Edgar Filing: NEOMEDIA TECHNOLOGIES INC

U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

FORM 10 - Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2001

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

Commission File Number 0-21743

NEOMEDIA TECHNOLOGIES, INC.
(Exact Name of Small Business Issuer as Specified In Its Charter)

Delaware 36-3680347
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

2201 Second Street, Suite 600, Fort Myers, Florida 33901
(Address of Principal Executive Offices) (Zip Code)

Issuer's Telephone Number (Including Area Code) 941-337-3434

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
--- ---

As of October 31, 2001, there were 15,804,917 outstanding shares of the
issuer's Common Stock.

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NeoMedia Technologies, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

September 30, December 31,

2001 2000
-------- --------
ASSETS (Unaudited) (Audited)
Current assets:
Cash and cash equivalents................................................................. $ 290 $ 4,453
Restricted cash........................................................................... --- 750
Trade accounts receivable, net of allowance for doubtful
account of $61 in 2001 and $484 in 2000.................................................... 575 4,370
Digital:Convergence receivable............................................................ --- 5,144
Costs and estimated earnings in excess of billings on
uncompleted contracts...................................................................... 19 89
Inventories............................................................................... 247 116
Assets held for sale...................................................................... 1,404 ---
Prepaid expenses and other current assets................................................. 660 946
-------- --------
Total current assets.................................................................... 3,195 15,868

Property and equipment, net................................................................ 269 365
Digital:Convergence receivable, net of current portion..................................... --- 10,288
Prepaid - Digital:Convergence.............................................................. --- 4,116
Intangible assets, net..................................................................... 4,863 9,043
Other long-term assets..................................................................... 918 914
-------- --------
Total assets............................................................................ $ 9,245 $ 40,594
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................................... $ 2,922 $ 2,301
Accrued expenses.......................................................................... 1,863 2,691
Current portion of long-term debt......................................................... 145 137
Notes payable............................................................................. 670 ---
Sales taxes payable....................................................................... 20 261
Billings in excess of costs and estimated earnings on
uncompleted contracts...................................................................... 24 49
Deferred revenues - Digital:Convergence................................................... --- 1,543
Deferred revenues......................................................................... 648 449
Liabilities of Qode transferred in disposition........................................... 1,194 ---
Other..................................................................................... --- 11
-------- --------
Total current liabilities............................................................... 7,486 7,442

Long-term debt, net of current portion..................................................... 428 539
Long-term deferred revenues - Digital:Convergence.......................................... --- 13,503
-------- --------
Total liabilities....................................................................... 7,914 21,484
-------- --------

Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, 452,489 issued and outstanding................................................. 5 ---
Additional paid-in capital, preferred stock............................................... 878 ---
Common stock, $.01 par value, 50,000,000 shares
authorized, 17,446,343 shares issued and 15,804,917 outstanding
in 2001 and 14,460,384 shares issued and outstanding in 2000............................... 158 145
Additional paid-in capital................................................................ 62,720 57,619
Accumulated deficit....................................................................... (61,651) (37,875)
Treasury stock, at cost, 201,230 shares of common stock................................... (779) (779)
-------- --------
Total shareholders' equity.............................................................. 1,331 19,110
-------- --------
Total liabilities and shareholders' equity............................................. $ 9,245 $ 40,594
======== ========

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

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

Nine months Ended September 30,
-------------------------------
2001 2000
---------- ----------

NET SALES:
License fees.............................................................. $ 464 $ 398
Resale of software and technology equipment and service fees.............. 3,199 17,113
---------- ----------
Total net sales....................................................... 3,663 17,511
---------- ----------

COST OF SALES:
License fees.............................................................. 1,262 205
Resale of software and technology equipment and service fees.............. 2,696 15,310
---------- ----------
Total cost of sales................................................... 3,958 15,515
---------- ----------
GROSS PROFIT(LOSS)......................................................... (295) 1,996

Sales and marketing expenses............................................... 2,041 4,491
General and administrative expenses........................................ 3,389 3,866
Research and development costs............................................. 220 935
Write-off of Digital:Convergence license contract.......................... 7,354 ---
---------- ----------
Loss from operations....................................................... (13,299) (7,296)
Interest expense (income), net............................................. (30) (148)
---------- ----------
Loss from continuing operations............................................ (13,269) (7,148)
Discontinued operations (Note 1):
Loss from operations of discontinued business units...................... (4,361) (928)
Loss on disposal of discontinued business units, including provision of
$503 for operating losses during phase-out period....................... (6,147) ---
---------- ----------

NET LOSS................................................................... $ (23,777) $ (8,076)
========== ==========

NET LOSS PER SHARE FROM CONTINUING OPERATIONS-
BASIC AND DILUTED................................................... $ (0.88) $ (0.52)
========== ==========

NET LOSS PER SHARE--BASIC AND DILUTED...................................... $ (1.57) $ (0.59)
========== ==========

Weighted average number of common shares--basic and diluted................ 15,142,312 13,802,381
========== ==========

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

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

Three months Ended September 30,
--------------------------------
2001 2000
---------- ----------

NET SALES:
License fees.............................................................. $ 92 $ 77
Resale of software and technology equipment and service fees.............. 806 3,911
---------- ----------
Total net sales....................................................... 898 3,988
---------- ----------

