based in Lisle, Illinois.

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

Following the anticipated completion of NeoMedia's pending acquisition of
BSD Software, Inc., NeoMedia will add a fourth business unit called NeoMedia
Telecom Services, Inc.

Company History

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

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

Recent Developments

Acquisition of CSI International, Inc.

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

Pending Acquisition of BSD Software, Inc.

On December 21, 2004, NeoMedia signed a merger agreement with BSD Software
Inc., ("BSD") of Calgary, Alberta, Canada (OTCBB: BSDS). Under the terms of the
agreement, each share of BSD stock will be exchanged for NeoMedia stock
equivalent to .07 divided by the volume-weighted average price of NeoMedia stock

for the five days prior to the effective time of the merger. Closing will occur
when all regulatory approvals have been granted, including effectiveness of a
Form S-4 information/registration statement registering the NeoMedia shares to
be granted in the transaction. The number of NeoMedia shares to be granted in
the exchange will change depending on NeoMedia's stock price at the time of
closing. Because a majority of BSD shareholders have approved the merger prior
to the signing of the merger agreement, BSD will not hold a shareholders meeting
to vote on the merger.

Prior to closing, the merger can be terminated by BSD if more than 5% of
BSD's outstanding shares dissent to the merger. The merger can be terminated
prior to closing by NeoMedia if, at the time of closing, BSD has: (i) less than
$850,000 in assets, (ii) more than $5,000,000 in liabilities, or (iii) more than
35,000,000 shares of common stock outstanding. Either party can terminate the
merger if the merger has not closed by March 31, 2005, which date may be
extended by mutual consent of NeoMedia and BSD.

Acquisition of Secure Source Technologies, Inc.

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

iPoint-Media Ltd.

On September 7, 2004, NeoMedia and iPoint-media Ltd. ("iPoint-media") of
Tel Aviv, Israel, entered into a business development agreement. In exchange for
entering into the service agreement, NeoMedia received 7% ownership in
iPoint-media, consisting of 28,492 shares of iPoint-media common stock. In
addition to the business development agreement, NeoMedia acquired an additional
10% ownership of iPoint-media, consisting of 40,704 shares of common stock, for
$1 million cash.

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

On October 26, 2004, NeoMedia announced that it would issue its first-ever
stock dividend with the distribution of common shares of iPoint-media Ltd. of
Tel Aviv as a property dividend. NeoMedia will distribute 5% (or 20,435 shares)
of iPoint-media's common stock to NeoMedia shareholders of record as of November
17, 2004. The date of the property dividend payment will be announced after the
Securities and Exchange Commission declares iPoint-media's Form SB-2
registration statement effective.

PaperClick(R) Developments

On December 13, 2004, NeoMedia introduced PaperClick(R) Mobile Marketing
Services, a tool that allows global marketers and advertising agencies to have
one-on-one contact with consumers through cell phones and other mobile wireless
devices. PaperClick(R) Mobile Marketing Services delivers real-time promotional
content, which can be updated and changed by marketers, while giving consumers
one-click e-commerce buying power. The latest addition to the Mobile Marketing
Services suite lets users of a wide range of already-in-use camera phones "take

pictures" of special created codes on packages and promotional items and connect
in one-click to marketing information. First available for Nokia(R) Series 60
mobile phones, the new capability complements the launch of the PaperClick(R)
Mobile Go-Window(TM) during 2004 and PaperClick(R) for Camera Cell Phones(TM) in
2003.

On December 6, 2004, NeoMedia signed a non-binding Letter of Intent with
Nextcode Corporation to form a strategic partnership, with joint marketing and
sales efforts, involving use of NeoMedia's PaperClick(R) technology and Nextcode
Corporation's barcode reading software. Nextcode, based in Concord,
Massachusetts, provides barcode reading software and technology designed to
enhance the usability of mobile phones and enable access to Internet-based
content, services and commerce. When finalized, the one-year renewable agreement
would give the companies mutual rights to resell PaperClick(R) Client Software,
PaperClick(R) Code Activation, PaperClick(R) Server Software and PaperClick(R)
Integration Services, as well as Nextcode's mobile barcode decoding applications
and Nextcode's code creation and publishing systems.

During October 2004, NeoMedia entered into a marketing alliance with
Science Applications International Corporation (SAIC) to jointly establish,
launch, promote and manage the new worldwide mobile "PaperClick(R)
WordRegistryTM," a linking and switching platform for use on Web-enabled cell
phones and PDA's. When used with PaperClick(R) Mobile Go-Window, NeoMedia's new
wireless product which creates a text-entry window on a phone or PDA screen,
registered words (or registered phrases) are entered to bring up an automatic
link to specific targeted products and promotions. No official date has been set
for the launch of the WordRegistryTM.

During 2003, NeoMedia unveiled its PaperClick(R) for Camera Cell PhonesTM
product, which reads and decodes UPC/EAN or other bar codes to link users to the
Internet, providing information and enabling e-commerce on a compatible camera
cell phone, such as the Nokia 3650 model. During the second quarter of 2004,
NeoMedia introduced its PaperClick(R) Mobile Go-WindowTM, a horizontal bar on
the screen of a wireless device where users can enter numeric strings from UPC
or other bar codes to link directly to targeted online information via patented
PaperClick(R) technology and software. The PaperClick(R) Mobile Go-WindowTM
currently works with Palm(TM) Tungsten C PDA, the Handspring(TM) Treo 270 and
600 Smartphones, Pocket PC(R), Java MIDP 2.0 (Mobile Independent Device Profile)
standard, Microsoft Windows Mobile(TM)-based Smartphones, Nokia Series 60
phones, Sendo(R) X, Panasonic(R) X700, and Siemens(R) SX-1.

During 2003, NeoMedia unveiled the go-to-market strategy for its
PaperClick(R) suite of products. Over the past several months, NeoMedia has
signed contracts with several key partners outlined in the strategy, including
agents and resellers Big Gig Strategies (United Kingdom), SRP Consulting (USA),
AURA Digital Communications (Australia), Relyco (USA), E&I Marketing (Taiwan),
Deusto Sistemas (Spain), Nextcode Corporation (USA), and Jorge Christen and
Partners LLP (Mexico). NeoMedia has also teamed with systems integrator SAIC to
create the PaperClick(R) WordRegistryTM, and European advertising agency 12Snap.
In June 2004, NeoMedia entered into a collaborative agreement with Intel
Corporation for NeoMedia's PaperClick(R) mobile connectivity platform to operate
on the recently introduced Intel PXA27x processor family-based cellular phones.

In addition, during June 2004 NeoMedia signed a teaming agreement with
IPSO, an integrator of proprietary solutions developed by its provider companies
for financial institution members and a leader in meeting Check 21 standards.
Enacted by Congress and signed into law last year, Check 21 requires banks to
begin accepting substitute checks (called IRDs for image replacement documents)
in lieu of original checks as of October 29, 2004. NeoMedia and IPSO could
partner on proposals and presentations surrounding Check 21.

During January 2005, NeoMedia signed a Letter of Intent to enter into a
licensing agreement with Shelron Group, Inc. for PaperClick(R)'s family of
mobile marketing products to be used with Shelron's ActivShopper comparison
shopping toolbar (attached as Exhibit 10.56 hereto). The agreement will give
Shelron Group, Inc. the worldwide rights to use PaperClick(R) on the new
ActivShopper Mobile Edition for cell phones and PDA's. ActivShopper is a free
software download designed to automatically scan, locate and compare prices for
items a consumer selects at an e-commerce site.

AirClic, Inc. Scanbuy, Inc., and LScan Technologies, Inc. Lawsuits

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

On April 19, 2004, AirClic filed a declaratory judgment action against
NeoMedia in the Eastern District of Pennsylvania. NeoMedia answered and
counterclaimed on May 18, 2004. AirClic answered NeoMedia's counterclaim on June
10, 2004. On April 20, 2004, NeoMedia re-filed its suit against AirClic in
Pennsylvania for patent infringement. AirClic answered and counterclaimed on May
13, 2004. NeoMedia filed its answer to AirClic's counterclaims on June 2, 2004.
NeoMedia filed an amended complaint on July 1, 2004, and AirClic answered and
counterclaimed on July 20, 2004. NeoMedia's answer to AirClic's counterclaims
was filed on August 3, 2004. The two actions were consolidated and the parties
are currently engaged in discovery.

NeoMedia voluntarily dismissed the suit against LScan in the Northern
District of Illinois and re-filed the suit on May 26, 2004, in the Eastern
District of Pennsylvania. After LScan failed to answer, NeoMedia filed and
served its motion for default judgment on July 6, 2004. The Court entered
default judgment on July 7, 2004.

On March 29, 2004, Scanbuy filed suit against NeoMedia in the Southern
District of New York alleging that NeoMedia infringed Scanbuy's copyrights,
violated the Lanham Act and committed deceptive trade practices and tortious
interference. Scanbuy filed an amended complaint on June 23, 2004. NeoMedia
filed its answer and affirmative defenses on July 23, 2004. On April 20, 2004,
NeoMedia re-filed its suit against Scanbuy in the Southern District of New York
alleging patent infringement. Scanbuy filed its answer on June 2, 2004. NeoMedia
filed its answer and affirmative defenses on July 23, 2004. The parties are
currently engaged in discovery in both of these actions.

Virgin Entertainment Group Lawsuit

On January 2, 2004, NeoMedia filed a patent infringement lawsuit against
Virgin(R) Entertainment Group, Inc., Virgin Megastore Online and Virgin
Megastore ("Virgin"). The complaint for Patent Infringement and Damages was
filed in the United States District Court for the Northern District of Illinois,
by Baniak Pine & Gannon, NeoMedia's intellectual property law firm. The
complaint claims that Virgin has infringed four of NeoMedia's patents - U.S.
Patents Nos. 5,933,829, 5,978,773, 6,108,656, and 6,199,048. The complaint
alleges that the Virgin Megaplay Stations located in Virgin's Megastores
infringe NeoMedia's patents by using Virgin's Megascan technology to allow
customers to scan UPC codes from in-store CDs and DVDs to access Internet-based
product information, such as music and movie previews, and album and video art.
The complaint also alleges that Virgin had notice of NeoMedia's patents since
the latter part of 2002 or before, yet it continued with its infringing
activities. The complaint seeks compensatory damages for Virgin's infringement,
with those damages to be trebled due to the willful and wanton nature of the
infringement. NeoMedia also seeks to preliminarily and permanently enjoin Virgin
from its infringing activities. Virgin answered NeoMedia's complaint on March 1,
2004. The parties are currently engaged in discovery.

Industry Overview

NeoMedia Internet Switching Software

The goal of NeoMedia's Internet Switching Software business segment is to
promote mass adoption of the Company's switch and background computer process to
link physical world objects to the Internet. The Company's switching platform is
a state-of-the-art open and extensible cross-media publishing tool that applies
to customers in a variety of industrial, commercial, and educational
applications. This business segment is also responsible for licensing NeoMedia's
intellectual property to others as a means of promoting this new market as well
as providing a revenue and cash resource. NeoMedia 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,
NeoMedia 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.

NeoMedia 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. NeoMedia believes
that, with an estimated 1.5 billion mobile phone users worldwide, mobile devices
such as cellular telephones and PDAs are a key device in the development of the
physical world to Internet marketplace. To this end, during 2003, NeoMedia
announced its PaperClick(R) for Camera Cell PhonesTM product, which reads and
decodes UPC/EAN or other bar codes to link users to the Internet, providing
information and enabling e-commerce on a compatible camera cell phone. During
2004, NeoMedia introduced PaperClick(R) Mobile Marketing Services, a mobile
solution using PaperClick(R) for Camera Cell Phones that allows global marketers
and advertising agencies to have one-on-one contact with consumers through cell
phones and other mobile wireless devices. PaperClick(R) Mobile Marketing
Services delivers real-time promotional content, which can be updated and
changed by marketers, while giving consumers one-click e-commerce buying power.
The latest addition to the Mobile Marketing Services suite lets users of a wide
range of already-in-use camera phones "take pictures" of special created codes
on packages and promotional items and connect in one-click to marketing
information.

NeoMedia Consulting and Integration Services

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

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

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

NeoMedia Micro Paint Repair

NMPR serves the light collision and paint repair industry offering
products and processes that are designed to increase customer productivity and

profits. NMPR's products are positioned to augment traditional paint repair
methods commonly used in body shops, as well as allowing non-body shop
operations to expand their service offerings. The micro paint repair industry is
a sub-segment of the aftermarket automotive coatings business.

Strategy

NeoMedia Internet Switching Software

NeoMedia has spent the past decade developing and patenting the now
confirmed space of linking the physical and Internet environments, and
developing and implementing five generations of continuously refined switch
technology that bridge these environments. During the past year and half,
NeoMedia has introduced PaperClick(R) for Camera Cell Phones and PaperClick(R)
Mobile Marketing Services, shifting the focus of this dynamic unit to the
rapidly-emerging mobile marketing sector. The Company is strategically pursuing
potential licensees of the PaperClick(R) 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.

NeoMedia Consulting and Integration Services

The goal of the NCIS unit is to continue to provide customized technology
infrastructure solutions, as well as act as the integration arm for the
PaperClick(R) family of products.

NeoMedia Micro Paint Repair

NeoMedia's proprietary Micro Paint Repair system can dramatically reduce
costs for current auto body repair facilities, or create a new profit center for
auto-related businesses that do not currently offer paint repair. NeoMedia is
attempting to market its Micro Paint Repair system to a myriad of automotive
industry businesses, from auto dealers to body shops to glass repair shops, and
more.

Products/Services

NeoMedia Internet Switching Software

PaperClick(R) Mobile Marketing Service

PaperClick(R) is a Mobile Marketing Service that enables brand managers
and consumer product manufacturers to market directly to their target customers
via their portable devices such as mobile phones, and PDAs. Using products,
brand names, and marketing collateral, brand managers and consumer product
manufacturers can interact directly with their customers.

By entering a word or phrase (such as your brand name or tagline) into a
mobile device, or by taking a picture of a barcode on your product or your
marketing collateral, a consumer can retrieve tailored Web content in one click
- even pages deep within a website. PaperClick(R) bypasses long URLs, search
engines, or difficult-to-navigate phone menus. PaperClick(R) can directly link a
word or code to mobile commerce, rebates, contests, coupons, registration,
instructional videos, ad tracking, polling, customer profiling, and more.

PaperClick(R) links a unique identifier (barcode or word) to a specific URL (Web
page) using a simple 5-step process:

Step 1: Activation - A barcode or word is activated by the product
manufacturer

Step 2: A PaperClick(R)-enabled device retrieves the code or word

Step 3: The device's Web browser is automatically launched and connects to
a designated server

Step 4: The server retrieves the specific URL based on the barcode or word

Step 5: The URL is downloaded to the device's browser

The PaperClick(R) solution consists of:

Word Activation

1. Register brand names or taglines in the PaperClick(R)
WordRegistryTM. The WordRegistryTM, a joint effort of NeoMedia and
Fortune 500 company S.A.I.C., which is the official repository for
PaperClick(R) Words

2. Bid on non-trademarked words. Non-trademarked words (such as cola,
burger, car) will be auctioned to the highest bidder via the
PaperClick(R) WordRegistryTM

3. Activate your brand names and taglines by linking them to mobile web
content using Link Manager Software

Created Code Activation - NeoMedia can create custom PaperClick(R)
Codes to place on product packaging or literature, a subway
poster, a direct mailer, or other marketing collateral. Consumers
with a camera phone simply snap a picture of the code and link
directly to Web content designated by the product's manufacturer.

Existing Code Activation - As with created codes, PaperClick(R) can
link already-existing product codes, such as UPC, EAN, JAN, and
ISBN codes, to tailored Web content.

With activation, NeoMedia also provides the following word and code link
management tools:

Link Manager Software - Software for a PC that allows a product owner
to link words and codes to a specific URL.

Handset Software - Device software required for a mobile device
customers to read activated codes and words.

Basic Reporting - Allows product owner to track the number of consumer
"hits" by code, date and time.

NeoMedia also offers the following value-added services with word or code
activation:

Click Management Services

- Link Manager Service - NeoMedia will manage the linking of
all words and codes on behalf of a product owner

- Code Verification - NeoMedia will test each code to ensure
that it is printed properly and that it links to the correct
URL

Web Content Creation Services - NeoMedia assists its customers in
creating Web content for mobile devices in XHTML, WAP and other
mobile formats.

Mobile Marketing Campaign Services - NeoMedia helps its customers
create mobile advertising campaigns using their products with
PaperClick(R) technology.

Customized Reporting - NeoMedia offers customized reporting and data
mining that allows product owners to receive additional data about
their marketing campaigns.

