Ipix Corp · 10-K · For 12/31/02

Filed On 3/31/03 4:11pm ET   ·   SEC File 0-26363   ·   Accession Number 1005794-3-101

Annual Report   ·   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                         94    355K 

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

 FORM 10-K

(Mark One)

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(D) OF THE  SECURITIES  EXCHANGE
ACT OF 1934                                                           

For the fiscal year ended December 31, 2002                                     

OR

[ ]  TRANSITION  REPORT  PURSUANT  TO SECTION  13 OR 15(D) OF THE  SECURITIES   
EXCHANGE ACT OF 1934                                                  

For the transition period from         to                                       

Commission file number                                       00-26363           

 INTERNET PICTURES CORPORATION

(Exact name of registrant as specified in its charter)

        DELAWARE                                  52-2213841

           State or other jurisdiction               (IRS Employer
                 incorporation or organization             Identification No.)

3160 Crow Canyon Road, San Ramon, California 94853
--------------------------------------------------
 (Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (925) 242-4002
 -----------------

 Securities registered pursuant to Section 12(b) of the Act: None.

 Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value
------------------------------
(Title of Class)

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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [  ]                                                                

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405  
of Regulation S-K is not contained herein, and will not be contained, to the    
best of registrant's knowledge, in definitive proxy or information statements   
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.                                                                      

[X]                                                                             

Indicate by check mark whether the registrant is an accelerated filer (as       
defined in Exchange Act Rule 12b-2)                                             

Yes [  ]  No                                                                    

The aggregate  market value of the voting and  non-voting  common equity held by
non-affiliates  of the registrant as of June 28, 2002 was $13,268,972  (based on
the last sale price of $2.00).                                                  

The number of shares outstanding of the registrant's common stock, $0.001 par   
value, as of March 3, 2003 was 6,812,955. On August 22, 2001 our stockholders   
approved a ten-for-one reverse stock split. All share and per share data is     
presented to give effect to the retroactive application of the reverse stock    
split.                                                                          

 DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Information Statement for the Annual Stockholders' 
Meeting to be held on or about May 6, 2003, to be filed with the Securities and 
Exchange Commission pursuant to Regulation 14C under the Securities Exchange Act
of 1934, as amended, are incorporated by reference into Part III of this report 
on Form 10-K. Such Information Statement, except for the portions thereof which 
are specifically incorporated herein by reference, shall not be deemed "filed"  
for purposes of this report on Form 10-K.                                       

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PART I
Item 1.  Business.                                                              

OVERVIEW                                                                        

Internet Pictures Corporation, or iPIX, is a technology provider and the leader 
in the delivery of mission-critical imaging. The Company's imaging platforms and
technologies provide its customers with increased revenues, improved customer   
satisfaction and enhanced security for the protection of life and property.     

The robust and reliable imaging infrastructure, Rimfire, manages nearly a       
billion image views and two million image submissions daily, facilitating       
millions of dollars in commerce each and every day.                             

iPIX combines its people, technology, processes and partnerships to deliver an  
extensive range of full and self-service imaging solutions worldwide. Our       
end-to-end solutions include the capture, processing, hosting and distribution  
of immersive, still and video images. We deliver the necessary imaging solutions
to facilitate commerce, communication and security so customers can outsource   
their imaging needs and focus on their core competencies.                       

iPIX's patented immersive imaging technology is used to provide an unparalleled 
view of the world to promote, inspect and protect. iPIX is the leading provider 
of virtual tour technology for real estate, travel and hospitality, and can even
be found on the White House Web site. Governments around the world are finding  
new ways to use iPIX for video security, situational awareness, planning and    
documentation.                                                                  

In early 2003, iPIX organized into three primary business units: Transaction    
Services, Immersive Still Solutions and Immersive Video Solutions. The          
Transaction Services unit focuses on the sale of iPIX solutions to customers who
rely on images to complete business transactions such as auctions, real estate  
and classifieds. The Immersive Still Solutions unit focuses on the sale of      
immersive still technology licenses for real estate, travel and hospitality and 
visual documentation markets. The Immersive Video Solutions unit provides       
observation and security products and services for commercial and governmental  
customers. We encourage you to also read our segment reporting disclosure in the
accompanying notes to the financial statements that are a part of this report.  

THE iPIX SOLUTION                                                               

iPIX Rimfire(R) Imaging Platform                                                

iPIX's open imaging platform, Rimfire, allows business and consumer sites to    
quickly and easily capture, manage and distribute media from site viewers to    
live Web pages. Rimfire is an end-to-end, fully automated imaging management    
solution that addresses the preparation, submission and management of digital   
media. With Rimfire, users can easily publish still photos and other digital    
media to the Web with simple drag-and-drop image submission. Through processes  
that are nearly instantaneous and invisible to the user, Rimfire automatically  
sizes the images to the target Web site's specifications. At the same time, on  
behalf of the target Web site, Rimfire can handle all of the data and image     
management, storage and serving requirements associated with that image. The    
iPIX open imaging platform solves the most common problems associated with      
user-supplied digital media by automating the tasks and simplifying the process 
for the user and the Web site.                                                  

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Digital Media Preparation                                     

         Rimfire leverages the ease-of-use of the Internet to allow end users to
       drag-and-drop media content to the Web without the need to prepare it
         with desktop software ahead of time. Challenging and complex tasks such
  as formatting, sizing and cropping, are easily and automatically
        accomplished through Rimfire's integrated and intuitive tools. Instant
previews of the media supplied prevent incorrect submissions. 

Digital Media Submission                                      

         Rimfire accepts a wide and growing variety of file formats and converts
  the files to customer specifications automatically, without user
        intervention. Rimfire's smart-sizing feature allows the user to supply
        files of any size without the worry of upload times for submission, or
      viewing times. Like file formats, Rimfire automatically prepares the
      media for transmission by optimizing its size to the requirements of
    the site. In addition, Rimfire supports the submission of multiple
files and associated data.                                    

Media Deployment                                              

Once media is received by Rimfire, it is processed to customer
       specifications. This includes database management, further processing
 such as creating multiple files of varying sizes or quality and
       distribution to the appropriate storage facility. Rimfire's "layered"
   architecture enables services such as the transformation of still
         images into interactive advertisements, slide shows, images watermarked
        with text or graphics or new capabilities created by iPIX or our third
      party developers. Rimfire technology was designed to be scalable and
   fault tolerant to handle high volumes of user submissions and our
        clients' rapid pace of growth. Built on industry standard hardware and
      software platforms, Rimfire allows for rapid expansion of rich media
acquisition, processing, transformation and delivery.         

Rimfire generates direct and indirect revenue opportunities for our customers'  
businesses by incorporating imaging into their e-commerce and community         
offerings. Rimfire's media processing capabilities include the mechanism to take
different media items supplied from users such as text, audio and images and    
transform them into one new rich media item. iPIX can then serve the media      
directly from iPIX servers or send the media to a remote database to be served  
directly from the customer's Web site.                                          

By offering an outsourced infrastructure solution, we offer our customers an    
alternative to building a costly infrastructure, enabling them to utilize scarce
technical resources in other mission critical capacities. Our solution          
eliminates expensive media processing tasks and decreases customers' support    
expenses. Further, our solution optimizes storage and bandwidth resources for   
our customers.                                                                  

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iPIX Immersive Imaging                                                          

iPIX patented technology creates spherical immersive images with a full         
360-degree by 360-degree field of view. The technology is used with film or     
video images captured with any camera equipped with a fisheye lens. iPIX        
software and hardware technology compensates for errors in camera placement and 
corrects the distortion inherent in fisheye photographs. The resulting immersive
image can be viewed in any direction, up-down, left-right and horizon to horizon
without curvature. The viewer can easily navigate the image by moving a cursor  
inside the image or using iPIX navigation controls via an Internet browser or   
integrated into third party software. For video applications, iPIX offers       
360-degree and 180-degree hemispherical solutions.                              

iPIX Immersive Stills                                                           

iPIX offers an image key pricing model that allows users to purchase individual 
still image keys or bulk key purchases to create iPIX immersive images. These   
iPIX licenses make iPIX technology easy to use, cost effective and accessible to
a larger audience.                                                              

Current iPIX immersive still imaging solutions and applications include:        

iPIX Immersive Images and Virtual Tours                       

   iPIX provides immersive 360-degree virtual tours for real estate,
    e-commerce, travel and hospitality and entertainment Web sites. In
         addition, iPIX immersive imaging is designed for documentation, project
        management and facilities planning applications. iPIX immersive images
       offer viewers the opportunity to navigate a scene on their own terms,
      looking in any direction and zooming in and out as they choose. This
       interactive imaging experience helps to increase buyer confidence and
       immerses the viewer in the photographed scene so everything is viewed
in context of its complete surroundings.                      

iPIX Camera Solutions                                         

    Partnering with leading camera manufacturers, iPIX offers complete
       camera solutions from a variety of manufacturers for the self-service
     capture of iPIX immersive images. Photographers, Web developers and
     other businesses may purchase complete camera solutions including a
         digital camera, fisheye lens, iPIX software, camera rotator and tripod.
         Users may also purchase partial kits to use with their existing digital
camera equipment.                                             

iPIX Immersive Imaging Software and Keys                      

    iPIX offers complete immersive imaging software to allow users the
        ability to create their own 360-degree by 360-degree immersive images.
         The software offers automatic de-warping of fisheye images and seamless
  generation of 360-degree by 360-degree immersive images from two
       185-degree images. iPIX software creates an iPIX immersive image that
        has a small file size, typically between 25 and 160 kilobytes, and can
be quickly delivered, even across low bandwidth systems.      

         An iPIX Image Key is an encryption tool that enables the user to save a
    single iPIX immersive image captured using iPIX software. One iPIX
     Image Key enables the user to save one iPIX image, just as one film
     negative enables the creation of one film photograph. Customers can
  purchase additional keys through our online store or through our
      toll-free order system. iPIX Image Keys are sold on a pay-per-use or
unlimited use subscription basis.                             

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iPIX GPS Mapping System                                       

    The iPIX GPS Mapping System combines Geographic Information System
     (GIS) Map editing software, Global Positioning System (GPS) precise
       location information and iPIX Immersive Images to capture, create and
        output interactive visual maps. The iPIX GPS Mapping System can import
     hundreds of iPIX images into GIS maps in a matter of minutes. It is
  designed to meet the specific needs of transportation, municipal
   planners, military and defense, agricultural and land management,
chemical and facilities management.                           

iPIX Immersive Imaging Software Development Kit (SDK)         

 iPIX offers a software development kit to third parties for the
  integration of iPIX images directly into their applications. The
        availability of the SDK allows iPIX immersive imaging to enhance third
      party applications with rich visual information and provides us with
the ability to reach new markets through partnership.         

iPIX Immersive Video                                                            

iPIX immersive video is a revolutionary development in security and surveillance
imaging that provides the most expansive view of live and archival video from a 
single camera without requiring pan/tilt/zoom hardware. iPIX-enabled cameras    
capture immersive wide-angle views up to 360-degree by 360-degree that can be   
navigated in any direction with zoom in and out capabilities.                   

Current iPIX immersive video imaging solutions and applications include:        

iPIX 360VS                                                    

     The iPIX 360VS (Video Surveillance) provides complete 360-degree by
   360-degree video coverage of an area in real time, using only one
      camera, with no moving parts. The dual-lens, fixed spherical optical
    system is manufactured by iPIX and uses iPIX patented software and
    off-the-shelf hardware products to create a scalable core hardware
  platform. Customized versions of the 360VS were first shipped to
    government customers in the fourth quarter of 2002. Designed to be
        custom configured to provide the highest level of reliable situational
         awareness, the 360VS is rugged in construction and small in size making
        it ideal for portable or fixed installations in a variety of housings,
        or for operation on unmanned vehicles, robots or ground sensors in any
      environment. This innovative technology, ideal for military, defense
         and law enforcement security, facilitates live, real-time capture at up
  to 18 frames per second and archived images for future playback.

iPIX NetCam Software                                          

      iPIX NetCam software provides the new rapidly growing network camera
        market with incredible new vision capabilities. An iPIX NetCam enabled
         network camera has the ability to pan/tilt/zoom an entire 360-degree by

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        180-degree scene without moving the camera. Plus, the entire scene can
    be recorded or viewed by others regardless where another viewer is
        looking. The iPIX NetCam software is ideal for businesses that want to
    provide a real time view of their facilities. Hotels, construction
   sites, ski areas, amusement parks, schools, pre-schools, offices,
     warehouses and others are some of the first that have utilized iPIX
        NetCam. The iPIX NetCam software includes Java based software that can
      be installed directly into network cameras from Axis, IQinvision and
        other popular network cameras, or placed on a server for higher volume
      sites. Up to 50 simultaneous viewers can view and navigate the video
        images using the on-camera software while the server software supports
thousands of simultaneous users.                              

iPIX NetCam i1000                                             

     The iPIX NetCam i1000 is a complete Web attraction camera ready for
     easy installation. Everything needed is included, starting with the
      mega pixel IQeye3 network camera from IQinvision. iPIX preconfigures
      the system by pre-installing a vari-focal fisheye lens and embedding
   the iPIX NetCam software directly into the camera's memory. After
  plugging the cameras power into a wall jack and connecting to an
  Ethernet network, the system is ready to start broadcasting high
quality video images with all the features of iPIX immersive  
pan/tilt/zoom.                                                

IPIXVS Software Development Kit (SDK)                         

    The iPIXVS SDK offers security system designers and integrators an
         immersive enhancement for expansive wide-field viewing without the need
    for pan/tilt/zoom hardware. This software has been integrated into
several of the leading software solutions for digital security
         including Milestone, Technivision and Sharks Eye. We are in discussions
     with a number of DVR manufactures who intend to enable end users to
         upgrade existing CCTV security installations with our system as well as
   introduce new system sales to include the benefit of iPIX digital
pan/tilt/zoom.                                                

THE iPIX STRATEGY                                                               

Establish iPIX as the Standard for Mission-Critical Imaging                     

We believe iPIX imaging solutions deliver the most interactive, reliable,       
high-quality and expansive imaging available on and offline. Because iPIX offers
end-to-end imaging solutions, we are able to deliver multi-dimensional and      
exponential value to businesses. As a result, we believe we are poised to be the
standard for mission-critical imaging technology. We will focus our business,   
sales and marketing strategies to support this position. We will continue       
research and development efforts so that our technology remains at the forefront
of innovation, yet open for easy integration with other technologies. We will   
concentrate on developing partnerships to make iPIX imaging a standard component
of security solutions and the preferred technology for online image management. 

With these combined efforts, we believe the value proposition of iPIX imaging   
solutions will become well known and we will earn the reputation as the standard
and extensible platform for mission-critical imaging.                           

Build Indirect Sales & Marketing Channels                                       

iPIX has adopted a strategy that will leverage relationships with business      
partners and major market leaders in order to increase market penetration and   

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revenue while reducing operating expenses. This strategy will develop multiple  
sales and marketing channels for iPIX products and services including:          

Vertical Market Leaders                                       

         iPIX has partnered with major customers such as eBay, Clairol, LA Times
   and Homestore.com to leverage their leading sales channels to our
target markets with iPIX products and services. Through these 
   relationships, our customers market and sell imaging products and
        services, powered by iPIX, along with their existing services directly
    to their customers. iPIX benefits from the brand equity and buying
      recommendations provided by the customer's sales channel to increase
        sales and market penetration while maintaining the ability to focus on
       iPIX technology support and enhancements. We will continue to partner
         with additional vertical market leaders to serve as direct and indirect
    channels for the promotion and sale of iPIX products and services.

Integrators and Resellers                                     

   iPIX has partnered with established security system resellers and
        integrators to help penetrate the commercial and governmental security
         and observation markets. Resellers and integrators such as ADT Security
      Services, Jullien Enterprises, Unisys, Loral, Public Safety Systems,
     LLC and Visual Security offer iPIX the opportunity to be integrated
        into full security systems sold and marketed by vendors well-known and
        respected in the industry. Through such relationships, we believe iPIX
    technology will be incorporated in solutions for homeland defense,
   national security, critical infrastructure protection, commercial
security and other applications to protect life and property. 

Partner with Web Developers                                   

         We will leverage the community of Web developers currently building and
   designing Web sites to drive the use and adoption of iPIX dynamic
       imaging. We will also generate revenue through the purchase of camera
       kits and keys by Web developers and their customers. We will continue
   to support iPIX Web Developers through the iPIX Developer Network
       program. This dedicated program was specifically designed to increase
     iPIX-to-developer and developer-to-developer interactivity and will
provide member Web developers a competitive advantage through 
    availability of increased resources, technical support and special
pricing for iPIX offerings.                                   

Partner Internationally                                       

      We intend to further capitalize on what we believe to be significant
       revenue opportunities in international markets. We have international
        licensing and distribution agreements with partners in a wide range of
countries spanning Europe, the Middle East and Asia. These    
      relationships allow us to deploy iPIX technology into regions of the
   world that would normally require significant time and effort for
marketing and development.                                    

Business Development and Strategic Direct Sales               

    In addition to our existing sales channels, iPIX employs a team of
senior sales professionals focused on new business development
     opportunities and strategic direct sales across our target markets.

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MARKETS                                                                         

We have directed our sales efforts and channel strategies toward the industry   
leaders within the following markets.                                           

Auctions and Classifieds: As the primary mechanism for ecommerce, auction and   
classified sites and portals such as eBay rely heavily upon imaging to drive    
sales of new and used consumer items. Sellers require an easy to use method for 
uploading images to accompany their item listing and buyers desire confidence in
items they can view and inspect online. In our experience, listings with images 
result in more bids and higher final sale amounts. With Rimfire, auction and    
classified sites can offer photo services that make adding images to Web sites  
easy, affordable and efficient.                                                 

Observation and Security: Military, businesses, facilities, airlines and        
airports can use iPIX immersive technology to monitor and secure buildings,     
people and property. Whether observing department store activity through a      
security camera, or providing the command and control center a full view of a   
battlefield, iPIX immersive imaging offers the best way to capture the most data
in a single image. Unlike traditional cameras that capture only what is directly
in front of the camera, iPIX-enabled video cameras capture up to 360-degree by  
360-degree scenes that can be navigated in any direction with zoom in and out   
capabilities without additional hardware.                                       

Real Estate: Residential and commercial real estate companies and professionals 
use our solutions to provide online iPIX still and immersive images of          
properties including existing homes, new homes, rental apartments, time-share   
units and office buildings and their surrounding areas. Our imaging solutions   
allow real estate companies and professionals offering real estate for sale or  
lease to use the Internet to provide more visual information about the property 
to prospective buyers. Our solutions enable real estate professionals to        
cost-effectively market properties to a wide audience, thereby providing a      
value-added service to both buyers and sellers.                                 

Consumer Product Manufacturers: Traditional businesses and consumer product     
manufacturers rely on imaging to help sell, market and enhance their current    
products. They often capture and distribute images using systems that have been 
developed internally and typically require manual and time-consuming processes. 
With Rimfire, these companies can outsource their imaging infrastructure and    
automate imaging processes saving time and operational expenses. Rimfire        
technology makes it cost-effective, fast and easy for businesses to leverage    
imaging for online and offline catalogs, operational directories, new           
interactive marketing tools and personalized, image-enhanced consumer products. 
For example, Clairol uses Rimfire services to allow consumers to upload personal
photos into Clairol's "Try It On Studio" tool and test different hair colors and
styles.                                                                         

Visual Documentation: Because iPIX immersive technology allows customers to     
capture a full 360-degree by 360-degree environment, iPIX is one of the best    
ways to photographically document facilities, public buildings, schools and     
other spaces for emergency and tactical preparedness, project management,       
historical archival image database, facilities planning and design, training    
vulnerability and disaster assessments. iPIX visual documentation is also proven
to be effective in presenting locations that would otherwise be inaccessible or 
entail a risk of exposure to hazardous materials or situations.                 

Travel and Hospitality: Hotel chains, vacation resorts, cruise lines, golf      
courses, restaurants, theme parks, major tourist attractions and tourism bureaus
use our digital media content solutions to enhance their online marketing. iPIX 

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immersive images provide a prospective visitor the opportunity to take online   
tours of rooms, meeting and conference facilities and attractions. Our visual   
content and digital media solutions enable consumers to more effectively        
research, plan and reserve travel arrangements over the Internet. Further,      
online tours allow destination operators to feature premier packages as well as 
showcase specific destinations. We distribute our customers' digital media      
content to their own Web sites and to selected travel destination affiliate Web 
sites.                                                                          

SALES AND MARKETING                                                             

Our marketing efforts focus on supporting our sales force with marketing        
materials and sales tools that help generate and close new business for iPIX.   
Using this strategy, we intend to acquire new customers for our end-to-end      
solutions, increase purchases of iPIX kits and iPIX keys and develop new sales  
opportunities. We also intend to continue utilizing distributors and resellers  
to penetrate indirect markets. Our marketing efforts include traditional and    
Internet advertising as well as direct mailings, participation in trade shows,  
co-marketing with strategic partners and public relations campaigns.            

Our sales and marketing groups focus on direct and indirect sales. Located in   
Oak Ridge, TN and San Ramon, CA, our sales teams focus on developing strategic  
relationships and opening sales channels with potential partners and customers  
in our targeted vertical markets. We also employ a telesales team that targets  
additional business customers, provides support for the direct sales teams and  
fields inquiries from our Web site and toll-free customer service number.       

We also maintain a customer relations department to answer inquiries regarding  
our offerings and respond to technical questions. Our service personnel also    
perform quality assurance checks on each component included in an iPIX kit prior
to shipping and process customer service inquiries concerning order status,     
shipping information, returns and exchanges.                                    

COMPETITION                                                                     

We currently compete with several providers of immersive imaging technology. We 
do not believe any of our competitors are dominant in this industry. We compete 
with these companies on the basis of ease of use, reliability, end user         
experience and price.                                                           

In the security markets, our immersive video solutions compete with traditional 
pan/tilt/zoom cameras. iPIX technology, however, can deliver the pan/tilt/zoom  
functionality at a lower cost and without the need for additional hardware that 
requires maintenance and repair over the life of the camera. Our navigable      
solution also captures a larger field of view with fewer cameras.               

When selling our imaging platform and image management services, we often find  
that potential customers are considering internal development of an imaging     
system. The time, cost and imaging expertise required to build their own imaging
system typically leads them to the conclusion that they should outsource. There 
are other companies marketing image servers and interactive imaging services to 
our target markets. They generally offer only components or layers of the iPIX  
comprehensive imaging solution and do not currently address how their technology
successfully integrates with others to deliver an end-to-end solution (capture, 
process, host and distribute) to compete with iPIX.                             

While competitors may offer only components of the end-to-end solution iPIX     
imaging solution, they may have greater financial, marketing, distribution and  

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technical resources with which to target our markets. Our success will be       
dependent on our ability to compete on the cost-effectiveness and quality of our
solutions, the success of our indirect channel partners and the tangible value  
of our solutions.                                                               

INTELLECTUAL PROPERTY                                                           

We rely on a combination of patent, copyright, trade secret and trademark laws  
and contractual restrictions to establish and protect proprietary rights in our 
products. Our patents are intended to protect and support current and future    
development of our technology. We currently have 22 U.S. patents. In addition,  
we hold international counterparts to many of our U.S. patents in selected      
countries covering various aspects of our products. We have numerous patent     
applications pending in the United States as well as international counterparts 
to many of these applications. There can be no assurance that our current and   
future patent applications will be granted, or, if granted, that the claims     
covered by the patents will not be reduced from those included in our           
applications.                                                                   

Our success and ability to compete are dependent on our ability to develop and  
maintain the proprietary aspects of our technology and operate without          
infringing on the proprietary rights of others. We seek to limit disclosure of  
our intellectual property by requiring employees, suppliers and customers with  
access to our proprietary information to execute confidentiality agreements with
us and by restricting access to our source code. Despite our efforts to protect 
our proprietary rights, unauthorized parties may attempt to copy aspects of our 
services or software or to obtain and use information that we regard as         
proprietary. We have experienced wrongful use in the past, and although we have 
taken steps to stop that use, we expect to experience more attempts in the      
future. The laws of many countries do not protect our proprietary rights to as  
great an extent as to the laws of the United States. Litigation may be necessary
in the future to enforce our intellectual property rights to protect our trade  
secrets, to determine the validity and scope of the proprietary rights of others
or to defend against claims of infringement or invalidity. There can be no      
assurance that the statutory and contractual arrangements we currently depend   
upon will provide sufficient protection to prevent misappropriation of our      
technology or deter independent third-party development of competing            
technologies.                                                                   

Claims by third parties that our current or future products infringe upon their 
intellectual property rights may have a material adverse effect on us.          
Intellectual property litigation is complex and expensive, and the outcome of   
this litigation is difficult to predict. We have been involved in litigation    
relating to the protection of our intellectual property rights. Such litigation,
and any future litigation, regardless of outcome, may result in substantial     
expense to us and significant diversion of our management and technical         
personnel. An adverse determination in any litigation may subject us to         
significant liabilities to third parties, require us to license disputed rights 
from other parties, if licenses to these rights could be obtained, or require us
to cease using the technology.                                                  

EMPLOYEES                                                                       

As of March 1, 2003, we employed 81 full-time employees. Our employees are not  
represented by any collective bargaining unit. We believe our relations with our
employees are good.                                                             

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Item 2.  Properties.                                                            

We lease approximately 13,000 square feet of space in Oak Ridge, Tennessee for  
our corporate office and operations and approximately 19,000 square feet in San 
Ramon, California for our co-headquarters. We have exited approximately 6,500   
square feet of office space in San Ramon for which approximately half has been  
sub-let and we are actively marketing the remaining space to potential          
sub-tenants. If we are unable to successfully sublease our vacated and          
unoccupied office space, or if any of our current sub-tenants fail to make      
required lease payments, our business, financial condition, results of          
operations and cash flows may be adversely affected. (See Note 12 to our        
consolidated financial statements included elsewhere in this Annual Report on   
Form 10-K.)                                                                     

Item 3.  Legal Proceedings.                                                     

On October 28, 1998, Minds-Eye-View, Inc. ("Minds-Eye") and Mr. Ford Oxaal      
("Oxaal") filed a lawsuit against us in the United States District Court for the
Northern District of New York. Minds-Eye alleged in its lawsuit that we breached
a duty of confidence to them, made misrepresentations and misappropriated trade 
secrets. The court removed this action to arbitration upon our motion, and we   
cross-claimed alleging various affirmative claims, including trade secret theft.
Minds-Eye and Oxaal filed a motion to dismiss the suit, and the court dismissed 
the lawsuit on May 19, 1999. Although the lawsuit was dismissed, we proceeded   
with the arbitration in Knoxville, Tennessee. The arbitration was stayed pending
resolution of the following lawsuit.                                            

On May 20, 1999, Oxaal filed a lawsuit against us and certain of our customers  
in the same court alleging that our technology infringes upon a patent claim for
360 degree spherical visual technology held by him. Oxaal filed an additional   
complaint on December 5, 2000 in the United States District Court for the       
Northern District of New York, naming us as the sole defendant. The complaint   
states a single claim for relief, alleging infringement of U.S. Patent No.      
6,157,385, which issued on December 5, 2000. This patent encompasses a method of
seamlessly combining at least two images into a spherical image.                

On June 11, 2002, we reached an out of court settlement with Oxaal and          
Minds-Eye. As a result of the settlement, each of the lawsuits and the          
arbitration proceeding described above were dismissed and mutual releases have  
been executed. Pursuant to the settlement agreement, neither party admitted     
liability or any wrong doing. We were granted a non-exclusive license under     
patents and pending patents conceived by Oxaal or in which Oxaal has an         
interest. The license rights inure to the benefit of our customers with respect 
to their purchases from us and also inure to the benefit of our business        
partners with respect to their business relations with us. We included the cost 
of the license in computer hardware and software on the accompanying balance    
sheet. We do not believe that the cost of the license in 2002 or the future,    
will have a material effect on our financial condition, results of operations or
cash flows.                                                                     

On May 10, 2001, Stanley Fry, Woodhaven Venture Partners, L.P., Cyrus Greg,     
Patrick Oliver and related entities, all of whom are former stockholders of     
PictureWorks Technology, Inc. (which we acquired in April 2000) filed a lawsuit 
in the Delaware Chancery Court alleging causes of action for failure to timely  
issue stock certificates and breach of contract. An unspecified amount of       
damages was sought. In December, 2002, we settled this case pursuant to a       
settlement agreement in which neither party admitted liability or any wrong     
doing. The settlement did not have a material effect on our financial condition,
results of operations or cash flows.                                            

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During the quarter ending September 30, 2002, we received approximately $1.4    
million in cash from a previously disclosed favorable jury verdict against      
Infinite Pictures that found the defendants liable for infringement of our      
patents under the doctrine of equivalents and awarding us $1.0 million in       
damages, plus approximately $0.4 million in interest and court costs. The       
defendants filed for a writ of certiorari with the United States Supreme Court  
in an effort to reverse the lower court's findings in our favor. The Supreme    
Court refused to grant the writ, which exhausted the legal remedies for         
disputing the award. Accordingly, we recorded the $1.0 million in damages as a  
patent infringement award, along with the $0.4 million in interest and court    
costs, in the quarter ended September 30, 2002.                                 