COST OF SALES:
License fees.............................................................. 416 ---
Resale of software and technology equipment and service fees.............. 730 3,682
---------- ----------
Total cost of sales................................................... 1,146 3,682
---------- ----------
GROSS PROFIT (LOSS)........................................................ (248) 306

Sales and marketing expenses............................................... 715 1,548
General and administrative expenses........................................ 821 1,717
Research and development costs............................................. 79 273
Write-off of Digital:Convergence license contract.......................... --- ---
---------- ----------
Loss from operations....................................................... (1,863) (3,232)
Interest expense (income), net............................................. 22 (65)
---------- ----------
Loss from continuing operations............................................ (1,885) (3,167)
Discontinued operations (Note 1):
Loss from operations of discontinued business units...................... (1,278) (388)
Loss on disposal of discontinued business units, including provision of
$503 for operating losses during phase-out period........................ (6,147) ---
---------- ----------

NET LOSS................................................................... $ (9,310) $ (3,555)
========== ==========

NET LOSS PER SHARE FROM CONTINUING OPERATIONS-
BASIC AND DILUTED.................................................. $ (0.12) $ (0.22)
========== ==========

NET LOSS PER SHARE--BASIC AND DILUTED...................................... $ (0.60) $ (0.25)
========== ==========

Weighted average number of common shares--basic and diluted................ 15,570,693 14,412,405
========== ==========

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

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

Nine Months Ended September 30,
--------------------------------
2001 2000
-------- -------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................................. $(23,777) $(8,076)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization....................................................... 2,932 2,157
Loss on disposal of property and equipment.......................................... --- 8
Loss on disposal of discontinued business units..................................... 5,644 ---
Effect of Digital:Convergence write-off............................................. 7,354 ---
Preferred Stock issued to pay advertising expense................................... 882 ---
Expense associated with warrant repricing........................................... 845 ---
Stock options and warrants granted for services..................................... 94 ---
Trade accounts receivable......................................................... 1,299 (83)
Prepaid - Digital:Convergence..................................................... 118 ---
Costs and estimated earnings in excess of billings on
uncompleted contracts.......................................................... 70 ---
Other current assets.............................................................. (237) 22
Other long-term assets............................................................ --- ---

Accounts payable and accrued expenses............................................. (235) (3,553)
Billings in excess of costs and estimated earnings on
uncompleted contracts.......................................................... (25) 4
Deferred revenue.................................................................. 199 (99)
Other current liabilities......................................................... (11) ---
-------- -------
Net cash used in operating activities.......................................... (4,848) (9,620)
-------- -------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of software development and purchased intangible assets............... (2,939) (1,739)
Long-term assets..................................................................... (3) (194)
Acquisition of property and equipment................................................ (81) (108)
-------- -------
Net cash used in investing activities.......................................... (3,023) (2,041)
-------- -------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock
net of $10 issuance costs in 2001 and $74 in 2000.................................. 1,637 9,137
Net proceeds from exercise of stock warrants......................................... 1,034 2,876
Net proceeds from exercise of stock options.......................................... 139 407
Treasury stock repurchased........................................................... --- (184)
Borrowings under notes payable and long-term debt.................................... 500 ---
Net proceeds from sale of certificate of deposit held for line of credit............. 750 ---
Repayments on notes payable and long-term debt....................................... (352) (576)
-------- -------
Net cash provided by financing activities...................................... 3,708 11,660
-------- -------

NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS................................................................ (4,163) (1)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR......................................... 4,453 3,404
-------- -------

CASH AND CASH EQUIVALENTS, SEPTEMBER 30, 2001........................................ $ 290 $ 3,403
======== =======

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid/ (received) during the nine months ended September 30 (net)........... (31) (30)
Non-cash activities:
Issuance costs for shares issued through private placements...................... 10 74
Net assets acquired as part of Qode purchase agreement in exchange for
common stock and forgiveness of note.......................................... 1,800 ---
Shares earned by Qode under purchase agreement.................................. 13 ---
Fixed assets purchased with shares of common stock................................ --- 3,520
Prepaid expenses paid with shares of common stock................................. --- 182
Accrued expenses paid with shares of common stock................................. --- 70
Accounts receivable converted to fixed assets..................................... --- 480
Accounts payable converted to note payable........................................ 170 ---

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

NeoMedia Technologies, Inc. and Subsidiaries
Unaudited Notes to Condensed Consolidated Financial Statements

1. Basis of Presentation and Nature of Business Operations

Basis of Presentation

The condensed consolidated financial statements include the financial statements
of NeoMedia Technologies, Inc. and its wholly-owned subsidiaries. The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete consolidated financial statements. These condensed
consolidated financial statements and related notes should be read in
conjunction with the Company's Form 10-KSB for the fiscal year ended December
31, 2000. In the opinion of management, these condensed consolidated financial
statements reflect all adjustments which are of a normal recurring nature and
which are necessary to present fairly the consolidated financial position of
NeoMedia as of September 30, 2001, and the results of operations for the three
months and nine months ended September 30, 2001 and 2000, and cash flows for the
nine months ended September 30, 2001 and 2000. The results of operations for the
three months and nine months ended September 30, 2001 are not necessarily
indicative of the results which may be expected for the entire fiscal year. All
significant intercompany accounts and transactions have been eliminated in
preparation of the condensed consolidated financial statements.