Server Software - For product owners that are managing a large number
of codes or words, NeoMedia offers Server Software that allows
them to store the links within their organization's network.

Intellectual Property Licensing.

The Company currently holds six U.S. patents relating to the physical
world-to-Internet marketplace, and an additional six patents acquired in 2003
with the purchase of Secure Source Technologies related to document security.
The Company's core physical-world-to-Internet patent portfolio (Patent No.
5,933,829, No. 5,978,773, No. 6,108,656, No. 6,199,048, No. 6,434,561, and No.
6,542,933) is comprised of "system and method" patents that cover the use of
machine-readable data for information retrieval. Among the identifiers that
could be classified as machine-readable are PaperClick(R)-enabled 2D barcodes,
1D barcodes, UPC/EAN barcodes, magnetic stripes, OCR/ICR, RFID, smartcards,
numbers, hot words, and voice. The Company intends to license this intellectual
property portfolio to companies endeavoring to tap the potential of this
emerging market. To date, the Company has entered into such agreements with
Digital:Convergence, A.T. Cross Company, Symbol Technologies, and Brandkey
Systems Corporation. During 2002, the Company entered into an agreement with
Baniak Pine and Gannon, a law firm specializing in patent licensing and
litigation, under which the firm will represent NeoMedia in seeking out
potential licensees of NeoMedia's patent portfolio.

NeoMedia Consulting and Integration Services

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

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

A. For implementation of PaperClick(R)Mobile Marketing Service

B. For development and implementation of Customized Applications

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

o Create PaperClick(R) Implementation Vision.

o Develop methodology including updating and deployment of best
practices.

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

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

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

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

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

(B) Services for development and implementation of Customized
Applications: NeoMedia's NCIS business assists clients in developing
and implementing their own customized PaperClick(R) applications.

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

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

NeoMedia Micro Paint Repair

NMPR's system utilizes proprietary technology to repair cosmetic
automobiles damage such as chips, scratches, spots, blemishes, and oxidized
paint. While competitive paint repair products utilize a mechanical fix, the
NMPR system chemically alters the paint to make the repair invisible to the
naked eye, even with the most lustrous metal flake and pearlized auto paints.
Repairs can be completed in a fraction of the time of conventional methods, and
all of NMPR's products are free of harmful isocyanates.

The products offered through NMPR include:

NMPR Paint System - NMPR offers a license to use its proprietary NMPR
Paint System, along with a training program and ongoing technical
support relating to the system.

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

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

NMPR Paint Repair Services - NMPR currently operates a paint repair
facility in its Calgary office. The facility utilizes the NMPR
Paint System to make cosmetic repairs to automobiles for
dealerships, rental car companies, and consumers.

Strategic Relationships

NeoMedia Internet Switching Software

During January 2002, the Company engaged Baniak Pine and Gannon, a Chicago
law firm specializing in intellectual property licensing and litigation. The
firm assists the Company in seeking out potential licensees of its intellectual
property portfolio, including any resulting litigation. Baniak Pine and Gannon
currently represents NeoMedia in its lawsuits against AirClic, Scanbuy, LScan,
and Virgin.

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

On October 30, 2003, NeoMedia unveiled the go-to-market strategy for its
PaperClick(R) suite of products. Since that time, NeoMedia has signed contracts
with several key partners outlined in the strategy, including channel partners
Big Gig Strategies, SRP Consulting, and Relyco, systems integrator Science
Applications International Corporation (SAIC), and European advertising agency
12Snap.

In June 2004, NeoMedia entered into a collaborative agreement with Intel
Corporation for NeoMedia's PaperClick(R) mobile connectivity platform to operate
on the recently introduced Intel PXA27x processor family-based cellular phones.

On June 3, 2004, NeoMedia announced that it signed a teaming agreement
with IPSO, an integrator of proprietary solutions developed by its provider
companies for financial institution members and a leader in meeting Check 21
standards.

During 2003 and 2004, NeoMedia engaged key partners around the world to
assist in the anticipated roll-out of the PaperClick(R) family of products.
During this time, NeoMedia has partnered with distributors and resellers such as
Big Gig Strategies (United Kingdom), SRP Consulting (USA), AURA Digital
Communications (Australia), Relyco (USA), E&I Marketing (Taiwan), Deusto
Sistemas (Spain), and Jorge Christen and Partners LLP (Mexico).

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 large
corporations.

NeoMedia Micro Paint Repair

On June 1, 2004, NeoMedia entered into a distribution agreement with Micro
Paint Systems (Australasia) Limited of New Zealand for exclusive distribution
rights to NeoMedia's Micro Paint Repair products in Australia and New Zealand.
The agreement is contingent upon a minimum purchase of 500 systems over five
years in that territory. NeoMedia received an initial payment on signing of the
contract, which included the fee for four initial systems.

On August 2, 2004, NeoMedia announced that it signed a distribution
agreement with Motor Dealer's Association (MDA) Co-Auto Ltd., the largest buying
consortium for new car franchised dealers in Western Canada. The agreement
provides exclusive rights for MDA Co-Auto to market NeoMedia's Micro Paint
Repair system to its member dealers. MDA Co-Auto has 1,050 member dealers in
British Columbia, Alberta, Saskatchewan, Manitoba and the Yukon.

Sales and Marketing

NeoMedia Internet Switching Software

During 2003 and 2004, NeoMedia has worked to establish a global network of
direct salespeople and resellers to sell and market the PaperClick(R) suite of
products. NeoMedia currently employs 8 direct sales and technical consultants in
its Lisle, Illinois office who represent the NISS and NCIS business units.
Additionally, NeoMedia has established reseller relationships with industry
innovators, with a presence in the US, Europe, South America, Asia, and
Australia.

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 three individuals
as of December 31, 2004. In addition, this business unit also relies upon
strategic alliances to help market products and services, provide lead
referrals, and establish informal co-marketing arrangements. NeoMedia's
representatives attend seminars and trade shows, both as speakers and
participants, to help market products and services. In addition, this business
segment has three agents in the United States that sell NeoMedia's products and
services.

NeoMedia Micro Paint Repair

NeoMedia markets its Micro Paint Repair products and services primarily
through a direct sales force. In addition, this business unit is exploring
strategic alliances to help market products and services, provide lead
referrals, and establish informal co-marketing arrangements. This business
segment is also establishing an agent network in the United States and Canada to
sell NeoMedia's products and services. To this end, during 2004 NeoMedia Micro
Paint Repair signed distribution agreements with MDA Co-Auto Ltd., the largest
buying consortium for new car franchised dealers in Western Canada, and Micro
Paint Systems (Australasia) Limited of New Zealand.

Customers

NeoMedia Internet Switching Software

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

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

NeoMedia Consulting and Integration Services

NCIS 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.

NeoMedia Micro Paint Repair

The customer base for the NMPR business unit consists primarily of auto
dealers and repair shops throughout Canada, the US, and Australia/New Zealand.
In addition, the Company is party to distribution arrangements with several
organizations, including MDA Co-Auto and Novus in Canada, and Micro Paint
Systems Australasia in New Zealand.

Research and Development

NeoMedia Internet Switching Software

NISS employed 3 persons in the area of product development as of December
31, 2004. During the years ended December 31, 2004 and 2003, NISS incurred total
software development costs of $462,000 and $332,000, respectively.

NeoMedia Consulting and Integration Services

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

NeoMedia Micro Paint Repair

During October 2004, NeoMedia contracted the founder of the CSI
International to provide research and development services for its Micro Paint
Repair business. In addition, NeoMedia has 1 employee in its Calgary, Alberta,
Canada office, to assist with research and development. During the years ended
December 31, 2004 and 2003, NMPR incurred total product development costs of
$19,000 and $0, respectively.

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 U.S.
patents for its physical world-to-Internet technology, an additional patent for
which the Company received a notification of issuance from the US Patent and
Trademark Office in 2005, an additional patent in Mexico for which the Company
received a notification of issuance from the Mexicano de la Propiedad Industrial
in 2005, and an additional six patents acquired with the purchase of Secure
Source Technologies related to document security. The Company also has several
trademarks relating to its proprietary software products.

Competition

NeoMedia Internet Switching Software

Although the Company has been developing its physical world-to-Internet
technology and offerings since 1996, the market surrounding the technology is
only now beginning to take shape. Over the past year, new technologies and
concepts have emerged in the physical world-to-Internet space, specifically
relating to mobile commerce and mobile marketing on Internet-enabled cellular
phones and PDAs. NeoMedia 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 NeoMedia
and other companies in this space will raise consumer awareness of this

technology, resulting in a larger, and more rapidly-developing market. The
Company believes its portfolio of physical world-to-Internet technologies and
patents could provide a barrier to entry for many potential competitors.

NeoMedia Consulting and Integration Services.

Competitors in the consulting and integration services business 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.

NeoMedia Micro Paint Repair. ?

NeoMedia's competitors in the micro paint repair consist primarily of
suppliers of traditional paint repair methods, such as automotive paint
manufacturers.

Product Liability

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

Government Regulation

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

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

Environmental Protection Compliance

The Company's Micro Paint Division operations are subject to normal
environmental protection regulations. Compliance with federal, state and local
provisions which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the protection of the

environment, is not expected to have a material effect upon the capital
expenditures, earnings or the competitive position of the Company. However,
environmental requirements are constantly changing, and it is difficult to
predict the effect of future requirements on the Company. Company policy
requires that all operations fully meet or exceed legal and regulatory
requirements.

Employees

As of December 31, 2004, the Company employed 34 persons, of which 16 are
located at the Company's headquarters in Fort Myers, Florida, 8 at the Company's
Lisle, Illinois office, 8 at the Company's Calgary, Alberta, Canada office, and
2 remote employees. None of the Company's employees are represented by a labor
union or bound by a collective bargaining agreement. The Company believes that
its employee relations are good.

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

Safe Harbor Provision of the Private Securities Litigation Act of 1995

The Company operates in a dynamic and rapidly changing environment that
involves numerous risks and uncertainties. The market for software products is
generally characterized by rapidly changing technology, frequent new product
introductions and changes in customer requirements which can render existing
products obsolete or unmarketable. The statements contained in this document
that are not historical facts may be forward-looking statements (as such term is
defined in the rules promulgated pursuant to the Securities Exchange Act of
1934) that are subject to a variety of risks and uncertainties more fully
described in the Company's filings with the Securities and Exchange Commission.
The forward-looking statements are based on the beliefs of the management of the
Company, as well as assumptions made by, and information currently available to,
the Company's management. Accordingly, these statements are subject to
significant risks, uncertainties and contingencies which could cause the
Company's actual growth, results, performance and business prospects and
opportunities in 2005 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.

RISK FACTORS

Risks Specific To NeoMedia

The Company Has Historically Lost Money and Losses May Continue

The Company has incurred substantial losses since its inception, and
anticipates continuing to incur substantial losses for the foreseeable future.
The Company incurred a loss of $7,230,000 in the year ended December 31, 2004
and $5,382,000 in the year ended December 31, 2003. The Company's accumulated
losses were approximately $83,377,000 as of December 31, 2004. As of December
31, 2004 and 2003, the Company had a working capital (deficit) of approximately
$(2,597,000) and $(6,526,000), respectively. The Company had stockholders'
equity / (deficit) of $4,392,000 and $(3,203,000) at December 31, 2004 and 2003,
respectively. The Company generated revenues of $1,700,000 and $2,400,000 for
the years ended December 31, 2004 and 2003, respectively. In addition, during
the years ended December 31, 2004 and 2003, the Company recorded negative cash
flows from operations of $4,650,000 and $2,979,000, respectively. To succeed,
the Company must develop new client and customer relationships and substantially
increase its revenue derived from improved products and additional value-added
services. The Company has expended and to the extent it has available financing,
the Company intends to continue to expend substantial resources to develop and
improve its products, increase its value-added services and to market its
products and services. These development and marketing expenses must be incurred
well in advance of the recognition of revenue. As a result, the Company may not
be able to achieve or sustain profitability.

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

The report of Stonefield Josephson, Inc., the Company's independent
auditors, with respect to the Company's financial statements and the related
notes for the years ended December 31, 2004 and 2003, indicates that, at the
date of their report, the Company had suffered recurring losses from operations
and that the Company's current cash position raises substantial doubt about its
ability to continue as a going concern. The Company's financial statements do
not include any adjustments that might result from this uncertainty.

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

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

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.

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

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

The Company's Common Stock Is Subject to Price Volatility

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

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

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

o the Company's ability to maintain client satisfaction;

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

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

o the timing and size of client and customer purchases;

o introductions of products and services by competitors;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

o the products the Company develops will obtain market acceptance.

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

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, 2004, approximately 49% 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 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
may 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.

The Company Could Fail to Attract Or Retain Key Personnel

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

qualified personnel would have a material adverse effect on its business,
prospects, financial condition, and results of operations will be materially
adversely affected.

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

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

NeoMedia May Be Unsuccessful In Integrating Its Micro Paint Repair Business With
Its Current Business

The success of NeoMedia's Micro Paint Repair business unit could depend on
the ability of NeoMedia's executive management to integrate the business plan
with the business plan of NeoMedia's NCSI and NISS business units. The NMPR
business unit operates in a separate industry from NeoMedia's other two business
units.

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

The Company's success in the physical world-to-Internet and the value-added
systems integration markets is dependent upon its proprietary technology,
including its patents and other intellectual property, and on the Company's
ability to protect its proprietary technology and other intellectual property
rights. In addition, the Company must conduct its operations without infringing
on the proprietary rights of third parties. The Company also intends to rely
upon unpatented trade secrets and the know-how and expertise of its employees,
as well as its patents. To protect its proprietary technology and other
intellectual property, the Company relies primarily on a combination of the
protections provided by applicable patent, copyright, trademark, and trade
secret laws as well as on confidentiality procedures and licensing arrangements.
The Company has six patents for its core physical world-to-Internet technology,
and an additional six patents acquired with the purchase of Secure Source
Technologies related to document security in 2003. 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 those of the Company.

The Company licenses from third parties certain software tools that it
includes in its services and products. If any of these licenses were terminated,
the Company could be required to seek licenses for similar software from other
third parties or develop these tools internally. The Company may not be able to
obtain such licenses or develop such tools in a timely fashion, on acceptable
terms, or at all. Companies participating in the software and Internet

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

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

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

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

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

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

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

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

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

Some of the provisions of the Company's certificate of incorporation and
by-laws could make it more difficult for a third party to acquire the Company,
even if doing so might be beneficial to the Company's stockholders by providing
them with the opportunity to sell their shares at a premium to the then market
price. On December 10, 1999, the Company's Board of Directors adopted a
stockholders rights plan and declared a non-taxable dividend of one right to

acquire Series A Preferred Stock of NeoMedia, par value $0.01 per share, on each
outstanding share of the Company's common stock to stockholders of record on
December 10, 1999 and each share of common stock issued thereafter until a
pre-defined hostile takeover date. The stockholder rights plan was adopted as an
anti-takeover measure, commonly referred to as a "poison pill." The stockholder
rights plan was designed to enable all stockholders not engaged in a hostile
takeover attempt to receive fair and equal treatment in any proposed takeover of
NeoMedia and to guard against partial or two-tiered tender offers, open market
accumulations and other hostile tactics to gain control of NeoMedia. The
stockholders rights plan was not adopted in response to any effort to acquire
control of NeoMedia at the time of adoption. This stockholders rights plan may
have the effect of rendering more difficult, delaying, discouraging, preventing,
or rendering more costly an acquisition of NeoMedia or a change in control of
NeoMedia. Certain of the Company's directors, officers and principal
stockholders, Charles W. Fritz, William E. Fritz and The Fritz Family Limited
Partnership and their holdings were exempted from the triggering provisions of
the Company's "poison pill" plan, as a result of the fact that, as of the plan's
adoption, their holdings might have otherwise triggered the "poison pill".

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

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

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 Mobile 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 mobile Internet and
other online services as an effective medium of information and commerce. If use
of the mobile Internet and other online services does not continue to grow or
grows more slowly than the Company expects, if the infrastructure for the mobile
Internet and other online services does not effectively support the growth that
may occur, or if the mobile 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 mobile 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 mobile
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 mobile 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 mobile 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 mobile Internet and online networks may be unable to
support the demands placed upon them. In addition, the mobile 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
activity, or due to increased governmental regulation. Significant issues
concerning the commercial and informational use of the mobile Internet and
online networks technologies, including security, reliability, cost, ease of
use, and quality of service, remain unresolved and may inhibit the growth of
mobile Internet business solutions that utilize these technologies. Changes in,
or insufficient availability of, telecommunications services to support the
mobile Internet or other online services also could result in slower response
times and adversely affect usage of the mobile 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;

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.

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

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

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.

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 July 31, 2005, with monthly rent totaling
approximately $7,000.