On November 15, 2002, a First Amended Consolidated Complaint for violation of   
federal securities laws was filed against Homestore.com, Inc. ("Homestore") by  
the California Teachers' Retirement System ("CalSTRS"). The Complaint is a class
action lawsuit filed on behalf of stockholders of Homestore which flows from    
alleged misstatements and omissions made by Homestore and the other named       
defendants, which include us. The Complaint alleges that during 2001, Homestore 
and iPIX entered into fraudulent reciprocal transactions intended to            
artificially bolster and maintain Homestore's and our respective stock prices.  
The Complaint alleges that Homestore's public statements with respect to these  
transactions are attributable to us and violate Sections 10(b) and 20(a) of the 
Securities Exchange Act of 1934. We joined with other co-defendants and filed a 
joint motion to dismiss, alleging that the Complaint fails to state a claim upon
which relief may be granted, among other things. On March 7, 2003, the United   
States District Court for the District of Central California granted our motion 
to dismiss, with prejudice. However, CalSTRS may appeal this dismissal in       
accordance with the federal rules of procedure.                                 

We are not currently a party to any other legal proceedings the adverse outcome 
of which, individually or in the aggregate, we believe could have a material    
adverse effect on our business, financial condition, results of operations or   
cash flows.                                                                     

Item 4.  Submission of Matters to Vote of Security Holders                      

No matters where submitted to a vote of the Company's stockholders during the   
fourth quarter of fiscal year 2002.                                             

Item 4A.  Executive Officers of Registrant                                      

The following sets forth information with respect to our executive officers as  
of March 1, 2003:                                                               

    NAME               AGE                       TITLE

  Donald W. Strickland..........    53     President and Chief Executive Officer
Paul A. Farmer................    44     Chief Financial Officer, Executive 
                                  Vice President and Treasurer
 Sarah F. Pate.................    43     Executive Vice President and General
                                       Manger Transaction Services Group

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DONALD W. STRICKLAND has been the chief executive officer of iPIX since May 2001
and has been president and chief operating officer since October 2000. Mr.      
Strickland joined iPIX in April 2000 and served as executive vice president     
until his appointment as president and chief operating officer in October 2000. 
Prior to joining us, Mr. Strickland was president and chief executive officer of
PictureWorks Technology, Inc. from March 1996 until March 2000. From June 1993  
until March 1996, Mr. Strickland held the position of vice president, Imaging   
and Publishing at Apple Computer. Prior to joining Apple in June 1993, Mr.      
Strickland spent twenty years at Eastman Kodak Company where he held a          
succession of positions in engineering, sales, marketing and executive          
management. Mr. Strickland holds several degrees including a bachelor's degree  
in physics from Virginia Tech, a master's degree in physics from the University 
of Notre Dame, a master's degree in optics from the University of Rochester, a  
master's degree in management from the Stanford Sloan School of Management and a
law degree from George Washington University.                                   

PAUL A. FARMER has been the chief financial officer, executive vice president   
and treasurer of iPIX since June 2001. Prior to joining us, Mr. Farmer was the  
chief financial officer of Buzzsaw.com from June 2000 to June 2001. Prior to    
Buzzsaw, Mr. Farmer was chief financial officer, chief administrative officer   
and executive vice president of CCAi Consulting from June 1998 to June 2000.    
Prior to CCAi, Mr. Farmer was chief financial officer of TCSI, Inc. from June   
1994 to June 1998 and vice president and corporate controller of Technology     
Solutions Company from November 1990 to June 1994. Mr. Farmer is a CPA and was  
with Price Waterhouse from January 1982 through November 1990. Mr. Farmer holds 
a bachelor's degree in accounting from the University of Illinois and a masters 
in business administration from the University of Chicago.                      

SARAH F. PATE has been the executive vice president, general manager of iPIX's  
Transactional Services Group since December 2001, and has been with iPIX since  
April 2000. Prior to joining us, Ms. Pate was vice president in charge of       
operations for PictureWorks Technology, Inc., from August 1995 until March 2000.
Ms. Pate has extensive experience in financial services and in managing large   
and small organizations. She spent 12 years with Household International serving
as president of Household Bank, director of sales at Household Finance          
Corporation and several other high-level management roles. Ms. Pate holds a     
bachelor's degree in business administration from the University of Washington. 

 PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters  

Our common stock is traded on the Nasdaq SmallCap Market (symbol: IPIX). Prior  
to August 26, 1999, there was no public market for our common stock. As of March
1, 2003, there were 985 stockholders of record.                                 

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The following table reflects the range of the high and low bid information for  
our common stock for the periods indicated and takes into account the           
ten-for-one reverse stock split in August 2001.                                 

                                        High               Low
FISCAL 2002                                                                     
Fourth Quarter..........................        $ 1.45             $0.72        
Third Quarter...........................          1.86              1.00        
Second Quarter..........................          2.84              1.25        
First Quarter...........................          3.48              2.00        

FISCAL 2001                                                                     

Fourth Quarter..........................        $ 3.33             $1.63        
Third Quarter...........................          3.60              1.10        
Second Quarter..........................         11.50              1.25        
First Quarter...........................         14.69              1.25        

We currently intend to retain all future earnings to finance the continuing     
development of our business and do not anticipate paying cash dividends on our  
common stock in the foreseeable future. Any payment of cash dividends in the    
future will depend upon our financial condition, future loan covenants, capital 
spending requirements and earnings, as well as other factors the board of       
directors may deem relevant.                                                    

Equity Compensation Plan Information                                            

The table below sets forth information relating to our compensation plans as of 
December 31, 2002:                                                              

                                                        [Enlarge/Download Table]

                                                                                                               
                                                                                      Number of securities     
                                                  Number of                             remaining available    
                                               securities to be                         for future issuance    
                                                 issued upon        Weighted-average        under equity       
                                                 exercises of      exercise price of     compensation plans    
                                                 outstanding          outstanding      (excluding securities   
               Plan Category                  options, warrants    options, warrants    reflected in column    
                                                  and rights           and rights               (a))           
---------------------------------------------------------------------------------------------------------------
                                                     (a)                  (b)                   (c)            
 2001 Equity Compensation Plan                    2,854,287              $2.06              3,106,963          
 2000 Equity Compensation Plan                      245,752             $28.06                     --          
 1998 Employee, Director and Consultant              38,941            $286.69                     --          
 Stock Option Plan                                                                                             
 1997 Equity Compensation Plan                       48,864            $137.17                     --          
 Prior option plans                                  32,035             $32.77                     --          
 Employee Stock Purchase Plan                            --                 --                473,075          
 Total                                            3,219,879              $9.86              3,580,038          


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Item 6.  Selected Financial Data                                                

Selected Historical Financial Information                                       

The statement of operations data presented below for the years ended December   
31, 2000, 2001 and 2002 and the balance sheet data as of December 31, 2001 and  
2002 have been derived from our audited consolidated financial statements that  
are included elsewhere in this report. The statement of operations data for the 
years ended December 31, 1998 and 1999 and the balance sheet data as of December
31, 1998, 1999 and 2000 are derived from audited consolidated financial         
statements that are not included in this report. These results are not          
necessarily indicative of results to be expected for any future period. You     
should read the data presented below together with our consolidated financial   
statements and related notes to those statements and with "Management's         
Discussion and Analysis of Financial Condition and Results of Operations"       
included in this report.                                                        

                                                        [Enlarge/Download Table]


                                                         Fiscal Years Ended December 31,             
                                         1998        1999           2000            2001      2002   
                                                    (In thousands, except per share data)            

Statement of Operations Data                                                                         
Revenues:                                                                                            
                                                                                                     
   Products..........................  $           $ 12,523       $  48,943       $ 14,758   $ 6,512 
                                          2,789                                                      
   Services..........................       329          --           4,730         14,148    15,901 
                                       --------   ---------       ---------       --------   ------- 
                                          3,118      12,523          53,673         28,906    22,413 
                                       --------   ---------       ---------       --------   ------- 
Cost of revenues:                                                                                    
   Products..........................     1,274       7,660          25,555          7,270     2,145 
   Services..........................       241          --           2,516          4,991     6,583 
                                       --------   ---------       ---------       --------   ------- 
                                          1,515       7,660          28,071         12,261     8,728 
                                       --------   ---------       ---------       --------   ------- 

Gross profit.........................     1,603       4,863          25,602         16,645    13,685 
                                       --------   ---------       ---------       --------   ------- 

Operating expenses:                                                                                  
   Sales and marketing...............     9,366      51,138          83,064         21,252     7,607 
   Research and development..........     3,018       6,690          14,582          7,671     4,862 
   General and administrative........     4,385      19,499          22,850         15,816     2,933 
   Impairment and amortization of                                                                    
      intangibles....................        --          --         234,024          2,433        -- 
   Merger expenses...................        --          --          15,175             --        -- 
   Loss on disposal of assets........        --          --              --          1,655        -- 
   Restructuring and impairment......        --          --           4,161         11,655       687 
                                       --------   ---------       ---------       --------   ------- 
           Total operating expenses..    16,769      77,327         373,856         60,482    16,089 
                                       --------   ---------       ---------       --------   ------- 
Loss from operations.................   (15,166)    (72,464)       (348,254)       (43,837)   (2,404)
Interest expense.....................      (202)     (6,684)           (436)       (10,667)     (183)
Interest income......................       276       2,546           3,345            305       456 
Patent infringement award............        --          --              --             --     1,000 
Other income (expense), net..........        27          (1)         (1,250)          (380)      (12)
                                       --------   ---------       ---------       --------   ------- 
Net loss before extraordinary gain..`   (15,065)    (76,603)       (346,595)       (54,579)   (1,143)
Extraordinary gain...................        --          --              --            901        -- 
                                       --------   ---------       ---------       --------   ------- 
       Net loss......................   (15,065)    (76,603)       (346,595)       (53,678)   (1,143)
Dividend relative to beneficial                                                                      
   conversion feature of Series B                                                                    
   convertible preferred stock.......        --       1,000              --             --        -- 
                                       --------   ---------       ---------       --------   ------- 
Net loss attributable to common                                                                      
   stockholders......................  $(15,065)   $(77,603)      $(346,595)      $(53,678)  $(1,143)
                                       ========   =========       =========       ========   ======= 
Net loss per common share -                                                                          
   basic and diluted.................  $ (12.22)   $ (30.13)      $  (61.55)      $  (8.22)  $ (0.17)
                                       ========   =========       =========       ========   ======= 
Weighted average common shares -                                                                     
   basic and diluted.................     1,233       2,576           5,631          6,534     6,794 
                                       ========   =========       =========       ========   ======= 

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                                                        [Enlarge/Download Table]


                                                                As of December 31,                      
                                     -------------------------------------------------------------------
                                       1998         1999         2000             2001             2002 
                                     --------     -------      --------         --------         -------
                                                                  (In thousands)                        
                                                                                                        
Balance Sheet Data:                                                                                     
Cash, cash equivalents,restricted                                                                       
   cash, short-term investments and                                                                     
   securities available for sale....  $1,494      $73,366       $11,035          $13,401          $5,992
Working capital (deficit)...........    (371)      58,617         1,174            3,506           2,418
Total assets........................   4,769       95,803        60,614           23,078          18,435
Long-term liabilities...............      21          387           957            2,392           1,769
Total stockholders' equity..........   1,310       81,041        28,213            8,770           8,392

Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations                                                                   

The following discussion is intended to assist in the understanding and         
assessment of significant changes and trends related to our results of          
operations and our financial condition together with our consolidated           
subsidiaries. This discussion and analysis should be read in conjunction with   
the consolidated financial statements and notes thereto included elsewhere in   
this Annual Report on Form 10-K. Historical results and percentage relationships
set forth in the statement of operations, including trends which might appear,  
are not necessarily indicative of future operations.                            

Overview                                                                        

In 2001, we restructured the Company around our higher gross margin businesses. 
The result is that we are focused on two businesses: (1) providing outsourced   
imaging services to facilitate online transactions in the auction, classifieds  
and real estate markets and (2) providing immersive imaging solutions for the   
real estate, security and observation and visual documentation markets.         

Our products and services include the capture, processing, management and       
distribution of images and related data. Revenues from online auctions and      
classifieds are primarily transaction based. Our transaction services involve   
designing, building and managing an image management infrastructure as well as  
leasing spaces from state-of-the-art co-location facilities with access to      
telecommunications bandwidth. Since these services are capital intensive, a high
percentage of the costs associated with transaction services are fixed and      
accordingly the margins from transaction services are highly dependent upon     
asset utilization. Substantially all of our recurring revenue is derived from   
transaction fees generated by our Rimfire service. In particular, eBay and      
Homestore are our largest Rimfire customers. eBay represented approximately 60% 
of total revenue and 82% of total Rimfire service revenue for 2002 and          
approximately 74% of total revenue and 94% of total Rimfire service revenue for 
fourth quarter of 2002. Homestore.com represented approximately 16% of total    
revenue and 13% of total Rimfire service revenue for 2002, but less than 10% of 
total revenue and Rimfire revenue for the fourth quarter 2002.                  

Our principal agreements with Homestore and eBay, expire on June 30, 2003 and   
September 30, 2003, respectively. These agreements are subject to extension,    
amendment and re-negotiation from time to time. We are currently negotiating    
extensions to our agreements with both customers. Significant changes in the    
terms of our relationships with these customers or the loss of either customer  
could have a material adverse effect on our business. We believe that           
transaction fees from eBay will continue to increase as a percentage of Rimfire 
and total revenue through September 30, 2003 as more eBay customers utilize our 
service on the eBay auction Web site.                                           

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Our immersive technology primarily generates revenues in two ways: licenses of  
software and re-sale of camera equipment. We utilize iPIX keys to license our   
still immersive technology to capture and save a single immersive image. We also
offer time-based seat or user licenses which permit an unlimited number of      
immersive images to be captured and saved within a specific time period, usually
a year. Our video immersive technology, which may be off-line or online, may be 
purchased on a per-unit basis or a per-year license. We sell our immersive      
products and services primarily into the real estate, security and observation  
and visual documentation markets. The cost of sales for our licenses is low in  
proportion to the related revenue. The cost of sales for the sale of camera     
equipment has generally been 50% to 75% of related revenues.                    

We also provide professional services to customers that request specific        
customizations or integrations of our products and services. Providing          
professional services is labor intensive, and our cost of sales for professional
service tends to be 40% to 60% of revenues.                                     

Our real estate business has changed over the past few years. In 2000, our real 
estate focused revenues were generated from four primary sources: full service  
virtual tours; image management services; camera kits and immersive keys; and   
professional services. We offered full service virtual tours through January    
2001. A full service tour includes the capture, processing, management and      
distribution of real estate images and related data for one price. As part of   
the sale of assets to a subsidiary of Homestore in January 2001, we no longer   
directly sell full service virtual tours to customers in the U.S. residential   
real estate market.                                                             

Throughout 2001 and 2002, our real estate focused revenues were generated from  
three primary sources: image management services; camera kits and immersive     
keys; and other services. Our image management products and services were used  
in the real estate industry primarily to associate online still images with     
for-sale listings. This service is offered to customers under license           
agreements, transaction based agreements and revenue share agreements for real  
estate properties around the world. Through January 12, 2002, we provided       
Homestore with processing, hosting and distribution services and received       
transaction fees.                                                               

iPIX INTERNATIONAL                                                              

In the third quarter of 2002, we entered into license, distribution and         
trademark agreements with Soroof International, a Saudi Arabia-based corporation
("Soroof"). Under the agreements, Soroof is the exclusive distributor for iPIX  
immersive still products, including the iPIX GPS Mapping System, outside of     
North America and Asia through Soroof's newly established entity, iPIX          
International ("iPIX-I"). The agreement, effective July 1, 2002, expires        
December 31, 2007, unless renewed. iPIX-I has an exclusive license to develop   
integrated solutions for markets including real estate, travel and tourism and  
other markets in which online marketing is critical. iPIX-I serves as an        
effective extension of our international channel strategy and allows iPIX to    
provide our patented immersive still products globally. For a more detailed     
description of iPIX-I, please see Note 8 in the accompanying financial          
statements.                                                                     

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CRITICAL ACCOUNTING POLICIES                                                    

Financial Reporting Release 60 issued by the Securities and Exchange Commission 
("SEC") requires all registrants to discuss critical accounting policies or     
methods used in the preparation of the financial statements. The notes to the   
consolidated financial statements included in our Annual Report filed on Form   
10-K include a summary of the significant accounting policies and methods used  
in the preparation of our consolidated financial statements. Further, we have   
made a number of estimates and assumptions that affect reported amounts of      
assets, liabilities, revenues and expenses and actual results may differ from   
those estimates. Those areas that require the greatest degree of management     
judgment include revenue recognition, adequacy of the allowance for doubtful    
accounts, goodwill and significant accruals.                                    

We believe that full consideration has been given to all relevant circumstances 
that we may be subject to, and our financial statements accurately reflect      
management's best estimate of the results of operations, financial position and 
cash flows for the periods presented.                                           

We believe the following represent our critical accounting policies:            

Revenue Recognition                                                             

We recognize revenue in accordance with SOP 97-2, "Software Revenue             
Recognition," and SAB 101, "Revenue Recognition in Financial Statements."       
Transaction hosting revenues are recognized as transactions are performed       
provided there was persuasive evidence of an arrangement, the fee was fixed or  
determinable and collection of the resulting receivable was reasonably assured. 
Initial license fees are recognized when a contract exists, the fee is fixed or 
determinable, software delivery has occurred and collection of the receivable is
reasonably assured. If there are continuing obligations, then we recognize      
license revenue ratably over the life of the contract.                          

Product revenue is recognized upon shipment or delivery provided there are no   
uncertainties surrounding product acceptance or significant vendor obligations, 
persuasive evidence of an arrangement exists, the fees are fixed or determinable
and collection is reasonably assured.                                           

Royalties derived from desktop imaging products are recognized as revenues upon 
receipt of the royalty sell-through reports from customers, which are generally 
in the quarter following the quarter in which the sale by the customer took     
place.                                                                          

Revenues from the sale of our virtual tour products are recognized upon         
distribution to the Web site designated by the customer.                        

Revenues generated from professional services are recognized as the related     
services are performed. When such professional services are combined with       
on-going transaction services or are deemed to be essential to the functionality
of the delivered software product, revenue from the entire arrangement is       
recognized while the transaction services are performed, on a percentage of     
completion method or not until the contract is completed in accordance with SOP 
81-1, "Accounting for Performance of Construction-Type and Certain              
Production-Type Contracts," and ARB 45, "Long-Term Construction-Type Contracts."

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Allowances for Doubtful Accounts                                                

Significant management judgments and estimates must be made and used in         
connection with establishing the doubtful account allowances in any accounting  
period. Management specifically analyzes accounts receivable and historical bad 
debts, customer concentrations, customer credit-worthiness, current economic    
trends and changes in our customer payment terms when evaluating the adequacy of
the allowance for doubtful accounts. Material differences could result in the   
amount and timing of expense recorded if management had different judgment or   
utilized different estimates.                                                   

Goodwill                                                                        
Under United States generally accepted accounting principles, we evaluate       
goodwill for impairment on an annual basis and on an interim basis if events or 
changes in circumstances between annual impairment tests indicate that the asset
might be impaired. In assessing the recoverability of our goodwill, we must make
assumptions regarding estimated future cash flows and other factors to determine
the fair value of the goodwill. These estimates include forecasted revenues and 
operating expenses, which are inherently difficult to predict. If these         
estimates or their related assumptions change in the future, we may be required 
to record impairment charges for these assets. We believe that the accounting   
estimate related to goodwill is a "critical accounting estimate" because (1) it 
requires Company management to make assumptions about fair values and (2) the   
impact of recognizing an impairment could be material to our financial position,
as well as our results of operations. Management's assumptions about fair values
require significant judgment because broad economic factors, industry factors   
and technology considerations can result in variable and volatile fair values.  
If we are unable to extend our agreement with eBay, we may incur a significant  
impairment of our goodwill.                                                     

Significant Accruals, including Restructuring Charges and Sales Tax             

We recorded restructuring charges associated with vacated facilities. The key   
assumptions associated with these charges include the timing and amount of      
sub-lease income. In addition, in establishing and providing for sales tax      
accruals, we make judgments based on the actual tax laws and guidance. While    
management believes that its judgments and interpretations regarding tax        
liabilities are appropriate, significant differences in actual experience may   
materially affect our future financial results.                                 

RECENT DEVELOPMENTS                                                             

During 2002, we introduced new products, formed new international distribution  
arrangements and strengthened our intellectual property rights.                 

We introduced three iPIX Immersive Video products:                              

o        iPIX Video SDK for Digital Security Applications - a software          
         developers kit licensed to OEMs to integrate iPIX's patented 360-degree
        video pan/tilt/zoom into security applications. OEM partners are "iPIX
      enabled" to turn any CCTV camera with a fish-eye lens into a digital
pan/tilt/zoom camera with no moving parts.                    
o        iPIX NetCam i1000 - an intelligent network video camera that combines a
one mega-pixel high quality video stream with iPIX's patented 
     360-degree pan/tilt/zoom for observation and security applications.

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o        360VS surveillance system for Homeland Security, DoD/Military, Federal,
State and local government use. iPIX 360VS provides real-time 
    360-degree spherical video surveillance with no blind spots and no
        moving parts. The single-camera solution is the only way to monitor an
    entire area without multiple cameras. There are no post processing
        requirements for live, real-time viewing and multiple remote operators
      can navigate simultaneously in any direction and allows for panning,
tilting and zooming of historical images.                     

We introduced several new and updated versions of still image photography       
products including:                                                             

o        The iPIX GPS Mapping System was introduced in June 2002. This system   
      creates a new way to utilize and index iPIX immersive photographs by
     associating a GPS coordinate with images captured in the field. The
    system, developed with inputs from customers in the U.S. military,
    allows customers to quickly map large areas and to see those areas
using iPIX's patent immersive imaging.                        
o        Several new digital camera models were introduced in 2002. Included    
       were the Nikon Coolpix 4500 and the Nikon Coolpix 4300. These cameras
        are the latest in a long line of digital cameras offered by Nikon that
  provide a high quality and cost effective solution for immersive
      photography. Additionally, iPIX introduced support for the Canon G2,
        the Sony DSC-F85 and the Olympus 4040. 2002 marked the introduction of
the broadest range of iPIX enabled cameras ever.              

We also enhanced our Rimfire service in the following ways:                     

During 2002, we announced iPIXads which is built on the iPIX Rimfire(R)         
technology. iPIXads is a turnkey solution providing newspapers with enhanced    
selling power and revenue opportunities. Newspapers using iPIXads have the      
ability to accept photos from their classified advertisers via a private labeled
online service. Similar to iPIX services provided to the Web's largest auction  
sites and newspapers, iPIXads features intuitive "image wells" that allow users 
to crop, rotate, edit and submit photos. Photo submissions can be used in the   
online and print versions of the paper's classifieds. iPIX provides the service 
turnkey, complete with localized branding, requiring virtually no technical     
integration for the newspaper.                                                  

iPIXads completes the Company's three-pronged approach for making services      
available to papers of all sizes. With the addition of iPIXads, Rimfire         
technology is now available to virtually every newspaper reaching millions of   
local classified advertisers around the world. Rimfire is also available to     
newspapers through customized integration, such as LA Times' Recycler.com or San
Francisco Chronicle's SFGate.com, or application service providers including    
AdStar and GDT-NOVA.                                                            

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Key business benefits of iPIXads:                                               

o        iPIX handles all uploading and viewing of photos through a robust      
      imaging infrastructure--a complete outsourced solution that requires
virtually no technical integration by the newspaper.          
o        iPIXads is designed specifically for call centers,  allowing newspapers
to  begin  generating   revenue   immediately.                
o        Enables classified advertisers to take advantage of the visual power of
the Internet to improve the effectiveness of their ads.       
o        The iPIXads interface and URL (Web address) is brandable and           
      customizable allowing newspapers to easily tie this into their print
and online marketing programs.                                
o        Automatically prepares images for optional use in print.               

Key features of iPIXads:                                                        

o        iPIX Rimfire technology automatically performs all photo file format   
    conversions, compression, uploading, storage, and links to the ad.
o        Submission  of  photos is fully  automated  over the  Internet  with no
special software required.                                    
o        Backed by iPIX, which handles nearly two million image uploads and     
     serves over a billion images daily via world-class 24x7x365 network
      operations with planned 99.7 percent uptime - making it the largest,
most robust Internet imaging infrastructure in the world.     

International                                                                   

In 2002, we entered into license, distribution and trademark agreements with    
Soroof. Under the agreements, Soroof will be the exclusive distributor for iPIX 
immersive still products, including the iPIX GPS Mapping System, outside of     
North America and Asia through its newly established entity, iPIX-I. We will    
provide certain hosting services during the term of the agreements. Soroof has  
committed to certain minimum quarterly royalties during the term of the         
agreement. Should these minimum royalties not be met, we have the right to      
terminate our agreements with Soroof. iPIX has a minority equity interest in    
iPIX-I, however, iPIX does not have the ability to exercise significant         
influence over iPIX-I operations. We account for our investment in iPIX-I on the
cost basis. We did not make any capital contributions to iPIX-I and we have no  
commitments to fund iPIX-I. We do have the right, however, but not the          
obligation, to purchase iPIX-I from Soroof after December 31, 2005 for          
consideration as defined in the agreement. During 2002, we recognized $0.6      
million of revenue under these agreements.                                      

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Intellectual Property Rights                                                    

On June 11, 2002, we reached an out of court settlement with Oxaal and          
Minds-Eye. As a result of the settlement, each of the lawsuits and the          
arbitration proceeding described above in Item 3 were dismissed and mutual      
releases were executed. Pursuant to the settlement agreement, neither party     
admitted liability or any wrong doing. We were granted a non-exclusive license  
under patents and pending patents conceived by Oxaal or in which Oxaal has an   
interest. The license rights inure to the benefit of our customers with respect 
to their purchases from us and also inure to the benefit of our business        
partners with respect to their business relations with us. We do not believe    
that the cost of the license in 2002 or the future, will have a material effect 
on our financial condition, results of operations or cash flows.                

During the quarter ending September 30, 2002, we received approximately $1.4    
million in cash from a previously disclosed favorable jury verdict against      
Infinite Pictures that found the defendants liable for infringement of our      
patents under the doctrine of equivalents and awarding us $1.0 million in       
damages, plus $0.4 million in interest and court costs. The defendants filed for
a writ of certiorari with the United States Supreme Court in an effort to       
reverse the lower court's findings in our favor. The Supreme Court refused to   
grant the writ, which exhausted the legal remedies for disputing the award.     
Accordingly, we recorded the $1.0 million in damages as a patent infringement   
award, along with the $0.4 million in interest and court costs, in the quarter  
ended September 30, 2002.                                                       

RESTRUCTURING ACTIONS                                                           

We executed several restructuring actions throughout 2001 and 2002. These       
actions and the charges relating to them are described below.                   

On March 1, 2001, we had 552 employees, but by the end of the second quarter we 
had reduced our workforce by approximately 440 positions. The reductions were   
primarily in the full-service virtual real estate business. The first quarter   
reductions resulted in a restructuring charge of $3.0 million. In the second    
quarter of 2001, we reorganized our management personnel, closed our sales      
offices throughout the U.S. and made further reductions in our workforce. As a  
result of these actions, we recorded a $7.2 million restructuring charge in the 
second quarter of 2001. Included in 2001 is a $1.5 million impairment charge    
related to the write off of the unamortized portion of our directors' and       
officers' insurance policy. We were required to obtain a new policy due to the  
change in control related to our 2001 financing.                                

In September 2002, $0.7 million of restructuring charges were recorded related  
to expenses associated primarily with a negotiated buy-out of certain lease     
obligations for previously vacated offices. We paid approximately $1.3 million  
during the fourth quarter of 2002 to end our continuing obligations under those 
leases.                                                                         

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The activity in the current and long-term restructuring accruals for the years  
ended December 31, were as follows:                                             

(In Thousands)                                                                  

                                                        [Enlarge/Download Table]


                              Payments/   Balance at           Payments/   Balance at               Payments/     Balance at 
                     Initial  Write-offs   December   Expense   Write-offs   December   Expense in   Write-offs  December 31,
                     Expense   in 2000     31, 2000   in 2001   in 2001     31, 2001       2002      in 2002       2002      
                   ----------------------------------------------------------------------------------------------------------

                                                                                                                             
Restructuring                                                                                                                
Provisions:                                                                                                                  
 Severance            $1,584     $(994)        $590   $4,537   $(4,027)      $1,100        $--        $(600)         $500    
 Employee debt                                                                                                               
  forgiveness             --        --           --    2,163    (2,163)          --         --           --            --    
 Write-offs and                                                                                                              
   impairments           692      (597)          95    1,959    (2,054)          --         --            --           --    
 Lease obligations     1,681      (337)       1,344    3,006    (2,897)       1,453        687       (1,591)          549    
 Other                   204      (173)          31       --       (31)          --         --            --           --    
                      ------   --------      ------  -------  ---------      ------       ----      --------       ------    

Total                 $4,161   $(2,101)      $2,060  $11,665  $(11,172)      $2,553       $687      $(2,191)       $1,049    
                      ======   ========      ======  =======  =========      ======       ====      ========       ======    

We realized significant savings as a result of these restructuring actions. We  
expect continued savings to be realized primarily in cost of sales, but also in 
selling, general and administrative expenses and research and development       
expenses.                                                                       

OUTLOOK                                                                         

The Company is subject to generally prevailing economic conditions and, as such,
believes that much of our success in 2003 will be dependent upon the success of 
our customers and the appropriations processes of various governmental          
departments. With the elimination of $7.5 million of 2001 full service real     
estate revenue and other lower margin businesses, revenue in 2002 was less than 
2001, but due to the restructuring actions described above, our gross margins   
were improved. Our principal agreements with Homestore and eBay, expire on June 
30, 2003 and September 30, 2003, respectively. These agreements are subject to  
extension, amendment and re-negotiation from time to time. We are currently     
negotiating extensions to our agreements with both customers. Significant       
changes in the terms of our relationships with these customers or the loss of   
either customer could have a material adverse effect on our business. We believe
that transaction fees from eBay will continue to increase as a percentage of    
revenue through September 30, 2003 as more eBay customers utilize our service on
the eBay auction Web site. In 2003, we are launching products aimed at serving  
the growing needs of the security and observation markets.                      

