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)
<PAGE>
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.



<PAGE>

                                     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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<PAGE>

         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.

                                       10
<PAGE>
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

                                       11
<PAGE>
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.

                                       12

<PAGE>


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:
<TABLE>
<CAPTION>
<S>                                                <c>                  <C>                  <C>
                                                                                      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

</TABLE>

                                       13
<PAGE>
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.
<TABLE>
<CAPTION>

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

Statement of Operations Data
Revenues:
<S>                                    <C>                           <C>            <C>             <C>
   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
                                       ========     =========       =========       ========       =======
</TABLE>

                                       14
<PAGE>
<TABLE>
<CAPTION>


                                                                 As of December 31,
                                      -------------------------------------------------------------------
                                        1998         1999         2000             2001             2002
                                      --------     -------      --------         --------         -------
                                                                   (In thousands)
<S>                                    <C>         <C>           <C>              <C>              <C>
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
</TABLE>

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.

                                       15
<PAGE>

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.

                                       16

<PAGE>
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."

                                       17

<PAGE>
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.

                                       18
<PAGE>
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.

                                       19

<PAGE>
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.


                                       20
<PAGE>
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.

                                       21
<PAGE>
The activity in the current and long-term restructuring accruals for the years
ended December 31, were as follows:

(In Thousands)
<TABLE>
<CAPTION>

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

<S>                   <C>        <C>           <C>    <C>      <C>           <C>           <C>     <C>               <C>
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
                      ======   ========      ======  =======  =========      ======       ====      ========       ======
</TABLE>


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.

                                       22
<PAGE>
<TABLE>
<CAPTION>


                                                                        Fiscal Years Ended December 31,
                                                                   2000            2001              2002
                                                                ---------       ---------          -------
                                                                (In thousands, except per share data)
<S>                                                              <C>               <C>                <C>
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
                                                                =========        ========          =======
</TABLE>

                                       23
<PAGE>

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


                                                                    Fiscal Years Ended December 31,
                                                              -------------------------------------------
                                                                2000             2001            2002
                                                              ---------       ----------       ----------
<S>                                                                 <C>              <C>             <C>
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)%
                                                              =========        =========        =========
</TABLE>

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.

                                       24
<PAGE>
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

                                       25
<PAGE>
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

                                       26
<PAGE>
$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

                                       27
<PAGE>
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.

                                       28

<PAGE>

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.

                                       29

<PAGE>


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

                                       30
<PAGE>

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
account for arrangements that involve the delivery or performance of multiple

                                       31
<PAGE>
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

                                       32
<PAGE>
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.

                                       33
<PAGE>
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.

                                       34
<PAGE>
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.

                                       35
<PAGE>
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.

                                       36
<PAGE>
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

                                       37
<PAGE>
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

                                       38
<PAGE>
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

                                       39
<PAGE>



                 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)).

                                       40
<PAGE>
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))

                                       41
<PAGE>
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.

                                       42
<PAGE>
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

                                       43
<PAGE>



                                   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


                                       44
<PAGE>


                                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

                                       45


<PAGE>


                                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

                                       46
<PAGE>


                                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

                                       47
<PAGE>

                        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

                                      F-1
<PAGE>

                          INTERNET PICTURES CORPORATION
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>




                                                                                              DECEMBER 31,
                                                                                     ------------------------------
                                                                                        2001               2002
                                                                                     -----------        -----------
<S>                                                                                      <C>                <C>
                                                                                             (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
                                                                                     ===========        ===========
</TABLE>

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


                                      F-2
<PAGE>
<TABLE>
<CAPTION>


                          INTERNET PICTURES CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS



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

                                                                        2000               2001                 2002
                                                                     ---------          -----------          -----------
<S>                                                                  <C>                <C>                  <C>
                                                                          (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
                                                                     =========          ===========          ===========
</TABLE>






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

                                      F-3
<PAGE>


                          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)
<TABLE>
<CAPTION>



                                                                      Class B                                         Additional
                                                                   Common Stock                     Common Stock        Paid-in
                                                                      Number       Amount        Number      Amount     Capital
                                                                ----------------------------------------------------------------
<S>                <C> <C>                                           <C>          <C>           <C>           <C>          <C>