The Company maintains a sales facility at 2150 Western Court, Suite 230,
Lisle, Illinois 60532, occupying approximately 6,000 square feet under the terms
of a written lease from an unaffiliated party expiring on October 31, 2004, with
monthly rent totaling approximately $4,000. The Company has a one-year renewal
option on the facility.

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

During February 2005, the Company signed a lease to occupy a 10,000 square
foot Micro Paint Repair facility in Ft. Myers, Florida, under the terms of a
written lease from an unaffiliated party expiring on February 28, 2008, with
monthly rent totaling approximately $9,000. The facility will host training,
demonstrations, production, distribution, and retail services for the Micro
Paint Repair business unit.

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

ITEM 3. Legal Proceedings

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

AirClic, Inc., Scanbuy, Inc., and LScan Technologies, Inc.

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

Virgin Entertainment Group

Other Litigation

On October 28, 2002, Merrick & Klimek, P.C., filed a complaint against
NeoMedia seeking payment of approximately $170,000 in past due legal services.
The amount in question is subject to an unsecured promissory note that matured
unpaid on February 28, 2002. On May 1, 2003, NeoMedia settled the suit for cash
payments totaling approximately $196,000, to be paid at a rate of $30,000 per
quarter until the balance is satisfied. NeoMedia had a remaining liability of
$33,000 relating to this matter as of December 31, 2004, which was included in
accrued expenses.

On December 7, 2004, Reitler Brown & Rosenblatt LLC, filed a complaint
against NeoMedia seeking payment of approximately $422,000 in past due legal
services and accrued interest. NeoMedia had a remaining liability of $422,000
relating to this matter as of December 31, 2004, which was included in accounts
payable and accrued expenses.

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

None.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a) Market Information. The Company's shares trade on the OTC Bulletin
Board under the symbol "NEOM." As of December 31, 2004, the Company had
432,525,053 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:

(U.S. $)
------------------- ----------- -------------
2002 HIGH LOW
------------------- ----------- -------------
First Quarter $0.41 $0.14
Second Quarter 0.17 0.05
Third Quarter 0.10 0.02
Fourth Quarter 0.05 0.01

------------------- ----------- -------------
2003 HIGH LOW
------------------- ----------- -------------
First Quarter $0.06 $0.01
Second Quarter 0.04 0.01
Third Quarter 0.29 0.01
Fourth Quarter 0.23 0.10

------------------- ----------- -------------
2004 HIGH LOW
------------------- ----------- -------------
First Quarter $0.16 $0.14
Second Quarter $0.11 $0.05
Third Quarter $0.12 $0.06
Fourth Quarter $0.30 $0.06

(b) Holders. As of December 31, 2004, NeoMedia had an estimated 8,500
recordholders of common stock.

(c) Dividends. The Company has not declared or paid any dividends on its
common stock during the years ended December 31, 2003 or 2004. The Company will
base any issuance of dividends upon its earnings, financial condition, capital
requirements and other factors considered important by its board of directors.
Delaware law and the Company's certificate of incorporation do not require the
board of directors to declare dividends on the Company's common stock. The
Company expects to retain all earnings, if any, generated by its operations for
the development and growth of its business and does not anticipate paying any
dividends to its stockholders for the foreseeable future.

(d) Recent Issuances of Unregistered Securities.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

On April 21, 2003, the Company sold 25,000,000 shares of its common stock,
par value $0.01, in a private placement at a price of $0.01 per share. The
Company's stock price at the time of the sale was $0.012. In connection with the
sale, the Company also granted the purchaser 25,000,000 warrants to purchase
shares of its common stock at an exercise price of $0.01 per share. The warrants
had a fair value of $298,000 and have been recorded as a cost of issuance. The
purchaser was William E. Fritz, a member of the Company's Board of Directors.
Proceeds to NeoMedia from sale of the shares were $250,000. The Company
recognized a discount expense in general and administrative expenses of
approximately $50,000 relating to this transaction with Mr. Fritz. On August 6,
2003, Mr. Fritz exercised his warrants and purchased 25,000,000 additional
shares of common stock at a price of $0.01 per share.

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

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

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

Overview

NISS (Physical-World-to-Internet Offerings) Business Unit Developments.

Over the past several years, NeoMedia's focus has been aimed toward the
commercialization of its Internet Switching Systems (NISS) business unit. NISS
consists of the patented PaperClick(R) 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 its end-users, competitive advantage for their
business partners and return-on-investment for their investors.

On September 8, 2003, NeoMedia announced its PaperClick(R) for Camera Cell
PhonesTM product, which reads and decodes UPC/EAN or other bar codes to link
users to the Internet, providing information and enabling e-commerce on a
compatible camera cell phone, such as the Nokia 3650 model. During the second
quarter of 2004, NeoMedia introduced its PaperClick(R) Mobile Go-WindowTM, a
horizontal bar on the screen of a wireless device where users can enter numeric
strings from UPC or other bar codes to link directly to targeted online
information via patented PaperClick(R) technology and software. The
PaperClick(R) Mobile Go-WindowTM currently works with Palm(TM) Tungsten C PDA,
the Handspring(TM) Treo 270 and 600 Smartphones, Pocket PC(R), Java MIDP 2.0
(Mobile Independent Device Profile) standard, and Microsoft Windows
Mobile(TM)-based Smartphones.

During 2003, NeoMedia unveiled the go-to-market strategy for its
PaperClick(R) suite of products. Over the past several months, NeoMedia has
signed contracts with several key partners outlined in the strategy, including
agents and resellers Big Gig Strategies (United Kingdom), SRP Consulting (USA),
AURA Digital Communications (Australia), Relyco (USA), E&I Marketing (Taiwan),
Deusto Sistemas (Spain), Nextcode Corporation (USA), and Jorge Christen and
Partners LLP (Mexico). NeoMedia has also teamed with systems integrator SAIC to
create the PaperClick(R) WordRegistryTM, and European advertising agency 12Snap
to provide click management services for PaperClick(R) products in Europe. In
June 2004, NeoMedia entered into a collaborative agreement with Intel
Corporation for NeoMedia's PaperClick(R) mobile connectivity platform to operate
on the recently introduced Intel PXA27x processor family-based cellular phones.

During October 2004, NeoMedia and SAIC entered into a marketing alliance
to jointly establish, launch, promote and manage the new worldwide mobile
"PaperClick(R) WordRegistryTM," a linking and switching platform for use on
Web-enabled cell phones and PDA's. When used with PaperClick(R) Mobile
Go-Window, NeoMedia's new wireless product, which creates a text-entry window on
a phone or PDA screen, registered words (or registered phrases) are entered to
bring up an automatic link to specific targeted products and promotions. No
official date has been set for the launch of the WordRegistryTM.

During January 2005, NeoMedia signed a Letter of Intent to enter into a
licensing agreement with Shelron Group, Inc. for PaperClick(R)'s family of
mobile marketing products to be used with Shelron's ActivShopper comparison
shopping toolbar. The agreement will give Shelron Group, Inc. the worldwide
rights to use PaperClick(R) on the new ActivShopper Mobile Edition for cell
phones and PDA's. ActivShopper is a free software download designed to

automatically scan, locate and compare prices for items a consumer selects at an
e-commerce site.

NMPR (Micro Paint Repair) Business Unit Developments.

On June 1, 2004, NeoMedia announced that it had entered into a distribution
agreement with Micro Paint Systems (Australasia) Limited of New Zealand for
exclusive distribution rights to NeoMedia's Micro Paint Repair products in
Australia and New Zealand. The agreement is contingent upon a minimum purchase
of 500 systems over five years in that territory. NeoMedia received an initial
payment on signing of the contract, which included the fee for four initial
systems.

On June 22, 2004, NeoMedia announced its new product called "Silver
Solutions," a process created specifically to mend the popular high metallic and
pearl paint finishes on new cars.

On July 16, 2004, NeoMedia announced that its NeoMedia Micro Paint Repair
business unit added five more licensees as part of a private label contract with
Crackmaster Distributors Ltd., a Canadian auto aftermarket company.

NCIS (Systems Integration) Business Unit Developments.

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

Acquisitions

CSI International, Inc. On February 6, 2004, NeoMedia acquired 100%
ownership of CSI International, Inc., of Calgary, Alberta, Canada, a
private company in the micro paint repair industry. NeoMedia issued
7,000,000 shares of its common stock, plus $2.5 million cash in exchange
for all outstanding shares of CSI. NeoMedia has centralized the
administrative functions in its Ft. Myers, Florida headquarters, and
maintains a sales office in Calgary, Alberta, Canada.

BSD Software, Inc. On December 21, 2004, NeoMedia and BSD Software Inc.
("BSD") (OTCBB: BSDS) signed a definitive Agreement and Plan of Merger. BSD
owns 90% of the outstanding shares of Triton Global Business Services,
Inc., a provider of live and automated operator calling services and

e-business support, including billing, clearinghouse and information
management services, to companies in the telecommunications industry. BSD's
shareholders will receive, for each share of BSD stock owned, NeoMedia
stock equivalent to .07 divided by the volume-weighted average price of
NeoMedia stock for the five days prior to the effective time of the merger.
The agreement has been approved by holders of approximately 63% of BSD's
outstanding shares and its Board. NeoMedia and BSD expect to file a joint
registration/information statement with the SEC in the first quarter of
2005. NeoMedia expects to complete the merger when the review is complete
and the registration is approved. At this time, the exchange rate will be
determined and closing will be held. Closing is subject to the terms and
conditions outlined in the merger agreement, as well as regulatory approval
of the merger and registration/information statement by the United States
Securities and Exchange Commission.

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

iPoint-Media Ltd.

On October 26, 2004, NeoMedia announced that it would issue its
first-ever stock dividend with the distribution of common shares of IPoint-media
Ltd. of Tel Aviv as a property dividend. NeoMedia will distribute 5% (or 20,435
shares) of iPoint-media's common stock to NeoMedia shareholders of record as of
November 17, 2004. The date of the property dividend payment will be announced
after the Securities and Exchange Commission declares iPoint-media's Form SB-2
registration statement effective.

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

Critical Accounting Policies

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

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

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

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

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

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

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

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

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

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

In December 2003, the SEC issued SAB 104, "Revenue Recognition." SAB
104 supersedes SAB 101, "Revenue Recognition in Financial
Statements." SAB 104's primary purpose is to rescind accounting
guidance contained in SAB 101 related to multiple element revenue
arrangements, superseded as a result of the issuance of EITF 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables."
Additionally, SAB 104 rescinds the SEC's Revenue Recognition in
Financial Statements Frequently Asked Questions and Answers ("the
FAQ") issued with SAB 101 that had been codified in SEC Topic 13,
Revenue Recognition. Selected portions of the FAQ have been
incorporated into SAB 104. While the wording of SAB 104 has changed
to reflect the issuance of EITF 00-21, the revenue recognition

principles of SAB 101 remain largely unchanged by the issuance of
SAB 104, which was effective upon issuance. The adoption of SAB 104
did not impact the consolidated financial statements.

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

Results of Operations for the Year Ended December 31, 2004 as Compared to the
Year Ended December 31, 2003

Net sales. Total net sales for the year ended December 31, 2004 were
$1,700,000, which represented a $700,000, or 29%, decrease from $2,400,000 for
the year ended December 31, 2003. This decrease primarily resulted from reduced
resales of Sun Microsystems equipment due to increased competition and general
economic conditions, offset by new sales from the Company's Micro Paint Repair
business acquired during February 2004. NeoMedia could realize an increase in
license fees over the next 12 months if the Company is successful in
implementing its PaperClick(R) go-to-market strategy, or if pending court cases
involving its intellectual property are resolved in NeoMedia's favor. NeoMedia
could also realize a material increase in Micro Paint Repair revenue if the
Company is successful in implementing its business plan for that business unit.

License fees. License fees were $343,000 for the year ended December 31,
2004, compared with $414,000 for the year ended December 31, 2003, a decrease of
$71,000, or 17%. The decrease was due to lower sales of internally developed
software licenses in 2004. NeoMedia could realize an increase in license fees
over the next 12 months if the Company is successful in implementing its
PaperClick(R) go-to-market strategy, or if pending court cases involving its
intellectual property are resolved in NeoMedia's favor.

Resales of software and technology equipment and service fees. Resales of
software and technology equipment and service fees decreased by $1,356,000, or
68%, to $630,000 for the year ended December 31, 2004, as compared to $1,986,000
for the year ended December 31, 2003. This decrease primarily resulted from
reduced resales of Sun Microsystems equipment due to increased competition and
general economic conditions. NeoMedia intends to continue to pursue additional
resales of equipment, software and services. NeoMedia expects resales to more
closely resemble the results for the year ended December 31, 2004, rather than
the year ended December 31, 2003.

Micro Paint Repair products and services. Sales of Micro Paint Repair
products and services were $727,000 for the year ended December 31, 2004.
NeoMedia acquired this business on February 6, 2004, and as a result there were
no sales of Micro Paint Repair products and services during the year ended
December 31, 2003. NeoMedia could realize a material increase in Micro Paint
Repair revenue if the Company is successful in implementing its business plan
for that business unit.

Cost of license fees. Cost of license fees was $324,000 for the year ended
December 31, 2004, an increase of $24,000, or 8%, compared with $300,000 for the
year ended December 31, 2003. The increase resulted from increased amortization
of capitalized patent costs during 2004 compared with 2003.

Cost of resales of software and technology equipment and service. Cost of
resales of software and technology equipment and service was $604,000 for the
year ended December 31, 2004, a decrease of $1,225,000, or 67%, compared with
$1,829,000 for the year ended December 31, 2003. The decrease resulted from
decreased resales in 2004 compared with 2003. Cost of resales as a percentage of
related resales was 96% in 2004, compared to 92% in 2003. This increase is due
to revenue declining more rapidly than the fixed portion of costs of resales,
coupled with eroding margins in the resale business. NeoMedia expects costs of
resales to fluctuate with the mix of sales of equipment, software, and services
over the next 12 months.

Cost of Micro Paint Repair products and services. Cost of micro paint
repair products and services was $541,000 for the year ended December 31, 2004.
Cost of micro paint repair products and services as a percentage of related
sales was 74%. NeoMedia acquired this business on February 6, 2004, and as a
result there were no cost of sales of micro paint repair products and services
during the year ended December 31, 2003. NeoMedia expects cost of micro paint
repair products and services to increase with Micro Paint Repair revenue over
the next 12 months as the Company continues its roll-out of this business unit.

Gross Profit. Gross profit was $231,000 for the year ended December 31,
2004, a decrease of $40,000, or 15%, compared with gross profit of $271,000 for
the year ended December 31, 2003. This decrease was primarily the result of
reduced resales of Sun Microsystems equipment due to increased competition and
general economic conditions.

Sales and marketing. Sales and marketing expenses were $2,046,000 for the
year ended December 31, 2004, compared to $523,000 for the year ended December
31, 2003, an increase of $1,523,000 or 291%. This increase resulted primarily
from the addition of recently-acquired Micro Paint Repair business sales force
and cost associated with marketing and as promotion of the Company's
PaperClick(R) and Micro Paint Repair products. NeoMedia expects sales and
marketing expense to increase over the next 12 months with the continued
development and anticipated rollout of the PaperClick(R) and Micro Paint Repair
product suites, as well as the anticipated acquisition of BSD Software.

General and administrative. General and administrative expenses decreased
by $2,055,000, or 48%, to $2,215,000 for the year ended December 31, 2004,
compared to $4,270,000 for the year ended December 31, 2003. The decrease
resulted primarily from non-cash expenses relating to the Company's option
repricing program, expense for stock options issued with exercise prices below
market price, and higher stock-based professional service expense in 2003 as
compared with 2004. NeoMedia expects general and administrative expense to
increase over the next 12 months with the recent acquisition of CSI
International and the potential acquisition of BSD Software.

Research and development. During the year ended December 31, 2004, NeoMedia
charged to expense $651,000 of research and development costs, an increase of
$319,000 or 96% compared to $332,000 charged to expense for the year ended
December 31, 2003. The increase is primarily due to the addition of development
headcount and computer systems during 2004, as well as development costs
associated with the Micro Paint Repair business unit acquired in 2004. NeoMedia
expects research and development costs to increase over the next 12 months with
the continued development efforts of its PaperClick(R) and Micro Paint Repair
products and services.

Gain on extinguishment of debt. During the year ended December 31, 2004,
NeoMedia recognized a gain on extinguishment of debt of $140,000, resulting from
the payment of debt at a discount to the book value of the debt, an increase of
$292,000, or 192%, compared with a loss on extinguishment of debt of $152,000
for the year ended December 31, 2003. These gains resulted from a difference
between the cash or market value of stock issued to settle the debt and the
carrying value of the debt at the time of settlement.