We expect to continue to make significant capital investments in our image      
management infrastructure and in the development of new products for the        
security market, which may consume some of our cash reserves.                   

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                                                        [Enlarge/Download Table]


                                                                Fiscal Years Ended December 31,    
                                                           2000            2001              2002  
                                                        ---------       ---------          ------- 
                                                        (In thousands, except per share data)      
                                                                                                   
Statement of Operations Data:                                                                      
Revenues:                                                                                          
   Products............................................  $ 48,943        $ 14,758          $ 6,512 
   Services............................................     4,730          14,148           15,901 
                                                         --------        --------          ------- 
                                                           53,673          28,906           22,413 
                                                         --------        --------          ------- 
Cost of revenues:                                                                                  
   Products............................................    25,555           7,270            2,145 
   Services............................................     2,516           4,991            6,583 
                                                         --------        --------          ------- 
                                                           28,071          12,261            8,728 
                                                         --------        --------          ------- 
Gross profit...........................................    25,602          16,645           13,685 
                                                         --------        --------          ------- 

Operating expenses:                                                                                
   Sales and marketing.................................    83,064          21,252            7,607 
   Research and development............................    14,582           7,671            4,862 
   General and administrative..........................    22,850          15,816            2,933 
   Impairment and amortization of intangibles..........   234,024           2,433               -- 
   Merger expenses.....................................    15,175              --               -- 
   Loss on disposal of assets..........................        --           1,655               -- 
   Restructuring and impairment .......................     4,161          11,655              687 
                                                         --------        --------          ------- 
          Total operating expenses.....................   373,856          60,482           16,089 
                                                         --------        --------          ------- 
Loss from operations...................................  (348,254)        (43,837)          (2,404)
Interest expense.......................................      (436)        (10,667)            (183)
Interest income........................................     3,345             305              456 
Patent infringement award..............................        --              --            1,000 
Other expense..........................................    (1,250)           (380)            (12) 
                                                         --------        --------          ------- 
Net loss before extraordinary gain.....................  (346,595)        (54,579)         (1,143) 
Extraordinary gain.....................................        --             901               -- 
                                                         --------        --------          ------- 
Net loss............................................... $(346,595)       $(53,678)         $(1,143)
                                                        =========        ========          ======= 
Net loss per common share - basic and diluted.......... $  (61.55)     $    (8.22)         $ (0.17)
                                                        =========        ========          ======= 
Weighted average common shares - basic and diluted.....     5,631           6,534            6,794 
                                                        =========        ========          ======= 

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The following table presents for the periods indicated, the percent relationship
to total revenues of select items of our statement of operations:               

                                                        [Enlarge/Download Table]


                                                              Fiscal Years Ended December 31,       
                                                        ------------------------------------------- 
                                                          2000             2001            2002     
                                                        ---------       ----------       ---------- 
                                                                                                    
Revenues:                                                                                           
   Products............................................     91.2 %           51.1 %           29.1 %
   Services............................................      8.8             48.9             70.9  
                                                        ---------        ---------        --------- 
                                                             100.0           100.0           100.0  
                                                        ---------        ---------        --------- 

Cost of revenues:                                                                                   
   Products............................................     47.6             25.2              9.5  
   Services............................................      4.7             17.3             29.4  
                                                        ---------        ---------        --------- 
                                                            52.3             42.5             38.9  
                                                        ---------        ---------        --------- 
Gross profit...........................................     47.7             57.5             61.1  
                                                        ---------        ---------        --------- 

Operating expenses:                                                                                 
   Sales and marketing.................................    154.8             73.5             33.9  
   Research and development............................     27.2             26.6             21.7  
   General and administrative..........................     42.6             54.7             13.1  
   Impairment and amortization of intangibles..........    436.0              8.4               --  
   Merger expenses.....................................     28.3               --               --  
   Loss on disposal of assets..........................       --              5.7               --  
   Restructuring and impairment .......................      7.7             40.3              3.1  
                                                        ---------        ---------        --------- 
          Total operating expenses.....................    696.6            209.2             71.8  
                                                        ---------        ---------        --------- 
Loss from operations...................................   (648.9)          (151.7)           (10.7) 
                                                        ---------        ---------        --------- 
Interest expense.......................................     (0.8)           (36.9)            (0.8) 
Interest income........................................      6.2              1.1              2.0  
Patent infringement award..............................       --               --              4.5  
Other expense..........................................     (2.3)            (1.3)            (0.1) 
                                                        ---------        ---------        --------- 
Net loss before extraordinary gain.....................   (645.8)          (188.8)            (5.1) 
Extraordinary gain.....................................       --              3.1              --   
                                                        ---------        ---------        --------- 
Net loss...............................................   (645.8)%         (185.7)%           (5.1)%
                                                        =========        =========        ========= 

Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001       

Revenues. Total revenues decreased to $22.4 million in 2002, compared to $28.9  
million in 2001, a decrease of $6.5 million or 22%. This decrease was due       
primarily to a decrease of $7.5 million in sales of full service virtual tours  
to the residential real estate market, which was off-set by an increase of $1.0 
million in technology products and services revenues due to increased           
transaction volumes.                                                            

As part of the sale of assets to Homestore.com during the first quarter of 2001,
we no longer directly sell full service virtual tours or iPIX keys to customers 
in the U.S. residential real estate market. Instead, through January 12, 2002,  
we provided Homstore.com certain processing, hosting and distribution services  
and received transaction fees and royalties. Throughout 2002, other than full   
service virtual tours, our real estate focused revenues were generated from     
three primary sources: image management services; camera kits and immersive     
keys; and other services. The 2001 revenues of $28.9 million included $21.4     
million from the sale of our technology products and services and $7.5 million  
related to full service virtual real estate tours. We did not have any full     
service virtual real estate tour revenues in 2002. We expect to generate minimal
future revenues from the sale of full service virtual real estate tours in the  
U.S. residential markets.                                                       

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Product revenues decreased to $6.5 million in 2002, compared to $14.8 million in
2001, a decrease of $8.3 million. This decrease was due primarily to the $7.5   
million reduction in sales of virtual tours and reduced sales and marketing     
efforts to sell low margin camera kits. Services revenues from our professional 
services and Rimfire technology were $15.9 million in 2002, compared to $14.1   
million in 2001. The increase in service revenues related primarily to expanded 
use of Rimfire to process images for on-line auction transactions.              

Cost of Revenues. Cost of revenues consists of our direct expenses associated   
with the processing, hosting and distribution of digital content and the costs  
of the digital camera and related components included in an iPIX kit. Cost of   
revenues decreased to $8.7 million in 2002, compared to $12.3 million in 2001, a
decrease of $3.6 million or 29%. Cost of revenues as a percentage of total      
revenues decreased to 39% in 2002 from 42% in 2001. This decrease was primarily 
the result of a lower volume of virtual tour deliveries and an increase in      
higher margin Rimfire based revenues.                                           

Sales and Marketing. Sales and marketing expenses consist primarily of salaries 
for marketing, sales and business development personnel. Sales and marketing    
expenses also include commissions and related benefits for sales personnel and  
consultants, traditional advertising and promotional expenses. Sales and        
marketing expenses decreased to $7.6 million in 2002, compared to $21.3 million 
in 2001, a decrease of $13.7 million or 64%. This decrease was due primarily to 
our decision to sell more of our products and services through third parties and
become less reliant upon a worldwide direct sales force. As a result, we        
significantly reduced our sales force and eliminated our field operations       
personnel resulting in a decrease of $11.6 million. In addition, we eliminated  
costs relating to technology access and sponsorship fees and decreased          
advertising and branding expenses, which accounted for $2.1 million of the      
decrease.                                                                       

Research and Development. Research and development expenses consist primarily of
personnel costs related to building and enhancing our digital media             
infrastructure and immersive imaging technology. Research and development       
expenses decreased to $4.9 million in 2002, compared to $7.7 million in 2001, a 
decrease of $2.8 million or 37%. This decrease was due primarily to decreased   
personnel and related costs as a result of our reduction in work force and our  
exit from the full service virtual tour real estate business.                   

General and Administrative. General and administrative expenses consist         
primarily of salaries and related benefits for administrative and executive     
staff, fees for outside professional services, bad debt expenses and other costs
associated with being a public company. General and administrative expenses     
decreased to $2.9 million in 2002, compared to $15.8 million in 2001, a decrease
of $12.9 million or 81%. This decrease was due primarily to a decrease in       
personnel and related costs of $6.2 million. Bad debt expense decreased by $4.7 
million in 2002 from $4.4 million in 2001. In 2002, no additional provisions for
uncollectible receivables were required; however, $0.3 million was collected    
from previously reserved receivables. Professional fees, which included legal   
fees, accounting fees and public company expenses, accounted for $2.0 million of
the decrease in 2002.                                                           

Stock-based Compensation. Stock-based compensation expense is included in       
various expense line items in the statement of operations and consists of the   
amortization of deferred compensation related to stock options granted to       
employees and others prior to our initial public offering with an exercise price

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below the deemed fair market value of our common stock on the date of grant. In 
addition, it also includes the amortization of the fair value of warrants and   
options issued to non-employees and restricted stock granted to employees. The  
related compensation is amortized over the vesting period of the options or     
stock grants. Expenses related to the warrants are amortized over the term of   
the agreements to which they relate. The following table summarizes amounts     
expensed in 2001 and 2002 for stock-based compensation:                         

                                        Years Ended December 31,
                                      ------------------------------------
(In thousands)                                  2001              2002          
                                     --------           --------
Cost of revenues                             $    95             $  --          
Sales and marketing                            1,605               171          
Research and development                         650                --          
General and administrative                     2,149                --          
                                     --------            -------
                                    $ 4,499             $  171
                                      ========            ========

The decrease in total expense for 2001 and 2002 was because most of the related 
stock options and warrants were fully vested prior to the end of 2001. In 2002, 
we did not issue any additional warrants or stock options priced below the      
deemed fair market value of our common stock on the date of grant.              

Impairment and Amortization of Intangibles. Amortization expense consists of    
goodwill associated with corporate acquisitions during the second quarter of    
2000. We adopted Statement of Financial Accounting Standards 142, "Goodwill and 
Other Intangible Assets" (FAS 142), effective January 1, 2002. Under FAS 142,   
goodwill is no longer amortized, but reviewed for impairment annually, or more  
frequently if certain indicators arise. Amortization of goodwill was $0.0       
million in 2002, compared to $2.4 million in 2001.                              

Loss on Disposal of Assets. Loss on disposal of assets was $1.7 million in the  
2001 compared to $0 in 2002. We recorded a loss on disposal of assets as a      
result of the sale of assets used to provide residential real estate virtual    
tours that consisted of the remaining residential real estate assets that were  
unrelated to the 2000 pooling of Interactive Pictures Corporation and           
bamboo.com.                                                                     

Restructuring and Impairment. Restructuring and Impairment charges were $0.7    
million in 2002, compared to $11.7 million in 2001, a decrease of $11.0 million 
or 94%. Restructuring charges are primarily associated with reductions of our   
workforce, outstanding obligations under non-productive leases resulting from   
the consolidation of certain offices and write-offs of abandoned computers and  
office furniture and equipment. Included in the 2001 impairment expense is $1.5 
million related to the write off of the unamortized portion of our directors'   
and officers' insurance policy. We were required to obtain a new policy due to  
the change in control related to our 2001 financing which culminated in the     
third quarter. Please see Note 4 in the accompanying financial statements for a 
more detailed explanation.                                                      

Interest Expense. Interest expense was $0.2 million 2002, compared to $10.7     
million in 2001, a decrease of $10.5 million. In 2001, we recorded non-cash     
interest expense of $10.0 million related to the accretion of a promissory note 
issued in the second quarter 2001 to its face value when the promissory note was
converted to Series B Preferred Stock during the third quarter of 2001 and $0.3 
million of interest expense on the promissory note. The remaining interest      
expense charges in 2001 and 2002 relate to capital lease obligations.           

Interest Income. Interest income consists primarily of interest earned on cash  
and investments. Interest income increased to $0.5 million in 2002, compared to 

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$0.3 million in 2001. The increase was primarily due to interest earned of $0.3 
million on the patent infringement award.                                       

Patent Infringement Award. The patent infringement award in 2002 of $1.0 million
is due to the collection of a previously awarded court judgment for which all   
legal remedies for appeal have been exhausted and the case is now closed.       

Other Expense. Other expense was $0.0 million in 2002, compared to $0.4 million 
in 2001. The change was primarily due to realized losses on investments sold    
during 2001.                                                                    

Extraordinary Gain. Extraordinary gain was $0.9 million 2001, compared to $0.0  
million in 2002. We recorded an extraordinary gain from the cash received from  
the sale of assets to Homestore.com in January, 2001. The assets were used to   
provide virtual tours of residential real estate properties that were related to
the pooling of Interactive Pictures Corporation and bamboo.com which occurred   
less than 12 months prior to the sale.                                          

Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000     

Revenues. Total revenues decreased to $28.9 million in 2001, compared to $53.7  
million in 2000, a decrease of $24.8 million or 46%. This decrease was due      
primarily to a decrease of $27.9 million in sales of full service virtual tours 
to the residential real estate market, which was off-set by an increase of $3.1 
million in technology products and services revenues.                           

The 2001 revenues of $28.9 million included $21.4 million from the sale of our  
technology products and services and $7.5 million related to full service       
virtual real estate tours. The 2000 revenues of $53.7 million included $18.3    
million from the sale of our technology products and services and $35.4 million 
related to full service virtual real estate tours. We expect to generate minimal
future revenues from the sale of full service virtual real estate tours in the  
U.S. residential markets. The increase in 2001 technology products and services 
revenues was primarily related to image management solutions for the auction    
industry.                                                                       

Product revenues decreased to $14.8 million in 2001, compared to $48.9 million  
in 2000, a decrease of $34.1 million. This decrease was due primarily to the    
reduction in sales of virtual tours. Services revenues from our professional    
services and Rimfire technology were $14.1 million in 2001, compared to $4.7    
million in 2000. The increase in professional service revenues related primarily
to integrations of our technology with new customers.                           

Cost of Revenues. Cost of revenues consists of our direct expenses associated   
with the processing, hosting and distribution of digital content and the costs  
of the digital camera and related components included in an iPIX kit. Cost of   
revenues decreased to $12.3 million in 2001, compared to $28.1 million in 2000, 
a decrease of $15.8 million or 56%. Cost of revenues as a percentage of total   
revenues decreased to 42% in 2001 from 52% in 2000. This decrease was primarily 
the result of a lower volume of virtual tour deliveries and an increase in      
higher margin Rimfire based revenue.                                            

Sales and Marketing. Sales and marketing expenses consist primarily of salaries 
for marketing, sales and business development personnel. Sales and marketing    
expenses also include commissions and related benefits for sales personnel and  
consultants, traditional advertising and promotional expenses. Sales and        

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marketing expenses decreased to $21.3 million in 2001, compared to $83.1 million
in 2000, a decrease of $61.8 million or 74%. This decrease was due primarily to 
our decision to sell more of our products and services through third parties and
become less reliant upon a worldwide direct sales force. As a result, we        
significantly reduced our sales force and eliminated our field operations       
personnel. In addition, we eliminated costs relating to technology access and   
sponsorship fees and decreased advertising and branding expenses.               

Research and Development. Research and development expenses consist primarily of
personnel costs related to building and enhancing our digital media             
infrastructure and immersive imaging technology. Research and development       
expenses decreased to $7.7 million in 2001, compared to $14.6 million in 2000, a
decrease of $6.9 million or 47%. This decrease was due primarily to decreased   
personnel and related costs as a result of our reduction in work force and our  
exit from the full service virtual tour real estate business.                   

General and Administrative. General and administrative expenses consist         
primarily of salaries and related benefits for administrative and executive     
staff, fees for outside professional services, bad debt expenses and other costs
associated with being a public company. General and administrative expenses     
decreased to $15.8 million in 2001, compared to $22.9 million in 2000, a        
decrease of $7.1 million or 31%. This decrease was due primarily to a decrease  
in personnel and related costs and fees related to professional services. Bad   
debt expense was $4.4 million in 2001 compared to $4.0 million in 2000, an      
increase of $0.4 million.                                                       

Stock-based Compensation. Stock-based compensation expense is included in       
various expense line items in the statement of operations and consists of the   
amortization of deferred compensation related to stock options granted to       
employees and others prior to our initial public offering with an exercise price
below the deemed fair market value of our common stock on the date of grant. In 
addition, it also includes the amortization of the fair value of warrants and   
options issued to non-employees and restricted stock granted to employees. The  
related compensation is amortized over the vesting period of the options or     
stock grants. Expenses related to the warrants are amortized over the term of   
the agreements to which they relate.                                            

The following table summarizes amounts expensed in 2000 and 2001 for stock-based
compensation:                                                                   

                                      Years Ended December 31,
                                     -------------------------------------
(In thousands)                              2000                    2001        
                                   --------                 --------

Cost of revenues                         $   165                  $    95       
Sales and marketing                        3,038                    1,605       
Research and development                   1,380                      650       
General and administrative                   544                    2,149       
                                   --------                 --------
                                  $ 5,127                  $ 4,499
                                   ========                 ========

Stock-based compensation expense decreased to $4.5 million in 2001, compared to 
$5.1 million in 2000, a decrease of $0.6 million or 12%. This decrease was due  
to a decrease in expense related to stock options and warrants which were issued
prior to 2001. In 2001, we did not issue any additional warrants or stock       
options priced below the deemed fair market value of our common stock on the    
date of grant.                                                                  

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Impairment and Amortization of Intangibles. Amortization expense consists of    
goodwill associated with corporate acquisitions during the second quarter of    
2000. Amortization of goodwill was $2.4 million in 2001, compared to $234.0     
million in 2000, a decrease of $231.6 million or 99%. The decrease is primarily 
related to the impairment charge taken in the fourth quarter of 2000 of $176.8  
million.                                                                        

Merger Expenses. Merger expenses consist of costs incurred as a result of the   
merger of Interactive Pictures and bamboo.com that occurred on January 19, 2000.
Merger expense was $0.0 million in 2001, compared to $15.2 million in 2000.     

Loss on Disposal of Assets. Loss on disposal of assets was $1.7 million in the  
2001 compared to $0 in 2000. We recorded a loss on disposal of assets as a      
result of the sale of assets used to provide residential real estate virtual    
tours that consisted of the remaining residential real estate assets that were  
unrelated to the 2000 pooling of Interactive Pictures Corporation and           
bamboo.com.                                                                     

Restructuring and Impairment. Restructuring and impairment charges were $11.7   
million in 2001, compared to $4.2 million in 2000, an increase of $7.5 million  
or 180%. Restructuring charges are primarily associated with reductions of our  
workforce, outstanding obligations under non-productive leases resulting from   
the consolidation of certain offices and write-offs of abandoned computers and  
office furniture and equipment. Included in the 2001 impairment expense is $1.5 
million related to the write off of the unamortized portion of our directors'   
and officers' insurance policy. We were required to obtain a new policy due to  
the change in control related to our 2001 financing which culminated in the     
third quarter.                                                                  

Interest Expense. Interest expense was $10.7 million 2001, compared to $0.4     
million in 2000, an increase of $10.3 million. In 2001, we recorded non-cash    
interest expense of $10.0 million related to the accretion of the second quarter
2001 promissory note to its face value when converted to preferred stock during 
the third quarter of 2001.                                                      

Interest Income. Interest income consists primarily of interest earned on cash  
and investments. Interest income decreased to $0.3 million in 2001, compared to 
$3.3 million in 2000. This decrease was due primarily to decreased earnings on  
our cash investments related to lower average cash balances throughout the      
years.                                                                          

Other Expense. Other expense was $0.4 million in 2001, compared to other expense
of $1.2 million in 2000. In 2001, the expense was due to realized losses on     
investments sold during 2001, while in 2000, the expense was primarily          
associated with the write down of various investments.                          

Extraordinary Gain. Extraordinary gain was $0.9 million 2001, compared to $0.0  
million in 2000. We recorded an extraordinary gain from the cash received from  
the sale of assets to Homestore.com in January, 2001. The assets were used to   
provide tours of residential real estate properties that were related to the    
pooling of Interactive Pictures Corporation and bamboo.com which occurred less  
than 12 months prior to the sale.                                               

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LIQUIDITY AND CAPITAL RESOURCES                                                 

Since inception, we have financed our operations through our registered public  
offerings, the private placements of capital stock, a convertible debenture, a  
convertible promissory note and warrant and option exercises. At December 31,   
2002, we had $6.0 million of cash, cash equivalents, restricted cash and        
short-term investments.                                                         

Net cash used in operating activities was $4.7 million for year ended December  
31, 2002 and $26.7 million for the year ended December 31, 2001. Net cash used  
for operating activities in 2002 was primarily a result of payments throughout  
the year for accounts payable of $1.1 million and accrued expenses of $1.7      
million, many of which related to payments on restructuring and other           
obligations from 2001 and earlier. In addition, during 2002, accounts           
receivables increased $2.3 million, primarily as a result of fourth quarter     
revenues, which were collected in January 2003.                                 

Net cash provided by (used in) investment activities was $(4.9) million for the 
year ended December 31, 2002 and $13.2 million for the year ended December 31,  
2001. Net cash provided by (used in) investing activities was related to the net
purchases and maturities of short-term investments, the acquisition of computer 
software and hardware and other equipment and the proceeds from the sale of     
assets.                                                                         

Net cash provided by financing activities was $1.5 million for the year ended   
December 31, 2002 and $20.0 million for the year ended December 31, 2001. The   
net cash provided by financing activities for 2002 was due primarily to the     
proceeds from sale-leaseback transactions. The net cash provided by financing   
activities for 2001 was due primarily to the sale of shares of our preferred    
stock, off-set by the repayment of capital lease obligations.                   

The table below shows our contractual obligations as of December 31, 2002:      

(In thousands)                           Payments Due by Period             
                           Less than    1-3      4 - 5     After 5
                Total      1 year     years     years      years
Capital Leases       $  4,090    $ 2,582    $1,508     $  --      $  --       
Operating Leases        7,786      3,189     3,762       771         64       
Total                   11,876     5,771     5,270       771         64       

Management  believes we have sufficient cash resources to meet our funding needs
for 2003.  We  finished  2002 with  approximately  $6.0  million  in cash,  cash
equivalents,   restricted  cash  and  short-term   investments.   Our  principal
agreements  with  Homestore and eBay,  expire on June 30, 2003 and September 30,
2003,  respectively.  These  agreements are subject to extension,  amendment and
re-negotiation from time to time. We are currently negotiating extensions to our
agreements  with  both  customers.  Significant  changes  in  the  terms  of our
relationships  with these customers,  delays in payments from these customers or
the  loss of  either  customer  could  have a  material  adverse  effect  on our
business.  We believe that  transaction fees from eBay will continue to increase
as a percentage of revenue  through  September  30, 2003 as more eBay  customers
utilize our service on the eBay auction Web site.                               

Depending upon the outcome of the  negotiations  noted above,  the timeliness of
collection  of our  accounts  receivable,  our rate of growth and our ability to

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control costs, we may require additional equity or debt financing to meet future
working  capital or capital  expenditure  needs.  There can be no assurance that
such additional financing will be available or if available, that such financing
can be obtained on terms satisfactory to us.                                    

Management's focus in 2003 will be to manage our cash requirements and focus our
operations on profitability. Our long-term strategy remains unchanged. We will  
continue to make significant capital investments as well as investments in      
research and development for all segments and will invest in the expansion of   
the online auction and classified businesses and in the development of new      
security and observation products and services during this economic downturn.   

RECENT ACCOUNTING PRONOUNCEMENTS                                                

In February 2002, the Emerging Issues Task Force ("EITF") issued EITF 00-14,    
"Income Statement Characterization of Reimbursements Received for Out-of-Pocket 
Expenses Incurred," which is effective for financial statements beginning after 
December 31, 2001. EITF 00-14 requires that reimbursements received for         
out-of-pocket expenses incurred, generally, be characterized as revenue in the  
statement of operations. We adopted EITF 00-14 in the quarter ended March 31,   
2002. The adoption of EITF 00-14 did not have a material effect on our reported 
results of operations, financial position or cash flows.                        

In June 2002, the Financial Accounting Standards Board ("FASB") issued FAS 146, 
"Accounting for Exit or Disposal Activities" ("FAS 146"). FAS 146 addresses     
significant issues regarding the recognition, measurement, and reporting of     
costs that are associated with exit and disposal activities, including          
restructuring activities that are currently accounted for under EITF 94-3,      
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The 
scope of FAS 146 also includes costs related to terminating a contract that is  
not a capital lease and termination benefits that employees who are             
involuntarily terminated receive under the terms of a one-time benefit          
arrangement that is not an ongoing benefit arrangement or an individual         
deferred-compensation contract. FAS 146 will be effective for exit or disposal  
activities that are initiated after December 31, 2002 and early application is  
encouraged. We will adopt FAS 146 during the first quarter ending March 31,     
2003. The effect on adoption of FAS 146 will change on a prospective basis the  
timing of when restructuring charges are recorded from a commitment date        
approach to when the liability is incurred.                                     

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),        
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including   
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability
be recorded in the guarantor's balance sheet upon issuance of a guarantee. In   
addition, FIN 45 requires disclosures about the guarantees that an entity has   
issued, including a reconciliation of changes in the entity's product warranty  
liabilities. The initial recognition and initial measurement provisions of FIN  
45 are applicable on a prospective basis to guarantees issued or modified after 
December 31, 2002, while the disclosure requirements are applicable in 2002. The
Company is complying with the disclosure requirements of FIN 45 for the year    
ending December 31, 2002 (See Note 12) and is evaluating the effect the other   
requirements may have on its financial statements.                              

In November 2002, the EITF reached consensus on Issue No. 00-21, "Revenue       
Arrangements with Multiple Deliverables." EITF 00-21 provides guidance on how to
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products, services and/or rights to use assets. The provisions of EITF Issue No.
00-21 will apply to revenue arrangements entered into in fiscal periods         
beginning after June 15, 2003. The Company does not believe that the adoption of
this standard will have a material effect on its financial position or results  
of operations.                                                                  

In December 2002, the FASB issued FAS No. 148, "Accounting for Stock-Based      
Compensation, Transition and Disclosure"("FAS 148"). FAS 148 provides           
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. FAS 148 also        
requires that disclosures of the pro forma effect of using the fair value method
of accounting for stock-based employee compensation be displayed more           
prominently and in a tabular format. Additionally, FAS 148 requires disclosure  
of the pro forma effect in interim financial statements. The transition and     
annual disclosure requirements of FAS 148 are effective for fiscal years ending 
after December 15, 2002, and these disclosures are contained in Note 2. The     
interim disclosure requirements are effective for interim periods commencing    
after December 15, 2002. The Company will continue to apply the APB 25          
provisions and will disclose the fair value information on a proforma basis.    

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51"("FIN 46"). FIN 46 requires certain   
variable interest entities to be consolidated by the primary beneficiary of the 
entity if the equity investors in the entity do not have the characteristics of 
a controlling financial interest or do not have sufficient equity at risk for   
the entity to finance its activities without additional subordinated financial  
support from other parties. FIN 46 is effective immediately for all new variable
interest entities created or acquired after January 31, 2003. For variable      
interest entities created or acquired prior to February 1, 2003, the provisions 
of FIN 46 must be applied for the first interim or annual period beginning after
June 15, 2003. The Company does not believe that the adoption of this standard  
will have a material effect on its financial position or results of operations. 

INFLATION                                                                       

Inflation has not had a significant impact on our operations to date.           

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk.           

As of December 31, 2002, we had $6.0 million of cash, cash equivalents,         
restricted cash and short-term investments. Our interest income is sensitive to 
changes in the general level of United States interest rates, particularly since
the majority of our investments are in short-term instruments. Due to the nature
of our short-term investments, we concluded that we do not have material market 
risk exposure.                                                                  

Item 8.  Financial Statements and Supplementary Data.                           

The consolidated financial statements and financial statement schedule of the   
Company, together with the reports thereon of PricewaterhouseCoopers, LLP,      
independent accountants, are set forth on the pages indicated in item 15 (a)    
below of this Annual Report on Form 10-K.                                       

This Form 10-K contains certain forward-looking statements regarding, among     
other things, the anticipated financial and operating results of the Company.   
Investors are cautioned not to place undue reliance on these forward-looking    
statements, which speak only as of the date hereof. We do not undertake any     

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obligation to publicly release any modifications or revisions to these          
forward-looking statements to reflect events or circumstances occurring after   
the date hereof or to reflect the occurrence of unanticipated events. In        
connection with the "safe harbor" provisions of the Private Securities          
Litigation Reform Act of 1995, we caution investors that future financial and   
operating results may differ materially from those projected in forward-looking 
statements made by, or on behalf of, us. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause our     
actual results, performance or achievements to be materially different form any 
future results, performance or achievements expressed or implied by such        
forward-looking statements.                                                     

RISK FACTORS                                                                    

Our operating results are highly dependent on generating recurring revenue from 
our existing Rimfire service customers, and we must be successful in adding new 
Rimfire service customers and generating revenue from new markets               

Substantially all of our recurring revenue is derived from transaction fees     
generated by our Rimfire service. In particular, eBay and Homestore.com are our 
largest Rimfire customers. eBay represented approximately 60% of total revenue  
and 82% of total Rimfire service revenue for 2002. Homestore.com represented    
approximately 16% of total revenue and 13% of total Rimfire service revenue for 
2002. The loss of either of these customers may have a material adverse effect  
on our business. Because we are dependent on these two customers, we must       
continue to add new Rimfire customers in order to increase revenues and         
diversify our sources of revenue. We must also be successful in developing our  
product and service offerings for new markets, such as security and observation 
and classified advertising. In order to achieve and maintain profitability, we  
must be successful in generating revenue from sales of our product and service  
offerings into existing and new markets. We must also continue to improve and   
enhance our Rimfire service. If we fail to do so in a timely manner, or if we   
suffer a decrease in demand for our products and services, our revenue will     
decrease.                                                                       

Our principal agreements with Homestore.com and eBay, expire on June 30, 2003   
and September 30, 2003, respectively. These agreements are subject to extension,
amendment and re-negotiation from time to time. If these agreements are not     
extended, we may suffer a material adverse effect on our revenue and our ability
to achieve profitability. In addition, any significant decrease in demand for   
our revenue generating picture services on the eBay auction site could have a   
material adverse effect on our revenue and our ability to achieve profitability.