Nature of Business Operations

The Company is structured and evaluated by its Board of Directors and Management
as two distinct business units: Application Service Provider (ASP) and System
Integration Services (SI).

Application Service Provider (ASP)

Application services (physical world-to-Internet offerings) is the
Company's core business and is based in the US, with development and
operating facilities in Fort Myers, Florida. ASP develops and supports all
of the Company's core technology as well as its suite of application
services including its linking "switch" and its versatile applications
including PaperClick(TM). ASP also provides the contract systems
integration resources needed to design and build custom solutions
predicated on the Company's infrastructure technology.

System Integration Services (SI)

System integration is the original business line upon which the Company was
organized. SI resells client-server equipment and related software. The
unit also provides general and specialized consulting services targeted at
software driven print applications, and especially at process automation of
production print facilities through the efforts of its Integrated Document
Factory (IDF) consulting team. SI also identifies prospects for custom
applications based on the NeoMedia's ASP products and services. The
operations are based in Lisle, Illinois.

Reclassifications

Certain amounts in the 2000 condensed consolidated financial statements have
been reclassified to conform to the 2001 presentation.

Recent Accounting Pronouncements

On July 21, 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141 (SFAS No. 141), "Business Combinations",
and No. 142 (SFAS No. 142), "Goodwill and Other Intangible Assets." SFAS No. 141
addresses financial accounting and reporting for goodwill and other intangible
assets acquired in a business combination at acquisition. SFAS No. 141 requires
the purchase method of accounting to be used for all business combinations
initiated after June 30, 2001 and establishes specific criteria for the
recognition of intangible assets separately from goodwill; SFAS No. 142
addresses financial accounting and reporting for goodwill and other intangible
assets subsequent to their acquisition.

SFAS No. 142 provides that goodwill and intangible assets which have indefinite
useful lives will not be amortized but rather will be tested at least annually
for impairment. It also provides that intangible assets that have finite useful
lives will continue to be amortized over their useful lives, but those lives
will no longer be limited to forty years. SFAS No. 141 is effective for all
business combinations after June 30, 2001. The provisions of SFAS No. 142 are
effective beginning January 1, 2002. The Company is considering the provisions
of SFAS No. 141 and No. 142 and at present has not determined the impact of
adopting SFAS No. 141 and SFAS No. 142.

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

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

Purchase of Qode.com, Inc.

On March 1, 2001, NeoMedia purchased all of the net assets of Qode.com,
Inc. (Qode), except for cash. Qode is a development stage company, as defined in
Statement of Financial Accounting Standards (SFAS) No. 7, "Accounting and
Reporting By Development Stage Enterprises". In consideration for these assets,
NeoMedia issued 274,699 shares of common stock, valued at $1,359,760.
Additionally, the Company placed in escrow 1,676,500 shares of its common stock
valued at $8,298,675. Stock issued was valued at $4.95 per share, which is the
average closing price for the few days before and after the measurement date of
March 1, 2001. The 1,676,500 shares paid to Qode are to be held in escrow for a
period of one year, and are subject to downward adjustment, based upon the
achievement of certain performance targets over the period of March 1, 2001 to
February 28, 2002.

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

The purchase price was calculated and allocated as follows:

Shares issued 274,699
Value per share $4.95
-------------------
Total purchase price $1,359,760
-------------------
Purchase price allocated as follows:
------------------------------------
Assets purchased
----------------
Trade receivables $ 4,526
Inventory 144,393
Prepaid expenses 49,362
Furniture & fixtures 909,180
Capitalized development costs 2,123,185
Capitalized software 83,357
Refundable deposits - non-current 37,796

Liabilities assumed
-------------------
Accounts payable (981,033)
Forgiveness of note receivable (440,000)
Interest receivable (10,340)
Current portion of long-term debt (117,465)
Note payable (24,218)
Capitalized lease obligation (418,983)
-------------------

Total purchase price allocated $1,359,760
===================

Contingent consideration

In accordance with the purchase of the assets of Qode.com, Inc., NeoMedia has
placed 1,676,500 shares of its common stock in escrow for a period of one year,
subject to downward adjustment, based upon the achievement of certain
performance targets over the period of March 1, 2001 to February 28, 2002. The
criteria used to determine the number of shares released from escrow is a
weighted combination of revenue, page views, and fully allocated earnings before
taxes relating to the Qode Universal Commerce Solution.

At the end of each of certain interim periods as outlined in the purchase
agreement, the number of cumulative shares earned by Qode.com is calculated
based on revenue and page views and the shares are released. The resulting
financial impact on NeoMedia is a proportionate increase in the long-term assets
acquired from Qode, with a corresponding increase in depreciation expense from
that point forward. The amount of the increase in long-term assets is dependent
upon the number of shares released from escrow, as well as the value of NeoMedia
stock at the time of measurement. The first such measurement date is July 1,
2001. At the end of the 12-month measurement period (February 28, 2002), the
final number of shares earned is calculated based on all three criteria and any
unissued shares are released. At that time, the Company will record the final
purchase price allocation of assets purchased from Qode.com.