Amortization of debt discount. During the year ended December 31, 2004,
NeoMedia recognized an amortization of debt issuance cost of $2,500,000 relating
to the fair value of warrants granted to Cornell Capital Partners in connection
with promissory notes issued to Cornell by NeoMedia during January 2004.
NeoMedia did not recognize any such expense during the year ended December 31,
2003. During the year ended December 31, 2004, NeoMedia amortized the full $2.5
million discount value relating to the Cornell warrants, and as a result does
not expect to recognize such expense in the next 12 months.

Interest expense. Interest expense consists primarily of interest accrued
for creditors as part of financed purchases, past due balances, notes payable
and interest earned on cash equivalent investments. Interest expense decreased
by $187,000, or 50%, to $189,000 for the year ended December 31, 2004 from
$376,000 for the year ended December 31, 2003, due to reduced expense associated
with vendor settlements and debt in 2004 compared with 2003.

Net Loss. The net loss for the year ended December 31, 2004 was $7,230,000,
which represented a $1,848,000, or 34% increase from a $5,382,000 loss for the
year ended December 31, 2003. The increase resulted primarily from the
amortization of debt issuance cost of $2,500,000 in 2004, offset by reduced
general and administrative costs in 2004.

Liquidity and Capital Resources

As of December 31, 2004, NeoMedia's cash balance was $2,634,000, compared
to $61,000 at December 31, 2003.

Net cash used in operating activities was approximately $4,650,000 for the
year ended December 31, 2004, compared with $2,979,000 for the year ended
December 31, 2003, an increase of $1,671,000, or 56%. The increase was primarily
due to increased sales and marketing expenses in 2004 associated with NeoMedia's
PaperClick(R) products, the addition of infrastructure with the acquisition of
CSI, and the continued payment of accounts payable and accruals incurred in
previous years.

NeoMedia's net cash flow used in investing activities for the years ended
December 31, 2004 and 2003, was $1,252,000 and $281,000, respectively, an
increase of $971,000, or 346%. The increase was due to the Company's $1 million
investment in I-Point Media Ltd. during 2004.

Net cash provided by financing activities for the years ended December 31,
2004 and 2003 was $8,535,000 and $3,251,000, respectively, an increase of
$5,284,000, or 163%. The increase was due to increased draws under the Company's
Standby Equity Distribution Agreement with Cornell Capital Partners in 2004 as
compared with 2003.

During the years ended December 31, 2004 and 2003, NeoMedia's net loss
totaled $7,230,000 and $5,382,000, respectively. As of December 31, 2004,
NeoMedia had accumulated losses from operations of $83,377,000, had a working
capital deficit of $2,597,000, and $2,634,000 in cash balances.

The accompanying consolidated financial statements have been prepared
assuming NeoMedia will continue as a going concern. Accordingly, the
consolidated financial statements do not include any adjustments that might
result from NeoMedia's inability to continue as a going concern.

NeoMedia may obtain up to $20 million through its Standby Equity
Distribution Agreement with Cornell Capital Partners. As of December 31, 2004,
NeoMedia had drawn $8 million against the Standby Equity Distribution Agreement,
leaving an available balance of $12 million. NeoMedia sold approximately 107
million shares during 2004 to Cornell to draw $8 million against the Standby
Equity Distribution Agreement.

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

Contractual Obligations

The following table presents the Company's contractual obligations as of
December 31, 2004, over the next five years and thereafter:

Payments by Period
(in thousands)
---------------------------------------------------------------------------------------------------
Less
Than 1-3 4-5 After 5
Amount 1 Year Years Years Years
--------- --------- --------- --------- ---------

Legal Settlements $ 185 $ 181 $ 4 $ -- $ --

Vendor Settlements & Agreements 89 73 16 -- --

Operating Leases 89 89 -- -- --

Short Term Debt 1,136 1,136 -- -- --
--------- --------- --------- --------- ---------
Total Contractual Cash Obligations $ 1,499 $ 1,479 $ 20 $ -- $ --
========= ========= ========= ========= =========
Intangible Assets

At the end of each quarter, or upon occurrence of material events relating
to a specific intangible item, NeoMedia performs impairment tests on each of its
intangible assets, which include goodwill, capitalized patent costs, repair
chemical formulations and proprietary process, customer base and trademarks, and
capitalized and purchased software costs. In doing so, NeoMedia evaluates the
carrying value of each intangible asset with respect to several factors,
including historical revenue generated from each intangible asset, application
of the assets in NeoMedia's current business plan, and projected discounted cash
flow to be derived from the asset. Intangible asset balances are then adjusted
to their current net realizable value based on these criteria if impaired. The
Company received an independent valuation of its patent portfolio as of December
31, 2003. In addition, the Company had an independent valuation on the
intangible assets acquired through the acquisition of CSI and has assigned the
fair value of the intangible assets based on the fair value assessed in the
appraisal. The independent valuation concluded that no impairment was necessary
as of December 31, 2003. No impairment charges were taken during the year ended
December 31, 2004 or 2003.

Financing Agreements

As of December 31, 2003 and 2002, NeoMedia was party to a commercial
financing agreement with GE Access that provides short-term financing for
certain computer hardware and software purchases. This arrangement allows
NeoMedia to re-sell high-dollar technology equipment and software without
committing cash resources to financing the purchase. Termination of this
financing relationship with GE Access could materially adversely affect
NeoMedia's financial condition by hindering its ability to resell hardware and
software. Management expects the agreement to remain in place in the near
future. As of December 31, 2004, the amount payable under this financing
arrangement was approximately $17,000.

Note Payable to Cornell Capital Partners, LLC

On October 18, 2004, the Company borrowed from Cornell the gross amount
of $1,085,000 before discounts and fees. Cornell withheld a retention fee of
$85,000 related to the issuance of stock to pay off the debt in the future. The
note was repaid during January 2005. The Company invested the proceeds from the
note in iPoint-media pursuant to the investment agreement between NeoMedia and
iPoint-media (see "iPoint-media Ltd." for description of agreement).

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, 2004, NeoMedia has not been able to generate sufficient revenues from its
operations to cover its costs and operating expenses. Although NeoMedia has been
able to issue its common stock or other financing for a significant portion of
its expenses, it is not known whether NeoMedia will be able to continue this
practice, or if revenue will increase significantly to be able to meet cash
operating expenses. This, in turn, raises substantial doubt about NeoMedia's
ability to continue as a going concern. Management believes that NeoMedia will
be able to raise additional funds through its $20 million Standby Equity
Distribution Agreement with Cornell, or through other strategic investments.
However, there can be no assurances that the market for NeoMedia's stock will
support the sale of sufficient shares of stock to raise enough capital to
sustain operations. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.

Based on current cash balances and operating budgets, as well as the $12
million available under its Standby Equity Distribution Agreement, NeoMedia
believes it has sufficient financing available to operate until at least
December 31, 2005. NeoMedia cannot predict whether additional financing will be
available, its form, whether equity or debt, or be in another form, or if it
will be successful in identifying entities with which it may consummate a merger
or other corporate finance transactions.

Effect Of Recently Issued Accounting Pronouncements

In December 2003, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." SAB 104
supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's
primary purpose is to rescind accounting guidance contained in SAB 101 related
to multiple element revenue arrangements, superseded as a result of the issuance
of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables."
Additionally, SAB 104 rescinds the SEC's Revenue Recognition in Financial
Statements Frequently Asked Questions and Answers (the "FAQ") issued with SAB
101 that had been codified in SEC Topic 13, Revenue Recognition. Selected
portions of the FAQ have been incorporated into SAB 104. While the wording of
SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged by the issuance of
SAB 104, which was effective upon issuance. The adoption of SAB 104 did not
impact the consolidated financial statements.

In March 2004, the FASB approved the consensus reached on the Emerging
Issues Task Force ("EITF") Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." The objective of this
Issue is to provide guidance for identifying impaired investments. EITF 03-1
also provides new disclosure requirements for investments that are deemed to be
temporarily impaired. In September 2004, the FASB issued a FASB Staff Position
(FSP) EITF 03-1-1 that delays the effective date of the measurement and
recognition guidance in EITF 03-1 until after further deliberations by the FASB.
The disclosure requirements are effective only for annual periods ending after
June 15, 2004. The Company has evaluated the impact of the adoption of the
disclosure requirements of EITF 03-1 and does not believe the impact will be
significant to the Company's overall results of operations or financial
position. Once the FASB reaches a final decision on the measurement and
recognition provisions, the company will evaluate the impact of the adoption of
EITF 03-1.

require the allocation of fixed production overheads to inventory based on the
normal capacity of the production facilities. The guidance is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Earlier application is permitted for inventory costs incurred during fiscal
years beginning after November 23, 2004. . The Company has evaluated the impact
of the adoption of SFAS 151, and does not believe the impact will be significant
to the Company's overall results of operations or financial position.

In December 2004, the FASB issued SFAS No.152, "Accounting for Real Estate
Time-Sharing Transactions--an amendment of FASB Statements No. 66 and 67" ("SFAS
152). The amendments made by Statement 152 amend FASB Statement No. 66,
Accounting for Sales of Real Estate, to reference the financial accounting and
reporting guidance for real estate time-sharing transactions that is provided in
AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing
Transactions. This Statement also amends FASB Statement No. 67, Accounting for
Costs and Initial Rental Operations of Real Estate Projects, to state that the
guidance for (a) incidental operations and (b) costs incurred to sell real
estate projects does not apply to real estate time-sharing transactions. The
accounting for those operations and costs is subject to the guidance in SOP
04-2. This Statement is effective for financial statements for fiscal years
beginning after June 15, 2005 with earlier application encouraged. The Company
has evaluated the impact of the adoption of SFAS 152, and does not believe the
impact will be significant to the Company's overall results of operations or
financial position.

In December 2004, the FASB issued SFAS No.153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions." The amendments made by Statement 153 are based on the principle
that exchanges of nonmonetary assets should be measured based on the fair value
of the assets exchanged. Further, the amendments eliminate the narrow exception
for nonmonetary exchanges of similar productive assets and replace it with a
broader exception for exchanges of nonmonetary assets that do not have
commercial substance. Previously, Opinion 29 required that the accounting for an
exchange of a productive asset for a similar productive asset or an equivalent
interest in the same or similar productive asset should be based on the recorded
amount of the asset relinquished. Opinion 29 provided an exception to its basic
measurement principle (fair value) for exchanges of similar productive assets.
The Board believes that exception required that some nonmonetary exchanges,
although commercially substantive, be recorded on a carryover basis. By focusing
the exception on exchanges that lack commercial substance, the Board believes
this Statement produces financial reporting that more faithfully represents the
economics of the transactions. The Statement is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The provisions of this Statement
shall be applied prospectively. The Company has evaluated the impact of the
adoption of SFAS 152, and does not believe the impact will be significant to the
Company's overall results of operations or financial position.

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

ITEM 7. FINANCIAL STATEMENTS

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

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

None.

ITEM 8A. CONTROLS AND PROCEDURES

(A) Evaluation Of Disclosure Controls And Procedures

As of the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's Principal Executive Officer and Principal Financial Officer of the
effectiveness of the design and operation of the Company's disclosure controls
and proceduresas of December 31, 2004 pursuant to Rule 13a-15under the
Securities Act of 1934. The Company's disclosure controls and procedures are
designed to provide a reasonable level of assurance of achieving the Company's
disclosure control objectives. The Company's Principal Executive Officer and
Principal Financial Officer have concluded that the Company's disclosure
controls and procedures are, in fact, effective at this reasonable assurance
level as of the period covered. In addition, the Company reviewed its internal
controls, and there have been no significant changes in its internal controls or
in other factors that could significantly affect those controls subsequent to
the date of their last evaluation or from the end of the reporting period to the
date of this Form 10-KSB/A.

(B) Changes In Internal Controls Over Financial Reporting

In connection with the evaluation of the Company's internal controls
during the Company's fourth fiscal quarter ended December 31, 2004, the
Company's Principal Executive Officer and Principal Financial Officer have
determined that there are no changes to the Company's internal controls over
financial reporting that has materially affected, or is reasonably likely to
materially effect, the Company's internal controls over financial reporting.

Report of Independent Registered Public Accounting Firm

Board of Directors
NeoMedia Technologies, Inc.

We have audited the accompanying consolidated balance sheets of NeoMedia
Technologies, Inc. as of December 31, 2004, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the two years in the period ended December 31, 2004. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2004, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 2004, in conformity with U.S.
generally accepted accounting principles.

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

/s/ STONEFIELD JOSEPHSON, INC.

CERTIFIED PUBLIC ACCOUNTANTS

Irvine, California
February 11, 2005

F-1

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

December 31,
2004

ASSETS
Current assets:
Cash and cash equivalents $ 2,634
Trade accounts receivable, net of allowance for doubtful accounts of $46 282
Inventories, net of allowance for obsolete & slow-moving inventory of $0 115
Prepaid expenses and other current assets 386
----------
Total current assets
3,417

Property and equipment, net 110
Capitalized patents, net 2,174
Micro paint repair chemical formulations and proprietary process, net 1,630
Goodwill 1,099
Other Intangible assets, net 221
Investment in iPoint-media, Ltd. 1,000
Cash surrender value of life insurance policy 728
Other long-term assets 27
----------
Total assets $ 10,406
==========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,911
Amounts payable under settlement agreements 103
Liabilities of discontinued business unit 676
Sales taxes payable 108
Accrued expenses 1,566
Deferred revenues and other 514
Notes payable 1,136
----------
Total current liabilities 6,014
----------

Shareholders' equity:
Preferred stock, $0.01 par value, 25,000,000 shares authorized, none
issued
and outstanding --
Common stock, $0.01 par value, 1,000,000,000 shares authorized,
436,746,758 shares issued and 432,525,053 outstanding 4,325
Additional paid-in capital 84,728
Deferred stock-based compensation (445)
Accumulated deficit (83,377)
Accumulated other comprehensive loss - foreign currency translation
adjustment (60)
Treasury stock, at cost, 201,230 shares of common stock (779)
----------
Total shareholders' equity 4,392
----------
Total liabilities and shareholders' equity $ 10,406
==========

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

F-2

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

Years Ended December 31,
--------------------------------
2004 2003
-------------- --------------

NET SALES:
License fees $ 343 $ 414
Resale of software and technology equipment and service fees 630 1,986
Micro paint repair products and services 727 --
-------------- --------------
Total net sales 1,700 2,400
-------------- --------------

COST OF SALES:
License fees 324 300
Resale of software and technology equipment and service fees 604 1,829
Micro paint repair products and services 541 --
-------------- --------------
Total cost of sales 1,469 2,129
-------------- --------------

GROSS PROFIT 231 271

Sales and marketing expenses 2,046 523
General and administrative expenses 2,215 4,270
Research and development costs 651 332
-------------- --------------

Loss from operations (4,681) (4,854)
Gain (loss) on extinguishment of debt 140 (152)
Amortization of debt discount (2,500) --
Interest expense, net (189) (376)
-------------- --------------

NET LOSS (7,230) (5,382)

Other comprehensive loss:
Foreign currency translation adjustment (60) --
-------------- --------------

COMPREHENSIVE LOSS $ (7,290) $ (5,382)
============== ==============

LOSS PER SHARE--BASIC AND DILUTED $ (0.02) $ (0.04)
============== ==============

Weighted average number of common shares--basic and diluted 329,362,127 125,029,723
============== ==============

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

F-3

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

Years Ended
December 31,
------------------------
2004 2003
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss $ (7,230) $ (5,382)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of discount on note payable 2,500 --
Depreciation and amortization 674 470
Inventory reserve -- 13
Bad debt 24 191
Expense (decrease of fair value) for repriced options 104 773
Fair value of expense portion of stock-based
compensation granted for professional services 626 1,000
Interest expense allocated to debt 3 56
Discount related to common stock issuance -- 50
Loss on payment of accounts payable in stock -- 152
(Increase)/decrease in value of life insurance policies (1) (35)
Changes in operating assets and liabilities
Trade accounts receivable, net (82) 212
Inventory (58) (3)
Other current assets 68 273
Accounts payable (421) (1,064)
Amounts payable under settlement agreements (669) 772
Liabilities of discontinued business unit 19 (838)
Sales taxes payable (29) (189)
Accrued expenses (177) 936
Deferred revenue other current liabilities (1) (366)
---------- ----------
Net cash used in operating activities (4,650) (2,979)
---------- ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Amounts issued under notes receivable -- (209)
Investment in iPoint-media, Ltd. (1,000) --
Capitalization of software development and purchased intangible assets (141) (28)
Acquisition of property and equipment (111) (44)
---------- ----------
Net cash used in investing activities (1,252) (281)
---------- ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock, net of issuance costs of $620 in
2004 and $226 in 2003 7,906 250
Net proceeds from exercise of stock options and warrants 2,687 406
Borrowings under notes payable and long-term debt 9,085 3,350
Repayments on notes payable and long-term debt (8,753) (755)
Cash paid to acquire CSI International, Inc. (net of cash acquired) (2,390) --
---------- ----------
Net cash provided by financing activities 8,535 3,251
---------- ----------