We rely on third party systems to provide our Rimfire service                   

We rely on certain third-party computer systems and third-party service         
providers, including a third party Internet service provider, to host and       
maintain our production services for all of our Rimfire customers. The          
performance and availability of our Internet systems is critical to our business
and reputation. Any system failure, including network, software or hardware     
failure that interrupts the delivery of Rimfire services or decreases our       
responsiveness to our customers could be disruptive to our business. Our        
Internet service provider does not guarantee that its Internet access will be   
uninterrupted, error free or secure. From time to time it is necessary to change
the providers of these services. During the period we are moving our services   
from one provider to another, interruptions in our offerings could occur.       
Because our revenue from our Rimfire service is transaction based, any          
interruption in Internet access will result in a loss of revenue for the period 
that Internet access is unavailable.                                            

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Our  limited  operating  history  and  recent  restructuring  efforts  makes  it
difficult to evaluate our business                                              

During 2001, we sold our full-service, residential real estate business and     
completed a significant restructuring of our Company. We focused our business on
generating higher margin revenue from our Rimfire and iPIX immersive solutions  
and significantly reduced our operating expenses and number of employees. As a  
result, we have a limited operating history on which you can base an evaluation 
of our business and prospects. Our prospects must be considered in the light of 
the risks, uncertainties, expenses and difficulties frequently encountered by   
companies that have undertaken a substantial business restructuring. To address 
these risks and uncertainties, we must, among other things:                     

o        increase our customer base for Rimfire services;                       
o        maintain  and  enhance our brand and expand our  immersive  product and
service offerings;                                            
o        attract, integrate, retain and motivate qualified personnel; and       
o        adapt to meet changes in our markets and competitive developments.     

We may not be successful in accomplishing these objectives.                     

Failure to increase our revenues or increases in expenses would prevent us from 
achieving and maintaining profitability                                         

Until the third quarter of 2002, we had never been profitable. We have incurred 
significant losses and may incur losses in the future. A substantial portion of 
our revenues for 2002 and our future revenues will be derived from transaction  
fees and license fees from our Rimfire customers, particularly eBay Inc. In the 
future, we may introduce new products and services and enhancements and         
improvements to our current product and service offerings. We may have to       
increase our operating expenses in order to increase our customer base, enhance 
our brand image and support our growing infrastructure. In order for us to      
become profitable, we must increase our revenues and gross profit margins       
sufficiently to cover current and future operating expenses. If we fail to do   
so, we may never achieve sustained profitability.                               

Our quarterly results may fluctuate, which could make financial forecasting     
difficult and increase volatility in our common stock                           

Our revenues and operating results may vary significantly from                  
quarter-to-quarter. As a result, quarter-to-quarter comparisons of our revenues 
and operating results may not be meaningful. In addition, due to our limited    
operating history and restructuring, it may be difficult to predict our future  
revenues and results of operations accurately. It is likely that, in one or more
future quarters, our operating results will fall below the expectations of      
investors. If this happens, the trading price of our common stock is likely to  
be materially and adversely affected.                                           

Our success depends on our ability to protect our intellectual property         

We rely on trademark, copyright and patent law, trade secret protection and     
confidentiality or license agreements with our employees, customers, partners   
and others to protect our proprietary rights. If we are not successful in       
protecting our intellectual property, there could be a material adverse effect  
on our business.                                                                

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While we believe that our issued patents and pending patent applications help to
protect our business, there can be no assurance that:                           

o        any patent can be  successfully  defended  against  challenges by third
parties;                                                      
o        pending patent applications will result in the issuance of patents;    
o        our competitors or potential competitors will not devise new methods of
         competing  with us that  are  not  covered  by our  patents  or  patent
applications;                                                 
o        new prior art will not be discovered which may diminish the value of or
invalidate an issued patent; or                               
o        a third party will not have or obtain one or more  patents that prevent
         us from  practicing  features of our business or will require us to pay
for a license to use those features.                          

Also, our patents, service marks or trademarks may be challenged and invalidated
or circumvented. In addition, we are exposed to infringement of our intellectual
property in foreign markets because our intellectual property is protected under
United States laws that may not extend to foreign uses.                         

We have been involved in litigation relating to the protection of intellectual  
property rights and could be involved in future litigation as third parties     
develop products that we believe infringe on our patents and other intellectual 
property rights. We have experienced attempts to misappropriate our technology, 
and we expect those attempts may continue. We have been involved in litigation  
in which our rights to technology have been challenged. The cost of such        
litigation, or the determination against us in this type of lawsuit, could have 
a material adverse effect on our business.                                      

If we lose key members of our personnel, our future success could be limited    

Our future success depends on our ability to attract and retain key management, 
engineering, technical and other personnel. In addition, we must recruit        
additional qualified management, engineering, technical and marketing and sales 
and support personnel for our operations. Competition for this type of personnel
is intense, and we may not be successful in attracting or retaining personnel.  
The loss of the services of one or more members of our management group or other
key employees or the inability to hire additional qualified personnel will limit
our ability to grow our business.                                               

Our success is dependent upon our ability to adapt to technological changes, and
if we fail to do so, our offerings may become obsolete                          

We compete in a market  characterized by rapidly changing  technology,  evolving
industry   standards,   frequent   new  service   and   product   announcements,
introductions  and  enhancements  and changing  customer  demands.  These market
characteristics  are  intensified by the emerging nature of the Internet and the
multitude of companies offering Internet-based products and services.  Thus, our
success  depends on our ability to adapt to rapidly  changing  technologies,  to
adapt our offerings to evolving  industry  standards and to continually  improve
the  performance,  features  and  reliability  of our  offerings  in response to
competitive  products  and  shifting  demands of the  marketplace.  In addition,
widespread changes in Internet, networking or telecommunications technologies or
other technological alterations could require substantial expenditures to modify
our products, services or infrastructure.  Failure to adapt to new technology in
any of these areas could have a material adverse effect on our business, results
of operations and financial condition.                                          

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We may not be successful in expanding our business into international markets   

A part of our long-term strategy has been to expand into international markets. 
The success of any additional foreign operations will be substantially dependent
upon our entering and succeeding in those markets, including through joint      
ventures or other indirect strategies. We may experience difficulty in managing 
international operations as a result of competition, technical problems,        
distance, language or cultural differences.                                     

As we manage our international efforts, we will be subject to a number of risks,
including the following:                                                        

o        failure of foreign  countries to rapidly  adopt the  Internet,  digital
imaging or other required technologies;                       
o        unexpected changes in regulatory requirements, especially regarding the
Internet;                                                     
o        slower  payment  and  collection  of  accounts  receivable  than in our
domestic market; and                                          
o        political and economic instability.                                    

We cannot assure you that we will be able to successfully market our products in
foreign markets.                                                                

We are susceptible to breaches of online commerce security                      

A party able to circumvent our security measures could misappropriate           
proprietary database information or cause interruptions in operations. As a     
result, we may need to expend significant capital and other resources to protect
against security breaches or to alleviate problems caused by security breaches. 
This additional expense could harm our business, financial condition and results
of operation.                                                                   

Our certificate of incorporation and bylaws contain anti-takeover provisions    
that may make it more difficult or expensive to acquire us in the future, which 
could negatively affect our stock price                                         

Our amended and restated certificate of incorporation and amended and restated  
bylaws and applicable provisions of Delaware law contain several provisions that
may make it more difficult for a third party to acquire control of us without   
the approval of our board of directors. In addition, in October of 2000, our    
board of directors approved a stockholder rights plan that has the effect of    
making an acquisition of us prohibitively expensive unless our board of         
directors approves of the acquisition. The provisions of our certificate and    
bylaws and the Delaware General Corporation Law may make it more difficult or   
expensive for a third party to acquire a majority of our outstanding voting     
common stock or delay, prevent or deter a merger, acquisition, tender offer or  
proxy contest, which may negatively affect our stock price.                     

Because our product and service offerings are intended to enhance Internet      
commercial transactions, the success of our business will be dependent upon     
continued growth of Internet commerce                                           

Our products and services are intended to enhance and facilitate commercial     
transactions over the Internet. Our future revenues are substantially dependent 
upon the widespread acceptance and use of the Internet and other online services
as a medium for commerce by consumers and sellers. If continued acceptance and  
growth of Internet use does not occur, it could have a material adverse effect  
on our business.                                                                

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The Internet has experienced, and is expected to continue to experience,        
significant growth in the number of users and in the amount of traffic.         
Continued development and maintenance of the Internet's infrastructure to handle
this increased traffic must continue. In addition, timely development of        
complimentary products, such as high-speed modems, providing reliable Internet  
access and services will also be required.                                      

The Internet has experienced a variety of outages and other delays as a result  
of computer viruses and other damages to portions of its infrastructure. Outages
and delays and infections by computer viruses are likely to continue and affect 
the level of Internet usage generally. Such outages and delays will affect      
processing of transactions on Rimfire integrated Websites. We will experience a 
reduction in revenues and increased expenses as a result of such outages and    
delays. We will be required to continually make capital investments to enhance  
our infrastructure and protect our services from computer viruses and other     
outages and delays on the Internet. The cost of such improvements could have a  
material adverse effect on our business.                                        

Our market is highly  competitive,  and our business may suffer if we are unable
to compete successfully                                                         

The market for our immersive products and our Rimfire products and services are 
new and rapidly evolving. Competitions for Rimfire primarily comes in the form  
of a buy vs. build analysis. We currently see minimal competition from other    
providers of image management services. The market for immersive products and   
services is intensely competitive. We compete with other providers of immersive 
imaging technology, such as Apple, BeHere Corporation, Remote Reality and       
iSeeMedia. Each of these companies develops and markets products and services   
similar to ours. We expect additional competition from other emerging and       
established companies. There can be no assurance that the Company's current and 
potential competitors will not develop products that are more effective than our
current or future products, or that our products and technology will not be     
rendered obsolete by such developments. Some of our competitors have longer     
operating histories, greater name recognition and significantly greater         
financial, technical and marketing resources. As a result, they may be able to  
adapt more quickly to new or emerging technologies and changes in customer      
requirements or devote greater resources to promotion and sale of their products
than us. Our business will suffer if we are unable to compete effectively.      

Concentrated control over our voting stock could adversely affect stockholders  

The holders of our Series B Preferred Stock beneficially owned approximately 62%
of our outstanding voting stock. As a result, these stockholders are able to    
exercise control over certain matters requiring stockholder approval, including 
the election of directors and approval of significant corporate transactions.   
Such control could discourage others from initiating potential merger, takeover 
or other change of control transactions. As a result, the market price of our   
common stock could be adversely affected.                                       

Recent  terrorist  activities  and  resulting  military and other  actions could
adversely affect our business                                                   

Terrorist attacks in 2001 and 2002 disrupted commerce throughout the United     
States and other parts of the world. The continued threat of terrorism within   
the United States and abroad, and the continued military action and heightened  
security measures, may cost significant disruptions to global commerce. Such    
disruptions could result in the delay or cancellation of customer orders, a     
general decrease in corporate spending on information technology or our ability 

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to effectively market and sell our products and services. Such events could have
material adverse affect on our business.                                        

Item 9.  Changes in and  Disagreements  with  Accountants  on Accounting  and   
Financial Disclosure.                                         

None.                                                                           
PART III

Item 10.  Directors and Executive Officers of the Registrant.                   

The information called for by this item is incorporated herein by reference to  
iPIX's Information Statement for its Annual Meeting of Stockholders to be held  
on or about May 6, 2003, to be filed with the SEC pursuant to Regulations 14C   
under the Securities Exchange Act of 1934, as amended.                          

Item 11.  Executive Compensation                                                

The information called for by this item is incorporated herein by reference to  
iPIX's Information Statement for its Annual Meeting of Stockholders to be held  
on or about May 6, 2003, to be filed with the SEC pursuant to Regulation 14C    
under the Securities Exchange Act of 1934, as amended.                          

Item 12.  Security Ownership of Certain Beneficial Owners and Management.       

The information called for by this item is incorporated herein by reference to  
iPIX's Information Statement for its Annual Meeting of Stockholders to be held  
on or about May 6, 2003, to be filed with the SEC pursuant to Regulation 14C    
under the Securities Exchange Act of 1934, as amended.                          

Item 13.  Certain Relationships and Related Transactions.                       

The information called for by this item is incorporated herein by reference to  
iPIX's Information Statement for its Annual Meeting of Stockholders to be held  
on or about May 6, 2003, to be filed with the SEC pursuant to Regulation 14C    
under the Securities Exchange Act of 1934, as amended.                          

 PART IV

Item 14.  Controls and Procedures.                                              

(a) Evaluation of Disclosure Controls and Procedures. The Company's chief       
executive officer and chief financial officer have evaluated the effectiveness  
of the design and operation of the Company's disclosure controls and procedures 
(as defined in Exchange Act Rule13a-14(c)) as of a date within 90 days of the   
filing date of this annual report. Based on that evaluation, the chief executive
officer and chief financial officer have concluded that the Company's disclosure
controls and procedures are effective to ensure that material information       
relating to the Company and the Company's consolidated subsidiaries is made     

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known to such officers by others within these entities, particularly during the 
period this annual report was prepared, in order to allow timely decisions      
regarding required disclosure.                                                  

(b) Changes in Internal Controls. There have not been any significant changes in
the Company's internal controls or in other factors that could significantly    
affect these controls subsequent to the date of their evaluation.               

Item 15.  Exhibits, Financial Statement Schedules and Reports on form 8-K.      

(a)                                                           

         (1) The following  documents are filed as part of this Annual Report on
Form 10-K:                                                                      

                                                                        Page

Internet Pictures Corporation Consolidated Financial                            
Statements Consolidated Balance Sheets at                                 
 December 31, 2001 and 2002 .............................................F-2

Consolidated Statements of Operations for the                                   
 years ended December 31, 2000, 2001 and 2002............................F-3

Consolidated Statements of Changes in Stockholders'                             
 Equity for the years ended December 31, 2000, 2001 and 2002.............F-4

Consolidated Statements of Cash Flows for the years ended                       
 December 31, 2000, 2001 and 2002........................................F-6

Notes to Consolidated Financial Statements.................................F-8  

         (2) Except as provided  below,  all schedules have been omitted because
they are not  required or because the required  information  is contained in the
financial statements or notes thereto.                                          

Report Of Independent Accountants On
Financial Statement Schedule

To the Board of Directors and Stockholders of                               
Internet Pictures Corporation:                                              

 Our audits of the consolidated financial statements referred to in our report
dated March 27, 2003 appearing in this Annual Report on Form 10-K also      
  included an audit of the financial statement schedule listed in Item 15 (a)(2)
 of this Form 10-K. In our opinion, this financial statement schedule presents
 fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements.          

/s/  PricewaterhouseCoopers LLP                                             
-------------------------------                                             

San Jose, California                                                        
March 27, 2003                                                              

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VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FISCAL YEARS 2000, 2001 AND 2002

           Additions
                         Balance     (deductions)  Write-offs   Balance at
                      Beginning     Charged to      and         End of
Description                of Period      Expense     Deductions     Period     
------------------------  -----------  ------------  ------------  -----------  

2000                                                                  
------------------------                                                        
Allowance for Doubtful                                                          
Accounts               $     198     $   4,419    $      --     $  4,617  

Valuation Allowance on                                                          
Deferred Tax Assets       (30,737)           --      (65,114)     (95,851)  

Provision for Excess and                                                        
Obsolete Inventory             55           145            3          203   

2001                                                                  
-----------------------                                                         
Allowance for Doubtful                                                          
Accounts                    4,617         4,421       (6,867)       2,171   

Valuation Allowance on                                                          
Deferred Tax Assets       (95,851)           --       82,180      (13,671)  

Provision for Excess and                                                        
Obsolete Inventory            203           276           14          493   

2002                                                                  
-----------------------                                                         
Allowance for Doubtful                                                          
Accounts                    2,171         (279)       (1,684)         208   

Valuation Allowance on                                                          
Deferred Tax Assets       (13,671)          --        (7,051)     (20,722)  

Provision for Excess and                                                        
Obsolete Inventory            493           --          (333)         160   

(b) Reports on Form 8-K.                                      

         The  Company  filed no reports on Form 8-K  during  the  quarter  ended
December 31, 2002.                                            

(c) Exhibits.                                                 

         The following exhibits are filed herewith or incorporated by reference:

Exhibit                                                                         
Number                     Description                                          

3.1      Form of  Amended  and  Restated  Certificate  of  Incorporation  of the
         Registrant  (incorporated  herein by  reference to Form S-1 as declared
effective on August 25, 1999 (File No. 333-80639)).           

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3.1(a)   Form  of  Amendment  to  the  Amended  and  Restated   Certificate   of
         Incorporation  of the Registrant  (incorporated  herein by reference to
Form S-1 as filed with the Commission on March 17, 2000).     

3.2      Form of Amended and  Restated  Bylaws of the  Registrant  (incorporated
         herein  by  reference  to Form  10-Q as filed  with the  Commission  on
November 14, 2000).                                           

3.3      Certificate of Designations of Series A Junior Participating  Preferred
         Stock  (incorporated  herein by reference to Form 8-A as filed with the
Commission on November 2, 2000).                              

3.3      Amended  Certificate  of  Designations  of  Series  B  Preferred  Stock
         (incorporated  herein  by  reference  to Form  8-K as  filed  with  the
Commission on October 3, 2001).                               

4.1      Form of certificate  representing the common stock, $.001 par value per
         share  of  Internet  Pictures   Corporation   (incorporated  herein  by
         reference to Form 10-K as filed with the Commission on March 30, 2000).

4.2      Rights  Agreement  dated  October 31, 2000  between  Internet  Pictures
         Corporation and EquiServe (incorporated herein by reference to Form 8-A
as filed with the Commission on November 2, 2000).            

4.3      Registration  Rights  Agreement  dated May 14,  2001  between  Internet
         Pictures Corporation and Image Investors  Portfolio,  a separate series
         of Memphis Angels, LLC (incorporated herein by reference to Form 8-K as
filed with the Commission on May 29, 2001).                   

10.1*    Employment  Agreement  dated July 1, 2001,  between  Internet  Pictures
         Corporation and Donald W. Strickland  (incorporated herein by reference
to Form 10-Q as filed with the Commission on August 14, 2001).

10.2*    Employment  Agreement  dated July 1, 2001,  between  Internet  Pictures
         Corporation  and Paul A. Farmer  (incorporated  herein by  reference to
Form 10-Q as filed with the Commission on August 14, 2001).   

10.3*#   Employment  Agreement  dated  July 1, 2001  between  Internet  Pictures
Corporation and Sarah Pate.                                   

10.4*    Employment  Agreement  dated May 31,  2001  between  Internet  Pictures
         Corporation and Matthew S. Heiter  (incorporated herein by reference to
Form 10-K as filed with the Commission on March 29, 2002)     

10.5     Amended  and  Restated  Internet   Pictures   Corporation  2001  Equity
         Incentive Plan  (incorporated  herein by reference to Form S-8 as filed
with the Commission on January 16, 2002).                     

10.6     Amended and Restated 1997 Equity Compensation Plan (incorporated herein
         by  reference  to Form S-4 as declared  effective  on December 16, 1999
(File No. 91139))                                             

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10.7     Amended and Restated 1998 Employee,  Director and Consultant Stock Plan
         (incorporated  herein by reference to Form S-4 as declared effective on
December 16, 1999 (File No. 91139)).                          

10.8     1999 Employee Stock Purchase Plan (incorporated  herein by reference to
      Form S-4 as declared effective on December 16, 1999 (File No. 91139)

10.9     2000 Equity  Incentive Plan  (incorporated  herein by reference to Form
  S-8 as declared effective on June 27, 2000 (File No. 333-40160).

10.10    PictureWorks  Technology,  Inc.  1994 Stock  Option Plan  (incorporated
         herein by  reference  to Form S-8 as declared  effective on May 2, 2000
(File No. 333-36068))                                         

10.11    PictureWorks  Technology,  Inc.  1996 Stock  Option Plan  (incorporated
         herein by  reference  to Form S-8 as declared  effective on May 2, 2000
(File No. 333-36068))                                         

10.12    PictureWorks  Technology,  Inc.  1997 Stock  Option Plan  (incorporated
         herein by  reference  to Form S-8 as declared  effective on May 2, 2000
(File No. 333-36068))                                         

10.13    Form of  Indemnification  Agreement  between the Registrant and each of
         its  directors and officers  (incorporated  herein by reference to Form
     S-1 as declared effective on August 25, 1999 (File No. 333-80639)).

10.14    Acquisition  Agreement dated January 12, 2001 between Internet Pictures
         Corporation and Homestore Virtual Tours, Inc.  (incorporated  herein by
         reference  to Form 8-K as filed  with the  Commission  on  January  29,
2001).                                                        

10.15**  License  Agreement  dated  January 12, 2001 between  Internet  Pictures
         Corporation and Homestore Virtual Tours, Inc.  (incorporated  herein by
        reference to Form 10-K as filed with the Commission on April 2, 2001).

10.16**  Visual Content Service Agreement, as amended, between Internet Pictures
         Corporation  and eBay Inc.  (incorporated  herein by  reference to Form
10-Q filed with the Commission on October 31, 2001).          

10.17    Purchase Agreement between Internet Pictures  Corporation and eBay Inc.
         dated September 26, 2001 (incorporated herein by reference to Form 10-Q
filed with the Commission on October 31, 2001).               

10.18    Master Lease Agreement between Internet  Pictures  Corporation and eBay
         Inc. dated September 26, 2001 (incorporated herein by reference to Form
10-Q filed with the Commission on October 31, 2001).          

10.19    Purchase Agreement between Internet Pictures  Corporation and eBay Inc.
         dated  December 1,  2001(incorporated  herein by reference to Form 10-K
filed with the Commission on March 29, 2002).                 

10.20    Purchase  Agreement  No. 3 between the Company and eBay Inc.  dated May
         31, 2002 (incorporated  herein by reference to Form 10-Q filed with the
Commission on August 13, 2002).                               

21.1#    Subsidiaries of the Registrant.                                        

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23.1#    Consent of PricewaterhouseCoopers LLP                                  

24.1     Power of Attorney (included on page 28)                                

99.1#    Certification  pursuant to 18 U.S.C.  Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002              

99.2#    Certification  pursuant to 18 U.S.C.  Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002              

*Executive Compensation Plan or Agreement                                       
**Portions of the exhibit have been omitted pursuant to a request for           
confidential treatment.                                                         
# Filed Herewith                                                                

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SIGNATURES

       Pursuant to the requirements of 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.                       

 INTERNET PICTURES CORPORATION
By:/s/Donald W. Strickland  
               -------------------------------------
Donald W. Strickland  
               President and Chief Executive Officer

Date:  March 28, 2003       

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 POWER OF ATTORNEY

     Each person whose signature appears below hereby appoints Donald W.
Strickland, Paul A. Farmer and Matthew S. Heiter, or any of them, as such       
person's true and lawful attorney-in-fact, with full power of substitution or   
resubstitution for such person and in such person's name, place and stead, in   
any and all capacities, to sign on such person's behalf, individually and in    
each capacity stated below, any and all amendments to this Report on Form 10-K, 
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact, full  
power and authority to do and perform each and every act and thing requisite or 
necessary to be done in and about the premises, as fully to all intents and     
purposes as such person might or could do in person, hereby ratifying and       
confirming all that said attorneys-in-fact, or their substitute or substitutes, 
may lawfully do or cause to be done by virtue hereof.                           

    Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of   
the Registrant and in the capacities and on the dates indicated.                

       Signature                        Title                     Date

  /s/ Donald W. Strickland           President, Chief Executive   March 28, 2003
  ------------------------           Officer and Director         --------------
Donald W. Strickland                                                        

  /s/Paul A. Farmer                  Chief Financial Officer      March 28, 2003
  -----------------                  (Chief Accounting Officer)   --------------
Paul A. Farmer                                                              

  /s/ David M. Wilds                 Chairman of the Board of     March 28, 2003
  ------------------                 Directors                    --------------
David M. Wilds                                                              

  /s/ Gregory S. Daily               Director                     March 28, 2003
  --------------------                                            --------------
Gregory S. Daily                                                            

  Director
  -----------------------                                         --------------
Michael D. Easterly                                                         

  /s/ Thomas M. Garrott              Director                     March 28, 2003
  ---------------------                                           --------------
Thomas M. Garrott                                                           

  /s/ Laban P. Jackson, Jr.          Director                     March 28, 2003
  -------------------------                                       --------------
Laban P. Jackson, Jr                                                        

  /s/ Andrew P. Seamons              Director                     March 28, 2003
  ---------------------                                           --------------
Andrew P. Seamons                                                           

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 302 CERTIFICATION

I, Donald Strickland, certify that:                                             

1. I have reviewed this annual report on Form 10-K of Internet Pictures         
Corporation;                                                              

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

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

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

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

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

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

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

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

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

6. The registrant's other certifying officer and I have indicated in this annual
  report whether or not there were significant changes in internal controls or
   in other factors that could significantly affect internal controls subsequent
 to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.          

March 28, 2003                                                            

/s/ Donald Strickland                                                     
---------------------                                                     
Donald Strickland                                                         
Chief Executive Officer                                                   

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 302 CERTIFICATION

I, Paul Farmer, certify that:                                                   

1. I have reviewed this annual report on Form 10-K of Internet Pictures         
Corporation;                                                              

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

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

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

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

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

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

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

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

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

6. The registrant's other certifying officer and I have indicated in this annual
  report whether or not there were significant changes in internal controls or
   in other factors that could significantly affect internal controls subsequent
 to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.          