Intangible assets

Intangible assets acquired from Qode.com include:

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

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

Proforma information

Proforma results of operations as though the companies had combined at the
beginning of the period is as follows:

NINE MONTHS ENDED
-----------------
September 30, 2001 September 30, 2000
------------------ ------------------
Revenue $ 3,749 $ 13,833
Net Loss (25,226) (10,785)
EPS - basic and diluted $ (1.65) $ (0.78)

Write-off of Digital:Convergence Contract

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

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

In the first quarter of 2001, DC issued the Company an interest bearing $3
million note payable in lieu of a $3 million cash payment due in January 2001.
The Company also received $2 million of DC stock in January as part of the $5
million payment due. The note was originally due on April 24, 2001, however, on
that date the Company agreed to extend it until June 24, 2001. As a result of
this extended payment, royalty revenue was not recognized in the first quarter
2001. The Company also partially wrote down, in the first quarter of 2001, the
value of the DC stock receivable, and DC stock that had already been received,
to a value that management believed was reasonable at the time. The write-down
consisted of a reduction in assets of $7.7 million and a corresponding reduction
in liabilities of $7.7 million. The DC stock was valued at $1 million and the DC
receivable was valued at $9.2 million. In April 2001, the Company received an
additional $5 million in DC stock based on the valuation formula stipulated in
the contract. This stock was valued at $2.5 million upon receipt.

Also in April, an agreement was entered into with DC whereby for a period from
the date of registration of the shares underlying the warrant to purchase 1.4
million shares of the Company's common stock until October 24, 2001, if the
Company would identify a purchaser for the Company's shares, DC would exercise
the warrant and purchase 1.4 million shares of common stock and sell the shares
to the identified purchaser. One third of the net proceeds received by DC on
the sale of the Company's common stock shall be paid to the Company toward

repayment of DC's obligations under the note to the Company in the amount of $3
million. In consideration for this, the warrant exercise price was reduced
during this period to 38 percent of the closing sale price of the Company's
common stock on the day prior to the date of exercise, subject to a minimum
price. Because the exercise of the warrants at this reduced price is contingent
upon the Company finding a purchaser of the underlying 1.4 million shares, the
value of this re-pricing will be measured and recorded at the time the shares
are sold. As of October 24, the Company was not able to locate a purchaser and
therefore, the warrant was not exercised.

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

December 31, March 31, Write-off
2000 Balances 2001 Balances June 30, 2001
------------- ------------- -------------
(Dollars in thousands)

ASSETS
Investment in Digital:Convergence............................................. $ 2,500 $ 2,500 $ 2,500
Digital: Convergence receivable............................................... 5,144 5,144 5,144
Digital: Convergence receivable, net of current portion....................... 10,288 2,572 2,572
Prepaid expenses (current portion)............................................ 470 470 470
Prepaid DC (long-term portion)................................................ 4,116 3,998 3,998
------- ------- -------
Total assets............................................................... $22,518 $14,684 $14,684
======= ======= =======
LIABILITIES
Deferred revenues DC.......................................................... $ 1,543 $ 772 $ 772
Long term deferred revenues - DC.............................................. 13,503 6,558 6,558
------- ------- -------
Total liabilities.......................................................... $15,046 $ 7,330 $ 7,330
======= ======= =======

The net effect of the write-off is a $7,354,000 non-cash charge to income during
the second quarter, which is included in Write off of Digital:Convergence
contract in the consolidated statements of operations for the nine month period
ending September 30, 2001. Any future revenues related to this contract will be
recorded as payments are received.

Disposal of Business Units

Qode Business Unit. On August 31, 2001, the Company signed a non-binding letter
of intent to sell the assets and liabilities of its Ft. Lauderdale-based Qode
business unit, which it acquired in March 2001, to The Finx Group, Inc., a
holding company based in Elmsford, NY. The final contract is contingent upon
the completion of due diligence and definitive terms and conditions stated in
the letter of intent. The Company intends to sell the assets and liabilities of
Qode, which consist of all inventory, equipment and the ownership and operation
of the comprehensive universal internet database along with the corresponding
patents. The Finx Group will assume $620,000 in Qode payables and $800,000 in
long-term leases in exchange for 500,000 shares of the Finx Group, right to use
and sell Qode services, and up to $5 million in affiliate revenues over the next
five years. During the three-month period ended September 30, 2001, the
company recorded a $2.8 million expense from the write-down of the Qode
assets/liabilities to the following net realizable value:

September 30, 2001
(Balances in Thousands)
Inventory $ 144
Equipment 268
Intangible Assets 992
------
Assets 1,404
------

Accounts Payable $ 884
Note Payable 15
Capital Lease 295
------
Liabilities 1,194
------

Net Realizable Value $ 210
======

The loss for discontinued operations during the phase-out period from August 31,
2001 (measurement date) to September 30, 2001 was $424,000.

Multi-Level Marketing(MLM)/Affinity Product Line. In connection with the
Company's reduction in work force during the third quarter 2001, the Company
discontinued implementation of its business plan for its MLM/Affinity product
line. As a result of this decision, on October 16, 2001, the Company sold the
rights to its Pacer Advantage end-user software product for $40,000 cash.
Additionally, the Company wrote-off all assets relating to the purchase of
Daystar Services, LLC and a customer list purchased in 1998 for a total of $2.9
million. All of the above assets were employed to execute the MLM/Affinity
market plan. Accordingly, as of September 30, 2001, the remaining carrying
value of assets relating to this product line was $40,000.

The loss for discontinued operations during the phase-out period from August 31,
2001 (measurement date) to September 30, 2001 was $79,000.