EFFECT OF EXCHANGE RATE CHANGES ON CASH (60) --

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,573 (9)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 61 70
---------- ----------

CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,634 $ 61
========== ==========

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid/(received) during the period $ 111 $ 6
Income taxes paid -- --
Non-cash investing and financing activities:
Reduction in accounts payable and accruals for debt paid in stock 190 1,509
Reduction of note payable paid in stock 32 --
Reduction of long-term debt and accrued interest paid in stock -- 904
Fair value of stock issued for services and deferred to future periods 653 282
Fair value of shares issued to acquire CSI Int'l (net of costs of registration) 695 --
Change in net assets resulting from acquisition of CSI (net of cash acquired) 3,090 --
Value of stock granted to acquire Secure Source Technologies, Inc. -- 500
Gain (loss) on extinguishment of debt 140 (152)
Direct costs associated with Standby Equity Distribution Agreement and Equity
Line of Credit 2,216 6,772

Fair value of warrants issued as a direct incremental cost of financing -- 93

Discount recognized on the issuance of stock with notes payable -- 56

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

F-4

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

----------------------------------------------------------------------------------------------------------------------------------
Common Stock Accumulated
Additional Deferred Other
Paid-in Stock Comprehensive Accumulated
Shares Amount Capital Compensation Loss Deficit
----------------------------------------------------------------------------------------------------------------------------------

BALANCE, 30,746,968 $ 307 $ 65,442 (231) $ 0 $ (70,765)
DECEMBER 31,
2002
----------------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------------------
Shares issued
to Cornell
Capital
Partners under
Equity line of
Credit 98,933,244 990 1,803 -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Issuance of
Common Stock
through private
Placement, Net
of $6,818 of
issuance costs 25,000,000 250 50 -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Exercise of
employee options 15,599,175 156 0 -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Exercise of
Warrants 28,904,900 289 (39) -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Expense
associated with
option &
warrant
repricing -- -- 774 -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Fair value
stock, options,
& warrants
issued for
professional
services
rendered 4,030,424 40 385 -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Stock issued to
pay past due
liabilities 40,776,546 408 2,505 -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Issuance of
warrants and
stock with debt -- -- 19 -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Expense
recognized for
options issued
with exercise
price below
market price -- -- 626 -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Change in
Deferred Stock
Compensation -- -- -- (51) -- --
----------------------------------------------------------------------------------------------------------------------------------
Net Loss -- -- -- -- -- (5,382)
----------------------------------------------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31,
2003 243,991,257 $ 2,440 $ 71,565 $ (282) $ 0 $ (76,147)
----------------------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------------------
Shares issued
to Cornell
Capital
Partners under
ELOC and SEDA 112,743,417 1,127 6,864 -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Exercise of
stock options 12,860,616 129 43 -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Exercise of
stock warrants 51,510,000 515 2,000 -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Fair value
stock, options,
& warrants
issued for
professional
services
rendered 2,013,375 20 785 -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Stock issued to
pay past due
liabilities 2,406,388 24 242 -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Stock issued in
connection with
acquisition of
CSI
International 7,000,000 70 625 -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Expense
associated with
option repricing -- -- 104 -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Fair value of
warrants issued
with debt -- -- 2,500 -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Change in
Deferred Stock
Compensation -- -- -- (163) -- --
----------------------------------------------------------------------------------------------------------------------------------
Comprehensive
loss - foreign
currency
translation
adjustment -- -- -- -- (60) --
----------------------------------------------------------------------------------------------------------------------------------
Net Loss -- -- -- -- -- (7,230)
----------------------------------------------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31,
2004 432,525,053 $ 4,325 $ 84,728 (445) $ (60) $ (83,377)
==================================================================================================================================

-------------------------------------------------------------------------
Treasury Stock
Total
Stockholders'
Shares Amount Equity
-------------------------------------------------------------------------

BALANCE, 201,230 ($779) $ (6,026)
DECEMBER 31,
2002
-------------------------------------------------------------------------

-------------------------------------------------------------------------
Shares issued
to Cornell
Capital
Partners under
Equity line of
Credit -- -- 2,793
-------------------------------------------------------------------------
Issuance of
Common Stock
through private
Placement, Net
of $6,818 of
issuance costs -- -- 300
-------------------------------------------------------------------------
Exercise of
employee options -- -- 156
-------------------------------------------------------------------------
Exercise of
Warrants -- -- 250
-------------------------------------------------------------------------
Expense
associated with
option &
warrant
repricing -- -- 774
-------------------------------------------------------------------------
Fair value
stock, options,
& warrants
issued for
professional
services
rendered -- -- 425
-------------------------------------------------------------------------
Stock issued to
pay past due
liabilities -- -- 2,913
-------------------------------------------------------------------------
Issuance of
warrants and
stock with debt -- -- 19
-------------------------------------------------------------------------
Expense
recognized for
options issued
with exercise
price below
market price -- -- 626
-------------------------------------------------------------------------
Change in
Deferred Stock
Compensation -- -- (51)
-------------------------------------------------------------------------
Net Loss -- -- (5,382)
-------------------------------------------------------------------------
BALANCE,
DECEMBER 31,
2003 201,230 ($779) $ (3,203)
-------------------------------------------------------------------------

-------------------------------------------------------------------------
Shares issued
to Cornell
Capital
Partners under
ELOC and SEDA -- -- 7,991
-------------------------------------------------------------------------
Exercise of
stock options -- -- 172
-------------------------------------------------------------------------
Exercise of
stock warrants -- -- 2,515
-------------------------------------------------------------------------
Fair value
stock, options,
& warrants
issued for
professional
services
rendered -- -- 805
-------------------------------------------------------------------------
Stock issued to
pay past due
liabilities -- -- 266
-------------------------------------------------------------------------
Stock issued in
connection with
acquisition of
CSI
International -- -- 695
-------------------------------------------------------------------------
Expense
associated with
option repricing -- -- 104
-------------------------------------------------------------------------
Fair value of
warrants issued
with debt -- -- 2,500
-------------------------------------------------------------------------
Change in
Deferred Stock
Compensation -- -- (163)
-------------------------------------------------------------------------
Comprehensive
loss - foreign
currency
translation
adjustment -- -- (60)
-------------------------------------------------------------------------
Net Loss -- -- (7,230)
-------------------------------------------------------------------------
BALANCE,
DECEMBER 31,
2004 201,230 ($779) $ 4,392
========================================================================

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

F-5

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, NeoMedia
Technologies UK Limited incorporated in the United Kingdom, NeoMedia Micro Paint
Repair, Inc. a Nevada corporation, and NeoMedia Telecom Services, Inc. a Nevada
corporation, and are collectively referred to as "NeoMedia" or the "Company".
The consolidated financial statements of NeoMedia are presented on a
consolidated basis for all years presented. All significant intercompany
accounts and transactions have been eliminated in preparation of the
consolidated financial statements.

The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern.
However, the Company has reported net losses of $7,230,000 and $5,382,000 for
the years ended December 31, 2004 and 2003, respectively, and has an accumulated
deficit of $83,377,000 as of December 31, 2004. In addition, the Company had
working capital deficit of $2,597,000 as of December 31, 2004.

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

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

F-6

Nature of Business Operations

During 2004, NeoMedia was structured as three distinct business units:
NeoMedia Internet Software Service (NISS), NeoMedia Consulting and Integration
Services (NCIS), and NeoMedia Micro Paint Repair (NMPR).

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

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

NMPR (Micro Paint Repair offerings) is the business unit
encompassing the recently-acquired CSI International chemical line. NMPR
is attempting to commercialize its unique micro-paint repair solution. The
Company completed its acquisition of CSI on February 6, 2004. As a result,
NeoMedia's results for the year ended December 31, 2003 do not include
operations from this business unit.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Estimates

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

Cash and Cash Equivalents

For the purposes of the consolidated balance sheet and consolidated
statements of cash flows, all highly liquid investments with original maturities
of three months or less are considered cash equivalents. The Company maintains
bank accounts with balances which, at times, may exceed federally insured
limits. The Company has not experienced any losses on such accounts. The Company
believes it is not exposed to any significant risk on bank deposit accounts. As
of December 31, 2004, the Company had cash balances of $2,692,000 which were not
insured by the FDIC.

Financial Instruments

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

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

F-7

It is not practicable to estimate the fair value of the Company's 17%
investment in the common stock of i-Point Media Ltd., which distributes video,
audio and data over IP networks, because of the lack of quoted market prices and
the inability to estimate fair value without incurring excessive costs. However,
management believes that the carrying amount (on the cost method) of $1,000,000
at December 31, 2004 was not impaired.

Pertinent financial information reported by iPoint Media Ltd. is as follows:

(in thousands of US
dollars)
---------------------------
2004 2003
----------- ------------
Total assets $1,119 $193
Stockholders' deficit (341) (1,451)
Revenues 514 618
Net loss (695) (544)

Accounts Receivable

The Company reports accounts receivable at net realizable value. The
Company's terms of sale provide the basis for when accounts become delinquent or
past due. The Company provides an allowance for doubtful accounts equal to the
estimated uncollectible amounts. The Company's estimate is based on historical
collection experience and a review of the current status of accounts receivable.
Receivables are generally charged off and sent to a collections agency after
ninety days past due. It is at least reasonably possible that the Company's
estimate of the allowance for doubtful accounts will change in the near-term. At
December 31, 2004, the allowance for doubtful accounts was $46,000.

Inventories

Inventories are stated at the lower of cost or market, and at December 31,
2003 was comprised of purchased computer technology resale products and micro
paint repair products. Cost is determined using the first-in, first-out method.
At December 31, 2003, the reserve for obsolescence was $13,000. There was no
reserve as of December 31, 2004.

Property and Equipment

Property and equipment are carried at cost less allowance for accumulated
depreciation. Repairs and maintenance are charged to expense as incurred.
Depreciation is generally computed using the straight-line method over the
estimated useful lives of the related assets. Upon retirement or sale, cost and
accumulated depreciation are removed from the accounts and any gain or loss is
reflected in the consolidated statements of operations. The cost of normal
maintenance and repairs is charged to operations as incurred. Material
expenditures, which increase the life of an asset, are capitalized and
depreciated over the estimated remaining life of the asset.

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

Furniture and fixtures 7 years
Computer equipment 3 to 5 years

Capitalized Patents

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

F-8

Micro Paint Chemical Formulations and Proprietary Processes

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

Goodwill

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

Other Intangible Assets

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

Investments

Investments consist of NeoMedia's investment in iPoint-media. On September
7, 2004, NeoMedia acquired 17% ownership of iPoint-media, consisting of 69,196
shares of common stock, for $1 million cash. NeoMedia has recorded the
investment at cost as of December 31, 2004.

Evaluation of Long-Lived Assets

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

Amounts Due Under Settlement Agreements

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

F-9

Revenue Recognition

During 2004 and 2003, NeoMedia derived revenues from three primary
sources: (1) license revenues, (2) resale of software and technology equipment
and service fee revenues, and (3) Micro Paint Repair sales.

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

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

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

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

(a) Paint system revenue is a one-time fee paid by NeoMedia's customer
to use NeoMedia's proprietary paint system, and is deferred and
recognized over the expected life of the relationship, which was
estimated at one year during 2004.
(b) Paint product and service revenue is recognized when products are
shipped or when services are performed.
(c) Training revenue is recognized upon completion of a
company-certified training course.
(d) Technical support revenue is recognized on a monthly basis as
support services are provided.

Shipping and Handling Costs

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

Research and Development

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

F-10

Stock Based Compensation

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

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

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

Years Ended
December 31,
------------------------
2004 2003
---------- ----------

Net Loss, as reported $ (7,230) $ (5,382)
Compensation recognized under APB 25 -- 623
Compensation recognized under SFAS 123 (1,445) (962)
---------- ----------
Pro-forma net loss $ (8,675) $ (5,721)
========== ==========

Net Loss per share:
Basic and diluted - as reported $ (0.02) $ (0.04)
========== ==========
Basic and diluted - pro-forma $ (0.03) $ (0.05)
========== ==========

F-11

For grants in 2004 and 2003, the following assumptions were used: (i) no
expected dividends; (ii) a risk-free interest rate of 4.5%; (iii) expected
volatility ranging from 438% to 451% for 2004 and from 253% to 457% for 2003,
and (iv) an expected life of the shorter of 3 years or the stated life of the
option for options granted in 2004 and 2003. The fair-value was determined using
the Black-Scholes option-pricing model.

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

Income Taxes

In accordance with SFAS No. 109, "Accounting for Income Taxes", income
taxes are accounted for using the assets and liabilities approach. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities, and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be recognized. The
Company has recorded a 100% valuation allowance as of December 31, 2004.

Translation of Foreign Currency

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

Computation of Net Loss Per Share

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

December 31, 2004 December 31, 2003

Outstanding Stock Options 52,804,121 33,512,507
Outstanding Warrants 18,825,000 26,195,000

Reclassifications

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

F-12

Recent Accounting Pronouncements

In December 2003, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." SAB 104
supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's
primary purpose is to rescind accounting guidance contained in SAB 101 related
to multiple element revenue arrangements, superseded as a result of the issuance
of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables."
Additionally, SAB 104 rescinds the SEC's Revenue Recognition in Financial
Statements Frequently Asked Questions and Answers ("the FAQ") issued with SAB
101 that had been codified in SEC Topic 13, Revenue Recognition. Selected
portions of the FAQ have been incorporated into SAB 104. While the wording of
SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged by the issuance of
SAB 104, which was effective upon issuance. The adoption of SAB 104 did not
impact the consolidated financial statements.

In March 2004, the FASB approved the consensus reached on the Emerging
Issues Task Force (EITF) Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." The objective of this
Issue is to provide guidance for identifying impaired investments. EITF 03-1
also provides new disclosure requirements for investments that are deemed to be
temporarily impaired. In September 2004, the FASB issued a FASB Staff Position
(FSP) EITF 03-1-1 that delays the effective date of the measurement and
recognition guidance in EITF 03-1 until after further deliberations by the FASB.
The disclosure requirements are effective only for annual periods ending after
June 15, 2004. The Company has evaluated the impact of the adoption of the
disclosure requirements of EITF 03-1 and does not believe the impact will be
significant to the Company's overall results of operations or financial
position. Once the FASB reaches a final decision on the measurement and
recognition provisions, the company will evaluate the impact of the adoption of
EITF 03-1.

In November 2004, the FASB issued SFAS No. 151 "Inventory Costs, an
amendment of ARB No. 43, Chapter 4. The amendments made by Statement 151 clarify
that abnormal amounts of idle facility expense, freight, handling costs, and
wasted materials (spoilage) should be recognized as current-period charges and
require the allocation of fixed production overheads to inventory based on the
normal capacity of the production facilities. The guidance is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Earlier application is permitted for inventory costs incurred during fiscal
years beginning after November 23, 2004. . The Company has evaluated the impact
of the adoption of SFAS 151, and does not believe the impact will be significant
to the Company's overall results of operations or financial position.

F-13

for nonmonetary exchanges of similar productive assets and replace it with a
broader exception for exchanges of nonmonetary assets that do not have
commercial substance. Previously, Opinion 29 required that the accounting for an
exchange of a productive asset for a similar productive asset or an equivalent
interest in the same or similar productive asset should be based on the recorded
amount of the asset relinquished. Opinion 29 provided an exception to its basic
measurement principle (fair value) for exchanges of similar productive assets.
The Board believes that exception required that some nonmonetary exchanges,
although commercially substantive, be recorded on a carryover basis. By focusing
the exception on exchanges that lack commercial substance, the Board believes
this Statement produces financial reporting that more faithfully represents the
economics of the transactions. The Statement is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The provisions of this Statement
shall be applied prospectively. The Company has evaluated the impact of the
adoption of SFAS 152, and does not believe the impact will be significant to the
Company's overall results of operations or financial position.