March 28, 2003                                                            
/s/ Paul Farmer                                                           
-----------------------                                                   
Paul Farmer                                                               
Chief Financial Officer                                                   

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 REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of                                   
Internet Pictures Corporation:                                                  

In our opinion, the accompanying consolidated balance sheets and the related    
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of  
Internet Pictures Corporation and its subsidiaries (the "Company") at December  
31, 2001 and 2002 and the results of their operations and their cash flows for  
each of the three years in the period ended December 31, 2002, in conformity    
with accounting principles generally accepted in the United States of America.  
These financial statements are the responsibility of the Company's management;  
our responsibility is to express an opinion on these financial statements based 
on our audits. We conducted our audits of these statements in accordance with   
auditing standards generally accepted in the United States of America, which    
require that we plan and perform the audit to obtain reasonable assurance about 
whether the financial statements are free of material misstatement. An audit    
includes examining, on a test basis, evidence supporting the amounts and        
disclosures in the financial statements, assessing the accounting principles    
used and significant estimates made by management, and evaluating the overall   
financial statement presentation. We believe that our audits provide a          
reasonable basis for our opinion.                                               

As discussed in Note 5 to the consolidated financial statements, effective      
January 1, 2002, the Company changed its method of accounting for goodwill in   
accordance with Statement of Financial Accounting Standards No. 142, "Goodwill  
and Other Intangible Assets."                                                   

/s/ PricewaterhouseCoopers LLP                                                  
------------------------------                                                  
San Jose, California                                                            

March 27, 2003                                                                  

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 INTERNET PICTURES CORPORATION
 CONSOLIDATED BALANCE SHEETS

                                                        [Enlarge/Download Table]


                                                                                            DECEMBER 31,          
                                                                                   ------------------------------ 
                                                                                      2001               2002     
                                                                                   -----------        ----------- 
                                                                                                                  
                                                                                           (In thousands,         
                                                                                          except share and        
                                                                                          per share amounts)      
ASSETS                                                                                                            
CURRENT ASSETS:                                                                                                   

Cash and cash equivalents ......................................................   $    11,103        $     3,020 
Restricted cash and short-term investments......................................         2,298              2,972 
Accounts receivable, net of allowance for doubtful accounts of                                                    
   $2,171 in 2001 and $208 in 2002 .............................................           921              3,535 
Inventory, net of reserve for obsolescence of $493 in 2001 and $160 in 2002 ....           219                181 
Prepaid expenses and other current assets ......................................           881                984 
                                                                                   -----------        ----------- 
       Total current assets ....................................................        15,422             10,692 

Computer hardware, software and other, net .....................................         4,614              4,631 
Other assets ...................................................................            --                 70 
Goodwill .......................................................................         3,042              3,042 
                                                                                   -----------        ----------- 
       Total assets ............................................................   $    23,078        $    18,435 
                                                                                   ===========        =========== 

LIABILITIES AND STOCKHOLDERS' EQUITY                                                                              
CURRENT LIABILITIES:                                                                                              

Accounts payable ...............................................................   $     1,500        $       360 
Accrued liabilities ............................................................         7,557              5,426 
Deferred revenue ...............................................................         1,592                 85 
Current portion of obligations under capital leases ............................         1,267              2,403 
                                                                                   -----------        ----------- 
       Total current liabilities ...............................................        11,916              8,274 
                                                                                   -----------        ----------- 
Obligations under capital leases, net of current portion .......................         1,277              1,459 
                                                                                   -----------        ----------- 
Other non-current liabilities ..................................................         1,115                310 
                                                                                   -----------        ----------- 
Commitments and contingencies (Note 12)                                                                           

STOCKHOLDERS' EQUITY:                                                                                             

Preferred stock, $0.001 par value: .............................................             1                  1 
   Authorized:  5,001,100 shares in 2001 and 2002                                                                 
   Issued and outstanding: 1,115,080 shares in 2001 and 2002                                                      
   (Aggregate liquidation value: $22,276 in 2001, $24,560 in 2002)                                                
Common stock, $0.001 par value: ................................................            65                 65 
   Authorized:  150,000,000 in 2001 and 50,000,000 in 2002                                                        
   Issued and outstanding:  6,729,869 shares in 2001 and 6,795,007 shares in 2002                                 
Class B common stock, $0.0001 par value: .......................................            --                 -- 
   Authorized:  7,421,536 shares in 2001 and 2002                                                                 
   Issued and outstanding:  17,948 shares in 2001 and 2002                                                        
Additional paid-in capital .....................................................       513,468            513,937 
Note receivable from stockholder ...............................................          (179)                -- 
Unearned stock-based compensation ..............................................          (142)                -- 
Accumulated deficit ............................................................      (503,974)          (505,117)
Accumulated other comprehensive loss ...........................................          (469)              (494)
                                                                                   -----------        ----------- 
       Total stockholders' equity ..............................................         8,770              8,392 
                                                                                   -----------        ----------- 
       Total liabilities and stockholders' equity ..............................   $    23,078        $    18,435 
                                                                                   ===========        =========== 

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

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                                                        [Enlarge/Download Table]


                          INTERNET PICTURES CORPORATION                                                          
                      CONSOLIDATED STATEMENTS OF OPERATIONS                                                      

                                                                         YEARS ENDED DECEMBER 31,                
                                                             --------------------------------------------------- 

                                                                2000               2001                 2002     
                                                             ---------          -----------          ----------- 
                                                                                                                 
                                                                  (In thousands, except per share amounts)       
REVENUES:                                                                                                        

Products ................................................... $  48,943          $    14,758          $     6,512 
Services ...................................................     4,730               14,148               15,901 
                                                             ---------          -----------          ----------- 

                                                                53,673               28,906               22,413 
                                                             ---------          -----------          ----------- 
COST OF REVENUES:                                                                                                
Products....................................................    25,555                7,270                2,145 
Services....................................................     2,516                4,991                6,583 
                                                             ---------          -----------          ----------- 

                                                                28,071               12,261                8,728 
                                                             ---------          -----------          ----------- 

Gross profit ...............................................    25,602               16,645               13,685 
                                                             ---------          -----------          ----------- 

OPERATING EXPENSES:                                                                                              
Sales and marketing.........................................    83,064               21,252                7,607 
Research and development....................................    14,582                7,671                4,862 
General and administrative..................................    22,850               15,816                2,933 
Impairment and amortization of intangibles .................   234,024                2,433                   -- 
Merger expenses ............................................    15,175                   --                   -- 
Loss on disposal of assets .................................        --                1,655                   -- 
Restructuring and impairment ...............................     4,161               11,655                  687 
                                                             ---------          -----------          ----------- 

Total operating expenses ...................................   373,856               60,482               16,089 
                                                             ---------          -----------          ----------- 

Loss from operations .......................................  (348,254)             (43,837)              (2,404)

OTHER INCOME (EXPENSE):                                                                                          
Interest expense ...........................................      (436)             (10,667)                (183)
Interest income ............................................     3,345                  305                  456 
Patent infringement award ..................................        --                   --                1,000 
Other ......................................................    (1,250)                (380)                 (12)

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

Net loss before extraordinary gain .........................  (346,595)             (54,579)              (1,143)
Extraordinary gain .........................................        --                  901                   -- 
                                                             ---------          -----------          ----------- 

Net loss.................................................... $(346,595)         $   (53,678)         $    (1,143)
                                                             =========          ===========          =========== 

Basic and diluted loss per common share .................... $  (61.55)         $     (8.22)         $     (0.17)
                                                             =========          ===========          =========== 

Weighted average common shares - basic and diluted..........     5,631                6,534                6,794 
                                                             =========          ===========          =========== 

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

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 INTERNET PICTURES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 FOR THE PERIOD FROM JANUARY 1, 2000 TO DECEMBER 31,
 2002 (In thousands, except share amounts)

                                                        [Enlarge/Download Table]


                                                            Class B                                         Additional
                                                         Common Stock                     Common Stock        Paid-in 
                                                            Number       Amount        Number      Amount     Capital 
                                                      ----------------------------------------------------------------
                                                                                                                      

Balances, December 31, 1999                                701,274      $     1       3,823,158     $38     $ 187,829 
Issuance of common stock from secondary offering                --           --         611,500       6        68,768 
Issuance of common stock from acquisitions                      --           --         486,657       5       218,473 
Stock issued on exercise of stock options                       --           --         433,266       4         2,113 
Conversion of Class B common stock into common stock      (297,101)          (1)        297,101       3            (2)
Stock issued from employee stock purchase plan                  --           --          49,539      --         1,387 
Stock issued from option exchange program                       --           --         245,181       3         3,197 
Notes receivable from stockholders                              --           --              --      --            -- 
Repayment of notes from stockholders                            --           --              --      --            -- 
Unearned stock-based compensation                               --           --              --      --         2,333 
Amortization of unearned stock-based compensation               --           --              --      --            -- 
Net loss                                                        --           --              --      --            -- 
Other comprehensive income                                      --           --              --      --            -- 
                                                         ---------      -------      ----------     ---     --------- 
Balances, December 31, 2000                                404,173      $    --       5,946,402     $59     $ 484,098 

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

                                                        [Enlarge/Download Table]

                                                           Notes                    Accumulated                            
                                                        Receivable     Unearned       Other                                
                                                           From       Stock-Based  Comprehensive  Accumulated              
                                                        Stockholders  Compensation    Income        Deficit       Total    
                                                      -------------------------------------------------------------------- 
                                                                                                                           

Balances, December 31, 1999                              $  (181)     $(2,955)         $10         $(103,701)    $  81,041 
Issuance of common stock from secondary offering              --           --           --                --        68,774 
Issuance of common stock from acquisitions                    --           --           --                --       218,478 
Stock issued on exercise of stock options                     --           --           --                --         2,117 
Conversion of Class B common stock into common stock          --           --           --                --            -- 
Stock issued from employee stock purchase plan                --           --           --                --         1,387 
Stock issued from option exchange program                     --       (3,200)          --                --            -- 
Notes receivable from stockholders                        (2,349)          --           --                --        (2,349)
Repayment of notes from stockholders                         181           --           --                --           181 
Unearned stock-based compensation                             --       (2,333)          --                --            -- 
Amortization of unearned stock-based compensation             --        5,127           --                --         5,127 
Net loss                                                      --           --           --          (346,595)     (346,595)
Other comprehensive income                                    --           --           52                --            52 
                                                         -------      -------          ---         ---------     --------- 
Balances, December 31, 2000                              $(2,349)     $(3,361)         $62         $(450,296)    $  28,213 
                                                         =======      =======          ===         =========     ========= 

                                                        [Enlarge/Download Table]


                                                       Class B                                                            Additional
                                                     Common Stock                Preferred Stock        Common Stock        Paid-in 
                                                        Number     Amount       Number    Amount    Number      Amount      Capital 
                                                   ---------------------------------------------------------------------------------
                                                                                                                                    

Balance, December 31, 2000                             404,173    $    --           --       $--     5,946,402     $59    $ 484,098 
Stock issued on exercise of stock options                              --           --        --        37,977      --           28 
Stock issued from employee stock purchase plan              --         --           --        --        31,581      --           86 
Stock issued from option exchange program                   --         --           --        --       137,684       1          968 
Notes receivable from stockholders                          --         --           --        --            --      --           -- 
Unearned stock-based compensation                           --         --           --        --            --      --          310 
Sale of convertible debt and preferred stock                --         --    1,115,080         1            --      --       30,962 
Amortization of unearned stock-based compensation           --         --           --        --            --      --           -- 
Dividend to stockholder                                     --         --           --        --       190,000       2       (2,981)
Conversion of Class B common stock                    (386,225)        --           --        --       386,225       3           (3)
Net loss                                                    --         --           --        --            --      --           -- 
Other comprehensive loss                                    --         --           --        --            --      --           -- 
                                                     ---------    -------    ---------      ----    ----------     ---    --------- 
Balances, December 31, 2001                             17,948    $    --    1,115,080       $ 1     6,729,869     $65    $ 513,468 
                                                     =========    =======    =========      ====    ==========     ===    ========= 

                                                        [Enlarge/Download Table]


                                                        Notes                    Accumulated                            
                                                     Receivable     Unearned        Other                               
                                                        From       Stock-Based  Comprehensive   Accumulated             
                                                     Stockholders  Compensation Income (Loss)     Deficit       Total   
                                                   -------------------------------------------------------------------- 
                                                                                                                        

Balances, December 31, 2000                           $(2,349)     $(3,361)       $  62         $(450,296)    $  28,213 
Stock issued on exercise of stock options                  --           --           --                --            28 
Stock issued from employee stock purchase plan             --           --           --                --            86 
Stock issued from option exchange program                  --         (970)          --                --            -- 
Notes receivable from stockholders                      2,170           --           --                --         2,170 
Unearned stock-based compensation                          --         (310)          --                --            -- 
Sale of convertible debt and preferred stock               --           --           --                --        30,962 
Amortization of unearned stock-based compensation          --        4,499           --                --         4,499 
Dividend to stockholder                                    --           --           --                --        (2,979)
Conversion of Class B common stock                         --           --           --                --            -- 
Net loss                                                   --           --           --           (53,678)      (53,678)
Other comprehensive loss                                   --           --         (531)               --          (531)
                                                      -------      -------        -----          ---------    --------- 
Balances, December 31, 2001                           $  (179)     $  (142)       $(469)         $(503,974)   $   8,770 
                                                      =======      =======        =====          =========    ========= 


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                                                        [Enlarge/Download Table]


                                                       Class B                                                           Additional 
                                                     Common Stock                Preferred Stock        Common Stock        Paid-in 
                                                        Number     Amount       Number    Amount    Number      Amount      Capital 
                                                   ---------------------------------------------------------------------------------
                                                                                                                                    

Balances, December 31, 2001                             17,948    $    --    1,115,080       $ 1     6,729,869     $65    $ 513,468 
Stock issued on exercise of stock options                              --           --        --        32,500      --           84 
Stock issued from employee stock purchase plan              --         --           --        --        32,638      --           47 
Note receivable from stockholder                            --         --           --        --            --      --           -- 
Unearned stock-based compensation                           --         --           --        --            --      --           29 
Reversal of accrued stock issuance costs                    --         --           --        --            --      --          309 
Amortization of unearned stock-based compensation           --         --           --        --            --      --           -- 
Net loss                                                    --         --           --        --            --      --           -- 
Foreign currency translation                                --         --           --        --            --      --           -- 
                                                     ---------    -------    ---------      ----    ----------     ---    --------- 
Balances, December 31, 2002                             17,948    $    --    1,115,080       $ 1     6,795,007     $65    $ 513,937 
                                                     =========    =======    =========      ====    ==========     ===    ========= 

                                                        [Enlarge/Download Table]


                                                        Note                    Accumulated                             
                                                     Receivable     Unearned        Other                               
                                                        From       Stock-Based  Comprehensive   Accumulated             
                                                     Stockholder   Compensation     Loss          Deficit       Total   
                                                   -------------------------------------------------------------------- 
                                                                                                                        

Balances, December 31, 2001                           $  (179)     $  (142)        $(469)       $(503,974)    $   8,770 
Stock issued on exercise of stock options                  --           --            --               --            84 
Stock issued from employee stock purchase plan             --           --            --               --            47 
Note receivable from stockholder                          179           --             --              --           179 
Unearned stock-based compensation                          --          (29)           --               --            -- 
Reversal of accrued stock issuance costs                   --           --            --               --           309 
Amortization of unearned stock-based compensation          --          171            --               --           171 
Net loss                                                   --           --            --           (1,143)       (1,143)
Foreign currency translation                               --           --           (25)              --           (25)
                                                      -------      -------         -----         --------      -------- 
Balances, December 31, 2002                           $    --      $    --         $(494)       $(505,117)    $   8,392 
                                                      =======      =======         =====         ========      ======== 

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

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                                                        [Enlarge/Download Table]


                          INTERNET PICTURES CORPORATION                                                                      
                      CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                  

                                                                                        YEARS ENDED DECEMBER 31,             
                                                                             ----------------------------------------------- 
                                                                                2000             2001               2002     
                                                                             ---------        -----------        ----------- 
                                                                                                                             
                                                                                              (In thousands)                 
CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                        

Net loss ................................................................... $(346,595)        $  (53,678)        $   (1,143)
Adjustments to reconcile net loss to net cash used in operating activities:                                                  
  Depreciation and amortization ............................................    63,047              3,477              3,400 
  Impairment and amortization of intangibles................................   176,831              2,434                 -- 
  Provision for doubtful accounts receivable ...............................     4,419              4,421               (279)
  Provision for inventory obsolescence .....................................       145                276                 -- 
  Amortization of discounts on securities available-for-sale ...............       141                 --                 -- 
  Interest charge for amortization of discount on convertible debt..........        --             10,000                 -- 
  Non-cash compensation expense related to issuance of options and warrants.     5,127              4,499                171 
  Forgiveness of debt.......................................................        --              2,193                 -- 
  Impairment loss ..........................................................        --              1,122                 -- 
  Loss on disposal of equipment ............................................        --              1,655                 -- 
  Extraordinary gain .......................................................        --               (901)                -- 
Changes in operating assets and liabilities:                                                                                 
  Accounts receivable ......................................................   (13,731)             1,546             (2,335)
  Inventory ................................................................      (147)               566                 38 
  Prepaid expenses and other current assets ................................       804                904               (103)
  Other long-term assets ...................................................        64              1,199                (70)
  Accounts payable .........................................................    (2,219)            (2,697)            (1,140)
  Accrued liabilities ......................................................     8,818             (3,825)            (1,723)
  Deferred revenue .........................................................     3,402                158             (1,507)
                                                                             ---------        -----------        ----------- 
      Net cash used in operating activities ................................   (99,894)           (26,651)            (4,691)
                                                                             ---------        -----------        ----------- 

CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                        
Purchases of computer hardware, software and other..........................   (13,745)            (1,440)            (3,508)
Proceeds from sale of assets ...............................................        --              8,666                 -- 
Acquisitions, net of cash received .........................................    (8,290)                --                 -- 
Purchases of securities available-for-sale and short-term investments.......   (44,766)                --             (1,400)
Maturities of securities available-for-sale ................................    93,369              6,000                 -- 
Note receivable from stockholder...........................................    (2,000)                --                 --  
Other ......................................................................        32                 --                 -- 
                                                                             ---------        -----------        ----------- 
      Net cash provided by (used in) investing activities ..................    24,600             13,226             (4,908)
                                                                             ---------        -----------        ----------- 
CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                        
Net proceeds from issuance of common stock .................................    70,161                 86                 47 
Net proceeds from issuance of convertible debt and exercise of warrants for                                                  
  preferred stock ..........................................................        --             20,666                 -- 
Proceeds from exercise of stock options and warrants .......................     2,117                 28                 84 
Proceeds from sale/leaseback ...............................................        --              2,840              3,870 
Repayments of capital lease obligations and notes payable ..................   (10,623)            (2,762)            (2,460)
Distribution to stockholders  ..............................................        --               (839)                -- 
                                                                             ---------        -----------        ----------- 
      Net cash provided by financing activities ............................    61,655             20,019              1,541 
                                                                             ---------        -----------        ----------- 
Effect of exchange rate changes on cash ....................................       334               (813)               (25)
                                                                             ---------        -----------        ----------- 
Net increase (decrease) in cash and cash equivalents .......................   (13,305)             5,781             (8,083)
Cash and cash equivalents, beginning of year ...............................    18,627              5,322             11,103 
                                                                             ---------        -----------        ----------- 
Cash and cash equivalents, end of year ..................................... $   5,322         $   11,103         $    3,020 
                                                                             =========        ===========        =========== 


SUPPLEMENTAL DATA                                                               

                                                        [Enlarge/Download Table]


                                                                                    YEARS ENDED DECEMBER 31, 
                                                                                -----------------------------
                                                                               2000         2001        2002 
                                                                              ------       ------      ------
                                                                                                             
Supplemental disclosures:                                                                                    
     Unearned stock-based compensation related to stock options and warrants  $5,533       $1,280      $   29

     Interest paid                                                               407          667         183

     Conversion of accrued interest into Series B preferred stock                 --          277          --


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

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 INTERNET PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

1. NATURE OF OPERATIONS                                                         

Internet Pictures Corporation ("iPIX" or "Company") provides mission-critical   
imaging solutions for commerce, communication and security applications. The    
Company's solutions create, process and manage a rich variety of media including
still images, 360-degree by 360-degree immersive images, video, text and audio. 

IPIX's extensive intellectual property covers patents for immersive imaging,    
video and surveillance applications.                                            

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                   

PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the  
accounts of Internet Pictures Corporation and its wholly-owned subsidiaries,    
Interactive Pictures Corporation, Interactive Pictures UK Limited, Internet     
Pictures (Canada)and PW Technology, Inc. The consolidation of these entities    
will collectively be referred to as the Company. All significant intercompany   
balances and transactions have been eliminated.                                 

FOREIGN CURRENCY TRANSLATION. The functional currency of the Company's Canadian 
and United Kingdom subsidiaries is the U.S. dollar. Monetary assets and         
liabilities denominated in foreign currencies are translated into the Company's 
functional currency, U.S. dollars, at the exchange rate prevailing at the       
balance sheet date. Non-monetary assets and liabilities and transactions are    
translated at exchange rates prevailing at the respective transaction dates.    
Revenue and expenses are translated at the average rates of exchange during the 
year. Translation gains and losses are recorded in accumulated other            
comprehensive income. Transaction exchange gains and losses are included in the 
statement of operations and have not been material for any periods presented.   

POOLING OF INTERESTS. Interactive and iPIX received stockholder approval and    
executed an Agreement and Plan of Merger ("the merger agreement") in January    
2000. Pursuant to the merger agreement, Interactive became a wholly-owned       
subsidiary of iPIX and iPIX issued 1.369 shares of its common stock for every   
share of Interactive common stock outstanding immediately prior to the Effective
Time (as defined in the merger agreement) of the merger. The transaction was    
accounted for as a pooling of interests.                                        

CASH, CASH EQUIVALENTS, RESTRICTED CASH AND SHORT-TERM INVESTMENTS. The Company 
considers all highly liquid debt instruments with an original maturity or       
remaining maturity at date of purchase of three months or less to be cash       
equivalents. All other liquid investments are classified as either short-term or
long-term investments.                                                          

Management determines the appropriate classification of investment securities at
the time of purchase and re-evaluates such designation as of each balance sheet 
date. Available-for-sale securities are carried at fair value with the resulting
unrealized gains and losses reported as a component of accumulated other        
comprehensive income(loss). At December 31, 2002, the Company had $1,400 of     
investments with a remaining maturity of six months that have been provided as  
collateral for certain capital lease obligations and, accordingly, classified as
restricted. The remaining balance of restricted cash relates primarily to       
certain customer deposits.                                                      

Realized gains and losses and declines in value judged to be                    
other-than-temporary on available-for-sale securities are included in the       
statement of operations. The cost of securities sold is based on the specific   
identification method. There have been no such transactions in the year ended   
December 31, 2002.                                                              

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Interest income includes interest, amortization of purchase premiums and        
discounts and realized gains and losses on sales of securities. A realized loss 
of $282 was recognized in 2001, while in 2000, a $1,250 other expense was       
recognized primarily because of the write down of various investments.          

CERTAIN RISKS AND CONCENTRATIONS. Financial instruments that potentially subject
the Company to a concentration of credit risk consist of cash and cash          
equivalents, restricted cash and short-term investments and accounts receivable.
Cash, cash equivalents and restricted cash and short-term investments are       
deposited with high quality financial institutions. Accounts receivable are     
derived from revenue earned from customers located in the U.S. and abroad. The  
Company performs ongoing credit evaluations of customers' financial condition   
and the Company does not require collateral from customers.                     

The following  table  summarizes  the revenue from customers in excess of 10% of
total revenues:                                                                 

                                            Years ended December 31,
                                               2001             2002
                                               ----             ----

Homestore ..................................          23%              16%      
eBay .......................................          21%              60%      

At December 31, 2002, Homestore and eBay represented 0% and 83% of accounts     
receivable, respectively. All amounts due from eBay as of December 31, 2002,    
were collected in full during January 2003. The Company's principal agreements  
with Homestore and eBay, expire on June 30, 2003 and September 30, 2003,        
respectively. These agreements are subject to extension, amendment and          
re-negotiation from time to time. During the year ended December 31, 2000, no   
customer equaled more than 10% of the Company's revenue and as of December 31,  
2001 no customer accounted for more than 10% of the Company's accounts          
receivable.                                                                     

Depending upon the outcome of the negotiations noted above, the timeliness of   
collection of accounts receivable, the Company's rate of growth and ability to  
controls costs may require additional equity or debt financing to meet future   
working capital or capital expenditure needs. There can be no assurance that    
such additional financing will be available, or if available that such financing
can be obtained on terms satisfactory to the Company.                           

INVENTORY. Inventory, which consists primarily of digital cameras and related   
hardware, is stated at the lower of cost or market, with costs determined using 
standard costs (which approximate actual first-in, first-out costs). The Company
records a provision for obsolete inventory whenever an impairment has been      
identified.                                                                     

PREPAID EXPENSES. Prepaid expenses consist primarily of insurance, maintenance  
and rent, which will be reflected as an expense during the period benefited.    

COMPUTER HARDWARE, SOFTWARE AND OTHER. Computer hardware and software are       
recorded at cost and are depreciated primarily using the straight-line method   
over estimated useful lives, which range from two to three years. Furniture and 
fixtures are depreciated over the estimated useful life, which range from two to
ten years. Leasehold improvements are amortized over the term of the lease or   
estimated useful life, which ranges from one to five years. Routine maintenance 
and repair costs are expensed as incurred. The costs of major additions,        
replacements and improvements are capitalized. Gains and losses from disposals  
are included in operations as incurred.                                         

ACCOUNTING FOR LONG-LIVED ASSETS. The carrying value of intangible assets,      
computer hardware and software and other long-lived assets is reviewed on a     
regular basis for the existence of facts, both internally and externally, that  
may suggest impairment. The Company recognizes impairment losses whenever events
or circumstances result in the carrying amount of the assets exceeding the sum  
of the expected future cash flows associated with such assets. The measurement  
of the impairment losses to be recognized is based on the difference between the
discounted cash flows from such assets and the carrying amounts of the assets.  
During 2000, the Company recorded an impairment of goodwill (See Note 5).       

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INCOME TAXES. The Company uses the asset and liability method of accounting for 
income taxes, which requires the recognition of deferred tax liabilities and    
assets for expected future tax consequences of temporary differences between the
carrying amounts and the tax basis of assets and liabilities. A valuation       
allowance against deferred tax assets is recorded if, based upon available      
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized. Tax credits are accounted for as a reduction of tax       
expense in the year in which the credits reduce taxes payable.                  

The Company did not recognize deferred income taxes for temporary differences   
associated with its investment in the foreign subsidiaries because the          
differences are essentially permanent in duration.                              

Interactive Pictures UK Limited is not included in the tax filing of its parent,
Internet Pictures Corporation. As a result, Interactive Pictures UK Limited     
files a separate return with the United Kingdom tax authorities. Internet       
Pictures (Canada), Inc. is not included in the tax filing of its parent,        
Internet Pictures Corporation. As a result, Internet Pictures (Canada), Inc.    
files a separate return with Canadian tax authorities.                          

REVENUE RECOGNITION. The Company recognizes revenue in accordance with SOP 97-2,
"Software Revenue Recognition" and SAB No. 101, "Revenue Recognition in         
Financial Statements." Transaction hosting revenues are recognized ratably as   
transactions are performed provided there was persuasive evidence of an         
arrangement, the fee was fixed or determinable and collection of the resulting  
receivable was reasonably assured. Initial license fees are recognized when a   
contract exists, the fee is fixed or determinable, software delivery has        
occurred and collection of the receivable is reasonably assured. If there are   
continuing obligations, then license fees are recognized ratably over the life  
of the contract.                                                                

Product revenue is recognized upon shipment or delivery provided there are no   
uncertainties surrounding product acceptance, persuasive evidence of an         
arrangement exists, there are no significant vendor obligations, the fees are   
fixed or determinable and collection is reasonably assured.                     

Revenues generated from professional services are recognized as the related     
services are performed. When such professional services are combined with       
on-going transaction services or are deemed to be essential to the functionality
of the delivered software product, revenue from the entire arrangement is       
recognized while the transaction services are performed, on a percentage of     
completion method or not until the contract is completed in accordance with SOP 
81-1, "Accounting for Performance of Construction-Type and Certain              
Production-Type Contracts," and ARB No. 45, "Long-Term Construction-Type        
Contracts." In February 2002, the Emerging Issues Task Force ("EITF") issued    
EITF 00-14, "Income Statement Characterization of Reimbursements Received for   
Out-of-Pocket Expenses Incurred"("EITF-00-14"), which is effective for financial
statements beginning after December 31, 2001. EITF 00-14 requires that          
reimbursements received for out-of-pocket expenses incurred, generally, be      
characterized as revenue in the statement of operations. The Company adopted    
EITF 00-14 in the quarter ended March 31, 2002. The adoption of EITF 00-14 did  
not have a material effect on reported results of operations, financial position
or cash flows.                                                                  

Revenue from the sale of the Company's virtual tour product was recognized upon 
distribution to the Website designated by the customer. Royalties derived from  
desktop imaging products were recognized as revenues upon receipt of the royalty
sell-through reports from customers, which are generally in the quarter         
following the quarter in which the sale by the customer took place.             

Payments received in advance are initially recorded as deferred revenue and     
recognized ratably as obligations are fulfilled.                                

FAIR VALUE OF FINANCIAL INSTRUMENTS. Carrying amounts of the Company's financial
instruments including short-term investments, accounts receivable, accounts     
payable, accrued liabilities approximate fair value due to their short          
maturities. Obligations under capital leases are recorded at discounted value of
the future lease payments.                                                      

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BARTER REVENUES. Barter revenues come from barter sales of the Company's        
products, which are similar in nature to the Company's cash sales for the same  
products. Barter revenues have resulted from the exchange by the Company of     
certain products for advertising. Barter revenues are recognized in accordance  
with APB 29, "Accounting for Nonmonetary Transactions." The Company records     
barter revenue at fair value of the products exchanged for advertising.         

Revenues and sales and marketing expenses arising from these transactions are   
recorded at fair value as the Company has an established historical practice of 
receiving cash for similar sales. The Company recorded no barter revenue or     
related expense in 2001 and 2002. The Company recorded barter revenues of $3,060
in 2000 which represented 6% of total revenues for 2000. Sales and marketing    
expense arising from these barter transactions is recognized when the           
advertising takes place, which occurred in 2000.                                