Other Events

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

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

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

In June 2001, the Board of Directors approved the issuance of 414,000 warrants
for Charles W. Fritz, NeoMedia's Chairman, CEO, and president at a exercise
price of $2.09, a $0.23 discount to market value. The Company recognized an
expense of approximately $99,000 related to this transaction in the second
quarter, which is included in general and administrative expense in the
accompanying consolidated statements of operations.

In June 2001, the Board of Directors approved the issuance of 404,900 warrants
to an outside consultant at an exercise price of $2.09. The Company recognized
an expense of approximately $550,000 related to this

transaction in the second quarter, which is included in general and
administrative expense in the accompanying consolidated statements of
operations. The Company used the Black-Scholes option-pricing model to value the
shares, with the following assumptions: (i) no expected dividends (ii) a risk-
free interest rate of 6.35% (iii) expected volatility of 80% and (iv) an
expected life of 3 years.

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

In June of 2001, the Company announced that it entered into a one-year license
agreement with About.com to provide the Qode Commerce SolutionTM to About.com's
estimated 36 million worldwide users. NeoMedia and About.com were to promote the
co-branded shopping service throughout the About.com network. In addition,
About.com ran banner ads during June to promote the Qode Commerce SolutionTM,
for which they received 452,489 shares of NeoMedia preferred stock. NeoMedia
recorded an expense of $882,000 associated with this transaction in the second
quarter in sales and marketing expense in the accompanying consolidated
statements of operations. On August 12, 2001, the Company cancelled the
contract with About.Com on the grounds that the projected user traffic and
purchases with resulting revenues did not materialize.

The Preferred Stock issued to About.com is a new series, Series B Convertible
Preferred Stock (the "Preferred Stock"), which consists of 500,000 authorized
shares, par value $0.01 per share, of which the preferences and relative and
other rights, and the qualifications, limitations or restrictions thereof; are
the same as common stock except as follows: The holders of preferred stock have
the right to convert, at the holder's option, once the underlying common stock
has been registered, Preferred Stock into common shares at a one-to-one ratio.
The Preferred Stock converts automatically on January 2, 2002. The Preferred
Stock has liquidation rights upon liquidation or dissolution of the Company.

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

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

On September 6, 2001, AirClic filed suit against the Company in the Court of
Common Pleas, Montgomery County, PA, for breach of contract relating to the July
3, 2001 non-binding letter of intent signed by the Company and AirClic. AirClic
claims that the Company violated express representations and warranties relating
to the Company's assets and state of business affairs. AirClic seeks a judgment
to accelerate repayment of the $500,000 note due January 11, 2002, and to
relieve AirClic from any obligation to make further loans to the Company as
outlined in the letter of intent.

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

On August 20, 2001, Ripfire, Inc. filed suit against the Company in the San
Francisco County Superior Court seeking payment of $135,000 under a software
license agreement entered into between the Company and Ripfire in May 2001.

On September 7, 2001, the Company announced that it had signed a letter of
intent to sell the assets of its Fort Lauderdale-based Qode business unit, which
it acquired in March of this year, to The Finx Group, Inc., a holding company in
Elmsford, NY. The agreement calls for The Finx Group to assume approximately
$620,000 of Qode's payables and $800,000 in long-term leases. The Company is to
receive 500,000 shares of

The Finx Group common stock, a five-year license to use and sell Qode Services,
and up to $5 million in affiliate revenues from The Finx Group from Qode sales
over the next five years.

During September 2001, the Board of Directors approved the issuance of 200,000
options to Charles W. Fritz, NeoMedia's Chairman and CEO at an exercise price of
$0.20 per share and 150,000 options to Charles T. Jensen, Vice President,
Treasurer, and CFO at an exercise price of $0.20 per share. No expense was
recognized relating to these transactions.

During September 2001, the Board of Directors approved the issuance of 150,000
options to an outside consultant at an exercise price of $0.20 per share for the
services rendered. The company recognized approximately $19,000 related to this
transaction as general and administrative expense in the third quarter of 2001.

NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

2. Liquidity and Capital Resources

The accompanying unaudited consolidated financial statements have been prepared
assuming the Company will continue as a going concern. Accordingly, the
consolidated financial statements do not include any adjustments that might
result from the Company's inability to continue as a going concern. Based on
current operating budgets, the Company believes that its available capital
resources, together with anticipated revenues from operations, will be
sufficient to satisfy its capital requirements through at least December 31,
2001. The Company's belief is based on its operating plan, which in turn is
based on assumptions that may prove to be incorrect. As a result, the Company's
financial resources may not be sufficient to satisfy its capital requirements
for this period. If the Company's financial resources are insufficient and, in
any case, after December 31, 2001, the Company may require additional financing
in order to meet its plans for expansion or may be forced to seek protection
from its creditors under the United States Bankruptcy Code or analogous state
statutes unless it is able to engage in a merger or other corporate finance
transaction with a better capitalized entity. The Company cannot predict
whether additional financing will be available, its form, whether equity or
debt, or be in another form, or if the Company will be successful in identifying
entities with which it may consummate a merger or other corporate finance
transactions.