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

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

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

F-14

During the years ended December 31, 2004 and 2003, the Company sold
112,743,417 and 98,933,244 shares, respectively, of its common stock to Cornell
under the Standby Equity Distribution Agreement and Equity Line of Credit. The
following table summarizes funding received and from, and shares sold to,
Cornell during the years ended December 31, 2004 and 2003:

Year Ended December 31,
------------------------------
2004 2003
------------- -------------
Number of shares sold to Cornell 112,743,417 98,933,244

Gross Proceeds from sale of shares to
Cornell 10,123,000 9,565,000
Less: discounts and fees* (1,967,000) (6,772,000)
------------- -------------
Net Proceeds from sale of shares to
Cornell $ 8,156,000 $ 2,793,000
------------- -------------

* - In accordance with terms of Standby Equity Distribution Agreement, stock is
valued at 98% of the lowest closing bid price during the week it is sold

5. PROPERTY AND EQUIPMENT

As of December 31, 2004, property and equipment consisted of the
following:

(dollars
in
thousands)
----------
2004

Furniture and fixtures $ 273
Equipment 149
----------
Total 422
Less: accumulated depreciation
Furniture and fixtures (262)
Equipment (50)
----------
Total property and equipment, net $ 110
==========

Depreciation expense was $66,000 and $83,000 for the years ended December
31, 2004 and 2003, respectively.

F-15

6. INTANGIBLE ASSETS

As of December 31, 2004, intangible assets consisted of the following:

(dollars
in
thousands)
2004
----

Patents and related costs $ 3,645
Micro paint repair chemical formulations and proprietary process 1,800
Goodwill 1,099
Other intangible assets 788
----------
Total 7,332
Less: accumulated amortization
Patents and related costs (1,471)
Micro paint repair chemical formulations and proprietary process (170)
Other intangibles (567)
----------
Intangible assets, net $ 5,124
==========

Capitalized patent activity for the year ended December 31, 2004 was as
follows:

(dollars in
thousands)
----------
2004
Beginning balance $ 2,415
Additions 80
Amortization (321)
----------
Ending balance $ 2,174
==========

Amortization expense of capitalized patents was $321,000 and $273,000 for
the years ended December 31, 2004 and 2003, respectively. The weighted-average
amortization period of capitalized patents as of December 31, 2004 was 7.6
years.

Capitalized Micro Paint Repair chemical formulations and propriety process
activity for the year ended December 31, 2004 was as follows:

(dollars in
thousands)
----------
2004
----------

Beginning balance $ --
Micro paint repair chemical formulations and propriety
process obtained through acquisition of CSI International 1,800
Amortization (170)
----------
Ending balance $ 1,630
==========

F-16

Amortization expense of Micro Paint Repair chemical formulations and
propriety process was $170,000 and $0 for the years ended December 31, 2004 and
2003, respectively. The weighted-average amortization period of capitalized
repair chemical formulations and propriety process as of December 31, 2004 was
10 years.

Capitalized goodwill activity for the year ended December 31, 2004 was as
follows:

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

2004

Beginning balance $ --
Goodwill obtained through acquisition of CSI International 1,099
----------
Ending balance $ 1,099
==========

There was no amortization expense of goodwill for the years ended December
31, 2004 and 2003, respectively.

Other intangible assets activity for the year ended December 31, 2004 was
as follows:

(dollars in
thousands)
----------
2004

Beginning balance $ 118
Additions 220
Amortization (117)
----------
Ending balance $ 221
==========

Amortization expense of capitalized and purchased software costs and other
intangible assets was $117,000 and $114,000 for the years ended December 31,
2004 and 2003, respectively. The weighted-average amortization period of
capitalized and purchased software costs as of December 31, 2004 was 4.7 years.

As of December 31, 2004, the Company estimated future amortization expense
of capitalized patents and software for the next five years to be:

(In Thousands)
--------------
2005 598
2006 525
2007 498
2008 487
2009 437

F-17

7. ALLOWANCE FOR DOUBTFUL ACCOUNTS AND INVENTORY RESERVE

Allowance for doubtful accounts activity for the year ended December 31,
2004 was as follows:

(dollars
in thousands)
---------------
2004

Beginning balance $49
Bad debt 24
Write-off of uncollectible accounts (27)
---------------
Ending balance $ 46
===============

Inventory reserve for the year ended December 31, 2004 was $0.

8. FINANCING AGREEMENTS

As of December 31, 2004, 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. Termination of the
Company's financing relationship with GE Access could have a material adverse
effect the Company's financial condition. Management expects the agreement to
remain in place in the near future. As of December 31, 2004 the amount payable
under this financing arrangement was approximately $17,000.

9. NOTES PAYABLE

On March 13, 2003, the Company borrowed from Cornell the gross amount of
$262,000 before discounts and fees. The note was repaid in full during 2003.

On May 27, 2003, the Company borrowed from Cornell the gross amount of
$245,000 before discounts and fees. The note was repaid in full during 2003.

On June 24, 2003, the Company borrowed from Cornell the gross amount of
$400,000 before discounts and fees. The note was repaid in full during 2003.

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

On July 21, 2003, the Company borrowed from Cornell the gross amount of
$200,000 before discounts and fees. The note was repaid in full during 2003.

On August 1, 2003, the Company borrowed from Cornell the gross amount of
$200,000 before discounts and fees. The note was repaid in full during 2003.

F-18

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

On September 2, 2003, the Company borrowed from Cornell the gross amount of
$200,000 before discounts and fees. The note was repaid in full during 2003.

On September 11, 2003, the Company received funding in the form of a
promissory note from Cornell in the gross amount of $500,000 before discounts
and fees. The note was repaid in full during 2003.

On September 29, 2003, the Company borrowed from Cornell the gross amount
of $1,500,000 before discounts and fees. The note was repaid in full during
2003.

On January 20, 2004, the Company borrowed from Cornell the gross amount of
$4,000,000 before discounts and fees. Of the $4,000,000 funding, $2,500,000 was
used to fund the acquisition of CSI International, Inc. during February 2004.
Cornell withheld a $315,000 retention fee related to the issuance of stock to
pay off the debt in the future. The Company paid this note in full during 2004.

The Company also granted to Cornell 40,000,000 warrants to purchase shares
of NeoMedia stock with an exercise price of $0.05 per share during January 2004.
In April 2004, the Company filed a Form SB-2 to register 40 million shares
underlying warrants granted to Cornell (and subsequently transferred by Cornell
to Stone Street Asset Management LLC) in connection with a promissory note
issued by the Company to. In May 2004, the Form SB-2 was declared effective by
the Securities and Exchange Commission. The fair value of the warrants using the
Black-Scholes pricing model was $5,000,000. In accordance with APB 14,
"Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants",
the Company has compared the relative fair values of the warrants and the face
value of the notes, and has allocated a value of $2.5 million to the warrants.
Of the $2.5 million, $2 million was allocated to the $4 million note issued in
January 2004 and $0.5 million against the $1 million note in April 2004. The
$2.5 million was recorded as a discount against the carrying value of the note.
The $2.5 million that was allocated to the notes is considered a discount on the
promissory notes, and therefore was amortized over the life of the notes using
the effective interest method, in accordance with Staff Accounting Bulletin No.
77, Topic 2.A.6, "Debt Issue Costs" of SFAS 141, "Business Combinations".
Accordingly, the Company recorded an amortization of discount of $2,500,000
related to the warrants during the year ended December31, 2004. Stone Street
Asset Management LLC exercised the warrants during November 2004, resulting in
net funds to NeoMedia of $2 million.

On April 8, 2004, the Company borrowed from Cornell the gross amount of
$1,000,000 before discounts and fees. Cornell withheld a $76,000 retention fee
related to the issuance of stock to pay off the debt in the future. The Company
paid this note in full during 2004.

On July 2, 2004, the Company borrowed from Cornell the gross amount of
$1,000,000 before discounts and fees. Cornell withheld a $76,000 retention fee
related to the issuance of stock to pay off the debt in the future. The Company
paid this note in full during 2004.

On August 6, 2004, the Company borrowed from Cornell the gross amount of
$2,000,000 before discounts and fees. Cornell withheld a retention fee of
$153,000 related to the issuance of stock to pay off the debt in the future. The
Company paid this note in full during 2004.

On October 18, 2004, the Company borrowed from Cornell the gross amount of
$1,085,000 before discounts and fees. Cornell withheld a retention fee of
$85,000 related to the issuance of stock to pay off the debt in the future. As
of December 31, 2004, the Company had not made any payments against this note.
The Company paid this note in full during the first quarter of 2005. The Company
invested the proceeds from the note in iPoint-media pursuant to the investment
agreement between NeoMedia and I-Point Media Ltd.

F-19

10. CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject NeoMedia to concentrations
of credit risk consist primarily of trade accounts receivable with customers.
NeoMedia extends credit to its customers as determined on an individual basis
and has included an allowance for doubtful accounts of $46,000 in its December
31, 2004 consolidated balance sheet. In addition, a single company supplies the
majority of the Company's resold equipment and software, which is re-marketed to
this customer. Accordingly, the loss of this supplier could 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 37% and
83% of NeoMedia's revenue for the years ended December 31, 2004 and 2003,
respectively.

F-20

11. ACQUISITIONS

Acquisition of CSI International, Inc. ("CSI")

On February 6, 2004, NeoMedia acquired 100% ownership of CSI
International, Inc., of Calgary, Alberta, Canada, a private technology products
company in the micro paint repair industry. NeoMedia paid a purchase price
including an issuance of 7,000,000 shares of its common stock, and cash of
$2,500,000 in exchange for all outstanding shares of CSI. The shares were valued
at $0.10 per share, which was the market price of NeoMedia's common stock on the
Over-the-counter Bulletin Board exchange around the acquisition date. NeoMedia
also incurred direct costs of the business combination totaling $5,000, which
are included in the purchase price for purposes of allocating assets acquired
and liabilities assumed.

The acquisition was accounted for under the purchase method. The actual
purchase price was based on cash paid, the fair value of NeoMedia stock around
the date of the acquisition, and direct costs associated with the combination.
The purchase price was allocated as follows:

(Dollars in
Thousands)

Value of 7 Million Shares Issued ($0.10 per share) $ 700
Cash paid 2,500
Direct costs of acquisition 5
----------
Total Fair Value of Purchase Price $ 3,205
----------

Assets Purchased:
Cash $ 115
Accounts receivable, net 67
Inventory 54
Other current assets 12
Investments 25
Property, plant & equipment 8
Micro paint repair chemical formulations and proprietary process 1,800
Goodwill 1,099
Customer base / contracts 110
Copyrighted materials 50
----------
Total Assets Purchased 3,340
----------

Less Liabilities Assumed:
Accounts payable (23)
Accrued liabilities (12)
Notes payable (100)
----------
Total Liabilities Assumed (135)
----------

The combination is being accounted for as a purchase business combination
as defined by Statement of Financial Accounting Standards No. 141, Business
Combinations. The final allocation of the excess purchase price over net
tangible assets was determined based on independent appraisal of the assets
purchased. The values assigned to intangible assets, aside from goodwill, are
subject to amortization. The intangible assets were assigned the following lives
for amortization purposes:

F-21

(life in
Intangible asset years)
---------------- ------

Micro paint repair chemical formulations and proprietary process 10
Customer base / contracts 5
Copyrighted materials 5

Goodwill was not assigned a life and will be tested for impairment as
defined by Statement of Financial Accounting Standards No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets.

The accompanying consolidated statement of operations presented herein
contains the results of operations for CSI for the period February 6, 2004,
through December 31, 2004

Pro-forma results of operations as if NeoMedia and CSI had combined as
of January 1, 2004 and 2003 are as follows:

Year Ended December 31, 2004 Year Ended December 31, 2003
-------------------------------------------- --------------------------------------------
(A) (A)
Pro-forma Pro-forma
CSI Adjust- Pro-forma CSI Adjust- Pro-forma
NeoMedia Int'l ments Combined NeoMedia Int'l ments Combined
---------- ------- ---------- ---------- ---------- ------- --------- -----------

Total net sales $1,700 791 (727) (A) $1,764 $2,400 654 --- (A) $3,054
Loss from operations ($4,681) (1,746) 1,720 (A) ($4,707) ($4,854) 34 --- (A) ($4,820)
Net loss ($7,230) (2,639) 2,613 (A) ($7,256) ($5,382) 34 --- (A) ($5,348)
Net loss per share-basic and diluted ($0.02) ($0.02) ($0.04) (A) ($0.04)
Weighted average number of
common shares - basic and
diluted 329,362,127 690,411 (B) 330,052,538 125,029,723 7,000,000 (B) 132,029,723

Pro-forma Adjustments

(A) - Adjustments are to reflect operations of CSI from February 6, 2004
through December 31, 2004, which are included in NeoMedia's operations
for year ended December 31, 2004.
(B) - To adjust weighted average shares outstanding as if the 7,000,000
shares issued as part of the purchase price of CSI on February 6, 2004,
had been issued on January 1, 2004 and 2003

F-22

BSD Software, Inc. ("BSD)

On December 21, 2004, NeoMedia Technologies, Inc. ("NeoMedia")
(OTCBB:NEOM) and BSD Software Inc. ("BSD") (OTCBB: BSDS) signed a definitive
Agreement and Plan of Merger, the form of which is attached as Exhibit 16.1
hereto.

BSD owns 90% of the outstanding shares of Triton Global Business Services,
Inc., a provider of live and automated operator calling services and e-business
support, including billing, clearinghouse and information management services,
to companies in the telecommunications industry.

BSD's shareholders will receive, for each share of BSD stock owned,
NeoMedia stock equivalent to .07 divided by the volume-weighted average price of
NeoMedia stock for the five days prior to the effective time of the merger.

The agreement has been approved by holders of approximately 63% of BSD's
outstanding shares and its Board. NeoMedia and BSD intend to file a joint
registration/information statement with the SEC for review.

Upon effectiveness of the registration, the exchange rate will be
determined, a closing meeting will be held, and the acquisition and merger will
be completed. Closing is subject to the terms and conditions outlined in the
merger agreement, as well as regulatory review of the merger and
registration/information statement by the United States Securities and Exchange
Commission.

Secure Source Technologies, Inc. ("SST")

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

(Dollars in
Thousands)

Value of 3.5 Million Shares Issued (Purchase Price) $500

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

F-23

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

The values assigned to intangible assets are subject to amortization. The
acquired software platform has no residual value and a weighted-average
amortization period of 3 years. The acquired patents have no residual value and
a weighted-average amortization period of 11.1 years. The results of SST are
included in the consolidated financial statements for the period October 8, 2003
through December 31, 2004.

13. 2000 EXECUTIVE INCENTIVE

During the years ended December 31, 2004 and 2003, the Company satisfied a
portion of its 2000 accrued executive incentive obligation through the issuance
of common stock to current and former employees who had participated in the
plan. The Company relieved approximately $160,000 and $692,000 of the liability
through the issuance of approximately 1.5 and 15.4 million shares during the
years ended December 31, 2004 and 2003, respectively. The excess of the fair
value of the common stock issued over the outstanding accrued bonuses was
included in the gain (loss) on extinguishment of debt.

14. COMPREHENSIVE LOSS

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

2004
----------
$ --
Beginning balance
Additions:
Foreign currency translation adjustment (60)
----------
Ending Balance $ (60)
==========

F-24

15. INCOME TAXES

For the years ended December 31, 2004 and 2003, the components of income
tax expense were as follows:

2004 2003
---- ----
(In thousands)
Current $ -- $ --
Deferred -- --
Foreign -- --
------------------

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

As of December 31, 2004 and 2003, the types of temporary differences
between the tax basis of assets and liabilities and their financial reporting
amounts which gave rise to deferred taxes, and their tax effects were as
follows:

2004 2003
---- ----

Accrued employee benefits $ -- $ 8
Provisions for doubtful accounts 18 20
Capitalized software development costs and fixed assets 799 740
Net operating loss carryforwards (NOL) 30,319 27,014
Accruals 501 578
Write-off of long-lived assets 2070 2,070
State taxes 156 107
Alternative minimum tax credit carryforward 45 45
---------- ----------
Total deferred tax assets 33,908 30,582
Valuation Allowance (33,908) (30,582)
---------- ----------
Net deferred income tax asset $ -- $ --
========== ==========

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

For the years ended December 31, 2004 and 2003, the income tax benefit
differed from the amount computed by applying the statutory federal rate of 34%
as follows:

2004 2003
---------- ----------

Benefit at federal statutory rate $ (2,458) $ (1,830)
State income taxes, net of federal (286) (213)
Permanent and other, net (582) 142
Change in valuation allowance 3,326 1,901
---------- ----------
Income tax expense/(benefit) $ -- $ --
========== ==========

As of December 31, 2004, NeoMedia had net operating loss carryforwards for
federal tax purposes totaling approximately $76 million which may be used to
offset future taxable income, or, if unused expire between 2011 and 2020. As a
result of certain of NeoMedia's equity activities, NeoMedia anticipates that the
annual usage of its pre-1998 net operating loss carryforwards should be further
restricted pursuant to the provisions of Section 382 of the Internal Revenue
Code.