RESEARCH AND DEVELOPMENT COSTS. Research and development expenditures are       
expensed as incurred.                                                           

ADVERTISING EXPENSES. All advertising expenditures are expensed as incurred.    
Advertising expenses for 2000, 2001 and 2002, were $24,186, $4,130 and $2,017,  
respectively.                                                                   

STOCK-BASED COMPENSATION. The Company has adopted the disclosure provisions of  
Financial Accounting Standards Board Statement of Financial Accounting          
Standards No. 123. "Accounting for Stock-based Compensation"("FAS 133"). The    
Company has elected to continue accounting for stock-based compensation issued  
to employees using Accounting Principles Board ("APB") Opinion No. 25,          
"Accounting for Stock Issued to Employees," and, accordingly, pro forma         
disclosures required under FAS 123 have been presented (See Note 10). Under APB 
25, compensation expense is based on the difference, if any, on the date of     
grant, between the fair value of the Company's stock and exercise price of the  
option. Stock and other equity instruments issued to non-employees have been    
accounted for in accordance with FAS 123 and Emerging Issues Task Force Issue   
No. 96-18, "Accounting for Equity Instruments Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods, or Services," and valued using
the Black-Scholes model.                                                        

Pro forma information regarding net loss is required by FAS 123 and FAS 148, and
has been determined as if the Company had accounted for its stock options under 
the fair value method of FAS 123.                                               

The computations for pro-forma basic and diluted earnings per share for each    
year follow:                                                                    

                                            Years Ended December 31,
                                           -----------------------
(In thousands, except per share)             2000           2001        2002    
                                         --------       --------    --------

Net loss before extraordinary gain        $(346,595)    $ (54,579)    $ (1,143) 
 Extraordinary gain                            --           901           --
                                        ---------     ---------     --------
Net loss                                   (346,595)      (53,678)      (1,143) 
Add employee stock compensation                                           
 expense included in reported net loss      4,569         3,213           --
  Less FAS 123 pro-forma charges           (26,509)      (11,503)      (5,742)
                                         ----------    ----------    ---------
Adjusted net loss                         $(368,535)    $ (61,968)    $ (6,885) 
                                         ==========    ===========   =========
Basic net loss per common share:                                                
Net loss before extraordinary gain        $  (61.55)    $   (8.36)    $  (0.17) 
 Extraordinary gain                            --          0.14           --
                                        ---------     ---------     --------
Net loss before pro-forma charges         $  (61.55)        (8.22)       (0.17) 
  Net effect of pro-forma charges            (3.90)        (1.27)       (0.85)
                                       ----------    ----------     --------
Adjusted basic net loss per common share  $  (65.45)    $   (9.49)    $  (1.02) 
                                         ==========    ==========    =========

In connection with certain employee and non-employee stock option and restricted
stock grants, the Company amortizes unearned stock-based compensation over the  
vesting period of the related grant using the method prescribed in FASB         

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Interpretation No. 28. Under this method, each vested tranche of options is     
accounted for as a separate grant awarded for past services. Accordingly, the   
compensation expense is recognized over the period in which the services have   
been provided. This method results in higher compensation expense in the earlier
vesting periods of the related grants.                                          

ESTIMATES. The preparation of financial statements in conformity with generally 
accepted accounting principles requires management to make estimates and        
assumptions that affect the reported amounts of assets and liabilities and      
disclosure of contingent assets and liabilities at the date of the financial    
statements and the reported amounts of revenues and expenses during the         
reporting period. Actual results could differ from those estimates. Examples of 
items affected by certain significant estimates made by management are adequacy 
of the allowance for doubtful accounts, restructuring changes, sales taxes and  
the carrying value of goodwill.                                                 

SEGMENT REPORTING. The Company uses a "management" approach, which designates   
the internal organization that is used by management for making operating       
decisions and assessing performance as the source of the Company's reportable   
segments. Segment reporting includes disclosures about products and services,   
geographic areas and major customers for years ending December 31, 2000, 2001   
and 2002. In addition, for fiscal years 2001 and 2002, segment reporting        
includes the Company's primary business units: Transaction Services and         
Immersive Solutions.                                                            

NET LOSS PER SHARE. The Company computes net loss per share in accordance with  
FAS No. 128, "Earnings Per Share". Basic and diluted net loss per share is      
computed by dividing the net loss available to common stockholders for the      
period by the weighted average number of shares of common stock outstanding     
during the period. The calculation of diluted net loss per share excludes       
potential common shares because the effect is antidilutive. Potential common    
shares are composed of incremental shares of common stock issuable upon the     
exercise of potentially dilutive stock options and warrants and upon conversion 
of the Company's preferred stock and convertible debenture.                     

The following table sets forth potential common shares that are not included in 
the diluted net loss per share calculation above because to do so would be      
antidilutive for the periods indicated:                                         

                                                        [Enlarge/Download Table]


                                                                                 YEARS ENDED DECEMBER 31,             
                                                                     -------------------------------------------------
                                                                        2000                2001                2002  
                                                                     ---------          ----------          ----------
                                                                                                                      
         Weighted average effect of potential common shares:                                                          
         Series B Preferred Stock...................................        --           2,700,387          10,267,096
         Employee stock options.....................................   255,300             539,983                    
195,866                                                                                                               
         Warrants to purchase common stock..........................   151,748                  --                  --
         Warrants to purchase Series B preferred stock..............        --           2,051,902                  --
         Convertible debenture......................................        --           1,702,756                  --
                                                                     ---------          ----------          ----------
                                                                       407,048           6,995,028          10,462,962
                                                                     =========          ==========          ==========

In 2002, the Company's common stock had an average share price of $1.77. The    
average strike price of the warrants to purchase common stock is $3.04 and the  
average strike price of employee stock options is $9.86. Not included in the    
table above are (i) 1,935,852 shares issuable upon exercise of options and (ii) 
2,438,824 shares issuable upon exercise of warrants, all of which have a strike 
price above the average share price during 2002.                                

COMPREHENSIVE INCOME (LOSS). The Company follows FAS No. 130, "Reporting        
Comprehensive Income" ("FAS 130"), which establishes requirements for reporting 
and displaying the comprehensive income (loss) and its components. FAS 130      
requires net unrealized gains or losses on the Company's available-for-sale     
securities and foreign currency translation adjustments to be reported as       
accumulated other comprehensive income (loss).                                  

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The components of comprehensive income (loss) are as follows:                   

                                                        [Enlarge/Download Table]


                                                          Years Ended December 31,               
                                             --------------------------------------------------- 
                                                2000               2001                 2002     
                                             ---------          -----------          ----------- 
                                                                                                 

Net loss                                     $(346,595)          $  (53,678)          $   (1,143)
Foreign currency translation adjustment            334                 (813)                 (25)
Fair market value adjustment of investments       (282)                 282                   -- 
                                             ---------          -----------          ----------- 
                                             $(346,543)          $  (54,209)          $   (1,168)
                                             =========          ===========          =========== 

RECENT ACCOUNTING PRONOUNCEMENTS                                                

In June 2002, the FASB issued FAS 146, "Accounting for Exit or Disposal         
Activities" ("FAS 146"). FAS 146 addresses significant issues regarding the     
recognition, measurement, and reporting of costs that are associated with exit  
and disposal activities, including restructuring activities that are currently  
accounted for under EITF 94-3, "Liability Recognition for Certain Employee      
Termination Benefits and Other Costs to Exit an Activity (including Certain     
Costs Incurred in a Restructuring)." The scope of FAS 146 also includes costs   
related to terminating a contract that is not a capital lease and termination   
benefits that employees who are involuntarily terminated receive under the terms
of a one-time benefit arrangement that is not an ongoing benefit arrangement or 
an individual deferred-compensation contract. FAS 146 will be effective for exit
or disposal activities that are initiated after December 31, 2002 and early     
application is encouraged. The Company will adopt FAS 146 during the quarter    
ended March 31, 2003. The effect on adoption of FAS 146 will change on a        
prospective basis the timing of when restructuring charges are recorded from a  
commitment date approach to when the liability is incurred.                     

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),        
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including   
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability
be recorded in the guarantor's balance sheet upon issuance of a guarantee. In   
addition, FIN 45 requires disclosures about the guarantees that an entity has   
issued, including a reconciliation of changes in the entity's product warranty  
liabilities. The initial recognition and initial measurement provisions of FIN  
No. 45 are applicable on a prospective basis to guarantees issued or modified   
after December 31, 2002, while the disclosure requirements are applicable in    
2002. The Company is complying with the disclosure requirements of FIN No. 45   
for the year ending December 31, 2002 and is evaluating the effect the other    
requirements may have on its financial statements.                              

In November 2002, the EITF reached consensus on Issue No. 00-21, "Revenue       
Arrangements with Multiple Deliverables"("EITF 00-21"). EITF 00-21 provides     
guidance on how to account for arrangements that involve the delivery or        
performance of multiple products, services and/or rights to use assets. The     
provisions of EITF 00-21 will apply to revenue arrangements entered into in     
fiscal periods beginning after June 15, 2003. The Company does not believe that 
the adoption of this standard will have a material effect on its financial      
position or results of operations.                                              

In December 2002, the FASB issued FAS No. 148, "Accounting for Stock-Based      
Compensation, Transition and Disclosure"("FAS 148"). FAS 148 provides           
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. FAS 148 also        
requires that disclosures of the pro forma effect of using the fair value method
of accounting for stock-based employee compensation be displayed more           
prominently and in a tabular format. Additionally, FAS 148 requires disclosure  
of the pro forma effect in interim financial statements. The transition and     
annual disclosure requirements of FAS 148 are effective for fiscal years ending 
after December 15, 2002, and these disclosures are contained in Note 10. The    
interim disclosure requirements are effective for interim periods commencing    
after December 15, 2002. The Company will continue to apply the APB 25          
provisions and will disclose the fair value information on a proforma basis.    

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In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51"("FIN 46"). FIN 46 requires certain   
variable interest entities to be consolidated by the primary beneficiary of the 
entity if the equity investors in the entity do not have the characteristics of 
a controlling financial interest or do not have sufficient equity at risk for   
the entity to finance its activities without additional subordinated financial  
support from other parties. FIN 46 is effective immediately for all new variable
interest entities created or acquired after January 31, 2003. For variable      
interest entities created or acquired prior to February 1, 2003, the provisions 
of FIN 46 must be applied for the first interim or annual period beginning after
June 15, 2003. The Company does not believe that the adoption of this standard  
will have a material effect on its financial position or results of operations. 

RECLASSIFICATIONS                                                               

Certain amounts reported in the previous period have been reclassified to       
conform to the current period presentation. The reclassifications did not affect
the previously reported total revenue, operating loss, net loss, total current  
assets, total assets or stockholders' equity.                                   

3. MERGER COSTS                                                                 

The Company recorded a charge of $15,175 in 2000 operating expenses for costs   
incurred related to a merger(See Note 2). These merger costs consisted primarily
of investment banking fees and costs of attorneys, accountants and other        
directly related external costs.                                                

4. RESTRUCTURING AND OTHER                                                      

Restructuring during 2000, 2001 and 2002, the Company recorded as a separate    
line item in its statements of operations restructuring charges which consist   
primarily of expenses associated with reductions in workforce, the consolidation
of certain offices, principally lease obligations for vacated offices, as well  
as a write down of abandoned office equipment and leasehold improvements to net 
realizable values.                                                              

On March 1, 2001, the Company had 552 employees, but by the end of the second   
quarter the Company had reduced its workforce by approximately 440 positions.   
The reductions were primarily in the full-service virtual real estate business. 

Included in the 2001 charges is a $1,462 impairment charge related to the write 
off of the unamortized portion of our directors' and officers' insurance policy.
The Company was required to obtain a new policy due to the change in control    
related to our 2001 financing.                                                  

During the third quarter of 2002, the Company recorded a restructuring charge of
$687 consisting of expenses associated primarily with a negotiated buy-out of   
certain lease obligations for previously vacated offices. In November 2002, the 
Company paid approximately $1,250 related to the buy-out. As of December 31,    
2002, $1,049 remained in these restructuring accruals, primarily associated with
abandoned re-negotiated lease obligations and long term severance agreements.   

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The activity in the current and long-term  restructuring  accruals for the years
ended December 31, are as follows:                                              

                                                        [Enlarge/Download Table]


                             Payments/  Balance at           Payments/  Balance at             Payments/   Balance at   
                   Initial  Write-offs   December  Expense  Write-offs   December  Expense in Write-offs  December 31,  
                    Expense   in 2000    31, 2000   in 2001   in 2001    31, 2001     2002      in 2002       2002      
                   -----------------------------------------------------------------------------------------------------
                                                                                                                        

Restructuring                                                                                                           
Provisions:                                                                                                             
 Severance          $1,584     $(994)     $590     $4,537    $(4,027)     $1,100     $ --        $(600)       $ 500     
 Employee debt                                                                                                          
   forgiveness          --         --       --      2,163     (2,163)         --       --           --           --     
 Write-offs and                                                                                                         
   impairments         692      (597)       95      1,959     (2,054)         --       --           --           --     
 Lease obligations   1,681      (337)    1,344      3,006     (2,897)      1,453      687       (1,591)         549     
 Other                 204      (173)       31         --        (31)         --       --           --           --     
                    ------   --------    -------    -----    -------      ------      ---       ------        ------    

Total               $4,161   $(2,101)   $2,060     $11,665   $(11,172)    $2,553     $687      $(2,191)       $1,049    
                    ======   ========   ======     =======   ========     ======     ====      ========       ======    


LOSS ON DISPOSAL OF ASSETS                                                      

A subsidiary of Homestore purchased certain assets from the Company pursuant to 
the terms of an acquisition agreement dated January 12, 2001. Under the terms of
the acquisition agreement, the subsidiary of Homestore purchased certain        
computers, furniture, fixtures and equipment and certain sales contracts with   
residential real estate brokers and agents. The Company used these assets in its
operations providing virtual tours of residential real estate properties. As    
part of the acquisition, Homestore's subsidiary hired certain sales force and   
customer service personnel. The purchase price for these assets was $12,000 in  
cash, of which $155 was paid directly to a lessor for certain capital lease     
obligations, $7,454 was deposited into control accounts for deferred revenue    
obligations and the remainder, $4,391, was paid to the Company. The Company also
granted Homestore's subsidiary an exclusive domestic license of certain of its  
virtual tour technology for the residential real estate market. In the first    
quarter of 2001, the Company recorded an extraordinary gain of $901 from the    
cash received from the January 12, 2001 agreement, resulting in the disposal of 
assets used to provide tours of residential real estate properties that were    
related to the 2000 pooling of Interactive Pictures Corporation and bamboo.com. 

The $1,655 loss on the 2001 sale of the remaining residential real estate       
related assets that were unrelated to the pooling of Interactive Pictures       
Corporation and bamboo.com was included in loss on the disposal of assets in the
accompanying statement of operations.                                           

5. BALANCE SHEET ACCOUNTS                                                       

COMPUTER HARDWARE, SOFTWARE and other:                                          

The components of computer hardware, software and other as of December 31, are  
as follows:                                                                     

                                                   2001             2002
                                                  -----------      -----------

   Computer hardware and software..............   $     7,265      $     9,729
   Fixtures and leasehold improvements ........           317              317
                                                  -----------      -----------
                                                        7,582           10,046
   Accumulated depreciation and amortization ..         2,968            5,415
                                                  -----------      -----------
   Computer hardware, software and other, net .   $     4,614      $     4,631
                                                  ===========      ===========

Computer hardware, software and other includes $2,799 and $6,220 of assets held 
under capital lease and related accumulated amortization of $274 and $2,337 at  
December 31, 2001 and 2002, respectively.                                       

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GOODWILL AND OTHER INTANGIBLES:                                                 

Prior to the Company's adoption of FAS 142, the Company periodically reviewed   
the net realizable value of its intangible assets, including goodwill, through  
an assessment of the estimated future cash flows related to such assets. The    
reviews determined whether future cash flows over the remaining estimated useful
lives of the assets provide for recovery of the assets. During the fourth       
quarter of 2000, certain events, including the decline in the Company's stock   
price and market capitalization, led the Company to perform an impairment review
of goodwill in accordance with the requirements of FAS No. 121. This review     
indicated that goodwill was being carried at amounts in excess of revised       
estimates of undiscounted future cash flows of the acquired businesses, which   
resulted in a charge of $176,831 to expense in the year ended December 31, 2000.

As of December 31, 2002, our consolidated balance sheet included $3,042 of      
goodwill. The Company adopted the provisions of FAS 142 "Goodwill and Other     
Intangibles" ("FAS 142"). Under FAS 142, the Company no longer amortizes        
goodwill but rather evaluates goodwill for impairment on an annual basis and on 
an interim basis if events or changes in circumstances between annual impairment
tests indicate that the asset might be impaired. In assessing the recoverability
of goodwill, the Company must make assumptions regarding estimated future cash  
flows and other factors to determine the fair value of the goodwill. These      
estimates include forecasted revenues and operating expenses, which are         
inherently difficult to predict. If these estimates or their related assumptions
change in the future, the Company may be required to record impairment charges  
for these assets. The Company's assumptions about fair values require           
significant judgment because broad economic factors, industry factors and       
technology considerations can result in variable and volatile fair values. The  
Company completed impairment analyses on goodwill in the fourth quarter of 2002.
These tests were performed internally. As of December 31, 2002, no impairment   
existed.                                                                        

A reconciliation of reported net loss and net loss per common share as if FAS   
142 had been in effect for 2000 and 2001 is presented as follows:               

                                              Years Ended December 31,
                                             -----------------------
(In thousands, except per share)                 2000       2001       2002     
                                            --------   --------   --------

Net loss before extraordinary gain         $(346,595)    $ (54,579)    $ (1,143)
  Extraordinary gain                             --           901           --
                                           ----------    ----------    ---------
Net loss                                    (346,595)      (53,678)      (1,143)
  Goodwill amortization                      57,193         2,433           --
                                           ---------     ---------     ---------
Adjusted net loss                          $(289,402)    $ (51,245)    $ (1,143)
                                           ==========    ===========   =========
Basic net loss per common share:                                                
Net loss before extraordinary gain         $  (61.55)    $   (8.36)    $  (0.17)
  Extraordinary gain                             --          0.14           --
                                           ---------     ---------     ---------
Net loss                                   $  (61.55)        (8.22)       (0.17)
   Goodwill amortization                        8.76          0.38           ---
                                           ---------     ---------     ---------
Adjusted basic net loss per common share   $  (52.79)    $   (7.84)    $  (0.17)
                                           ==========    ==========    =========

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ACCRUED LIABILITIES:                                                            

The following table summarizes accrued liabilities as of December 31:           

                                                                [Download Table]


                                                                2001       2002  
                                                             ---------  ---------
                                                                                 
Accrued liabilities - trade ................................ $   1,208  $     495
Accrued salaries and benefits ..............................       993        210
Accrued legal fees .........................................       276         31
Accrued vacation ...........................................       485        356
Accrued restructuring (current portion).....................     1,438        739
Customer Deposits ..........................................     1,698      1,372
Other liabilities ..........................................     1,459      2,223
                                                             ---------  ---------
                                                             $   7,557   $  5,426
                                                             =========  =========

6. INCOME TAXES                                                                 

The components of the Company's net deferred tax assets (liabilities) as of     
December 31, are as follows:                                                    

                                                                [Download Table]


                                                    2001       2002   
                                                  --------   -------- 
                                                                      
Deferred tax assets current:                                          
  Financial reserves                              $    848   $    141 
  Stock-based compensation                             107         -- 
  Accrued expenses and deferred revenues             2,725      1,590 
  Other                                                 57         36 
                                                  --------   -------- 
                                                     3,737      1,767 
  Valuation allowance                               (3,737)    (1,767)
                                                  --------   -------- 
  Net current deferred tax assets                 $     --   $     -- 
                                                  ========   ======== 

                                                    2001       2002   
                                                  --------   -------- 

Deferred tax assets(liabilities)long-term:                            
  Net operating loss carryforwards                $  9,756   $ 11,733 
  Capitalized research and development                  --      6,908 
  Other                                                360        210 
  Depreciation                                        (182)       104 
                                                  --------   -------- 
                                                     9,934     18,955 
  Valuation Allowance                               (9,934)   (18,955)
                                                  --------   -------- 
  Net long-term deferred tax assets(liabilities)  $     --   $     -- 
                                                  ========   ======== 


At December 31, 2002, the Company has approximately $31,000 and $29,000 of      
federal and state, respectively, net operating loss carryforwards, which it may 
use to offset future taxable income as described below. The net operating loss  
carryforwards, if not utilized, will begin to expire in 2009. To the extent that
net operating loss carryforwards, when realized, relate to stock option         
deductions, the resulting benefits will be credited to stockholders' equity.    

Internal Revenue Code Section 382 stipulates an annual limitation on the amount 
of Federal net operating losses incurred prior to a change in ownership, which  
can be utilized to offset the Company's future taxable income. An ownership     
change occurred as a result of the conversion of debt and exercise of warrants  
into preferred stock on September 26, 2001. The Section 382 limitation has      
significantly limited the amount of net operating losses the Company can use in 
future years. Accordingly, the Company has included in its deferred tax assets  
only the amount of net operating losses that are available after the Section 382
limit.                                                                          

The Company has recorded a full valuation allowance against its deferred tax    
assets because it believes it is more likely than not that sufficient taxable   
income will not be realized during the carryforward period to utilize the       
deferred tax asset. Realization of the future tax benefits related to the       
deferred tax assets is dependent upon many factors, including the Company's     
ability to generate taxable income in the respective tax jurisdiction within the
loss carryforward periods.                                                      

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The Company's 2000, 2001 and 2002 income tax provision differs from that        
obtained by using the U.S. statutory rate of 34% due to the following:          

                                                        [Enlarge/Download Table]


                                                       Years Ended December 31,              
                                                       -----------------------               

                                                      2000               2001          2002  
                                                     ------             ------        ------ 
                                                                                             
Computed "expected" tax benefit                   $ (129,865)        $  (18,251)  $     (389)
State income taxes, net of U.S. federal benefits     (16,174)            (2,267)         (48)
Valuation allowance changes affecting the                                                    
  provision for income taxes                          65,114             17,857          359 
Warrant expense                                           --              1,706           66 
Permanent differences                                 80,925                955           12 
                                                  ----------         ----------   ---------- 
                                                  $       --         $       --   $       -- 
                                                  ==========         ==========   ========== 

7. CONVERTIBLE DEBT                                                             

On May 14, 2001, the Company entered into a definitive agreement with Image     
Investor Portfolio, a separate series of Memphis Angels, LLC ("Image") for an   
investment by Image in the Company. Pursuant to the terms of a securities       
purchase agreement between the Company and Image dated as of May 14, 2001, Image
purchased the Company's $10,000 convertible senior secured note and received    
Tranche A and Tranche B warrants to purchase up to $20,000 of the Company's     
Series B Preferred Stock.                                                       

The warrants were issued in conjunction with the convertible promissory note,   
and accordingly, based on APB 14, "Accounting for Convertible Debt and Debt     
Issued with Stock Purchase Warrants" and EITF 98-5, "Accounting for Convertible 
Securities with Beneficial Conversion Features," the entire proceeds from the   
convertible promissory note, $10,000, were allocated to the warrants and the    
beneficial conversion feature based on a calculation using the Black-Scholes    
model. During the third quarter of 2001, the $10,000 note and the Tranche B     
warrants were converted to preferred stock and accordingly in 2001 the Company  
recorded $10,000 as interest expense related to the accretion of the convertible
promissory note to its face value.                                              

8. iPIX INTERNATIONAL                                                           

In the third quarter of 2002, the Company entered into license, distribution and
trademark agreements with Soroof International, a Saudi Arabia-based corporation
("Soroof"). Under the agreements, Soroof will be the exclusive distributor for  
iPIX immersive still products, including the iPIX GPS Mapping System, outside of
North America and Asia through Soroof's newly established entity, iPIX          
International ("iPIX-I"). The agreement, effective July 1, 2002, expires        
December 31, 2007, unless renewed. iPIX-I has an exclusive license to develop   
integrated solutions for markets including real estate, travel and tourism and  
other markets in which online marketing is critical. The Company will provide   
certain hosting services during the term of the agreements. Soroof has committed
to certain minimum quarterly royalties during the term of the agreement. Should 
these minimum royalties not be met, the Company has the right to terminate the  
agreements with Soroof.                                                         

iPIX has a minority equity interest in iPIX-I, however, iPIX does not have the  
ability to exercise significant influence over iPIX-I operations. The Company   
accounts for the investment in iPIX-I on the cost basis, not as a variable      
interest entity under FIN 46. The Company did not make any capital contributions
to iPIX-I and has no commitments to fund iPIX-I. The Company does have the      
right, however, but not the obligation, to purchase iPIX-I from Soroof after    
December 31, 2005 for consideration as defined in the agreements. During the six
months ended December 31, 2002, the Company recognized $631 of revenue under    
these agreements.                                                               

9. STOCKHOLDERS' EQUITY                                                         

General                                                                         

On May 28, 2002 at the annual stockholders meeting, the authorized number of    
shares of common stock was reduced to 50,000,000 from 150,000,000. The Company's
amended and restated certificate of incorporation authorizes the issuance of up 
to 50,000,000 shares of common stock, par value $0.001 per share, 7,421,536     

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shares of Class B common stock, par value $0.0001 per share and 5,001,100 shares
of preferred stock, par value $0.001 per share. The board of directors is       
authorized, without stockholder approval, to issue up to an aggregate of        
5,001,100 shares of preferred stock, $0.001 par value per share, in one or more 
series. Included in this amount are designated 1,100 shares of Series C         
redeemable preferred stock and designated 3,000,000 shares of Series B preferred
stock. Each series of preferred stock may have the rights and preferences,      
including voting rights, dividend rights, conversion rights, redemption         
privileges and liquidation preferences that the board of directors determines.  
There were 1,115,080 shares of Series B preferred stock outstanding at December 
31, 2002.                                                                       

Each holder of common stock is entitled to one vote for each share on all       
matters to be voted upon by the stockholders, and there are no cumulative voting
rights. Holders of common stock may receive dividends after all dividends that  
are owed have been paid to holders of preferred stock.                          

Each holder of Class B common stock is entitled to one vote for each share on   
all matters to be voted upon by the stockholders and, except as required by law,
shall have voting rights and powers equal to the voting rights and powers of the
common stock. There are no cumulative voting rights. Holders of Class B common  
stock may at any time convert Class B shares into Class A common stock, are not 
entitled to dividends and are not entitled to receive any assets of the         
corporation upon dissolution or liquidation.                                    

Common Stock                                                                    

On August 22, 2001 the stockholders approved a ten-for-one reverse stock split  
of all outstanding $0.001 par value common stock and $0.0001 Class B common     
stock. The effect of these stock splits has been retroactively reflected        
throughout the financial statements.                                            

Preferred Stock                                                                 

On May 14, 2001, the Company entered into a definitive agreement with Image     
Investor Portfolio, a separate series of Memphis Angels, LLC ("Image") for an   
investment by Image in the Company. Pursuant to the terms of a securities       
purchase agreement between the Company and Image dated as of May 14, 2001, Image
purchased the Company's $10,000 convertible senior secured note and received    
Tranche A and Tranche B warrants to purchase up to $20,000 of the Company's     
Series B Preferred Stock.                                                       

On September 26, 2001, the Company, Image and strategic investors completed the 
Tranche B stage of the investment. At this time, the Company issued 1,115,080   
shares of the Company's Series B Preferred Stock for total consideration of     
$22,302, represented by the conversion of the $10,000 note, the conversion of   
$277 of interest on the Note and $12,025 in cash through the exercise of Tranche
B warrants. The remainder of the Tranche B warrants expired. The Company        
recorded a charge of $1,636 to additional paid in capital for costs incurred    
related to the Tranche A and Tranche B financings. These costs consisted        
primarily of costs of attorneys, accountants and other directly related external
costs.                                                                          

At December 31, 2002, there are two Tranche A warrants ("Warrant 1" and "Warrant
2"), issued to Paradigm Capital Partners and Memphis Angels, LLC, which are     
outstanding. Warrant 1 entitles the holder to purchase 150,000 shares of Series 
B Preferred Stock at $20 per share and is exercisable at any time before the    
expiration date of May 14, 2006. Warrant 2 entitles the holder to purchase      
100,000 shares of Series B Preferred Stock at $40 per share and is exercisable  
at any time before the expiration date of May 14, 2006 (See Note 13).           