3. Subsequent Events

On October 3, 2001, Headway Associates, LTD. filed a complaint for damages in
the Circuit Court of the Seventeenth Judicial Circuit for Broward County,
Florida. Headway Associates, Ltd. is seeking payment of all amounts due under
the terms of the lease agreement of the Ft. Lauderdale office of NeoMedia's Qode
business unit, of not less than $445,000 plus attorney fees. The lease commenced
on March 3, 2000 and terminates on March 31, 2005. The Company expects to
sub-lease the property within the next six months and has accrued a $57,000
liability in the accompanying financial statements.

On October 24, 2001, the Company filed a proxy statement with the SEC to request
a shareholder vote that would increase the number of the Company's authorized
shares of common stock from 50,000,000 shares to 100,000,000 and increase the
number of the Company's authorized shares of preferred stock from 10,000,000
shares to 25,000,000. The proxy also requests approval to sell 19,000,000
shares of common stock to accredited investors in exchange for limited recourse
promissory notes.

On October 30, 2001, AirClic, Inc. filed a civil action in the United States
District Court for the Eastern District of Pennsylvania, requesting a
declaratory judgment that three of the Company's patents are invalid and/or
unenforceable. The action alleges that NeoMedia failed to disclose material
prior art to the US Patent and Trade Office in connections with the prosecution
of certain of its patents. The action further alleges that claims of certain of
NeoMedia's patents fail to satisfy the requirements for patentability.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Overview

During the third quarter of 2001, the Company has restructured its resources to
re-focus on core services and products. The Company has also implemented
intensive cost reduction policies. For the three months ended September 30,
2001, a substantial part of NeoMedia's revenue was derived from its Systems
Integration business unit which includes resales of software and technology
equipment. NeoMedia couples its proprietary software products with independent
vendor products it resells, enabling it to provide a complete "turn-key" service
for its customers. Currently, NeoMedia's revenue consists of (i) software
license fees, (ii) resales of software and technology equipment from independent
vendors and (iii) service fees, including consulting and post contract software
support.

The Company has also focused on its technologies in the Application Service
Provider business unit, which consists of the patented PaperClickTM technology
that enables users to link directly from the physical to the digital world.
NeoMedia's mission is to invent, develop, and commercialize technologies and
products that effectively leverage the integration of the physical and
electronic worlds to provide clear functional value for the Company's end-users,
competitive advantage for its business partners and return-on-investment for its
investors.

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

Results of Operations for the Nine Months Ended September 30, 2001 as Compared
to the Nine Months Ended September 30, 2000

Net sales. Total net sales for the nine months ended September 30, 2001
were $3.7 million, which represented a $13.8 million, or 79%, decrease from
$17.5 million for the nine months ended September 30, 2000. This decrease
primarily resulted from reduced resales of Sun Microsystems equipment due to
increased competition and general economic conditions.

License fees. License fees for the nine months ended September 30, 2001
were $0.5 million compared to $0.4 million for the nine months ended September
30, 2000. The company will continue their efforts to expand the sales of this
technology in the future.

Resales of software and technology equipment and service fees. Resales of
software and technology equipment and service fees decreased by $13.9 million,
or 81%, to $3.2 million for the nine months ended September 30, 2001, as
compared to $17.1 million for the nine months ended September 30, 2000. This
decrease primarily resulted from fewer sales of Sun Microsystems hardware due to
increased competition and general economic conditions.

Cost of Sales. Cost of sales as a percentage of related sales was 108% in
2001 and 89% in 2000. This increase is substantially due to the decreased sales
revenue while the corresponding amortization of product-related software
development costs remained constant.

Sales and marketing. A portion of the compensation to the sales and
marketing staff constitutes salary and is fixed in nature and the remainder of
this compensation, which is paid as a commission, is directly related to sales
volume. Sales and marketing expenses were $2.0 million for the nine months ended
September 30, 2001, compared to $4.5 million for the nine months ended September
30, 2000, a decrease of $2.5 million or 56%. This decrease primarily resulted
from fewer marketing personnel coupled with a decrease in sales commissions from
reduced sales.

General and administrative. General and administrative expenses decreased
by $0.5 million, or 13%, to $3.4 million for the nine months ended September 30,
2001, compared to $3.9 million for the nine months ended September 30, 2000. The
decrease is primarily related to a reduction in personnel as a result of the
Company's cost reduction initiative.

Research and development. During the nine months ended September 30, 2001,
NeoMedia charged to expense $0.2 million of research and development costs, a
decrease of $0.7 million or 78% compared to $0.9 million charged to expense for
the nine months ended September 30, 2000. This decrease is predominately
associated with decreased personnel devoted to NeoMedia's development combined
with increased capitalization of software development costs associated with
NeoMedia's "switching" platform.

Interest expense (income), net. Interest expense/(income) consists
primarily of interest paid to creditors as part of financed purchases, notes
payable and NeoMedia's asset-based collateralized line of credit net of interest
earned on cash equivalent investments. Interest (income) decreased by $118,000,
or 80%, to $(30,000) for the nine months ended September 30, 2001 from
$(148,000) for the nine months ended September 30, 2000, due to reduced cash
balances throughout the 2001year as compared to the 2000 cash balance.

Loss from continuing operations. During the nine months ended September
30, 2001, the Company's loss from continuing operations increased by $6.2
million or 87% from $7.1 million in 2000 to $13.3 million in 2001. This increase
is primarily due to the write-off of the Digital:Convergence license contract of
$7.4 in the second quarter of 2001.