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

                                                                   =========      =======      ==========     ===     =========
</TABLE>

<TABLE>
<CAPTION>
                                                                    Notes                    Accumulated
                                                                 Receivable     Unearned       Other
                                                                    From       Stock-Based  Comprehensive  Accumulated
                                                                 Stockholders  Compensation    Income        Deficit       Total
                                                               --------------------------------------------------------------------
<S>                <C> <C>                                        <C>          <C>              <C>         <C>           <C>

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
                                                                  =======      =======          ===         =========     =========
</TABLE>

<TABLE>
<CAPTION>


                                                       Class B                                                            Additional
                                                     Common Stock                Preferred Stock        Common Stock        Paid-in
                                                        Number     Amount       Number    Amount    Number      Amount      Capital
                                                   ---------------------------------------------------------------------------------
<S>                                                      <C>          <C>          <C>        <C>       <C>       <C>         <C>

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
                                                     =========    =======    =========      ====    ==========     ===    =========
</TABLE>

<TABLE>
<CAPTION>

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

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

</TABLE>

                                      F-4
<PAGE>

<TABLE>
<CAPTION>

                                                       Class B                                                           Additional
                                                     Common Stock                Preferred Stock        Common Stock        Paid-in
                                                        Number     Amount       Number    Amount    Number      Amount      Capital
                                                   ---------------------------------------------------------------------------------
<S>                                                     <C>          <C>         <C>         <C>       <C>         <C>     <C>

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
                                                     =========    =======    =========      ====    ==========     ===    =========
</TABLE>

<TABLE>
<CAPTION>



                                                                    Note                    Accumulated
                                                                 Receivable     Unearned        Other
                                                                    From       Stock-Based  Comprehensive   Accumulated
                                                                 Stockholder   Compensation     Loss          Deficit       Total
                                                               --------------------------------------------------------------------
<S>                                                                   <C>          <C>          <C>          <C>             <C>

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
                                                                  =======      =======         =====         ========      ========
</TABLE>

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

                                      F-5

<PAGE>
<TABLE>
<CAPTION>


                          INTERNET PICTURES CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                                                              YEARS ENDED DECEMBER 31,
                                                                                   -----------------------------------------------
                                                                                      2000             2001               2002
                                                                                   ---------        -----------        -----------
<S>                                                                                <C>               <C>                <C>
                                                                                                    (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
                                                                                   =========        ===========        ===========

</TABLE>

SUPPLEMENTAL DATA
<TABLE>
<CAPTION>

                                                                                                   YEARS ENDED DECEMBER 31,
                                                                                               -----------------------------
                                                                                              2000         2001        2002
                                                                                             ------       ------      ------
<S>                                                                                          <C>          <C>         <C>
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          --


</TABLE>

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


                                      F-6
<PAGE>

                          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.

                                      F-7
<PAGE>
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).

                                      F-8
<PAGE>
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.

                                       F-9
<PAGE>
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

                                      F-10
<PAGE>
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:
<TABLE>
<CAPTION>

                                                                                          YEARS ENDED DECEMBER 31,
                                                                              -------------------------------------------------
                                                                                 2000                2001                2002
                                                                              ---------          ----------          ----------
<S>                                                                             <C>                 <C>                 <C>
         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
                                                                              =========          ==========          ==========
</TABLE>


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).

                                      F-11
<PAGE>

The components of comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>

                                                                                  Years Ended December 31,
                                                                     ---------------------------------------------------
                                                                        2000               2001                 2002
                                                                     ---------          -----------          -----------
<S>                                                                  <C>                 <C>                  <C>

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)
                                                                     =========          ===========          ===========
</TABLE>

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.

                                      F-12
<PAGE>
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.


                                      F-13
<PAGE>

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

                             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
                   -----------------------------------------------------------------------------------------------------
<S>                   <C>        <C>           <C>    <C>      <C>           <C>           <C>     <C>             <C>

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

</TABLE>

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.