F-25

16. TRANSACTIONS WITH RELATED PARTIES

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

During July 2003, the Company borrowed $25,000 from William E. Fritz, one
of its outside directors. This amount was added to the principal of a $10,000
note payable to Mr. Fritz that matures in April 2004, with all other terms of
the note remaining the same. As consideration for the loan, the Company granted
Mr. Fritz 2,500,000 warrants to purchase shares of its common stock at an
exercise price of $0.01 per share. The full principle of $35,000 plus interest
was paid in full during 2004.

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

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

During April 2003, the Company sold 25,000,000 shares of its common stock,
par value $0.01, in a private placement at a price of $0.01 per share to William
Fritz. The Company's stock price at the time of the sale was $0.012. In
connection with the sale, the Company also granted 25,000,000 warrants to
purchase shares of NeoMedia common stock at an exercise price of $0.01 per
share. The warrants had a fair value of $298,000 and have been recorded as a
cost of issuance. The Company recognized a discount expense in general and
administrative expenses of approximately $50,000 relating to this transaction
with Mr. Fritz. On August 6, 2003, Mr. Fritz exercised his warrants and
purchased 25,000,000 additional shares of common stock at a price of $0.01 per
share.

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

F-26

during April 2003. The Company repaid the balance on William Fritz's note during
2004. The new note also included a provision under which, as consideration for
the loan, Mr. Fritz will receive a 3% royalty on all future revenue generated
from the Company's intellectual property.

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

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

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

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

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

17. 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, 2004 and 2003, NeoMedia's rent expense was $229,000 and
$265,000, respectively.

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

The following is a schedule of the future minimum payments under
non-cancelable operating leases in effect as of December 31, 2004:

Payments
(In thousands)
--------------
2005 89
2006 ---
Thereafter ---
----------------
Total $89
================

As of December 31, 2004, none of the Company's employees were under
contract. Additionally, as of December 31, 2004, the Company was not a party to
any long-term consulting agreements that are required to be paid in cash.

Legal Proceedings

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

F-27

AirClic, Inc., Scanbuy, Inc., and LScan Technologies, Inc.

Virgin Entertainment Group

F-28

Other Litigation

On October 28, 2002, Merrick & Klimek, P.C., filed a complaint against
NeoMedia seeking payment of approximately $170,000 in past due legal services.
The amount in question is subject to an unsecured promissory note that matured
unpaid on February 28, 2002. On May 1, 2003, NeoMedia settled the suit for cash
payments totaling approximately $196,000, to be paid at a rate of $30,000 per
quarter until the balance is satisfied. NeoMedia had a remaining liability of
approximately $33,000 relating to this matter as of December 31, 2004, which was
included in accrued expenses.

On December 7, 2004, Reitler Brown & Rosenblatt LLC, filed a complaint
against NeoMedia seeking payment of approximately $422,000 in past due legal
services and accrued interest. NeoMedia had a remaining liability of
approximately $422,000 relating to this matter as of December 31, 2004, which
was included in accounts payable and accrued expenses.

18. 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.

19. STOCK OPTIONS AND WARRANTS

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

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

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

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

F-29

The following table summarizes the status of NeoMedia's 2003, 2002, 1998
and 1996 stock option plans as of and for the years ended December 31, 2004 and
2003:

2004 2003
------------------------- -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- ----- -------- -----
(In (In
thousands) thousands)

Outstanding at beginning of year 33,512 $0.23 10,801 $1.11
Granted 32,752 $0.09 39,018 $0.01
Exercised (12,860) $0.23 (15,605) $0.01
Forfeited (600) $0.09 (702) $1.26
---------- ----------- ---------- -----------
Outstanding at end of year 52,804 $0.06 33,512 $0.23*
========== =========== ========== ===========

Options exercisable at year-end 34,680 33,512

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

Available for grant at the end of the
year 81,873 114,025

* - Includes 3,644,382 options that had a restated exercise price of
$0.01 under option repricing program that was in place as of December
31, 2004. For purposes of this table, options subject to repricing are
shown at their original exercise price.

The following table summarizes information about NeoMedia's stock options
outstanding as of December 31, 2004:

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

$-- to $0.010 26,568 8.8 years $0.01 26,568 $0.01
0.011 to 0.087 4,640 9.4 years $0.07 3,516 $0.07
0.088 to 0.160 21,575 9.1 years $0.11 4,575 $0.11
0.170 to 7.000 21 4.8 years $6.89 21 $6.89
------------------ -------------- -------- --------- -------------- -------------- -------------
$-- to $7.000 52,804 9.0 years $0.06 34,680 $0.03
================== ============== ======== ========= ============== ============== =============

F-30

During the years ended December 31, 2004 and 2003, NeoMedia made the
following option grants:

2004 2003
---------------------------------- -----------------------------------
Range of Options Range of Options
Exercise Granted Exercise Granted
(In (In
Recipients Prices thousands) Prices thousands)
----------------------------- -------------------- ---------- -------------------- -----------

Employees $0.062 to $0.128 23,290 $0.010 to $0.010 31,725
Non-employee directors $0.010 to $0.075 3,357 $0.010 to $0.010 3,000
Non-employees $0.025 to $0.100 6,105 $0.010 to $0.160 4,293
-------------------- ---------- -------------------- -----------
Total $0.010 to $0.128 32,752 $0.010 to $0.160 39,018
-------------------- ---------- -------------------- -----------

Option-Related Expense

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

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

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

In October 2003, the Company issued 500,000 options to buy shares of the
Company's common stock to an outside consultant at a price of $0.01 per share
for consulting to be provided over a period of one year. The options were valued
at approximately $51,000, of which the Company recognized approximately $10,000
in general and administrative expense in the accompanying consolidated financial
statements for the year ended December 31, 2003.
............
In November 2003, the Company issued 50,000 options to buy shares of the
Company's common stock to an outside consultant at a price of $0.06 per share
for consulting services rendered. The Company recognized approximately $7,000 in
general and administrative expense in the accompanying consolidated financial
statements for the year ended December 31, 2003.

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

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

F-31

In December 2003, the Company issued 43,125 options to buy shares of the
Company's common stock to an outside consultant at a price of $0.01 per share
for consulting services rendered. The Company recognized approximately $6,000 in
general and administrative expense in the accompanying consolidated financial
statements for the year ended December 31, 2003.

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

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

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

Warrants

Warrant activity as of December 31, 2004 and 2003 was as follows:

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

Warrants Outstanding as of December 31, 2003 26,195,000
Warrants issued 44,150,000
Warrants exercised (51,510,000)
Warrants expired (10,000)
---------------

Warrants Outstanding as of December 31, 2004 18,825,000
===============

The following table summarizes information about warrants outstanding at
December 31, 2004, 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 13,050 3.5 years $0.01
0.06 to 3.56 4,375 4.2 years $0.28
3.57 to 6.00 1,400 0.8 years $6.00
--------------------- -------------- ------- ------------ ------------
$--- to $6.00 18,825 3.4 years $0.52
===================== ============== ======= ============ ============

F-32

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

During February 2003, the Company granted 500,000 warrants to GE Access,
its primary equipment supplier, as payment of interest relating to a commercial
credit agreement between GE Access and NeoMedia. The Company recognized
approximately $7,000 in interest expense in the 2003 consolidated financial
statements relating to the warrant issuance.
The warrants were exercised during 2004

During April 2003, the Company granted 25,000,000 warrants to purchase
shares of NeoMedia common stock at an exercise price of $0.01 per share to
William E. Fritz, an outside director, in connection with financing provided to
the Company by Mr. Fritz. The warrants were exercised during the year ended
December 31, 2003.

During July 2003, the Company granted 2,500,000 warrants to purchase
shares of NeoMedia common stock at an exercise price of $0.01 per share to
William E. Fritz, an outside director, in connection with financing provided to
the Company by Mr. Fritz. The warrants were not exercised as of December 31,
2004.

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

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

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

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

F-33

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

Option and Warrant Repricing Programs

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

During May 2003, NeoMedia re-priced approximately 8.0 million stock
options under a repricing program. Under the terms of the program, the exercise
price for outstanding options under NeoMedia's 2002, 1998, and 1996 Stock Option
Plans was restated to $0.01 per share for an original period of 6 months. The
program was subsequently extended through December 31, 2004. In accordance with
FASB Interpretation, FIN 44, Accounting for Certain Transactions Involving Stock
Transactions, the award was accounted for as variable from May 19, 2003 through
the period ended December 31, 2004. Accordingly, NeoMedia recognized
approximately $104,000 and $746,000 as compensation in general and
administrative expense during the years ended December 31, 2004 and 2003,
respectively. Approximately 3.5 million and 4.4 million options were exercised
under the program during the years ended December 31, 2004 and 2003,
respectively. The repricing program expired on December 31, 2004.

20. SEGMENT AND GEOGRAPHICAL INFORMATION

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

NeoMedia is structured as three distinct business units: NeoMedia Internet
Software Service (NISS), NeoMedia Consulting and Integration Services (NCIS),
and NeoMedia Micro Paint Repair (NMPR). Performance is evaluated and resources
allocated based on specific segment requirements and measurable factors.
Management uses the Company's internal income statements to evaluate each
business unit's performance.

F-34

Operational results for the three segments for the years ended December
31, 2004 and 2003 are presented below:

(in thousands)
--------------------------
Years Ended
December 31,
--------------------------
2004 2003
Net Sales:
NeoMedia Consulting & Integration Services $ 910 $2,354
NeoMedia Internet Switching Service 62 46
NeoMedia Micro Paint Repair 728 ---
------------- ------------
$1,700 $2,400
------------- ------------

Net Loss:
NeoMedia Consulting & Integration Services ($1,862) $(4,331)
NeoMedia Internet Switching Service (2,755) (1,051)
NeoMedia Micro Paint Repair (2,613) ---
------------- ------------
($7,230) $(5,382)
------------- ------------

Identifiable Assets
NeoMedia Consulting & Integration Services $ 274
NeoMedia Internet Switching Service 2,423
NeoMedia Micro Paint Repair 3,183
Corporate 4,526
-------------
$10,406
-------------

Net revenues, loss, and identifiable assets by geographic area are
presented based upon the country of destination. During 2004, NeoMedia had
operations and assets in the United States and Canada. During 2003, NeoMedia
operated within the United States only. No other foreign country represented 10%
or more of net revenues for the years ended December 31, 2004 or 2003. Net
revenues, loss, and identifiable assets by geographic area were as follows:

(in thousands)
--------------------------
Years Ended
December 31,
--------------------------
2004 2003
---- ----
Net Sales:
United States $1,063 $2,400
Canada 637 ---
------------ -------------
$1,700 $2,400
------------ -------------
Net Loss:
United States ($6,516) ($5,382)
Canada (714) ---
------------ -------------
($7,230) ($5,382)
------------ -------------
Identifiable Assets
United States $7,272 $3,876
Canada 3,134 ---
------------ -------------
$10,406 $3,876
------------ -------------

F-35

21. COMMON STOCK

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

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

22. 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. Additionally, 47,511
shares are designated as Series A Convertible Preferred Stock, none of which are
issued and outstanding, and 100,000 shares are designated as Series B 12%
Convertible Redeemable Preferred Stock, none of which are issued and
outstanding. The Company has no present agreements relating to or requiring the
designation or issuance of additional shares of preferred stock.

23. SUBSEQUENT EVENTS

During January 2005, NeoMedia introduced the newest PaperClick(R) Mobile
Go Window(TM) for Nokia(R) Series 60 cell phones and other cell phones which use
Series 60 software. This introduction became the fifth Go Window from NeoMedia,
making the product line available across five mobile operating environments, on
over 35 models of cell phones.

During January 2005, NeoMedia signed a reseller agreement with Jorge
Christen & Partners LLP of Mexico. The reseller agreement gives Jorge Christen &
Partners LLP the rights to resell PaperClick(R) products in Mexico and Latin
America.

F-36

During January 2005, NeoMedia signed a reseller agreement with Deusto
Sistemas of Bilbao, Spain. The reseller agreement gives Deusto Sistemas the
rights to resell PaperClick(R) products in Europe.

During January 2005, NeoMedia signed a reseller agreement with E&I
Marketing and Consulting Co. of Taipei, Taiwan. The reseller agreement gives E&I
Marketing and Consulting Co. the rights to resell PaperClick(R) products in
Asia.

During January 2005, NeoMedia signed a Letter of Intent to enter into a
licensing agreement with Shelron Group, Inc. for PaperClick(R)'s family of
mobile marketing products to be used with Shelron's ActivShopper comparison
shopping toolbar. The agreement will give Shelron Group, Inc. the worldwide
rights to use PaperClick(R) on the new ActivShopper Mobile Edition for cell
phones and PDA's. ActivShopper is a free software download designed to
automatically scan, locate and compare prices for items a consumer selects at an
e-commerce site.

In February 2005, NeoMedia was awarded a patent in Mexico from the
Instituto Mexicano de la Propiedad Industrial, the patent office in Mexico, for
the process invented by NeoMedia for "automatic access of electronic information
through secure machine readable codes on printed documents." The patent
recognizes NeoMedia's innovation in creating a secure link between printed
documents and the Internet using an obfuscated bar code and its technology. The
U.S. Patent and Trademark Office had previously awarded patent No. 5,933,829 to
NeoMedia for the same technology.

In February 2005, NeoMedia was awarded an allowance for another new patent
in the U.S. from the U.S. Patent and Trademark Office. The application is serial
no. 09/821,677 which covers 44 claims and is an adaptation of NeoMedia's U.S.
Patent 6,542,933, applying to technology that accesses Internet content from
wireless devices. NeoMedia expects the patent to be issued shortly.

On February 22, 2005, NeoMedia and IT-Global signed a one-year renewable
agreement giving IT-Global rights to sell and license PaperClick(R) products,
including client and server software, code activation and integration services.
IT-Global will focus on the New York tri-state area, where it is based, as well
as other areas, domestically and internationally, it serves.

On February 25, 2005, NeoMedia invested $250,000 in exchange for
8,333,333 shares of Pickups Plus, Inc. ("PUPS")(OTCBB:PUPS) restricted common
stock. PUPS is a retail operator and franchiser of retail automotive parts and
accessories stores catering to the light truck market, and also provides new
vehicle preparation, environmental protection packages, detailing and
reconditioning products and services.

On February 25, 2005, NeoMedia signed two non-binding letters of intent to
acquire up to 100% of Automotive Preservation, Inc. ("AP"), a distributor of
automotive paint and accessory products, from AP's parent company, PUPS. The
first LOI calls for NeoMedia to initially acquire 30% of AP for $1,600,000, to
be paid $600,000 in cash, $554,000 in shares of NeoMedia restricted common
stock, and $446,000 through the assumption of AP debt by NeoMedia. Under the
second LOI, upon completion of the acquisition of the initial 30% of AP by
NeoMedia, NeoMedia would have the option to acquire an additional 30% of AP for
$1,650,000, payable in shares of NeoMedia restricted common stock. The second
LOI also gives NeoMedia the option to purchase the final 40% of AP for either:
(i) $2,200,000, payable in shares of NeoMedia restricted common stock, if
NeoMedia exercises this right within 12 months of acquiring the second 30% of
AP, or (ii) a price equivalent to AP's previous quarter EBITDA multiplied by 8,
payable in shares of NeoMedia restricted common stock. Both LOIs are non-binding
and subject to due diligence by NeoMedia and AP.

F-37

PART III

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

Directors and Executive Officers

As of January 24, 2005, NeoMedia's directors and executive officers
were:

Name Age Position

Charles W. Fritz 48 Chairman of the Board of Directors
Charles T. Jensen 61 President, Chief Executive Officer, Chief Operating
Officer, and Director
David A. Dodge 29 Vice-President, Chief Financial Officer and Controller
William E. Fritz 74 Director
James J. Keil 77 Director
A. Hayes Barclay 73 Director

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

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

Charles T. Jensen was Chief Financial Officer, Treasurer and Vice-President
of NeoMedia from 1996 through 2002. Mr. Jensen has been a Director since 1996,
and currently is a member of the Compensation Committee. During 2002, Mr. Jensen
was promoted to President, Chief Operating Officer, and Acting Chief Executive
Officer. During August 2004, Mr. Jensen was made permanent 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

III-1

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

William E. Fritz is a founder of NeoMedia and has served as a Director of
NeoMedia since its inception. Mr. Fritz also served as Treasurer of NeoMedia
from its inception until May 1, 1996. Since February 1981, Mr. Fritz has been an
officer and either the sole 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 38 years at IBM Corporation and Xerox
Corporation in various marketing, sales and senior executive positions. From
1989-1995, Mr. Keil was on the Board of Directors of Elixir Technologies
Corporation (a non-public corporation), and from 1990-1992 was the Chairman of
its Board of Directors. From 1992-1996, Mr. Keil served on the Board of
Directors of Document Sciences Corporation. Mr. Keil holds a B.S. degree from
the University of Dayton and did Masters level studies at the Harvard Business
School and the University of Chicago in 1961/62.