Loss from discontinued operations. The Company discontinued operations of
its Qode and Multi-level Marketing/Affinity product lines in 2001. The increase
in loss from discontinued operations from $0.9 million in 2000 to $4.4 million
in 2001 is primarily due to the implementation of the Qode Universal Commerce
Solution during the first and second quarters of 2001. The implementation was
cancelled during the second quarter of 2001. (See Note 1)

Loss on disposal of discontinued operations. The Company sustained a loss
of $6.1 million in 2001 from the disposal of the Qode and Multi-level
Marketing/Affinity product lines in 2001. (See Note 1)

Net Loss. The net loss for the nine months ended September 30, 2001 was
$23.8 million, which represented a $15.7 million, or 195% increase from a $8.1
million loss for the nine months ended September 30, 2000. The increase in net
loss is due primarily to the write-off of the Digital:Convergence contract and
the discontinuation of the Company's Qode and Multi-level Marketing/Affinity
product lines, offset by lower expenses as a result of the Company's cost
reduction effort.

Results of Operations for the Three Months Ended September 30, 2001 as Compared
to the Three Months Ended September 30, 2000

Net sales. Total net sales for the three months ended September 30, 2001
were $0.9 million, which represented a $3.1 million, or 78%, decrease from $4.0
million for the three months ended September 30, 2000. This decrease primarily
resulted from reduced resales of Sun Microsystems equipment due to increased
competition and general economic conditions.

License fees. License fees were $0.1 million for the three months ended
September 30, 2001 and 2000. The Company will continue to increase sales efforts
of their internally developed license software in the future.

Resales of software and technology equipment and service fees. Resales of
software and technology equipment and service fees decreased by $3.1 million, or
79%, to $0.8 million for the three months ended September 30, 2001, as compared
to $3.9 million for the three months ended September 30, 2000. This decrease
primarily resulted from fewer sales of Sun Microsystems hardware due to
increased competition and general economic conditions.

Cost of Sales. Cost of sales as a percentage of related sales was 128% in
2001 and 92% in 2000. This increase is primarily due to the decreased sales
revenue while the corresponding amortization of product-related software
development costs remained constant.

Sales and marketing. A portion of the compensation to the sales and
marketing staff constitutes salary and is fixed in nature and the remainder of
this compensation, which is paid as a commission, is directly related to sales
volume. Sales and marketing expenses were $0.7 million for the three months
ended September 30, 2001, compared to $1.5 million for the three months ended
September 30, 2000, a decrease of $0.8 million or 53%. This decrease resulted
from a reduction in marketing personnel along with decreased commissions from
lower sales.

General and administrative. General and administrative expenses decreased
by $0.9 million, or 53%, to $0.8 million for the three months ended September
30, 2001, compared to $1.7 million for the three months ended September 30,
2000. The decrease is primarily related to a reduction in personnel as a result
of the Company's cost reduction initiative.

Research and development. During the three months ended September 30,
2001, NeoMedia charged to expense $0.1 of research and development costs, a
decrease of $0.2 or 67% compared to $0.3 charged to expense for the three months
ended September 30, 2000. This decrease is predominately associated with
decreased personnel devoted to NeoMedia's development combined with increased
capitalization of software development costs associated with NeoMedia's
"switching" platform.

Interest expense/(income), net. Interest expense/(income) consists
primarily of interest paid to creditors as part of financed purchases, notes
payable and NeoMedia's asset-based collateralized line of credit net of interest
earned on cash equivalent investments. Interest expense increased by $87,000 to
$22,000 for the three months ended September 30, 2001 from $(65,000) for the
three months ended September 30, 2000, due to reduced cash balances during the
third quarter of 2001.

Loss from continuing operations. During the three months ended September
30, 2001, the Company's loss from continuing operations decreased by $1.3
million or 41% from $3.2 million in 2000 to $1.9 million in 2001. This decrease
is due to a company-wide cost-reduction initiative implemented in the third
quarter of 2001.

Loss from discontinued operations. The Company discontinued operations of
its Qode and Multi-level Marketing/Affinity product lines in the third quarter
of 2001. The increased loss from $0.4 million in 2000 to $1.3 million in 2001 is
primarily due to the implementation of the Qode Universal Commerce Solution
during the first and second quarters of 2001. The implementation was cancelled
during the second quarter of 2001. (See Note 1)

Loss on disposal of discontinued operations. The Company sustained a loss
of $6.1 million during the three months ended September 2001 from the disposal
of the Qode and Multi-level Marketing/Affinity product lines in 2001. (See Note
1)

Net Loss. The net loss for the quarter ended September 30, 2001 was $9.3
million, which represented a $5.7 million, or 158% increase from a $3.6 million
loss for the three months ended September 30, 2000. The increase in net loss
resulted from the discontinuation of the Company's Qode and Multi-level
Marketing/Affinity product lines, offset by a lower expenses as a result of the
Company's cost reduction effort.

Financial Condition

As of September 30, 2001, the Company's cash balance was $0.3 million compared
to $4.5 million at December 31, 2000. This decrease primarily resulted from
decreased sales volume, along with increased expenditures associated with the
Qode Commerce Solution implementation.