Each share of the Series B Preferred Stock is convertible into approximately 9.2
shares of the Company's common stock and is entitled to vote on matters         
submitted to holders of common stock on an as-converted basis. However, at any  
time that the holders of the Series B Preferred Stock hold more than 50% of the 

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voting stock of the Company, a voluntary liquidation, dissolution or winding up 
of the Company must be approved by at least five of the seven members of the    
Company's board of directors. Holders of Series B Preferred, in preference to   
holders of any other series of Preferred Stock and in preference to the holders 
of Common Stock (collectively, "Junior Securities"), shall be entitled to       
receive, when and if declared by the Board, but only out of funds that are      
legally available, cash dividends at the rate of eight percent (8%) of $20 (or  
$40 for Warrant 2 shares) per annum on each outstanding share of Series B       
Preferred ("Series B Dividends"). The Series B Dividends shall be cumulative,   
shall accrue daily and shall by payable quarterly in cash or as an accretion to 
the Liquidation Preference, defined below.                                      

Upon any liquidation event, before any distribution or payment shall be made to 
the holders of any junior securities, the holders of Series B Preferred shall be
entitled to be paid out of the assets of the Company legally available for      
distribution, or the consideration received in such transaction, an amount per  
share of Series B Preferred equal to the $20 (or $40 for Warrant 2 shares) plus 
all accrued and unpaid Series B Dividends for each share of Series B Preferred  
held by them (the "Liquidation Preference"). If, upon any such Liquidation      
Event, the assets of the Company (or the consideration received in such         
transaction) shall be insufficient to make payment in full to all holders of    
Series B Preferred of the Liquidation Preference, then such assets (or          
consideration) shall be distributed among the holders of Series B Preferred at  
the time outstanding, ratably in proportion to the full amounts to which they   
would otherwise be respectively entitled.                                       

10. EMPLOYEE STOCK AND BENEFIT PLANS                                            

2001 Equity Compensation Plan                                                   

In 2001, the Company authorized the 2001 Equity Compensation Plan (the "2001    
Plan"). The 2001 Plan authorizes the granting of options and restricted stock   
awards to acquire up to 6,326,842 shares of common stock. As of December 31,    
2002, 2,854,287 options are outstanding under the 2001 Plan. The exercise price 
of all options granted is the fair value of the Company's common stock at the   
date of grant. The options generally vest over a one to three-year period and   
expire ten years from the grant date.                                           

2000 Equity Compensation Plan                                                   

In January 2000, the Company authorized the 2000 Equity Compensation Plan (the  
"2000 Plan"). The 2000 Plan authorizes the granting of options and restricted   
stock awards to acquire up to 350,000 shares of common stock. As of December 31,
2002, 245,752 options are outstanding under the 2000 Plan. The exercise price of
all options granted is the fair value of the Company's common stock at the date 
of grant. The options generally vest over a two-year period and expire ten years
from the grant date. No further options will be granted under the 2000 Plan. The
remaining options not granted under the 2000 Plan were transferred to the 2001  
Plan.                                                                           

1998 Employee, Director and Consultant Stock Option Plan                        

During 1998, the Company authorized an Employee, Director and Consultant Stock  
Option Plan for a total of 238,000 common shares. The 1998 Plan became effective
on January 1,1999 once the Company was reorganized. During 1999 and 2000, an    
additional 579,939 and 112,403, respectively, common shares were authorized     
under the 1998 Plan. As of December 31, 2002, 38,941 options are outstanding    
under the 1998 Plan. Each option under the 1998 Plan allows for the purchase of 
common stock and expires not later than five or ten years from the date of      
grant, depending on the ownership of the option participants. The vesting terms 
of the stock options will be determined on each grant date and are generally two
or three years; however, the amount of options that can be exercised per        
participant in any calendar year will be restricted to an aggregate fair market 
value of $100 of the underlying common stock. No further options will be granted
under the 1998 Plan. The remaining options not granted under the 1998 Plan were 
transferred to the 2000 Plan.                                                   

1997 Equity Compensation Plan                                                   

The Company authorized the 1997 Equity Compensation Plan, under which 410,503   
shares of common stock are authorized and reserved for issuance to selected     
employees, officers, directors, consultants and advisors. The Company reserved a
sufficient number of shares of common stock for issuance pursuant to the        

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authorized options. As of December 31, 2002, 48,864 options are outstanding     
under the 1997 Plan. In addition, the Company granted certain options to        
purchase shares of common stock to employees not under the 1997 Plan; these     
options were primarily granted prior to the authorization of the 1997 Plan. The 
exercise price of all options granted is the fair value of the Company's common 
stock at the date of grant as estimated by common stock and convertible         
preferred stock transactions with third parties at or near grant dates. The     
options generally vest over one to three-year periods and expire five years     
after the respective vesting dates. No further options will be granted under the
1997 Plan. The remaining options not granted under the 1997 Plan were           
transferred to the 2000 Plan.                                                   

Other Stock Option Plans                                                        

The 1994 Stock Option Plan (the "1994 Plan"), the 1996 Stock Option Plan (the   
"1996 Plan") and the 1997 Stock Option Plan (the "1997 Options Plan") were      
originally adopted by PictureWorks, Inc., a wholly-owned subsidiary of iPIX, in 
November 1994, May 1996 and November 1996, respectively. Under the 1994 Plan,   
eligible employees, directors and consultants could receive options to purchase 
shares of the Company's common stock at a price not less than 100% and 50% of   
the fair value on the date of the grant for incentive stock options and         
nonqualified stock options, respectively. Under the 1996 Plan and 1997 Options  
Plans, eligible employees, directors and consultants who owned less than 10% of 
all voting classes of stock could receive options to purchase shares of our     
common stock at a price not less than 110% and 85% of fair value on the date of 
grant of incentive stock options and nonqualified stock options, respectively.  
Employees owning greater than 10% of all voting classes of stock could receive  
options to purchase shares at a price not less than 110% of the fair market     
value for both incentive and nonqualified stock options. As of December 31,     
2002, 32,035 options are outstanding under these plans. The options granted     
under these plans are exercisable over a maximum term of ten years from the date
of grant and generally vest in various installments over a five-year period     
under the 1994 Plan and a four-year period under the 1996 Plan and 1997 Options 
Plan. No further options or restricted stock awards will be granted under the   
1994, 1996 and 1997 Options Plans.                                              

A summary of the Company's stock option activity under all plans is as follows: 

                                                        [Enlarge/Download Table]


                                                     WEIGHTED     WEIGHTED                WEIGHTED
                                                      AVERAGE      AVERAGE      STOCK     AVERAGE 
                                                    OF EXERCISE  GRANT DATE    OPTIONS    EXERCISE
                                          SHARES      PRICES     FAIR VALUE  EXERCISABLE    PRICE 
                                       -----------  -----------  ----------  -----------  ------- 
                                                                                                  
Under option at December 31,                                                                      
  1999................................    952,782                              457,924     $20.30 
Options granted ......................    878,992    $223.80      143.10                          
Options exercised ....................   (433,266)      4.90                                      
Options forfeited or expired .........   (697,299)    175.80                                      
Options through acquisitions..........     73,400      36.80                                      
                                        ---------                                                 
Under option at December 31,                                                                      
  2000................................    774,609                              287,520      68.40 
                                        =========                                                 

Options granted ......................  4,227,100       2.43        1.90                          
Options exercised ....................    (37,977)      1.77                                      
Options forfeited or expired .........   (589,425)     42.30                                      
Options cancelled ....................   (273,961)    147.74                                      
                                        ---------                                                 
Under option at December 31,                                                                      
  2001................................  4,100,346                              969,056      11.22 
                                        =========                                                 

Options granted ......................    260,000       1.86        2.06                          
Options exercised ....................    (32,500)      2.60                                      
Options forfeited or expired ......... (1,107,967)     13.22                                      
                                        ---------                                                 
Under option at December 31,                                                                      
  2002................................  3,219,879                            2,461,247      12.05 
                                        =========                                                 

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The following table summarizes information about stock options at December 31,  
2002:                                                                           

                                                        [Enlarge/Download Table]


                              OPTIONS OUTSTANDING                          OPTIONS EXERCISABLE     
                ------------------------------------------------     ----------------------------- 
                              WEIGHTED-AVERAGE                                                     
   RANGE OF        NUMBER        REMAINING       WEIGHTED-AVERAGE      NUMBER      WEIGHTED-AVERAGE
EXERCISE PRICE  OUTSTANDING   CONTRACTUAL LIFE    EXERCISE PRICE    EXERCISABLE     EXERCISE PRICE 
--------------  -----------   ----------------   ----------------   -----------    ----------------

                                                                                                   
$   1.10-1.99    1,132,042         8.81             $  1.49          697,440            $1.50      
$   2.00-3.99    1,722,292         8.73             $  2.45        1,405,923            $2.42      
$   4.00-9.99      203,299         2.44             $  8.49          202,580            $8.49      
$10.00-300.00      162,246         6.70             $148.76          155,304          $151.22      

   Total         3,219,879         8.26             $  9.86        2,461,247           $12.05      

Employee Stock Purchase Plan                                                    

The Company has an Employee Stock Purchase Plan (the "Purchase Plan"). Under the
Purchase Plan, employees meeting certain specific employment qualifications are 
eligible to participate and can purchase shares of common stock semi-annually   
through payroll deductions at the lower of 85% of the fair market value of the  
stock on the enrollment date or the fair market value of the stock at the end of
the offering period. The Purchase Plan permits eligible employees to purchase   
common stock through payroll deductions for up to 15% of qualified compensation.
As of December 31, 2002, 585,000 shares were reserved under the Purchase Plan.  
As of December 31, 2002, 111,925 shares had been issued and 473,075 shares were 
available for issuance under the Purchase Plan.                                 

Stock-Based Compensation                                                        

Stock based compensation charges are made up of the following:                  

                      Years ended December 31,
                        ------------------------------------
                    2000      2001      2002
                    ------    ------    ------

Stock options                        $  757    $2,385    $   --                 
Stock and restricted stock            3,812       828        --                 
Warrants                                558     1,286       171                 
                    ------    ------    ------
Total                                $5,127    $4,499    $  171                 
                   ========   ========  ========

In connection with certain stock options granted to consultants or to employees 
(with below market price exercise prices), the Company recorded unearned        
stock-based compensation, which was amortized over the vesting periods of the   
related options, generally two to three years. In connection with certain       
restricted stock awards to employees, the Company recorded unearned stock-based 
compensation for the value of the restricted awards, which was amortized over   
the vesting periods of the awards, generally less than a year. The Company has  
from time to time issued to customers warrants to purchase equity securities.   
The value of these warrants was estimated using the Black-Scholes option-pricing
model and recorded as stock-based compensation over the vesting period of the   
warrants, generally two to three years (See Note 13).                           

Fair Value Disclosure                                                           

For all other option grants, because the exercise price of the stock options    
equaled the deemed fair value of the underlying stock on the date of the grant, 
no compensation cost has been recognized in the accompanying financial          
statements. Pro forma information regarding net loss is required by FAS 123 and 
FAS 148, and has been determined as if the Company had accounted for its stock  
options under the fair value method of FAS 123.                                 

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The computations for pro-forma basic and diluted earnings per share for each    
year follow:                                                                    

                                                                [Download Table]


                                                  Years Ended December 31,       
                                            -------------------------------------
(In thousands, except per share)               2000         2001       2002      
                                            ---------     ---------   --------   
                                                                                 

Net loss before extraordinary gain          $(346,595)    $ (54,579)  $ (1,143)  
   Extraordinary gain                              --           901         --   
                                            ---------     ---------   --------   
Net loss                                     (346,595)      (53,678)    (1,143)  
   Add employee stock compensation expense                                       
   included in reported net loss                4,569         3,213         --   
   Less FAS 123 pro-forma charges             (26,509)      (11,503)    (5,742)  
                                            ----------    ----------  --------   
Adjusted net loss                           $(368,535)    $ (61,968)  $ (6,885)  
                                            ==========    =========== ========   
Basic net loss per common share:                                                 
Net loss before extraordinary gain          $  (61.55)    $   (8.36)  $  (0.17)  
   Extraordinary gain                              --          0.14         --   
                                            ---------     ---------   --------   
Net loss before pro-forma charges           $  (61.55)        (8.22)     (0.17)  
   Net effect of pro-forma charges              (3.90)        (1.27)     (0.85)  
                                            ---------     ---------   --------   
Adjusted basic net loss per common share    $  (65.45)    $   (9.49)  $  (1.02)  
                                            =========     =========   ========   

Under FAS 123, grants under the Employee Stock Purchase Plan ("ESPP")have a     
look-back feature and a 15% discount and accordingly would have had compensation
expense calculated as a result. The fair value disclosure associated with the   
ESPP grants is included in the fair value pro-forma information above.          

The minimum fair value of each option grant is estimated on the date of grant   
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: expected lives of three to four years in 1999, 2000
and 2001; risk free interest rate of 6.0% to 6.8% in 2000, 4.7% to 5.4% in 2000 
and 4.0% to 4.5% in 2002; expected dividends of zero in 2000, 2001 and 2002; and
volatility of 83% to 113% in 2000, 69% to 192% in 2001 and 92% to 117% in 2002. 

401(k) Plan                                                                     

The Company has a 401(k) profit sharing plan, which is available to all         
full-time employees after six months of service and those part-time employees   
who have completed one thousand hours of employment during twelve consecutive   
months. During 2000 and 2001 the Company matched sixty-five cents per dollar up 
to 6.15% of the employee's annual salary. The Company made contributions, net of
forfeitures, of $500, $117 and $0 in 2000, 2001 and 2002, respectively.         

11. SEGMENT INFORMATION                                                         

The Company has two reportable segments. The accounting policies of the segments
are the same as those of the Company. Management evaluates the performance of   
the segments and allocates resources to them based on evaluations of the        
segment's gross profit. There are no inter-segment revenues. The Company does   
not make allocations of corporate costs to the individual segments and does not 
identify separate assets of the segments in making decisions regarding          
performance or allocation of resources to them.                                 

Starting in fiscal year 2001, the Company organized into two primary business   
units: Transaction Services and Immersive Solutions. In addition, as part of the
sale of assets to Homestore.com during the first quarter of 2001, the Company no
longer directly sells full service virtual real estate tours or iPIX keys to    
customers in the U.S. residential real estate market. During 2001, the Company  
generated $7,550 of revenue, with a gross profit of $3,948, related to full     
service virtual real estate tours. The Company has not generated full service   
virtual tour revenues since the quarter ended September 30, 2001 and does not   
expect to generate material future revenues from the sale of full service       
virtual real estate tours in the U.S. residential real estate markets.          

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Of the $28,906 of revenues for 2001, $21,356 was not related to full service    
virtual tours. Of the $16,645 of gross profit for 2001, $12,697 was not related 
to full service virtual tours. Information about the new 2001 reported segments 
is as follows:                                                                  

                           TRANSACTION   IMMERSIVE
                                       SERVICES     SOLUTIONS      TOTAL
                                       -----------   ----------     ------

YEARS ENDED DECEMBER 31:                                  

2002                                                      
         Revenues.....................    $16,242       $6,171       $22,413
         Gross profit.................      9,414        4,271        13,685

2001                                                      
         Revenues.....................    $13,320       $8,036       $21,356
         Gross profit.................      7,436        5,261        12,697

Information about prior reported segments is as follows:                        

                                       PRODUCTS     SERVICES       TOTAL
                                       --------     --------       -----
YEARS ENDED DECEMBER 31                                   

2002                                                      
        Revenues...................      $6,512      $15,901       $22,413
        Gross profit...............       4,367        9,318        13,685

2001                                                      
        Revenues...................     $14,758      $14,148       $28,906
        Gross profit...............       7,488        9,157        16,645

2000                                                      
        Revenues...................     $48,943       $4,730       $53,673
        Gross profit...............      23,388        2,214        25,602

Revenue and long-lived asset information by geographic area is as follows:      

                          YEARS ENDED DECEMBER 31,
                      --------------------------------
                      2000          2001        2002
                      ------        ------      ------
REVENUES:                                                   
United States....      $45,535       $24,683     $19,962  
Canada...........        1,608           369          --  
Japan............          390            --         577  
Europe...........        4,630         2,802         904  
Other foreign                                             
countries......        1,510         1,052         970
                     -------       -------     -------
                     $53,673       $28,906     $22,413
                     =======       =======     =======

                    AS OF DECEMBER 31,
                    --------------------------------
                    2000          2001        2002
                     ------        ------     --------
LONG-LIVED ASSETS:                                          
Foreign..........      $ 3,285       $    83     $    --    
United States....       17,680         4,531       4,631    
                   -------       -------     -------
                   $20,965       $ 4,614     $ 4,631
                   =======       =======     =======

Foreign revenues include all sales made to customers outside the United States, 
including those generated by our United Kingdom and Canadian subsidiaries.      

12. COMMITMENTS AND CONTINGENCIES                                               

COMMITMENTS                                                                     

During April 2000, the Company entered into an agreement to provide visual      
content services under which the Company is required to pay marketing fees to a 

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related party of $16,000 over a two-year period. As of September 26, 2001, the  
Company had paid $9,500 of the $16,000 commitment and has agreed to extend the  
additional $6,500 of payments through September 2003 (See Note 14).             

In 2001 and 2002, the Company sold certain assets totaling $2,840 and $2,494,   
respectively, to a stockholder and agreed to leaseback those assets over a      
three-year period. In order to sell the assets to the stockholder during the    
third quarter 2001, the Company paid off the remaining payments under an        
existing capital lease of the assets from a third party. During the quarter     
ended September 30, 2002, the Company sold certain assets totaling $1,376 to an 
unaffiliated leasing company and agreed to leaseback those assets over a        
thirty-month period. The net book value and the fair value of the assets sold in
these sale/leaseback transactions equaled the sale price, resulting in no gain  
or loss on the sale of the assets. The leases are accounted for as capital      
leases in accordance with FAS 13, "Accounting for Leases."                      

At December 31, 2002, the future minimum payments under these and other capital 
lease agreements are as follows:                                                

2003......................................................................$2,582
2004...................................................................... 1,402
2005.......................................................................  106
                                                                          ------
Minimum lease payments...................................................  4,090
Less: amount representing interest.......................................    228
                                                                          ------
Principal amount of minimum lease payments...............................  3,862
Less: current portion....................................................  2,403
                                                                          ------
Long-term portion........................................................ $1,459
                                                                          ======

The Company leases certain office space, co-location space and equipment under  
noncancelable operating leases.                                                 

Future minimum lease payments under these and other operating leases are as     
follows:                                                                        

2003.....................................................................$ 3,189
2004...................................................................... 2,738
2005...................................................................... 1,024
2006........................................................................ 771
2007......................................................................... 64

Rental expense for operating leases was $4,579, $2,921 and $2,638 for 2000, 2001
and 2002, respectively.                                                         

CONTINGENCIES                                                                   

On October 28, 1998, Minds-Eye-View, Inc. ("Minds-Eye") and Mr. Ford Oxaal      
("Oxaal") filed a lawsuit against the Company in the United States District     
Court for the Northern District of New York. Minds-Eye alleged in its lawsuit   
that the Company breached a duty of confidence to them, made misrepresentations 
and misappropriated trade secrets. The court removed this action to arbitration 
upon our motion, and the Company cross-claimed alleging various affirmative     
claims, including trade secret theft. Minds-Eye and Oxaal filed a motion to     
dismiss the suit, and the court dismissed the lawsuit on May 19, 1999. Although 
the lawsuit was dismissed, the Company proceeded with the arbitration in        
Knoxville, Tennessee. The arbitration was stayed pending resolution of the      
following lawsuit.                                                              

On May 20, 1999, Oxaal filed a lawsuit against the Company and certain of the   
Company's customers in the same court alleging that our technology infringes    
upon a patent claim for 360 degree spherical visual technology held by him.     
Oxaal filed an additional complaint on December 5, 2000 in the United States    
District Court for the Northern District of New York, naming the Company as the 
sole defendant. The complaint states a single claim for relief, alleging        
infringement of U.S. Patent No. 6,157,385, which was issued on December 5, 2000.
This patent encompasses a method of seamlessly combining at least two images    
into a spherical image.                                                         

On June 11, 2002, the Company reached an out of court settlement with Oxaal and 
Minds-Eye. As a result of the settlement, each of the lawsuits and the          

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arbitration proceeding described above were dismissed and mutual releases have  
been executed. Pursuant to the settlement agreement, neither party admitted     
liability or any wrongdoing. The Company was granted a non-exclusive license    
under patents and pending patents conceived by Oxaal or in which Oxaal has an   
interest. The license rights inure to the benefit of the Company's customers    
with respect to their purchases from the Company and also inure to the benefit  
of the Company's business partners with respect to their business relations with
iPIX. The Company included the cost of the license in computer hardware,        
software and other on the accompanying balance sheet. The Company does not      
believe that the cost of the license in the current period or the future, will  
have a material effect on its financial condition, results of operations or cash
flows.                                                                          

On May 10, 2001, Stanley Fry, Woodhaven Venture Partners, L.P., Cyrus Greg,     
Patrick Oliver and related entities, all of whom are former stockholders of     
PictureWorks Technology, Inc. (which the Company acquired in April 2000) filed a
lawsuit in the Delaware Chancery Court alleging causes of action for failure to 
timely issue stock certificates and breach of contract. An unspecified amount of
damages was sought. In December, 2002, the Company settled this case pursuant to
a settlement agreement in which neither party admitted liability or any         
wrongdoing. The settlement did not have a material effect on the Company's      
financial condition, results of operations or cash flows.                       

During the quarter ending September 30, 2002, the Company received approximately
$1,400 in cash from a previously disclosed favorable jury verdict against       
Infinite Pictures that found the defendants liable for infringement of our      
patents under the doctrine of equivalents and awarding us $1,000 in damages,    
plus approximately $400 in interest and court costs. The defendants filed for a 
writ of certiorari with the United States Supreme Court in an effort to reverse 
the lower court's findings in our favor. The Supreme Court refused to grant the 
writ, which exhausted the legal remedies for disputing the award. Accordingly,  
the Company recorded the $1,000 in damages as patent infringement award, along  
with the $400 in interest and court costs, in the quarter ended September 30,   
2002.                                                                           

On November 15, 2002, a First Amended Consolidated Complaint for violation of   
federal securities laws was filed against Homestore.com, Inc. ("Homestore") by  
the California Teachers' Retirement System ("CalSTRS"). The Complaint is a class
action lawsuit filed on behalf of stockholders of Homestore.com which flows from
alleged misstatements and omissions made by Homestore and the other named       
defendants, which include the Company. The Complaint alleges that during 2001,  
Homestore and iPIX entered into fraudulent reciprocal transactions intended to  
artificially bolster and maintain Homestore's and our respective stock prices.  
The Complaint alleges that Homestore's public statements with respect to these  
transactions are attributable to the Company and violate Sections 10(b) and     
20(a) of the Securities Exchange Act of 1934. The Company joined with other     
co-defendants and filed a joint motion to dismiss, alleging that the Complaint  
fails to state a claim upon which relief may be granted, among other things. On 
March 7, 2003, the United States District Court for the District of Central     
California granted the Company's motion to dismiss, with prejudice. However,    
CalSTRS may appeal this dismissal in accordance with the federal rules of       
procedure.                                                                      

The Company is not currently a party to any other legal proceedings the adverse 
outcome of which, individually or in the aggregate, the Company believes could  
have a material adverse effect on the Company's business, financial condition,  
results of operations or cash flows.                                            

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13. WARRANTS                                                                    

The Company has from time to time issued warrants to purchase equity securities.

The following tables summarize warrants outstanding at December 31, 2002:       

                                                                [Download Table]


Common Stock                                                                    
                  Grant       Expiration                       Exercise         
                  Date           Date         Shares             Price          
              ------------------------------------------------------------------

                                                                                
              4/19/2000    10/18/2004         60,000           $203.80          
              5/26/2000    2/25/2005          20,000           $120.60          
              5/26/2000    2/25/2005          20,000           $120.60          
              1/6/2000     1/5/2009           20,000           $154.70          
                                                                $40.00 to       
              2000         Various            16,949           $176.60          
                                           ---------                            
                                             136,949                            
                                           =========                            

                                                        [Enlarge/Download Table]


                                 Date        Expiration                       Exercise         
Series B Preferred Stock       of Grant         Date         Shares             Price          
                             ------------------------------------------------------------------
                             ------------------------------------------------------------------
                                                                                               
Warrant 1                    5/14/2001    5/14/2006         150,000             $20.00         
Warrant 2                    5/14/2001    5/14/2006         100,000             $40.00         

Equivalent to common shares  9.21                                                              

Warrant 1                                                 1,381,125         $2.17              
Warrant 2                                                   920,750         $4.34              
                                                          ---------                            

Total                                                     2,301,875                            
                                                          =========                            


14. RELATED PARTY TRANSACTIONS                                                  

During 2000, the Company's CEO at that time obtained a $2,000 loan under a line 
of credit made available through his employment agreement dated February 22,    
2000. Interest accrued at a rate of 9.5% during 2000 and 5.0% during 2001. The  
loan is collateralized by the Company stock owned by the CEO and the stock      
options granted pursuant to his employment agreement. At December 21, 2000, the 
$2,000 principal amount plus $130 of accrued interest was reflected as contra   
equity in the accompanying balance sheet. As part of a separation agreement, the
line of credit was forgiven, along with accrued interest of $163 in May 2001.   
Compensation expense related to this forgiveness is included in restructuring   
expense for the year ended December 31, 2001. As guarantee to pay the related   
severance agreement, the Company provided a letter of credit to the employee.   
The letter of credit had related balances of $600 and $200 as of December 31,   
2001 and 2002.                                                                  

In September 1996, PictureWorks' President, currently the Company's CEO,        
exercised his right under his employment agreement to purchase 39,339 shares of 
iPIX common stock in exchange for a full recourse promissory note issued to the 
Company in the amount of $126. Interest accrued semiannually at a 6.74% annual  

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rate. The principal amount of $126 plus accrued interest of $41 and $52 are     
reflected as contra equity in the accompanying balance sheet on December 31,    
2000 and 2001, respectively. The note and accrued interest were forgiven.       
Compensation expense totaling $178 was recorded in 2002 for the forgiveness of  
the principal and accrued interest.                                             

Transactions with eBay, Inc.                                                    

Pursuant to an agreement dated April 19, 2000, as amended, the Company provides 
to eBay, Inc., which beneficially owns more than 10% of the Company's common    
stock, image management services to eBay's online auction Web sites. Pursuant to
that agreement, the Company issued eBay a warrant to purchase 60,000 shares of  
common stock at an exercise price of $203.80 per share. The warrant expires on  
April 19, 2010. Under this agreement, the Company generated revenue of $212,    
$6,048 and $13,368 for the years ended December 31, 2000, 2001 and 2002,        
respectively.                                                                   

During April 2000, the Company entered into an agreement to provide visual      
content services to eBay under which the Company is required to pay marketing   
fees to eBay of $16,000 over a two-year period. As of September 26, 2001, the   
Company had paid $9,500 of the $16,000 commitment and has agreed to extend the  
additional $6,500 of payments through September 2003. As of December 31, 2002,  
the Company has $3,000 of the commitment remaining. In accordance with EITF     
01-09, $1,000 of these fees was offset against revenue which amount represented 
the excess over the fair value of the benefit received during the year ended    
December 31, 2002.                                                              

In 2001 and 2002, the Company sold to eBay, and eBay leased back to the Company,
certain computer equipment utilized to provide image management services to eBay
and other customers. The purchase price for the equipment was approximately     
$5,334. The transactions resulted in no gain or loss to the Company. Pursuant to
lease schedules covering this equipment, the Company will pay eBay annual lease 
payments of approximately $1,897, $779 and $106 in 2003, 2004 and 2005,         
respectively. In 2001 and 2002, the Company paid eBay $194 and $2,373,          
respectively, pursuant to these lease schedules.                                

QUARTERLY INFORMATION                                                           
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)                          

                                                        [Enlarge/Download Table]


                                                                                  QUARTER ENDED                         
                                                          ------------------------------------------------------------- 
                                                  TOTAL   MARCH 31            JUNE 30     SEPTEMBER 30      DECEMBER 31 
                                                  -----   --------            -------     ------------      ----------- 
                                                                                                                        
Fiscal Year 2002:                                                                                                       
   Revenue                                      $22,413     $4,794             $5,761           $5,995           $5,863 
   Gross profit                                 $13,685     $2,670             $3,575           $3,696           $3,744 
   Net income (loss)                            $(1,143)   $(1,512)            $ (692)          $  575           $  486 
   Net income (loss)per share (1):                                                                                      
       Basic                                    $ (0.17)    $(0.22)            $(0.10)          $ 0.08           $ 0.07 
       Diluted                                  $ (0.17)    $(0.22)            $(0.10)          $ 0.03           $ 0.03 
Fiscal Year 2001:                                                                                                       
   Revenue                                      $28,906     $9,523             $7,963           $6,576           $4,844 
   Gross profit                                 $16,645     $4,689             $4,526           $4,185           $3,245 
   Extraordinary Gain                           $   901     $   --             $   --           $   --           $  901 
   Net loss                                    $(53,678)  $(17,108)          $(19,615)        $(14,546)         $(2,409)
   Net loss per share, basic and diluted (1)    $ (8.22)    $(2.69)            $(3.00)          $(2.19)          $(0.36)
Fiscal Year 2000:                                                                                                       
   Revenue                                      $53,673     $8,283            $15,489          $17,218          $12,683 
   Gross profit                                 $25,602     $3,437             $7,466           $9,073           $5,626 
   Net loss                                   $(346,595)  $(36,890)          $(47,934)        $(37,712)       $(224,059)
   Net loss per share, basic and diluted (1)    $(61.55)    $(7.91)            $(8.45)          $(6.24)         $(36.63)

(1) The sum of the quarterly earnings(loss) per share amounts may differ from   
annual loss per share because of the differences in the weighted average number 
of common shares and dilutive potential shares used in the quarterly and annual 
computations.                                                                   

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                                                                    Exhibit 10.3

EMPLOYMENT AGREEMENT

         This Employment Agreement is made and entered into effective as of July
1, 2001 by and between Internet Pictures Corporation, a Delaware corporation    
having an office at 3160 Crow Canyon, Fourth Floor, San Ramon, California 94583,
and the individual named in Exhibit A ("Executive").                            

   WHEREAS, the Company wishes to employ Executive with the title in
Exhibit A and upon the terms and conditions hereinafter set forth, and Executive
desires to serve in such capacities upon the terms and conditions hereinafter   
set forth.                                                                      

   NOW THEREFORE, in consideration of the premises and of the mutual
covenants and conditions contained herein, and other good and valuable          
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Company and Executive hereby agree as follows:                                  

        1. Term. Executive's employment under this Agreement shall commence on
the Effective Date set forth in Exhibit A and shall continue indefinitely as set
forth herein until termination of Executive's employment as provided in Section 
6 hereof. If Executive's employment is terminated pursuant to Section 6 hereof, 
the Term of Employment shall expire as of the termination Date (as defined in   
Section 6 hereof).                                                              

         2. Duties and Activities. During the Term of Employment, Executive will
faithfully perform those duties and responsibilities commensurate with the      
position set forth in Exhibit A. Executive shall participate and perform such   
other responsibilities and duties as may be reasonably determined in the future 
by the Company's Chief Executive Officer ("CEO") or other officer designated in 
Exhibit A as Executive's Direct Supervisor. Executive will devote Executive's   
entire business time, attention and energy and use best efforts to advance the  
business and welfare of the Company in furtherance of the policies established  
by the CEO. Executive shall report to officers on the Senior Executive level    
(Senior Vice President, Executive Vice President, President, CEO) as the CEO may
determine. Executive shall not engage in any other employment activities for any
direct or indirect remuneration, except that Executive may continue to devote   
reasonable time to the management of personal investments, participation in     
community and charitable affairs, and the activities as further set forth in    
Exhibit B hereto, so long as such activities do not interfere with Executive's  
performance of his duties under this Agreement.                                 

        3. Former Employers. Executive represents and warrants that employment
by the Company will not conflict with and will not be constrained by any prior  
or current employment, consulting or other relationship. Executive represents   
and warrants that Executive does not posses confidential information arising out
of any such employment, consulting or other relationship, which in Executive's  
best judgment, would be utilized in connection with employment by the Company.  
Executive has documented in Exhibit C any prior inventions claimed by Executive.

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4. Compensation.                                              

                4.1 Base Salary. In consideration for Executive's services under
            this Agreement, Executive will be paid a salary at an annual
                rate set forth in Exhibit A, or at such other annual salary rate
       as determined by the CEO, the Board or its Compensation
                Committee, but in any event at least equal to the salary rate in
           effect from time to time is referred to herein as the "Base
          Salary." Executive's Base Salary shall be paid in periodic
            installments at such times as salaries are generally paid to
other senior executives of the Company.         