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

Election Of Directors And Officers

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

Meetings Of The Board Of Directors

During the year ended December 31, 2004, NeoMedia held 5 directors'
meetings and each incumbent director attended more than seventy-five percent of
the total of meetings of the Board of Directors and the Committees of which he
is a member. The Board of Directors also acted 20 times by unanimous written
consent.

III-2

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 2004, members of the Audit Committee were
non-employee directors James J. Keil and A. Hayes Barclay. During 2004, the
Audit Committee held 4 meetings. Due to financial constraints, the Company does
not currently have an audit committee financial expert serving on its audit
committee.

Compensation Committee. The Compensation Committee is responsible for
recommending compensation and benefits for the executive officers of NeoMedia to
the Board of Directors and for administering NeoMedia's Incentive Plan for
Management. Charles W. Fritz, Charles T. Jensen, A. Hayes Barclay and James J.
Keil, were members of NeoMedia's Compensation Committee during 2004. The
Compensation Committee acted by unanimous written consent 2 times during 2004.

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 2004, the Stock Option Committee met once and
acted by unanimous written consent 6 times.

Director Compensation

Outside directors are currently compensated through the issuance of stock
options from the Company's 2003 Stock Option Plan. During May 2004, each outside
director received 1,000,000 options with an exercise price of $0.075 per share,
and the audit and compensation committee chairperson received and additional
500,000 options with an exercise price of $0.075 per share. NeoMedia does not
have a written compensation policy for its outside directors at this time.

Code of Ethics

Section 16(a) Beneficial Ownership Reporting Compliance

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

Based solely on a review of the copies of such forms furnished to NeoMedia,
NeoMedia believes that during 2003 all Section 16(a) filing requirements
applicable to NeoMedia's officers, directors and ten percent beneficial owners
were complied with.

III-3

ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth certain information with respect to the
compensation paid to (i) NeoMedia's Chief Executive Officer and (ii) each of
NeoMedia's other executive officers who received aggregate cash compensation in
excess of $100,000 for services rendered to NeoMedia (collectively, "the Named
Executive Officers") during the years ended December 31, 2004 and 2003:

Annual Compensation Long-term Compensation
------------------------------------------- ------------------------------------------------
Other Securities
d g All
Annual Restricte Underlyin other
Compens- Stock Options/ LTIP Compens-
Name and Salary Bonus ation Award(s) SARs (1) Payouts ation
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
---------------------- ----- -------- ------- --------- --------- --------- -------- ---------

------------------------------------------------------------------------------------------------------------------------------
Charles T. Jensen 2004 175,000 --- --- --- 4,000,000 --- ---
President and
Chief Executive Officer 2003 162,000 92,000 (2) --- --- 10,000,000 --- 1,000 (4)

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

------------------------------------------------------------------------------------------------------------------------------
Charles W. Fritz 2004 $175,000 --- --- --- 4,000,000 --- ---
Chairman of the
Board 2003 145,000 110,000 (2) $60,000 (3) --- 10,000,000 --- 1,000 (4)

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

------------------------------------------------------------------------------------------------------------------------------
David A. Dodge 2004 122,000 --- --- --- 2,000,000 --- ---
Vice President and 2003 90,000 7,000 (2) --- --- 2,300,000 --- ---
Chief Financial
Officer
------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

Employment Agreements

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

Incentive Plan for Management

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

III-4

for participation or exclusion. The Board of Directors can amend, modify or
terminate the Incentive Plan for the next plan year at any time prior to the
commencement of such next plan year.

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

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

The Company did not have a formal incentive plan for management in place
for the year ended December 31, 2004.

During the years ended December 31, 2004 and 2003, the Company paid
$159,000 and $593,000, respectively, in past due incentive awards relating to
its executive incentive plan for fiscal 2000, through the issuance of common
stock.

Stock Option Plans

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

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

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

Effective September 24, 2003, NeoMedia adopted its 2003 Stock Option Plan
("2003 Stock Option Plan"). The 2003 Stock Option Plan provides for authority
for the Board of Directors to the grant non-qualified stock options with respect
to a maximum of 150,000,000 shares of common stock. On October 17, 2003,
NeoMedia filed a Form S-8 to register all 150,000,000 shares underlying the
options in the 2003 Stock Option Plan. As of December 31, 2004, the Company had
issued approximately 69 million shares under the 2003 Stock Option Plan

III-5

Stock Incentive Plan

Effective October 31, 2003, NeoMedia adopted the 2003 Stock Incentive Plan.
Under the terms of the Plan, NeoMedia has set aside up to 30,000,000 shares of
common stock to be issued to pay compensation and other expenses related to
employees, former employees, consultants, and non-employee directors. On
November 3, 2003, NeoMedia filed a Form S-8 to register all 30,000,000 shares
underlying the options in the 2003 Stock Incentive Plan. As of December 31,
2004, the Company had issued approximately 9.3 million shares under the 2003
Stock Incentive Plan.

401(k) Plan

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

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, 2004:

Percent of Potential Realizable Value
Number of Total at Assumed Annual Rates
Securities Options/ of Stock Price
Underlying SARs Appreciation
Options Granted to Exercise or for option Term
Named Granted Employees in Base Price Expiration ------------------------
Executive Officer (#) Fiscal Year ($/share) Date 5% ($) 10% ($)
------------------- ------------ ------------- ------------ ---------------- ------------ -----------

Charles T. Jensen 4,000,000 5.2% $0.11 March 8, 2014 $277,000 $701,000

Charles W. Fritz 4,000,000 5.2% $0.11 March 8, 2014 $277,000 $701,000

David A. Dodge 2,000,000 2.6% $0.11 March 8, 2014 $138,000 $351,000

III-6

Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Options/SAR Values

The following table sets forth options exercised by NeoMedia Named
Executive Officers during the year ended December 31, 2004, and the number and
value of all unexercised options at fiscal year end.

Number of Unexercised
Securities Underlying Value of Unexercised In-
Shares Options/SARs at the-Money Options/SARs at
Acquired Value December 31, 2004 December 31, 2004 (1)
Named on Exercise Realized -------------------------------- --------------------------------
Executive Officer (#) ($) Exercisable Unexercisable Exercisable Unexercisable
------------------- ------------ --------- ------------- --------------- ------------- ---------------

Charles T. Jensen 1,505,386 $347,000 11,000,000 3,000,000 $2,705,000 $465,000

Charles W. Fritz 1,549,000 $156,000 12,510,000 3,000,000 $3,030,000 $465,000

David A. Dodge 100,000 $25,000 2,700,000 1,500,000 $639,000 $233,000

(1) Based on the difference between the closing price of $0.265 of NeoMedia's
common stock as quoted on OTC Bulletin Board on December 31, 2004 and the
exercise price of the option/SAR.

III-7

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding beneficial
ownership of NeoMedia's common stock as of January 31, 2005, (i) by each person
or entity known by NeoMedia to own beneficially more than five percent of
NeoMedia's Common Stock, (ii) by each of NeoMedia's directors and nominees,
(iii) by each executive officer of NeoMedia named in the Summary Compensation
Table, and (iv) by all executive officers and directors of NeoMedia as a group.

Amount and Nature of Percent of
Beneficial Ownership (1) Class (1)
-------------------------------- -------------

Charles W. Fritz (2)(3) 30,620,574 6.8%
William Fritz(2)(4) 51,890,944 11.7%
Charles T. Jensen(2)(5) 12,001,500 2.7%
David A. Dodge(2)(6) 3,200,000 *
A. Hayes Barclay(2)(7) 1,405,000 *
James J. Keil(2)(8) 2,388,619 *
-------------------------- -------------
Officers and Directors as a Group (9 Persons)(9) 101,506,637 22.3%
-------------------------- -------------
-------------------------

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

(1) Applicable percentage of ownership is based on 437,356,497 shares of
common stock outstanding as of January 31, 2005, together with securities
exercisable or convertible into shares of common stock within 60 days of
January 31, 2005, for each stockholder. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities.
Shares of common stock subject to securities exercisable or convertible
into shares of common stock that are currently exercisable or exercisable
within 60 days of January 31, 2005, are deemed to be beneficially owned by
the person holding such securities for the purpose of computing the
percentage of ownership of such person, but are not treated as outstanding
for the purpose of computing the percentage ownership of any other person.
The common stock is the only outstanding class of equity securities of
NeoMedia.

(2) Address of the referenced individual is c/o NeoMedia Technologies, Inc.,
2201 Second Street, Suite 402, Fort Myers, FL, 33901.

(3) Charles W. Fritz is the Company's founder and the Chairman of the Board of
Directors. Shares beneficially owned include 100 shares owned by each of
Mr. Fritz's four children for an aggregate of 400 shares, 12,000,000
shares of common stock issuable upon exercise of options granted under the
Company's 2003, 2002 and 1998 stock option plans, 1,510,000 shares
issuable upon exercise of stock warrants, 15,567,605 shares of common
stock owned by Mr. Charles W. Fritz directly, and 1,542,969 shares of
common stock held by the CW/LA II Family Limited Partnership, a family
limited partnership for the benefit of Mr. Fritz's family.

(4) William E. Fritz, a member of the board of directors, and his wife, Edna
Fritz, are the general partners of the Fritz Family Limited Partnership
and therefore each are deemed to be the beneficial owners of the 1,511,742
shares held in the Fritz Family Partnership. As trustee of each of the
Chandler R. Fritz 1994 Trust, Charles W. Fritz 1994 Trust and Debra F.
Schiafone 1994 Trust, William E. Fritz is deemed to be the beneficial
owner of the 165,467 shares of NeoMedia held in these trusts.
Additionally, Mr. Fritz is deemed to own: 45,923,735 shares held directly
by Mr. Fritz or his spouse, 2,540,000 shares to be issued upon the
exercise of warrants held by Mr. Fritz or his spouse, and 1,750,000 shares
to be issued upon the exercise of options held by Mr. Fritz or his spouse.
Mr. Fritz may be deemed to be a parent and promoter of NeoMedia, as those
terms are defined in the Securities Act.

(5) Charles T. Jensen is President, Chief Operating Officer, Acting Chief
Executive Officer, and a member of the Board of Directors. Beneficial
ownership includes 12,000,000 shares of common stock issuable upon
exercise of options granted under NeoMedia's stock option plans, and 1,500
shares owned by Mr. Jensen's sons.

(6) David A. Dodge is Vice President, Chief Financial Officer, and Controller.
Beneficial ownership includes 3,200,000 shares of common stock issuable
upon exercise of options granted under NeoMedia's stock option plans.

(7) A. Hayes Barclay is a member of the Board of Directors. Ownership includes
1,400,000 shares of common stock issuable upon exercise of options granted
under NeoMedia's stock option plans, and 5,000 shares owned by Mr. Barclay
directly.

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

(9) Includes an aggregate of 36,850,000 currently exercisable options to
purchase shares of common stock granted under NeoMedia's stock option
plans, 4,050,000 currently exercisable warrants to purchase shares of
common stock, and 65,606,637 shares owned directly by NeoMedia's officers
and directors.

III-8

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

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

During April 2003, the Company sold 25,000,000 shares of its common stock,
par value $0.01, in a private placement at a price of $0.01 per share. The
Company's stock price at the time of the sale was $0.012. In connection with the
sale, the Company also granted the purchaser 25,000,000 warrants to purchase
shares of the Company's common stock at an exercise price of $0.01 per share.
The warrants had a fair value of $298,000 and have been recorded as a cost of
issuance. The purchaser was William E. Fritz, a member of the Company's Board of
Directors. Proceeds to the Company from sale of the shares were $250,000. The
Company recognized a discount expense in general and administrative expenses of
approximately $50,000 relating to this transaction with Mr. Fritz. On August 6,
2003, Mr. Fritz exercised his warrants and purchased 25,000,000 additional
shares of common stock at a price of $0.01 per share.

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

III-9

relative fair value of the warrants as a discount against the note, and
amortized the discount over the life of the note.

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

III-10

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

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

Exhibit No. Description Location

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

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

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

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

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

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

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

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

III-11

Exhibit No. Description Location

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

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

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

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

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

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

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

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

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

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

III-12

Exhibit No. Description Location

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

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

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

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

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

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

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

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

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

III-13

Exhibit No. Description Location

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

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

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

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

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

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

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

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

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

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

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

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

III-14

Exhibit No. Description Location

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

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

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

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

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

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

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

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

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

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

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

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

III-15

Exhibit No. Description Location

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

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

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

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

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

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

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

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

10.46 $4 million Promissory note payable to Cornell Incorporated by reference to Exhibit
Capital Partners, dated January 15, 2004 10.49 to the Registrant's Form 10-KSB as
filed on March 9, 2004
10.47 Form of Business Development Agreement Incorporated by reference to Exhibit 2.2
between NeoMedia and iPoint-media to the Registrant's Form 8-K as filed on
September 17, 2004
10.48 Form of Investment Agreement between NeoMedia Incorporated by reference to Exhibit 2.3
and iPoint-media to the Registrant's Form 8-K as filed on
September 17, 2004
10.49 Form of Registration Rights Agreement between Incorporated by reference to Exhibit 2.4
NeoMedia and iPoint-media to the Registrant's Form 8-K as filed on
September 17, 2004
10.50 Form of Indemnification Agreement between Incorporated by reference to Exhibit 2.5
NeoMedia and iPoint-media to the Registrant's Form 8-K as filed on
September 17, 2004

III-16

Exhibit No. Description Location

10.51 Form of Merger Agreement among NeoMedia Incorporated by reference to Exhibit 16.1
Technologies, Inc., NeoMedia Telecom Services, to the Registrant's Form 8-K as filed on
Inc., and BSD Software, Inc. December 22, 2004
10.52 Form of Letters of Intent With Pickups Plus, Incorporated by reference to Exhibits
Inc. 16.1 and 16.2 to the Registrant's Form
8-K as filed on March 1, 2005
10.53 Form of NeoMedia's Policy Statement on Ethical Provided Herewith
Behavior
10.54 Form of Term Sheet with Nextcode Corporation Provided Herewith

10.55 Form of Letter of Intent With Shelron Group, Provided Herewith
Inc.

23.1 Consent of Stonefield Josephson, Inc., Provided Herewith
independent auditors

31.1 - 31.4 Certifications Provided Herewith

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

(b) Reports on Form 8-K

NeoMedia filed a Form 8-K on December 22, 2004, disclosing that it had
entered into an agreement to acquire and merge with BSD Software, Inc.

NeoMedia filed a Form 8-K on March 1, 2005, disclosing that it had entered
into 2 letters of intent to acquire up to 100% interest in Automotive
Preservation, Inc. NeoMedia also invested $250,000 in common stock of
Pickups, Plus, Inc., the parent company of Automotive Preservation, Inc.

III-17

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

The aggregate fees billed by Stonefield Josephson, Inc., NeoMedia's
independent auditors, for the audit of NeoMedia's annual consolidated financial
statements and reviews of quarterly financial statements for the years ended
December 31, 2004 and 2003 were $137,000 and $119,000, respectively.

Audit-related Fees

The aggregate fees billed by Stonefield Josephson, Inc., NeoMedia's
independent auditors, for assurance and related services for the years ended
December 31, 2004 and 2003 were $0 and $0, respectively.

Tax Fees

The aggregate fees billed by Wiltshire, Whitley, Richardson & English,
NeoMedia's principal accountants for tax compliance, advice, and planning, were
$9,000 for each of the years ended December 31, 2004 and 2003.

All Other Fees

The aggregate fees billed by Stonefield Josephson, Inc., for other
products and services during the years ended December 31, 2004 and 2003 were $0
and $0, respectively.

Audit Committee Pre-approval

The audit committee of NeoMedia's board of directors approves all
non-audit services provided by NeoMedia's primary accountants.

III-18

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized in the City of Fort Myers, State of
Florida, on the 13th day of May, 2005.

NEOMEDIA TECHNOLOGIES, INC.
Registrant

By:
----------------------------------
/s/ Charles T. Jensen, President,
Chief Executive Officer, and
Director

In accordance with the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 4, 2005.

Signatures Title Date
---------- ----- ----

President, Chief Executive Officer, and
------------------------ Director May 13, 2005
/s/ Charles T. Jensen

------------------------ Director May 13,, 2005
/s/ William E. Fritz

Chairman of the Board
/s/ Charles W. Fritz May 13,, 2005
------------------------
Vice-President and Chief Financial
------------------------ Officer May 13,, 2005
/s/ David A. Dodge

------------------------ Director May 13,, 2005
/s/ Hayes Barclay

------------------------ Director May 13,, 2005
/s/ James J. Keil