                                      F-14
<PAGE>

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)
                                           ==========    ==========    =========


                                      F-15
<PAGE>

ACCRUED LIABILITIES:

The following table summarizes accrued liabilities as of December 31:
<TABLE>
<CAPTION>


                                                                                     2001              2002
                                                                                  ---------         ---------
<S>                                                                               <C>               <C>
         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
                                                                                  =========         =========
</TABLE>

6. INCOME TAXES

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

                                                                                2001            2002
                                                                              --------        --------
                  <S>                                                            <C>             <C>
         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)                     $     --        $     --
                                                                              ========        ========

</TABLE>

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.

                                      F-16
<PAGE>
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:
<TABLE>
<CAPTION>

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

                                                             2000               2001                 2002
                                                            ------             ------               ------
<S>                                                      <C>                <C>                 <C>
   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
                                                         ----------         ----------          ----------
                                                         $       --         $       --          $       --
                                                         ==========         ==========          ==========
</TABLE>
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

                                      F-17
<PAGE>
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

                                      F-18
<PAGE>
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

                                      F-19
<PAGE>
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:
<TABLE>
<CAPTION>

                                                                             WEIGHTED      WEIGHTED                    WEIGHTED
                                                                              AVERAGE       AVERAGE        STOCK       AVERAGE
                                                                            OF EXERCISE   GRANT DATE      OPTIONS      EXERCISE
                                                               SHARES         PRICES      FAIR VALUE    EXERCISABLE      PRICE
                                                            -----------     -----------   ----------    -----------    -------
                        <S>                                    <C>             <C>             <C>           <C>         <C>
                    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
                                                             =========
</TABLE>

                                      F-20

<PAGE>

The following table summarizes information about stock options at December 31,
2002:
<TABLE>
<CAPTION>


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

                     <C>               <C>            <C>                  <C>             <C>              <C>
               $   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
</TABLE>

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.

                                      F-21

<PAGE>



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

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

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)
                                                         =========     =========   ========
</TABLE>

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.

                                      F-22
<PAGE>
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

                                      F-23
<PAGE>
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

                                      F-24
<PAGE>
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.

                                      F-25

<PAGE>
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:

<TABLE>
<CAPTION>

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

<S>                                     <C>           <C>              <C>               <C>
                                     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
                                                                  =========
</TABLE>

<TABLE>
<CAPTION>

                                         Date        Expiration                       Exercise
Series B Preferred Stock               of Grant         Date         Shares             Price
                                     ------------------------------------------------------------------
                                     ------------------------------------------------------------------
<S>                                     <C>          <C>              <C>                 <C>
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
                                                                  =========

</TABLE>

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

                                      F-26

<PAGE>
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)
<TABLE>
<CAPTION>

                                                                                             QUARTER ENDED
                                                                     -------------------------------------------------------------
                                                     TOTAL           MARCH 31            JUNE 30     SEPTEMBER 30      DECEMBER 31
                                                     -----           --------            -------     ------------      -----------
<S>                                                <C>                 <C>                <C>              <C>              <C>
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)
</TABLE>

(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.

F-27

<PAGE>
                                                                    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.

                                      E-1
<PAGE>

         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.

                                      E-2
<PAGE>

                        (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":

                                      E-3
<PAGE>




                        (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.

                                      E-4
<PAGE>

                        (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.

                                      E-5
<PAGE>

                   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.

                                      E-6
<PAGE>

                   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

                                      E-7
<PAGE>

                        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

                                      E-8
<PAGE>


                        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.

                                      E-9
<PAGE>


                   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

                                      E-10
<PAGE>

                   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

                                      E-11

<PAGE>


                                    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

                                      E-12
<PAGE>


                                    EXHIBIT B

                                 OTHER POSITIONS

                                      None


                                      E-13

<PAGE>


                                    EXHIBIT C

                                PRIOR INVENTIONS

                                      None



                                      E-14

<PAGE>
                                                                   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



                                      E-15
<PAGE>
                                                                   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

                                      E-16

<PAGE>

                                                                   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

                                      E-17
<PAGE>


                                                                   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


                                      E-18