               4.2 Earned Bonus, Performance Bonus and Other Compensation.
               Executive shall be eligible to receive Bonus Compensation equal
               to the Bonus Rate set forth in Exhibit A at target and based on
              objectives to be mutually defined. Bonus Compensation shall be
              paid on terms agreed to and documented in writing. Executive's
              compensation by payments of Base Salary and Bonus Compensation
             shall not be deemed exclusive and shall not prevent Executive
              from participating in any other incentive compensation, profit
            sharing or benefit plan made available by the Company to its
        executive Executives generally. The Base Salary payments
        hereunder shall not in any way limit or reduce any other
         obligation of the Company hereunder, and no compensation,
             benefit or payment hereunder shall in any way limit or reduce
             the obligation of the company to pay Executive's Base Salary.

                4.3 Stock Option Grant. The Company shall grant to Executive
        an incentive stock option (the "Option"), (to the extent
            permitted by the applicable provisions of Section 422 of the
              Internal Revenue Code) to purchase the number of shares of the
                common stock of the Company as set forth in Exhibit A. Executive
              shall be entitled to option shares in an amount and consistent
              with option shares being granted to the Company's other senior
               executive officers, which option shears will be issued pursuant
        to the Company's employee stock option plans, subject to
         approval by the Board of Directors, and shall include the
following terms:                                

                        (1)     The  option  shares  will  vest as set  forth in
Exhibit A.      

                        (2)     The  exercise  price for the option  shall be at
                                the  closing  price  on the  date  the  Board of
                                Directors  approves  the  option  (the  "Date of
                                Grant"),  as  appropriate   adjusted  for  stock
                      splits, stock dividends, and the like.

                        (3)     The option shall be exercisable  upon vesting or
                                within 90 days after  termination of Executive's
                                employment with the Company.  Termination  shall
                                occur  after  all  Continuation   Payments,   as
                                defined  in  Section  7,  have  been made by the
         Company to the Executive.

                        (4)     Issuance  of the option  shall be in  accordance
                                with  all  applicable  securities  laws  and the
                                other  terms  and  conditions  of the  Company's
                                Stock  Option Plan and form of the Stock  Option
Agreement.      

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                 (5)     The Option will have a term of ten years.

                        (6)     In the event of a Change of Control  (as defined
                                in the Company's  2001 Equity  Incentive  Plan),
                                all unvested  options will vest and become fully
                                exercisable.  In the  event of the  death of the
                                Executive;   or  the  Permanent   Disability  of
                                Executive (as defined in Section 6.1(b) hereof),
                                vesting of options will  continue for the 90 day
                                period   thereafter.   In  the   event   of  the
                                termination  of  Executive   without  Cause  (as
                                defined in Section 6.1(c) hereof) or termination
                                by  Executive  for Good  Reason  (as  defined in
                                Section  6.1(e),  then  vesting of options  will
                                continue in accordance with their terms over the
          6 months severance period.

5. Benefits.                                                  

                   5.1 Participation. Executive shall be entitled to participate
                  in all fringe benefit programs maintained by the Company and
                 made available to its executive officers from time to time.
                  The Company shall maintain for Executive disability, health,
                 vision, dental and prescription drug coverage comparable to
                 that provided to executives of the Company. Executive shall
              be entitled to four (4) weeks of paid vacation per year,
             which vacation time shall accrue in accordance with the
Company's policies.                       

                   5.2 Expenses. The Company will pay or reimburse Executive for
             such reasonable travel, entertainment or other business
                   expenses incurred on behalf of the Company in connection with
                 the performance of Executive's duties hereunder but only to
            the extent that such expenses were either specifically
              authorized by the Company or incurred in accordance with
                 policies established by the CEO for executives and provided
                 that Executive shall furnish the Company with such evidence
             relating to such expenses as the Company may reasonably
             require to substantiate such expenses for tax purposes.

6. Termination of Employment.                                 

                 6.1 Circumstances of Termination. Notwithstanding the terms
                 set forth in Section 1 hereof, Executive's employment shall
                terminate under any of the following circumstances and the
                  date of such an occurrence, unless otherwise provided below,
shall be Executive's "Termination Date":  

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                        (a)     Death. Immediately , in the event of Executive's
death.          

                        (b)     Permanent  Disability.  At  the  option  of  the
                                Company,   if   Executive   --------------------
                                becomes physically or mentally  incapacitated or
                                disabled  so that (i)  Executive  is  unable  to
                                perform for the Company  substantially  the same
                                services  as   Executive   performed   prior  to
                                incurring  such  incapacity  or disability or to
                                devote  a  substantial  portion  of  Executive's
                                business time or use Executive's best efforts to
                                advance the  business and welfare of the Company
                                or otherwise to perform Executive's duties under
                                this Agreement,  (ii) such condition  exists for
                                an  aggregate  of six (6)  months in any  twelve
                                (12)  month  consecutive  calendar  months,  and
                                (iii) such incapacity or disability is incapable
                                of reasonable  accommodations  under  applicable
                                law,  including but not limited to the Americans
                                with  Disabilities  Act of 1990,  as  amended (a
                                "Permanent  Disability"),  the  Company,  at its
                                option  and  expense,  is  entitled  to retain a
                                physician reasonably  acceptable to Executive to
                                confirm  the  existence  of such  incapacity  or
                                disability,   and  the   determination  of  such
                                physician   is  binding  upon  the  Company  and
Executive.      

                        (c)     Cause.   At  the  option  of  the  Company,   if
Executive:      

                          (i)     has been convicted of a felony; or

                                (ii)    has embezzled or misappropriated Company
                                        funds  or   property   or  that  of  the
                                        Company's   customers,    suppliers   or
              affiliates; or

                                (iii)   has violated  any material  term of this
                        Employment Agreement; or

                                (iv)    has  demonstrated  gross  negligence  or
                                        willful  misconduct in  connection  with
                                        the  performance of  Executive's  duties
          hereunder;

                     provided, however, that with respect to subsections (iii)
                      and (iv) above, the Company's right to terminate Executive
                    shall be conditioned on (A) the Company giving Executive
                  written notice specifically referring to the pertinent
                      subsection above and describing the specific circumstances
                    and/or actions purportedly giving rise to the occurrence
                  of such item; and (B) failure by Executive, within ten
                   (10) days after receipt of any such notice to cease the
                 actions and/or reinstate or rectify the circumstances
                      described in such notice to the reasonable satisfaction of
                     CEO. With respect to these subsections, the Company shall
                     have the right to place Executive on administrative leave
                     pending investigation of the circumstance(s) or action(s)
                    purportedly giving rise to the occurrence of such items.

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                        (d)     Without Cause. At the option of the Company,  at
                                any time for any ------------- reason other than
                                those referred to above or for no reason at all,
                                whereupon the Company shall be obligated to make
                                those payments set forth in Section 7 hereof but
                                if,  and only if,  Executive  executes a mutual,
                                valid and  comprehensive  release of any and all
                                claims that the  Executive  may have against the
                          Company in a form provided by the Company.

    (e)     Resignation for Good Reason.

                                (i)     Executive,   at  Executive  option,  may
                         resign for "Good Reason'"

                                (1)     because  the  Company  has  unreasonably
                                        reduced the role or  responsibilities of
          Executive;

                                (2)     because    the   Company   has   reduced
                                        Executive's  Base  Salary from the level
                                        in  effect  immediately  prior  to  such
                                        change,   with   the   exception   of  a
                                        company-wide  reduction of  compensation
                                        due to economic considerations, provided
                                        that the  foregoing  shall  not limit or
                                        derogate from the Company's  obligations
                             set forth in Section 4 above;

                                (3)     because  the Company  has  breached  any
                                        material  term of this  Agreement  other
                                        than as noted in subsections (1) and (2)
      above;

                                (4)     because the Company  requests  Executive
               to relocate; or

                                (5)     the  Company has  relocated  Executive's
                                        principal  office  location more than 20
                                miles from its current location.

                                (b)     in the event that  Executive  terminates
                                        this  Agreement  for  Good  Reason,  the
                                        Company  shall become  obligated to make
                                        those  payments  set forth in  Section 7
       hereof.

                   6.2 Notice of Termination. Any intent to terminate employment
                   by Executive pursuant to Section 6.1(c) shall be communicated
                  by written notice to the Company setting forth in detail the
               specific actions deemed to constitute Good Reason. If the
            Company does not respond within ten (1) days from such
            notice, the resignation shall be deemed effective. The
              Company may, within the ten (1) day period, correct such
            condition giving rise to Executive's notice or dispute
                  Executive's claims by giving written notice of such dispute.

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           6.3 At-Will Employment. Notwithstanding the Company's
           obligation described in Sections 6 and 7, Executive's
                employment with the Company will be on an "at will" basis,
                meaning that either Executive or the Company may terminate
             Executive's employment at any time for any reason or no
      reason, without further obligation or liability.

                6.4 Resignation. Upon termination of employment, Executive
                  shall be deemed to have resigned from the Board of Directors
 of the Company if Executive was a director.

                  6.5 Corporation. After notice of termination and the 60 days
                thereafter, Executive shall cooperate with the Company, as
                 reasonably requested by the Company, to effect a transition
            of Executive's responsibilities and to ensure that the
                 Company is aware of all matters being handled by Executive.

7. Payments Upon Termination of Employment.                                     

                  7.1 Payments.  In addition to any rights  Executive may have
under Section 4.3 on the Termination Date:

                  (a) If the Company terminates Executive's employment for Cause
or if Executive voluntarily terminates employment without Good Reason, the      
Company's obligation to compensate Executive shall in all respects cease as of  
the Termination Date, except that the Company shall pay to Executive within 30  
days the Base Salary accrued under Section 4.1, a pro-rata amount of any Bonus  
or other compensation earned under Section 4.3, the value of accrued vacation   
time pursuant to Section 5.1 hereof, and the reimbursable expenses incurred     
under Section 5.2 of this Agreement up to such Termination Date (the "Accrued   
Obligations");                                                                  

                (b) If Executive's employment is terminated due to the death
of Executive, the Company's obligation to compensate Executive shall in all     
respects cease as of the Termination Date, except that within thirty (30) days  
after the Termination Date, the Company shall pay Executive's estate or legal   
representative the Accrued Obligations;                                         

                  (c) If Executive's employment is terminated upon the Permanent
Disability of Executive, the Company's obligation to compensate Executive with  
respect to Base Salary (as in effect on the Termination Date) shall continue for
up to six (6) months or until Executive is eligible for long-term disability    
payments from the Company's insurance provider, whichever is sooner. In         
addition, the Company shall pay Executive any Accrued Obligations within 30 days
of termination; and                                                             

              (d) If Executive's employment is terminated by the Company
pursuant to Section 6.1(d), or by Executive pursuant to Section 6.1(e), the     
Company's obligation to compensate Executive shall in all respects cease, except
that within thirty (30) days after the Termination Date the Company shall pay   
Executive the Accrued Obligations and during the period ending on the expiration
of the sixth month following the Termination Date the Company shall pay to      
Executive each month one-twelfth (1/12th) of the annual Base Salary of Executive
in effect at the Termination Date (the "Continuation Payments"). The Company    
shall be excused from the obligations of this Section 7.1(d) if Executive       
breaches Executive's obligations under this Agreement or the Confidentiality    
Agreement.                                                                      

Notwithstanding the foregoing, in the event such termination occurs within two  
(2) years of a Change of Control of the Company, the full amount of the         
Continuation Payments will be paid in a lump sum within ten (10) days of such   
Change of Control.                                                              

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                   7.2 Medical Benefits. If Executive's employment is terminated
               by the Company pursuant to Section 6.1(d) or by Executive
                 pursuant to Section 6.2(e), the Company shall reimburse the
                  Executive for the amount of Executive's premium payments for
             group health coverage, if any, elected by the Executive
                pursuant to the Consolidated Omnibus Budget Reconciliation
                Act of 1985, as amended ("COBRA"); provided, however, that
               the Executive shall be solely responsible for all matters
                  relating to Executive's continuation of coverage pursuant to
                   COBRA, including (without limitation) Executive's election of
               such coverage and Executive's timely payment of premiums;
                 provided further, that upon the earlier to occur of (C) the
               time that the Executive no longer constitutes a Qualified
                 Beneficiary (as such term is defined in Section 4980B(g)(1)
                   of the Internal Revenue Code of 1986, as amended) and (D) the
                date six (6) months following the Executive's termination,
                the Company's obligations to reimburse the Executive under
this subsection (ii) shall cease.         

                  7.3 Effect on this Agreement. Any termination of Executive's
          employment under this Agreement shall not affect the
                   continuing operation and effect of this Section and Section 8
                hereof, which shall continue in full force and effect with
            respect to the Company and Executive, and their heirs,
successors and assigns.                   

                 Nothing in Section 6 hereof shall be deemed to operate as a
          release, settlement or discharge of any liability of
           Executive to the Company or others from any action or
                  omission by Executive enumerated in Section 6.1(c) hereof as
                a possible basis for termination of Executive's employment
for Cause.                                

               7.4 No Duty to Mitigate. Subject to the provisions of the
                Confidentiality Agreement and Section 8 of this Agreement,
                  Executive shall be free to accept such employment and engage
            in such business as Executive may desire following the
              termination of employment hereunder, and no compensation
                received by Executive therefrom shall reduce or affect any
                  payments required to be made by the Company hereunder except
               to the extent expressly provided herein or in the benefit
plans of the Company.                     

8. Post-Employment Activities.                                                  

                  8.1 Conditional Nature of Severance Payments; Non-Competition.
           Executive acknowledges that the nature of the Company's
               business is such that during the term of employment and for
           twelve (12) months following termination of Executive's
          employment with the Company (the "Noncompete Period"):

                  8.1.1 if Executive were to become  employed,  or substantially
                        involved in, the business of a  Competitor,  it would be
                        very  difficult  for the Executive not to rely on or use
                        the   Company's    trade   secrets   and    confidential
                        information.  A  "Competitor"  is defined as any person,
                        entity or  division,  whether now  existing or hereafter
                        established,  which directly  competes with the products
                        and  services of the  Company.  To avoid the  inevitable
                        disclosure   of  the   Company's   trade   secrets   and
                        confidential    information,    Executive   agrees   and
                        acknowledges  that the Executive's  right to receive the
                        severance  payments  and  other  benefits  set  forth in

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                        Section 7 (to the  extent  the  Executive  is  otherwise
                        entitled to such payments) shall be conditioned upon (a)
                        the  Executive  not directly or  indirectly  engaging in
                        (whether  as  an   employee,   consultant,   proprietor,
                        partner,   director  or   otherwise),   nor  having  any
                        ownership  interest  directly or indirectly in more than
                        1% in, or  participating  in the  financing,  operation,
                        management  or  control  of,  a   Competitor;   and  (b)
                        Executive  continuing  to observe,  and not be in breach
                        of, the provisions of the Confidentiality  Agreement and
                        Invention  Assignment  Agreement  (the  "Confidentiality
                        Agreement")  entered into by Executive  and the Company.
                        Upon any breach of this  Section or the  Confidentiality
                        Agreement,  all severance payments pursuant to Section 7
shall immediately cease.        

                        The obligations  under the Confidential  Agreement shall
                     survive termination of this Agreement for any reason.

                  8.1.2 Executive  shall not,  without the prior written consent
                        of the  Company,  directly or  indirectly,  (i) solicit,
                        request,  cause or induce any person who is at the time,
                        or 12 months prior thereto had been, an employee of or a
                        consultant  of the  Company  to leave  the  employ of or
                        terminate such person's relationship with the Company or
                        (ii)  attempt to limit or  interfere  with any  business
                        agreement or relationship  existing  between the Company
        and/or its affiliates with a third part.

                  8.1.3 Executive shall not disparage the business reputation of
                        the Company (or its management  team) or take any action
                        that are  harmful  to the  Company's  goodwill  with its
                        customers, content providers, bandwidth or other network
                        infrastructure providers,  vendors, employees, the media
                        or the public.  Executive  recognizes  that such actions
                        would  cause  irreparable  harm  for  which  there is no
                        adequate  remedy at law and that the Company may seek in
                        state or federal  court,  and is entitled to a temporary
                        restraining  order  and  to  preliminary  and  permanent
                        injunctive  relief in state or federal court to stop any
                        such conduct or statements  for any breach or threatened
                        breach of this  Section 8 during the term of  employment
         and for a period of two years thereafter.

                  8.1.4 The Company spends  considerable  amounts of time, money
                        and effort in developing  and  maintaining  good will in
                        its industry.  Executive agrees the covenants  contained
                        within this Section 8: (i) are  reasonable and necessary
                        in all respects to protect the goodwill,  trade secrets,
                        confidential  information,  and  business  interests  of
                        Company; (ii) are not oppressive to Executive; and (iii)
                        do not impose any greater restraint on Executive than is
                        reasonably  necessary  to protect  the  goodwill,  trade
                        secrets,   confidential   information   and   legitimate
business interests of Company.  

                  8.1.5 Executive  acknowledges and agrees that promises made by
                        the   Company  in  this   Agreement   such  as  (i)  the
                        establishment of an employment relationship and (ii) the
                        commitment  to  provide  severance  compensation  in the
                        event of the  termination of Executive's  employment for
                        reasons   other   than   Cause   (subject   to   certain

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                        requirements  on the part of Executive),  constitute one
                        form of consideration  for Executive's  agreement to and
                        compliance  with  the  restrictive   covenants  in  this
                        Agreement.   Executive   acknowledges  and  agrees  that
                        Company's  agreement to provide Executive with access to
                        Company's confidential and proprietary  information is a
                        separate   form   of   consideration    supporting   the
                        restrictive  covenants  in  this  Agreement.   Executive
                        acknowledges and agrees that the Company's  agreement to
                        permit the use of the Company's  goodwill with Company's
                        customers, investors and content providers is a separate
                        form  of   consideration   supporting  the   restrictive
                        covenants of this Agreement.  Executive acknowledges and
                        agrees  that  the  Company's   commitment  to  providing
                        Executive with unique skill  development and training is
                        a  separate  form  of   consideration   supporting   the
        restrictive covenants in this Agreement.

                    8.2  Exclusions.  No  provision of this  Agreement  shall be
                    construed to preclude  Executive  from  performing  the same
                    services  which the  Company  hereby  retains  Executive  to
                    perform for any person or entity  which is not a  Competitor
                    of  the  Company  upon  the  expiration  or  termination  of
                    Executive's employment (or any post-employment consultation)
                    so long as  Executive  does not thereby  violate any term of
the Confidentiality Agreement.          

9. Remedies. Executive's obligations under the Confidentiality Agreement under  
Section 8 of this Agreement shall survive the expiration or termination of      
Executive's employment (whether through Executive's resignation or otherwise)   
with the Company. Executive acknowledges that a remedy at law for any breach or 
threatened breach by Executive of the provisions of the Confidentiality         
Agreement or Section 8 would be inadequate and Executive therefore agrees that  
the Company shall be entitled to injunctive relief in any court of competent    
jurisdiction in the case of any such breach or threatened breach. Executive     
acknowledges that this Section does not limit the Company's right to seek       
monetary damages for breach of this Agreement.                                  

10. Miscellaneous.                                                              

                    10.1  Notice.  All  notices,  requests,  consents  and other
                    communications  hereunder  shall  be in  writing,  shall  be
                    addressed to the receiving  party's  address set forth below
                    or to such other  address as a party may designate by notice
                    hereunder,  and shall be either (i) delivered by hand,  (ii)
                    made by telecopy,  (iii) sent by overnight courier,  or (iv)
                    sent  by  registered  or  certified  mail,   return  receipt
required, postage prepaid.              

                        If to the Company:       Internet Pictures Corporation
                                         3160 Crow Canyon Road
                                Fourth Floor
                                        San Ramon, CA  94583

                    If                       to Executive:Home address
                                              of Executive as maintained
                                              in the Company's personnel
                            records.

             10.2 Modification and No Waiver of Breach. No waiver or
                  modification of this Agreement shall be binding unless it is
                   in writing signed by the parties hereto. No waiver by a party
              of a breach hereof by the other party shall be deemed to
                  constitute a waiver of a future breach, whether of a similar
             or dissimilar nature, except to the extent specifically
        provided in any written waiver under this Section.

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                 10.3 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
                  CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE
                   STATE OF CALIFORNIA EXCLUDING ITS CONFLICT OF LAW PRINCIPLES.
                   ALL QUESTIONS RELATING TO THE VALIDITY AND PERFORMANCE HEREOF
                   AND REMEDIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH
SUCH LAW.                                 

                 10.4 Counterparts. This Agreement may be executed in one or
                   more counterparts, each of which shall be deemed an original,
                  but all of which taken together shall constitute one and the
same agreement.                           

                  10.5  Captions.  The  captions  used  herein are for ease of
                  reference  only and shall not define or limit  --------  the
provisions hereof.                        

                10.6 Assistance in Litigation. Executive shall, during and
              after termination of employment, upon reasonable notice,
                   furnish such information and proper assistance to the Company
                as may reasonably be required by the Company in connection
                   with any litigation in which it or any of its subsidiaries or
                  affiliates is or may become a party; provided, however, that
                 such assistance following termination shall be furnished at
         mutually agreeable times and for mutually agreeable
compensation.                             

                 10.7 Entire Agreement.This Agreement, any written agreement
               referred to herein and the Exhibits hereto constitute the
                 entire agreement between the parties hereto relating to the
           matters encompassed hereby and supersede any prior or
 contemporaneous written or oral agreements.

10.8  Successors.                           

            (a)    Any successor to the Company (whether direct or
                    indirect and whether by purchase, lease, merger,
                      consolidation, liquidation or otherwise) to all or
                          substantially all of the Company's business and assets
                         shall assume the obligations under this Agreement and
                         agree expressly to perform the obligations under this
                          Agreement in the same manner and to the same extent as
                 the Company would be required to perform such
                       obligations in the absence of a succession. For all
                          purposes under the Agreement, the term "Company" shall
                          include successor to the Company's business and assets
                       that executes and delivers the assumption agreement
                     described in this subsection (a) or which becomes
                        bound by the terms of this Agreement by operation of
law.                        

          (b)    The terms of this Agreement and all rights of
                       Executive hereunder shall insure to the benefit of,
                        and be enforceable by, Executive's personal or legal
               representatives, executors, administrators,
             successors, heirs, devisees and legatees.

                  10.9 Arbitration. Any dispute, controversy, or claim arising
                  out of, in connection with, or in relation to this Agreement

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               and its exhibits, except as provided in Section 9 hereof,
                   shall be settled by arbitration in California pursuant to the
                 Commercial Rules then in effect of the American Arbitration
                   Association and in no other place. Any award or determination
                  shall be final, binding and conclusive upon the parties, and
            a judgment rendered may be entered in any court having
               jurisdiction thereof. Executive and the Company knowingly
               waive any and all rights to a jury trial in any form. The
                   parties hereby expressly waive punitive damages, and under no
                 circumstances shall an award contain any amount that in any
                  way reflects punitive damages. Each party shall bear its own
            expenses relating to the arbitration, unless otherwise
determined in arbitration.                

            It is intended that controversies or claims submitted to
         arbitration under this Section shall remain confidential, and to that
       end it is agreed by the parties that neither the facts disclosed in
        the arbitration, the issues arbitrated, nor the views or opinions of
       any persons concerning them, shall be disclosed to third persons at
   any time, except to the extent necessary to enforce an award or
        judgment or as required by law or in response to legal process or in
         connection with such arbitration. Nothing in this Section shall limit
  the Company's right to seek equitable remedies in any court of
competent jurisdiction for breach of this Agreement.        

IN WITNESS HEREOF, this Agreement has been duly executed as of the Effective    
date written in Exhibit A.                                                      

                                               INTERNET PICTURES CORPORATION

                             By:/s/Paul Farmer
                                              ----------------------------
                              Name:  Paul Farmer
                                          Title: Chief Financial Officer

                          /s/ Sarah Pate
                                           -------------------------------
                     Executive

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 EXHIBIT A

Effective Date of Employment Agreement: July 01, 2001                           

Name:    Sarah Pate                                                             

Title:   Senior Vice President, General Manager                                 

Direct Supervisor:         Donald Strickland                                    

Annual Base Salary:        $225,000                                             

Target bonus rate:         100%                                                 

Options:                                                                        
Number:  750,000(1)                                           
Vesting start date:        June 28, 2001                      
Vesting terms:    25% vesting immediately on grant date,      
25% on January 1, 2002    
25% July 1, 2002, then    
                       1/12th each month thereafter for full vesting two
years from grant date.    

(1) Does not reflect a 10-for-1 reverse stock split effective August 22, 2001.  

Other (state "None") if no other items should be noted):                        
None                                                                            

 INTERNET PICTURES CORPORATION

By:/s/Paul Farmer           
     ---------------------------
Name: Paul Farmer           
  Title: Chief Financial Officer

/s/Sarah Pate               
  ------------------------------
Executive                   

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 EXHIBIT B

 OTHER POSITIONS

None

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 EXHIBIT C

PRIOR INVENTIONS

None

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                                                                  Exhibit 21.1

 SUBSIDIARIES OF INTERNET PICTURES CORPORATION

Name of Subsidiary                                State or Other Jurisdiction   
------------------                                ---------------------------   
Interactive Pictures Corporation                  Tennessee                     

Interactive Pictures Corporation                  United Kingdom                
UK Limited                                                                      

PW Technology, Inc.                               Delaware                      

Internet Pictures (Canada),Inc.                   Canada                        

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                                                                  Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS                                              

We hereby consent to the incorporation by reference in the Registration         
Statements on Form S-3 (No. 333-71690) and Form S-8 (Nos. 333-76808, 333-40160, 
333-36068, 333-33358, 333-87309 and 333-89499) of Internet Pictures Corporation 
of our reports dated March 27, 2003 relating to the consolidated financial      
statements and the financial statement schedule, which appear in this Form 10-K.

/s/ PricewaterhouseCoopers LLP                                                  
------------------------------                                                  
San Jose, California                                                            
March 28, 2003                                                                  

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                                                                  Exhibit 99.1

 CERTIFICATION PURSUANT TO
 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
       In connection with the Annual Report of Internet Pictures Corporation
 (collectively, the "Company") on Form 10-K for the period ending December 31,
2002 as filed with the Securities and Exchange Commission on the date hereof
 (the "Report"), I, Donald Strickland, Chief Executive Officer of the Company,
  certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:                                           

          (1) The Report fully complies with the  requirements  of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and                        

          (2) The information  contained in the Report fairly  presents,  in all
material  respects,  the  financial  condition  and results of  operation of
the Company.                                                                

/s/ Donald Strickland                                                       
-----------------------                                                     
Donald Strickland                                                           
Chief Executive Officer                                                     
March 28, 2003                                                              

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                                                                  Exhibit 99.2
 CERTIFICATION PURSUANT TO
 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

       In connection with the Annual Report of Internet Pictures Corporation
 (collectively, the "Company") on Form 10-K for the period ending December 31,
2002 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Paul Farmer, Chief Financial Officer of the Company,     
  certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:                                           

          (1) The Report fully complies with the  requirements  of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and                        

          (2) The information  contained in the Report fairly  presents,  in all
material  respects,  the  financial  condition  and results of  operation of
the Company.                                                                

/s/ Paul Farmer                                                             
-----------------------                                                     
Paul Farmer                                                                 
Chief Financial Officer                                                     
March 28, 2003                                                              

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Dates Referenced Herein   and   Documents Incorporated By Reference

				Referenced-On Page
This 10-K Filing		Date		First		Last			Other Filings
		10/28/98		12		73
		12/31/98		16
		5/19/99		12		73
		5/20/99		12		73
		8/25/99		42		44			S-1/A
		8/26/99		14					424B4
		12/16/99		43		44			S-4/A
		12/31/99		16		69			10-K
		1/1/00		53
		1/19/00		31
		2/22/00		75
		3/17/00		43					S-1
		3/30/00		43					10-K
		4/19/00		76
		5/2/00		44					S-8
		6/27/00		44					S-8
		10/31/00		43
		11/2/00		43					8-A12G, 8-K
		11/14/00		43					10-Q
		12/5/00		12		73
		12/21/00		75
		12/31/00		16		76			10-K, 10-K/A
		1/12/01		44		63			8-K
		1/29/01		44					8-K
		3/1/01		23		62
		4/2/01		44					10-K
		5/10/01		12		74
		5/14/01		43		67			8-K
		5/29/01		43					8-K
		5/31/01		43
		6/28/01		88
		7/1/01		43		88
		8/14/01		43					10-Q
		8/22/01		2		88			DEF 14A
		9/26/01		44		76			8-K
		9/30/01		71					10-Q
		10/3/01		43					8-K
		10/31/01		44					10-Q
		12/1/01		44
		12/31/01		16		76			10-K
		1/1/02		28		88
		1/12/02		18		26
		1/16/02		43					S-8
		3/29/02		43		44			10-K
		3/31/02		33		58			10-Q
		5/28/02		66
		5/31/02		44					SC 13D/A
		6/11/02		12		73
		6/28/02		2
		7/1/02		18		88
		8/13/02		44					10-Q
		9/30/02		13		74			10-Q
		11/15/02		13		74
		12/15/02		34		61
For The Period Ended		12/31/02		1		94			10-K/A, DEF 14C
		1/31/03		34		62
		2/1/03		34		62
		3/1/03		11		14
		3/3/03		2
		3/7/03		13		74
		3/27/03		41		92
		3/28/03		46		94
Filed On / Filed As Of		3/31/03		33		61			10-Q, 10-Q/A
		5/6/03		2		40
		6/15/03		34		62
		6/30/03		17		57			10-Q, 8-K
		9/30/03		17		57			10-Q
		12/31/05		22		66			10-K, 10-K/A, NT 10-K
		5/14/06		67
		12/31/07		18		66
		4/19/10		76
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