Net cash used in operating activities for the nine months ended September 30,
2001 and 2000, was $4.8 million and $9.6 million, respectively. During 2001,
trade accounts receivable inclusive of costs and estimated earnings in excess of
billings on uncompleted contracts decreased $1.4 million, while accounts payable
inclusive of billings in excess of costs and estimated earnings on uncompleted
contracts, accrued expenses and deferred revenue decreased $0.1 million. During
2000, trade accounts receivable inclusive of costs and estimated earnings in
excess of billings on uncompleted contracts increased $0.1 million, while
accounts payable inclusive of billings in excess of costs and estimated earnings
on uncompleted contracts, accrued expenses and deferred revenue decreased $3.6
million. NeoMedia's net cash flow used in investing activities for the nine
months ended September 30, 2001 and 2000 was $3.0 million and $2.0 million,
respectively.

Net cash provided by financing activities for the nine months ended September
30, 2001 and 2000, was $3.7 million and $11.7 million, respectively. The
decrease was due to $12.4 million raised during the first quarter of 2000
through the issuance of common stock, as well as the exercise of warrants and
stock options.

The accompanying unaudited financial statements have been prepared assuming the
Company will continue as a going concern. Accordingly, the financial statements
do not include any adjustments that might result from the Company's inability to
continue as a going concern. Based on current operating budgets, the Company
believes that its available capital resources, together with anticipated
revenues from operations, will be sufficient to satisfy its capital requirements
through at least December 31, 2001. The Company's belief is based on its
operating plan, which in turn is based on assumptions that may prove to be
incorrect. As a result, the Company's financial resources may not be sufficient
to satisfy its capital requirements for this period. If the Company's financial
resources are insufficient and, in any case, after December 31, 2001, the
Company may require additional financing in order to meet its plans for
expansion or may be forced to seek protection from its creditors under the
United States Bankruptcy Code or analogous state statutes unless it is able to
engage in a merger or other corporate finance transaction with a better
capitalized entity. The Company cannot predict whether additional financing
will be available, its form, whether equity or debt, or be in another form, or
if the Company will be successful in identifying entities with which it may
consummate a merger or other corporate finance transactions.

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

PART II -- OTHER INFORMATION

Item 1. Legal Proceedings

In June 2001, the Company filed a $3 million lawsuit in the U.S. District Court,
Northern District of Texas, Dallas Division, against Digital:Convergence
Corporation for breach of contract regarding a $3 million promissory note due on
June 24, 2001 that was not paid. The Company is seeking payment of the $3
million note plus interest and attorney's fees.

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

On September 6, 2001, AirClic filed suit against the Company in the Court of
Common Pleas, Montgomery County, PA for breach of contract relating to the July
3, 2001 non-binding letter of intent signed by the Company and AirClic. AirClic
claims that the Company violated express representation and warranties relating
to the Company's assets and state of business affairs. AirClic seeks a judgment
to accelerate repayment of the $500,000 note due January 11, 2002, and to
relieve AirClic from any obligation to make further loans to the Company as
outlined in the letter of intent.

On October 3, 2001, Headway Associates, LTD. filed a complaint for damages in
the Circuit Court of the Seventeenth Judicial Circuit for Broward County,
Florida. Headway Associates, Ltd. is seeking payment of all amounts due under
the terms of the lease agreement of the Ft. Lauderdale office of NeoMedia's Qode
business unit, of not less than $445,000 plus attorney fees. The lease commenced
on March 3, 2000 and terminates on March 31, 2005. The Company expects to sub-
lease the property within the next six months, and has accrued a $57,000
liability in the accompanying financial statements.

Item 2. Changes in Securities and Use of Proceeds

In June of 2001, the Company entered into a one-year license agreement with
About.com to provide the Qode Commerce Solution to About.com's users. As
consideration for banner ads placed during June to promote the Qode Commerce
Solution(TM), About.com received 452,480 shares of NeoMedia Series B Preferred
Stock. Each share of Preferred Stock is convertible into one share of
NeoMedia's Common Stock. The issuance of the securities was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended, as a
sale not constituting a public offering.

In July 2001, holders of the Company's warrants exercised 11,300 warrants to
purchase shares of the Company's common stock at an exercise price of $2.00 per
share.

The issuances of the securities were exempt from registration under Section 4(2)
of the Securities Act of 1933, as amended, as a sale not constituting a public
offering.

Item 6. Exhibits and reports on Form 8-K

(a) Exhibits

(None)

(b) Reports on Form 8-K

On March 16, 2001, the Company filed a Form 8-K Current Report to disclose
that it had acquired substantially all of the assets of Qode.com, Inc., a
commerce-enabling company that delivers promotions to consumers over the
internet through its Qode Universal Commerce Solution(TM).

On October 29, 2001, the Company filed a Form 8-K current report to
disclose that, effective October 24, 2001, it dismissed Arthur Andersen LLP
as its independent accountants, and engaged Stonefield Josephson, Inc. as
its new independent accountants.

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

NEOMEDIA TECHNOLOGIES, INC.
---------------------------
Registrant

Date November 7, 2001 By: /s/ Charles W. Fritz
---------------- -------------------------------------
Charles W. Fritz, Chief Executive Officer
and Chairman of the Board

Date November 7, 2001 By: /s/ Charles T. Jensen
---------------- -------------------------------------
Charles T. Jensen, Vice President, Chief
Financial Officer, Treasurer and Director